U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ___________ to ___________
Commission file number: 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
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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of September 30, 1998: 5,159,592
<PAGE>
POSITRON CORPORATION
TABLE OF CONTENTS
Form 10-QSB for the quarter ended September 30, 1998
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of December 31, 1997 and
September 30, 1998 F-1
Statements of Operations for the three and
nine months ended September 30, 1998 and 1997 F-2
Condensed Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 F-3
Selected Notes to Financial Statements F-4
Item 2. Management's Discussion and Analysis of F-10
Financial Condition and Results of Operation
PART II - OTHER INFORMATION
Item 1. Legal Proceedings F-14
Item 6. Exhibits and Reports on Form 8K
Signature Page F-16
Exhibit 27 - Financial Data Schedule F-17
<PAGE>
<TABLE>
POSITRON CORPORATION
BALANCE SHEETS
--------------------
(In thousands, except share data)
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------
(Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 145 $ 160
Accounts receivable, net 110 253
Inventories 331 408
Prepaid expenses 24 131
-------- --------
Total current assets 610 952
Plant and equipment, net 464 715
-------- --------
Total assets $ 1,074 $ 1,667
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable, trade $ 1,327 $ 1,573
Accrued liabilities 3,281 3,205
Note payable to an affiliate 767 767
Other note payable 1,136 930
Unearned revenue 60 60
-------- --------
Total current liabilities 6,571 6,535
-------- --------
Other liabilities 600 245
-------- --------
Commitments and contingencies
Stockholders' deficit:
Series A Preferred Stock: $1.00 par value;
8% cumulative, convertible, redeemable;
$1.00 par value; 5,450,000 shares authorized;
1,564,403 and 1,594,999 shares issued and
outstanding at September 30, 1998 and December 31,
1997, respectively 1,564 1,595
Series B Preferred Stock: $1.00 par value,
cumulative, convertible, redeemable; 25,000
shares authorized, issued and outstanding at
September 30, 1998 and December 31, 1997 25 25
Common stock: $0.01 par value; 15,000,000
shares authorized, 5,159,592 and 5,128,990
shares issued and outstanding at September 30,
1998 and December 31, 1997, respectively 52 51
Additional paid-in capital 42,221 42,191
Accumulated deficit (49,944) (48,960)
Treasury stock: 60,156 shares at cost (15) (15)
-------- --------
Total stockholders' deficit (6,097) (5,113)
-------- --------
Total liabilities and stockholders'
deficit $ 1,074 $ 1,667
======== ========
<FN>
Note: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
See accompanying notes.
</FN>
F-1
</TABLE>
<PAGE>
<TABLE>
POSITRON CORPORATION
STATEMENTS OF OPERATIONS
------------------------
(In thousands, except share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Fee per scan $ 147 $ 229 $ 454 $ 437
Service and component 153 431 933 1,321
----------- ----------- ----------- -----------
Total revenues 300 660 1,387 1,758
----------- ----------- ----------- -----------
Costs of sales and services:
Fee per scan 29 39 89 117
Service, warranty and component 108 221 286 500
----------- ----------- ----------- -----------
Total costs of sales and
services 137 260 375 617
----------- ----------- ----------- -----------
Gross profit 163 400 1,012 1,141
----------- ----------- ----------- -----------
Operating expenses:
Research and development -- 421 18 1,037
Selling and marketing -- 230 16 572
General and administrative 840 673 1,734 1,921
----------- ----------- ----------- -----------
Total operating expenses 840 1,324 1,768 3,530
----------- ----------- ----------- -----------
Loss from operations (677) (924) (756) (2,389)
----------- ----------- ----------- -----------
Other income (expenses):
Other expense -- 8 -- (93)
Interest expense (67) (53) (228) (243)
----------- ----------- ----------- -----------
Total other expense (67) (45) (228) (336)
----------- ----------- ----------- -----------
Net loss $ (744) $ (969) $ (984) $ (2,725)
=========== =========== =========== ===========
Basic and dilutive net loss
per common share $ (0.14) $ (0.19) $ (0.19) $ (0.57)
=========== =========== =========== ===========
Weighted average common
shares outstanding 5,144,291 5,111,292 5,139,191 4,794,107
=========== =========== =========== ===========
<FN>
Note: The Company's financial statements include no additional elements of comprehensive income. Accordingly, comprehensive income
and net income are identical.
