Proxy Statement
Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission
only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
POSITRON CORPORATION
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which the transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
Positron Corporation
1304 Langham Creek Drive, Suite 310
Houston, Texas 77084
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Shareholders
of Positron Corporation ("Positron") to be held at 10:00 a.m. Houston, Texas
time on December 18, 1998 at Positron Corporation, 1304 Langham Creek Drive,
Suite 310, Houston, Texas. Shareholders of record at the close of business on
November 10, 1998 are entitled to notice of, and to vote at, the Annual Meeting.
I hope that you will be present or represented by proxy at this important
meeting.
At the Annual Meeting, you will be asked to (i) elect one director,
(ii) consider and act upon a proposal of the Board of Directors to amend
Positron's Articles of Incorporation to increase the authorized Common Stock of
Positron from 15,000,000 to 100,000,000, (iii) ratify the designation of Ham,
Langston & Brezina, L.L.P. as independent auditors for the fiscal year ended
December 31, 1997 and (iv) transact such other business as may properly come
before the meeting or any adjournment(s) thereof.
If the proposal to increase the authorized Common Stock to 100,000,000
shares is approved by Positron's shareholders, Positron will issue 51% of the
outstanding Common Stock to Imatron Inc. in return for working capital financing
and support of Positron's marketing program (the "Imatron Transaction"). Your
Board of Directors has determined that the Imatron Transaction is fair to and in
the best interests of Positron and its shareholders. Your Board of Directors has
unanimously approved the Imatron Transaction and recommends that you vote FOR
the increase of the authorized shares of Common Stock to 100,000,000 shares.
The proposals to be voted on at the Annual Meeting are described in
greater detail in the accompanying Proxy Statement, which you are urged to read
carefully and in its entirety.
Directors are elected by a plurality of the voting power of the Common
Stock and the Series A Preferred Stock voting together as one class that is
represented in person or by proxy and entitled to vote at the Annual Meeting.
The proposal to amend the Articles of Incorporation requires the affirmative
vote of two-thirds of the outstanding voting power of the Common Stock and the
Series A Preferred Stock voting together as one class. The proposal to ratify
the selection of auditors requires the affirmative vote of a majority of the
voting power of the Common Stock and the Series A Preferred Stock voting
together as one class that is present in person or by proxy and entitled to
vote.
We urge you to consider these important matters, which are described in
the enclosed Proxy Statement. In order to ensure that your vote is represented
at the Annual Meeting, whether or not you plan to attend the Annual Meeting,
please indicate your choice on the enclosed proxy card, date and sign it, and
return it in the enclosed envelope. Your prompt response will be greatly
appreciated. If you are able to attend the Annual Meeting, you may revoke your
proxy at any time before its exercise and may, of course, vote your shares in
person.
Sincerely,
Gary B. Wood
Chairman of the Board of Directors
----------------------------------
THE BOARD OF DIRECTORS OF POSITRON RECOMMENDS THAT SHAREHOLDERS VOTE
FOR ALL OF THE PROPOSALS LISTED ABOVE TO BE PRESENTED AT THE ANNUAL MEETING.
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY CARD PROMPTLY, WHETHER OR
NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. YOUR PROXY WILL BE REVOCABLE, EITHER
IN WRITING OR BY VOTING IN PERSON AT THE ANNUAL MEETING, AT ANY TIME PRIOR TO
ITS EXERCISE.
YOUR VOTE IS IMPORTANT
PLEASE VOTE, SIGN, DATE AND RETURN YOUR PROXY
<PAGE>
POSITRON CORPORATION
1304 Langham Creek Drive
Suite 310
Houston, Texas 77084
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held December 18, 1998
Notice is hereby given that the Annual Meeting of Shareholders of
Positron Corporation, a Texas corporation (the "Company"), will be held at
Positron Corporation, 1304 Langham Creek Drive, Suite 310, Houston, Texas, on
December 18, 1998, at 10:00 a.m. Central Standard Time (the "Annual Meeting")
for the following purposes:
(i) To elect one director;
(ii) To consider and act upon a proposal of the Board of
Directors to amend the Articles of Incorporation to
increase the authorized Common Stock, par value $.01
per share, of the Company from 15,000,000 shares to
100,000,000 shares;
(iii) To ratify the designation of Ham, Langston & Brezina,
L.L.P. as independent auditors for the fiscal year
ended December 31, 1997; and
(iv) To transact such other business as may properly come
before the meeting or any adjournment(s) thereof.
The accompanying Proxy Statement contains information regarding, and a
more complete description of, the items of business to be considered at the
meeting.
Only shareholders of record at the close of business on November 10,
1998, are entitled to notice of, and to vote at, the Annual Meeting of
Shareholders or any adjournment(s) thereof.
You are cordially invited and urged to attend the meeting, but if you
are unable to attend, you are requested to sign and date the accompanying proxy
and return it promptly in the enclosed self-addressed envelope. If you attend
the meeting, you may vote in person, if you wish, whether or not you have
returned your proxy. In any event, a proxy may be revoked at any time before it
is exercised.
By Order of the Board of Directors
Gary B. Wood
Secretary
Houston, Texas
November 24, 1998
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE ANNUAL MEETING
IN ORDER THAT THE PRESENCE OF A QUORUM MAY BE ASSURED. IF YOU DO NOT EXPECT TO
ATTEND THE MEETING, PLEASE COMPLETE AND SIGN THE ACCOMPANYING FORM OF PROXY AND
RETURN IT IN THE ENCLOSED ENVELOPE.NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES.
<PAGE>
POSITRON CORPORATION
1304 Langham Creek Drive
Suite 310
Houston, Texas 77084
PROXY STATEMENT
For
ANNUAL MEETING OF SHAREHOLDERS
To Be Held December 18, 1998
This Proxy Statement is sent to shareholders of Positron Corporation, a
Texas corporation (the "Company"), in connection with the solicitation of
proxies by the Board of Directors of the Company (the "Board of Directors") for
use at the Annual Meeting of Shareholders of the Company, and any adjournment(s)
thereof (the "Annual Meeting"), to be held on December 18, 1998, at 10:00 a.m.
Central Standard Time at Positron Corporation, 1304 Langham Creek Drive, Suite
310, Houston, Texas, for the purposes set forth in the accompanying Notice of
Annual Meeting of Shareholders. Solicitation of proxies may be made in person or
by mail, telephone, or telegraph by directors, officers, and regular employees
of the Company. The Company may also request banking institutions, brokerage
firms, custodians, nominees and fiduciaries to forward solicitation materials to
the beneficial owners of shares of common stock, par value $.01 per share (the
"Common Stock"), of the Company held of record by such persons, and the Company
will reimburse the forwarding expenses. In addition, Positron has engaged
Innisfree M&A Incorporated to assist in the solicitation of proxies. Positron
anticipates that it will incur total fees of approximately $6,500, plus $5.50
per telephone call that Innisfree makes to or receives from individual
shareholders, plus reimbursement of certain out-of-pocket expenses for this
service. The cost of solicitation of proxies will be paid by the Company.
The approximate date on which this Proxy Statement and the enclosed
form of proxy are first being sent to shareholders is November 24, 1998.
The Annual Report to Shareholders covering the Company's fiscal year
ended December 31, 1997 ("Fiscal 1997"), including audited financial statements,
and the Quarterly Report on Form 10-QSB for the Period Ended September 30, 1998,
are enclosed herewith.
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THE ANNUAL MEETING
Date, Time, and Place of the Annual Meeting
The Annual Meeting will be held on December 18, 1998, at 10:00 a.m.
Central Standard Time at Positron Corporation, 1304 Langham Creek Drive, Suite
310, Houston, Texas.
Record Date and Shares Entitled to Vote
The voting securities of the Company are shares of its Common Stock and
its Series A 8% Cumulative Convertible Redeemable Preferred Stock (the "Series A
Preferred Stock"). Holders of shares of Common Stock are each entitled to one
vote on each matter to be voted upon. Voting with the Common Stock, each share
of Series A Preferred Stock entitles the holder thereof to the number of votes
equal to the number of shares of Common Stock (including fractional shares) into
which such shares of Series A Preferred Stock could be converted. On October 30,
1998, there were 5,159,592 shares of Common Stock outstanding and 1,564,403
shares of Series A Preferred Stock outstanding which could be converted into
1,564,403 shares of Common Stock. Only shareholders of record at the close of
business on November 10, 1998 are entitled to notice of, and to vote at, the
Annual Meeting. Cumulative voting is not permitted in the election of directors
of the Company.
Revocation of Proxy
Any shareholder returning the accompanying proxy may revoke such proxy
at any time prior to its exercise: (i) by giving written notice to the Company
of such revocation; (ii) by voting in person at the Annual Meeting; or (iii) by
executing and delivering to the Company a later dated proxy.
Voting of Proxies
Proxies in the accompanying form, if properly executed and returned,
will be voted at the Annual Meeting in accordance with the instructions thereon.
Any proxy upon which no instructions have been indicated with respect to any of
the following matters will be voted as follows: (i) "FOR" the election of the
person named in this Proxy Statement as the Board of Directors' nominee for
election to the Board of Directors; (ii) "FOR" the proposal to amend the
Articles of Incorporation to increase the shares of authorized Common Stock;
(iii) "FOR" the ratification of the appointment of Ham, Langston & Brezina,
L.L.P., as independent auditors for the fiscal year ending December 31, 1998
("Fiscal 1998"); and (iv) in accordance with the discretion of the holders of
such proxies with respect to any other business that properly comes before the
shareholders at the Annual Meeting. The Board of Directors knows of no matters,
other than those stated above, to be presented for consideration at the Annual
Meeting. If, however, other matters properly come before the Annual Meeting, it
is the intention of the persons named in the accompanying proxy to vote such
proxy in accordance with their judgment on any such matters. The persons named
in the accompanying proxy may also, if it is deemed to be advisable, vote such
proxy to adjourn the Annual Meeting from time to time.
Broker non-votes with respect to the amendment to the Company's
Articles of Incorporation will be treated as "no" votes.
Quorum and Voting
The presence, in person or by proxy, of the holders of a majority of
the outstanding shares of Common Stock and Series A Preferred Stock entitled to
vote is necessary to constitute a quorum at the Annual Meeting. If a quorum is
not present or represented at the Annual Meeting, the shareholders entitled to
vote thereat, present in person or represented by proxy, have the power to
adjourn the Annual Meeting from time to time, without notice other than an
announcement at the Annual Meeting, until a quorum is present or represented. At
any such adjourned Annual Meeting at which a quorum is present or represented,
any business may be transacted that might have been transacted at the original
Annual Meeting.
Abstentions may be specified on all proposals (other than the election
of directors) and will be counted towards a quorum. With respect to the election
of directors, votes may be cast in favor or withheld.
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Brokers who hold shares in street name for customers are required to
vote those shares in accordance with instructions received from the beneficial
owners. In addition, brokers are entitled to vote on certain items, such as the
election of directors, the ratification of auditors and other "discretionary
items" even when they have not received instructions from beneficial owners.
Brokers are not permitted to vote (a "broker non-vote") for "non-discretionary"
items without specific instructions from the beneficial owners. Broker non-votes
will be counted as shares as to which voting power has been withheld by the
beneficial owner and, therefore, as shares not entitled to vote on the item as
to which there is a broker non-vote.
Vote Required
Directors are elected by a plurality of the voting power of the Common
Stock and the Series A Preferred Stock voting together as one class that is
represented in person or by proxy and entitled to vote at the Annual Meeting,
and votes that are withheld will be excluded entirely from the vote and will
have no effect. The proposal to amend the Articles of Incorporation requires the
affirmative vote of two-thirds of the outstanding voting power of the Common
Stock and the Series A Preferred Stock voting together as one class. The
proposal to ratify the selection of auditors requires the affirmative vote of a
majority of the voting power of the Common Stock and the Series A Preferred
Stock voting together as one class that is present in person or by proxy and
entitled to vote. Abstentions with respect to the amendment of the Articles of
Incorporation and ratification of the auditors will have the same effect as a
negative vote.
Broker non-votes with respect to the amendment to the Company's
Articles of Incorporation will be treated as "no" votes.
Solicitation of Proxies and Expenses
Solicitation of proxies may be made in person or by mail, telephone, or
telegraph by directors, officers, and regular employees of the Company. The
Company may also request banking institutions, brokerage firms, custodians,
nominees, and fiduciaries to forward solicitation materials to the beneficial
owners of Common Stock of the Company held of record by such persons, and the
Company will reimburse the forwarding expenses. In addition, Positron has
engaged Innisfree M&A Incorporated to assist in the solicitation of proxies.
Positron anticipates that it will incur total fees of approximately $6,500, plus
$5.50 per telephone call that Innisfree makes to or receives from individual
shareholders, plus reimbursement of certain out-of-pocket expenses for this
service. The cost of solicitation of proxies will be paid by the Company.
Dissenters' Rights
Under Texas law, the holders of Common Stock will not be entitled to
any dissenters' rights in connection with the increase of authorized shares of
Common Stock available for issuance, as described in Proposal Two below.
PROPOSAL ONE -- ELECTION OF DIRECTOR
Pursuant to the Company's bylaws, the Board of Directors has fixed the
number of directors at four. All directors' terms expire this year as of the
election of directors at the Annual Meeting. The term of office for each
director shall be for the ensuing year or until a successor is elected and
qualified, and will expire concurrently with the election of directors at the
1999 Annual Meeting. Immediately prior to the Annual Meeting, it is anticipated
that the Board of Directors will amend the Company's bylaws to decrease the
number of directors to three. At that time, K. Lance Gould, M.D., John H.
Laragh, M.D. and Ronald B. Schilling, Ph.D., will resign as directors, leaving
Gary B. Wood, Ph.D. as the sole remaining director of the Company.
In May 1998, the Company entered into an agreement (the "Imatron
Agreement") with Imatron Inc. of South San Francisco ("Imatron"), whereby
Imatron will acquire a majority ownership of the Company (the "Imatron
Transaction"). The Imatron Agreement contemplates that, effective upon its
consummation, Dr. Wood will appoint S. Lewis Meyer, Ph.D, and Gary H. Brooks to
fill the vacancies on the Board of Directors. Dr. Meyer and Mr. Brooks are
nominees of Imatron. For a detailed description of the Imatron Transaction, see
"Proposal to Amend the Company's Articles of Incorporation and to Increase the
Number of Authorized Shares of Common Stock Available for Issuance -- Terms of
the Imatron Transaction."
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The proposal at the Annual Meeting will be to reelect Gary B. Wood,
Ph.D. as the sole director of the Company. Dr. Wood, 48, has served as director
and Chairman of the Board of Directors of the Company since April 1990. From
October 1, 1994 to December 31, 1995 and since February 17, 1997, he has acted
as President and Chief Executive Officer of the Company pending the selection of
a new President and Chief Executive Officer. Upon the resignation of Dr. Werner
J. Haas in February 1997, Dr. Wood again assumed the duties of President and
Chief Executive Officer pending the selection of a new President and Chief
Executive Officer. He is President of Concorde Financial Corporation, a private
investment management and consulting firm which he founded in 1981 and is the
founder, chairman and a principal shareholder of OmniMed Corporation, a venture
capital investment firm founded in 1986. Dr. Wood is also the founder and
Chairman of Uro-Tech Management Corporation (a wholly owned subsidiary of
OmniMed) founded in 1983. Both OmniMed and Uro-Tech specialize in investing in
the biotechnology and healthcare industries. Dr. Wood holds a B.S. degree and an
M.S. degree in Electrical Engineering (with special emphasis in Biomedical
Instrumentation), and an interdisciplinary Doctorate of Philosophy from Texas
Tech University. Certain of the entities controlled by Dr. Wood are principal
shareholders of the Company. OmniMed holds 15,280 shares of Common Stock.
Uro-Tech holds 433,329 shares of Series A Preferred Stock, 424,787 shares of
Common Stock and warrants to purchase 514,190 shares of Common Stock.
Dr. Wood has consented to his nomination for election to the Board of
Directors. Should Dr. Wood become unable due to death or disability to accept
nomination or election, it is intended that the persons acting under the proxy
will vote for the election, in his stead, of such other person as the Board of
Directors may recommend. The Board of Directors has no reason to believe that
Dr. Wood will be unable to serve if elected.
The Board of Directors recommends a vote FOR the election to the Board
of Gary B. Wood, Ph.D.
PROPOSAL TWO --AMENDMENT TO THE COMPANY'S
ARTICLES OF INCORPORATION TO INCREASE THE NUMBER
OF AUTHORIZED SHARES OF COMMON STOCK AVAILABLE FOR ISSUANCE
General
The Company, under its Articles of Incorporation, is presently
authorized to issue 10,000,000 shares of Preferred Stock, par value $1.00 per
share, and 15,000,000 shares of Common Stock, par value $.01 per share. As of
the date of this proxy, there are 1,564,403 shares of Series A Preferred Stock
outstanding, 25,000 shares of Series B 8% Cumulative Convertible Redeemable
Preferred Stock (the "Series B Preferred Stock") outstanding, 5,159,592 shares
of Common Stock outstanding and 9,840,408 shares of Common Stock reserved for
issuance.
The Amendment
The proposed amendment would amend the first paragraph of Article IV of
the Articles of Incorporation to read:
The total number of shares of all classes of stock that the
corporation shall be authorized to issue is 110,000,000 shares, of
which 10,000,000 shares of the par value of $1.00 per share shall be a
class designated as Preferred Stock("Preferred Stock"); and 100,000,000
shares of the par value $.01 per share shall be designated Common Stock
("Common Stock").
The proposed amendment to the Company's Articles of Incorporation would
increase the total number of authorized shares of Common Stock from 15,000,0000
shares to 100,000,000 shares. Shares of the Common Stock do not have preemptive
rights
Reasons for the Amendment and Interests of Certain Persons
The Company does not have sufficient authorized but unissued shares to
cover all of its current commitments. In order to complete the sale of the
Series B Preferred Stock, the Company was required to enter into a series of
forbearance agreements (the "Forbearance Agreements"). Pursuant to the
Forbearance Agreements, holders of options and warrants that are exercisable for
shares of Common Stock have agreed not to exercise or convert, as applicable,
into Common Stock any of their securities until the Company has amended its
Articles of Incorporation to increase its authorized Common Stock by at least
2,500,000 shares or such greater number of shares of Common Stock so that a
sufficient number of shares of Common Stock are available to permit the
conversion or exercise of their securities. In connection with the Imatron
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Transaction discussed below, the Company will require a minimum of 9,000,000
shares of Common Stock. For a more detailed discussion of the Imatron
Transaction and the securities to be issued in connection therewith, see "--
Terms of the Imatron Transaction." The Board of Directors believes that, in
addition to shares sufficient to cover its current commitments and shares
issuable in connection with the Imatron Transaction, having such additional
shares available for issuance to meet possible future development and financing
requirements would be advantageous to the Company, and avoid the expense and
delay of calling a special meeting of the shareholders to secure authorization
each time a specific need arises. Among the purposes for which such additional
authorized but unissued shares of stock could be used would be the acquisition
of complimentary technology, employee compensation, fund expansion and the
raising of funds for general corporate purposes. Other than the Imatron
Transaction, no other specific transactions are currently contemplated that
would result in the issuance of additional shares.
Vote Required and Recommendation for Approval of the Proposed Amendment to the
Company's Articles of Incorporation.
To be approved by the Company's shareholders, the amendment to the
Articles of Incorporation must receive the approval of holders of at least
two-thirds of the voting power of the Common Stock and the Series A Preferred
Stock voting together as one class. The enclosed form of proxy provides a means
for shareholders to vote for the amendment, to vote against the amendment or to
abstain from voting on the amendment. Each properly executed proxy received in
time for the Annual Meeting will be voted as specified therein. If a shareholder
executes and returns a proxy but does not specify otherwise, the shares
represented by such shareholder's proxy will be voted "FOR" the amendment.
Recommendations of the Board of Directors and Reasons for the Amendment to the
Articles of Incorporation
The Board of Directors determined that the Imatron Agreement is in the
best interest of the Company's securityholders and recommends that the Company's
shareholders vote in favor of ratifying and approving the amendment to the
Articles of Incorporation.
Terms of the Imatron Transaction
The Imatron Agreement
The following is a summary of the material terms of the Imatron
Agreement. This summary is qualified in its entirety by reference to the Imatron
Agreement, a copy of which is attached hereto as Annex A. Capitalized terms used
herein and not otherwise defined shall have the meanings ascribed to them in the
Imatron Agreement. Shareholders are urged to read the Imatron Agreement in its
entirety.
In May 1998, the Company entered into the Imatron Agreement, whereby
Imatron will acquire control of the Company. In conjunction with the execution
of definitive agreements, Imatron began making working capital advances
available to the Company up to $500,000 (subsequently revised by oral agreement
to $750,000) in order to enable it to meet a portion of its current obligations.
As of September 30, 1998, the Company had borrowed $568,000. The loan bears
interest at 1/2% over the prime rate, is due March 1, 2000 (with interest being
payable monthly), and is secured by all of the Company's assets.
Under the terms of the agreement, Imatron will acquire ownership of 51%
of the outstanding Common Stock of the Company on a fully-diluted and as-if
converted basis, which assumes that all outstanding warrants, options and other
derivatives have been exercised or converted into shares of Common Stock other
than out-of-the-money warrants and options, determined at the time of issuance
of shares of Common Stock to Imatron. If such shares were issued to Imatron on
September 30, 1998, the Company would have been obligated to issue 9,000,000
shares of Common Stock. The Company will receive a nominal cash payment of $100
from Imatron in payment for the shares of Common Stock.
In addition to providing limited working capital financing, Imatron has
agreed to support the Company's marketing program, particularly with regard to
Imatron's affiliate, Imatron Japan, Inc. ("Imatron Japan"), by agreeing to make,
after the share issuance closing date, all reasonable efforts to cause the
placement of 10 POSICAM(TM) positron emission tomography ("PET") cameras over
the next three years. The Company recently shipped a POSICAM(TM) PET camera to
Imatron Japan as the first delivery under a three-year distribution agreement
entered into last year. Imatron Japan is a major distributor for Imatron's
Ultrafast CT and for the equipment of certain other high technology companies.
Imatron has a 24% minority interest in Imatron Japan. Imatron has also agreed to
help facilitate the recapitalization of the Company to support its re-entry into
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the medical imaging market by using its best efforts after the share issuance
closing date to arrange for additional third-party equity financing for the
Company over an 18-month period in an aggregate amount of not less than
$8,000,000. There can be no assurances, however, that any such sales will
actually be consummated or that Imatron will be able to successfully assist the
Company in raising additional capital.
Consummation of the issuance of shares to Imatron is conditioned upon,
among other things (a) the resignation of each officer of the Company, (b) the
resignation of at least three of the four current directors of the Company and
the appointment of Imatron's nominees to fill such vacancies, and (c)
shareholder approval of an amendment to the Company's Articles of Incorporation
to increase its authorized Common Stock to at least 100,000,000 shares of Common
Stock. The Company anticipates that the share issuance to Imatron will close
immediately after the Annual Meeting if the required shareholder approval is
obtained.
In connection with the above transactions, the Company, Imatron and two
current lenders to the Company, Uro-Tech, Ltd. ("Uro-Tech") and ProFutures
Bridge Capital Fund, L.P. ("ProFutures"), entered into certain agreements
whereby (a) ProFutures waived all past defaults and extended the maturity of its
loan (with a current balance of approximately $570,000) (the "ProFutures Loan")
to December 5, 1998, in return for a $50,000 payment, the issuance of warrants
to purchase 1,150,000 shares of Common Stock at $0.25 per share (in addition to
the issuance of previously bargained for warrants to purchase an additional
100,000 shares of Common Stock at $0.25 per share), and minimum loan repayments
of $50,000 for each of the months of April, May, June and July 1998, $100,000
for the month of August 1998 and $50,000 for each of the months of September,
October and November 1998, (b) Imatron agreed to subordinate its loan to the
ProFutures Loan, (c) Uro-Tech agreed to subordinate its loan (with a current
balance of approximately $767,000 plus accrued interest payable of approximately
$286,000) to Imatron's loan, and (d) ProFutures and Imatron agreed that all
amounts above the first $1,000,000 of any third-party equity financing obtained
by Imatron would be applied equally to reduce the Company's debt to both
ProFutures and Imatron. Consistent with the oral amendment to the Imatron
Agreement, the Company and ProFutures have amended their agreements to provide
further waivers of any past defaults and have further extended the maturity of
the ProFutures Loan to December 5, 1998 and minimum loan repayments of $50,000
for each of the months of September, October and November 1998, leaving a
balance at December 5, 1998 of approximately $400,000. Imatron agreed to
continue to subordinate its loan to the ProFutures Loan, and Uro-Tech agreed to
subordinate its loan to Imatron's loan. Except as modified by the amendments,
the remaining agreements remain the same.
