U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ________________
Commission file 0-24092
POSITRON CORPORATION
(Name of small business issuer in its charter)
Texas
(State or other jurisdiction of incorporation or organization)
I.D. No. 76-0083622
1304 Langham Creek Drive, Suite 310, Houston, Texas 77084
(address of principal executive offices)
Issuer's telephone number: (281) 492-7100
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Redeemable Warrants
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[X]
Issuer's revenues for fiscal year ended December 31, 1997: $3,526,000
As of June 30, 1998, there were 5,159,592 shares of the Registrant's
Common Stock, $.01 par value outstanding.
Documents incorporated by reference: None
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PART I
The Company is including the following cautionary statement in this
Annual Report on Form 10-KSB to make applicable and take advantage of the safe
harbor provision of the Private Securities Litigation Reform act of 1995 for any
forward looking statements made by, or on behalf of the Company. Forward looking
statements include statements concerning plans, objectives, goals strategies,
future events or performance and underlying assumptions and other statements
which are other than statements of historical facts. Certain statements
contained herein are forward looking statements and, accordingly, involve risks
and uncertainties which could cause actual results or outcomes to differ
materially from those expressed in the forward looking statements. The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitations, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectation, beliefs or
projections will result or be achieved or accomplished. In addition to other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward looking statements: the ability
of the Company to attain widespread market acceptance of its POSICAM(TM)
systems; the ability of the Company to obtain acceptable forms and amounts of
financing to fund future operations; demand for the Company's services; and
competitive factors. The Company disclaims any obligation to update any forward
looking statements to reflect events or circumstances after the date hereof.
Item 1. Description of Business
General
Positron Corporation (the "Company") was incorporated in the State of
Texas on December 20, 1983, and commenced commercial operations in 1986. The
Company designs, manufacturers, markets and services, advanced medical imaging
devices utilizing positron emission tomography ("PET") technology under the
trade-name POSICAM(TM) systems. Unlike other currently available imaging
technologies, PET technology permits the measurement of the biological processes
of organs and tissues as well as producing anatomical and structural images.
POSICAM(TM) systems, which incorporate patented and proprietary technology,
enable physicians to diagnose and treat patients in the areas of cardiology,
neurology and oncology. The United States Food and Drug Administration approved
the initial POSICAM(TM) system for marketing in 1985, and as of December 31,
1997, the Company has sold twenty (21) POSICAM(TM) systems, of which fifteen
(15) are in leading medical facilities in the United States, two (2) are
installed in international medical institutions, one (1) is awaiting
governmental approval for installation at a facility in Japan and three (3) are
no longer operational. The Company presently markets its POSICAM(TM) systems at
list prices up to $2.0 million depending upon the configuration and equipment
options of the particular system.
The following table provides summary information regarding the
Company's installed base of POSICAM(TM) systems, which were operational as of
December 31, 1997:
<TABLE>
<CAPTION>
Date of
Site Location Clinical Application Installation
<S> <C> <C> <C>
Prototype:
U.T. Health Science Center Houston, TX Neurology/Cardiology 1985
POSICAM(TM) Systems:
Saint Joseph's Hospital Atlanta, GA Cardiology 1988
Cleveland Clinic Foundation Cleveland, OH Neurology/Cardiology 1988
Memorial Hospital Jacksonville, FL Oncology/Cardiology 1988
Kennestone Hospital Marietta, GA Cardiology 1989
Medical City Dallas Dallas, TX Cardiology 1990
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Yale/Veterans Adm. New Haven, CT Neurology/Oncology/Cardiology 1991
Beth Israel New York, NY Cardiology 1991
Our Lady of The Lake Baton Rouge, LA Cardiology 1992
Crawford Long Hospital Atlanta, GA Cardiology 1992
Hermann Hospital Houston, TX Neurology/Oncology/Cardiology 1993
Hadassah Medical Organization Israel Neurology/Oncology/Cardiology 1995
Bio-Metabolic, Inc. Detroit, MI Cardiology/Oncology 1995
Bergan Mercy Hospital Omaha, NE Cardiology/Oncology 1995
Buffalo Cardiology & Pulmonary
Associates Buffalo, NY Cardiology 1995
University of Madrid Spain Cardiology/Oncology/Neurology 1995
Baptist Hospital Nashville, TN Cardiology/Oncology 1996
Imatron Japan Cardiology/Oncology 1997
</TABLE>
PET technology is an advanced imaging technique, which permits the
measurement of the biological processes of organs and tissues as well as
producing anatomical and structural images. Other advanced imaging techniques,
such as magnetic resonance imaging ("MRI") and computerized axial tomography
("CAT") scans, produce anatomical and structural images, but do not image or
measure biological processes. The ability to measure biological abnormalities in
tissues and organs allows physicians to detect disease at an early stage and
provides physicians with information, which would otherwise be unavailable, to
diagnose and manage the treatment of disease. The Company believes that PET
technology can lower the total cost of managing certain diseases by providing a
means for early diagnosis and reduction of expensive invasive or unnecessary
procedures, such as angiograms or biopsies which in addition to being costly and
painful, may not be necessary or appropriate.
Commercial utilization of PET technology commenced in the mid-1980s and
the Company is one of several commercial manufacturers of PET imaging systems in
the United States. Although the other manufacturers are substantially larger,
the Company believes that its POSICAM(TM) systems have proprietary operational
and performance characteristics, which may give it certain performance
advantages over other commercially available PET systems. Such performance
advantages include the POSICAM(TM) systems high count-rate sensitivity, which
results in faster imaging, an enhanced ability to use certain types of
radiopharmaceuticals, which minimize patient exposure to radiation and its
ability to minimized false positive and false negative diagnoses of disease. The
industry in which the Company is engaged is, however, subject to rapid and
significant technological change. There can be no assurance that the 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 noncompetitive. See "Item
1. Description of Business - Risks Associated with Business
Activities--Substantial Competition and effects of Technological Change."
The Company's primary focus to date has been on the clinical cardiology
market, where its POSICAM(TM) systems have been used to assess diseases, such as
the effect of arterial blockages and heart damage due to heart attacks. In 1994
and 1995 the Company made technological advances which allowed it to market its
products to the neurological and oncological markets. Neurological applications
of POSICAM(TM) systems include diagnoses of certain brain disorders, such as
epileptic seizures, dementia, stroke, Alzheimer's disease, Pick's disease and
Parkinson's disease. In oncology, POSICAM(TM) systems are used in the diagnosis
and evaluation of tumors of the bone and various organs and tissues such as the
brain, liver, colon and breast.
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Medical Imaging Industry Overview
Diagnostic imaging allows a physician to assess disease, trauma or
dysfunction without the necessity of surgery. The diagnostic imaging industry
includes ultrasound, X-ray, MRI, CAT scans, and nuclear medicine (which includes
PET technology and single-photon emission computed tomography ("SPECT")). MRI
technology uses
powerful magnetic fields to provide anatomical and structural images of the
brain, the spine and other soft tissues, as well as determining the location and
size of tumors. CAT scans use X-ray beams to obtain anatomical and structural
images of bones and organs. Nuclear medicine focuses on providing information
about the function and biological processes of organs and tissues through the
use of radiopharmaceuticals.
The first prototype PET scanner was developed in the mid 1970s and the
first commercial PET scanner was constructed in 1978. Approximately 70 PET
systems are currently operational in the United States and approximately 100 PET
systems are in commercial use internationally. Of the PET systems currently
operational in the United States, 15 systems were sold by the Company.
PET Technology
The PET imaging process begins with the injection of a
radiopharmaceutical (a drug containing a radioactive agent) by a trained medical
person into a patient's bloodstream. The injected radiopharmaceutical undergoes
a process of radioactive decay, whereby positrons (positively charged electrons)
are converted into light energy, or photons. These photons are detected by the
POSICAM(TM) systems. The source of the photons is determined and is
reconstructed into a color image of the scanned organ utilizing proprietary
computer software. Since the concentration of the radiopharmaceutical is
determined by certain functional processes in the organ, such as blood flow,
metabolism or other biochemical processes, the brightness or color at each point
in the PET image directly maps the vitality of the respective function at that
point within the organ.
PET imaging is an accurate non-invasive method of diagnosing or
assessing the severity of coronary artery disease. Unlike other imaging
technologies, PET technology allows a physician to determine whether blood flow
to the heart muscle is normal, thereby identifying narrowed coronary arteries,
and whether damaged heart muscle is viable and may benefit from treatment such
as bypass surgery or angioplasty.
In neurology, PET imaging is now being used as a surgical planning tool
to locate the source of epileptic disturbances in patients with uncontrollable
seizures. In other neurological applications, PET is used in the diagnosis of
dementia, Alzheimer's disease, Pick's disease and Parkinson's disease and in the
evaluation of stroke severity.
In oncology, PET imaging is currently used to measure the metabolism of
tumor masses after surgery or chemotherapy. Clinical experience has shown the
PET is more accurate than CAT scans or MRI in determining the effectiveness of
chemotherapy and radiotherapy in the treatment of cancer. Scans used to assess
suspected breast cancer are still in the experimental stage. Whole body scans,
however, are now performed with PET to survey the body for cancer.
The radiopharmaceuticals (together with the radioactive substances
contained therein) employed in PET scanning are used by the organ in its natural
processes (such as blood flow and metabolism) without affecting its normal
function, and quickly dissipates from the body. Radiopharmaceuticals used in PET
procedures expose patients to a certain amount of radiation, which exposure is
measured in units of rads. Exposure to radiation can cause damage to living
tissue, and the greater the radiation exposure the greater the potential for
damage. Certain PET procedures expose a patient to less radiation than would be
associated with other imaging technologies. A PET cardiac scan, using the
radiopharmaceutical Rubidium-82 results in exposure of approximately 0.096 rad,
while a neurology PET scan results in exposure of approximately 0.39 rad. In
contrast, a typical chest X-ray results in exposure of approximately 0.15 rad
and a CAT scan results in exposure to between approximately 0.5 rad and 4.0 rad,
depending on the procedure.
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Radiopharmaceuticals used in PET technology can be created from many
natural substances including carbon, oxygen, nitrogen and fluorine. The PET
procedure to be performed determines the type of radiopharmaceutical.
Radiopharmaceuticals are made ready for use at a clinic or hospital by either a
cyclotron or generator. Cyclotrons require an initial capital investment in a
range up to $2 million, additional capital investment for site preparation, and
significant annual operating expenses. A generator requires an initial capital
investment of approximately $50,000, no additional capital investment for site
preparation, and monthly operating expenses of approximately $25,000. While
POSICAM(TM) systems have been designed to be used with both cyclotron and
generator processed radiopharmaceuticals, they have proprietary design features
which enhance their ability to use generator processed radiopharmaceuticals,
thereby allowing a clinic or hospital which intends to focus on certain cardiac
PET applications to avoid the significant capital and operating expenses
associated with a cyclotron.
Marketing Strategy
The Company initially targeted clinical cardiology as its marketing
strategy based on research conducted at the University of Texas Health Science
Center in Houston, Texas which showed the commercial potential of clinician
cardiology applications of PET imaging.
The Company relies on referrals from users of the Company's existing
base of installed scanners, clinical presentations at professional conferences
by customers of the Company, and published articles in trade journals to market
its systems.
THE POSICAM(TM) System
At the heart of the POSICAM(TM) system is its detector assembly which
detects positron emissions and electronic circuits which pinpoint the location
of those positron emissions. POSICAM(TM) systems are easy to use and are not
physically confirming thereby not intimidating to patients. POSICAM(TM) scans
are commonly performed on an outpatient basis.
The Company's POSICAM(TM) systems compare favorably with PET systems
produced by other manufacturers based upon count rate and sensitivity. Count
rate and sensitivity of an imaging system determines its ability to detect,
register and assimilate the greatest number of meaningful positron emission
events in the shortest period of time. The favorable count rate and sensitivity
of the POSICAM(TM) systems results in good diagnostic accuracy as measured by
fewer false positives and false negatives. Further benefits of high count rate
and sensitivity include faster imaging and the ability to use short half-life
radiopharmaceuticals, thereby reducing patient exposure to radiation and
potentially reducing the capital cost to some purchasers through the elimination
of the need for a cyclotron for certain cardiac applications.
The detector assembly consists of crystals, which scintillate (give off
light) when exposed to positron emissions, and photomultiplier tubes, which are
coupled to the crystals and convert the scintillations into electrical impulses.
The Company employs its own patented staggered crystal array design for the
POSICAM(TM) detectors which unlike competing PET systems, permits the
configuration of the detector crystals into overlapping series to create a
higher quality image by eliminating image sampling gaps. This feature is
important since under-sampling or gaps in sampling can contribute to an
inaccurate diagnosis. The crystal array design also reduces "dead time" (the
time interval following the detection and registering of a positron emission
during which a subsequent even cannot be detected).
The POSICAM(TM) system creates a high number of finely spaced image
slices in. An image slice is a cross- sectional view that is taken at an
arbitrary angle to the angle of the organ being scanned and is not necessarily
the angle, which a physician wishes to view. The POSICAM(TM) computer can then
adjust the cross-sectional view to create an image from any designed angle. The
high number of finely spaced image slices created by the POSICAM(TM) system
enhances the accuracy of the created image.
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An integral part of a POSICAM(TM) system is its proprietary data
acquisition microprocessor and its application system software. The Company's
software can reconstruct an image in five seconds or less. The Company has
expended substantial effort and resources to develop the computer software to
insure that it is user-friendly and clinically oriented. The only personnel
needed to perform clinical studies with the POSICAM(TM) systems are a trained
nurse, a trained technician and an overseeing physician for patient management
and safety.
