Proxy Statement
Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
POSITRON CORPORATION
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which the transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
POSITRON CORPORATION
1304 Langham Creek Drive
Suite 310
Houston, Texas 77084
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held _______, 1998
Notice is hereby given that the Annual Meeting of Shareholders of
Positron Corporation, a Texas corporation (the "Company"), will be held at
___________________________________________________________, on ____________, at
____ _.m., __________________ (the "Annual Meeting") time for the following
purposes:
To elect one director;
To consider and act upon a proposal of the Board of
Directors to amend the Articles of Incorporation to
increase the authorized Common Stock, par value $.01
per share, of the Company from 15,000,000 shares to
100,000,000 shares;
To ratify the designation of Ham, Langston &
Brezina, L.L.P. as independent auditors for the
fiscal year ended December 31, 1997; and
To transact such other business as may properly come
before the meeting or any adjournment(s) thereof.
The accompanying Proxy Statement contains information regarding, and a
more complete description of, the items of business to be considered at the
meeting.
Only shareholders of record at the close of business on _______, 1998,
are entitled to notice of, and to vote at, the Annual Meeting of Shareholders or
any adjournment(s) thereof.
You are cordially invited and urged to attend the meeting, but if you
are unable to attend, you are requested to sign and date the accompanying proxy
and return it promptly in the enclosed self-addressed envelope. If you attend
the meeting, you may vote in person, if you wish, whether or not you have
returned your proxy. In any event, a proxy may be revoked at any time before it
is exercised.
By Order of the Board of Directors
Gary B. Wood
Secretary
Houston, Texas
_______________, 1998
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE ANNUAL MEETING
IN ORDER THAT THE PRESENCE OF A QUORUM MAY BE ASSURED. IF YOU DO NOT EXPECT TO
ATTEND THE MEETING, PLEASE COMPLETE AND SIGN THE ACCOMPANYING FORM OF PROXY AND
RETURN IT IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES.
<PAGE>
POSITRON CORPORATION
1304 Langham Creek Drive
Suite 310
Houston, Texas 77084
PROXY STATEMENT
For
ANNUAL MEETING OF SHAREHOLDERS
To Be Held ____________, 1998
This Proxy Statement is sent to shareholders of Positron Corporation, a
Texas corporation (the "Company"), in connection with the solicitation of
proxies by the Board of Directors of the Company (the "Board of Directors") for
use at the Annual Meeting of Shareholders of the Company, and any adjournment(s)
thereof (the "Annual Meeting"), to be held on _______________, 1998, at _____
_.m., Central Daylight Time at __________________________, for the purposes set
forth in the accompanying Notice of Annual Meeting of Shareholders. Solicitation
of proxies may be made in person or by mail, telephone, or telegraph by
directors, officers, and regular employees of the Company. The Company may also
request banking institutions, brokerage firms, custodians, nominees and
fiduciaries to forward solicitation materials to the beneficial owners of shares
of common stock, par value $.01 per share (the "Common Stock"), of the Company
held of record by such persons, and the Company will reimburse the forwarding
expenses. The cost of solicitation of proxies will be paid by the Company.
The approximate date on which this Proxy Statement and the enclosed
form of proxy are first being sent to shareholders is _________________, 1998.
The Annual Report to Shareholders covering the Company's fiscal year
ended December 31, 1997 ("Fiscal 1997"), including audited financial statements,
and the Current Report on Form 10-QSB for the Period Ended June 30, 1998, are
enclosed herewith.
1
<PAGE>
THE ANNUAL MEETING
Date, Time, and Place of the Annual Meeting
The Annual Meeting will be held on _______________, 1998, at ______.m.,
Central Daylight Time at ___________________.