See accompanying notes
</FN>
F-2
</TABLE>
<PAGE>
<TABLE>
POSITRON CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30, September 30,
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (984) $(2,725)
Adjustment to reconcile net loss to net
cash used in operating activities 763 2,340
------- -------
Net cash used in operating
activities (221) (385)
------- -------
Cash flows from investing activities:
Capital expenditures, net -- 3
------- -------
Net cash used in investing
activities -- 3
------- -------
Cash flows from financing activities:
Proceeds from other notes payable 568 --
Repayment of other notes payable (362) --
Proceeds from conversion of warrants
to common stock -- 3
------- -------
Net cash provided by (used in)
financing activities 206 3
------- -------
Net decrease in cash and cash equivalents (15) (379)
Cash and cash equivalents, beginning
of year 160 382
------- -------
Cash and cash equivalents, end of period $ 145 $ 3
======= =======
<FN>
See accompanying notes
</FN>
F-3
</TABLE>
<PAGE>
POSITRON CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
1. Basis of Presentation
The accompanying unaudited interim financial statements have been
prepared in accordance with generally accepted accounting principles and
the rules of the U.S. Securities and Exchange Commission, and should be
read in conjunction with the audited financial statements and notes
thereto contained in the Company's Annual Report of Form 10-KSB for the
year ended December 31, 1997. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of financial position and the results of operations for
the interim periods presented have been reflected herein. The results of
operations for interim periods are not necessarily indicative of the
results to be expected for the full year. Notes to the financial
statements which would substantially duplicate the disclosure contained
in the audited financial statements for the most recent fiscal year ended
December 31, 1997, as reported in the Form 10-KSB, have been omitted.
2. Company Operations
Since its inception Positron Corporation (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 year ended December 31, 1997 and the nine months ended September
30, 1998 were $4,455,000 and $984,000, respectively. The Company has an
accumulated deficit of $49,711,000 at September 30, 1998. Due to the
sizable selling prices of the Company's systems and the limited number
of systems sold or placed in service each year, the Company's revenues
have fluctuated significantly year to year.
At September 30, 1998, the Company had cash and cash equivalents in the
amount of $145,000 compared to $160,000 at December 31, 1997. During
1997 and the first nine months of 1998, the Company was unable to meet
certain obligations as they came due. As a result of the Company's
liquidity problem, 1997 salary payments to certain management level
employees totaling approximately $600,000 were unpaid at September 30,
1998.
Additionally, the Company currently has no shares of its Common Stock
available for issuance and all other authorized shares have either been
issued or reserved for issuance in respect of outstanding options and
warrants or convertible securities. The lack of such available shares
significantly restricts the Company's ability to raise capital through
the issuance of additional equity securities. While the Company believes
that its shareholders will approve an increase in the number of
authorized shares of Common Stock at its Annual Meeting of Shareholders,
no assurance can be given that such increase in authorized shares will
be approved by the Company's shareholders.
F-4
<PAGE>
3. Net Loss Per Share
Net loss per common share for the three and nine months ended September
30, 1998 and 1997 have been computed by dividing net loss by the weighted
average number of shares of Common Stock outstanding during these
periods.
4. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets or liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
5. Income Tax
The difference between the Federal statutory income tax rate and the
Company's effective income tax rate is primarily attributable to
increases in valuation allowances for deferred tax assets relating to
net operating losses.
6. Imatron Transaction
In May 1998, the Company entered into an agreement (the "Imatron
Transaction") with Imatron, Inc. ("Imatron"), whereby Imatron will
acquire a majority ownership of the Company. In conjunction with the
execution of definitive agreements, Imatron began making working capital
advances available to the Company up to $500,000 (subsequently revised by
oral agreement to $750,000) in order to enable it to meet a portion of
its current obligations. As of September 30, 1998, the Company had
borrowed $568,000. The loan bears interest at 1/2% over the prime rate,
is due March 1, 2000 (with interest being payable monthly), and is
secured by all of the Company's assets.
F-5
<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 September 30, 1998 the
Company would have been obligated to issue nine million shares of common
stock. The Company will receive a nominal cash payment of $100 from
Imatron in payment for the shares.