POSICAM(TM) HZ and HZL. In addition to the basic POSICAM(TM) system,
the Company offers two advanced versions of its basic system which are known as
the POSICAM(TM) HZ and the POSICAM(TM) HZL. Oncologists and neurologists require
enhanced resolution and a large field of view to detect small tumors and
otherwise scan large organs, such as the liver. The POSICAM(TM) HZ and HZL
employ new detector concepts to satisfy these needs while maintaining the high
count rate sensitivity of the basic POSICAM(TM). In May 1991, the Company
received approval from the FDA to market the POSICAM(TM) HZ and in May 1993, the
Company received a patent for the innovative light guide and detector staggering
concepts used in the POSICAM(TM) HZ and HZL. In July 1993 the Company received
FDA approval to market in the United States the POSICAM(TM) HZL, which has an
even larger field of view than the POSICAM(TM) HZ facilitating whole body
scanning and the scanning of large organs. As the market for PET systems matures
and price sensitivity among purchasers increases, the Company believes that
interest in the POSICAM(TM) HZ, which costs less than the POSICAM(TM) HZL, will
increase. The Company also believes that the special features of the POSICAM(TM)
HZL enhance its usefulness in oncology and neurology applications.
Customer Service and Warranty
The Company has five (5) field service engineers in the United States,
who have primary responsibility for supporting and maintaining the Company's
installed equipment base. In addition, the Company has field engineers involved
in site planning, customer training, sales of hardware upgrades, sales and
administration of service contracts, telephone technical support and customer
service.
The company typically provides one-year warranties to purchasers of
POSICAM(TM) systems. However, in the past, the Company offered multi-year
warranties to facilitate sales of its systems. Following the warranty period,
the Company offers purchasers a comprehensive service contract under which the
Company provides all parts and labor, system software upgrades and unlimited
service calls. The Company currently provides service to all of its POSICAM(TM)
systems, ten (10) of which are under formal service contracts. One (1) of the
service contracts is automatically renewed on a month-to-month basis and one (1)
automatically renews on a year-to-year basis. Of the remaining eight (8) service
contracts, four (4) expire during 1998, one (1) expires in 1999, two expire in
2000 and one (1) expires in 2001. The Company is currently negotiating to extend
all of the service contracts, which expire in 1998; however, there can be no
assurances that such extension will be obtained.
The Company's service goal is to maintain maximum system uptime.
Success of a clinical site is largely dependent on patient volume during normal
working hours and therefore equipment uptime and reliability are key factors in
this success. Records compiled by the Company show an average uptime for all
installed POSICAM(TM) systems during 1997 and 1996 of greater than 95%.
Competition
The Company faces competition from two (2) other commercial
manufacturers of Pet systems and from other imaging technologies, primarily
SPECT and MRI. The Company does not believe that MRI and CAT scan imaging
represent significant competing technologies. The Company views MRI and CAT scan
imaging to be complementary technologies to PET, in that PET, MRI and CAT scans
each provide information not available from the other.
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The Company's primary competition from commercial manufacturers of PET
systems comes from General Electric Company ("GE") and Siemens Medical Systems,
Inc. ("Siemens") (in a joint venture with CTI, Inc. of Knoxville, Tennessee). GE
and Siemens have substantially greater financial, technological and personnel
resources than the Company. See "Item 1. Description of Business--Risk
Associated with Business Activities--Substantial Competition and Effects of
Technological Change and General Electric Transaction". In addition, two
Japanese manufacturers, Hitachi and Shimadzu, have manufactured and sold PET
scanners in Japan but not in the United States.
The primary competing technology in the nuclear medicine industry is
SPECT. The Company believes that the primary reason that SPECT competes
successfully with PET is the lower cost of the SPECT systems. A SPECT system can
cost between $175,000 and $750,000 as compared with up to $2.0 million
(depending on configuration and equipment options) for a POSICAM(TM) system.
However, the Company believes its POSICAM(TM) systems are a better diagnostic
tool in that the Company's systems are able to create more accurate images than
SPECT imaging. Unlike SPECT, the radioactive substances used by the Company's
systems are based on naturally occurring substances within the body and allow
the POSICAM(TM) systems to directly measure the metabolic processes and changes
occurring within the scanned organ, thus providing a more accurate image.
High field MRI technology, an advanced version of MRI, is in the
development stage, but is a potential competitor to PET in certain neurology and
oncology applications. Presently, high field MRI may be useful in performing
certain research (non-clinical) applications such as blood flow studies to
perform "brain mapping" to localize the portions of the brain associated with
individual functions (such as motor activities and vision). However, high field
MRI does not have the capability to assess metabolism. The Company cannot
presently predict the future competitiveness of high field MRI.
Several manufacturers of SPECT systems are now offering multi-head
systems, which have been modified to operate in coincidence mode, similar to a
PET scanner. These systems achieve spatial resolutions similar to that of PET
scanners, but their sensitivity and count rate are only a small fraction of that
achieved by true PET scanners, making the images "noisy" and more difficult to
interpret. The Company believes these systems are useful for only a very limited
class of clinical PET studies using only the FDG radiotracer. In addition, SPECT
coincidence systems offer limited, if any, corrections for patient attenuation
and scatter, which affects the accuracy of diagnosis.
Third-Party Reimbursement
POSICAM(TM) systems are purchased or leased primarily by medical
institutions, which provide health care services to their patients. Such
institutions or patients typically bill or seek reimbursement from various
third-party payors such as Medicare, Medicaid, other governmental programs and
private insurance carriers for the charges associated with the provided
healthcare services. The Company believes that the market success of PET imaging
depends largely upon obtaining favorable coverage and reimbursement policies
from such programs and carriers.
Medicare/Medicaid reimbursement. Prior to March 1995, Medicare and
Medicaid did not provide reimbursement for certain PET imaging. Decisions as to
such policies for major new medical procedures are typically Made by the U.S.
Health Care Financing Administration ("HCFA"), based in part on recommendations
made to it by the Office of Health Technology Assessment ("OHTA"). Historically
OHTA has not completed an evaluation of a procedure unless all of the devices
and/or drugs used in the procedure have received approval or clearance for
marketing by the FDA. Decisions as to the extent of Medicaid coverage for
particular technologies are made separately by the various state Medicaid
programs, but such programs tend to follow Medicare national coverage policies.
Medicare and Medicaid reimbursement for PET imaging have been, and the Company
believes will continue to be, very restrictive. The Company believes that
restrictive reimbursement policies have had a very significant adverse affect on
widespread use of PET imaging and have, therefore, adversely affected the
Company's business, financial condition, results of operations and cash flows.
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Private insurer reimbursement. Most insurance carriers currently
consider PET imaging to be an investigational procedure and do not reimburse for
procedures involving PET imaging. The Company believes that certain private
insurance carriers, while they do not have broad Pet reimbursement policies,
reimburse for PET scans on a case-by-case basis.
If third-party coverage for PET procedures using the POSICAM(TM) system
remains unavailable, it will likely have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows.
Manufacturing
The Company believes that it currently has the ability to assemble its
POSICAM(TM) scanners in a 2,700 square foot area of its 5,400 square foot
corporate facility located in Houston, Texas. Scanners are generally produced by
assembling parts furnished to the Company by outside suppliers. The Company
believes that it can assemble a typical POSICAM(TM) system in two months with an
additional month required for testing before delivery. Due to the Company's
current financial condition, the Company relocated its manufacturing area in
April 1998 and the Company has not yet produced any POSICAM(TM) systems at its
present facility.
An essential component of the Company's POSICAM(TM) systems is bismuth
germinate oxide ("BGO") crystals which detect the positron emissions forming the
basis for a PET image, and photomultiplier tubes, which convert the light energy
emitted by such crystals into electrical impulses for use in the image
reconstruction process. BGO crystals are specially manufactured and are
available from a supplier located in the United States, that is a subsidiary of
a Japanese company and another supplier located in France. While the Company
primarily relies on a single source for its BGO crystals, it has in the past
purchased crystals from the second manufacturer and believes that it could
resume such purchases at acceptable prices without significant delays. The
Company purchases photomultiplier tubes from a French supplier. In the event
that the supply of French photomultiplier tubes were to be interrupted, the
Company believes it has the ability to source similar product from an alternate
manufacturer in the United States. The Company believes that multiple vendor
sources exist in the United States for all other parts, for which no individual
vendor is critical to production. However, due to the Company's current
financial condition, many of its suppliers are requiring advanced payments for
materials.
Research and Development
The Company's POSICAM systems are based upon proprietary technology
initially developed at the University of Texas Health Science Center ("UTHSC")
in Houston, Texas under a $24 million research program begun in 1979 and funded
by UTHSC and The Clayton Foundation for Research (the "Clayton Foundation"), a
Houston- based, non-profit organization. Further product development and
commercialization of the system has been funded by the Company.
The Company's research and development expenses for the years ended
December 31, 1997 and 1996 were $1,305,000 and $2,227,000, respectively. In
addition to the Company's sponsored and funded research and development
programs, the Company in the past has supplemented its research and development
with a technology transfer agreement with UTHSC and currently is participating
in a collaborative research efforts with selected clinical and research
customers, and research grants funded through the federal government's Small
Business Innovative Research ("SBIR') program.
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Patent and Royalty Arrangements
The Company acquired the know-how and patent rights or positron
imaging (the "Licensed Technology") from the Clayton Foundation, K. Lance Gould
(a director of the Company) and Nizar A. Mullani (formerly a 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, 1% each to the Clayton Foundation, K. Lance Gould and to Nizar A.
Mullani.
The Company's current 3% royalty is based on agreements with Nizar A.
Mullani and K. Lance Gould to reduce the royalty payments due to them by the
Company in consideration of payments to be made to them under consulting
agreements and promissory notes. The consulting agreements provide that if the
Company defaults in its payment obligations thereunder, then Mr. Mullani and Dr.
Gould would be entitled to receive a regrant of the royalties that they
previously released. On April 12, 1998, the Company received a demand letter
from Mr. Mullani alleging default under his consulting agreement and demanding
the regrant of an additional 1% royalty interest. Although the Company has not
received any such demand from Dr. Gould, the Company believes that a payment
default may have occurred under Dr. Gould's consulting agreement and that as a
result thereof, Dr. Gould may be entitled to the regrant of an additional 0.5%
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.
Two of the Company's patents, issued in January 1986 and February 1987
and expiring in January 2003 and February 2004, respectively, relate to the
staggered crystal array design of its POSICAM systems. One additional patent
issued in June 1987 and expiring in June 2004 relates to technology, which the
company, by obtaining the patent, has reserved the right to use. The Company
maintains certain of its patents in Germany and has applied for certain patents
in Japan.
The Company seeks to protect its trade secrets and proprietary know how
through confidentiality agreements with its employees and consultants. The
Company requires each employee and consultant to enter into a confidentiality
agreement containing provisions prohibiting the disclosure of confidential
information to anyone outside the Company, and requiring disclosure to the
Company of any ideas, developments, discoveries or investigations conceived
during employment or service as a consultant and the assignment to the Company
of patents and proprietary rights to such matters related to the business and
technology of the Company.
Government Regulations
The Company's POSICAM(TM) systems and radiopharmaceuticals used in
connection with them are subject to regulation by the FDA. The FDA regulates and
approves the clinical testing, manufacturing, labeling, distribution and
promotion of medical devices in the United States prior to their
commercialization. In addition, various foreign countries in which the Company's
products are or may be marketed, impose certain regulatory requirements.
The Company's POSICAM(TM) systems are regulated as medical devices by
the FDA and require pre-market clearance by the FDA. Pursuant to the Medical
Device Amendments of May 1976, the FDA classifies medical devices in commercial
distribution as a class I, class II, or class III device. This classification
scheme is based on the controls necessary to reasonably ensure the safety and
effectiveness of the medical devices. Class I devices are those devices whose
safety and effectiveness can reasonably be ensured through general controls,
such as adequate labeling, premarket notification and adherence to the Good
Manufacturing Practice ("GMP") regulations. Class II devices are those devices
whose safety and effectiveness can reasonably be assured through the use of
special controls, such as performance standards, post market surveillance,
patient registries and FDA guidelines. Class III devices require premarket
approval from the FDA and are generally devices, which support or sustain human
life or present a potential risk of illness or injury. The POSICAM(TM) systems
are considered to be class II devices. However, as of June 30, 1998, the FDA has
not promulgated a performance standard for PET systems. Therefore, POSICAM(TM)
systems are not currently subject to such controls, nor are they subject to post
market surveillance, patient registries and FDA guides.
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Before it can be commercially marketed a class II device must be
approved by the FDA. If a medical device is "substantially equivalent" to a
legally marketed class II device, the manufacturer or distributor may seek FDA
clearance by filing what is known as a 510(k) pre-market notification which must
be supported by data and test results. If the FDA determines that the device is
substantially equivalent, then it may be marketed in the United States. The FDA
may, however, require additional data or additional test results, or may
determine that a device is "not substantially equivalent." Requests for
additional date or test results or a "not substantially equivalent"
determination could delay the Company's market introduction of new products and
could have a material adverse effect on the Company's financial results and
operations. The FDA is not required to respond to 510(k) pre-market
notifications within a specific time period. The FDA recently began requiring a
more rigorous demonstration of substantial equivalence and in many cases the
time periods required for product approvals has increased. If the FDA determines
that a new product is "not substantially equivalent," then the manufacturer must
undergo a lengthy Pre-Marketing Approval process which generally involves
clinical trials and submission of data to prove safety and effectiveness before
approval is granted.