Record Date and Shares Entitled to Vote
The voting securities of the Company are shares of its Common Stock and
its Series A 8% Cumulative Convertible Redeemable Preferred Stock (the "Series A
Preferred Stock"). Holders of shares of Common Stock are each entitled to one
vote on each matter to be voted upon. Voting with the Common Stock, each share
of Series A Preferred Stock entitles the holder thereof to the number of votes
equal to the number of shares of Common Stock (including fractional shares) into
which such shares of Series A Preferred Stock could be converted. On August 20,
1998, there were 5,159,592 shares of Common Stock outstanding and 1,564,403
shares of Series A Preferred Stock outstanding which could be converted into
1,564,403 shares of Common Stock. Only shareholders of record at the close of
business on ______________, 1998 are entitled to notice of, and to vote at, the
Annual Meeting. Cumulative voting is not permitted in the election of directors
of the Company.
Revocation of Proxy
Any shareholder returning the accompanying proxy may revoke such proxy
at any time prior to its exercise: (i) by giving written notice to the Company
of such revocation; (ii) by voting in person at the Annual Meeting; or (iii) by
executing and delivering to the Company a later dated proxy.
Voting of Proxies
Proxies in the accompanying form, if properly executed and returned,
will be voted at the Annual Meeting in accordance with the instructions thereon.
Any proxy upon which no instructions have been indicated with respect to any of
the following matters will be voted as follows: (i) "FOR" the election of the
person named in this Proxy Statement as the Board of Directors' nominee for
election to the Board of Directors; (ii) "FOR" the proposal to amend the
Articles of Incorporation to increase the shares of authorized Common Stock;
(iii) "FOR" the ratification of the appointment of Ham, Langston & Brezina,
L.L.P., as independent auditors for the fiscal year ending December 31, 1998
("Fiscal 1998"); and (iv) in accordance with the discretion of the holders of
such proxies with respect to any other business that properly comes before the
shareholders at the Annual Meeting. The Board of Directors knows of no matters,
other than those stated above, to be presented for consideration at the Annual
Meeting. If, however, other matters properly come before the Annual Meeting, it
is the intention of the persons named in the accompanying proxy to vote such
proxy in accordance with their judgment on any such matters. The persons named
in the accompanying proxy may also, if it is deemed to be advisable, vote such
proxy to adjourn the Annual Meeting from time to time.
Quorum and Voting
The presence, in person or by proxy, of the holders of a majority of
the outstanding shares of Common Stock and Series A Preferred Stock entitled to
vote is necessary to constitute a quorum at the Annual Meeting. If a quorum is
not present or represented at the Annual Meeting, the shareholders entitled to
vote thereat, present in person or represented by proxy, have the power to
adjourn the Annual Meeting from time to time, without notice other than an
announcement at the Annual Meeting, until a quorum is present or represented. At
any such adjourned Annual Meeting at which a quorum is present or represented,
any business may be transacted that might have been transacted at the original
Annual Meeting.
Abstentions may be specified on all proposals (other than the election
of directors) and will be counted towards a quorum. With respect to the election
of directors, votes may be cast in favor or withheld.
2
<PAGE>
Brokers who hold shares in street name for customers are required to
vote those shares in accordance with instructions received from the beneficial
owners. In addition, brokers are entitled to vote on certain items, such as the
election of directors, the ratification of auditors and other "discretionary
items" even when they have not received instructions from beneficial owners.
Brokers are not permitted to vote (a "broker non-vote") for "non-discretionary"
items without specific instructions from the beneficial owners. Broker non-votes
will be counted as shares as to which voting power has been withheld by the
beneficial owner and, therefore, as shares not entitled to vote on the item as
to which there is a broker non-vote.
Vote Required
Directors are elected by a plurality of the voting power of the Common
Stock and the Series A Preferred Stock voting together as one class that is
represented in person or by proxy and entitled to vote at the Annual Meeting,
and votes that are withheld will be excluded entirely from the vote and will
have no effect. The proposal to amend the Articles of Incorporation requires the
affirmative vote of two-thirds of the outstanding voting power of the Common
Stock and the Series A Preferred Stock voting together as one class. The
proposal to ratify the selection of auditors requires the affirmative vote of a
majority of the voting power of the Common Stock and the Series A Preferred
Stock voting together as one class that is present in person or by proxy and
entitled to vote. Abstentions with respect to the amendment of the Articles of
Incorporation and ratification of the auditors will have the same effect as a
negative vote.