The Company is in negotiations to sell one of its POSICAM(TM) systems
to a third party that currently leases the system. It is anticipated that, if
the Company is successful in consummating such sale, it will receive net
proceeds of approximately $360,000. It is the Company's intention to use such
proceeds, plus proceeds from a service contract currently being negotiated with
the third party, to retire the remaining balance of approximately $400,000 on
the ProFutures Loan. There can be no assurances, however, that the Company will
be successful in reaching an agreement concerning the proposed system sale or
that, if agreement is reached, such sale will be consummated, or that the
Company otherwise will be able to obtain additional debt or equity financing
necessary to repay the ProFutures Loan by such maturity date. Absent obtaining a
further extension of the December 5, 1998 maturity date of the ProFutures Loan,
closing the proposed sale of the POSICAM(TM) system, or obtaining additional
debt or equity financing necessary to repay the ProFutures Loan by the maturity
date, the Company may be forced to seek protection under the Federal Bankruptcy
laws.
If Proposal Two to amend the Company's Articles of Incorporation is not
approved by the Company's shareholders, or if such proposal is approved but the
Imatron Transaction does not subsequently close, the Company may be forced to
seek protection under the Federal Bankruptcy laws. Even if Proposal Two to amend
the Company's Articles of Incorporation is approved and the Imatron Transaction
closes, there can be no assurances that the Company will thereafter be able to
raise sufficient capital for the Company to continue as a going concern or even
if such additional capital is raised that the Company will ever achieve the
level of revenues needed to be profitable in the future, or, if profitability is
achieved, that it will be sustained.
Shareholders of the Company should be aware that if they vote to
approve Proposal Two to amend the Company's Articles of Incorporation, they may
be estopped from asserting a cause of action against the Company or against the
Board of Directors of the Company challenging the sale of control of the Company
to Imatron.
6
<PAGE>
Dilutive Effect
If the amendment to the Articles of Incorporation is approved by the
Company's shareholders, and if the Imatron Transaction subsequently closes, then
each existing shareholder's ownership percentage of Common Stock (on a
fully-diluted and as-if converted basis, which assumes that all outstanding
warrants, options and other derivatives have been exercised or converted into
shares of Common Stock other than out-of-the-money warrants and options) will be
reduced by 51%. In such case, assuming that the Imatron Transaction closed as of
September 30, 1998, each existing shareholder's ownership percentage of Common
Stock (on an outstanding basis, which ignores all outstanding options, warrants
and other derivatives) would be reduced by approximately 64%. The Imatron
Transaction, therefore, will be dilutive to the ownership position and voting
rights associated with the existing shareholders' ownership of Common Stock.
Accounting Treatment
Consummation of the Imatron Transaction will be accounted for as a
purchase for financial accounting purposes. For presentation of certain
anticipated effects of the accounting treatment on the consolidated financial
position and results of operations of the Company after giving effect to
consummation of the Imatron Agreement, see "Unaudited Pro Forma Financial
Statements of Operations."
Additional Information Concerning Positron and Imatron
Additional information concerning Positron and Imatron may be obtained
as described in the paragraph below.
Positron and Imatron are subject to the informational requirements of
the Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance
therewith, file periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission") relating to their
respective businesses, financial statements and other matters. Reports, proxy
statements and other information filed by Positron and Imatron can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and
at the Commission's Regional Offices at Seven World Trade Center, 13th Floor,
New York, New York 10048 and CitiCorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained by
mail from the Public Reference Section of the Commission at 450 West Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also
maintains a web site that contains reports, proxy and information statements and
other information regarding Positron and Imatron. The address of that web site
is http://www.sec.gov. In addition, reports, proxy statements and other
information concerning Imatron may be inspected at the offices of the Nasdaq
National Market, 1735 K Street, N.W., Washington, D.C. 20006.
PROPOSAL TO RATIFY SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
On April 7, 1998, Coopers & Lybrand L.L.P. (the "Former Accountants"),
by means of a letter addressed to the Chairman of the Board and Chief Executive
Officer of the Company, informed the Company that it had resigned as the
Company's independent auditors. The resignation arises from the Former
Accountants' desire to terminate its relationship with the Company because of
the Company's current financial condition.
There was no adverse opinion or disclaimer of opinion, or qualification
or modification as to uncertainty, audit scope, or accounting principles for
either of the Company's past two years except, (i) the Former Accountants'
report on the financial statements of the Company as of and for the years ended
December 31, 1996 contained a separate paragraph stating that "the Company has
suffered recurring losses from operations and has a net capital deficiency that
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty" and (ii) the financial statements of and for the
fiscal year ended December 31, 1997 have not been audited.
This decision to resign was made by the Former Accountants and was
neither approved nor disapproved by the Board of Directors.
7
<PAGE>
During the two most recent fiscal periods ended December 31, 1997 and
December 31, 1996 and from December 31, 1997 until April 7, 1998, (i) there were
no disagreements between the Company and the Former Accountants on any matter of
accounting principles or practice, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
the Former Accountants would have caused it to make reference thereto in its
report and (ii) there were no reportable events as defined in paragraph
304(a)(1)(v) of Regulation S-K promulgated under the Securities Act of 1933.
On June 26, 1998, the Company engaged Ham, Langston & Brezina, L.L.P.
("Ham Langston") as its new independent accountants as successor to the Former
Accountants.
The Board of Directors has selected Ham Langston to act as independent
auditors for the fiscal year ending December 31, 1998, subject to shareholder
approval. If the shareholders do not ratify this appointment, the appointment of
other independent accountants will be considered by the Board of Directors.
Ham Langston has advised the Company that it will have a representative
in attendance at the Annual Meeting with the opportunity to make a statement, if
such representative desires to do so, and to respond to appropriate questions
presented at the Annual Meeting.
The ratification of the appointment of Ham Langston requires the
approval of a majority of the outstanding shares of Common Stock that are
present at the Annual Meeting in person or by proxy and entitled to vote
thereon.
The Board of Directors recommends a vote FOR the proposal to ratify the
appointment of Ham Langston as independent accountants for the Company for
Fiscal 1998.
DIRECTORS AND EXECUTIVE OFFICERS
Information Regarding Current Directors
Name Age Position
Gary B. Wood, Ph.D. 48 Director, Interim President, Chief
Executive Officer and Secretary
K. Lance Gould, M.D. 57 Director
John H. Laragh, M.D. 69 Director
Ronald B. Schilling, Ph.D. 56 Director
Gary B. Wood, Ph.D., 48, has served as director and Chairman of the
Board of Directors of the Company since April 1990. From October 1, 1994 to
December 31, 1995 and since February 17, 1997, he has acted as President and
Chief Executive Officer of the Company pending the selection of a new President
and Chief Executive Officer. Upon the resignation of Dr. Werner J. Haas in
February 1997, Dr. Wood again assumed the duties of President and Chief
Executive Officer pending the selection of a new President and Chief Executive
Officer. He is President of Concorde Financial Corporation, a private investment
management and consulting firm which he founded in 1981 and is the founder,
chairman and a principal shareholder of OmniMed Corporation, a venture capital
investment firm founded in 1986. Dr. Wood is also the founder and Chairman of
Uro-Tech Management Corporation (a wholly owned subsidiary of OmniMed) founded
in 1983. Both OmniMed and Uro-Tech specialize in investing in the biotechnology
and healthcare industries. Dr. Wood serves as a director of Harken Energy
Corporation. Dr. Wood holds a B.S. degree and an M.S. degree in Electrical
Engineering (with special emphasis in Biomedical Instrumentation), and an
interdisciplinary Doctorate of Philosophy from Texas Tech University. Certain of
the entities controlled by Dr. Wood are principal shareholders of the Company.
OmniMed holds 15,280 shares of Common Stock. Uro-Tech holds 433,329 shares of
Series A Preferred Stock, 424,787 shares of Common Stock and warrants to
purchase 514,190 shares of Common Stock.
Information Regarding Directors to Fill Vacancies Upon Consummation of the
Imatron Transaction
8
<PAGE>
If the Imatron Transaction is consummated, it is anticipated that Dr.
Wood will appoint the following two Imatron designees to fill the vacancies on
the Board of Directors.
S. Lewis Meyer, 53, was appointed President, Chief Executive Officer
and Director of Imatron in June 1993. From April 1991 until joining Imatron, he
was Vice President, Operations of Otsuka Electronics (U.S.A.) Inc., Fort
Collins, Colorado, a manufacturer of clinical magnetic resonance systems and
analytical nuclear magnetic resonance spectrometers. From August 1990 to April
1991, he was a founding partner of Medical Capital Management, a company engaged
in providing consulting services to medical equipment manufacturers, imaging
service providers and related medical professionals. Mr. Meyer serves as a
director of BSD Medical Corp. and Finet Holdings Corp., which are publicly held
companies engaged in the design and manufacture of medical hypothermia equipment
and electronic real estate and mortgage banking services, respectively. Mr.
Meyer also serves on the National Board of Directors of the American Electronics
Association. Mr. Meyer received a B.S. degree in Physics from the University of
the Pacific, Stockton, California, in 1966, a M.S. degree in Physics from Purdue
University in 1968 and a Ph.D. in Physics from Purdue University in 1971.
Gary H. Brooks, 49, was appointed Vice President of
Finance/Administration, Chief Financial Officer and Secretary of Imatron in
December 1993. Prior to joining Imatron, Mr. Brooks was Chief Financial Officer
and Director for five years at Avocet, a privately held, sports electronics
manufacturer located in Palo Alto, California. Prior thereto, he had
progressively more responsible positions in accounting and finance at several
Fortune 500 companies, including Ford, Rockwell, Bendix and ITT. Mr. Brooks
received his B.A. in Zoology from the University of California, Berkeley, in
1971 and an M.B.A. in Finance and Accounting from the University of California,
Los Angeles in 1973.
Meetings and Committees of the Board of Directors
The Board of Directors held four meetings in Fiscal 1997, and each
director attended at least 75% of the aggregate of (i) the total number of
meetings of the Board of Directors held during the period for which he served as
a director and (ii) the total number of meetings held by all committees of the
Board of Directors on which he served.
The Board of Directors does not have a standing nominating committee or
a committee performing similar functions. Nominees to the Board of Directors are
selected by the entire Board of Directors.
The Board of Directors has a Compensation Committee (herein so called),
which during Fiscal 1997 was composed of Dr. Wood. The Compensation Committee
was instituted in December 1993 following the consummation of the Company's
initial public offering. The Compensation Committee establishes remuneration
levels for officers of the Company, reviews management organization and
development, reviews significant employee benefit programs and has the authority
to establish and administer executive compensation programs, including bonus
plans, stock option and other equity-based programs, deferred compensation plans
and any other cash or stock incentive programs, including the 1994 Incentive and
Non-statutory Option Plan (the "1994 Plan"). The Compensation Committee held no
meetings during Fiscal 1997.
The Board of Directors has an Audit Committee (herein so called), which
during Fiscal 1997 was composed of Dr. Wood. The Audit Committee was instituted
in December 1993 following the consummation of the Company's initial public
offering. The Audit Committee recommends to the Board of Directors the
independent public accountants to be selected to audit the Company's annual
financial statements and approves any special assignments given to such
accountants. The Audit Committee also reviews the planned scope of the annual
audit and the independent accountants' letter of comments and management's
responses thereto, any major accounting changes made or contemplated and the
effectiveness and efficiency of the Company's internal accounting staff. The
Audit Committee will consist solely of non-employee directors. The Audit
Committee held no meetings during Fiscal 1997.
Executive Officers
The executive officers of the Company are elected by the Board of
Directors and serve at the Board's discretion. The sole executive officer of the
Company is Gary B. Wood, Ph.D, who serves as Interim President and Chief
Executive Officer.
Dr. Wood is currently a director of the Company. See "Proposal One --
Election of Director" above for additional information regarding Dr. Wood.
9
<PAGE>
Executive Compensation
The following tables set forth certain information with respect to
compensation paid by the Company during the years ended 1997, 1996 and 1995 and
certain information regarding stock options issued to certain of the individuals
who have acted during 1997 in the capacity of executive officers of the Company.
<TABLE>
Summary Compensation Table
<CAPTION>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted All Other
Other Annual Stock Options/ Compensa-
Name and Principal Fiscal Salary Bonus Compensation Award(s) SARs LTIP tion(1)
Position Year ($) ($) ($) ($) (#) Payouts($) ($)(x)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary B. Wood Ph.D. 1997 33,333 -- -- --
President and Chief 1996 13,750 19,800 98,000(2) -- -- --
Executive Officer 1995 165,000 28,333 86,083(3) -- 53,636(4) -- --
(October 1, 1994 to December
31, 1995 and February 1, 1997
to present)
Werner J. Haas, Ph.D. 1997 8,021
(Resigned as CEO 1996 204,800 16,600(5)
effective February 1, 1997) 1995 N/A 2,339
<FN>
(1) These amounts represent the Company's matching contributions under its 401(k) plan. See "--401(k) Plan."
(2) Represents (a) $80,000 in consulting fees paid to Dr. Wood and (b) $18,000 in directors fees.
(3) Represents (a) $73,333 in consulting fees paid to Dr. Wood and (b) $12,750 in directors fees.
(4) Represents options to acquire 3,636 shares of Common Stock awarded
under the 1994 Plan in 1995 and 50,000 options to acquire Common Stock
issued in connection with Mr. Wood's acting as interim Chief Executive
Officer during 1995.
(5) These amounts represent the Company's reimbursement of certain of Dr.
Haas' living expenses during the period he served as President and
Chief Executive Officer of the Company.
</FN>
10
</TABLE>
<PAGE>
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<CAPTION>
(a) (b) (c) (d) (e)
Number of Unexercised Value of Unexercised In-the-
Options/SARs at Fiscal Money Options/SARs at
Shares Value Year-End Fiscal Year-End
Acquired On Realized Exercisable Unexercisable Exercisable Unexercisable
Name Exercise(#) ($) (#) (#) ($) ($)
- -------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gary B. Wood, Ph.D. 0 0 71,440 0 0 (1) 0 (1)
Werner J. Haas Ph.D.
<FN>
(1) Based upon the exercise price in effect on December 31, 1997 and the closing price of $0.29 for the Common Stock on
December 31, 1997, as reported on the Nasdaq National Market System.
</FN>
</TABLE>
11
<PAGE>
Compensation of Directors
The Company reimburses its directors for their reasonable expenses
associated with attending meetings of the Board of Directors. The Company also
compensates each director who is not a full time employee of the Company in the
amount of $12,500 per year. The Chairman of the Board also receives an
additional annual retainer of $2,000 per year and each director who is not a
full time employee of the Company and who is a member of a committee of the
board receives an additional $500 per committee meeting attended, not to exceed
$2,500 during any calendar year. Any director who is not a full time employee of
the Company and who is serving as the chairman of a committee of the board
receives an additional $2,000 per year for such services. For purposes of the
above described director compensation, Dr. Wood, while serving as interim
President and Chief Executive Officer, has not been considered a full time
employee of the Company. Due to the financial liquidity problems the Company is
experiencing, no cash payments were made to any of the directors during 1996 or
1997 for their services as directors of the Company. As of September 30, 1998,
approximately $540,000 was owed to directors.
Pursuant to the 1994 Plan, each non-employee director is automatically
granted a one-time stock option to purchase 10,500 shares of Common Stock at the
time such person is elected to the Board of Directors. In addition, pursuant to
the 1994 Plan, each non-employee director upon his reelection at the Annual
Meeting of Shareholders will automatically receive an option to purchase a
number of shares of Common Stock equal to the quotient derived by dividing
$15,000 by the fair market value of Common Stock on the date of the grant. All
options so granted under the 1994 Plan to non-employee directors are
automatically granted as of the first business day following the date such
person is elected or reelected, as applicable, as a director and have an
exercise price no less than the fair market value of Common Stock determined as
of the business day preceding the date of the grant.
One-third of the options granted to non-employee directors under the 1994
Plan are exercisable as of the date of the grant, an additional one-third of
such options becomes exercisable upon the first anniversary of such date and the
remaining one-third of such options become exercisable upon the second
anniversary of such date. If a non-employee director ceases to be a director for
any reason other than as a result of death, disability or not being reelected as
a director (in the case where such person is willing to serve as a director but
such person has not been renominated for election or, if renominated, the
shareholders failed to reelect such person as a director) then that director's
option will become void to the extent it is not then exercisable and the
portion, if any, of the option that is exercisable at such time will remain
exercisable for the lesser of the remaining term of the option or one year. In
addition, if any non-employee director ceases to be a director as a result of
death, disability or not being reelected as a director (in the case where such
person is willing to serve as a director but such person has not been
renominated for election or, if renominated, the shareholders failed to reelect
such person as a director) then the option held by that director to the extent
not then exercisable, will become fully vested and exercisable and the options
will remain exercisable for a period of the lesser of the remainder of the term
of the option or one year.
Employment Agreement
On January 1, 1996, the Company entered into an employment agreement with
Werner J. Haas, Ph.D., pursuant to which Dr. Haas agreed to serve as President
and Chief Executive Officer of the Company for a term of two years. The
employment agreement provided for the payment of an annual salary of $200,000,
bonuses in an amount to be determined at the discretion of the Board of
Directors of the Company, and participation in any employee benefit plan adopted
by the Company for its employees.
12
<PAGE>
The employment agreement provided that the Company could terminate the
employment agreement for cause (as defined in the agreement), in which case no
compensation or benefits would be paid under the employment agreement
thereafter. If the employment agreement was terminated for reasons other than
for cause, Dr. Haas would be entitled to (i) receive the full amount of his
salary and all benefits for the remainder of the term and (ii) the immediate
vesting of any unvested Company stock options he holds.
On February 18, 1997, Dr. Haas informed the Board of Directors of the
Company that he considered his contract to have been terminated by the Company
without cause as a result of the Company's failure to pay the February 15, 1997
payroll to any of its management level employees and, more specifically, to him.
Dr. Haas has demanded that the Company pay him all past due salary as well as
the nine months' severance pay specified in his employment agreement if his
contract is determined to have been terminated without cause. Additionally, Dr.
Haas resigned his position as a member of the Board of Directors. The Company
has indicated to Dr. Haas that it believes no amounts are due him under his
employment agreement. As of October 30, 1997, the Company is unable to predict
the outcome of the disagreement between Dr. Haas and the Company.
Dr. Wood assumed the duties of President and Chief Executive Officer upon
the resignation of Dr. Haas.
1987 Stock Option Plan
The Company has in effect an Amended and Restated 1987 Stock Option Plan
(the "1987 Plan") which was adopted by the Board of Directors and shareholders
of the Company effective June 1, 1987, and which was amended on March 13, 1991,
and further amended in March 1992, September 1992 and November 1993. The plan
currently provides for options exercisable for up to a total of 188,522 shares
of Common Stock. The 1987 Plan provides that incentive options which satisfy the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), may be granted to executives and other key employees (including
officers who may be members of the Board of Directors) of the Company and that
nonqualified options may be granted to such directors, executive employees and
other key employees (including officers who may be members of the Board of
Directors of the Company), each as the Board of Directors shall determine from
time to time. If any options granted under the 1987 Plan expire or terminate
without being exercised, the shares covered thereby are added back to the shares
reserved for issuance under the 1987 Plan.
The Compensation Committee of the Board of Directors administers the 1987
Plan. The 1987 Plan provides that options may be granted at no less than 75% of
the fair market value of the Common Stock on the date of the grant (or 110% of
the fair market value for options granted to participants who own 10% or more of
the Company's outstanding Common Stock).
The Compensation Committee determines, at its discretion, the persons to be
granted options, option prices, date of grant and vesting periods, although no
option may extend for longer than ten years (five years for incentive stock
options granted to 10% or greater shareholders). Payment of the exercise price
is made by check or in such other form as may be acceptable to the Board of
Directors including, under certain circumstances, the delivery of Common Stock.
No options may be granted under the 1987 Plan after June 1, 1997.
Options are not transferable by the optionee, other than by will or the
applicable laws of descent and distribution. In the event of termination of
employment, the option expires on the earlier of its stated expiration or three
months (six months in the case of the optionee's death) after termination of
employment.
In the event of a recapitalization, reorganization or other change in the
Company's capital structure or a merger or consolidation or the sale or transfer
of all or part of its assets, the 1987 Plan provides for adjustment of the
shares of Common Stock covered by the 1987 Plan and outstanding options granted
pursuant to the 1987 Plan.
The 1987 Plan may be amended at any time by the Board of Directors,
provided that amendments increasing the number of shares issuable under the 1987
Plan and amendments changing the eligibility of participants require the
approval of the holders of at least a majority of the outstanding Common Stock.
In November 1993, the Board of Directors canceled all of the outstanding
options under the 1987 Plan. Concurrently with such cancellation, the Company
entered into agreements with the holders of the canceled options providing for
13
<PAGE>
the reissuance of such options at an exercise price of $6.1875 per share. In
April 1994, the Company issued options replacing the previously canceled options
and issued additional options for a total of 185,229 shares of Common Stock at
an exercise price of $6.1875 per share. All of such options vested on January 1,
1995.
On February 23, 1995, the exercise price of all outstanding options under
the 1987 Plan was amended to reflect a new exercise price of $2.625 per share,
which was the market price of the Common Stock on such date. In addition, on
such date an additional 62,500 options were awarded under the 1987 Plan at the
$2.625 exercise price leaving only 12,431 options available for future awards
under the 1987 Plan.
1994 Incentive and Non-statutory Option Plan
On June 3, 1994, the shareholders of the Company approved the 1994
Incentive and Non-statutory Option Plan (the "1994 Plan"). The 1994 Plan is an
arrangement under which certain individuals may be granted options for incentive
stock options and non-statutory stock options as described below. Subject to
adjustment as set forth in the 1994 Plan, the aggregate number of shares of the
Common Stock that may be the subject of awards is 610,833. Of the 610,833 shares
of Common Stock available under the 1994 Plan, 160,000 have been reserved for
issuance to non-employee directors. As of December 31, 1996, 345,481 options had
been granted to employees and 113,724 options had been granted to non-employee
directors.
The Compensation Committee of the Board of Directors administers the 1994
Plan. The Compensation Committee consists of directors who, except for automatic
grants for non-employee directors under Section 7 of the 1994 Plan, are not
eligible and have not, within one year prior to the appointment of the
Compensation Committee, received equity securities of the Company under the 1994
Plan or any other incentive plan of the Company. The Compensation Committee
currently consists of Dr. Wood.
Under the 1994 Plan, the Compensation Committee has wide discretion and
flexibility, enabling the Compensation Committee to administer the 1994 Plan in
the manner that it determines is in the best interest of the Company. The
Compensation Committee has the authority to designate recipients of options
under the 1994 Plan, to interpret and construe the provisions of the 1994 Plan
and any options granted thereunder, and to do all things necessary or
appropriate to administer the 1994 Plan in accordance with its terms.
401(k) Plan
The Company has a 401(k) Retirement Plan and Trust (the "401(k) Plan")
which became effective as of January 1, 1989. Employees of the Company who have
completed one-quarter year of service and have attained age 21 are eligible to
participate in the 401(k) Plan. Subject to certain statutory limitations, a
participant may elect to have his or her compensation reduced by up to 20% and
have the Company contribute such amounts to the 401(k) Plan on his or her behalf
("Deferral Contributions"). The Company makes contributions in an amount equal
to 25% of the participant's Deferral Contributions up to 6% of his or her
compensation ("Employer Contributions"). Additionally, the Company may make such
additional contributions as it shall determine each year in its discretion. All
Deferral and Employer Contributions made on behalf of a participant are
allocated to his or her individual accounts and such participant is permitted to
direct the investment of such accounts.
A participant is fully vested in the current value of that portion of his
or her accounts attributable to Deferral Contributions. A participant's interest
in that portion of his or her accounts attributable to Employer Contributions is
generally fully vested after five years of employment. Distributions under the
401(k) Plan are made upon termination of employment, retirement, disability and
death. In addition, participants may make withdrawals in the event of severe
hardship or after the participant attains age fifty-nine and one-half.
The 401(k) Plan is intended to qualify under Section 401 of the Code, so
that contributions made under the 401(k) Plan, and income earned on
contributions, are not taxable to participants until withdrawal from the 401(k)
Plan.
The Company's contributions to the 401(k) Plan for the account of Mr. Haas
was $0 in 1997, and $2,339 in 1996, respectively. The Company's contributions to
the 401(k) Plan on behalf of all employees in the years ended December 31, 1997
and 1996 was $11,490 and $36,306 respectively. Dr. Wood is not eligible to
participate in the Company's 401(k) Plan.