In addition to providing limited working capital financing, Imatron has
agreed to support the Company's marketing program particularly with
regard to Imatron's affiliate, Imatron Japan, Inc. by agreeing to make,
after the share issuance closing date, all reasonable efforts to cause
the placement of 10 POSICAM(TM) systems over the next three years. The
Company recently shipped a POSICAM(TM) system to Imatron Japan as the
first delivery under a three-year distribution agreement entered into
last year. Imatron Japan is a major distributor for Imatron's Ultrafast
CT and for the equipment of certain other high technology companies.
Imatron has a 24 percent minority interest in Imatron Japan.
Imatron has also agreed to help facilitate the recapitalization of the
Company to support its re-entry into the medical imaging market by using
its best efforts after the share issuance closing date to arrange for
additional third-party equity financing for the Company over an
eighteen-month period in an aggregate amount of not less than $8,000,000.
There can be no assurances, however, that any such sales will actually be
consummated or that Imatron will be able to successfully assist the
Company in raising additional capital.
Consummation of the issuance of shares to Imatron is conditioned upon,
among other things (a) the resignation of each officer of the Company,
(b) the resignation of at least three of the four current directors of
the Company and the appointment of Imatron's nominees to fill such
vacancies, and (c) shareholder approval of an amendment to the Company's
Articles of Incorporation to increase its authorized common stock to at
least 100,000,000 shares. The Company anticipates that the share issuance
to Imatron will close immediately after the Annual Meeting if the
required shareholder approval is obtained.
F-6
<PAGE>
In connection with the above transactions, the Company, Imatron and two
current lenders, Uro-Tech, Ltd. ("Uro-Tech") and ProFutures Bridge
Capital Fund, L.P. ("ProFutures"), entered into certain agreements
whereby (a) ProFutures waived all past defaults and extended the maturity
of its loan ( with a current balance of approximately $570,000) to
December 5, 1998, in return for a $50,000 payment, the issuance of
warrants to purchase 1,150,000 shares of 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 stock
at $0.25 per share), and minimum loan repayments of $50,000 for each of
the months of April, May, June and July 1998, $100,000 for the month of
August 1998 and $50,000 for each of the months of September, October and
November 1998 (b) Imatron agreed to subordinate its loan to ProFuture's
loan, (c) Uro-Tech agreed to subordinate its loan (with a current balance
of approximately $767,000 plus accrued interest payable of approximately
$286,000 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 the Company's debt to both ProFutures and Imatron. Consistent with
the oral amendment to the Imatron Agreement, the Company and ProFutures
have amended their agreements to provide further waivers of any past
defaults and have further extended the maturity of the ProFutures Loan to
December 5, 1998 and minimum loan repayments of $50,000 for each of the
months of September, October and November 1998, leaving a balance at
December 5, 1998 of approximately $400,000. Imatron agreed to continue to
subordinate its loan to the ProFutures Loan, and Uro- Tech, 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, plus proceeds from a service contract currently being
negotiated with a third party, 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 an 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.
F-7
<PAGE>
If the Imatron Transaction is not completed, or if the Imatron
Transaction is completed and Imatron is unsuccessful in its efforts to
raise capital for the Company, management believes the Company will be
unable to continue as a going concern and that the Company may be forced
to seek protection under the Federal Bankruptcy laws.
7. Contingencies
The City of Houston has filed suit, and judgment has been entered,
against the Company for delinquent taxes in the amount of approximately
$240,000. The balance is fully accrued at September 30, 1998.
The Company is obligated to pay royalties of 3% of the gross revenue from
sales, uses, leases, licensing or rentals of POSICAM systems, 1% each to
a director of the Company and two other unrelated entities. During the
years ended December 31, 1997 and 1996 the Company incurred royalties of
$134,000 and $42,000, respectively, based upon system sales and
adjustments to royalties.