Solicitation of Proxies and Expenses
Solicitation of proxies may be made in person or by mail, telephone, or
telegraph by directors, officers, and regular employees of the Company. The
Company may also request banking institutions, brokerage firms, custodians,
nominees, and fiduciaries to forward solicitation materials to the beneficial
owners of Common Stock of the Company held of record by such persons, and the
Company will reimburse the forwarding expenses. The cost of solicitation of
proxies will be paid by the Company.
Dissenters' Rights
Under Texas law, the holders of Common Stock will not be entitled to
any dissenters' rights in connection with the increase of authorized shares of
Common Stock available for issuance, as described in Proposal Two below.
PROPOSAL ONE -- ELECTION OF DIRECTOR
Pursuant to the Company's bylaws, the Board of Directors has fixed the
number of directors at four. All directors' terms expire this year as of the
election of directors at the Annual Meeting. The term of office for each
director shall be for the ensuing year or until a successor is elected and
qualified, and will expire concurrently with the election of directors at the
1999 Annual Meeting. Immediately prior to the Annual Meeting, it is anticipated
that the Board of Directors will amend the Company's bylaws to decrease the
number of directors to three. At that time, K. Lance Gould, M.D., John H.
Laragh, M.D. and Ronald B. Schilling, Ph.D., will resign as directors, leaving
Gary B. Wood, Ph.D. as the sole remaining director of the Company.
In June 1998, the Company entered into an agreement (the "Imatron
Agreement") with Imatron Inc. of South San Francisco ("Imatron"), whereby
Imatron will acquire a majority ownership of the Company (the "Imatron
Transaction"). The Imatron Agreement contemplates that, effective upon its
consummation, Dr. Wood will appoint S. Lewis Meyer, Ph.D, and Gary H. Brooks to
fill the vacancies on the Board of Directors. Dr. Meyer and Mr. Brooks are
nominees of Imatron. For a detailed description of the Imatron Transaction, see
"Proposal to Amend the Company's Articles of Incorporation and to Increase the
Number of Authorized Shares of Common Stock Available for Issuance -- Terms of
the Imatron Transaction."
3
<PAGE>
The proposal at the Annual Meeting will be to reelect Gary B. Wood,
Ph.D. as the sole director of the Company. Dr. Wood, 48, has served as director
and Chairman of the Board of Directors of the Company since April 1990. From
October 1, 1994 to December 31, 1995 and since February 17, 1997, he has acted
as President and Chief Executive Officer of the Company pending the selection of
a new President and Chief Executive Officer. Upon the resignation of Dr. Werner
J. Haas in February 1997, Dr. Wood again assumed the duties of President and
Chief Executive Officer pending the selection of a new President and Chief
Executive Officer. He is President of Concorde Financial Corporation, a private
investment management and consulting firm which he founded in 1981 and is the
founder, chairman and a principal shareholder of OmniMed Corporation, a venture
capital investment firm founded in 1986. Dr. Wood is also the founder and
Chairman of Uro-Tech Management Corporation (a wholly owned subsidiary of
OmniMed) founded in 1983. Both OmniMed and Uro-Tech specialize in investing in
the biotechnology and healthcare industries. Dr. Wood holds a B.S. degree and an
M.S. degree in Electrical Engineering (with special emphasis in Biomedical
Instrumentation), and an interdisciplinary Doctorate of Philosophy from Texas
Tech University. Certain of the entities controlled by Dr. Wood are principal
shareholders of the Company.
Should Dr. Wood become unable or unwilling to accept nomination or
election, it is intended that the persons acting under the proxy will vote for
the election, in his stead, of such other person as the Board of Directors may
recommend. The Board of Directors has no reason to believe that Dr. Wood will be
unable or unwilling to serve if elected.
The Board of Directors recommends a vote FOR the election to the Board
of Gary B. Wood, Ph.D.