14
<PAGE>
Policy with Respect to $1 Million Deduction Limit
It is the Company's policy, where practical, to avail itself of all proper
deductions under the Code. Amendments to the Code in 1993 limit, in certain
circumstances, the deductibility of compensation in excess of $1 million paid to
each of the five highest paid executives in one year. The total compensation of
the executive officers did not exceed this deduction limitation in Fiscal 1996,
and is unlikely to exceed it in 1997.
15
<PAGE>
<TABLE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
AND COMPARATIVE PER SHARE DATA
Following are financial statements and the notes thereto of the Company
for the nine months ended September 30, 1998.
POSITRON CORPORATION
BALANCE SHEETS
--------------------
(In thousands, except per share data)
September 30, December 31,
1998 1997
-------- --------
(Unaudited) (Note)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 145 $ 160
Accounts receivable, net 110 253
Inventories 331 408
Prepaid expenses 24 131
-------- --------
Total current assets 610 952
Plant and equipment, net 464 715
-------- --------
Total assets $ 1,074 $ 1,667
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable, trade $ 1,327 $ 1,573
Accrued liabilities 3,281 3,205
Note payable to an affiliate 767 767
Other note payable 1,136 930
Unearned revenue 60 60
-------- --------
Total current liabilities 6,571 6,535
-------- --------
Other liabilities 600 245
-------- --------
Commitments and contingencies
Stockholders' deficit:
Series A Preferred Stock: $1.00 par value, 8% cumulative, convertible
redeemable; $1.00 par value; 5,450,000 shares authorized; 1,564,403
and 1,594,999 shares issued and outstanding at September 30, 1998 and
December 31, 1997, respectively 1,564 1,595
Series B Preferred Stock: $1.00 par value, cumulative, convertible
redeemable; 25,000 shares authorized, issued and outstanding at
June 30, 1998 and December 31, 1997 25 25
Common Stock: $0.01 par value; 15,000,000 shares authorized, 5,159,592
and 5,128,990 shares issued and outstanding at September 30, 1998 and
December 31, 1997, respectively 52 51
Additional paid-in capital 42,221 42,191
Accumulated deficit (49,944) (48,960)
Treasury Stock: 60,156 shares at cost (15) (15)
-------- --------
Total stockholders' deficit (6,097) (5,113)
-------- --------
Total liabilities and stockholders' deficit $ 1,074 $ 1,667
======== ========
<FN>
Note: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
See accompanying notes.
</FN>
16
</TABLE>
<PAGE>
<TABLE>
POSITRON CORPORATION
STATEMENTS OF OPERATIONS
------------------------
(In thousands, except share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Fee per scan $ 147 $ 229 $ 454 $ 437
Service and component 153 431 933 1,321
----------- ----------- ----------- -----------
Total revenues 300 660 1,387 1,758
----------- ----------- ----------- -----------
Costs of sales and services:
Fee per scan 29 39 89 117
Service, warranty and component 108 221 286 500
----------- ----------- ----------- -----------
Total costs of sales and services 137 260 375 617
----------- ----------- ----------- -----------
Gross profit 163 400 1,012 1,141
----------- ----------- ----------- -----------
Operating expenses:
Research and development -- 421 18 1,037
Selling and marketing -- 230 16 572
General and administrative 840 673 1,734 1,921
----------- ----------- ----------- -----------
Total operating expenses 840 1,324 1,768 3,530
----------- ----------- ----------- -----------
Loss from operations (677) (924) (756) (2,389)
----------- ----------- ----------- -----------
Other income (expenses):
Other expense -- 8 -- (93)
Interest expense (67) (53) (228) (243)
----------- ----------- ----------- -----------
Total other expense (67) (45) (228) (336)
----------- ----------- ----------- -----------
Net loss $ (744) $ (969) $ (984) $ (2,725)
=========== =========== =========== ===========
Basic and dilutive net loss per common share $ (0.14) $ (0.19) $ (0.19) $ (0.57)
=========== =========== =========== ===========
Weighted average common shares outstanding 5,144,291 5,111,292 5,139,191 4,794,107
=========== =========== =========== ===========
<FN>
Note: The Company's financial statements include no additional elements of comprehensive income. Accordingly,
comprehensive income and net income are identical.
See accompanying notes.
</FN>
17
</TABLE>
<PAGE>
<TABLE>
POSITRON CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30, September 30,
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (984) $(2,725)
Adjustment to reconcile net loss to net cash used in operating activities (763) 2,340
------- -------
Net cash used in operating activities (221) (385)
------- -------
Cash flows from investing activities:
Capital expenditures, net -- 3
------- -------
Net cash used in investing activities -- 3
------- -------
Cash flows from financing activities:
Proceeds from other notes payable 568 --
Repayment of other notes payable (362) --
Proceeds from conversion of warrants to common stock -- 3
------- -------
Net cash provided by (used in) financing activities 206 3
------- -------
Net decrease in cash and cash equivalents (15) (379)
Cash and cash equivalents, beginning of year 160 382
------- -------
Cash and cash equivalents, end of year $ 145 $ 3
======= =======
<FN>
See accompanying notes.
</FN>
18
</TABLE>
<PAGE>
POSITRON CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
1. Basis of Presentation
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles and the rules
of the U.S. Securities and Exchange Commission, and should be read in
conjunction with the audited financial statements and notes thereto
contained in the Company's Annual Report of Form 10-KSB for the year ended
December 31, 1997. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair
presentation of financial position and the results of operations for the
interim periods presented have been reflected herein. The results of
operations for interim periods are not necessarily indicative of the
results to be expected for the full year. Notes to the financial statements
which would substantially duplicate the disclosure contained in the audited
financial statements for the most recent fiscal year ended December 31,
1997, as reported in the Form 10-KSB, have been omitted.
2. Company Operations
Since its inception the Company has been unable to sell its POSICAM(TM)
systems in sufficient quantities to be profitable. Consequently, the
Company has sustained substantial losses. Net losses for the year ended
December 31, 1997 and the nine months ended September 30, 1998 were
$4,455,000 and $984,000, respectively. The Company has an accumulated
deficit of $49,944,000 at September 30, 1998. Due to the sizable selling
prices of the Company's systems and the limited number of systems sold or
placed in service each year, the Company's revenues have fluctuated
significantly year to year.
At September 30, 1998, the Company had cash and cash equivalents in the
amount of $145,000 compared to $160,000 at December 31, 1997. During 1997
and the first nine months of 1998, the Company was unable to meet certain
obligations as they came due. As a result of the Company's liquidity
problem, 1997 salary payments to certain management level employees
totaling approximately $600,000 were unpaid at September 30, 1998.
Additionally, the Company currently has no shares of its Common Stock
available for issuance and all other authorized shares have either been
issued or reserved for issuance in respect of outstanding options and
warrants or convertible securities. The lack of such available shares
significantly restricts the Company's ability to raise capital through the
issuance of additional equity securities. While the Company believes that
its shareholders will approve an increase in the number of authorized
shares of Common Stock at its Annual Meeting of Shareholders, no assurance
can be given that such increase in authorized shares will be approved by
the Company's shareholders.
3. Net Loss Per Share
Net loss per common share for the three and nine months ended September 30,
1998 and 1997 have been computed by dividing net loss by the weighted
average number of shares of Common Stock outstanding during these periods.
4. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets or liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
5. Income Tax
The difference between the Federal statutory income tax rate and the
Company's effective income tax rate is primarily attributable to increases
in valuation allowances for deferred tax assets relating to net operating
losses.
6. Imatron Transaction
In May 1998, the Company entered into an agreement (the "Imatron
Transaction") with Imatron, Inc. ("Imatron"), whereby Imatron will acquire
19
<PAGE>
a majority ownership of the Company. In conjunction with the execution of
definitive agreements, Imatron began making working capital advances
available to the Company up to $500,000 (subsequently revised by oral
agreement to $750,000) in order to enable it to meet a portion of its
current obligations. As of September 30, 1998, the Company had borrowed
$568,000. The loan bears interest at 1/2% over the prime rate, is due March
1, 2000 (with interest being payable monthly), and is secured by all of the
Company's assets.
Under the terms of the agreement, Imatron will acquire a majority ownership
of the outstanding Common Stock of the Company on a fully-diluted and as-if
converted basis, which assumes that all outstanding warrants, options and
other derivatives have been exercised or converted into shares of Common
Stock other than out-of-the-money warrants and options, determined at the
time of issuance of shares to Imatron. If such shares were issued to
Imatron on September 30, 1998 the Company would have been obligated to
issue 9,000,000 shares of Common Stock. The Company will receive a nominal
cash payment of $100 from Imatron in payment for the shares.
In addition to providing limited working capital financing, Imatron has
agreed to support the Company's marketing program, particularly with regard
to Imatron's affiliate, Imatron Japan, Inc. by agreeing to make, after the
share issuance closing date, all reasonable efforts to cause the placement
of 10 POSICAM(TM) systems over the next three years. The Company recently
shipped a POSICAM(TM) system to Imatron Japan as the first delivery under a
three-year distribution agreement entered into last year. Imatron Japan is
a major distributor for Imatron's Ultrafast CT and for the equipment of
certain other high technology companies. Imatron has a 24% minority
interest in Imatron Japan.
Imatron has also agreed to help facilitate the recapitalization of the
Company to support its re-entry into the medical imaging market by using
its best efforts after the share issuance closing date to arrange for
additional third-party equity financing for the Company over an
eighteen-month period in an aggregate amount of not less than $8,000,000.
There can be no assurances, however, that any such sales will actually be
consummated or that Imatron will be able to successfully assist the Company
in raising additional capital.
Consummation of the issuance of shares to Imatron is conditioned upon,
among other things (a) the resignation of each officer of the Company, (b)
the resignation of at least three of the four current directors of the
Company and the appointment of Imatron's nominees to fill such vacancies,
and (c) shareholder approval of an amendment to the Company's Articles of
Incorporation to increase its authorized Common Stock to at least
100,000,000 shares. The Company anticipates that the share issuance to
Imatron will close immediately after the Annual Meeting if the required
shareholder approval is obtained.
In connection with the above transactions, the Company, Imatron and two
current lenders, Uro-Tech, Ltd. ("Uro-Tech") and ProFutures Bridge Capital
Fund, L.P. ("ProFutures"), entered into certain agreements whereby (a)
ProFutures waived all past defaults and extended the maturity of its loan
(with a current balance of approximately $570,000) to December 5, 1998, in
return for a $50,000 payment, the issuance of warrants to purchase
1,150,000 shares of Common Stock at $0.25 per share (in addition to the
issuance of previously bargained for warrants to purchase an additional
100,000 shares of Common Stock at $0.25 per share), and minimum loan
repayments of $50,000 for each of the months of April, May, June and July
1998, $100,000 for the month of August 1998 and $50,000 for each of the
months of September, October and November 1998 (b) Imatron agreed to
subordinate its loan to ProFuture's loan, (c) Uro-Tech agreed to
subordinate its loan (with a current balance of approximately $767,000 plus
accrued interest payable of approximately $286,000) to Imatron's loan, and
(d) ProFutures and Imatron agreed that all amounts above the first
$1,000,000 of any third party equity financing obtained by Imatron would be
applied equally to reduce the Company's debt to both ProFutures and
Imatron. Consistent with the oral amendment to the Imatron Agreement, the
Company and ProFutures have amended their agreements to provide further
waivers of any past defaults and have further extended the maturity of the
ProFutures Loan to December 5, 1998 and minimum loan repayments of $50,000
for each of the months of September, October and November 1998, leaving a
balance at December 5, 1998 of approximately $400,000. Imatron agreed to
continue to subordinate its loan to the ProFutures Loan, and Uro-Tech
agreed to subordinate its loan to Imatron's loan. Except as modified by the
amendments, the remaining agreements remain the same.
20
<PAGE>
The Company is in negotiations to sell one of its POSICAM(TM) systems to a
third party that currently leases the system. It is anticipated that, if
the Company is successful in consummating such sale, it will receive net
proceeds of approximately $360,000. It is the Company's intention to use
such proceeds, plus proceeds from a service contract currently being
negotiated with the third party, to retire the remaining balance of
approximately $400,000 on the ProFutures Loan. There can be no assurances,
however, that the Company will be successful in reaching an agreement
concerning the proposed system sale or that, if agreement is reached, such
sale will be consummated, or that the Company otherwise will be able to
obtain additional debt or equity financing necessary to repay the
ProFutures Loan by such maturity date. Absent obtaining a further extension
of the December 5, 1998 maturity date of the ProFutures Loan, closing the
proposed sale of the POSICAM(TM) system, or obtaining additional debt or
equity financing necessary to repay the ProFutures Loan by the maturity
date, the Company may be forced to seek protection under the Federal
Bankruptcy laws.
If the proposal to amend the Company's Articles of Incorporation is not
approved by the Company's shareholders, or if such proposal is approved but
the Imatron Transaction does not subsequently close, the Company may be
forced to seek protection under the Federal Bankruptcy laws. Even if
Proposal Two to amend the Company's Articles of Incorporation is approved
and the Imatron Transaction closes, there can be no assurances that the
Company will thereafter be able to raise sufficient capital for the Company
to continue as a going concern or even if such additional capital is raised
that the Company will ever achieve the level of revenues needed to be
profitable in the future, or, if profitability is achieved, that it will be
sustained.
7. Contingencies
The City of Houston has filed suit, and judgment has been entered, against
the Company for delinquent taxes in the amount of approximately $240,000.
The balance is fully accrued at September 30, 1998.
The Company is obligated to pay royalties of 3% of the gross revenue from
sales, uses, leases, licensing or rentals of POSICAM systems, 1% each to a
director of the Company and two other unrelated entities. During the years
ended December 31, 1997 and 1996 the Company incurred royalties of $134,000
and $42,000, respectively, based upon system sales and adjustments to
royalties.
The Company's royalties were reduced to the 3% level based upon
consideration, provided to two of the payees, under consulting agreements
and promissory notes. However, the consulting agreements provide that if
the Company defaults in its payment obligations thereunder, then the payees
would be entitled to receive regrant of the royalties that they previously
released. In April 1998, the Company received a demand letter from one of
the payees alleging default under his consulting agreement in 1997 and
demanding regrant of an additional 1% royalty interest. Although the
Company has not received a demand from the second payee, the Company
believes that a payment default may have occurred under his consulting
agreement and that as a result thereof, he may be entitled to the regrant
of an additional 0.5% royalty interest. The Company anticipates initiating
settlement discussions with both payees concerning the alleged payment
defaults. The Company is unable to predict the outcome of such discussions
at this time; however, the Company recorded an adjustment of approximately
$100,000 during 1997 in recognition of the additional royalties it may owe.
If the parties fail to reach a settlement, one payee will be entitled to
receive an aggregate 2% royalty and the second payee will be entitled to
receive an aggregate 1.5% royalty, resulting in an increase of the
Company's royalty obligations from 3% to 4.5%. Such increase in royalty
obligations could have a material adverse effect on the Company's future
financial performance.
Arbitration procedures have been initiated against the Company in China
involving a dispute with respect to a POSICAMTM system. The Company entered
into a contract with a Chinese company in September 1996 to provide the
company with a POSICAMTM system. The Chinese company provided the Company
with a down payment of approximately $300,000 and agreed to provide the
company with a letter of credit for the remaining purchase price, which
letter of credit would be fundable upon shipment of the POSICAMTM system.
The Company utilized the down payment to purchase the beginning inventory
for the system and began construction of the system. The Chinese company,
however, failed to provide the Company with the letter of credit and the
Company, because of its severe financial difficulties, was unable to
complete and deliver the system without such additional funds. The Chinese
21
<PAGE>
company has demanded the return of its deposit and, on September 8, 1998, a
notice of arbitration concerning the sales contract dispute was issued to
the Company by the China International Economic and Trade Arbitration
Commission, Shanghai Commission. The Company believes that the claims
raised by the Chinese company are without merit and intends to vigorously
defend its interests. It is not possible at this time to predict the
outcome of this proceeding, although a ruling unfavorable to the Company
could have a material adverse effect on the Company's business and
financial performance.
8. Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income,
which requires a company to display an amount representing comprehensive
income as part of the company's basic financial statements. Comprehensive
income includes such items as unrealized gains or losses on certain
investment securities and certain foreign currency translation adjustments.
The Company's financial statements include none of the additional elements
that affect comprehensive income. Accordingly, comprehensive income and net
income are identical.
22
<PAGE>
Following are the reports of independent accountants, financial statements
and the notes thereto of the Company for the years ended December 31, 1997 and
1996.
Report of Independent Accountants
Board of Directors and Stockholders
Positron Corporation
We have audited the accompanying balance sheet of Positron Corporation as of
December 31, 1997 and the related statements of operations, stockholders'
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Positron Corporation as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plan with regard to this matter is
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Ham, Langston & Brezina, L.L.P.
Houston, Texas July 25, 1998, except for Notes 15 and 16, as to which the date
is October 27, 1998
23
<PAGE>
Report of Independent Accountants
Board of Directors and Stockholders
Positron Corporation
We have audited the accompanying balance sheet of Positron Corporation as of
December 31, 1996 and the related statements of operations, stockholders'
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Positron Corporation as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plan with regard to this matter is
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Coopers & Lybrand L.L.P.
Houston, Texas
April 9, 1997
24
<PAGE>
<TABLE>
POSITRON CORPORATION
BALANCE SHEETS
--------------------
(In thousands, except share data)
<CAPTION>
December 31,
ASSETS 1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 160 $ 382
Accounts receivable, net 253 520
Notes receivable -- 324
Inventories 408 2,633
Prepaid expenses 131 159
Other current assets -- 426
-------- --------
Total current assets 952 4,444
Plant and equipment, net 715 967
Intangible assets, net -- 106
-------- --------
Total asset $ 1,667 $ 5,517
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable, trade $ 1,573 $ 1,113
Accrued liabilities 3,205 2,654
Revolving line of credit -- 75
Note payable to an affiliate 767 663
Other note payable 930 1,335
Unearned revenue 60 267
-------- --------
Total current liabilities 6,535 6,107
-------- --------
Other liabilities 245 68
-------- --------
Commitments and contingencies
Stockholders' deficit:
Series A Preferred Stock: $1.00 par value; 8% cumulative, convertible,
redeemable; 5,450,000 shares authorized; 1,594,999 and 2,404,624
shares issued and outstanding at December 31, 1997 and 1996,
respectively
1,595 2,405
Series B Preferred Stock: $1.00 par value, 8% cumulative, convertible,
redeemable; 25,000 shares authorized, issued and outstanding at December 31,
1997 and 1996 25 25
Common stock: $0.01 par value; 15,000,000 shares authorized,
5,128,990 and 4,312,182 shares issued and outstanding at December 31, 1997
and 1996 51 43
Additional paid-in capital 42,191 41,374
Accumulated deficit (48,960) (44,505)
Treasury stock: 60,156 shares at cost (15) --
-------- --------
Total stockholders' deficit (5,113) (658)
-------- --------
Total liabilities and stockholders' deficit $ 1,667 $ 5,517
======== ========
<FN>
See notes to financial statements.
</FN>
25
</TABLE>
<PAGE>
<TABLE>
POSITRON CORPORATION
STATEMENTS OF OPERATIONS
------------------------
(In thousands, except share data)
<CAPTION>
Year Ended December 31,
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
System sales $ 1,129 $ 650
Fee per scan 602 415
Service and component 1,795 2,510
----------- -----------
Total revenues 3,526 3,575
----------- -----------
Costs of sales and services:
System sales 698 316
Fee per scan 156 172
Service, warranty and component 465 610
Provision for loss on system exchange -- 1,000
Provision for inventory obsolescence 1,224 --
----------- -----------
Total costs of sales and services 2,543 2,098
----------- -----------
Gross profit 983 1,477
----------- -----------
Operating expenses:
Research and development 1,305 2,227
Selling, general and administrative 3,609 5,263
Total operating costs 4,914 7,490
----------- -----------
Loss from operations (3,931) (6,013)
----------- -----------
Other expenses:
Interest expenses (334) (197)
Other expense (190) (165)
----------- -----------
Total other expense (524) (362)
----------- -----------
Net loss $ (4,455) $ (6,375)
=========== ===========
Basic and dilutive net loss per common share $ (0.91) $ (1.67)
=========== ===========
Weighted average common shares outstanding 4,884,870 3,811,026
=========== ===========
<FN>
See notes to financial statements.
</FN>
26
</TABLE>
<PAGE>
<TABLE>
POSITRON CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 1997 and 1996
(In thousands, except share data)
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 -- $ -- -- -- 3,637,320 $ 36
Net loss -- -- -- -- -- --
Issuance of Series A Preferred Stock 2,641,989 2,642 -- -- -- --
Issuance of Series B Preferred Stock -- -- 25,000 25 -- --
Conversion of Series A Preferred Stock to
Common Stock (670,694) (670) -- -- 670,694 7
Conversion of Warrants to Common Stock -- -- -- -- 4,168 --
Conversion of note payable to an affiliate
to Series A Preferred Stock 433,329 433 -- -- -- --
Balance at December 31, 1996 2,404,624 2,405 25,000 25 4,312,182 43
Net loss -- -- -- -- -- --
Conversion of Series A Preferred Stock to
Common Stock (809,625) (810) -- -- 809,625 8
Conversion of Warrants to Common Stock -- -- -- -- 7,183 --
Treasury stock received upon settlement of
note receivable -- -- -- -- -- --
Balance at December 31, 1997 1,594,999 $ 1,595 25,000 $ 25 5,128,990 $ 51
========= ======= ====== ==== ========= ====
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated Treasury
Capital Deficit Stock Total
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ 39,309 $ (38,130) $ -- $ 1,215
Net loss -- (6,375) -- (6,375)
Issuance of Series A Preferred Stock 52 -- -- 2,694
Issuance of Series B Preferred Stock 1,125 -- -- 1,150
Conversion of Series A Preferred Stock to
Common Stock 663 -- -- --
Conversion of Warrants to Common Stock 8 -- -- 8
Conversion of note payable to an affiliate to
Series A Preferred Stock 217 -- -- 650
Balance at December 31, 1996 41,374 (44,505) -- (658)
Net loss -- (4,455) -- (4,455)
Conversion of Series A Preferred Stock to
Common Stock 802 -- -- --
Conversion of Warrants to Common Stock 15 -- -- 15
Treasury stock received upon settlement of note
receivable -- -- (15) (15)
Balance at December 31, 1997 $ 42,191 $ (48,960) $ (15) $ (5,113)
======== ========= ===== ========
<FN>
See notes to financial statements.
</FN>
27
</TABLE>
<PAGE>
<TABLE>
POSITRON CORPORATION
STATEMENTS OF CASH FLOWS
------------------------
(In thousands)
<CAPTION>
Year Ended December 31,
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,455) $(6,375)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 255 112
Provision for doubtful accounts and notes receivable 456 760
Provision for obsolescence of inventory 1,224 --
Provision to reduce intangible assets to net realizable value 81 --
Amortization of intangible assets 25 25
Provision for loss on exchange of system -- 1,000
Change in assets and liabilities, operating:
Decrease (increase) in accounts receivable (87) 404
Decrease in inventories 1,001 33
Decrease in prepaid expenses 26 124
Decrease (increase) in other current assets 426 (368)
Increase (decrease) in accounts payable, trade 460 (642)
Increase (decrease) in accrued liabilities 553 (233)
Increase (decrease) in revolving line of credit (75) 75
Increase (decrease) in other liabilities 177 (11)
------- -------
Net cash provided by (used in) operating activities 67 (5,096)
------- -------
Cash flows from investing activities:
Capital expenditures (3) (51)
------- -------
Net cash used in investing activities (3) (51)
------- -------
Cash flows from financing activities:
Proceeds from note payable to an affiliate 104 240
Proceeds from other notes payable -- 1,400
Repayment of other notes payable (405) (65)
Proceeds from issuance of Series A preferred stock -- 3,375
Series A preferred stock issuance costs -- (681)
Proceeds from issuance of Series B preferred stock -- 1,250
Series B preferred stock issuance costs -- (100)
Proceeds from conversion of warrants to common stock 15 8
------- -------
Net cash provided by (used in) financing activities (286) 5,427
------- -------
Net increase (decrease) in cash and cash equivalents (222) 280
Cash and cash equivalents, beginning of year 382 102
------- -------
Cash and cash equivalents, end of year $ 160 $ 382
======= =======
<FN>
See notes to financial statements.