The Company's original POSICAM(TM) system received 510(k) clearance in
September 1985. In November 1989, the Company was granted 510(k) clearance for a
modified POSICAM(TM) system, and also received approval for a mobile van
configuration. In 1991, the Company applied for and received 510(k) clearance of
its POSICAM(TM) HZ system, and in July 1993 the Company received 510(k) approval
for the POSICAM(TM) HZL.
The Company is also required to register as a medical device
manufacturer with the FDA. As such, the Company may be inspected from time to
time by the FDA for compliance with the FDA's GMP regulations. These regulations
require that the Company manufacture its products and maintain its documents in
a prescribed manner with respect to manufacturing, testing and control
activities. Further, the Company is required to comply with various FDA labeling
requirements. The Medical Device Reporting regulation required that the Company
provide information to the FDA on deaths or serious injuries alleged to have
been associated with the use of its devices, as well as product malfunctions
that would likely cause or contribute to death or serious injury if the
malfunction were to recur. To date, no such deaths, injuries or product
malfunctions have occurred. In addition, the FDA prohibits an approved device
from being marketed for unapproved applications. To date the Company has not
received any notices of noncompliance from the FDA concerning GMP regulations.
During February 1995, the FDA conducted a GMP compliance inspection at
the Company's manufacturing facility that resulted in the Company receiving an
FDA warning letter. Several issues were noted for corrective action in that
letter and the Company expeditiously took action to address the FDA's concerns.
In February 1996, the FDA began a follow-up inspection of the Company's
corrective actions. In February 1996, February 1997 and July 1998 the FDA
conducted follow-up inspections of the Company's facilities. As of June 30,
1998, the Company has not been informed of the results of such follow-up
inspections. If the FDA finds that the Company has not corrected the
deficiencies noted in the warning letter it could, among other things, issue
another warning letter, prohibit new product introductions, institute a product
recall or prohibit the Company from shipping products until all deficiencies are
corrected to the FDA's satisfaction. The Company is cooperating fully and
intends to continue to work with the FDA in all compliance matters.
The Company is required under Texas law to register with the Texas
Department of Health with respect to the Company's maintaining
radiopharmaceuticals on premises for testing and for research and development
purposes. The Texas Department of Health has the authority to inspect the
Company's records and facilities to ensure compliance with these regulations.
The Company has in the past received notice of minor violations, which have been
satisfactorily resolved with no punitive action. The Company believes that
adequate measures have been taken to prevent their recurrence.
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Sales of medical devices outside of the United States may be subject
to foreign regulatory requirements that vary widely from country to country. The
time required to obtain approval by a foreign country may be longer than that
required for FDA approval and the requirements may differ.
PET imaging centers must comply with regulations promulgated, in most
states, by an agency of the state government, under authority delegated by the
Nuclear Regulatory Commission governing the possession and use of
radiopharmaceuticals for medical diagnostic procedure. In order to secure
approval, a PET imaging center must submit an acceptable site for its scanner,
employ adequate radiation safety and quality procedures, and provide a nuclear
physician who meets certain training and experience standards. Cyclotrons are
considered industrial devices and are therefore not covered by any FDA
regulations. Currently, there are no state or federal regulations concerning the
sale, marketing, or ownership of cyclotrons. However, operational licenses are
required by state radiation regulatory divisions. The licensing and/or
registration of cyclotrons by a state is typically handled by the state's
Department of Health or Bureau of Radiation Control.
Many states have "certificate of need" regulations that require a
purchaser or user of expensive diagnostic equipment such as PET systems to
obtain regulatory approval before it may purchase and install such equipment. A
primary purpose of these regulations is to contain health costs by restricting
the number of similar units in a particular locality. The Company has yet to
experience a situation where a customer was unable to obtain such approval.
However, restrictions of this mature may increase in the future through the
passage of legislation and the adoption of regulatory changes as a part of
overall health care reform.
Backlog
The Company had no backlog for its POSICAM(TM) systems at June 30, 1998
or December 31, 1997.
Product Liability and Insurance
Medical device companies are subject to a risk of product liability and
other liability claims in the event that the use of their products results in
personal injury claims. The Company has not experienced any product liability
claims to date. The Company maintains liability insurance with coverage of $2
million per occurrence and an annual aggregate maximum of $3 million.
Employees
As of June 30, 1998, the Company employed ten (10) full-time persons,
two (2) are employed in the Company's engineering department, five (5) in field
service, two (2) in manufacturing and one (1) in the executive and
administration department.
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
Company's Board of Directors, 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. Dr.
Haas has demanded that the Company pay to 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 Company's Board of Directors. The
Company has indicated to Dr. Haas that it believes no amounts are due him under
his employment agreement. As of June 30, 1998, the Company is unable to predict
the outcome of the disagreement between Dr. Haas and the Company.
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Gary B. Wood, Ph.D., currently Chairman of the company's Board of
Directors, has assumed the duties of President and Chief Executive Officer until
selection of a replacement for Dr. Haas.
Risks Associated with Business Activities
Potential Default Under Pro Futures Loan. The Pro Futures Loan matures
on December 5, 1998 and, at that time, approximately $400,000 will be due under
the Pro Futures Loan. Unless the maturity date of the Pro Futures Loan is
extended or the Company is successful in obtaining additional debt or equity
financing in an amount necessary to discharge the Pro Futures Loan prior to its
maturity, the Company will be unable to pay when due the Pro Futures Loan and a
payment default thereunder will occur. The Pro Futures Loan is secured 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. Upon
a payment default under the Pro Futures Loan, the Company anticipates that the
lender thereunder will seek to foreclose its liens and security interest
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
POSICAMTM 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 to retire the remaining balance 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 Pro Futures Loan. Absent obtaining a further extension of the
December 5, 1998 maturity date of the Pro Futures Loan, closing the proposed
sale of the POSICAMTM system, or obtaining additional debt or equity financing
necessary to repay the Pro Futures 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 ever
achieve the level of revenues needed to be profitable in the future, if
profitability is achieved, that it will be sustained. Due to the sizable 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, operating results and cash flows
could be adversely affected.
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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 half 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 and second quarters of 1998, the
Company made payments to such management level employees to reduce its liability
for past due salaries and wages to approximately $600,000 at June 30, 1998.
Additionally, the Company is in arrears to many of its vendors and suppliers. As
of June 30, 1998, such amount owed to vendors and suppliers totaled
approximately $1,327,000.
Assuming that the Company is successful in obtaining an extension of
the October 5, 1998 maturity date of the Pro Futures Loan or the additional debt
or equity financing necessary to repay the Pro Futures Loan, the Company will
also require additional debt or equity financing to sustain its operations
beyond the fourth quarter of 1998. The Company currently is unable to seek such
additional debt or equity financing and, unless the closing of the Imatron
Transaction occurs, it is unlikely that the Company will be able to seek to
obtain such financing. In the event that the Imatron Transaction (see below)
closes, the Company intends to rely upon Imatron's undertaking (to use its best
efforts to arrange additional third party equity financing for the Company) in
order to fulfill its current financing needs. There are no assurances that the
closing of the Imatron Transaction will occur, or if the closing occurs, that
Imatron will be successful in arranging additional third party equity financing
for the Company or, if such equity financing is obtained, that the terms of such
equity financing will be favorable to the Company or its securityholders.
As a result of the Company's liquidity problems, its auditors, Ham,
Langston & Brezina, L.L.P., have added an emphasis paragraph to their opinion on
the Company's financial statements indicating that substantial doubt exists
about the Company's ability to continue as a going concern.
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 anticipates that it will hold a special meeting of its
shareholders at which time it will seek approval of the Imatron Transaction and
approval of an increase in the number of authorized common shares; however, no
assurances can be given that such additional shares will be authorized in
adequate time to allow the Company to issue such equity securities.
Imatron Transaction. In May 1998, the Company entered into an agreement
(the "Imatron Transaction") with Imatron Inc. of South San Francisco
("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 Positron up to $500,000 in order to enable
it to meet a portion of its current obligations. As of June 30, 1998, the
Company had borrowed $468,000. 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 Positron'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, excluding 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 June 30,1998 Positron would have been obligated to issue at
least 9,000,000 shares of common stock. Positron will receive a nominal cash
amount from Imatron in payment for the shares. Under the planned arrangement,
Positron will remain an independent public company.
Imatron, in addition to providing limited working capital financing,
has agreed to support Positron's marketing program particularly with regard to
Imatron's affiliate, Imatron Japan, Inc. by agreeing to take, after the share
issuance closing date, all reasonable efforts to cause the placement of 10
POSICAM(TM) systems over the next three years. Positron 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, an affiliate of
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Imatron, Inc. is a major distributor for Imatron's Ultrafast CT and several
other high tech companies. Imatron has a 24 percent minority interest in Imatron
Japan. Imatron has also agreed to help facilitate the recapitalization of
Positron 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 Positron 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 Positron, (b) the
resignation of at least three of the four Positron directors and the appointment
of Imatron's nominees to fill such vacancies, and (c) Positron shareholder
approval of an amendment to Positron's Articles of Incorporation to increase its
authorized common stock to at least 100,000,000 shares. Positron anticipates
that the share issuance to Imatron will close in the third quarter of this year
if such shareholder approval is obtained.
In connection with the above transactions, Positron, Imatron and two
current lenders to Positron, Uro-Tech, Ltd. 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 $845,000) to October 5, 1998, in return for a $50,000
payment, the issuance of warrants to purchase 1,150,000 shares of Positron
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 Positron
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 and $100,000 for each of
the months of August and September 1998, (b) Imatron agreed to subordinate its
loan to ProFutures' loan, (c) Uro-Tech, Ltd. agreed to subordinate its loan
(with a current balance of approximately $767,000 plus accrued interest payable
of approximately $260,000 at June 30, 1998) 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 Positron's debt to both ProFutures and Imatron.
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 may be unable to
continue as a going concern and that the Company's assets may be seized by its
secured creditors.
NASDAQ SmallCap Market Eligibility Failure to Meet Maintenance
Requirements: Delisting of Securities from the NASDAQ Systems. The Company's
Common Stock was previously listed on the NASDAQ SmallCap Market. The Board of
Governors of the National Association of Securities Dealers, Inc. (the "NASD")
has established certain standards for the continued listing of a security 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 December 31, 1997, the Company had a total
capital and surplus deficit of $5,113,000. 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 increase sales of its POSICAM(TM)
systems. There can be no assurances 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 Company's Common Stock is currently conducted in the
"pink sheets" or the NASD's Electronic Bulletin Board. Trading in the Common
Stock is covered by rules promulgated under the Exchange Act 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 June 30, 1998, the closing price of the Company's Common
Stock was $0.41.
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The SEC has adopted regulations that generally define a penny stock to
be any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. The Company's common stock is currently subject
to such penny stock rules. The regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith. As a penny stock, the
market liquidity for the Company's Common Stock is severely affected due to the
limitations placed on broker/dealers that sell the Common Stock in the public
market.
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 its 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 infringes
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
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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 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. Such transactions may not give rise to the same
economic benefit to the Company as would have occurred had the Company made 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 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.
Item 2. Description of Property
The Company occupies a 5,400 square foot facility in Houston, Texas.
That facility includes area for system assembly and testing, a computer room for
hardware and software product design, and office space. The facility is leased
through September 30, 1998, at a lease rate of approximately $2,700 per month.
The Company estimates the space to be sufficient for the period through the
expiration of its current lease.
Item 3. Legal Proceedings
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.
Nizar A. Mullani and K. Lance Gould previously agreed to reduce the
royalty payments due to them by the Company in consideration of payments to be
made to them under consulting agreements and promissory notes. The consulting
agreements provide that if the Company defaults in its payment obligations
thereunder, then Mr. Mullani and Dr. Gould would be entitled to receive a
regrant of the royalties that they previously released. On April 12, 1998, the
Company received a demand letter from Mr. Mullani alleging default under his
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consulting agreement and demanding the regrant of an additional 1% royalty
interest. Although the Company has not received any such demand from Dr. Gould,
the Company believes that a payment default may have occurred under Dr. Gould's
consulting agreement and that as a result thereof, Dr. Gould may be entitled to
the regrant of an additional 0.5% Royalty interest. The Company anticipates
initiating settlement discussions with Mr. Mullani and Dr. Gould concerning the
alleged payment defaults. The Company is unable to predict the outcome of such
discussions at this time. If the parties fail to reach a settlement, Mr. Mullani
will be entitled to receive an aggregate 2% royalty and Dr. Gould 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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the Company's fiscal year.
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PART II
Item 5. Market for Common Equity and Related Stockholder 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 (the "Initial Public Offering").
Prior to the Initial Public Offering there was no public market for Company's
Common Stock. The Company's Common Stock and Redeemable Warrants are currently
traded in the over-the-counter securities market, and quoted on the NASDAQ OTC
Bulletin Board under the symbols POSI and POSIW, respectively. The Company's
Common Stock and Redeemable Warrants were previously traded on the NASDAQ
SmallCap Market but were delisted in 1997 because the Company was unable to
comply with various financial and compliance requirements for continued
inclusion on the NASDAQ SmallCap Market. See "Item 1. Description of Business -
Risks Associated with Business Activities."
The following sets forth the range of the high and low reported closing
sales prices for the Company's Common Stock for the first three quarters of
1998, through August 17, 1998, and for each quarter in 1997 and 1996, all as
reported on the NASDAQ OTC Bulletin Board or the NASDAQ SmallCap Market.
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 -- -- 0.953 0.172 3.250 1.500
* Through August 17, 1998
There were approximately 220 holders or record of shares of Common
Stock as of June 30, 1998, including broker-dealers holding shares beneficially
owned by their customers .
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. 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.
Item 6. Management's Discussion and Analysis or 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
operations.