PROPOSAL TWO -- AMENDMENT TO THE COMPANY'S
ARTICLES OF INCORPORATION TO INCREASE THE NUMBER
OF AUTHORIZED SHARES OF COMMON STOCK AVAILABLE FOR ISSUANCE
General
The Company, under its Articles of Incorporation, is presently
authorized to issue 10,000,000 shares of Preferred Stock, par value $1.00 per
share, and 15,000,000 shares of Common Stock, par value $.01 per share. As of
the date of this proxy, there are 1,564,403 shares of Series A Preferred Stock
outstanding, 25,000 shares of Series B 8% Cumulative Convertible Redeemable
Preferred Stock (the "Series B Preferred Stock") outstanding, 5,159,592 shares
of Common Stock outstanding and 9,840,408 shares of Common Stock reserved for
issuance.
The Amendment
The proposed amendment would amend the first paragraph of Article IV of
the Articles of Incorporation to read:
The total number of shares of all classes of stock that the
corporation shall be authorized to issue is 110,000,000 shares, of
which 10,000,000 shares of the par value of $1.00 per share shall be a
class designated as Preferred Stock("Preferred Stock"); and 100,000,000
shares of the par value $.01 per share shall be designated Common Stock
("Common Stock").
The proposed amendment to the Company's Articles of Incorporation would
increase the total number of authorized shares of Common Stock from 15,000,0000
shares to 100,000,000 shares. Shares of the Common Stock do not have preemptive
rights
Reasons for the Amendment and Interests of Certain Persons
The Company does not have sufficient authorized but unissued shares to
cover all of its current commitments. In order to complete the sale of the
Series B Preferred Stock, the Company was required to enter into a series of
forbearance agreements (the "Forbearance Agreements"). Pursuant to the
Forbearance Agreements, holders of options
4
<PAGE>
and warrants that are exercisable for shares of Common Stock have agreed not to
exercise or convert, as applicable, into Common Stock any of their securities
until the Company has amended its Articles of Incorporation to increase its
authorized Common Stock by at least 2,500,000 shares or such greater number of
shares of Common Stock so that a sufficient number of shares of Common Stock are
available to permit the conversion or exercise of their securities. In
connection with the Imatron Transaction discussed below, the Company will
require a minimum of 9,000,000 shares of Common Stock. For a more detailed
discussion of the Imatron Transaction and the securities to be issued in
connection therewith, see "-- Terms of the Imatron Transaction." The Board of
Directors believes that having such additional shares available for issuance to
meet possible future development and financing requirements would be
advantageous to the Company, and avoid the expense and delay of calling a
special meeting of the shareholders to secure authorization each time a specific
need arises. Among the purposes for which such additional authorized but
unissued shares of stock could be used would be the acquisition of complimentary
technology, employee compensation, fund expansion and the raising of funds for
general corporate purposes. Other than the Imatron Transaction, no other
specific transactions are currently contemplated that would result in the
issuance of additional shares.
Vote Required and Recommendation for Approval of the Proposed Amendment to the
Company's Articles of Incorporation.
To be approved by the Company's shareholders, the amendment to the
Articles of Incorporation must receive the approval of holders of at least
two-thirds of the voting power of the Common Stock and the Series A Preferred
Stock voting together as one class. The enclosed form of proxy provides a means
for shareholders to vote for the amendment, to vote against the amendment or to
abstain from voting on the amendment. Each properly executed proxy received in
time for the Annual Meeting will be voted as specified therein. If a shareholder
executes and returns a proxy but does not specify otherwise, the shares
represented by such shareholder's proxy will be voted "FOR" the amendment.
Recommendations of the Board of Directors and Reasons for the Amendment to the
Articles of Incorporation
The Board of Directors determined that the Imatron Agreement is in the
best interest of the Company's securityholders and recommends that the Company's
shareholders vote in favor of ratifying and approving the amendment to the
Articles of Incorporation.
Terms of the Imatron Transaction
The Imatron Agreement
The following is a summary of the material terms of the Imatron
Agreement. This summary does not purport to be complete and is qualified in its
entirety by reference to the Imatron Agreement, a copy of which has been filed
as Exhibit 10.59 to the Company's Annual Report on Form 10-KSB for the Period
Ended December 31, 1997. Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to them in the Imatron Agreement.
Shareholders are urged to read the Imatron Agreement in its entirety.
In June 1998, the Company entered into the Imatron Agreement, whereby
Imatron will acquire control of the Company. In conjunction with the execution
of definitive agreements, Imatron began making working capital advances
available to the Company up to $500,000 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 the
Company's assets.