</FN>
28
</TABLE>
<PAGE>
POSITRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. Description of Business
The Company was incorporated on December 20, 1983 in the state of Texas
and commenced commercial operations during 1986. The Company designs,
manufactures, markets and services its POSICAMTM system, advanced
medical imaging devices, utilizing positron emission tomography ("PET")
technology. These systems utilize the Company's patented and
proprietary technology, an imaging technique which assesses the
biochemistry, cellular metabolism and physiology of organs and tissues,
as well as producing anatomical and structural images. Targeted markets
include medical facilities and diagnostic centers located throughout
the world. POSICAMTM systems are used by physicians as diagnostic and
treatment evaluation tools in the areas of cardiology, neurology and
oncology. The Company faces competition principally from two other
companies which specialize in advanced medical imaging equipment.
Since its inception the Company has been unable to sell its POSICAMTM
systems in sufficient quantities to be profitable. Consequently, the
Company has sustained substantial losses. Net losses for the years
ended December 31, 1997 and 1996 were $4,455,000 and $6,375,000,
respectively, and at December 31, 1997 the Company has an accumulated
deficit of $48,960,000. The magnitude of the selling prices of the
Company's systems and the limited number of systems sold or placed in
service each year has caused the Company's revenues to fluctuate
significantly year to year.
At December 31, 1997, the Company had cash and cash equivalents in the
amount of $160,000 compared to $382,000 at December 31, 1996. During
both 1996 and 1997, the Company was unable to meet certain obligations
as they came due and the Company's liquidity problems have become
critical. As a result of the Company's severe liquidity problem, salary
payments owed to certain management level employees totaling
approximately $700,000 were unpaid at December 31, 1997.
To deal with its critical liquidity problem, in June 1998 the Company
entered into a preliminary agreement (the "Imatron Transaction") with
Imatron, Inc. ("Imatron"), whereby Imatron plans to acquire a majority
ownership in the Company (See Note 16). If the Imatron Transaction is
not completed or if the Imatron Transaction is completed and Imatron is
unsuccessful in its efforts to raise capital for the Company,
management believes that the Company will be unable to continue as a
going concern and that the Company's assets will be seized by its
secured creditors.
The Company currently has no shares of its Common Stock available for
issuance and all authorized shares have either been issued or reserved
for issuance in respect of outstanding options and warrants or
convertible securities. The lack of such available shares significantly
restricts the Company's ability to raise capital through the issuance
of additional equity securities. While the Company believes that its
shareholders will approve an increase in the number of authorized
shares of Common Stock at its Annual Meeting of Shareholders, no
assurance can be given that such increase in authorized shares will be
approved by the Company's shareholders.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with an original maturity of three months or less.
Inventory
Inventories are stated at the lower of cost or market and include
material, labor and overhead. Cost is determined using the first-in,
first-out (FIFO) method of inventory valuation.
29
<PAGE>
Plant and Equipment
Plant and equipment are recorded at cost and depreciated for financial
statement purposes using the straight-line method over estimated useful
lives of five to seven years. Gains or losses on dispositions are
included in the statement of operations in the period incurred.
Maintenance and repair cost are charged to expense as incurred.
Intangible Assets
Intangible assets, consisting principally of patent costs, are
amortized using the straight-line method over an estimated useful life
of 10 years.
Impairment of Long-Lived Assets
Periodically, the Company evaluates the carrying value of its plant and
equipment, and long-lived assets, which includes patents and other
intangible assets, by comparing the anticipated future net cash flows
associated with those assets to the related net book value. If an
impairment is indicated as a result of such reviews, the Company would
remove the impairment based on the fair market value of the assets,
using techniques such as projected future discounted cash flows or
third party valuations. As of December 31, 1997, an adjustment to
intangible assets was indicated and recorded.
Revenue Recognition
Revenues from POSICAMTM system contracts are recognized when all
significant costs have been incurred and the system has been shipped to
the customer. Revenues from fee per scan contracts are recognized upon
performance of patient scans. Revenues from maintenance contracts are
recognized over the term of the contract. Service revenues are
recognized upon performance of the services.
Research and Development Expenses
All costs related to research and development are charged to expense as
incurred.
Warranty Costs
The Company accrues for the cost of product warranty on POSICAMTM
systems at the time of shipment. Warranty periods generally range up to
a maximum of one year. Actual results could differ from the amounts
estimated.
Net Loss Per Common Share
Basic and dilutive net loss per common share for the years ended
December 31, 1997 and 1996 have been computed by dividing net loss by
the weighted average number of shares of Common Stock outstanding
during these periods. All Common Stock equivalents were antidilutive.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
30
<PAGE>
Fair Value of Financial Instruments
The Company includes fair value information in the notes to the
financial statements when the fair value of its financial instruments
is different from the book value. When the book value approximates fair
value, no additional disclosure is made.
Reclassifications
Certain amounts presented in the Company's December 31, 1996 financial
statements have been reclassified in order to conform to current year
presentation.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." Both SFAS No. 130 and SFAS No.
131 are effective for fiscal years beginning after December 15, 1997.
SFAS 130 requires a company to display an amount representing
comprehensive income, as defined by the statement, as part of the
company's basic financial statements. Comprehensive income will include
items such as unrealized gains or losses on certain investment
securities and foreign currency items. The adoption of SFAS 130 should
not materially affect the Company's financial statements.
SFAS 131 requires a company to disclose financial and other
information, as defined by the statement, about its business segments,
their products and services, geographic areas, major customers,
revenues, profits, assets and other information. The Company has not
yet assessed the impact that SFAS 131 will have on its financial
statement reporting.
3. Accounts Receivable
Accounts receivable at December 31, 1997 and 1996 consisted of the following:
1997 1996
------ ------
(In thousands)
Accounts receivable-- equipment sales $1,011 $1,011
Accounts receivable-- maintenance 75 101
Accounts receivable-- fee per scan 334 180
Accounts receivable-- other -- 41
------ ------
1,420 1,333
Less allowance for doubtful accounts (1,227) (1,080)
------ ------
$ 193 $ 253
4. Inventories
Inventories at December 31, 1997 and 1996, consisted of the following:
1997 1996
------ ------
(In thousands)
Raw materials $1,299 $1,955
Work in process -- 68
Finished goods 333 610
------ ------
1,632 2,633
Less reserve for obsolescence 1,224 --
------ ------
$ 408 $2,633
====== ======
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<PAGE>
Due to improvements in technology that will slow movement of the
Company's inventory, the Company recorded a reserve for obsolescence of
$1,224,000 at December 31, 1997 to reduce inventories to their
estimated net realizable value.
5. Plant and Equipment
Plant and equipment at December 31, 1997 and 1996 consisted of the
following:
1997 1996
------ ------
(In thousands)
Furniture and fixtures $ 327 $ 327
Computers and peripherals 775 772
Leasehold improvements 17 17
Leased assets 782 782
Machinery and equipment 518 518
------ ------
Total plant and equipment 2,419 2,416
Less accumulated depreciation (1,704) (1,449)
------ ------
$ 715 $ 967
====== ======
6. Accrued Liabilities:
Accrued liabilities at December 31, 1997 and 1996 consisted of the
following:
1997 1996
------ ------
(In thousands)
Royalties $ 368 $ 234
Research grants 8 58
Warranty 1,337 1,343
Compensation 752 130
Other 631 889
------ ------
$3,096 $2,654
====== ======
7. Revolving Line of Credit
On February 7, 1996, the Company entered into a lending facility with
Boston Financial & Equity ("BF&E") Corporation pursuant to which the
Company was allowed to borrow up to 80% of its outstanding qualified
accounts receivable. During 1997, this revolving line of credit was
canceled by BF&E and repaid by the Company.
8. Notes Payable to an Affiliate
During 1995 and 1996, in order to fund its activities, the Company
borrowed a total of $1,313,000 from Uro- Tech, Ltd. (the "Uro-Tech
Loan"), an affiliate of the Company. The Uro-Tech Loan, as amended,
bears interest at 13.8% per year and matured on April 30, 1997;
however, the Company was unable to repay the debt upon maturity. The
Company obtained an effective extension of the Uro-Tech Loan in
connection with the Imatron Transaction (See Note 15). The Uro-Tech
Loan is collateralized by liens and security interests encumbering most
of the Company's assets including the Company's know-how, patents and
proprietary rights pertaining to its PET technology. As part of the
private placement of Series A Preferred Stock, $650,000 of the
outstanding principal balance of the Uro-Tech Loan was converted into
Series A Preferred Stock. As of December 31, 1997 and 1996,
approximately $767,000 and $663,000 was payable to Uro-Tech, Ltd. In
connection with the loan from Uro-Tech, the Company granted Uro-Tech
warrants to purchase 67,500 shares of Common Stock, at an exercise
price of $2.00 per share exercisable through February 7, 2001.
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<PAGE>
9. Other Notes Payable
On November 14, 1996, in order to fund its continued activities, the
Company obtained a loan facility (the "ProFutures Loan") of $1,400,000
from ProFutures Bridge Capital, L.P. ("ProFutures"). The ProFutures
Loan originally bore interest at a rate of 12% until April 1, 1997, at
which date, the rate increased to 15%. The ProFutures Loan matured on
June 30, 1997; however, the Company was unable to repay the debt.
Accordingly, under terms specified in the loan agreement, after
November 30, 1997, the interest rate increased to 18% per annum. As of
December 31, 1997 and 1996, approximately $930,000 and $1,335,000,
respectively, was outstanding under the ProFutures Loan. Subsequent to
December 31, 1997, the Company was granted an extension of the maturity
of the ProFutures Loan (See Note 15). The ProFutures Loan is
collateralized by liens and security interest encumbering all of the
assets of the Company, including know-how, patents and proprietary
rights pertaining to its PET technology. In addition, the Company
granted ProFutures a ten year warrant to purchase 250,000 shares of its
Common Stock at an exercise price of $2.40 per share. At April 1, 1997
the Company was unable to repay the loan to ProFutures and, in
accordance with the ProFutures Loan, granted to ProFutures additional
warrants for the purchase of 100,000 shares of its Common Stock at
$1.84 per share. Concurrently, the exercise price of the previously
issued warrant for 250,000 shares of the Company's Common Stock at
$2.40 per share was reduced $1.84 per share.
10. Common Stock - Options and Warrants
Options
In 1987, the Company established a Common Stock option plan (the "1987
Plan") covering directors, officers and other key employees. In
November 1993, the Company canceled all options outstanding under the
1987 Plan. In connection with such cancellations, the board of
directors authorized the reissuance of 38,522 options to purchase
shares of Common Stock at 75 percent of the IPO price following the
closing of an initial public offering. Such options vested and became
exercisable on January 3, 1995. In addition, in February 1994, the
board of directors authorized the issuance of an additional 150,000
options at the same exercise price. Options granted under the 1987 Plan
expired on the earlier of three months after termination of employment
or ten years from the grant date.
Effective June 3, 1994, the shareholders of the Company approved the
1994 Incentive and Nonstatutory Option Plan (the "1994 Plan"). The 1994
Plan, as amended, provides for the issuance of an aggregate of 601,833
Common Stock options to key employees, directors, and certain
consultants and advisors of the Company. The 1994 Plan also provides
that the exercise price of Incentive Options shall not be less than the
fair market value of the shares on the date of the grant. The exercise
price per share of Nonstatutory options shall not be less than the par
value of the Common Stock or 50% of the fair market value of the Common
Stock on the date of grant. The 1994 Plan is administered by the
Compensation Committee of the Board of Directors. The committee has the
authority to determine the individuals to whom awards will be made, the
amount of the awards, and all other terms and conditions of the awards.
As of December 31, 1997, options to purchase an aggregate of 144,389
shares of Common Stock at a range of $2.626 - $4.125 per share, had
been granted to certain key employees.
The 1994 Plan also provides that each non-employee director
automatically receives options to purchase 10,500 shares of Common
Stock at the date such individual becomes a non-employee director. Each
non-employee director who is a director on the first business day
following each Annual Shareholder Meeting also receives an option to
purchase a number of shares of Common Stock having a value of $15,000
as determined by the fair market value of the Common Stock on the date
of grant. As of December 31, 1997, options to purchase an aggregate of
163,724 shares of Common Stock at a range of $2.625-$4.125 per share
had been granted to non-employee directors. All 1994 Plan options
expire within ten years of the date of the grant.
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<PAGE>
A summary of stock option activity is as follows:
Shares Issuable
Under Outstanding Weighted Average
Options Exercise Price
Balance at January 1, 1996 584,204 $ 2.80
Granted --
Exercised --
Forfeited (11,526) $ 2.77
-------
Balance at December 31, 1996 572,678 $ 2.80
Granted --
Exercised --
Forfeited --
-------
Balance at December 31, 1997 572,678 $ 2.80
=======
The Company has elected to apply the disclosure only requirements of
Statement of Financial Accounting No. 123, Accounting for Stock-Based
Compensation ("SFAS 123") which, if fully adopted by the Company, would
change the method the Company applies in recognizing the cost of the
Plan. Adoption of the cost recognition provisions of SFAS 123 is
optional and the Company has decided not to elect those provisions. As
a result, the Company continues to apply Accounting Principles Board
Opinion No. 25 ("APB 25") and related interpretations in accounting for
the measurement and recognition of the Plan's cost.
The shares exercisable for vested options and the corresponding
weighted average exercise price was 435,436 shares and $2.80 per share
at December 31, 1997 and 1996.
Following is a summary of stock options outstanding at December 31,
1997.
Options Outstanding Options Exercisable
--------------------------------------- ----------------------
Weighted Avg
Range of Remaining Term Weighted Avg Weighted Avg
Exercise Price Shares (in Years) Exercise Price Shares Exercise Price
- -------------- ------- -------------- -------------- ------- --------------
$2.625--$3.375 492,980 7.20 $2.63 376,194 $2.63
$3.376--$4.125 79,698 7.66 $3.91 59,242 $3.92
------- -------
$2.625--$4.125 572,678 7.27 $2.80 435,436 $2.80
======= =======
The Company did not grant or reprice any options during the year ended
December 31, 1997 or 1996.
Under SFAS 123, compensation cost is measured at the grant based on the
fair value of the awards and is recognized over the service period,
which is usually the vesting period. The fair value of options granted
during 1996 was estimated on the date of grant using the Black Scholes
option-pricing model with the following assumptions used to calculate
fair value of options awarded in 1996: (i) average dividend yield of
0.00%; (ii) expected volatility of 83.36%; (iii) expected life of five
(5) years; and (iv) estimated risk-free interest rate, which is
different for grants awarded on different grant dates, ranging from
5.66% to 7.15%.
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<PAGE>
The pro forma disclosures as if the Company adopted the cost
recognition requirements of SFAS 123 are as follows (in thousands):
1997 1996
------------------------- --------------------------
As Reported Pro Forma As Reported Pro Forma
------- ------- ------- -------
Net loss $(4,455) $(4,455) $(6,375) $(6,476)
Earnings per common share $ (0.91) $ (0.91) $ (1.67) $ (1.70)
The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future results. SFAS 123 does not apply to awards prior
to 1995. Additional awards in future years are not anticipated by the
Company.
Warrants
Prior to the Company's initial public offering, the Company issued
warrants to the purchasers of the then outstanding Series E Preferred
Stock (the "1993 Warrants"). Subject to adjustment for certain
transactions, the 1993 Warrants, as originally issued, were exercisable
for an aggregate of 353,531 shares of Common Stock at an exercise price
of $9.90. Because of certain specified anti-dilution provisions, the
1993 Warrants were exercisable for an aggregate of 519,394 shares of
Common Stock at a purchase price of $5.60 per share as of December 31,
1997. The 1993 Warrants are exercisable at any time until November 30,
1998 and are entitled to the benefit of adjustments in the exercise
price and in the number of shares of Common Stock or other securities
deliverable upon the exercise thereof in the event of a stock dividend,
stock split, reclassification, reorganization, consolidation, merger,
sale of all substantially all of the property of the Company, or other
dilutive transactions.
The 1993 Warrants are redeemable at the option of the Company at a
price equal to $.10 per share of the Common Stock covered by the 1993
Warrant, on 30 days written notice, provided that the market price of
the Common Stock equals or exceeds $12.544 for the 20 consecutive
trading days ending within 10 days prior to the notice of redemption.
The Company also granted the holders of the 1993 Warrants certain
registration rights with respect to the 1993 Warrants and the Common
Stock for which the 1993 Warrants are exercisable.
In connection with its initial public offering, the Company issued
3,898,550 Redeemable Warrants (the "Redeemable Warrants"). The
Redeemable Warrants as originally issued were exercisable for an
aggregate of 3,893,550 shares of Common Stock at an exercise price of
$8.25 per share. Because of their anti-dilution provisions the
Redeemable Warrants were exercisable for an aggregate of 5,646,798
shares of Common Stock at a purchase price of $5.60 per share as of
December 31, 1997. The Redeemable Warrants are entitled to the benefit
of adjustment in the exercise price and in the number of shares of
Common Stock or other securities deliverable upon the exercise thereof
in the event of a stock dividend, stock split, reclassification,
reorganization, consolidation, merger, sale of all or substantially all
of the property of the Company, or other dilutive transactions. The
Company has the right to reduce the exercise price or increase the
number of shares of Common Stock issuable upon the exercise of the
Redeemable Warrants.
Each Redeemable Warrant expires on December 3, 1998 (the "Expiration
Date"), subject to extension. The Company may at any time extend the
Expiration Date of all outstanding Redeemable Warrants for such
increased period of time as it may determine.
The Company has the right at any time after March 3, 1995, to redeem
the Redeemable Warrants in whole or in part for cancellation at a price
of $1.25 each, by written notice to each Redeemable Warrant holder.
Such notice may only be given within 10 days following any period of 20
consecutive trading days during which the average closing bid for the
Common Stock (if then trading on the over-the-counter market) or the
35
<PAGE>
average closing price of the Common Stock (if then listed on the Nasdaq
Market) equals or exceeds $12.544 per share, subject to adjustment for
stock dividends, splits and similar events. If the Redeemable Warrants
are called in for cancellation, they must be exercised prior to the
close of business on the date of any such redemption and cancellation
or the right to purchase the applicable shares of Common Stock is
forfeited. The Company granted the holders of the Redeemable Warrants
certain registration rights with respect to the Common Stock for which
the Redeemable Warrants are exercisable.
A summary of warrant activity is as follows:
Number of
Shares Exercise Price
--------- -----------------
Balance at December 31, 1995 4,950,848 $8.04-- $3,572.27
Warrants issued in connection with the
Series B Preferred Stock 100,000 $2.00
Warrants issued in connection with the
Series A Preferred Stock 1,537,696 $2.00
1993 warrants anti-dilution provisions 1,112,973 $5.60
Redeemable warrant anti-dilution provisions 102,371 $5.60
Warrants converted to Common Stock (4,168)
---------
Balance at December 31, 1996 7,799,720 $2.00-- $3,572.27
Warrants issued in connection with the
ProFutures Loan 100,000 $1.84
1993 warrants anti-dilution provisions --
Redeemable warrant anti-dilution provisions --
Warrants converted to Common Stock (7,183)
---------
Balance at January 31, 1997 7,892,537 $1.84-- $3,752.27
=========
No compensation expense related to options and warrants was recognized
by the Company in the accompanying statement of operations during the
years ended December 31, 1997 or 1996.
The Company has reserved 9,871,010 shares of Common Stock for issuance
upon the exercise of all employee and nonemployee director Common Stock
options and outstanding warrants.
11. Preferred Stock
The Company's Articles of Incorporation authorize the board of
directors to issue 10,000,000 shares of preferred stock from time to
time in one or more series. The board of directors is authorized to
determine, prior to issuing any such series of preferred stock and
without any vote or action by the shareholders, the rights,
preferences, privileges and restrictions of the shares of such series,
including dividend rights, voting rights, terms of redemption, the
provisions of any purchase, retirement or sinking fund to be provided
for the shares of any series, conversion and exchange rights, the
preferences upon any distribution of the assets of the Company,
including in the event of voluntary of involuntary liquidation,
dissolution or winding up of the Company, and the preferences and
relative rights among each series of preferred stock.
In February, March and May of 1996, the Company issued 3,075,318 shares
of Series A 8% Cumulative Convertible Redeemable Preferred Stock $1.00
par value ("Series A Preferred Stock") and Redeemable Common Stock
Purchase Warrants to purchase 1,537,696 shares of the Company's Common
36
<PAGE>
Stock. The net proceeds of the private placement were approximately
$2,972,000. Each share of the Series A Preferred Stock is immediately
convertible into one share of Common Stock. Each Redeemable Common
Stock Purchase Warrant is exercisable at a price of $2.00 per share of
Common Stock. Each Redeemable Common Stock Purchase Warrant is
exercisable at a price of $2.00 per share of Common Stock. Eight
percent (8%) dividends on the Series A Preferred Stock may be paid in
cash or the Series A Preferred Stock at the discretion of the Company.
The Series A Preferred Stock is senior to the Company's Series B
Preferred Stock and Common Stock in liquidation. Holders of the Series
A Preferred Stock may vote on an as if converted basis on any matter
requiring shareholder vote. While the Series A Preferred Stock is
outstanding or any dividends thereon remain unpaid, no Common Stock
dividends may be paid or declared by the Company. The Series A
Preferred Stock may be redeemed in whole or in part, at the option of
the Company, at any time subsequent to March 1998 at a price of $1.46
per share plus any undeclared and/or unpaid dividends to the date of
redemption. Redemption requires at least 30 days advanced notice and
notice may only be given if the Company's common stock has closed above
$2.00 per share for the twenty consecutive trading days prior to the
notice.
In conjunction with the issuance of the aforementioned Series A
Preferred Stock, Uro-Tech converted amounts receivable from the Company
totaling $650,000 into 433,329 shares of Series A Preferred Stock and
216,671 Redeemable Stock Purchase Warrants.
Series B Preferred Stock
In July 1996, the Company issued 25,000 shares of Series B 8%
Cumulative Convertible Redeemable Preferred Stock $1.00 par value
("Series B Preferred Stock") and Common Stock Purchase Warrants to
purchase up to 100,000 shares of its Common Stock, par value $.01 per
share. The Series B Preferred Stock plus Common Stock Purchase Warrants
sold for approximately $50.00 per share of Series B Preferred Stock.
Subject to adjustment for certain antidilution events, each share of
Series B Preferred Stock is initially convertible into 25 shares of
Common Stock and each Common Stock Purchase Warrant is exercisable for
one share of Common Stock at an exercise price of $2.00 per share.
Eight percent (8%) dividends on the Company's Series B Preferred Stock
may be paid in cash or in Series B Preferred Stock, at the discretion
of the Company. The series B Preferred Stock is junior to the Series A
Preferred Stock, but senior to the Company's Common Stock in
liquidation. The Series B Preferred Stock has no voting rights other
than those afforded by law. As a class, however, the holders of the
Series B Preferred Stock may vote on matters directly affecting the
Series B Preferred Stock or mergers and/or consolidations of the
Company with another company. The Series B Preferred Stock may be
redeemed in whole or in part, at the option of the Company, at any time
subsequent to July 1998 at a price of $50 per share plus any undeclared
and/or unpaid dividends to the date of redemption. Redemption requires
at least 30 days advanced notice and notice may only be given if the
Company's common stock has closed above $2.00 per share for the twenty
consecutive trading days prior to the notice.
Dividends may not be paid or declared on the Company's Common Stock
while any unpaid dividends are outstanding on the Series B Preferred
Stock. The Series B Preferred Stock and the Common Stock Purchase
Warrants are not convertible or exercisable until such time as the
Company's shareholders approve an amendment to its Articles of
Incorporation increasing the number of the authorized shares of Common
Stock by at least 2,500,000 shares.
As of December 31, 1997 and 1996, stated dividends that are undeclared
and unpaid on the Series A and Series B Preferred Stocks are as
follows:
1997 1996
---- ----
(in thousands)
Series A $191 $134
Series B 150 50
---- ----
$341 $185
==== ====
The Company anticipates that such dividends, when declared, will be
paid in the shares of Series A and Series B Preferred Stock.
37
<PAGE>
12. Income Taxes
The Company has incurred losses since its inception and, therefore, has
not been subject to federal income taxes. As of December 31, 1997, the
Company had net operating loss ("NOL") carryforwards for income tax
purposes of approximately $42,100,000 which expire in 1999 through
2012. Since the closing of the Company's IPO resulted in more than a 50
percent change in shareholder ownership percentages, the provisions of
Section 382 of the Internal Revenue Code limit the Company's ability to
utilize the NOL carryforwards to reduce future taxable income and tax
liabilities. Additionally, because United States tax laws limit the
time during which NOL carryforwards may be applied against future
taxable income, the Company will not be able to take full advantage of
its NOL for federal income tax purposes should the Company generate
taxable income.