Imatron Transaction. In May 1998, the Company entered into the Imatron
Transaction with Imatron, whereby Imatron will acquire a majority ownership of
the Company. In conjunction with the execution of definitive agreements, Imatron
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began making working capital advances available to Positron up to $500,000
(subsequently increased 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
approximately $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 Positron's assets. The loan agreement has been amended by oral agreement to
increase the working capital advances available to the Company under the
Agreement up to an additional $250,000.
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, excluding 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 June 30,1998 Positron would have been obligated to issue at
least 9,000,000 shares of common stock. Positron will receive a nominal cash
acquisition price from Imatron in payment for the shares.
Imatron, in addition to providing limited working capital financing,
has agreed to support Positron's marketing program particularly with regard to
Imatron's affiliate, Imatron Japan, Inc. by agreeing to take, after the share
issuance closing date, all reasonable efforts to cause the placement of 10
POSICAM(TM) systems over the next three years. Positron 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, an affiliate of
Imatron, Inc. is a major distributor for Imatron's Ultrafast CT and the products
of several other high tech companies. Imatron has a 24 percent minority interest
in Imatron Japan. Imatron has also agreed to help facilitate the
recapitalization of Positron 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 Positron 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 Positron, (b) the
resignation of at least three of the four Positron directors and the appointment
of Imatron's nominees to fill such vacancies, and (c) Positron shareholder
approval of an amendment to Positron's Articles of Incorporation to increase its
authorized common stock to [at least] 100,000,000 shares of common stock.
Positron anticipates that the share issuance to Imatron will close in the third
quarter of this year if such shareholder approval is obtained.
In connection with the above transactions, Positron, Imatron and two
current lenders to Positron, Uro-Tech, Ltd. and 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 at
September 30, 1998) to December 5, 1998, in return for a $50,000 payment, the
issuance of warrants to purchase 1,150,000 shares of Positron 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 Positron 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, Ltd.
agreed to subordinate its loan (with a current balance of approximately $767,000
plus accrued interest payable of approximately $286,000 at September 30, 1998)
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 Positron's debt to both ProFutures and
Imatron. Consistent with the 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. Imatron agreed to continue to
subordinate its loan to the ProFutures Loan, and Uro-Tech, Ltd. 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 POSICAMTM 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 to
19
<PAGE>
retire the remaining balance 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 POSICAMTM 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 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 may be unable to
continue as a going concern and that the Company's assets may be seized by its
secured creditors.
Results of Operations
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:
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 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 depreciation 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 POSICAMTM systems in order to meet current technological
requirements by potential customers. 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.
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 Company's
loan from ProFutures (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.
20
<PAGE>
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
Convertible Preferred Stock, each resulted in more than a 50% change in the
ownership percentages of shareholders, the provisions of Section 382 of the
Internal Revenue 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 Convertible
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.
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 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. 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 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 half 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 and second quarters of 1998 the Company has made payments to
such management level employees to reduce its liability for past due salaries
and benefits to approximately $600,000 at June 30, 1998 Additionally, the
Company is in arrears to many of its vendors and suppliers. As of June 30, 1998,
such amount owed to vendors and suppliers totaled approximately $1,327,000. This
amount excludes the nine months severance demand made by Dr. Haas. See comments
under Employees above.
Assuming that the company is successful in obtaining an extension of
the October 5, 1998 maturity date of the ProFutures Loan or the additional debt
or equity financing necessary to repay the ProFutures Loan, the Company will
also require additional debt or equity financing to sustain its operations
beyond the fourth quarter of 1998. The Company currently is unable to seek such
additional debt or equity financing and, unless the closing of the Imatron
Transaction occurs, it is unlikely that the Company will be able to seek to
obtain such financing. In the event that the Imatron Transaction closes, the
Company intends to rely upon Imatron's undertaking (to use its best efforts to
arrange additional third party equity financing for the Company) in order to
fulfill its current financing needs. There are no assurances that the closing of
the Imatron Transaction will occur, or if the closing occurs, that Imatron will
be successful in arranging additional third party equity financing for the
Company or, if such equity financing is obtained, that the terms of such equity
financing will be favorable to the Company or its securityholders.
As a result of the Company's liquidity problems, its auditors, Ham,
Langston & Brezina, L.L.P., have added an explanatory paragraph to their opinion
on the Company's financial statements indicating that substantial doubt exists
about the Company's ability to continue as a going concern.
21
<PAGE>
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 anticipates that it will hold a special meeting of its
shareholders at which it will seek approval of the Imatron Transaction and
approval of an increase in the number of authorized common shares; however, no
assurances can be given that such additional shares will be authorized in
adequate time to allow the Company to issue such equity securities.
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.
Based on a preliminary assessment, the Company believes that no
significant modifications to its existing computer software will be required and
that its existing computer systems will function properly with respect to dates
in the year 2000 and thereafter. The Company also believes that costs related to
the Year 2000 issues will not be significant. However, due to the Company's
current severe liquidity problems, the Company has been unable to perform a
complete assessment of Year 2000 issues and has developed no contingency plan
with regard to unsolved Year 2000 problems that may arise.
The Company is also currently performing a 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. Based on such preliminary assessment,
management believes that the Company does not have significant exposure with
respect to third parties.
The Company's preliminary assessments indicate that the worst case
scenario with regard to the year 2000 issue would be extreme 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.
Recently Issued Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board ("FASB") 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
The Company is including the following cautionary statement in this
Annual Report on Form 10-KSB to make applicable and take advantage of the safe
harbor provision of the Private Securities Litigation Reform Act of 1995 for any
forward looking statements made by, or on behalf of the Company. Forward looking
22
<PAGE>
statements include statements concerning plans, objectives, goals
strategies, future events or performance and underlying assumptions and other
statements which are other than statements of historical facts. Certain
statements contained herein are forward looking statements and, accordingly,
involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed in the forward looking statements. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitations, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectation, beliefs or
projections will result or be achieved or accomplished. In addition to other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward looking statements: the ability
of the Company to attain widespread market acceptance of its POSICAM(TM)
systems; the ability of the Company to obtain acceptable forms and amounts of
financing to fund future operations; demand for the Company's services; and
competitive factors. The Company disclaims any obligation to update any forward
looking statements to reflect events or circumstances after the date hereof.
Item 7. Financial Statements
The required Financial Statements and the notes thereto are contained
in a separate section of this report beginning with the page following the
signature page.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On April 7, 1998, Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), by
means of a letter addressed to the Chairman of the Board and Chief Executive
Officer of Positron Corporation informed the Company that it had resigned as the
Company's independent auditors. The resignation arises from Coopers & Lybrand's
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 (2) years except: (i) Coopers & Lybrand's
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 as of and for
the fiscal year ended December 31, 1997 have not been audited.
This decision to resign was made by Coopers & Lybrand and was neither
approved nor disapproved by the Company's Board of Directors.
During the two most recent fiscal periods ended December 31, 1997 and
December 31, 1996 and from December 31, 1997 to the date of Coopers & Lybrand's
resignation, there were: (i) no disagreements between the Company and Coopers &
Lybrand 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 Coopers & Lybrand would have caused it to make reference
thereto in its report; and (ii) no reportable events as defined in paragraph
304(a)(1)(v) or Regulation S- K.
Coopers & Lybrand has provided the Securities and Exchange Commission with
a letter agreeing to the disclosure contained herein.
Coopers and Lybrand was replaced by Ham, Langston & Brezina, L.L.P. on
June 26, 1998.
Prior to the engagement of Ham, Langston & Brezina, L.L.P. as independent
auditors, the Company had not consulted them regarding the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements or any other financial presentation whatsoever.
No disagreements exist between the Company and Ham, Langston & Brezina,
L.L.P. on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
23
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and key employees of the Company
consist of the following individuals:
Name Age Position
Gary B. Wood, Ph.D. 47 Director, Chairman of the Board and
Interim Chief Executive Officer
K. Lance Gould. M.D. 57 Director
John H. Laragh, M.D. 69 Director
Ronald B. Schilling, Ph.D. 56 Director
William S. Kiser, M.D. 68 Director (resigned effective
May 1, 1998)
Werner J. Haas, Ph.D. 59 Director, President and Chief
Executive Officer (resigned effective
February 1, 1997)
Howard R. Baker 45 Executive Vice President (resigned
effective April 14, 1998)
David O. Rodrigue 49 Chief Financial Officer and Secretary
(resigned effective January 21, 1998)
Richard Hitchens 53 Vice President Engineering (resigned
effective October 1, 1996)
Gary B. Wood, Ph.D., has served as director and Chairman of the Board
of Directors of the Company since April 1990. From October 1, 1994 to December
24
<PAGE>
31, 1995, he also 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 CEO pending the selection of a new President and CEO. 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
health care industries. Dr. Wood holds a BS and MS 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.
K. Lance Gould, M.D., one of the inventors of the Company's POSICAM(TM)
system, has served as a director and as Special Medical Consultant to the
Company since 1984. For more than the last five years, Dr. Gould has served as a
Professor of Medicine at the University of Texas Medical School in Houston. Dr.
Gould holds a BA in Physics from Oberlin College and a M.D. from Western Reserve
Medical School.
John H. Laragh, M.D. has served as a director since December 1993. Dr.
Laragh has been Chief of the Division of Cardiology of the Department of
Medicine at the Cornell University Medical College since 1976, and Director of
the Cardiovascular Center at the New York Hospital Cornell Medical Center since
1975. Dr. Laragh holds a BA and a M.D. from Cornell University.
Ronald B. Schilling, Ph.D., has served as a director since March 1995.
Since 1992 he has served as President and Chief Executive Officer of Prime-X,
General Imaging, Inc., a sensor imaging technology company, and served as a
consultant to other medical technology companies. From 1987 to 1992, Dr.
Schilling was Senior Vice President and General Manager at Toshiba America
Medical Systems, Inc., a medical technology company. Dr. Schilling holds a
B.S.E.E. in electrical engineering from City College of New York, an M.S.E.E.
from Princeton University, and Ph.D.
from the New York Polytechnic Institute.
Item 10. 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 as executive officers of the Company during 1997 and 1996.
<TABLE>
Summary Compensation Table
<CAPTION>
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (I)
-------------------------------------------------------------------------------------------
Restricted Options/
Name and Principal Fiscal Salary Bonus Other Annual Stock SARs LTIP All Other
Position Year ($) ($) compensation Award(s) (#) Payouts ($)Compensation
- -----------------------------------------------------------------------------------------------------------------
<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 (1) - - - -
Executive Officer 1995 165,000 28,333 86,083 (2) - 53,636 (3) - -
(October 1, 1994 to
December 31, 1995 and
February 1, 1997 to
Present)
Werner J. Haas, Ph.D. 1997 8,021 - - - - - -
(Resigned as CEO on 1996 204,800 - 16,600 (4) - - - -
February 1, 1997) 1995 N/A - - - - - -
<FN>
(1) Represents $80,000 in consulting fees paid to Dr. Wood and $18,000 in directors fees.
(2) Represents $73,333 in consulting fees paid to Dr. Wood and $12,750 in directors fees.
(3) Represents options to acquire 3,636 shares of Common Stock awarded under the
1994 Plan in 1995 and 50,000 options to acquire common stock
issued in connection with Mr. Wood's acting as interim CEO during 1995.
(4) These amounts represent the Company's reimbursement of certain of Dr. Haas' living
expenses during the period he served as President and CEO of the Company.
</FN>
</TABLE>
25
<PAGE>
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<CAPTION>
(a) (b) (c) (d) (e)
-------------------------- ---------------------------
Number of Unexercised Value of Unexercised In-the-
Options/SARs at Fiscal Year- Money Options/SARs at Fiscal
End Year-End
- ------------------------ ------------ -------- ----------- ------------ ----------- ------------
Shares Value
Acquired on Realized Exercisable Unexercisable Exercisable Unexercisable
Name Exercise (#) ($) (#) (#) ($) ($)
- ------------------------ ------------ -------- ----------- ------------ ----------- -------------
<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. 0 0 ________ 0 0(1) 0(1)
<FN>
(1) Based upon the exercise price in effect on December 31, 1997 and the closing price of $0.250 for the Company's Common Stock
on December 31, 1997, as reported on the NASDAQ National Market System.
</FN>
</TABLE>
26
<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 1997 or
1996 for their services as directors of the Company. As of June 30, 1998
approximately $540,000 was owed to Directors or former Directors of the Company.
Pursuant to the 1994 Incentive and Non-statutory Option Plan (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 Shareholder Meeting 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 with
the remaining one-third becoming 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.
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.
27
<PAGE>
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 Company's Board of Directors. The
Company has indicated to Dr. Haas that it believes no amounts are due him under
his employment agreement. As of June 30, 1998, 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 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 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 stockholders). 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
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.
28
<PAGE>
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
Company's 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, 1997,
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 two or more directors who,
except for automatic grants for non-employee directors under Section 7 of the
1994 Plan, are not eligible and have not, within a 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. Schilling and Dr. Gould.
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
Internal Revenue Code of 1986, 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.
29
<PAGE>
The Company's contributions to the 401(k) Plan for the accounts of Mr.
Haas were $0 in 1997, and $2,339 in 1996. 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.
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 Internal Revenue Code. Amendments to the Internal
Revenue 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 year 1997 or 1996.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of June 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 five percent of the outstanding
shares of Common Stock; (ii) each director and executive officer of the Company;
and (iii) all executive officers and directors of the Company as a group.
Included in the "Number of Shares of Common Stock" are shares attributable to
options or warrants that are exercisable as of, or will be exercisable within 60
days after, December 31, 1997.