Under the terms of the agreement, Imatron will acquire ownership of 51%
of the outstanding Common Stock of the Company on a fully-diluted and
as-if-converted basis, excluding out-of-the-money warrants and options
determined at the time of issuance of shares of Common Stock to Imatron. If such
shares were issued to Imatron as of June 30, 1998, the Company would have been
obligated to issue approximately 9,000,000 shares of Common Stock. The Company
will receive a nominal cash payment of $100 from Imatron in payment for the
shares of Common Stock.
5
<PAGE>
In addition to providing limited working capital financing, Imatron has
agreed to support the Company's marketing program, particularly with regard to
Imatron's affiliate, Imatron Japan, Inc. ("Imatron Japan") by agreeing to take,
after the share issuance closing date, all reasonable efforts to cause the
placement of 10 POSICAM(TM) positron emission tomography ("PET") cameras over
the next three years. The Company recently shipped a POSICAM(TM) PET camera to
Imatron Japan as the first delivery under a three-year distribution agreement
entered into last year. Imatron Japan is a major distributor for Imatron's
Ultrafast CT and several other high tech companies. Imatron has a 24% minority
interest in Imatron Japan. Imatron has also agreed to help facilitate the
recapitalization of the Company to support its re-entry into the medical imaging
market by using its best efforts after the share issuance closing date to
arrange for additional third-party equity financing for the Company over an
18-month period in an aggregate amount of not less than $8,000,000. There can be
no assurances, however, that any such sales will actually be consummated or that
Imatron will be able to successfully assist the Company in raising additional
capital.
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 directors of the Company and the
appointment of Imatron's nominees to fill such vacancies, and (c) shareholder
approval of an amendment to the Company's Articles of Incorporation to increase
its authorized common stock to at least 100,000,000 shares of Common Stock. The
Company anticipates that the share issuance to Imatron will close immediately
after the Annual Meeting if the required shareholder approval is obtained.
In connection with the above transactions, the Company, Imatron and two
current lenders to the Company, Uro-Tech, Ltd. 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 (the
"ProFutures 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 Common Stock at $0.25 per share (in addition to the issuance
of previously bargained for warrants to purchase an additional 100,000 shares of
Common Stock at $0.25 per share), and minimum loan repayments of $50,000 for
each of the months of April, May, June and July 1998 and $100,000 for each of
the months of August and September 1998, (b) Imatron agreed to subordinate its
loan to the 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 the Company's debt to both ProFutures and Imatron.
Accounting Treatment
Consummation of the Imatron Transaction will be accounted for as a
purchase for financial accounting purposes. For presentation of certain
anticipated effects of the accounting treatment on the consolidated financial
position and results of operations of the Company after giving effect to
consummation of the Imatron Agreement, see "Unaudited Pro Forma Financial
Statements of Operations."
PROPOSAL TO RATIFY SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
On April 7, 1998, Coopers & Lybrand L.L.P. (the "Former Accountants"),
by means of a letter addressed to the Chairman of the Board and Chief Executive
Officer of the Company informed the Company that it had resigned as the
Company's independent auditors. The resignation arises from the Former
Accountants' desire to terminate its relationship with the Company because of
the Company's current financial condition.
There was no adverse opinion or disclaimer of opinion, or qualification
or modification as to uncertainty, audit scope, or accounting principles for
either of the Company's past two years except, (i) the Former Accountants'
report on the financial statements of the Company as of and for the years ended
December 31, 1996 contained a separate paragraph stating that "the Company has
suffered recurring losses from operations and has a net capital deficiency that
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
6
<PAGE>
outcome of this uncertainty" and (ii) the financial statements of and for the
fiscal year ended December 31, 1997 have not been audited.
This decision to resign was made by the Former Accountants and was
neither approved nor disapproved by the Board of Directors.
During the two most recent fiscal periods ended December 31, 1997 and
December 31, 1996 and from December 31, 1997 until April 7, 1998, (i) there were
no disagreements between the Company and the Former Accountants on any matter of
accounting principles or practice, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
the Former Accountants would have caused it to make reference thereto in its
report and (ii) there were no reportable events as defined in paragraph
304(a)(1)(v) of Regulation S-K promulgated under the Securities Act of 1933.