The Company's royalties were reduced to the 3% level based upon
consideration, provided to two of the payees, under consulting agreements
and promissory notes. However, the consulting agreements provide that if
the Company defaults in its payment obligations thereunder, then the
payees would be entitled to receive regrant of the royalties that they
previously released. In April 1998, the Company received a demand letter
from one of the payees alleging default under his consulting agreement in
1997 and demanding regrant of an additional 1% royalty interest. Although
the Company has not received a demand from the second payee, the Company
believes that a payment default may have occurred under his consulting
agreement and that as a result thereof, he may be entitled to the regrant
of an additional 0.5% royalty interest. The Company anticipates
initiating settlement discussions with both payees concerning the alleged
payment defaults. The Company is unable to predict the outcome of such
discussions at this time; however, the Company recorded an adjustment of
approximately $100,000 during 1997 in recognition of the additional
royalties it may owe. If the parties fail to reach a settlement, one
payee will be entitled to receive an aggregate 2% royalty and the second
payee will be entitled to receive an aggregate 1.5% royalty, resulting in
an increase of the Company's royalty obligations from 3% to 4.5%. Such
increase in royalty obligations could have a material adverse effect on
the Company's future financial performance.
F-8
<PAGE>
Arbitration procedures have been initiated against the Company in China
involving a dispute with respect to a POSICAMTM system. The Company
entered into a contract with a Chinese company in September 1996 to
provide the company with a POSICAMTM system. The Chinese company provided
the Company with a down payment of approximately $300,000 and agreed to
provide the company with a letter of credit for the remaining purchase
price, which letter of credit would be fundable upon shipment of the
POSICAMTM system. The Company utilized the down payment to purchase the
beginning inventory for the system and began construction of the system.
The Chinese company, however, failed to provide the Company with the
letter of credit and the Company, because of its severe financial
difficulties, was unable to complete and deliver the system without such
additional funds. The Chinese company has demanded the return of its
deposit and, on September 8, 1998, a notice of arbitration concerning the
sales contract dispute was issued to the Company by the China
International Economic and Trade Arbitration Commission, Shanghai
Commission. The Company believes that the claims raised by the Chinese
company are without merit and intends to vigorously defend its interests.
It is not possible at this time to predict the outcome of this
proceeding, although a ruling unfavorable to the Company could have a
material adverse effect on the Company's business and financial
performance.
8. Comprehensive Income
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income,
which requires a company to display an amount representing comprehensive
income as part of the company's basic financial statements. Comprehensive
income includes such items as unrealized gains or losses on certain
investment securities and certain foreign currency translation
adjustments. The Company's financial statements include none of the
additional elements that affect comprehensive income. Accordingly,
comprehensive income and net income are identical.
F-9
<PAGE>
POSITRON CORPORATION
(Form 10-QSB for the nine months ended September 30, 1998)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
unaudited financial statements and related notes thereto included in this
quarterly report and in the audited Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") contained in the Company's 10-KSB for the year ended December 31, 1997.
Certain statements in the following MD&A are forward looking statements. Words
such as "expects", "anticipates", "estimates" and similar expressions are
intended to identify forward looking statements. Such statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties are set forth below and under
"Information Regarding and Factors Affecting Forward Looking Statements".
Comparison of the Results of Operations for the three months ended September 30,
1998 and 1997.
During the three months ended September 30, 1998, the Company continued
to experience deterioration in its financial condition; however, the Company's
net loss decreased $225,000 from ($969,000) for the three months ended September
30, 1997 to ($744,000) for the three months ended September 30, 1998. This
decrease in net loss is primarily the result of significant staff reductions and
efforts to curtail costs.
The Company generated no revenue from system sales during the three
months ended September 30, 1998 or 1997. Fee per scan revenue decreased $82,000
from $229,000 during the three months ended September 30, 1997 to $147,000 for
the three months ended September 30, 1998 due primarily to fewer number of scans
being performed by Buffalo Cardiology during the three months ended September
30, 1998. In addition, there was a decrease in service and component sales
revenue of $278,000 during the same period due to less service work performed
during the three months ended September 30, 1998. This reduction in service work
is directly attributable to staff reductions and normal fluctuations in service.
Gross profit during the three months ended September 30, 1998 was
$163,000 compared to $400,000 for the three months ended September 30, 1997.
This decrease in gross profit of $237,000 is due primarily to lower fee per scan
and service and component revenue during the three months ended September 30,
1998.