<TABLE>
<CAPTION>
Number of Percent of Number of Percent of Number of Percent of
Name of Beneficial Shares Outstanding Shares of Outstanding Shares of Outstanding
Owner(1) of Common Common Series A Series A Series B Series B
Stock Stock Preferred Preferred Preferred Preferred
Stock Stock Stock Stock
<S> <C> <C> <C> <C> <C> <C>
Auer & Co.(2) 600,000 11.3% 399,996 25.1%
c/o ASB Capital Mgt.
1101 Pennsylvania Avenue
NW, Suite 300
Washington, DC 20004
DHB Capital 25,000 100%
11 Old Westbury Rd.
Old Westbury, NY 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%
Omni-MedCorporation
5430 LBJ Freeway
Dallas, Texas 75240
John H. Laragh, M.D.(6)
Positron Corporation 31,709 *
16350 Park Ten Place
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 (5 persons)
<FN>
* Less than 1%
30
<PAGE>
(1) Except as otherwise indicated, each stockholder 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 issuable upon the conversion of 400,000 shares
of Series A 8% Cumulative Convertible Redeemable 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 issuable upon the conversion of 433,333 shares
of Series A 8% Cumulative Convertible Redeemable Preferred Stock and
216,671 warrants to purchase Common Stock acquired upon the conversion
of $650,000 in principal amount of the Uro-Tech Loan. 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 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>
31
<PAGE>
Item 12. 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, 1% each to the
Clayton Foundation, K. Lance Gould and Nizar A. Mullani. The Company has not
made any royalty payments since 1993. As of June 30, 1998 approximately $368,000
was owned to the aforementioned individuals for past due royalties.
The 3% total royalty obligation of the Company was based on agreements
with Nizar A. Mullani and K. Lance Gould under which they previously agreed to
reduce the royalty payments due to them by the Company in consideration of
payments to be made to them under consulting agreements and promissory notes.
The consulting agreements provide that if the Company defaults in its payment
obligations thereunder, then Mr. Mullani and Dr. Gould would be entitled to
receive a regrant of the royalties that they previously released. On April 12,
1998, the Company received a demand letter from Mr. Mullani alleging default
under his consulting agreement and demanding the regrant of an additional 1%
royalty interest. Although the Company has not received any such demand from Dr.
Gould, the Company believes that a payment default may have occurred under Dr.
Gould's consulting agreement and that as a result thereof, Dr. Gould may be
entitled to the regrant of an additional 0.5% royalty interest. The Company
anticipates initiating settlement discussions with Mr. Mullani and Dr. Gould
concerning the alleged payment defaults. The Company is unable to predict the
outcome of such discussions at this time. If the parties fail to reach a
settlement, Mr. Mullani will be entitled to receive an aggregate 2% royalty and
Dr. Gould 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.
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.
32
<PAGE>
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 six percent 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. This loan was not repaid upon maturity and was fully
reserved by the Company at December 31, 1997.
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 system.
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.
33
<PAGE>
Item 13. Exhibits, Lists and Reports on Form 8-K
Exhibits:
3.1 Articles of Incorporation of the Registrant (incorporated herein by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
3.2 By-laws of the Registrant, as amended (incorporated herein by
reference to Exhibit 3.2 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
4.1 Specimen Stock Certificate (incorporated herein by reference to
Exhibit 4.1 of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1994).
4.2 Form of Redeemable Warrant (included as part of Exhibit 10.71)
4.3 Statement of Designation Establishing Series A 8% Cumulative
Convertible Redeemable Preferred Stock of Positron Corporation,
dated February 28, 1996 (incorporated herein by reference to Exhibit
4.3 of the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995).
4.4 Warrant Agreement dated as of February 29, 1996, between Positron
Corporation and Continental Stock Transfer & Trust Company
(incorporated herein by reference to Exhibit 4.4 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995).
4.5 Specimen Redeemable Warrant Certificate to Purchase Shares of Common
Stock (incorporated herein by reference to Exhibit 4.5 of the
Company's Annual Report on Form 10-KSB for the year ended December
31, 1995).
4.6 Stock Purchase Warrant dated as of February 7, 1996 issued by
Positron Corporation to Boston Financial & Equity Corporation
(incorporated herein by reference to Exhibit 4.6 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995).
4.7* Statement of Designation Establishing Series B 8% Cumulative
Convertible Redeemable Preferred Stock of Positron Corporation,
dated July 9, 1996.
4.8* Form of Warrant Agreement dated as of July 10, 1996, between
Positron Corporation and Brooks Industries Profit Sharing Plan.
34
<PAGE>
10.1 Lease Agreement dated as of July 1, 1991, by and between Lincoln
National Pension Insurance Company and Positron Corporation
(incorporated herein by reference to Exhibit 10.1 to the Company's
Registration Statement on Form SB-2 (File No. 33-68722)).
10.2 Agreement dated as of March 1, 1993, by and between Positron
Corporation and Oxford Instruments (UK) Limited (incorporated herein
by reference to Exhibit 10.2 to the Company's Registration Statement
on Form SB-2 (File No. 33-68722)).
10.3 International Distribution Agreement dated as of November 1, 1992,
by and between Positron Corporation and Batec International , Inc.
(incorporated herein by reference to Exhibit 10.3 to the Company's
Registration Statement on Form SB-2 (File No. 33-68722)).
10.4+ 1994 Incentive and Nonstatutory Option Plan.
10.5+ Amended and Restated 1987 Stock Option Plan (incorporated herein by
reference to Exhibit 10.5 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.6+ Retirement Plan and Trust (incorporated herein by reference to
Exhibit 10.6 to the Company's Registration Statement on Form SB-2
(File No. 33-68722)).
10.7 Amended and Restated License Agreement dated as of June 30, 1987, by
and among The Clayton Foundation for Research, Positron Corporation,
K. Lance Gould, M.D., and Nizar A. Mullani (incorporated herein by
reference to Exhibit 10.7 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.8 Clarification Agreement to Exhibit 10.7 (incorporated herein by
reference to Exhibit 10.8 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.9 Royalty Assignment dated as of December 22, 1988, by and between K.
Lance Gould and Positron Corporation (incorporated herein by
reference to Exhibit 10.10 to the Company's Registration Statement
on Form SB-2 (File No. 33-68722)).
10.10 Royalty Assignment dated as of December 22, 1988, by and between
Nizar A. Mullani and Positron Corporation (incorporated herein by
reference to Exhibit 10.11 to the Company's Registration Statement
on Form SB-2 (File No. 33-68722)).
10.11 Royalty Assignment dated as of December 22, 1988, by and between The
Clayton Foundation and Positron Corporation (incorporated herein by
reference to Exhibit 10.12 to the Company's Registration Statement
on Form SB-2 (File No. 33-68722)).
35
<PAGE>
10.12+ Stock Purchase Warrant dated October 31, 1993, issued to Gary B.
Wood (incorporated herein by reference to Exhibit 10.15 to the
Company's Registration Statement on Form SB-2 (File No. 33- 68722)).
10.13 Amendment No. 1 to Exhibit 10.22 (incorporated herein by reference
to Exhibit 10.23 to the Company's Registration Statement on Form
SB-2 (File No. 33-68722)).
10.14+ Consulting Agreement dated as of January 15, 1993, by and between
Positron Corporation and K. Lance Gould, M.D. (incorporated herein
by reference to Exhibit 10.24 to the Company's Registration
Statement on Form SB-2 (File No. 33-68722)).
10.15 Stock Purchase Warrant dated February 25, 1993, issued to K. Lance
Gould (incorporated herein by reference to Exhibit 10.26 to the
Company's Registration Statement on Form SB-2 (File No.
33-68722)).
10.16+ Consulting Agreement dated February 23, 1995, effective December 15,
1994, by and between Positron Corporation and F. David Rollo, M.D.
Ph.D., FACNP.
10.17+ Consulting Agreement dated as of January 15, 1993, by and between
Positron Corporation and Nizar A. Mullani (incorporated herein by
reference to Exhibit 10.31 to the Company's Registration Statement
on Form SB-2 (File No. 33-68722)).
10.18+ Consulting Agreement dated as of November 12, 1993, by and between
Positron Corporation and OmniMed Corporation (incorporated herein by
reference to Exhibit 10.35 to the Company's Registration Statement
on Form SB-2 (File No. 33-68722)).
10.19 Contract No. 1318 dated as of December 30, 1991, by and between
Positron Corporation and The University of Texas Health Science
Center at Houston (incorporated herein by reference to Exhibit 10.39
to the Company's Registration Statement on Form SB-2 (File No.
33-68722)).
10.20+ Letter Agreement dated July 30, 1993 between Positron Corporation
and Howard Baker (incorporated herein by reference to Exhibit 10.52
to the Company's Registration Statement on Form SB-2 (File No.
33-68722)).
10.21 Technology Transfer Agreement dated as of September 17, 1990, by and
between Positron Corporation and Clayton Foundation for Research
(incorporated herein by reference to Exhibit 10.54 to the Company's
Registration Statement on Form SB-2 (File No. 33-68722)).
10.22 Stock Purchase Warrant dated as of October 31, 1993 issued to Gerald
Hillman (incorporated herein by reference to Exhibit 10.56 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.23 Stock Purchase Warrant dated as of October 31, 1993 issued to The
Dover Group (incorporated herein by reference to Exhibit 10.57 to
the Company's Registration Statement on Form SB-2 (File No.
33-68722)).
10.24 Stock Purchase Warrant dated as of October 31, 1993 issued to John
Wilson (incorporated herein by reference to Exhibit 10.63 to the
Company's Registration Statement on Form SB-2 (File No.
33-68722)).
10.25+ Stock Purchase Warrant dated as of October 31, 1993 issued to Robert
Guezuraga (incorporated herein by reference to Exhibit 10.64 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.26 Stock Purchase Warrant dated as of October 31, 1993 issued to
Richard Ronchetti (incorporated herein by reference to Exhibit 10.65
to the Company's Registration Statement on Form SB-2 (File No.
33-68722)).
10.27 Form of Amended and Restated Registration Rights Agreement dated as
of November 3, 1993, by and among Positron and the other signatories
thereto (1993 Private Placement) (incorporated herein by reference
to Exhibit 10.73 to the Company's Registration Statement on Form
SB-2 (File No.
33-68722)).
36
<PAGE>
10.28 Registration Rights Agreement dated as of July 31, 1993, by and
among Positron and the other signatories thereto (other than the
1993 Private Placement) (incorporated herein by reference to Exhibit
10.74 to the Company's Registration Statement on Form SB-2 (File No.
33-68722)).
10.29 Software Licenses dated as of March 1, 1993, by and between Positron
Corporation and Oxford Instruments (UK) Limited (incorporated herein
by reference to Exhibit 10.81 to the Company's Registration
Statement on Form SB-2 (File No. 33-68722)).
10.30 Distribution Agreement dated as of June 1, 1993, by and between
Positron Corporation and Elscint, Ltd. (incorporated herein by
reference to Exhibit 10.82 to the Company's Registration Statement
on Form SB-2 (File No. 33-68722)).
10.31+ Employment Agreement dated as of August 19, 1993, by and between
Positron Corporation and Richard E. Hitchens (incorporated herein by
reference to Exhibit 10.83 to the Company's Registration Statement
on Form SB-2 (File No. 33-68722)).
10.32+ Employment Agreement dated as of August 19, 1993, by and between
Positron Corporation and Howard R. Baker (incorporated herein by
reference to Exhibit 10.84 to the Company's Registration Statement
on Form SB-2 (File No. 33-68722)).
10.33 Amended and Restated Warrant Agreement dated as of April 14, 1994,
by and between Positron Corporation and Continental Stock Transfer
and Trust Company (including form of Warrant Certificate).
10.34 First Amendment to Amended and Restated Registration Rights
Agreement, dated as of November 19, 1993, by and among Positron
Corporation and the other signatories thereto (incorporated herein
by reference to Exhibit 10.91 to the Company's Registration
Statement on Form SB-2 (File No.
33-68722)).
10.35 Agreement made and entered into as of October 31, 1993, by and
between Positron Corporation and Nizar A. Mullani (incorporated
herein by reference to Exhibit 10.97 to the Company's Registration
Statement on Form SB-2 (File No. 33-68722)).
10.36 Agreement made and entered into as of October 31, 1993, by and
between Positron Corporation and K. Lance Gould (incorporated herein
by reference to Exhibit 10.98 to the Company's Registration
Statement on Form SB-2 (File No. 33-68722)).
10.37 Agreement made and entered into as of November 15, 1993, by and
between Positron Corporation and Nizar A. Mullani (incorporated
herein by reference to Exhibit 10.100 to the Company's Registration
Statement on Form SB-2 (File No. 33-68722)).
10.38 Agreement made and entered into as of November 15, 1993, by and
between Positron Corporation and K. Lance Gould (incorporated herein
by reference to Exhibit 10.101 to the Company's Registration
Statement on Form SB-2 (File No. 33-68722)).
10.39 First Amendment made and entered as of January 25, 1994, by and
between Emory University d/b/a Crawford Long Hospital and Positron
Corporation (incorporated herein by reference to Exhibit 10.102 of
the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1993).
10.40+ Employment Agreement dated January 1, 1996 by and between Werner J.
Haas, Ph.D. and Positron Corporation (incorporated herein by
reference to Exhibit 10.40 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.41 Loan and Security Agreement made as of November 14, 1995, between
Positron Corporation and Uro-Tech, Ltd. (incorporated herein by
reference to Exhibit 10.41 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.42 First Modification and Extension Agreement made as of January 3,
1996, by Positron Corporation and Uro-Tech, Ltd. (incorporated
herein by reference to Exhibit 10.42 of the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1995).