On June 26, 1998, the Company engaged Ham, Langston & Brezina, L.L.P.
("Ham Langston") as its new independent accountants as successor to the Former
Accountants.
The Board of Directors has selected Ham Langston to act as independent
auditors for the fiscal year ending December 31, 1998, subject to shareholder
approval. If the shareholders do not ratify this appointment, the appointment of
other independent accountants will be considered by the Board of Directors.
Ham Langston has advised the Company that it will have a representative
in attendance at the Annual Meeting with the opportunity to make a statement, if
such representative desires to do so, and to respond to appropriate questions
presented at the Annual Meeting.
The ratification of the appointment of Ham Langston requires the
approval of a majority of the outstanding shares of Common Stock that are
present at the Annual Meeting in person or by proxy and entitled to vote
thereon.
The Board of Directors recommends a vote FOR the proposal to ratify the
appointment of Ham Langston as independent accountants for the Company for
Fiscal 1998.
DIRECTORS AND EXECUTIVE OFFICERS
Information Regarding Current Directors
Name Age Position
Gary B. Wood, Ph.D. 48 Director, Interim President, Chief
Executive Officer and Secretary
K. Lance Gould, M.D. 57 Director
John H. Laragh, M.D. 69 Director
Ronald B. Schilling, Ph.D. 56 Director
Gary B. Wood, Ph.D., 48, has served as director and Chairman of the
Board of Directors of the Company since April 1990. From October 1, 1994 to
December 31, 1995 and since February 17, 1997, he has acted as President and
Chief Executive Officer of the Company pending the selection of a new President
and Chief Executive Officer. Upon the resignation of Dr. Werner J. Haas in
February 1997, Dr. Wood again assumed the duties of President and Chief
Executive Officer pending the selection of a new President and Chief Executive
Officer. He is President of Concorde Financial Corporation, a private investment
management and consulting firm which he founded in 1981 and is the founder,
chairman and a principal shareholder of OmniMed Corporation, a venture capital
investment firm founded in
7
<PAGE>
1986. Dr. Wood is also the founder and Chairman of Uro-Tech Management
Corporation (a wholly owned subsidiary of OmniMed) founded in 1983. Both OmniMed
and Uro-Tech specialize in investing in the biotechnology and healthcare
industries. Dr. Wood serves as a director of Harken Energy Corporation. Dr. Wood
holds a B.S. degree and an M.S. degree in Electrical Engineering (with special
emphasis in Biomedical Instrumentation), and an interdisciplinary Doctorate of
Philosophy from Texas Tech University. Certain of the entities controlled by Dr.
Wood are principal shareholders of the Company.
Information Regarding Directors to Fill Vacancies Upon Consummation of the
Imatron Transaction
If the Imatron Transaction is consummated, it is anticipated that Dr.
Wood will appoint the following two Imatron designees to fill the vacancies on
the Board of Directors.
S. Lewis Meyer, 53, was appointed President, Chief Executive Officer
and Director of Imatron in June 1993. From April 1991 until joining Imatron, he
was Vice President, Operations of Otsuka Electronics (U.S.A.) Inc., Fort
Collins, Colorado, a manufacturer of clinical magnetic resonance systems and
analytical nuclear magnetic resonance spectrometers. From August 1990 to April
1991, he was a founding partner of Medical Capital Management, a company engaged
in providing consulting services to medical equipment manufacturers, imaging
service providers and related medical professionals. Mr. Meyer serves as a
director of BSD Medical Corp. and Finet Holdings Corp., which are publicly held
companies engaged in the design and manufacture of medical hypothermia equipment
and electronic real estate and mortgage banking services, respectively. Mr.
Meyer also serves on the National Board of Directors of the American Electronics
Association. Mr. Meyer received a B.S. degree in Physics from the University of
the Pacific, Stockton, California, in 1966, a M.S. degree in Physics from Purdue
University in 1968 and a Ph.D. in Physics from Purdue University in 1971.