F-10
<PAGE>
Total operating expense decreased approximately $484,000 or 36% from
$1,324,000 for the three months ended September 30, 1997 to $910,000 for the
three months ended September 30, 1998. The decrease primarily results from
significant staff reductions and related reductions in research and development
and selling and marketing costs during the three months ended September 30,
1998.
Interest expense increased from $53,000 for the three months ended
September 30, 1997 to $67,000 for the three months ended September 30, 1998 due
primarily to changes in the Company's average debt level.
Comparison of the Results of Operations for the nine months ended
September 30, 1998 and 1997.
During the nine months ended September 30, 1998, the Company continued to
experience deterioration in its financial condition; however, the Company's net
loss decreased $1,741,000 from ($2,725,000) for the nine months ended September
30, 1997 to ($984,000) for the nine months ended September 30, 1998. This
decrease in net loss is primarily the result of significant staff reductions and
efforts to curtail costs.
The Company generated no revenue from system sales during the first nine
months of 1998 or 1997. Fee per scan revenue increased $17,000 from $437,000
during the first nine months of 1997 to $454,000 for the first nine months of
1998 due primarily to a greater number of scans being performed by Buffalo
Cardiology during the nine months ended September 30, 1998. In addition, there
was a decrease in service and component sales revenue of $388,000 during the
same period due to less service work performed during the nine months ended
September 30, 1998. This reduction in service work is directly attributable to
staff reductions and normal fluctuations in service.
Gross profit during the first nine months of 1998 was $1,012,000 compared
to $1,141,000 for the nine months ended September 30, 1997. This decrease in
gross profit of $129,000 is due primarily to lower service and component revenue
during the nine months ended September 30, 1998.
Total operating expense decreased approximately $1,762,000 or 50% from
$3,530,000 for the nine months ended September 30, 1997 to $1,838,000 for the
nine months ended September 30, 1998. The decrease primarily results from
significant staff reductions and related reductions in research and development
and selling and marketing costs during the nine months ended September 30, 1998.
Interest expense decreased from $243,000 for the nine months ended
September 30, 1997 to $228,000 for the nine months ended September 30, 1998 due
primarily to changes in the Company's average debt level in the first nine
months of 1998 as compared to the first nine months of 1997.
F-11
<PAGE>
Financial Condition
Since its inception the Company has been unable to sell POSICAM(TM)
systems at quantities sufficient to be profitable. Consequently, the Company has
sustained substantial losses. Net losses for the year ended December 31, 1997
and the nine months ended September 30, 1998 were ($4,455,000) and ($984,000),
respectively. At September 30, 1998, the Company had an accumulated deficit of
approximately $49,944,000. Due to the sizable prices of the Company's systems
and the limited number of systems sold or placed in service each year, the
Company's revenues have fluctuated significantly year to year.
At September 30, 1998, the Company had cash and cash equivalents in the
amount of $145,000 compared to $160,000 at December 31, 1997. Throughout much of
1997 and the first nine months of 1998, the Company has been unable to meet
certain of its obligations as they came due. As a result of the Company's
liquidity problem, 1997 salary payments and other benefits to certain management
level employees totaling approximately $600,000 were unpaid at September 30,
1998.
The Company's only current plan with regard to its liquidity problems is
to attempt to complete the Imatron transaction discussed in Selected Notes to
the Financial Statements. If the Imatron Transaction is not completed, or if the
Imatron Transaction is completed and Imatron is unsuccessful in its efforts to
raise capital for the Company, management believes the Company may be unable to
continue as a going concern and the Company may be forced to seek protection
under the Federal Bankruptcy laws.
The Company currently has no shares of Common Stock available for
issuance and all authorized shares have either been issued or reserved for
issuance in respect of outstanding options and warrants or convertible
securities. The lack of such available shares significantly restricts the
Company's ability to raise additional capital through the sale of equity
securities. The Company believes that its shareholders will approve an increase
in the number of authorized common shares at its Annual Meeting; however, no
assurance can be given that such additional shares will be authorized in
adequate time to allow the Company to issue such equity securities.
Impact of the 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.
F-12
<PAGE>
The Company has performed only a preliminary assessment of the Year 2000
issue using a broad overview and management's current understanding of its
information and non-information systems. None of the detailed tasks necessary to
properly assess the Year 2000 issue (such as direct coordination with vendors,
customers and manufacturers) have been performed.