10.43 Second Modification and Extension Agreement made as of February 26,
1996 by Positron Corporation and Uro-Tech, Ltd. (incorporated herein
by reference to Exhibit 10.43 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
37
<PAGE>
10.44 Uro-Tech Loan Conversion Agreement dated as of November 14, 1995,
between Positron Corporation and Uro-Tech, Ltd. (incorporated herein
by reference to Exhibit 10.44 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.45 Promissory Note dated September 14, 1995, in the principal amount of
$1,500,000 payable to Uro- Tech, Ltd. (incorporated herein by
reference to Exhibit 10.45 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.46 Promissory Note dated September 14, 1995, in the principal amount of
$1,000,000 payable to Uro- Tech, Ltd. (incorporated herein by
reference to Exhibit 10.46 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.47 Revolving Finance agreement with Boston Financial & Equity
Corporation (incorporated herein by reference to Exhibit 10.47 of
the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995).
10.48 Security Agreement Boston Financial & Equity Corporation
(incorporated herein by reference to Exhibit 10.48 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995).
10.49 Supplement to Security Agreement Security Interest in Inventory
(incorporated herein by reference to Exhibit 10.49 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995).
10.50 Inter-Creditor Agreement (incorporated herein by reference to
Exhibit 10.50 of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995).
10.51 Loan Agreement between Positron Corporation and ProFutures Bridge
Capital Fund, L.P. dated November 1, 1996.
10.52 Promissory Note dated November 14, 1996, in the principal amount of
$1,400,000 payable to ProFutures Bridge Capital Fund, L.P.
10.53 InterCreditor Agreement dated November 14, 1996 among Uro-Tech,
Ltd., Boston Financial & Equity Corporation and ProFutures Bridge
Capital Fund, L.P.
10.54 Amendment to BF&E loan
10.55 Amendment to Uro-Tech loan
10.56 Acquisition Agreement between General Electric Company and Positron
Corporation dated July 15, 1996.
10.57* Loan Agreement between Positron Corporation and Imatron, Inc..
10.58 Sales and Marketing Agreement With Beijing Chang Feng Medical.
10.59* Stock Purchase Agreement between Positron Corp. and Imatron, Inc.
10.60* Promissory Note from Positron Corporation to Imatron, Inc.
27.0* Financial Data Schedule
* Filed herewith
+ Management contract or compensatory plan or arrangement identified
pursuant to Item 13(a).
Form 8-K Reports:
No current report on Form 8-K was filed by the Company during the
fourth quarter of 1997.
38
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
POSITRON CORPORATION
Date: September 17, 1998 By: /S/ GARY B. WOOD, PH.D.
Gary B. Wood, Ph.d.
Chairman of the Board
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
/S/ GARY B.WOOD, PH.D. __________________, 1998
Gary B. Wood, Ph.D.
Chairman of the Board, President and Chief
Executive Officer; Director
(Principal Executive Officer)
/S/ K. LANCE GOULD, M.D. __________________, 1998
K. Lance Gould, M.D.
Director
/S/ JOHN H. LARAGH, M.D. __________________, 1998
John H. Laragh, M.D.
Director
/S/ RONALD B. SCHILLING, PH.D. __________________, 1998
Ronald B. Schilling, Ph.D.
Director
<PAGE>
POSITRON CORPORATION
--------------------
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
for the years ended December 31, 1997 and 1996
POSITRON CORPORATION
TABLE OF CONTENTS
----------
Page(s)
Report of Independent Accountants F-2 to F-3
Balance Sheets as of December 31,
1997 and 1996 F-4
Statements of Operations for the
years ended December 31, 1997 and 1996 F-5
Statements of Stockholders' Deficit for the
years ended December 31, 1997 and 1996 F-6
Statements of Cash Flows for the years
ended December 31, 1997 and 1996 F-7
Notes to Financial Statements F-8 to F-28
F-1
<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, 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 has 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
F-2
<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 has 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
F-3
<PAGE>
<TABLE>
POSITRON CORPORATION
BALANCE SHEETS
--------------------
(In thousands, except share data)
<CAPTION>
December 31,
1997 1996
ASSETS: -------- --------
<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 assets $ 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% cumula-
tive, convertible, redeemable; 25,000 shares auth-
orized, issued and outstanding at December 31, 1997
and 1996, respectively 25 25
Common stock: $0.01 par value; 15,000,000 shares
authorized, 5,128,990 and 4,312,182 shares issued
and 5,068,834 and 4,312,182 shares outstanding at
December 31, 1997 and 1996, respectively 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
deficit $ 1,667 $ 5,517
======== ========
<FN>
See notes to financial statements.
</FN>
F-4
</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 645 610
Provision for loss on system exchange -- 1,000
Provision for inventory obsolescence 1,224 --
----------- -----------
Total costs of sales and service 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 expense (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>
F-5
</TABLE>
<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>
F-6
</TABLE>
<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 in accounts receivable 120 137
Decrease in inventories 1,001 33
Decrease in prepaid expenses 28 13
Decrease (increase) in other current assets 426 (368)
Increase (decrease) in accounts payable, trade 460 (642)
Increase in accrued liabilities 551 335
Increase (decrease) in revolving line of credit (75) 75
Increase (decrease) in other liabilities 177 (11)
Decrease in unearned revenue (207) (190)
------- -------
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>
F-7
</TABLE>
<PAGE>
POSITRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. Description of Business
Positron Corporation (the "Company") was incorporated on December 20,
1983 in the state of Texas and commenced commercial operations during
1986. The Company designs, manufacturers, 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 from 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. Additionally, the Company is subject to
certain unasserted claims which, as of July 25, 1998, have not been
resolved.
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.
F-8
<PAGE>
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.
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 costs 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.
Intangible assets were written down by approximately $79,000 to zero at
December 31, 1997 to reduce them to their estimated net realizable value.
F-9
<PAGE>
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.
F-10
<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 135 368
Accounts receivable-- fee per scan 334 180
Accounts receivable-- other -- 41
------ ------
1,480 1,600
Less allowance for doubtful accounts (1,227) (1,080)
------ ------
$ 253 $ 520
====== ======
F-11
<PAGE>
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
======= =======
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
======= =======
F-12
<PAGE>
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 740 889
------- -------
$ 3,205 $ 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 at 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.
F-13
<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 year. As of December 31, 1997 and
1996, approximately $930,000 and $1,335,000, respectfully, 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 to $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.
F-14
<PAGE>
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 at 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.
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
=======
F-15
<PAGE>
The Company has elected to apply the disclosure only provisions 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 date 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 1997 and 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 1997 and 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%.
F-16
<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) $ (0.93) $ (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 and
1996. 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 or 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.
F-17
<PAGE>
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 and 1996. 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
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.
F-18
<PAGE>
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 or involuntary
liquidation, dissolution or winding up of the Company, and the
preferences and relative rights among each series of preferred stock.
F-19
<PAGE>
Series A 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
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. Eight percent (8%) dividends on the Series A Preferred Stock may
be paid in cash or in 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
F-20
<PAGE>
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.
F-21
<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 $43,000,000 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. If the Imatron Transaction is completed the Company's
ability to utilize the NOL carryforwards could be further limited.
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) $ -- $ --
======= =======
F-22
<PAGE>
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
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 $36,000 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.
F-23
<PAGE>
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, 60,156 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.
F-24
<PAGE>
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.
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
$42,000 and $134,000, respectively.
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
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. 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.
F-25
<PAGE>
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 25, 1998, the Company is unable to predict the outcome of this
disagreement with its former landlord.
F-26
<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
disruption of business activities.
Based on a preliminary assessment, the Company believes that no
significant modifications of existing computer software will be required
and that its existing computer systems will function properly with
respect to dates in the year 2000 and thereafter. The Company also
believes that costs related to the Year 2000 issue will not be
significant. However, due to the Company's current severe liquidity
problems, the Company has been unable to perform a complete assessment of
Year 2000 issues and has developed no contingency plan with regard to
unsolved Year 2000 problems that may arise.
The Company is also currently performing a preliminary assessment of its
relationships with significant suppliers and major customers to determine
the extent to which the Company is vulnerable to any failure by third
party to remedy their own Year 2000 issues. Based on such preliminary
assessment, management believes that the Company does not have
significant exposure with respect to third parties.
The Company's preliminary assessments indicated that the worst case
scenario with regard to the 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.
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 to enable the Company to meet a
portion of its current obligations. As of July 25, 1998, the Company had
received advances totaling approximately $468,000. 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.
F-27
<PAGE>
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, excluding 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 June 30, 1998, the
Company would have been obligated to issue nine million shares of common
stock. The Company will receive a nominal cash amount of $100 from
Imatron in payment for the shares.
Imatron, in addition to providing limited working capital financing, 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
during 1997. Imatron Japan, an affiliate of Imatron, is a major
distributor for Imatron's Ultrafast CT and for the products of certain
other high technology companies. Imatron owns a 24 percent 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
eighteen-month period in an aggregate amount of at least $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 of the Company's officers,
(b) the resignation of at least three of the Company's four current
directors and the appointment of Imatron's nominees to fill vacancies so
created, and (c) approval by the Company's stockholders 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 in the third quarter of this
year if such stockholder approval is obtained.
F-28
<PAGE>
In connection with the Imatron Transaction, 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 balance of
approximately $845,000 at December 31, 1997) to December 5, 1998, in
return for a $50,000 payment, the issuance of warrants to purchase
1,150,000 shares of the Company's 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 the Company's 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
$207,000 at December 31, 1997) 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.
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.
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 leins 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
===== =====
F-29
EXHIBIT 10.57
LOAN AGREEMENT
THIS AGREEMENT is made as of the first day of May 1998 by and between
POSITRON CORPORATION ("Borrower"), a Texas corporation with its principal place
of business at 1304 Langham Creek Drive, Houston, Texas 77084 and IMATRON INC.
("Lender"), a New Jersey corporation with its principal place of business at 389
Oyster Point Blvd., So. San Francisco, CA 94080.
R E C I T A L S:
WHEREAS, Borrower has requested Lender to make certain loans to Borrower
for working capital and certain other needs as provided herein and Lender is
agreeable to make such loans upon the terms and conditions hereof;
NOW THEREFORE, in consideration of these premises and the mutual
covenants and agreements herein contained and other valuable consideration,
the receipt and adequacy of which the parties hereto acknowledge, the
parties have agreed as follows:
1. DEFINITIONS.
As used in this Loan Agreement, the following terms shall have the
following meanings unless the context requires otherwise:
Borrower's Obligations means all present and future obligations of Borrower
to Lender hereunder, under the Note, or any other document executed in
connection herewith.
Default means any event set forth in Section 6.1 hereof.
Lender's Obligations means all present and future obligations of Lender to
Borrower hereunder, or any other document executed in connection herewith.
Loan Agreement means this Loan Agreement and all attachments, exhibits,
schedules hereto, all as may be amended from time to time.
Loan Rate means the Prime Rate listed in the Western edition of the Wall
Street Journal or, if not so listed, the reference rate in use by Bank of
America NS & TA on the final business day of each month, plus one-half percent
(1/2 %), as applied to the payment for the next month.
Payment Dates means the first day of each calendar month.
2. LOANS.
2.1. Lender agrees, on terms and conditions of this Loan Agreement, to make
loans (hereinafter called individually a "Loan" and, collectively "The Loans"),
to Borrower in an aggregate principal amount at any one time outstanding up to
but not exceeding Five Hundred Thousand Dollars ($500,000). Within such limit,
and subject to the various conditions set forth herein, Borrower may borrow,
repay, re-borrow at any time or from time to time from the date hereof up to and
including the earlier of March 1, 2000 and the termination of the commitment of
Lender, as provided at Section 6.2 below. The obligation of Lender to make Loans
up to but not exceeding such aggregate amount at any one time outstanding herein
is hereinafter called its "Commitment."
2.2. Except for the borrowing contemplated to be made upon execution of
this Agreement, as set forth in Schedule 3.1(g), Borrower shall give Lender at
least three(3) calendar days' written notice (effective upon receipt) specifying
the amount and date of each borrowing under Section 2.1. The foregoing
notwithstanding, and provided all conditions have otherwise been met, the timing
set forth in Schedule 3.1(g) shall be deemed written notice of the amounts and
dates set forth in the Schedule.
2.3. Borrower's obligations to pay the principal of and interest on the
Loans shall be evidenced by its grid promissory note in the form of Exhibit A
hereto (the "Note") payable to the order of Lender. The Note shall reflect the
amount of the Commitment, with actual Loans, repayments and balances noted by
Lender on the grid attached to the Note and made a part thereof. The Note shall
bear interest on the unpaid principal amount thereof until such principal amount
shall be paid in full at a per annum rate equal to the Loan Rate (based on a
year of 365 or actual number of days elapsed). The Loan Rate shall apply to the
average outstanding principal balance on the Note during any month which shall
be the summation of the daily balances during such month divided by the number
of days in the particular month. Unless accelerated in accordance with the
provisions of this Loan Agreement, the interest on the Note for any calendar
month shall be paid within fifteen (15) days of each consecutive Payment Date
immediately following such calendar month until full payment of the Loan (and
related interest), with the first Payment Date being the first day of the month
immediately following execution of this Agreement. All principal and interest on
the Note shall be due and payable in full on March 1, 2000. If any Payment Date
(or other date for payment hereunder) falls on a day which is not a business
day, such Payment Date (or other date of payment) shall be the next succeeding
business day.