Gary H. Brooks, 50, was appointed Vice President of
Finance/Administration, Chief Financial Officer and Secretary of Imatron in
December 1993. Prior to joining Imatron, Mr. Brooks was Chief Financial Officer
and Director for five years at Avocet, a privately held, sports electronics
manufacturer located in Palo Alto, California. Prior thereto, he had
progressively more responsible positions in accounting and finance at several
Fortune 500 companies, including Ford, Rockwell, Bendix and ITT. Mr. Brooks
received his B.A. in Zoology from the University of California, Berkeley, in
1971 and an M.B.A. in Finance and Accounting from the University of California,
Los Angeles in 1973.
Meetings and Committees of the Board of Directors
The Board of Directors held four meetings in Fiscal 1997, and each
director attended at least 75% of the aggregate of (i) the total number of
meetings of the Board of Directors held during the period for which he served as
a director and (ii) the total number of meetings held by all committees of the
Board of Directors on which he served.
The Board of Directors does not have a standing nominating committee or
a committee performing similar functions. Nominees to the Board of Directors are
selected by the entire Board of Directors.
The Board of Directors has a Compensation Committee (herein so called),
which during Fiscal 1997 was composed of Dr. Wood. The Compensation Committee
was instituted in December 1993 following the consummation of the Company's
initial public offering. The Compensation Committee establishes remuneration
levels for officers of the Company, reviews management organization and
development, reviews significant employee benefit programs and has the authority
to establish and administer executive compensation programs, including bonus
plans, stock option and other equity-based programs, deferred compensation plans
and any other cash or stock incentive programs, including the 1994 Incentive and
Non-statutory Option Plan (the "1994 Plan"). The Compensation Committee held no
meetings during Fiscal 1997.
The Board of Directors has an Audit Committee (herein so called), which
during Fiscal 1997 was composed of Dr. Wood. Audit Committee was instituted in
December 1993 following the consummation of the Company's initial public
offering. The Audit Committee recommends to the Board of Directors the
independent public accountants to be selected to audit the Company's annual
financial statements and approves any special assignments given to such
8
<PAGE>
accountants. The Audit Committee also reviews the planned scope of the annual
audit and the independent accountants' letter of comments and management's
responses thereto, any major accounting changes made or contemplated and the
effectiveness and efficiency of the Company's internal accounting staff. The
Audit Committee will consist solely of non-employee directors. The Audit
Committee held no meetings during Fiscal 1997.
Executive Officers
The executive officers of the Company are elected by the Board of
Directors and serve at the Board's discretion. The sole executive officer of the
Company is Gary B. Wood, Ph.D, who serves as Interim President and Chief
Executive Officer.
Dr. Wood is currently a director of the Company. See "Proposal One --
Election of Director" above for additional information regarding Dr. Wood.
Executive Compensation
The following tables set forth certain information with respect to
compensation paid by the Company during the years ended 1997, 1996 and 1995 and
certain information regarding stock options issued to certain of the individuals
who have acted during 1997 in the capacity of executive officers of the Company.
<TABLE>
Summary Compensation Table
<CAPTION>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted All Other
Other Annual Stock Options/ Compensa-
Name and Principal Fiscal Salary Bonus Compensation Award(s) SARs LTIP tion(1)
Position Year ($) ($) ($) ($) (#) Payouts($) ($)(x)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary B. Wood Ph.D. 1997 33,333 -- -- --
President and Chief 1996 13,750 19,800 98,000(2) -- -- --
Executive Officer 1995 165,000 28,333 86,083(3) -- 53,636(4) -- --
(October 1, 1994 to December
31, 1995 and February 1, 1997
to present)
Werner J. Haas, Ph.D. 1997 8,021
(Resigned as CEO 1996 204,800 16,600(5)
effective February 1, 1997) 1995 N/A 2,339
<FN>
(1) These amounts represent the Company's matching contributions under its 401(k) plan. See "--401(k) Plan."
(2) Represents (a) $80,000 in consulting fees paid to Dr. Wood and (b) $18,000 in directors fees.
(3) Represents (a) $73,333 in consulting fees paid to Dr. Wood and (b) $12,750 in directors fees.