The composition of deferred tax assets and the related tax effects at
December 31, 1997 and 1996 are as follows:
December 31,
1996 1997
------- -------
(in thousands)
Deferred tax assets:
Net operating losses $14,620 $13,169
Allowance for doubtful accounts and notes
receivable 527 367
Inventory basis difference 767 860
Accrued liabilities and reserves 454 456
Valuation allowance (16,330) (14,816)
------- -------
Total deferred tax assets 38 36
------- -------
Deferred tax liabilities:
Property and equipment 16 18
Other 22 18
------- -------
Total deferred tax liability...... 38 36
------- -------
Net deferred tax asset (liability) $ -- $ --
======= =======
The difference between the income tax benefit in the accompanying
statement of operations and the amount that would result if the U.S.
Federal statutory rate of 34% were applied to pre-tax loss is as
follows (amounts in thousands):
1997 1996
-------------- --------------
Amount % Amount %
------ ---- ------ ----
Benefit for income tax at
federal statutory rate $1,514 34.0 $2,167 34.0
Increase in valuation allowance (1,514 (34.0) (2,167) (34.0)
------ ---- ------ ----
$ -- -- $ -- --
====== ==== ====== ====
13. 401(k) Plan
The Positron Corporation 401(k) Plan and Trust (the "Plan") covers all
of the Company's employees who are United States citizens, at least 21
years of age and have completed at least one quarter of service with
the Company. Pursuant to the Plan, employees may elect to reduce their
current compensation by up to the statutorily prescribed annual limit
and have the amount of such reduction contributed to the Plan. The Plan
provides for the Company to make contributions in an amount equal to 25
38
<PAGE>
percent of the participant's deferral contributions, up to 6 percent of
the employee's compensation, as defined in the Plan agreement. The
Company's contribution expense was approximately $12,000 and $35,000 in
1997 and 1996, respectively. The board of directors of the Company may
authorize additional discretionary contributions; however, no
additional Company contributions have been made as of December 31,
1997.
14. Related Party Transactions
The Company has an incentive compensation plan for certain key
employees and its Chairman. The incentive compensation plan provides
for annual bonus payments based upon achievement of certain corporate
objectives as determined by the Company's compensation committee,
subject to the approval of the board of directors. To date, the Company
has not paid any bonuses pursuant to the incentive compensation plan.
Pursuant to agreements entered into in November 1993, the Company
extended loans to a current board member and a former board member in
order to provide each of them with funds to satisfy their respective
personal income tax liability arising out of the conversion of certain
Positron Corporation Promissory Notes into Common stock. Such
agreements were entered into by the Company in connection with the IPO
and in consideration of certain concessions made by the board member
and former board member concerning the conversion terms under their
respective Notes. Pursuant to the agreements, each of the loans were
made on substantially the following terms: (i) limited to a principal
amount not to exceed $175,000, (ii) interest payable at a rate of six
percent per year, (iii) an initial term of three years with the
principal balance being due and payable upon the expiration of the
term, (iv) limited recourse against the borrower, and (v)
collateralized by Positron Corporation Common Stock owned by the
borrower. In accordance with such agreements, on April 15, 1994, the
Company extended a $165,817 loan to a current board member and a
$158,552 loan to the former board member.
Both of the notes receivable matured in April 1997 but were not repaid
by the debtors and, accordingly, 60,176 shares of the Company's Common
Stock reverted back to the Company and are included in treasury stock
at December 31, 1997. In connection with this transaction, the Company
recognized bad debt expense of $309,000.
The Company has certain consulting agreements with its Chairman and a
member of its board. Each agreement provides for monthly consulting
payments of $6,667 and expires in 1998.
15. Commitments and Contingencies
On January 1, 1996, the Company entered into an employment agreement
with Werner J. Haas, Ph.D. pursuant to which Dr. Haas agreed to serve
as President and Chief Executive Officer of the Company for a term of
two years. The employment agreement provided for the payment of an
annual base salary of $200,000, bonuses in an amount to be determined
at the discretion of the Board of Directors of the Company, and
participation in any employee benefit plan adopted by the Company for
its employees.
On February 18, 1997, Dr. Haas informed the Board of Directors of the
Company that he considered his contract to have been terminated by the
Company without cause as a result of the Company's failure to pay the
February 15, 1997 payroll to any of its management level employees and
specifically to him. Additionally, Dr. Haas resigned as a member of the
Company's Board of Directors. Dr. Haas has demanded that the Company
pay him all past due salary as well as the nine months severance pay
specified in his employment agreement if his contract is determined to
have been terminated without cause. The Company's maximum exposure with
regard to Dr. Haas' employment agreement is approximately $175,000
should Dr. Haas establish that he was terminated without cause. The
Company believes, and has indicated to Dr. Haas, that no amounts are
due him under his employment agreement. Accordingly, the Company's
potential loss with regard to this matter should fall within a range up
to $175,000. As of July 31, 1998, the Company is unable to predict the
outcome of the disagreement between Dr. Haas and the Company.
39
<PAGE>
The Company is obligated to pay royalties of 3% of the gross revenue
from sales, uses, leases, licensing or rentals of POSICAM systems, 1%
each to a director of the Company and two other unrelated entities.
During the years ended December 31, 1997 and 1996 the Company incurred
royalties of $134,000 and $42,000, respectively, based upon system
sales and adjustments to royalties.
The Company's royalties were reduced to the 3% level based upon
consideration, provided to two of the payees, under consulting
agreements and promissory notes. However, the consulting agreements
provide that if the Company defaults in its payment obligations
thereunder, then the payees would be entitled to receive regrant of the
royalties that they previously released. In April 1998, the Company
received a demand letter from one of the payees alleging default under
his consulting agreement in 1997 and demanding regrant of an additional
1% royalty interest. Although the Company has not received a demand
from the second payee, the Company believes that a payment default may
have occurred under his consulting agreement and that as a result
thereof, he may be entitled to the regrant of an additional 0.5%
royalty interest. The Company anticipates initiating settlement
discussions with both payees concerning the alleged payment defaults.
The Company is unable to predict the outcome of such discussions at
this time; however, the Company recorded an adjustment of approximately
$100,000 during 1997 in recognition of the additional royalties it may
owe. If the parties fail to reach a settlement, one payee will be
entitled to receive an aggregate 2% royalty and the second payee will
be entitled to receive an aggregate 1.5% royalty, resulting in an
increase of the Company's royalty obligations from 3% to 4.5%. Such
increase in royalty obligations could have a material adverse effect on
the Company's future financial performance.
During 1997, the Company leased its office and manufacturing facility
and certain office equipment under noncancelable operating leases with
unexpired terms ranging from one to four years. Rental expense for
operating leases amounted to approximately $256,000 per year for the
years ended December 31, 1997 and 1996, respectively. Future minimum
lease payments due under noncancelable operating leases with original
lease terms of greater than one year and expiration dates subsequent to
December 31, 1997, are summarized as follows:
Amount
Year Ended December 31, (In thousands)
----------------------- --------------
1998 $361
1999 421
2000 210
--------------
Total minimum lease payments $992
==============
In March 1998, the Company, under severe cash flow constraints, was
forced to leave its long-term office and manufacturing facility lease
and move its operations to a facility with significantly reduced space
and a more affordable lease payment. The Company entered into a
six-month lease at a monthly rate of $2,671; however, the Company was
unable to obtain a release from its original lease. The Company has
been notified by its former landlord that all delinquent amounts due
under its original lease are currently payable. However, Company
management believes that the landlord has leased its space to new
tenants at favorable lease rates and that its exposure is limited to
any shortfall in lease payments experienced by the former landlord. The
Company believes that its maximum exposure related to the lease with
its former landlord is approximately $950,000, based on the remaining
future payments due at the date the lease was abandoned. However, the
Company believes that the amounts due the landlord will be offset by
payments from the current tenant and will not exceed $50,000.
Accordingly, the Company's potential loss related to its former lease
should fall in the range from $50,000 to $950,000. As of July 31, 1998,
the Company is unable to predict the outcome of this disagreement with
its former landlord.
40
<PAGE>
Impact of Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have time sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculation causing a
disruption of business activities.
The Company has performed only a preliminary assessment of the Year
2000 issue using a broad overview and management's current
understanding of its information and non-information systems and its
informal understanding of the information and non-information systems
of its significant suppliers and major customers. None of the detailed
tasks necessary to properly assess the Year 2000 issue (such as direct
coordination with vendors, customers and manufacturers) have been
performed.
Based on its preliminary assessment, the Company believes that no
significant modifications to its computer software or hardware will be
required and that its existing computer systems (including information
systems, non-information systems using date sensitive embedded chips
and its POSICAMTM systems) will function properly with respect to dates
in the year 2000 and thereafter. Based upon such preliminary
assessment, the Company also currently believes that costs to modify
the Company's existing computer hardware and software systems in regard
to the Year 2000 issue will not be significant. However, the Year 2000
issue is extremely complex and the costs to properly assess its impact
on the Company and to correct associated problems may be very
significant.
Based on the Company's preliminary assessment of its relationships with
significant suppliers and major customers to understand the extent to
which the Company is vulnerable to any failure by third parties to
remedy their own Year 2000 issues, management believes that the Company
does not have significant exposure with respect to third parties.
However, the Company's preliminary assessments indicated that the worst
case scenario with regard to the Year 2000 issue would be delays in
receiving parts and materials needed for manufacturing and delays by
customers in making payments for fee-per-scan and maintenance services.
In the Company's current financial position, such circumstances could
threaten the Company's continued existence.
Due to the Company's current severe liquidity problems, the Company has
not had the financial resources to perform a complete assessment of
Year 2000 issues or assess the potential cost or develop any
contingency plan with regard to Year 2000 issues that may arise. The
Company is unable to predict at the current time, when and to what
extent it may further pursue its assessment of potential Year 2000
issues and the development of any contingency plans in respect thereof.
If the Company is able to obtain necessary financial resources, a
complete assessment of the Year 2000 issues facing the Company will
likely be completed in the first half of 1999.
16. Subsequent Events
In May 1998, the Company entered into an agreement (the "Imatron
Transaction") with Imatron Inc. ("Imatron"), whereby Imatron will
acquire a majority ownership of the Company. In conjunction with the
execution of definitive agreements, Imatron began making working
capital advances available to the Company up to $500,000 (subsequently
revised by oral agreement to $750,000) in order to enable the Company
to meet a portion of its current obligations. As of September 30, 1998,
the Company had received advances totaling approximately $568,000. The
advances bear interest at 1/2% over the prime rate, are due March 1,
2000 (with interest being payable monthly), and are secured by all of
the Company's assets.
41
<PAGE>
Under the terms of the agreement, Imatron will acquire ownership of 51%
of the outstanding Common Stock of the Company on a fully-diluted and
as-if converted basis, which assumes that all outstanding warrants,
options and other derivatives have been exercised or converted into
shares of Common Stock other than out-of- the-money warrants and
options, determined at the time of issuance of shares to Imatron. If
such shares were issued to Imatron on September 30, 1998, the Company
would have been obligated to issue 9,000,000 shares of Common Stock.
The Company will receive a nominal cash amount of $100 from Imatron in
payment for the shares.
In addition to providing limited working capital financing, Imatron has
agreed to support the Company's marketing program, particularly with
regard to Imatron's affiliate, Imatron Japan, Inc. ("Imatron Japan") by
agreeing to make, after the share issuance closing date, all reasonable
efforts to cause the placement of 10 POSICAM(TM) systems over the next
three years. The Company recently shipped a POSICAM(TM) system to
Imatron Japan as the first delivery under a three-year distribution
agreement entered into last year. Imatron Japan is a major distributor
for Imatron's Ultrafast CT and for the equipment of certain other high
technology companies. Imatron has a 24% minority interest in Imatron
Japan. Imatron has also agreed to help facilitate the recapitalization
of the Company and to support its re-entry into the medical imaging
market by using its best efforts after the share issuance closing date
to arrange for additional third-party equity financing for the Company
over an 18-month period in an aggregate amount of not less than
$8,000,000. There can be no assurances, however, that any such sales
will actually be consummated or that Imatron will be able to
successfully assist the Company in raising additional capital.
Consummation of the issuance of shares to Imatron is conditioned upon,
among other things, (a) the resignation of each officer of the Company,
(b) the resignation of at least three of the four current directors of
the Company and the appointment of Imatron's nominees to fill such
vacancies, and (c) shareholder approval of the Company of an amendment
to the Company's Articles of Incorporation to increase its authorized
Common Stock to at least 100,000,000 shares. The Company anticipates
that the share issuance to Imatron will close immediately after the
Annual Meeting if the required shareholder approval is obtained.
In connection with the above transactions, the Company, Imatron and two
current lenders to the Company, Uro-Tech and ProFutures, entered into
certain agreements whereby (a) ProFutures waived all past defaults and
extended the maturity of the ProFutures Loan (with a current balance of
approximately $570,000) to December 5, 1998, in return for a $50,000
payment, the issuance of warrants to purchase 1,150,000 shares of
Common Stock at $0.25 per share (in addition to the issuance of
previously bargained for warrants to purchase an additional 100,000
shares of Common Stock at $0.25 per share), and minimum loan repayments
of $50,000 for each of the months of April, May, June and July 1998,
$100,000 for the month of August 1998 and $50,000 for each of the
months of September, October and November 1998, (b) Imatron agreed to
subordinate its loan to the ProFutures Loan, (c) Uro-Tech agreed to
subordinate its loan (with a current balance of approximately $767,000
plus accrued interest payable of approximately $286,000) to Imatron's
loan, and (d) ProFutures and Imatron agreed that all amounts above the
first $1,000,000 of any third-party equity financing raised by Imatron
would be applied equally to reduce the Company's debt to both
ProFutures and Imatron. Consistent with the oral amendment to the
Imatron Agreement, the Company and ProFutures have amended their
agreements to provide further waivers of any past defaults and have
further extended the maturity of the ProFutures Loan to December 5,
1998 and minimum loan repayments of $50,000 for each of the months of
September, October and November 1998, leaving a balance at December 5,
1998 of approximately $400,000. Imatron agreed to continue to
subordinate its loan to the ProFutures Loan, and Uro-Tech agreed to
subordinate its loan to Imatron's loan. Except as modified by the
amendments, the remaining agreements remain the same.
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<PAGE>
The Company is in negotiations to sell one of its POSICAM(TM) systems
to a third party that currently leases the system. It is anticipated
that, if the Company is successful in consummating such sale, it will
receive net proceeds of approximately $360,000. It is the Company's
intention to use such proceeds, plus proceeds from a service contract
currently being negotiated with the third party, to retire the
remaining balance of approximately $400,000 on the ProFutures Loan.
There can be no assurances, however, that the Company will be
successful in reaching an agreement concerning the proposed system sale
or that, if agreement is reached, such sale will be consummated, or
that the Company otherwise will be able to obtain additional debt or
equity financing necessary to repay the ProFutures Loan by such
maturity date. Absent obtaining a further extension of the December 5,
1998 maturity date of the ProFutures Loan, closing the proposed sale of
the POSICAM(TM) system, or obtaining additional debt or equity
financing necessary to repay the ProFutures Loan by the maturity date,
the Company may be forced to seek protection under the Federal
Bankruptcy laws.
If the proposal to amend the Company's Articles of Incorporation is not
approved by the Company's shareholders, or if such proposal is approved
but the Imatron Transaction does not subsequently close, the Company
may be forced to seek protection under the Federal Bankruptcy laws.
Even if Proposal Two to amend the Company's Articles of Incorporation
is approved and the Imatron Transaction closes, there can be no
assurances that the Company will thereafter be able to raise sufficient
capital for the Company to continue as a going concern or even if such
additional capital is raised that the Company will ever achieve the
level of revenues needed to be profitable in the future, or, if
profitability is achieved, that it will be sustained.
In February 1998, certain taxing authorities filed legal actions
against the Company to collect certain past due property taxes, penalty
and interest totaling $241,307, and these amounts have been considered
in the financial statements at December 31, 1997. In connection with
such legal actions, the taxing authorities filed liens covering
substantially all inventory, furniture, fixtures and equipment of the
Company.
17. Supplemental Cash Flow Data
Supplemental disclosure of cash flow information:
Cash paid for interest $ 277 $ 139
===== =====
Cash paid for income taxes $-- $--
===== =====
Non-cash investing and financing activities:
Conversion of note payable to an
affiliate into Series A Preferred Stock $-- $ 650
===== =====
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<PAGE>
PROFORMA FINANCIAL DATA
The board of directors of the Company is currently considering the
sale of 9,000,000 shares of its Common Stock (or such other number of shares
that constitutes 51% of the Company's outstanding voting securities on a fully
diluted basis, exclusive of out of the money warrants, and/or options, and/or
convertible securities calculated as of the closing date, but not less than
9,000,000 shares) in a transaction (the "Imatron Transaction") with Imatron,
Inc. ("Imatron"), a New Jersey corporation with principal offices in San
Francisco, California. The total consideration to be paid by Imatron for such
shares is $100 plus the reimbursement of certain costs to be incurred by the
Company as a result of the transaction, which costs are estimated not to exceed
$25,000. The following Unaudited Proforma Statements of Operations for the nine
months ended September 30, 1998 and the year ended December 31, 1997 give effect
to the Imatron Transaction as if it had occurred on January 1, 1997. An
Unaudited Proforma Condensed Balance Sheet as of September 30, 1998 is not
presented because the impact of the Imatron Transaction on the balance sheet is
not material.
The Unaudited Proforma Statements of Operations are presented for
informational purposes only and are not necessarily indicative of the results of
operations that would have been achieved had the transaction been completed at
January 1, 1997, nor are they indicative of the Company's future results of
operations.
The Unaudited Proforma Statements of Operations should be read in
conjunction with the historical financial statements of the Company and related
notes thereto.
44
<PAGE>
<TABLE>
POSITRON CORPORATION
PROFORMA STATEMENT OF OPERATIONS
--------------------------------
(In thousands, except share data)
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
<S> <C> <C>
Revenues:
System sales $ -- $ 1,129
Fee per scan 454 602
Service and component 933 1,795
------------ ------------
Total revenues 1.387 3,526
------------ ------------
Cost of sales and services:
System sales -- 698
Fee per scan 89 156
Service, warranty and component 286 645
------------ ------------
Total costs of sales and service 375 1,499
------------ ------------
Gross profit 1,012 2,027
------------ ------------
Operating Expenses:
Research and development 18 1,305
Selling, general and administrative expenses 1,750 4,753
------------ ------------
Total operating costs 1,768 6,058
------------ ------------
Loss from operations (756) (4,031)
------------ ------------
Other expenses:
Interest expense (228) (335)
Other expense -- (190)
------------ ------------
Total other expense (228) (424)
------------ ------------
Net loss $ (984) $ (4,455)
============ ============
Basic and dilutive net loss per common share as reported $ (0.19) $ (0.91)
============ ============
Proforma basic and dilutive net loss per common share $ (0.07) $ (0.32)
============ ============
Weighted average common shares outstanding 5,144,291 4,884,870
Additional shares to be issued in connection with the proposed Imatron
Transaction 9,000,000 9,000,000
------------ ------------
Proforma weighted average shares outstanding 14,144,291 13,884,870
============ ============
<FN>
See notes to unaudited proforma statements of operations.
</FN>
45
</TABLE>
<PAGE>
POSITRON CORPORATION
NOTES TO UNAUDITED STATEMENTS OF OPERATIONS
-------------------------------------------
1. Basis of Presentation
The Unaudited Proforma Statements of Operations for the nine months
ended September 30, 1998 and the year ended December 31, 1997 give effect to the
Imatron Transaction as if it had occurred at January 1, 1997.
The Company believes that the assumptions used in preparing the
unaudited proforma statements of operations provide a reasonable basis for
presenting all of the significant effects of the Imatron Transaction (other than
any synergies anticipated by the Company, and nonrecurring charges directly
attributable to the sale), and that the proforma adjustments give effect to
those assumptions in the Unaudited Proforma Statements of Operations.
2. Earnings Per Share
Net loss per share of Common Stock was computed by dividing the net
income available to holders of Common Stock by the weighted average number of
shares of Common Stock outstanding during the period. Due to the net loss, all
of the Common Stock equivalents were excluded from this calculation due to their
anti-dilutive effect.
3. Proforma Adjustments
Proforma adjustments to the Unaudited Proforma Statements of Operations
are as follows:
1. Reflects the issuance of 9,000,000 shares of Common Stock in
connection with the Imatron Transaction.
2. Reflects the calculation of earnings per share assuming the
sale of 9,000,000 shares of Common Stock to Imatron.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Risks Associated with Business Activities
Potential Default Under ProFutures Loan. The ProFutures Loan matures on
December 5, 1998 and, at that time, approximately $400,000 will be due under the
ProFutures Loan. Unless the maturity date of the ProFutures Loan is extended or
the Company is successful in obtaining additional funds through a sale of
certain of its assets or additional debt or equity financing in an amount
necessary to discharge the ProFutures Loan prior to its maturity, the Company
will be unable to pay when due the ProFutures Loan and a payment default
thereunder will occur. The ProFutures Loan is secured by liens and security
interests encumbering all of the assets of the Company, including know-how,
patents and proprietary rights pertaining to its PET technology. Upon a payment
default under the ProFutures Loan, the Company anticipates that the lender
thereunder will seek to foreclose its liens and security interests encumbering
the Company's assets. Such foreclosure would have a material adverse affect on
the Company and its securityholders and would prevent the Company from
continuing as a going concern. The Company is in negotiations to sell one of its
POSICAM(TM) systems to a third party that currently leases the system. It is
anticipated that, if the Company is successful in consummating such sale, it
will receive net proceeds of approximately $360,000. It is the Company's
intention to use such proceeds, plus proceeds from a service contract currently
being negotiated with the third party, to retire the remaining balance of
approximately $400,000 on the ProFutures Loan. There can be no assurances,
however, that the Company will be successful in reaching an agreement concerning
the proposed system sale or that, if agreement is reached, such sale will be
consummated, or that the Company otherwise will be able to obtain additional
debt or equity financing necessary to repay the ProFutures Loan by such maturity
date. Absent obtaining a further extension of the December 5, 1998 maturity date
of the ProFutures Loan, closing the proposed sale of the POSICAM(TM) system, or
obtaining additional debt or equity financing necessary to repay the ProFutures
Loan by the maturity date, the Company may be forced to seek protection under
the Federal Bankruptcy laws.
History of Losses. To date the Company has been unable to sell
POSICAM(TM) systems at quantities sufficient to be profitable. Consequently, the
Company has sustained substantial losses. Net losses for the years ended
December 31, 1997 and 1996 were $4,455,000 and $6,375,000, respectively. At
December 31, 1997, the Company had an accumulated deficit of approximately
$48,960,000. If the proposal to amend the Company's Articles of Incorporation is
not approved by the Company's shareholders, or if such proposal is approved but
the Imatron Transaction does not subsequently close, the Company may be forced
to seek protection under the Federal Bankruptcy laws. Even if the proposal to
amend the Company's Articles of Incorporation is approved and the Imatron
Transaction closes, there can be no assurances that the Company will thereafter
be able to raise sufficient capital for the Company to continue as a going
concern or even if such additional capital is raised that the Company will ever
achieve the level of revenues needed to be profitable in the future, or, if
profitability is achieved, that it will be sustained. Due to the sizeable sales
price of each POSICAM(TM) system and the limited number of systems that are sold
or placed in service in each fiscal period, the Company's revenues have
fluctuated, and may likely continue to fluctuate, significantly from quarter to
quarter and from year to year.
Recruiting and Retention of Qualified Personnel. The Company's success
is dependent to a significant degree upon the efforts of its executive officers
and key employees. The loss or unavailability of the services of any of its key
personnel could have a material adverse effect on the Company. The Company's
success is also dependent upon its ability to attract and retain qualified
personnel in all areas of its business, particularly management, research and
marketing. Given the Company's current financial situation, there can be no
assurance that the Company will be able to continue to hire and retain a
sufficient number of qualified personnel. If the Company is unable to retain and
attract such qualified personnel, its business and operating results could be
adversely affected.
Working Capital Deficiency. At December 31, 1997, the Company had cash
and cash equivalents in the amount of $160,000 compared to $382,000 at December
31, 1996. Throughout much of 1997 and the first nine months of 1998, the Company
has been unable to meet certain of its obligations as they came due. As a result
of the Company's liquidity problem, the payment of salaries and other benefits
to certain management level employees (totaling approximately $700,000) were
deferred at December 31, 1997. During the first nine months of 1998, the Company
made payments to such management level employees to reduce its liability for
47
<PAGE>
past due salaries and wages to approximately $600,000 at September 30, 1998.