Based on a preliminary assessment, the Company believes that no
significant modifications to its computer software or hardware will be required
and that its existing computer systems (including information systems,
non-information systems using date sensitive embedded chips and its POSICAMTM
systems) will function properly with respect to dates in the year 2000 and
thereafter. Based upon such preliminary assessment, the Company also currently
believes that costs to modify the Company's existing computer hardware and
software systems in regard to the Year 2000 issue will not be significant.
However, the Year 2000 issue is extremely complex and the costs to properly
assess its impact on the Company and to correct associated problems may be very
significant.
Based on the Company's preliminary assessment of its relationships with
significant suppliers and major customers to understand the extent to which the
Company is vulnerable to any failure by third parties to remedy their own Year
2000 issues, management believes that the Company does not have significant
exposure with respect to third parties. However, the Company's preliminary
assessments indicated that the worst case scenario with regard to the Year 2000
issue would be delays in receiving parts and materials needed for manufacturing
and delays by customers in making payments for fee-per-scan and maintenance
services. In the Company's current financial position, such circumstances could
threaten the Company's continued existence. Due to the Company's current severe
liquidity problems, the Company has not had the financial resources to perform a
complete assessment of Year 2000 issues, assess the potential cost or develop
any contingency plan with regard to Year 2000 issues that may arise. The Company
is unable to predict at the current time, when and to what extent it may further
pursue its assessment of potential Year 2000 issues and the development of any
contingency plans in respect thereof. If the Company is able to obtain necessary
financial resources, a complete assessment of the Year 2000 issues facing the
Company will likely be completed in the first half of 1999.
F-13
<PAGE>
Information Regarding and Factors Affecting Forward Looking Statements
The Company is including the following cautionary statement in this
Quarterly Report on Form 10-QSB 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 be accomplished.
PART II - OTHER INFORMATION
ITEM 1 - 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. The balance is fully accrued at September 30, 1998.
Arbitration procedures have been initiated against the Company in China
involving a dispute with respect to a POSICAMTM system. The Company entered into
a contract with a Chinese company in September 1996 to provide the company with
a POSICAMTM system. The Chinese company provided the Company with a down payment
of approximately $300,000 and agreed to provide the company with a letter of
credit for the remaining purchase price, which letter of credit would be
fundable upon shipment of the POSICAMTM system. The Company utilized the down
payment to purchase the beginning inventory for the system and began
construction of the system. The Chinese company, however, failed to provide the
Company with the letter of credit and the Company, because of its severe
financial difficulties, was unable to complete and deliver the system without
such additional funds. The Chinese company has demanded the return of its
deposit and, on September 8, 1998, a notice of arbitration concerning the sales
contract dispute was issued to the Company by the China International Economic
and Trade Arbitration Commission, Shanghai Commission. The Company believes that
the claims raised by the Chinese company are without merit and intends to
vigorously defend its interests. It is not possible at this time to predict the
outcome of this proceeding, although a ruling unfavorable to the Company could
have a material adverse effect on the Company's business and financial
performance.
F-14
<PAGE>
The Company previously entered into agreements with Nizar A. Mullani and
K. Lance Gould under which such individuals 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 may be
entitled to receive an aggregate 2% royalty and Dr. Gould may 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 5 - OTHER INFORMATION
Because of a recent Securities and Exchange Commission change to Rule
14a-4(c)(1) promulgated under the Securities Exchange Act of 1934, the Company's
management will have discretionary authority with respect to proxies submitted
to the 1999 Annual Meeting of Shareholders on any matter which the Company does
not receive notice of by February 25, 1999. This rule change does not affect the
deadline set forth in Rule 14a-8 for including a shareholder proposal in the
board of directors' solicitation of proxies, and a shareholder proposal must be
received by the Company no later than December 11, 1998 in order to be included
in the board of directors' solicitation of proxies.
F-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
POSITRON CORPORATION
(Registrant)
Date: November 13, 1998 /s/ Gary B. Wood, Ph.D.
-------------------------------------
Chief Executive Officer
(Duly Authorized Officer and
Principal Accounting Officer)
F-16
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<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>
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<NAME> Positron Corporation
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