2.4. Mandatory Repayment. The foregoing notwithstanding, beginning on and
after any date, from the date of this Loan Agreement to the termination of
Lender's Commitment, that Borrower receives third party financing, whether
equity or debt ("Financing"), in an amount in excess of One Million U.S. Dollars
($1,000,000) in the aggregate ("Financing Threshold"), Borrower shall repay,
fifty percent (50%) of each dollar received above the Financing Threshold from
such Financing, toward any and all amounts of principal and interest outstanding
under this Loan Agreement until such amounts have been fully repaid and further,
Lender's Commitment shall terminate and not be renewed. Solely by way of
example, in the event Borrower shall receive Financing in an aggregate amount of
$750,000 at any time during the first nine (9) months of this Agreement, and six
(6) months thereafter Borrower receives additional Financing in an amount
$500,000, Borrower shall repay to Lender, promptly following receipt of the
$500,000, the sum of $125,000 representing fifty percent (50%) of all Financing
received above the Financing Threshold, which amount shall be applied to all
interest accrued on the Loans and unpaid to that date plus, to the extent that
accrued unpaid interest constitutes less than $125,000, that amount of principal
outstanding representing the difference between the amount of accrued unpaid
interest and $125,000. Thereafter, fifty percent (50%) of every dollar of
additional Financing provided to Borrower shall be paid over to Lender, and no
more Loans shall be authorized, until the full amount of any and all unpaid
principal and interest on the Loans shall have been paid.
2.5. All payments to Lender shall be paid by Borrower to Lender at Lender's
address as follows: Imatron Inc., 389 Oyster Point Blvd., So. San Francisco, CA
94080, Attn. President. All amounts paid shall be applied first, to the payment
of all interest accrued and payable with respect to the Note; and second, to the
payment of outstanding principal of the Loan; and third, following Default, to
the payment of all expenses and charges, including reasonable attorneys' fees,
included by Lender for the protection of its rights or the pursuance of its
remedies.
2.6. The Loans or any part thereof may be prepaid at any time without
penalty.
2.7. The interest and other charges charged with respect to the Loans shall
not exceed the highest rate permissible under any law which a court of competent
jurisdiction or an arbitrator or panel of arbitrators shall, in a final
determination, deem applicable to the Loans. As of the date of execution of this
Loan Agreement, the parties hereto, in good faith, agree that the total interest
and other charges payable by Borrower to Lender under the terms of this Loan
Agreement do not exceed the maximum legal interest rate applicable to the Loans.
If it is determined that Lender has received interest and other consideration
with respect to the Loans in excess of the highest rate applicable to the Loans,
Lender shall promptly refund not more than such excess amount to Borrower and
the provisions hereof shall be deemed amended to provide for such permissible
rate.
3. CONDITIONS OF LENDING.
The obligations of Lender to make a Loan is subject to the fulfillment of
the following conditions:
3.1. The following documents shall have been duly authorized, executed and
delivered by the Borrower to the Lender, and shall be in form and substance
satisfactory to the Lender and its counsel and shall be in full force and effect
on the date of the Loan.
Prior to the first Loan:
(a) an executed Loan Agreement, and all executed documents,
certificates and instruments contemplated by this Loan
Agreement, including but not limited to the Security
Agreement;
(b) a certified copy of the resolution of the Board of Directors
of Borrower, certified by the Secretary or a responsible
officer thereof, duly authorizing execution, delivery and
performance of this Loan Agreement and the Note contemplated
hereby;
(c) a certificate of recent date from the Secretary of State of
the state of incorporation of Borrower as to its good
standing;
(d) an incumbency certificate of Borrower dated as of the date of
funding, as to (i) the person or persons authorized to execute
and deliver this Loan Agreement, the Note, the Security
Agreement, and any other documents to be executed on behalf of
them in connection with the transactions contemplated hereby
and (ii) the signature of each person or persons;
(e) the executed Note;
(f) documentary evidence satisfactory to Lender that any and all
liens or other security interests on any of Borrower's
tangible or intangible property, including but not limited to
accounts, computer hardware and software, copyrights,
equipment, inventory, licenses, patents, trade secrets,
trademarks, general intangibles, chattel paper or other
property, and all proceeds thereof, shall have been
released or otherwise subordinated to Lender's security
interests contemplated herein, except as otherwise provided
by that certain agreement by and among ProFutures Bridge
Capital Fund, L.P., a Delaware limited partnership
("ProFutures"), Lender and Borrower, dated as of April 28,
1998 and attached hereto as Exhibit D, and except as provided
by that certain agreement by and among Uro-Tech, Ltd.,
Lender and Borrower, dated as of April 28, 1998 and attached
hereto as Exhibit E; and
(g) an expense plan and budget, including an acceptable cash
control system for managing expenditures within the plan and
budget, ("Expense Plan"), attached hereto as Schedule 3.1(g) ;
and
(h) documentary evidence satisfactory to Lender that any Letter of
Intent or contract arrangements of whatever nature between
Borrower and CTI PET Systems, Inc. have expired or otherwise
been terminated, and that there are no obligations of whatever
nature in effect between Borrower and CTI PET Systems, Inc.
For each Loan (including the first):
(i) an officer's certificate in the form of Exhibit B which shall
include the written request from Borrower setting forth the
requested amount of the Loan and the proposed date of
borrowing;
(j) for each Loan after the first Loan, documentary evidence
satisfactory to Lender, including but not limited to Exhibit
B, that Borrower is adhering strictly to the Expense Plan; and
(k) such other documents and evidence with respect to Borrower as
Lender may reasonably request.
3.2. On the date of each borrowing pursuant to Section 2.1 above, (i) no
Default or event that with the giving of notice or lapse of time or both would
constitute a Default hereunder has occurred and is continuing or would result
from the performance of this Loan Agreement, (ii) no material adverse change
shall have occurred since the date of this Loan Agreement in the financial
condition or operations of the Borrower, and (iii) there shall be no juridical
proceeding or regulatory action instituted by or against the Borrower, or, to
the best of Borrower's knowledge, any threatened proceeding or action which may
materially adversely affect the business, property, operation, or financial
condition of the Borrower. By acceptance of a Loan, Borrower represents as of
such Loan date, that each of the foregoing items is true. The foregoing
notwithstanding, Lender acknowledges that it has been advised of the status of
Borrower's lease for space located at 1304 Langham Creek Drive, #310, Houston,
Texas 77084, as set forth on Schedule 4.5 herein, and that such status will not
be deemed a breach of this Section 3.2.
4. REPRESENTATIONS AND WARRANTIES.
4.1. Borrower is a corporation duly organized and validly existing
in good standing under the laws of the state
of Texas.
4.2. Borrower has full corporate power to own its properties, to carry on
its business as now being conducted and has full corporate power to execute,
deliver and perform all of its obligations under this Loan Agreement and the
Note.
4.3. The execution, delivery and performance by Borrower of this Loan
Agreement, the Note, the Security Agreement and all related documents
contemplated by this transaction have been duly authorized by all necessary
corporate action of Borrower and do not violate any provision of law, statute,
rule or regulation, applicable to Borrower, or any judgment, franchise, permit,
order, decree, ruling, writ or injunction of any court or administrative body,
applicable to Borrower, or of Borrower's certificate of incorporation, by-laws
or the terms of any of its securities or result in the breach of, or constitute
a Default under, or require any consent under, any indenture, bank loan, credit
agreement or other agreement or instrument to which Borrower is a party or by
which Borrower or any of its property may be bound or affected.
4.4. No filings, recordations, notifications, registrations, notarizations,
authentications or other formalities or property, stamp or similar taxes or
duties and no approvals, licenses, orders, authorizations, consents or
undertakings of any governmental bodies or regulatory, supervisory authorities
are necessary in connection with the execution, delivery and performance by
Borrower of this Loan Agreement or the Note, or for the payment to Lender of all
sums hereunder or under the Note or for the legality, validity, binding effect
or enforceability hereof or thereof.
4.5. Except as disclosed and described in Schedule 4.5 hereto, Borrower has
good and marketable title to, or a valid leasehold interest in, the tangible
personal property or other properties and assets used by it, located on its
premises, or shown on the most recent balance sheet, free and clear of all liens
or other security interests.
4.6. This Loan Agreement and the Note, have been duly executed and
delivered by Borrower and are legal, valid and binding obligations of Borrower,
enforceable in accordance with their respective terms, subject to (i) the effect
of any applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights generally, (ii) the
availability of the remedies of specific performance or injunctive relief as
subject to the discretion of the court before which a proceeding for such
remedies may be brought, and (iii) the exercise by any court before which any
proceeding may be brought of equitable judicial discretion.
4.7. Borrower has delivered to Lender its unaudited balance sheet of the
Borrower and the related statements of income, retained earnings and cash flow
of Borrower (collectively "Financial Statements") for the nine month period
ending September 30, 1997. Such balance sheet and statement fairly present the
financial condition of the Borrower as of such date and the results of the
operations of the Borrower for the period ended on such date, and such statement
has been prepared in accordance with generally accepted accounting principles
consistently applied, and contain any disclosure that would normally be required
by financial statements prepared in accordance with generally accepted
accounting principles. Since the end of the period reflected in such financial
statements there has been no material adverse change in such condition or
operations.
4.8. Except as disclosed and described on Schedule 4.8, Borrower has filed
all applicable tax returns required to be filed by it, and has paid or made
provisions for the payment of all taxes which have become due pursuant to said
returns or pursuant to any assessment received by Borrower except such taxes, if
any, as are being contested in good faith and as to which adequate reserves have
been provided in accordance with generally accepted accounting principles, and
warrants that such returns properly reflect the United States, state and local
income and tax liability of the Borrower for the period covered thereby.
4.9. Except as disclosed and fully described on Schedule 4.9, there is no
action, suit or proceeding pending or, to the knowledge of the Borrower
threatened, against the Borrower or any of its property before any court,
governmental department, administrative agency or instrumentality which, if such
action, suit or proceeding were adversely determined, would materially affect
the financial condition or the results of operations of the Borrower or its
business or the ability of the Borrower to perform its obligations hereunder.
4.10. Except as disclosed and described on Schedule 4.10 hereto, Borrower
is not in default on or has otherwise delayed or postponed payment of any
accounts payable or other liabilities in excess of $25,000 outside the ordinary
course of business.
4.11. Each Loan shall be fully applied by Borrower solely for its working
capital needs or for the purchase of equipment or leasehold improvements,
consistent with Schedule 3.1(g) and the Cash Control System, and for no other
purpose.
4.12. No broker or finder acting on behalf of Borrower brought about the
obtaining, making or closing of this Loan Agreement and Borrower has no
obligation to pay any finder's or brokerage fees in connection with the
transactions contemplated herein.
4.13. As of the date of execution of this Loan Agreement, the aggregate
interest and other charges payable by Borrower to Lender under the terms of this
Loan Agreement do not exceed the maximum legal interest rate applicable to the
Loans.
5. COVENANTS.
Borrower hereby covenants and agrees that until satisfaction of all its
obligations, it shall:
5.1. Preserve and maintain its corporate existence and all of its rights,
privileges and franchises, and continue the conduct of its present business in
an orderly, efficient and regular manner; comply in all material respects with
all applicable laws, rules, regulations and orders of any governmental
authority, non-compliance with which would materially affect the ability of
Borrower to perform its obligations.
5.2. Make payments or commitments for payments only in strict compliance
with the Expense Plan and Cash Control System, or otherwise as authorized by
Lender.
5.3. Furnish Lender promptly with any financial information or statements,
and other current information regarding or relating to Borrower, as reasonably
requested by Lender, other than information relating to Borrower's proprietary
know-how and technology information.
5.4. Timely file any and all tax returns and tax filings required under any
governmental statute or regulation and timely pay and discharge, when due, all
tax obligations, and material obligations to third parties, except those
obligations being contested in good faith, and for which Borrower shall have
maintained, in accordance with generally accepted accounting principles,
adequate reserves for the payment of the same.
5.5. Notify Lender immediately upon receipt of notice of any lien,
attachment, administrative or judicial proceeding, pending or threatened claim,
dispute, litigation or governmental proceedings, material to the financial
condition or operations of Borrower, which for this purpose shall be any amount
in excess of $ 10,000; provide immediate written notice to Lender of any Default
or event which with the lapse of time or giving of notice or both would
constitute a Default.
5.6. Promptly and duly execute and deliver to Lender such further
documents, instruments and assurances and take such further action as Lender may
from time to time reasonably request in order to carry out the intent and
purpose of this Loan Agreement and to establish and protect the rights and
remedies created or intended to be created in favor of Lender hereunder.
5.7. Reimburse Borrower for its costs and reasonable attorneys' fees
incurred in enforcing its rights pursuant to the provisions of this Agreement.
6. DEFAULTS AND REMEDIES.
6.1. Any of the following shall constitute a default by Borrower hereunder
("Default"): (a) failure by Borrower to pay any amounts hereunder or under any
Note when due and such remains unremedied for a period of fifteen (15) days from
the due date; or (b) failure of Borrower to comply with any provisions or
perform any of its obligations arising under this Loan Agreement (other than
those referred to in clause (a) above), or if, but only if, such failure to
comply is remediable, it remains unremedied by Borrower for a period of ten (10)
days from notice to Borrower; or (c) any representations or warranties made or
given by Borrower in connection with this Loan Agreement were false or
misleading when made, in any material way; or (d) subjection of any of the
assets in an amount in excess of $10,000.00 of Borrower to attachment, levy,
execution, forfeiture or cancellation or other administrative or judicial
process which is not or cannot be removed with reasonable diligence within sixty
(60) days from the subjection thereof, or (e) commencement of any insolvency,
bankruptcy or similar proceedings, by or against Borrower, including any
assignment by Borrower for the benefit of creditors, and in the case of any
involuntary proceedings, such is not dismissed within ninety (90) days of
institution; or the inability of Borrower to pay its debts as they become due;
or (f) the liquidation or dissolution of Borrower or the commencement of any
acts relative thereto, or without the prior written consent of Lender, any sale
or other disposition of all or substantially all of the assets of Borrower, or
any merger or consolidation of Borrower, or the cessation of business by
Borrower; or (g) a default by Borrower under any agreement for borrowed money or
under any lease, except with regard to the lease of premises located at 16350
Park Ten Place, Houston, Texas 77084, whereby the holder of the obligation has
accelerated it prior to its stated maturity and such accelerated amount exceeds
$100,000.00, except as otherwise disclosed on Schedule 4.10; or (h) there shall
be a money judgment, in excess of $25,000.00 entered against Borrower which is
not fully covered by insurance or remains unvacated, unbonded, unstayed or
undischarged for more than sixty (60) days.