Additionally, the Company is in arrears to many of its vendors and suppliers. As
of September 30, 1998, such amount owed to vendors and suppliers totaled
approximately $1,327,000.
Substantial Competition and Effects of Technological Change. The
industry in which the Company is engaged is subject to rapid and significant
technological change. There can be no assurance that POSICAM(TM) systems can be
upgraded to meet future innovations in the PET industry or that new technologies
will not emerge, or existing technologies will not be improved, which would
render the Company's products obsolete or non-competitive. The Company faces
competition in the United States PET market primarily from General Electric
Company and Siemens Medical Systems, Inc., two major commercial manufacturers,
each of which has significantly greater financial and technical resources and
production and marketing capabilities than the Company. In addition, there can
be no assurance that other established medical concern, any of which would
likely have greater resources than the Company, will not enter the market. The
Company also faces competition from other imaging technologies which are more
firmly established and have a greater market acceptance, including single-photon
emission computed tomography ("SPECT"). There can be no assurance that the
Company will be able to compete successfully against any of its competitors.
No Assurance of Market Acceptance. The POSICAM(TM) systems involve new
technology that competes with more established diagnostic techniques. The
purchase and installation of a PET system involves a significant capital
expenditure on the part of the purchaser. A potential purchaser of a PET system
must have an available patient base that is large enough to provide the
utilization rate needed to justify such capital expenditure. There can be no
assurance that PET technology or the Company's POSICAM(TM) systems will be
accepted by the target markets or that the Company's sales of POSICAM(TM)
systems will increase or that the Company will ever be profitable.
Patents and Proprietary Technology. The Company holds certain patent
and trade secret rights relating to various aspects of its PET technology, which
are of material importance to the Company and it future prospects. There can be
no assurance, however, that the Company's patents will provide the meaningful
protection from competitors. Even if a competitor's products were to infringe on
patents held by the Company, it would be costly for the Company to enforce its
rights and the enforcement of its rights would divert funds and resources from
the Company's operations. Furthermore, there can be no assurance that the
Company's products will not infringe on any patents of others.
The Company requires each employee and/or consultant to enter into a
confidentiality agreement, but there can be no assurance that these agreements
will provide meaningful protection or adequate remedies for the Company's trade
secrets or proprietary know-how in the event of unauthorized use or disclosure
of such information or that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets and proprietary know-how.
Government Regulation. The Company's POSICAM(TM) systems and the
radiopharmaceuticals used in connection with them are subject to regulation by
the FDA. The FDA regulates and must approve the clinical testing, manufacturing,
labeling, distribution, and promotion of medical devices in the United States.
There can be no assurance that any additional product or enhancement that the
Company may develop will be approved by the FDA. Delays in receiving regulatory
approval could have a material adverse effect on the Company's business. In
addition, various foreign countries in which the Company's products are or may
be marketed impose additional regulatory requirements. Further, the Company's
operations and the operations of PET systems are subject to regulation under
federal and state health safety laws, and purchasers and users of PET systems
are subject to federal and state laws and regulations regarding the purchase of
medical equipment such as PET systems. All laws and regulations, including those
specifically applicable to the Company, are subject to change. The Company
cannot predict what effect changes in laws and regulations might have on its
business. Failure to comply with applicable laws and regulatory requirements
could have a material adverse effect on the Company's business, financial
conditions, results of operations and cash flows.
Certain Financing Arrangements. In order to sell its POSICAM(TM)
systems, the Company has from time to time found it necessary to participate in
ventures with certain customers or otherwise assist customers in their financing
arrangements. The venture arrangements have involved lower cash prices for the
Company's systems in exchange for interests in the ventures, thus exposing the
Company to the attendant business risks of the ventures. The Company has, in
certain instances, sold its systems to financial intermediaries, which have, in
turn, leased the system to users. Such transactions may not give rise to the
same economic benefit to the Company as would have occurred had the Company made
48
<PAGE>
a direct cash sale at its normal market prices on normal sale terms. There can
be no assurance that the Company will not find it necessary to enter into
similar transactions to effect future sales. The nature and extent of the
Company's interest in such ventures or the existence of remarketing or similar
obligations could require the Company to account for such transactions as
financing arrangements rather than "sales" for financial reporting purposes.
Such treatment could have the effect of delaying the recognition of revenue on
such transactions and may increase the volatility of the Company's financial
results.
Product Liability and Insurance. The use of the Company's products
entails risks of product liability. There can be no assurance that product
liability claims will not be successfully asserted against the Company. The
Company maintains liability insurance coverage in the amount of $2 million per
occurrence and an annual aggregate maximum of $3 million. However, there can be
no assurance that the Company will be able to maintain such insurance in the
future or, if maintained, that such insurance will be sufficient in amount to
cover any successful product liability claims.
Any uninsured liability could have a material adverse effect on the Company.
No Dividends. The Company has never paid cash dividends on its Common
Stock and does not intend to pay cash dividends on its Common Stock in the
foreseeable future. The Series A Preferred Stock and Series B Preferred Stock
Statements of Designation prohibit the payment of Common Stock dividends until
all required dividends have been paid on each series of preferred stock. As of
December 31, 1997, approximately $433,000 of preferred stock dividends are
undeclared and unpaid by the Company.
Management's Discussion and Analysis of Plan of Operation
General. The Company was incorporated in December 1983 and commenced
commercial operations in 1986. Since that time, the Company has generated
revenues primarily from the sale and service contract revenues derived from the
Company's POSICAM(TM) systems; 15 of which are currently in operation in certain
medical facilities in the United States. The Company has never been able to sell
its POSICAM(TM) systems in sufficient quantities to achieve profitability and
should the Company be unable to complete the Imatron Transaction discussed
below, the Company does not have sufficient capital to repay secured creditors
as obligations mature and will, in all likelihood, be unable to continue in
operation.
Imatron Transaction. In May 1998, the Company entered into the Imatron
Agreement, whereby Imatron will acquire a majority ownership of the Company. In
conjunction with the execution of definitive agreements, Imatron began making
working capital advances available to the Company up to $500,000 (subsequently
revised by oral agreement to $750,000) in order to enable it to meet a portion
of its current obligations. As of September 30, 1998, the Company had borrowed
$568,000. The loan bears interest at 1/2% over the prime rate, is due March 1,
2000 (with interest being payable monthly), and is secured by all of the
Company's assets.
Under the terms of the agreement, Imatron will acquire ownership of 51%
of the outstanding Common Stock of the Company on a fully-diluted and as-if
converted basis, which assumes that all outstanding warrants, options and other
derivatives have been exercised or converted into shares of Common Stock other
than out-of-the-money warrants and options, determined at the time of issuance
of shares of Common Stock to Imatron. If such shares were issued to Imatron on
September 30, 1998, the Company would have been obligated to issue 9,000,000
shares of Common Stock. The Company will receive a nominal cash payment of $100
from Imatron in payment for the shares of Common Stock.
In addition to providing limited working capital financing, Imatron has
agreed to support the Company's marketing program, particularly with regard to
Imatron's affiliate, Imatron Japan, Inc. ("Imatron Japan") by agreeing to make,
after the share issuance closing date, all reasonable efforts to cause the
placement of 10 POSICAM(TM) positron emission tomography ("PET") cameras over
the next three years. The Company recently shipped a POSICAM(TM) PET camera to
Imatron Japan as the first delivery under a three-year distribution agreement
entered into last year. Imatron Japan is a major distributor for Imatron's
Ultrafast CT and for the equipment of certain other high technology companies.
Imatron has a 24% minority interest in Imatron Japan. Imatron has also agreed to
help facilitate the recapitalization of the Company to support its re-entry into
the medical imaging market by using its best efforts after the share issuance
closing date to arrange for additional third-party equity financing for the
Company over an 18-month period in an aggregate amount of not less than
$8,000,000. There can be no assurances, however, that any such sales will
actually be consummated or that Imatron will be able to successfully assist the
Company in raising additional capital.
49
<PAGE>
Consummation of the issuance of shares to Imatron is conditioned upon,
among other things (a) the resignation of each officer of the Company, (b) the
resignation of at least three of the four current directors of the Company and
the appointment of Imatron's nominees to fill such vacancies, and (c)
shareholder approval of an amendment to the Company's Articles of Incorporation
to increase its authorized Common Stock to at least 100,000,000 shares of Common
Stock. The Company anticipates that the share issuance to Imatron will close
immediately after the Annual Meeting if the required shareholder approval is
obtained.
In connection with the above transactions, the Company, Imatron and two
current lenders to the Company, Uro-Tech, Ltd. ("Uro-Tech") and ProFutures
Bridge Capital Fund, L.P. ("ProFutures"), entered into certain agreements
whereby (a) ProFutures waived all past defaults and extended the maturity of its
loan (with a current balance of approximately $570,000) (the "ProFutures Loan")
to December 5, 1998, in return for a $50,000 payment, the issuance of warrants
to purchase 1,150,000 shares of Common Stock at $0.25 per share (in addition to
the issuance of previously bargained for warrants to purchase an additional
100,000 shares of Common Stock at $0.25 per share), and minimum loan repayments
of $50,000 for each of the months of April, May, June and July 1998, $100,000
for the month of August 1998 and $50,000 for each of the months of September,
October and November 1998, (b) Imatron agreed to subordinate its loan to
ProFutures' loan, (c) Uro-Tech agreed to subordinate its loan (with a current
balance of approximately $767,000 plus accrued interest payable of approximately
$286,000) to Imatron's loan, and (d) ProFutures and Imatron agreed that all
amounts above the first $1,000,000 of any third-party equity financing obtained
by Imatron would be applied equally to reduce the Company's debt to both
ProFutures and Imatron. Consistent with the oral amendment to the Imatron
Agreement, the Company and ProFutures have amended their agreements to provide
further waivers of any past defaults and have further extended the maturity of
the ProFutures Loan to December 5, 1998 and minimum loan repayments of $50,000
for each of the months of September, October and November 1998, leaving a
balance at December 5, 1998 of approximately $400,000. Imatron agreed to
continue to subordinate its loan to the ProFutures Loan, and Uro-Tech agreed to
subordinate its loan to Imatron's loan. Except as modified by the amendments,
the remaining agreements remain the same.
The Company is in negotiations to sell one of its POSICAM(TM) systems
to a third party that currently leases the system. It is anticipated that, if
the Company is successful in consummating such sale, it will receive net
proceeds of approximately $360,000. It is the Company's intention to use such
proceeds, plus proceeds from a service contract currently being negotiated with
the third party, to retire the remaining balance of approximately $400,000 on
the ProFutures Loan. There can be no assurances, however, that the Company will
be successful in reaching an agreement concerning the proposed system sale or
that, if agreement is reached, such sale will be consummated, or that the
Company otherwise will be able to obtain additional debt or equity financing
necessary to repay the ProFutures Loan by such maturity date. Absent obtaining a
further extension of the December 5, 1998 maturity date of the ProFutures Loan,
closing the proposed sale of the POSICAM(TM) system, or obtaining additional
debt or equity financing necessary to repay the ProFutures Loan by the maturity
date, the Company may be forced to seek protection under the Federal Bankruptcy
laws.
If the proposal to amend the Company's Articles of Incorporation is not
approved by the Company's shareholders, or if such proposal is approved but the
Imatron Transaction does not subsequently close, the Company may be forced to
seek protection under the Federal Bankruptcy laws. Even if Proposal Two to amend
the Company's Articles of Incorporation is approved and the Imatron Transaction
closes, there can be no assurances that the Company will thereafter be able to
raise sufficient capital for the Company to continue as a going concern or even
if such additional capital is raised that the Company will ever achieve the
level of revenues needed to be profitable in the future, or, if profitability is
achieved, that it will be sustained.
Results of Operations
1997 Compared to 1996. During the year ended December 31, 1997, the
Company continued to experience deterioration in its financial condition;
however, the Company's net loss decreased from ($6,375,000) in 1996 to
($4,455,000) in 1997. The decrease in net loss is primarily the result of
significant staff reductions and efforts to curtail costs, partially offset by
increases in valuation reserves to reduce inventories to their estimated net
realizable value.
Further analysis follows:
50
<PAGE>
Revenues. System sales increased from $650,000 in 1996 to
$1,129,000 in 1997, although the Company sold only one POSICAM(TM) system in
each year. The $479,000 increase is attributable to the fact that the system
sold in 1996 was a refurbished system and sold for a much lower price than the
new HZ series system sold in 1997. Fee per scan revenues increased from $415,000
in 1996 to $602,000 in 1997 as a result of improved performance under the
Company's only fee per scan contract. Service and component revenue decreased by
$715,000 in 1997 as compared to 1996 due primarily to a $750,000 system upgrade
performed on an older POSICAM(TM) system in 1996.
Cost of Sales and Services. Cost of system sales increased
from $316,000 in 1996 to $698,000 in 1997 due to the fact that the POSICAM(TM)
system sold in 1997 was a new system while the POSICAM(TM) system sold in 1996
was simply refurbished and, accordingly, was of lesser cost. Cost of fee per
scan decreased from $172,000 in 1996 to $156,000 in 1997 due to lower
maintenance costs on the Company's only fee per scan system. The primary cost
associated with fee per scan is deprecation expense, which remained constant.
Service, warranty and component cost decreased from $610,000 in 1996 to $465,000
in 1997 due to a 31% decline in service and component revenue. The Company
recognized a $1,224,000 provision for inventory obsolescence during the fourth
quarter of 1997 based upon management's assessment that improvements would need
to be made to the Company's POSICAM(TM) systems in order to meet current
technological requirements by potential costumers. The provision for loss on
system exchange was a non-recurring warranty reserve established in the first
quarter of 1996 in anticipation of possible losses to be incurred on the
exchange of the Company's first POSICAM(TM) HZL system. No similar reserve was
needed in 1997.
Operating Expenses. Research and development expenses
decreased from $2,227,000 in 1996 to $1,305,000 in 1997 due to reductions in
staff. The Company reduced personnel levels significantly in 1997 as liquidity
problems squeezed Company resources. Selling, general and administrative
expenses declined from $5,263,000 in 1996 to $3,609,000 also due to staff
reductions. However, the savings from staff reductions were partially offset by
a provision for bad debts associated with uncollectible notes receivable of
$309,000.
Other Expenses. Interest expense increased from $197,000 in
1996 to $335,000 in 1997 due primarily to interest expense associated with the
ProFutures Loan. The ProFutures Loan was initially funded in November 1996 and
had a balance in excess of $1,000,000 throughout much of 1997. The interest rate
on the ProFutures Loan increased from 12% to 18% during 1997 and that increase
in interest rate combined with a higher average debt level resulted in a
significant increase in interest expense.
Net Operating Loss Carry Forwards. The Company has accumulated
a significant net operating loss carry forward which may be used to reduce
taxable income and related income taxes in future years. Since the closing of
the Company's 1993 initial public offering and the sale in February, March and
May of 1996 of 3,075,318 shares of Series A Preferred Stock, each of which
resulted in more than a 50% change in the ownership percentages of shareholders,
the provisions of Section 382 of the Code severely limit the annual utilization
of the net operating loss carry forwards. If the Imatron Transaction is
completed, the utilization of net operating losses arising since the 1996
issuance of Series A Preferred Stock will be limited. In addition, the
utilization of the losses to reduce future income taxes is dependent upon the
generation of sufficient taxable income prior to the expiration of the net
operating loss carry forwards. The carry forwards will begin to expire in the
year 1999.
Nine Months Ended September 30, 1998 Compared to Nine Months
Ended September 30, 1997. During the nine months ended September 30, 1998, the
Company continued to experience deterioration in its financial condition;
however, the Company's net loss decreased $1,741,000 from ($2,725,000) for the
nine months ended September 30, 1997 to ($984,000) for the nine months ended
September 30, 1998. This decrease in net loss is primarily the result of
significant staff reductions and efforts to curtail costs.
51
<PAGE>
The Company generated no revenue from system sales during the first
nine months of 1998 or 1997. Fee per scan revenue increased $17,000 from
$437,000 during the first nine months of 1997 to $454,000 for the first nine
months of 1998 due primarily to a greater number of scans being performed by
Buffalo Cardiology during the nine months ended September 30, 1998. In addition,
there was a decrease in service and component sales revenue of $388,000 during
the same period due to less service work performed during the nine months ended
September 30, 1998. This reduction in service work is directly attributable to
staff reductions and normal fluctuations in service.
Gross profit during the first nine months of 1998 was $1,012,000
compared to $1,141,000 for the nine months ended September 30, 1997. This
decrease in gross profit of $129,000 is due primarily to lower service and
component revenue during the nine months ended September 30, 1998.
Total operating expense decreased approximately $1,762,000 or 50% from
$3,530,000 for the nine months ended September 30, 1997 to $1,838,000 for the
nine months ended September 30, 1998. The decrease primarily results from
significant staff reductions and related reductions in research and development
and selling and marketing costs during the nine months ended September 30, 1998.
Interest expense decreased from $243,000 for the nine months ended
September 30, 1997 to $228,000 for the nine months ended September 30, 1998 due
primarily to changes in the Company's average debt level in the first nine
months of 1998 as compared to the first nine months of 1997.
Liquidity and Capital Reserves
Since its inception the Company has been unable to sell POSICAM(TM)
systems at quantities sufficient to be profitable. Consequently, the Company has
sustained substantial losses. Net losses for the year ended December 31, 1997
and the nine months ended September 30, 1998 were $4,455,000 and $984,000,
respectively. At September 30, 1998, the Company had an accumulated deficit of
approximately $49,944,000. Due to the sizable prices of the Company's systems
and the limited number of systems sold or placed in service each year, the
Company's revenues have fluctuated significantly year to year.
At September 30, 1998, the Company had cash and cash equivalents in the
amount of $145,000 compared to $160,000 at December 31, 1997. Throughout much of
1997 and the first nine months of 1998, the Company has been unable to meet
certain of its obligations as they came due. As a result of the Company's
liquidity problem, 1997 salary payments and other benefits to certain management
level employees totaling approximately $600,000 were unpaid at September 30,
1998.
The Company's only current plan with regard to its liquidity problems
is to attempt to complete the Imatron Transaction discussed in Selected Notes to
the Financial Statements. If the Imatron Transaction is not completed, or if the
Imatron Transaction is completed and Imatron is unsuccessful in its efforts to
raise capital for the Company, management believes the Company will be unable to
continue as a going concern and the Company may be forced to seek protection
under the Federal Bankruptcy laws.
The Company currently has no shares of Common Stock available for
issuance and all authorized shares have either been issued or reserved for
issuance in respect of outstanding options and warrants or convertible
securities. The lack of such available shares significantly restricts the
Company's ability to raise additional capital through the sale of equity
securities. The Company believes that its shareholders will approve an increase
in the number of authorized common shares at its Annual Meeting; however, no
assurance can be given that such additional shares will be authorized in
adequate time to allow the Company to issue such equity securities.
Litigation
The City of Houston has filed suit, and judgment has been entered,
against the Company for delinquent taxes in the amount of approximately
$240,000. The balance is fully accrued at September 30, 1998.
The Company is obligated to pay royalties of 3% of the gross revenue
from sales, uses, leases, licensing or rentals of POSICAM systems, 1% each to a
director of the Company and two other unrelated entities. During the years ended
December 31, 1997 and 1996 the Company incurred royalties of $134,000 and
$42,000, respectively, based upon system sales and adjustments to royalties.
52
<PAGE>
The Company's royalties were reduced to the 3% level based upon
consideration, provided to two of the payees, under consulting agreements and
promissory notes. However, the consulting agreements provide that if the Company
defaults in its payment obligations thereunder, then the payees would be
entitled to receive regrant of the royalties that they previously released. In
April 1998, the Company received a demand letter from one of the payees alleging
default under his consulting agreement in 1997 and demanding regrant of an
additional 1% royalty interest. Although the Company has not received a demand
from the second payee, the Company believes that a payment default may have
occurred under his consulting agreement and that as a result thereof, he may be
entitled to the regrant of an additional 0.5% royalty interest. The Company
anticipates initiating settlement discussions with both payees concerning the
alleged payment defaults. The Company is unable to predict the outcome of such
discussions at this time; however, the Company recorded an adjustment of
approximately $100,000 during 1997 in recognition of the additional royalties it
may owe. If the parties fail to reach a settlement, one payee will be entitled
to receive an aggregate 2% royalty and the second payee will be entitled to
receive an aggregate 1.5% royalty, resulting in an increase of the Company's
royalty obligations from 3% to 4.5%. Such increase in royalty obligations could
have a material adverse effect on the Company's future financial performance.
Arbitration procedures have been initiated against the Company in China
involving a dispute with respect to a POSICAMTM system. The Company entered into
a contract with a Chinese company in September 1996 to provide the company with
a POSICAMTM system. The Chinese company provided the Company with a down payment
of approximately $300,000 and agreed to provide the company with a letter of
credit for the remaining purchase price, which letter of credit would be
fundable upon shipment of the POSICAMTM system. The Company utilized the down
payment to purchase the beginning inventory for the system and began
construction of the system. The Chinese company, however, failed to provide the
Company with the letter of credit and the Company, because of its severe
financial difficulties, was unable to complete and deliver the system without
such additional funds. The Chinese company has demanded the return of its
deposit and, on September 8, 1998, a notice of arbitration concerning the sales
contract dispute was issued to the Company by the China International Economic
and Trade Arbitration Commission, Shanghai Commission. The Company believes that
the claims raised by the Chinese company are without merit and intends to
vigorously defend its interests. It is not possible at this time to predict the
outcome of this proceeding, although a ruling unfavorable to the Company could
have a material adverse effect on the Company's business and financial
performance.
Impact of Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculation causing a disruption of business activities.
The Company has performed only a preliminary assessment of the Year
2000 issue using a broad overview and management's current understanding of its
information and non-information systems and its informal understanding of the
information and non-information systems of its significant suppliers and major
customers. None of the detailed tasks necessary to properly assess the Year 2000
issue (such as direct coordination with vendors, customers and manufacturers)
have been performed.
Based on its preliminary assessment, the Company believes that no
significant modifications to its computer software or hardware will be required
and that its existing computer systems (including information systems, non-
information systems using date sensitive embedded chips and its POSICAMTM
systems) will function properly with respect to dates in the year 2000 and
thereafter. Based upon such preliminary assessment, the Company also currently
believes that costs to modify the Company's existing computer hardware and
software systems in regard to the Year 2000 issue will not be significant.
However, the Year 2000 issue is extremely complex and the costs to properly
assess its impact on the Company and to correct associated problems may be very
significant.
53
<PAGE>
Based on the Company's preliminary assessment of its relationships with
significant suppliers and major customers to understand the extent to which the
Company is vulnerable to any failure by third parties to remedy their own Year
2000 issues, management believes that the Company does not have significant
exposure with respect to third parties. However, the Company's preliminary
assessments indicated that the worst case scenario with regard to the Year 2000
issue would be delays in receiving parts and materials needed for manufacturing
and delays by customers in making payments for fee-per-scan and maintenance
services. In the Company's current financial position, such circumstances could
threaten the Company's continued existence.
Due to the Company's current severe liquidity problems, the Company has
not had the financial resources to perform a complete assessment of Year 2000
issues or assess the potential cost or develop any contingency plan with regard
to Year 2000 issues that may arise. The Company is unable to predict at the
current time, when and to what extent it may further pursue its assessment of
potential Year 2000 issues and the development of any contingency plans in
respect thereof. If the Company is able to obtain necessary financial resources,
a complete assessment of the Year 2000 issues facing the Company will likely be
completed in the first half of 1999.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." These pronouncements are
effective for fiscal years beginning after December 15, 1997. SFAS 130 requires
a company to display an amount representing comprehensive income, as defined by
the statement, as part of the Company's basic financial statements.
Comprehensive income will include items such as unrealized gains or losses on
certain investment securities and foreign currency items. The adoption of SFAS
130 should not materially affect the Company's financial statements.
SFAS 131 requires a company to disclose financial and other
information, as defined by the statement, about its business segments, their
products and services, geographic areas, major customers, revenues, profits,
assets and other information. The Company has not yet assessed what impact SFAS
131 will have on its financial statement reporting.
Information Regarding and Factors Affecting Forward-Looking Statements
Certain statements contained in this report on, including without
limitation statements containing the words "believes," "anticipates," "expects"
and words of similar import, are forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other matters which may cause the actual results, performance or achievements of
the Company or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other matters include,
but are not limited to the factors described below. In addition, the Company's
ability to achieve anticipated results or meet any specific goals or milestones
will be subject to other factors affecting the Company's business that are
beyond the Company's control, including, but not limited to, general economic
conditions, the effect of government regulation on the conduct of the Company's
business, insurance reimbursements and changes in technology. Given these
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such statements or publicly announce any updates or revisions to any of the
forward-looking statements contained herein to reflect any change in the
Company's expectation with regard thereto or any change in events, conditions,
circumstances or assumptions underlying such statements.
54
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
In December 1993, the Company completed an initial public offering of
1,750,000 shares of Common Stock and 1,946,775 redeemable warrants (the
"Redeemable Warrants") to purchase Common Stock. Prior to the initial public
offering, there was no public market for the Common Stock. Initially after the
initial public offering, the Common Stock and Redeemable Warrants were quoted on
the Nasdaq National Market under the symbols POSI and POSIW, respectively.
Subsequently, the Common Stock and Redeemable Warrants were quoted on the Nasdaq
SmallCap Market. The standards required for the Company to maintain such listing
include, among other things, that the Company have total capital and surplus of
at least $2,000,000. As of September 30, 1998, the Company had a total capital
and surplus deficit of $(6,097,000). The Company failed to maintain its Nasdaq
stock market listing and will not meet the substantially more stringent
requirements to be re-listed until such time as it is able to raise capital by
sale of additional equity securities or increased sales of its POSICAM(TM)
systems. There can be no assurance that the Company will ever meet the capital
and surplus requirements needed to be re-listed under the Nasdaq SmallCap Market
System.
Trading of the Common Stock is currently conducted in the "pink
sheets"of the NASD's Electronic Bulletin Board. Trading in the Common Stock is
covered by rules promulgated under the Securities Exchange Act of 1934 for
non-Nasdaq and non-exchange listed securities. Under such rules, broker/dealers
who recommend such securities to persons other than established customers and
accredited investors must make a special written suitability determination for
the purchaser and receive the purchaser's written agreement to a transaction
prior to sale. Securities are exempt from these rules if the market price is at
least $5.00 per share. As of September 30, 1998, the closing price of the Common
Stock was $0.15.
The following sets forth the range of the high and low reported closing
sales prices of the Common Stock for the four quarters of 1997 and 1996 and the
four quarters of 1998 (through October 30, 1998), all as reported on the Nasdaq
National Market or Nasdaq SmallCap Market as appropriate.
1998 1997 1996
--------------- --------------- ---------------
High Low High Low High Low
------ ------ ------ ------ ------ ------
First Quarter $0.625 $0.266 $3.375 $1.250 $3.563 $1.375
Second Quarter 0.609 0.188 1.938 0.375 4.188 3.250
Third Quarter 0.453 0.213 1.438 0.422 5.500 2.000
Fourth Quarter 0.328 0.047 0.953 0.172 3.250 1.500
There were approximately 220 holders of record of shares of Common
Stock as of October 30, 1998. The Company estimated that there were also
approximately 800 beneficial holders of Common Stock as of October 30, 1998.
The Company has never paid cash dividends on its Common Stock. The
Company does not intend to pay cash dividends on its Common Stock in the
foreseeable future.
55
<PAGE>
PRINCIPAL SHAREHOLDERS AND MANAGEMENT OWNERSHIP
The following table sets forth certain information as of September 30,
1998, regarding the ownership of Common Stock of: (i) each person who is known
by the Company to be the beneficial owner of more than 5% of the outstanding
shares of Common Stock; (ii) each director and executive officer of the Company;
and (iv) all executive officers and directors of the Company as a group.
Included in the "Number of Shares of Common Stock" column are shares
attributable to options or warrants that are exercisable as of, or will be
exercisable within 60 days after, September 30, 1998.
<TABLE>
<CAPTION>
Number of Percent of Number of Percent of
Number of Percent of Shares of Outstanding Shares of Outstanding
Shares Outstanding Series A Series A Series B Series B
Name of Beneficial of Common Common Preferred Preferred Preferred Preferred
Owner(1) Stock Stock Stock Stock Stock Stock
- ----------------------------- ----------- ----------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Auer & Co.(2) 600,000 11.3% 400,000 25.1%
c/o ASB Capital Mgt.
1101 Pennsylvania Avenue NW,
Suite 300
Washington, DC 20004
DHB Capital 11,568 * 25,000 100%
11 Old Westbury Rd.
Old Westbury, New York 11568
Uro-Tech, Ltd.(3) 865,523 15.5% 433,329 27.2%
5430 LBJ Freeway
Dallas, Texas 75240
K. Lance Gould, M.D.(4) 103,830 2.1%
Positron Corporation
16350 Park Ten Place
Houston, Texas 77084
Gary B. Wood, Ph.D.(5) 80,793 1.6%
OmniMed Corporation
5430 LBJ Freeway
Dallas, Texas 75240
John H. Laragh, M.D.(6) 31,709 *
Positron Corporation
1304 Langham Creek Drive
Suite 310
Houston, Texas 77084
Ronald B. Schilling, Ph.D.(7) 8,709 *
Positron Corporation
16350 Park Ten Place
Houston, Texas 77084
All Directors and Executive 225,041 4.4% 433,329 27.2%
Officers as a Group
(4 persons)
<FN>
* Less than 1%
(1) Except as otherwise indicated, each shareholder has sole investment and
sole voting power with respect to the shares of Common Stock or Series
A Preferred Stock shown.
(2) Includes 600,000 shares of Common Stock issuable upon the conversion of
400,000 shares of Series A Preferred Stock and 200,000 warrants to
purchase Common Stock.
(3) Includes 424,787 shares of Common Stock owned by Uro-Tech, Ltd., a
Texas limited partnership, the general partner of which is OmniMed
Corporation ("OmniMed"). Includes 156,565 shares of Common Stock
issuable upon the exercise of Series E Warrants held by Uro-Tech, Ltd.
Includes 650,000 shares of Common Stock issuable upon the conversion of
433,329 shares of Series A Preferred Stock and 216,671 warrants to
purchase
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<PAGE>
Common Stock acquired upon the conversion $650,000 in principal amount
of the Uro-Tech Loan (as defined herein). Also includes 67,500 shares
issuable upon the conversion of warrants acquired in connection with
the Uro-Tech Loan. Dr. Wood is Chairman of the Board of Directors, and
beneficially owns 63.7% of the outstanding voting securities, of
OmniMed. All shares beneficially owned by OmniMed have been included in
the total number of shares of Common Stock beneficially owned by Dr.
Wood.
(4) Includes 9,936 shares of Common Stock issuable upon exercise of a
warrant held by Dr. Gould, and 11,709 shares of Common Stock issuable
upon exercise of an option awarded to Dr. Gould under the 1994 Plan and
250,000 shares of Common Stock issuable upon exercise of an option
awarded to Dr. Gould for services rendered by Dr. Gould in connection
with the sale of a POSICAMTM system.
(5) Includes 7,304 shares of Common Stock issuable upon exercise of a
warrant held by Dr. Wood and 50,000 shares of Common Stock issuable
upon exercise of an option granted to Mr. Wood on March 24, 1995.
Includes 7,000 shares of Common Stock issuable upon the exercise of an
option granted to Dr. Wood in June 1994 and 1,209 shares of Common
Stock issuable up to exercise of an option granted to Dr. Wood in June
1995. Includes 15,280 shares of Common Stock beneficially owned by
OmniMed. Dr. Wood owns 63.7% of the outstanding voting securities of
OmniMed.
(6) Includes 11,709 shares of Common Stock issuable upon exercise of
options awarded to Dr. Laragh under the 1994 Plan and 20,000 shares of
Common Stock issuable upon exercise of an option awarded to Dr. Laragh
on March 24, 1995.
(7) Includes 8,709 shares of Common Stock issuable upon exercise of options
award to Mr. Schilling under the 1994 Plan.
</FN>
</TABLE>
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Royalty Payments
In 1984, the Company licensed for use in the United States the know-how
and patent rights relating to positron imaging (the "Licensed Technology")
possessed by the Clayton Foundation, K. Lance Gould (a current director of the
Company) and Nizar A. Mullani (a former director of the Company). The Company is
currently obligated to pay royalties of 3% of the gross revenues from sales,
uses, leases, licensing or rentals of the Licensed Technologies, consisting of
1% to each of the Clayton Foundation, K. Lance Gould and Nizar A. Mullani. The
Company has not made any royalty payments since 1993. As of October 30, 1998,
approximately $225,000 was owed to the aforementioned individuals for past due
royalties.
Conversion of Debt
On January 15, 1993, the Company and Dr. K. Lance Gould entered into an
agreement (the "Gould Agreement") pursuant to which (i) Dr. Gould exchanged a 9%
Convertible Promissory Note in the principal amount of $281,250 issued to him on
December 22, 1988 for a new 9% Convertible Promissory Note in the principal
amount of $281,250, (ii) in exchange for past due royalties in the amount of
$36,951 and accrued interest in the amount of $101,643, the Company issued Dr.
Gould a second 9% Convertible Promissory Note in the principal amount of
$138,594 with an original maturity date of October 31, 1993 (which was
subsequently extended to December 15, 1993), (iii) the Company issued to Dr.
Gould a warrant expiring July 25, 1996, to purchase 9,936 shares of Common Stock
at an exercise price of $25.59 per share, and (iv) the Company agreed to pay Dr.
Gould's legal fees in the amount of $15,125 in connection with the negotiation
of the Gould Agreement. Pursuant to the conversion features of these 9%
Convertible Promissory Notes, upon the closing of the Company's initial public
offering, the 9% Convertible Promissory Notes converted into 50,889 shares of
Common Stock.
In November 1993, the Company entered into an agreement with Dr. Gould
under which the Company became obligated to extend loans to Dr. Gould in order
to provide him with funds to satisfy his personal income tax liability arising
out of the conversion of his 9% Convertible Promissory Notes into Common Stock.
Such agreement was entered into by the Company in consideration of certain
concessions made by Dr. Gould concerning the conversion terms under his 9%
Convertible Promissory Notes. Pursuant to the agreement, the loans would be on
substantially the following terms if made: (i) limited to a principal amount not
to exceed $175,000, (ii) interest payable at the rate of 6% per annum, (iii) an
initial term of three years, (iv) limited recourse against the borrower, and (v)
collateralized by Common Stock owned by the borrower. In accordance with such
agreement, on April 15, 1994, the Company extended a $165,817 loan to Dr. Gould.
The current outstanding balance is $165,817. In April 1997, the Company and Dr.
Gould agreed to a one-year extension of his loan.
Consultants
The Company and Dr. Wood have entered into a Consulting Agreement
whereby Dr. Wood provides certain managerial, financial, marketing and
organizational services to the Company. The Company incurred fees of
approximately $80,000 in both 1997 and 1996. In January 1995, the Company and
Dr. Wood agreed to extend the term of such consulting agreement to December 31,
1998.
The Company entered into a Consulting Agreement with Dr. Gould in
August 1984. On January 15, 1993, pursuant to the Agreement, the Company and Dr.
Gould entered into a new consulting agreement (the "Gould Consulting Agreement")
effective upon the closing of the Company's initial public offering. The Gould
Consulting Agreement provided for a term of ten years (which term was reduced by
agreement in May 1993 to three years) and provides for the Company to pay him
consulting fees at an annual rate of $80,000, payable monthly, subject to
adjustment based upon changes in the consumer price index. In addition, the
Company reimburses Dr. Gould for approved expenses in connection with rendered
services. In the event that the Company fails to make payments to Dr. Gould when
due under the Gould Consulting Agreement or fails to make any required royalty
payments to Dr. Gould, the Company may be required, at Dr. Gould's option to
convey to Dr. Gould a 0.5% royalty on sales of POSICAMTM systems.
Uro-Tech Loan
During the last quarter of 1995 and the first quarter of 1996, in order
to fund its activities the Company borrowed a total of $1,313,000 from Uro-Tech,
Ltd. , (the "UroTech Loan"). The Uro-Tech Loan, as amended, bears interest at
13.8% per annum and matures on December 31, 1997, and is secured by liens and
security interests encumbering most of the Company's assets including the
Company's know-how, patents and proprietary rights pertaining to its PET
technology. In connection with the loan from Uro-Tech, the Company granted
Uro-Tech warrants to purchase 67,500 shares of Common Stock, at an exercise
price of $2.00 per share exercisable through February 7, 2001.
58
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SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who beneficially own more
than 10% of a registered class of the Company's equity securities to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of the
Company. Based on the Company's review of forms furnished to the Company and
representations from reporting persons, the Company believes that all filing
requirements applicable to the Company's executive officers, directors and 10%
beneficial owners were complied with during 1997.
SHAREHOLDER PROPOSALS
Any shareholder of the Company desiring to present a proposal for
action at the Annual Meeting of Shareholders to be held in 1999 must deliver the
proposal to the executive offices of the Company by no later than December 11,
1998, unless the Company notifies the shareholders otherwise. The Company's
management will have discretionary authority with respect to proxies submitted
to the 1999 Annual Meeting of Shareholders on any matter which the Company does
not receive notice of by February 25, 1999.
ANNUAL REPORT ON FORM 10-KSB
A copy of the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997, as filed with the Securities and Exchange Commission, is
enclosed herewith as a part of the enclosed Annual Report to Shareholders. An
additional copy of the Annual Report on Form 10-KSB will be sent to any
shareholder without charge upon written request made to the Company at 1304
Langham Creek Drive, Suite 310, Houston, Texas 77084, Attention: Corporate
Communications.
OTHER MATTERS
The Board of Directors does not intend to bring any other matters
before the Annual Meeting and does not know of any matters which will be brought
before the Annual Meeting by others. However, if any other matters properly come
before the Annual Meeting, it is the intention of the persons named in the
accompanying proxy to vote such proxy in accordance with their judgment on such
matters.
By Order of the Board of Directors
Gary B. Wood
Secretary
Houston, Texas
November 20, 1998
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POSITRON CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD DECEMBER 18, 1998
The undersigned hereby (i) acknowledges receipt of the Notice of Annual
Meeting of Shareholders of Positron Corporation (the "Company") to be held on
December 18, 1998, and the Proxy Statement in connection therewith, each dated
as of November 20, 1998, and (ii) constitutes and appoints Gary B. Wood his
attorney and proxy, with full power of substitution to him, to vote, and to act
with respect to, all shares of Common Stock, par value $.01 per share, and
Series A 8% Cumulative Convertible Redeemable Preferred Stock of the Company
standing in the name of the undersigned or with respect to which the undersigned
is entitled to vote and act at the annual meeting, as indicated on the reverse
side of this card:
Dated this ______ day of ______________, 1998
Signature(s) of shareholder(s)
Please sign exactly as your name appears on
your stock certificate. When signing on
behalf of a corporation, partnership, estate,
trust or in other representative capacity,
please sign your full name and title. For
joint accounts, each joint owner must sign.
PLEASE DATE, SIGN AND MAIL YOUR PROXY PROMPTLY.
<PAGE>
1. ELECTION OF DIRECTOR:
WITHHOLD AUTHORITY to vote
FOR nominee listed below |_| for nominee listed below |_|
Gary B. Wood
2. PROPOSAL TO AMEND ARTICLES OF INCORPORATION:
FOR |_| AGAINST |_| ABSTAIN |_|
3. APPROVAL OF DESIGNATION OF HAM, LANGSTON & BREZINA, L.L.P., as
independent auditors for the fiscal year ended December 31,
1997:
FOR |_| AGAINST |_| ABSTAIN |_|
4. IN THE DISCRETION of the proxies on any other matters as may
properly come before the meeting or any Adjournment(s)
thereof.
THIS PROXY WILL BE VOTED AS SPECIFIED ABOVE. IF NO CONTRARY
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED "FOR" EACH OF THE PROPOSALS SET
FORTH ABOVE. IN ORDER FOR THIS CARD TO BE VALID IT MUST BE SIGNED ON THE REVERSE
SIDE OF THIS CARD.
If you plan to attend the annual meeting, check this box: |_|
<PAGE>
ANNEX A
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement") is made this 1st day of
May, 1998 by and between POSITRON CORPORATION, a Texas corporation with
principal offices located at 1304 Langham Creek Drive, Houston, Texas 77084
("SELLER") and IMATRON INC., a New Jersey corporation with principal offices
located at 389 Oyster Point Blvd., So. San Francisco, CA 94080 ("BUYER").
WHEREAS, Seller wishes to issue and sell to Buyer certain shares of its
common stock ("Shares") in exchange for certain consideration; and
WHEREAS, Buyer wishes to purchase such certain shares of common stock
issued by and from Seller pursuant to certain terms and conditions.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements, the Seller and Buyer hereby agree as follows:
AGREEMENT
1. Sale and Purchase of Shares. On the closing date as set forth in Section
3 ("Closing Date"), Seller shall deliver to Buyer, for the consideration set
forth in Section 2 hereof, the greater of Nine Million (9,000,000) shares of
Seller's common stock or whatever number of common shares in excess of 9,000,000
common shares constitutes fifty-one percent (51%) of Seller's outstanding voting
securities on a fully diluted basis, exclusive of out of the money warrants,
and/or options, and/or convertible securities, calculated as of the Closing
Date. For this purpose, "out of the money" shall mean warrants and/or options
and /or convertible securities in which the purchase price of the underlying
common stock for which the warrant or the option may be exercised or the
security converted exceeds the fair market value of the underlying common stock
by more than 10%, as determined by averaging the bid and asked prices of the
common stock during the last ten (10) trading days immediately prior to the
Closing Date.
2. Consideration. In consideration of the purchase of the Shares on the
Closing Date, Buyer hereby agrees to pay the following consideration:
i. The affirmative covenants of Buyer as described in Section 10 herein.
ii. Payment of One Hundred U.S. Dollars ($100.00), payable at Closing.
3. Closing. The closing of the sale to, and purchase by, Buyer of the
Shares shall take place at the offices of Imatron Inc. at the hour of 10:00
a.m., on the first business day after all conditions precedent shall have been
met or waived, or on such other day or at such other time or place as the Seller
and Buyer shall agree.
At the Closing, Seller will deliver to Buyer certificates representing the
Shares being purchased by Buyer, registered in its name.
4. Restriction on Transfer of Securities.
a. Restrictions. The Shares are transferable only pursuant to i. a public
offering registered under the Securities Act of 1933, as amended (the
"Securities Act"), ii. Rule 144 (or any similar rule then in effect) adopted
under the Securities Act, if such rule is available, and iii. subject to the
conditions elsewhere specified in this Section 4, any other legally available
means of transfer.
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b. Each certificate representing Shares will be endorsed with the
following legend:
i. Legend.
"The securities evidenced hereby may not be transferred without (i) the
opinion of counsel satisfactory to the Company that such transfer may
be lawfully made without registration under the Securities Act of 1933
and all applicable state securities laws or (ii) such registration."
ii. Stop Transfer Order. A stop transfer order shall be placed with the
Seller's transfer agent preventing transfer of any of the securities
referred to in paragraph (a) above pending compliance with the
conditions set forth in any such legend.
c. Removal of Legend. Any legend endorsed on a certificate or instrument
evidencing a security pursuant to Section 4.2 hereof shall be removed, and
Seller shall issue a certificate or instrument without such legend to the holder
of such security, i. in accordance with Section 4.2(a) hereof, ii. if such
security is being disposed of pursuant to registration under the Securities Act
and any applicable state acts or pursuant to Rule 144 or any similar rule then
in effect, or iii. if such holder provides Seller with an opinion of counsel
satisfactory to it to the effect that a sale, transfer, assignment, offer,
pledge or distribution for value of such security may be made without
registration and that such legend is not required to satisfy the applicable
exemption from registration.
5. Representations and Warranties by Seller. Except as disclosed and
described in Schedule 5 hereto, Seller represents and warrants to Buyer that:
a. Organization, Standing, Power. Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of Texas, and
has the requisite corporate power and authority to own its properties and to
carry on its business in all material respects as it is now being conducted.
Seller has, or at the Closing Date will have, the requisite corporate power and
authority to issue the Common Shares, and to otherwise perform its obligations
under this Agreement. The copies of the Articles of Incorporation and Bylaws of
the Company delivered to Buyer or its agents prior to the execution of this
Agreement are true and complete copies of the duly and legally adopted Articles
of Incorporation and Bylaws of Seller in effect as of the date of this
Agreement.
b. Qualification. Seller is duly qualified or licensed as a foreign
corporation in good standing in each jurisdiction wherein the nature of its
activities or of its properties owned or leased makes such qualification or
licensing necessary and failure to be so qualified or licensed would have a
material adverse impact on its business.
c. Financial Statements. Attached hereto as Exhibit A are: i. a balance
sheet at September 30, 1997, together with the related statements of operations
and cash flow, and changes to shareholders' equity for the 9 month period then
ended, and ii.a draft of a balance sheet at December 31, 1997 (the "Balance
Sheet Date"), and the related statements of operations and cash flow for the
quarter then ended, prepared by Seller. Such financial statements (1) are true
and correct and in accordance with the books and records of Seller, (2) present
fairly the financial condition of Seller at the balance sheet dates and the
results of its operations for the periods therein specified, and (3) have, in
all material respects, been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with prior accounting
periods, except that the balance sheet at December 31, 1997 and related
statements of operations and cash flow is in draft form and does not contain
footnotes. Specifically, but not by way of limitation, the balance sheets or
notes thereto disclose all of the debts, liabilities and obligations of any
nature (whether absolute, accrued or contingent and whether due or to become
due) of Seller at December 31, 1997 and at the Balance Sheet Date which,
individually or in the aggregate, are material and which in accordance with
generally accepted accounting principles would be required to be disclosed in
such balance sheets, and the omission of which would, in the aggregate, have a
material adverse impact on Seller. The balance sheets include appropriate
reserves for all taxes and other liabilities accrued at such date but not yet
payable.
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d. Tax Returns and Audits. Except as disclosed and described on Schedule
5.4 hereto, all required federal, state and local tax returns or appropriate
extension requests of Seller have been filed, and all federal, state and local
taxes required to be paid with respect to such returns have been paid or due
provision for the payment thereof has been made. Except as disclosed and
described on Schedule 5.4, Seller is not delinquent in the payment of any such
tax or in the payment of any assessment or governmental charge, Seller has not
received notice of any tax deficiency proposed or assessed against it, and
Seller has not executed any waiver of any statute of limitations on the
assessment or collection of any tax. None of Seller's tax returns has been
audited by governmental authorities in a manner to bring such audits to the
Seller's attention. Seller does not have any tax liabilities except those
reflected in Schedule 5.4 hereto and those incurred in the ordinary course of
business since the Balance Sheet Date.
e. Litigation; Governmental Proceedings. Except as disclosed and
described on Schedule 5.5 hereto: there are no legal actions, suits,
arbitrations or other legal, administrative or governmental proceedings or
investigations pending or, to the knowledge of Seller, threatened against
Seller, its properties, assets or business; Seller is not aware of any facts
which are likely to result in or form the basis for any such action, suit or
other proceeding; Seller is not in default with respect to any judgment, order
or decree of any court or any governmental agency or instrumentality; Seller has
not been threatened with any action or proceeding under any business or zoning
ordinance, law or regulation.
f. Compliance with Applicable Laws and Other Instruments. The business
and operations of Seller have been and are being conducted in accordance with
all applicable laws, rules and regulations of all governmental authorities.
Subject to shareholder approval of appropriate amendments to the Articles of
Incorporation as contemplated by this Agreement, and except with respect to
existing registration rights of holders of certain securities issued by Seller,
as disclosed and described on Schedule 5.6, neither the execution nor delivery
of, nor the performance of or compliance with, this Agreement nor the
consummation of the transactions contemplated hereby will conflict with, or,
with or without the giving of notice or passage of time, result in any breach
of, or constitute a default under, or result in the imposition of any lien or
encumbrance upon any asset or property of Seller pursuant to, any applicable
law, administrative regulation or judgment, order or decree of any court or
governmental body, any agreement or other instrument to which Seller is a party
or by which it or any of its properties, assets or rights is bound or affected,
and will not violate the Articles of Incorporation or Bylaws of Seller. Seller
is not in violation of its Articles of Incorporation or its Bylaws.
g. Common Shares. The Common Shares, when issued and paid for pursuant to
the terms of this Agreement, will be duly authorized, validly issued and
outstanding, fully paid, nonassessable and free and clear of all pledges, liens,
encumbrances and restrictions. The Common Shares, when issued, will contain no
undisclosed interest, present or future, and Seller does not know, and at
Closing will not know, of any assertion of such an interest. The Common Shares
will be genuine, and Seller has no knowledge of any fact which would impair the
validity thereof.
h. Capital Stock. The currently authorized capital stock of Seller is as
follows:
SECURITY AUTHORIZED ISSUED COMMON SHARE EQUIVALENT RESERVED
Common 15,000,000 5,128,990 5,128,990
Series A Preferred 5,450,000 1,595,005 1,614,705
Series B Preferred 35,000 25,000 632,721
All of the outstanding shares of capital stock of Seller have been duly
authorized and validly issued and are fully paid and nonassessable. Except as
disclosed and described in Schedule 5.8, neither the offer nor the issuance or
sale of the Common Shares as contemplated by this Agreement constitutes an
event, under any anti-dilution provisions of any securities issued or issuable
by Seller or any agreements with respect to the issuance of securities by
Seller, which will either increase the number of shares issuable pursuant to
such provisions or decrease the consideration per share to be received by Seller
pursuant to such provisions. All outstanding securities of Seller have been
issued in full compliance with an exemption or exemptions from the registration
and prospectus delivery requirements of the Securities Act and from the
registration and qualification requirements of all applicable state securities
laws. Seller is not a party or subject to any agreement or understanding, and to
Seller's knowledge, there is no agreement or understanding between any persons
or entities or by a director of Seller, which affects or relates to the voting
or giving of written consents with respect to any security of Seller.