6.2. Upon any default, Lender, upon written notice to Borrower, may
exercise any one or more of the following remedies (which remedies shall be
cumulative to the extent permitted by law): (a) terminate any further obligation
of Lender hereunder (including any obligation to make further loans); (b)
declare the remaining unpaid principal balances of the Note, plus all accrued
but unpaid interest thereon, plus all other amounts due from Borrower hereunder,
immediately due and payable in full without notice or demand, whereupon such
shall become due and payable; (c) exercise any other right or remedy which may
be available to it under applicable law; or (d) require the Borrower to purchase
from Lender, and Borrower shall have the obligation to purchase from Lender
("Put") any, or all, or less than all, of any shares of common stock issued by
Borrower and owned by Lender at the price of $ 0.01 per share. Upon a default
any proceeds received from Borrower shall be applied by Lender to the
obligations, in the order of application as Lender shall elect.
7. NOTICES; CHANGES.
Notices, requests or other communications required hereunder to be sent to
either party shall be in writing and shall be by: (a) United States first class
mail, postage prepaid, and addressed to the other party at the address set forth
above (or to such other address as such party shall have designated by proper
notice), effective five days after deposit; (b) by personal or overnight
delivery, effective upon receipt.
8. GOVERNING LAW.
This Loan Agreement shall be governed and construed in accordance with the
laws of the State of California without giving effect to the principles of
conflict of laws thereof.
9. DISPUTE RESOLUTION.
9.1. Any controversy or claim between or among the parties arising out of
or relating to this Loan Agreement or any related agreements or instruments
("Subject Documents"), including any claim based on or arising from an alleged
tort, shall be submitted to and determined by arbitration before one (1)
arbitrator who shall be an attorney admitted to practice law in the state of
California, in accordance with Title 9 of the U.S. Code and the Commercial
Arbitration Rules of the American Arbitration Association ("AAA") then in
effect, and shall be held in the county of San Francisco, CA. All statutes of
limitations which would otherwise be applicable shall apply to any arbitration
proceeding under this subparagraph 9.1. Judgment upon the award rendered may be
entered in any court having jurisdiction. This subparagraph 9.1 shall apply only
if, at the time of the proposed submission to AAA, none of the obligations to
Lender described in or covered by any of the Subject Documents are secured by
real property collateral or, if so secured, all parties consent to such
submission.
9.2. If the controversy or claim is not submitted to arbitration as
provided and limited in Section 9.1, but becomes the subject of a judicial
action, any party may elect to have all decisions of fact and law determined by
a referee in accordance with applicable state law. If such an election is made,
the parties shall designate to the court a referee or referees selected under
the auspices of the AAA in the same manner as arbitrators are selected in
AAA-sponsored proceedings. The referee, or presiding referee of the panel, shall
be an active attorney or retired judge. Judgment upon the award rendered shall
be entered in the court in which such proceeding was commenced.
9.3. Except as provided herein, no provision of, or the exercise of any
rights under, Section 9.1, shall limit the right of any party to exercise self
help remedies such as setoff, or to obtain provisional or ancillary remedies
such as injunctive relief or the appointment of a receiver from a court having
jurisdiction before, during or after the pendency of any arbitration. The
institution and maintenance of an action for judicial relief or pursuit of
provisional or ancillary remedies or exercise of self help remedies shall not
constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitrators.
9.4. The parties understand and agree the arbitration will be their
exclusive form of resolving disputes between them regarding the issues covered
by this Agreement. BOTH PARTIES EXPRESSLY WAIVE THEIR ENTITLEMENT, IF ANY, TO
HAVE CONTROVERSIES BETWEEN THEM DECIDED BY A JURY OR COURT OF LAW.
10. MISCELLANEOUS.
This Loan Agreement or any part hereof, may not be assigned by Borrower
without the written consent of Lender and shall be binding upon and inure to the
benefit of the parties hereto, their legal representatives, permitted successors
and assigns. This Loan Agreement and/or the note or any part thereof may be
assigned by Lender without the consent of Borrower. No amendment hereunder shall
be effective unless in writing signed by the parties hereto and no waiver
hereunder shall be effective unless in writing, signed by the party to be
charged. No failure to exercise, no delay in exercising, and no single or
partial exercise on the part of Lender of any right, remedy, or power hereunder,
shall operate as a waiver thereof or preclude Lender from exercising any other
right, remedy or power hereunder. Any provision of this Loan Agreement or the
Note which is unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability, without
invalidating the remaining provisions hereof or of the note. The
representations, warranties, obligations and indemnities of Borrower herein
shall survive the termination of this Loan Agreement to the extent required for
their full observance and performance. The obligation of each comaker (if any)
of this Loan Agreement or the Note shall be primary, joint and several and each
such comaker hereby irrevocably consents to any extension of time of payments
and/or the execution of any refinancing or restructuring agreements relative to
this Loan Agreement or the Note. In the event Borrower fails to meet any
obligation of it hereunder, Lender may at its option satisfy such obligation and
Borrower shall reimburse Lender on demand therefor. The captions in this Loan
Agreement are for convenience only and shall not define or limit any of the
terms hereof. This Loan Agreement may be executed in counterparts and all said
counterparts taken together shall be deemed to constitute one and the same
instrument.
THIS LOAN IS SECURED BY THE TERMS OF THAT CERTAIN SECURITY AGREEMENT OF
EVEN DATE BY AND BETWEEN BORROWER AND LENDER HEREUNDER, ATTACHED HERETO AS
EXHIBIT C.
IN WITNESS WHEREOF, the parties hereto have duly executed this Loan
Agreement as of the date first above written. Borrower acknowledges that this
Loan Agreement shall not be effective until accepted by Lender at its address
above.
LENDER: BORROWER:
IMATRON INC. POSITRON CORPORATION
By: /s/ S. Lewis Meyer By: /s/ Gary B. Wood
----------------------------- --------------------------------
Its: President/CEO Its: Chief Executive Officer
----------------------------- ---------------------------------
Attest: Attest:
By: /s/ Gary H. Brooks By: /s/ Howard R. Baker
----------------------------- --------------------------------
Its: CFO Its: Executive Vice President
---------------------------- -------------------------------
EXHIBIT 10.59
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:
(a) The affirmative covenants of Buyer as described in Section 10
herein.
(b) 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.
4.1. Restrictions. The Shares are transferable only pursuant to (a) a
public offering registered under the Securities Act of 1933, as amended (the
"Securities Act"), (b) Rule 144 (or any similar rule then in effect) adopted
under the Securities Act, if such rule is available, and (c) subject to the
conditions elsewhere specified in this Section 4, any other legally available
means of transfer.
4.2. Each certificate representing Shares will be endorsed with the
following legend:
(a) 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."
(b) 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.
4.3. 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, (a) in accordance with Section 4.2(a) hereof,
(b) 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 (c) 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:
5.1. 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.
5.2. 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.
5.3. Financial Statements. Attached hereto as Exhibit A are: (a) 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 (b) 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 (i)
are true and correct and in accordance with the books and records of Seller,
(ii) present fairly the financial condition of Seller at the balance sheet dates
and the results of its operations for the periods therein specified, and (iii)
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.
5.4. 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.
5.5. 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.
5.6. 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.
5.7. 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.
5.8. 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.
5.9. 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.
5.10. 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.
5.11. 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:
6.1. 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 (a)
registration under the Securities Act and any applicable state securities laws,
or (b) an exemption from the requirements of the Securities Act and applicable
state securities laws.
6.2. 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.
6.3. 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.
6.4. 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.
7.1. 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.
7.2. 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.
7.3. 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.
7.4. 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.
7.5. 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.
7.6. 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.
7.7. Board Resignations. (a) 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. (b) 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.
8.1. 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.
8.2. 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.
8.3. 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:
9.1. 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.
9.2. 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.
9.3. Furnishing of Financial Statements and Information. Seller will
deliver to Buyer:
(a) 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;
(b) 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;
(c) 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
(d) at least 20 days prior to the earlier of (i) 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 (ii) 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.
9.4. 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:
10.1. 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.
10.2. 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.
10.3. 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: (a) 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 (b) 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
(c) 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 (d) 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:
12.1. Rights to Registration. (a) 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 (i)
promptly give written notice to Buyer of its intention to file such registration
statement and (ii) 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. (b) 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: (i) 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; (ii) 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 (iii) 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.
12.2. 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.
12.3. 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.
12.4. 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.
12.5. 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. (a) 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. (b) 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
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.
IN WITNESS WHEROF, the parties execute this Agreement as of the date
first written above.
SELLER: BUYER:
POSITRON CORPORATION IMATRON INC.
By: /s/ Gary B. Wood By: /s/ S. Lewis Meyer
Its: Chief Executive Officer Its: President/CEO
ATTEST: ATTEST:
By: /s/ Howard R. Baker By: /s/ Gary H. Brooks
Its: Executive Vice President Its: CFO
EXHIBIT A
TO LOAN AGREEMENT
PROMISSORY NOTE
U.S.$500,000.00 May 1, 1998
San Francisco, California
The undersigned POSITRON CORPORATION, a corporation organized and validly
existing under the laws of the State of Texas, for value received, hereby
unconditionally promises to pay to the order of IMATRON INC. (the "Payee") at
389 Oyster Point Blvd., So. San Francisco, CA 94080, in lawful money of the
United States of America and in immediately available funds, the principal
amount of FIVE HUNDRED THOUSAND U.S. DOLLARS, or, if less, the aggregate unpaid
principal amount of all Loans (as more fully shown on the grid attached hereto
and made a part hereof), with interest on the principal amount hereof remaining
from time to time unpaid at such interest rates and payable at such times as
provided in the Loan Agreement. Notwithstanding the foregoing, Borrower hereby
authorizes Lender to record and adjust, on the grid attached hereto, the
principal amount of Loans, principal payments and balances by Borrower under the
Loan Agreement.
This Note evidences Loans by the Payee to the undersigned pursuant to the
Loan Agreement between the undersigned and the Payee dated as of April ____,
1998 (the "Loan Agreement") as from time to time may be amended, restated,
replaced, supplemented, substituted for or renewed, and the holder of this Note
is entitled to the benefits thereof. Each term defined in the Loan Agreement and
not otherwise defined herein shall have the same definition when used herein.
The principal hereof (together with any accrued but unpaid interest) shall
become forthwith due and payable as provided in the Loan Agreement. Payments
hereunder not made when due shall bear interest as provided in the Loan
Agreement. Rights of Borrower, if any, to prepay the Note are set forth in the
Loan Agreement.
All payments made pursuant to the terms of this Note shall be made free and
clear of, and without deduction for, withholding, setoff or counterclaim of any
kind.
Neither the failure on the part of the holder of this Note in exercising
any right or remedy nor any single or partial exercise or the exercise of any
other right or remedy shall operate as any waiver. No amendment hereunder shall
be effective unless in writing signed by the undersigned and holder of this Note
and no waiver hereunder shall be effective unless in writing, signed by the
party to be charged. The undersigned hereby waives demand for payment,
presentment, protest and notice of any kind in connection with the delivery,
acceptance, performance, default or enforcement of this Note and hereby consents
to any extensions of time, renewals, releases of any party to this Note, waivers
or modifications that may be granted or consented to by the holder of this Note
in respect of the time of payment or any other matter. Anything contained in
this Note to the contrary notwithstanding, in the event that any payment of
interest hereunder shall exceed the legal limit, such amount in excess of such
limit shall be deemed a payment of principal hereunder.
The terms and provisions hereof shall inure to the benefit of, and be
binding upon, the respective successors and assigns of the undersigned and
Payee. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF CALIFORNIA WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT
OF LAWS THEREOF.
IN WITNESS WHEREOF, the undersigned has caused this Promissory Note to be
executed by its authorized representative, who certifies that he has all
necessary authority on behalf of the undersigned to execute this Promissory Note
and bind the undersigned to the terms hereof.
POSITRON CORPORATION
By:
--------------------------------
Its:
-------------------------------
ATTEST: By:
--------------------------------
Its:
-------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Positron
Corporation's consolidated condensed statements of income and consolidated
condensed balance sheets and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000844985
<NAME> Positron Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<EXCHANGE-RATE> 1
<CASH> 160
<SECURITIES> 0
<RECEIVABLES> 1480
<ALLOWANCES> 1227
<INVENTORY> 408
<CURRENT-ASSETS> 952
<PP&E> 2419
<DEPRECIATION> 1704
<TOTAL-ASSETS> 1667
<CURRENT-LIABILITIES> 6535
<BONDS> 0
0
1620
<COMMON> 51
<OTHER-SE> (6784)
<TOTAL-LIABILITY-AND-EQUITY> 1667
<SALES> 1129
<TOTAL-REVENUES> 3526
<CGS> 2543
<TOTAL-COSTS> 7457
<OTHER-EXPENSES> 190
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 334
<INCOME-PRETAX> (4455)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4455)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4455)
<EPS-PRIMARY> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