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<PAGE>
i. Warrants, Options, Exchange Rights and Conversion Rights. Except as
otherwise disclosed and described in Schedule 5.9 hereto or as contemplated by
this Agreement, there are no outstanding or authorized options, warrants,
purchase rights, subscription rights, calls, contracts, demands, commitments,
Convertible Securities (as hereinafter defined) or other agreements or
arrangements of any character or nature whatever, under which Seller is or may
be obligated to issue capital stock or other securities of any kind representing
an ownership interest or contingent ownership interest in Seller. Except as
otherwise disclosed and described in Schedule 5.9 hereto or as contemplated by
this Agreement, there are no voting trusts, proxies, or other agreements or
understandings with respect to the voting of the capital stock of Seller.
j. No Brokers or Finders. No person, firm or corporation has or will
have, as a result of any act or omission of Seller, any right, interest or valid
claim against or upon the Seller or Buyer for any commission, fee or other
compensation as a finder or broker, or in any similar capacity, in connection
with the transactions contemplated by this Agreement. Seller will indemnify and
hold Buyer harmless against any and all liability with respect to any such
commission, fee or other compensation which may be payable or determined to be
payable in connection with the transactions contemplated by this Agreement.
k. Composition of the Board of Directors. As of the Execution
Date, the complete Board of Directors of Seller consists of those persons,
including vacant positions, as set forth on Schedule 5.11.
6. Representations and Warranties of Buyer. Buyer represents and warrants
that:
a. Investment Intent. The Common Shares being acquired hereunder are
being purchased for Buyer's own account and not with the view to, or for resale
in connection with, any distribution or public offering thereof within the
meaning of the Securities Act. Buyer understands that the Common Shares have not
been registered under the Securities Act or any applicable state laws by reason
of their issuance or contemplated issuance in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act and such
laws, and that the reliance of Seller and others upon this exemption is
predicated in part upon this representation and warranty. Buyer further
understands that the Common Shares may not be transferred or resold without i.
registration under the Securities Act and any applicable state securities laws,
or ii. an exemption from the requirements of the Securities Act and applicable
state securities laws.
b. Accredited Investor. The state in which Buyer's principal office is
located is set forth in Buyer's address as set forth in this Agreement. Buyer
qualifies as an accredited investor within the meaning of Rule 501 under the
Securities Act. Buyer has such knowledge and experience in financial and
business matters that Buyer is capable of evaluating the merits and risks of the
investment to be made hereunder by Buyer.
c. Acts and Proceedings. This Agreement has been duly authorized by all
necessary action on the part of Buyer, has been duly executed and delivered by
Buyer, and is a valid and binding agreement upon the part of Buyer.
d. No Brokers or Finders. No person, firm or corporation has or will
have, as a result of any act or omission by Buyer, any right, interest or valid
claim against Seller for any commission, fee or other compensation as a finder
or broker, or in any similar capacity, in connection with the transactions
contemplated by this Agreement. Buyer will indemnify and hold Seller harmless
against any and all liability with respect to any such commission, fee or other
compensation which may be payable or determined to be payable as a result of the
actions of Buyer in connection with the transactions contemplated by this
Agreement.
7. Conditions of Buyer's Obligation. Buyer's obligation to purchase and pay
for the Common Shares on the Closing Date is subject to the fulfillment prior to
or on the Closing Date of the conditions set forth below. In the event that any
such condition is not satisfied to Buyer's satisfaction, then Buyer shall not be
obligated to proceed with the purchase of such Common Shares nor otherwise with
any further of its obligations pursuant to this Agreement.
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<PAGE>
a. No Errors. etc. The representations and warranties of Seller under
this Agreement shall be true in all material respects as of the Closing Date
with the same effect as though made on and as of the Closing Date. b. Compliance
with Agreement. Seller shall have performed and complied in all material
respects with all agreements or conditions required by this Agreement to be
performed and complied with by it prior to or as of the Closing Date.
c. Qualification Under State Securities Laws. All registrations,
qualifications, permits and approvals required under applicable state securities
laws for the lawful execution and delivery of this Agreement and the offer,
sale, issuance and delivery of the Common Shares shall have been obtained.
d. Proceedings and Documents. All corporate and other proceedings and
actions taken in connection with the transactions contemplated hereby and all
certificates, opinions, agreements, instruments and documents mentioned herein
or incident to any such transaction shall be satisfactory in form and substance
to Buyer and its counsel.
e. Resignation of Officers and Appointment of Chief Executive Officer.
Seller will obtain and deliver to Buyer the resignations of each of the officers
of Seller, including but not limited to its chief executive officer, effective
as of the Closing Date, and simultaneously therewith shall cause the appointment
of a chief executive officer and such other officers as are designated by Buyer.
Seller acknowledges that the officers' resignations pursuant to this Section 7.5
will not constitute resignation by any such employee from employment by Seller,
unless specifically so indicated, and further that such resignation pursuant to
this Section 7.5 will not be deemed a breach of any employment agreement which
might be in effect between Seller and such employee. Seller further acknowledges
that delivery and acceptance of such resignation does not otherwise modify the
terms of any employment agreement which may be in effect, nor is it intended to
effect Seller's ability to negotiate mutually acceptable changes in future to
any employment agreement which may be currently in effect.
f. Special Shareholders' Meeting. Promptly following execution of this
Agreement, Seller shall take, with the assistance of Buyer as set forth in this
Agreement, all such actions as may be necessary and shall cause the convening of
a Special Meeting of Shareholders as promptly as possible to amend the Articles
of Incorporation to authorize an increase in its authorized common stock in such
an amount as to fully effectuate the provisions of this Agreement, taking into
account such obligations as Seller may currently have or may be expected to have
in the foreseeable future in light of its business plan. It is the reasonable
expectation of the parties that the appropriate number of authorized shares
resulting from such amendment will be not less than 100,000,000 common shares.
g. Board Resignations.
i. Upon request of Buyer at any time between
execution of this Agreement and the Closing Date, to be effective upon
the Closing Date, Seller will obtain and deliver to Buyer the
resignations of at least three of the four members of its Board of
Directors, as reflected on Schedule 5.11 to this Agreement.
ii. Immediately upon Closing, Seller will cause a
sufficient number of directors' resignations to be effective and
thereupon will cause the nominees of Buyer to be elected as directors
of Seller in place of the resigned directors or otherwise to fill
vacancies on the Board, so that, following such action, the nominees of
Buyer will constitute a majority of the members of the Board then in
office.
8. Conditions of Seller's Obligation. Seller's obligation to sell the
Common Shares to Buyer on the Closing Date is subject to the fulfillment prior
to or on the Closing Date of the conditions set forth below. In the event that
any such condition is not satisfied, Seller shall not be obligated to proceed
with the sale of such Common Shares.
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a. Shareholder Authorization. The shareholders shall have authorized an
increase in the number of authorized shares of common stock sufficient to fully
effectuate the purposes of this Agreement.
b. No Errors, etc. The representations and warranties of Buyer under this
Agreement shall be true in all material respects as of the Closing Date with the
same effect as though made on and as of the Closing Date.
c. Compliance with Conditions. Buyer shall have performed and complied
with all agreements or conditions required by this Agreement to be performed and
complied with by it prior to or as of the Closing Date.
9. Seller Affirmative Covenants. Seller covenants and agrees that:
a. Corporate Existence. Seller will maintain and cause each Subsidiary
(as hereinafter defined) to maintain its corporate existence in good standing
and comply with all applicable laws and regulations of the United States or of
any state or states thereof or of any political subdivision thereof and of any
governmental authority where failure to so comply would have a material adverse
impact on Seller or its business or operations.
b. Books of Account and Reserves. Seller will, and will cause each of its
Subsidiaries to, keep books of record and account in which full, true and
correct entries are made of all of its and their respective dealings, business
and affairs, in accordance with generally accepted accounting principles. Seller
will employ certified public accountants selected by the Board who are
"independent" within the meaning of the accounting regulations of the
Commission, and have annual audits made by such independent public accountants
in the course of which such accountants shall make such examinations, in
accordance with generally accepted auditing standards, as will enable them to
give such reports or opinions with respect to the financial statements of Seller
and its Subsidiaries as will satisfy the requirements of the Commission in
effect at such time with respect to certificates and opinions of accountants.
c. Furnishing of Financial Statements and Information. Seller will
deliver to Buyer:
i. as soon as practicable, but in any event within 45
days after the close of each quarterly period, unaudited consolidated
balance sheets of Seller and its Subsidiaries as of the end of such
period, together with the related consolidated statements of operations
and cash flow for such period, setting forth the budgeted figures for
such period prepared and submitted in connection with Seller's annual
business plan and in comparative form figures for the corresponding
quarterly period of the previous fiscal year, all in reasonable detail
and certified by an authorized accounting officer of Seller, subject to
year-end adjustments;
ii. as soon as practicable, but in any event within
90 days after the end of each fiscal year, a consolidated balance sheet
of Seller and its Subsidiaries, as of the end of such fiscal year,
together with the related consolidated statements of operations,
shareholders' equity and cash flow for such fiscal year, setting forth
in comparative form figures for the previous fiscal year, all in
reasonable detail and duly certified by Seller's independent public
accountants (except for the fiscal year ended 1997, for which certified
materials will be supplied as soon as practicable following Closing),
which accountants shall have given Seller an opinion, unqualified as to
the scope of the audit, regarding such statements;
iii. with reasonable promptness, such other financial
data relating to the business, affairs and financial condition of
Seller and any Subsidiaries as is available to Seller and as from time
to time Buyer may reasonably request; and
iv. at least 20 days prior to the earlier of (1) the
execution of any agreement relating to any merger or consolidation of
Seller or any of its Subsidiaries with another corporation, or a plan
of exchange involving the outstanding capital stock of Seller or any of
its Subsidiaries, or the sale, transfer or other disposition of all or
substantially all of the property, assets or business of Seller or any
of its Subsidiaries to another corporation, or (2) the holding of any
meeting of the shareholders of Seller for the purpose of approving such
action, written notice of the terms and conditions of such proposed
merger, consolidation, plan of exchange, sale, transfer or other
disposition.
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d. Indemnification Rights. For a period of not less than six (6) years
from the Closing Date, unless otherwise required by law, Seller will maintain
provisions in its articles of incorporation and by-laws with respect to
indemnification of directors and officers, whether then current or former, that
are no less favorable than as currently set forth in its articles of
incorporation and by-laws. Further, for a period of not less than six (6) years
from the Closing Date, unless otherwise required by law, Seller will continue to
provide indemnification of its directors and officers, whether then current or
former, to the fullest extent permissible under Texas law.
10. Buyer's Affirmative Covenants. Upon execution of this Agreement, Buyer
agrees as follows:
a. Special Shareholders' Meeting. In connection with Special
Shareholders' Meeting to be called pursuant to Section 7.6 herein, Buyer agrees
to assist Seller as reasonably requested and agreed in preparing materials and
soliciting proxies in connection with obtaining approval of its shareholders to
increase its authorization to issue common stock in connection with the
transaction contemplated by this Agreement. As part of Buyer's obligations
hereunder, Buyer agrees reimburse Seller for expenses incurred in preparing
materials and soliciting proxies, not in excess of the amounts set forth in
Schedule 10.1, and further to furnish Seller, within reasonably sufficient time
to be reviewed and included in the materials to be mailed to shareholders in
connection with the Special Shareholders' Meeting, the names of Buyer's nominees
for election to the Board, together with information with respect to each
nominee equivalent to the information required to be disclosed to stockholders
with respect to director nominees pursuant to Regulation 14A of the Securities
and Exchange Act and such other similar information that Seller may thereafter
reasonably request. It is understood that Seller may refuse to cause the
nomination and election as a director of Seller of any nominee proposed by Buyer
if (i) the information described above is not timely furnished by Buyer or (ii)
if, having been furnished, it is the reasonable judgment of Seller and its
counsel that the election of such nominee would not be in the best interests of
Seller or might tend to subject Seller to liability therefor. The foregoing
notwithstanding, Buyer and Seller agree to cooperate and use their mutual best
efforts for the purpose of preparing for and conducting the Special
Shareholders' Meeting as promptly as possible following the Execution Date.
b. Orders for Product. As soon as practicable following the Closing Date,
but not later than eight (8) months from the Execution Date, Buyer will take all
reasonable efforts to cause the placement of ten (10) product orders, in the
aggregate including any orders currently under discussion, from Buyer's
affiliate in Japan over a period of thirty-six (36) months from the placement of
the first order.
c. Additional Equity. As soon as practicable following the Closing Date,
Buyer will use its best efforts to arrange for additional third party equity
financing for Seller, to be contributed to Seller over a period of no greater
than eighteen (18) months from the Closing Date, and in an aggregate amount not
less than Eight Million U.S. Dollars ($8,000,000) ("Equity Financing"). The
parties specifically acknowledge and anticipate that this Equity Financing will
involve and/or cause a substantial dilution of existing shareholders, including
but not limited to Buyer.
11. Negative Covenants. Seller will not, without the prior approval of a
majority of all of the members of the Board of Directors:
i. guarantee, endorse or otherwise be or become contingently liable, or
permit any Subsidiary to guarantee, endorse or otherwise become contingently
liable, in connection with the obligations, securities or dividends of any
person, firm, association or corporation, other than Seller or any of its
Subsidiaries, except that Seller and any Subsidiary may endorse negotiable
instruments for collection in the ordinary course of business; or
ii. make or permit any Subsidiary to make loans or advances to any person
(including without limitation to any officer, director or shareholder of Seller
or any Subsidiary), firm, association or corporation, except loans and advances
to Seller and its wholly-owned Subsidiaries and advances to suppliers and
employees made in the ordinary course of business; or
iii. purchase or invest, or permit any Subsidiary to purchase or invest,
in the stock or obligations of any other person, firm or corporation, other than
a wholly-owned Subsidiary; or
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iv. pay, or permit any Subsidiary to pay, compensation, whether by way of
salaries, bonuses, participations in pension or profit sharing plans, fees under
management contracts or for professional services or fringe benefits to any
officer in excess of amounts fixed by the Board of Directors prior to any
payment to such officer.
12. Registration of Stock. Subject to the provisions of the several
registration rights agreements and /or other agreements containing registration
rights provisions, to which Seller is a party, all as disclosed and described on
Schedule 12 hereto, Seller agrees as follows:
a. Rights to Registration.
i. If, at any time during the period commencing on
the effective date of this Agreement and ending ten (10) years
thereafter, Seller shall determine to register under the Securities Act
of 1933, as amended, any shares of Stock to be offered for cash by it
or others, pursuant to a registration statement on Form S-1 (or its
equivalent), Seller will (1) promptly give written notice to Buyer of
its intention to file such registration statement and (2) at Seller's
expense (which shall include, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel and
independent accountants for Seller, and fees and expenses incident to
compliance with state securities law, but shall not include fees and
disbursements of counsel for Buyer) include among the securities
covered by the registration statement such portions of the Shares then
held by Buyer as shall be specified in a written request to Seller
within thirty (30) days after the date on which Seller gave the notice
described in (a)(i) above.
ii. Upon receipt of such written request and of the
shares of Stock specified in the request (any shareholder requesting
registration being individually called a "Selling Shareholder"), Seller
shall: (1) use its reasonable best efforts to effect the registration,
qualification or compliance of the Shares under the Securities Act and
under any other applicable federal law and any applicable securities or
blue sky laws of jurisdictions within the United States; (2) furnish
each Selling Shareholder such number of copies of the prospectus
contained in the registration statement filed under the Securities Act
(including preliminary prospectus) in conformity with the requirements
of the Securities Act, and such other documents as the Selling
Shareholder may reasonably request in order to facilitate the
disposition of the Stock covered by the registration statement; and (3)
notify each Selling Shareholders, at any time when a prospectus
relating to the Stock covered by such registration statement is
required to be delivered under the Securities Act, of the happening of
any event as a result of which the prospectus forming a part of such
registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading, and at the request of the Selling Shareholders prepare and
furnish to the Selling Shareholders any reasonable number of copies of
any supplement to or amendment of such prospectus as may be necessary
so that, as thereafter delivered to purchasers of the Stock, such
prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
b. Registration of Underwritten Offering. If the offering of securities
to be registered by Seller is underwritten, each Selling shareholder shall sell
the Stock to or through the underwriter(s) of the securities being registered
for the account of Seller or others upon the same terms applicable to Seller or
others, and if the managing underwriter(s) reasonably determine that all or any
portion of the shares of Stock held by the Selling Shareholders should not be
included in the registration statement, then notwithstanding anything to the
contrary in this Section, the determination of such underwriter(s) shall be
conclusive; provided however that if such underwriter(s) determine that some but
not all of the Stock of the Selling Shareholders shall be included in the
registration statement, the number of shares of Stock owned by each Selling
Shareholder to be included in the registration statement will be proportionately
reduced in accordance with the respective written requests given as provided
above.
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c. Indemnification. In the event that Shares purchased pursuant to this
Agreement are included in a registration statement under this Section 11, Seller
will indemnify and hold harmless each Selling Shareholder and each other person,
if any, who controls such Selling shareholder within the meaning of the
Securities Act, against any losses, claims, damages or liabilities, joint or
several, to which such Selling Shareholder or controlling person may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of are based
upon any untrue statement or alleged untrue statement of any material fact
contained, on the effective date thereof, in any registration statement pursuant
to which the Shares were registered under the Securities Act, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or arise out of or are based upon the
failure by Seller to file any amendment or supplement thereto that was required
to be filed under the Securities Act, and will reimburse such Selling
Shareholder and each such controlling person for any legal or any other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action. Notwithstanding the foregoing,
Seller will not be liable in any such case to the extent that any such loss,
claim, damage, or liability arises out of or is based upon an untrue statement
or omission made in such registration statement, preliminary prospectus, final
prospectus or amendment or supplement in reliance upon and in conformity with
written information furnished to Seller through an instrument duly executed by
or on behalf of any Selling Shareholder specifically for use in the preparation
of such registration statement, preliminary prospectus, final prospectus, or
amendment or supplement.
It shall be a condition precedent to the obligation of Seller to take any
action pursuant to this Section that seller shall have received an undertaking
satisfactory to it from each Selling Shareholder to indemnify and hold harmless
Seller (in the same manner and to the same extent as set forth in this Section),
each director of Seller, each officer who shall sign such registration
statement, and any persons who control Seller within the meaning of the
Securities Act, with respect to any statement or omission from such registration
statement, preliminary prospectus, or any final prospectus contained therein, or
any amendment or supplement thereto, if such statement or omission was made in
reliance upon and in conformity with written information furnished to Seller
through an instrument duly executed by the indemnifying party specifically for
use in the preparation of such registration statement, preliminary prospectus,
final prospectus, or amendment or supplement.
Promptly following receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to above in this Section
11.3, such indemnified party will, if a claim in respect thereof is to be made
against an indemnifying party, give written notice to the latter of the
commencement of such action. In case any such action is brought against an
indemnified party, the indemnifying party will be entitled to participate in and
to assume the defense thereof, jointly with any other indemnifying party
similarly notified, to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election to assume the defense thereof,
the indemnifying party will not be liable to such indemnified party for any
legal or other expenses subsequently incurred by the latter in connection with
the defense thereof.
d. Binding Provisions. The provisions of this Section 11 shall be binding
on the successors of Seller. No Shareholder may assign the provisions of this
Section 11 or all or any part of its or their rights or obligations hereunder,
except that in the event of a merger or consolidate in which the Seller is not
the survivor, the Seller shall assign and transfer, and successor shall assume,
the provisions of this Section 11.
e. Conflicts. To the extent that Seller's compliance with the obligations
set forth in Sections 12.1 through 12.4 above would conflict with or otherwise
cause a breach of or default under any of its existing obligations pursuant to
the agreements set forth on Schedule 12 attached hereto, Seller's failure to
comply with those obligations shall not be deemed a breach of this Agreement.
13. Remedies Cumulative, and not Waived.
i. No right, power or remedy conferred upon any party shall be exclusive,
and each such right, power or remedy shall be cumulative and in addition to
every other right, power or remedy, whether conferred hereby or by any such
security or now or hereafter available at law or in equity or by statute or
otherwise.
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ii. No course of dealing between the parties or the holder of any Shares
purchased pursuant to this Agreement, and no delay in exercising any right,
power or remedy conferred hereby or by any such security or now or hereafter
existing at law or in equity or by statute or otherwise, shall operate as a
waiver of or otherwise prejudice any such right, power or remedy; provided,
however, that this Section 13 shall not be construed or applied so as to negate
the provisions and intent of any statute which is otherwise applicable.
14. Changes. Waivers. etc. Neither this Agreement nor any provision hereof
may be changed, waived, discharged or terminated orally, but only by a statement
in writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
15. Notices. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be delivered, or
mailed first-class postage prepaid, registered or certified mail, or via
overnight delivery with by a service providing evidence of receipt to the
addresses below:
If to Buyer:
Imatron Inc.
389 Oyster Point Blvd.
South San Francisco, CA 94080
Attn: Mr. S. Lewis Meyer, President
Telephone: (415) 583-9964
Facsimile: (415) 871-0418
Copy to:
Roger S. Mertz, Esq.
Severson & Werson, P.C.
One Embarcadero Center
Suite 2600
San Francisco, CA 94111
Telephone: (415) 398-3344
Facsimile: (415) 956-0439
If to Seller:
Positron Corporation
1304 Langham Creek Drive, Suite 310
Houston, Texas 77084
Attn: President
Telephone: (281) 492-7100
Facsimile: (281) 492-2961
Copy to:
Michael D. Wortley, Esq.
Vinson & Elkins
3700 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
Telephone: (214) 220-7700
Facsimile: (214) 999-7732
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and such notices and other communications shall for all purposes of this
Agreement be treated as being effective or having been given if delivered
personally, or, if sent by first class mail, three days after posting, or if
sent via overnight delivery, when received as evidenced by an appropriate
receipt.
16. Survival of Representations and Warranties, etc. All representations
and warranties contained herein shall survive the execution and delivery of this
Agreement, any investigation at any time made by Buyer or on its behalf, and the
sale and purchase of the Common Shares. All statements contained in any
certificate, instrument or other writing delivered by or on behalf of Seller
pursuant hereto or in connection with or contemplation of the transactions
herein contemplated (other than legal opinions) shall constitute representations
and warranties by Seller hereunder, and not by the individual officer who signed
the certificate, instrument or writing by or on behalf of Seller.
17. Parties in Interest. All the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
respective successors and assigns of the parties hereto, whether so expressed or
not, and, in particular, shall inure to the benefit of and be enforceable by the
holder or holders at the time of any of the Common Shares. The former, current
and hereafter appointed officers and directors referenced in Section 9.4 above
are intended and deemed to be third party beneficiaries of Section 9.4, and are
entitled to enforce its provisions.
18. Headings. The headings of the Sections and paragraphs of this Agreement
have been inserted for convenience of reference only and do not constitute a
part of this Agreement.
19. Choice of Law. It is the intention of the parties that the laws of
California shall govern the validity of this Agreement, the construction of its
terms and the interpretation of the rights and duties of the parties.
20. Counterparts. This Agreement may be executed concurrently in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
21. Severability. In the event that any part of this Agreement is
determined by a court of competent jurisdiction to be unenforceable, the balance
of the Agreement shall remain in full force and effect.
[Remainder of page intentionally left blank.]
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IN WITNESS WHEREOF, the parties execute this Agreement as of the date
first written above.
SELLER:
ATTEST: POSITRON CORPORATION
/s/ Howard R. Baker By: /s/ Gary B. Wood
Howard R. Baker Gary B. Wood
Executive Vice President Chief Executive Officer
BUYER:
IMATRON INC.
/s/ Gary H. Brooks By: /s/ S. Lewis Meyer
Gary H. Brooks S. Lewis Meyer
Chief Financial Officer President/Chief Executive Officer