(4) Represents options to acquire 3,636 shares of Common Stock awarded
under the 1994 Plan in 1995 and 50,000 options to acquire Common Stock
issued in connection with Mr. Wood's acting as interim Chief Executive
Officer during 1995.
(5) These amounts represent the Company's reimbursement of certain of Dr.
Haas' living expenses during the period he served as President and
Chief Executive Officer of the Company.
</FN>
9
</TABLE>
<PAGE>
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<CAPTION>
(a) (b) (c) (d) (e)
Number of Unexercised Value of Unexercised In-the-
Options/SARs at Fiscal Money Options/SARs at
Shares Value Year-End Fiscal Year-End
Acquired On Realized Exercisable Unexercisable Exercisable Unexercisable
Name Exercise(#) ($) (#) (#) ($) ($)
- -------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gary B. Wood, Ph.D. 0 0 71,440 0 0 (1) 0 (1)
Werner J. Haas Ph.D.
<FN>
(1) Based upon the exercise price in effect on December 31, 1997 and the closing price of $0.29 for the Common Stock on
December 31, 1997, as reported on the Nasdaq National Market System.
</FN>
</TABLE>
Compensation of Directors
The Company reimburses its directors for their reasonable expenses
associated with attending meetings of the Board of Directors. The Company also
compensates each director who is not a full time employee of the Company in the
amount of $12,500 per year. The Chairman of the Board also receives an
additional annual retainer of $2,000 per year and each director who is not a
full time employee of the Company and who is a member of a committee of the
board receives an additional $500 per committee meeting attended, not to exceed
$2,500 during any calendar year. Any director who is not a full time employee of
the Company and who is serving as the chairman of a committee of the board
receives an additional $2,000 per year for such services. For purposes of the
above described director compensation, Dr. Wood, while serving as interim
President and Chief Executive Officer, has not been considered a full time
employee of the Company. Due to the financial liquidity problems the Company is
experiencing, no cash payments were made to any of the directors during 1996 or
1997 for their services as directors of the Company. As of June 30, 1998,
approximately $540,000 was owed to Directors.
Pursuant to the 1994 Plan, each non-employee director is automatically
granted a one-time stock option to purchase 10,500 shares of Common Stock at the
time such person is elected to the Board of Directors. In addition, pursuant to
the 1994 Plan, each non-employee director upon his reelection at the Annual
Meeting of Shareholders will automatically receive an option to purchase a
number of shares of Common Stock equal to the quotient derived by dividing
$15,000 by the fair market value of Common Stock on the date of the grant. All
options so granted under the 1994 Plan to non-employee directors are
automatically granted as of the first business day following the date such
person is elected or reelected, as applicable, as a director and have an
exercise price no less than the fair market value of Common Stock determined as
of the business day preceding the date of the grant.
One-third of the options granted to non-employee directors under the
1994 Plan are exercisable as of the date of the grant, an additional one-third
of such options becomes exercisable upon the first anniversary of such date and
the remaining one-third of such options become exercisable upon the second
anniversary of such date. If a non-employee director ceases to be a director for
any reason other than as a result of death, disability or not being reelected as
a director (in the case where such person is willing to serve as a director but
such person has not been renominated for election or, if renominated, the
shareholders failed to reelect such person as a director) then that director's
option will become void to the extent it is not then exercisable and the
portion, if any, of the option that is exercisable at such time will remain
exercisable for the lesser of the remaining term of the option or one year. In
addition, if any non-employee director ceases to be a director as a result of
death, disability or not being reelected as a director (in the case where such
person is willing to serve as a director but such person has not been
renominated for election or, if renominated, the shareholders failed to reelect
such person as a director) then the option held by that director to the extent
not then exercisable, will become fully vested and exercisable and the options
will remain exercisable for a period of the lesser of the remainder of the term
of the option or one year.
10
<PAGE>
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.
On February 18, 1997, Dr. Haas informed the Board of Directors of the
Company that he considered his contract to have been terminated by the Company
without cause as a result of the Company's failure to pay the February 15, 1997
payroll to any of its management level employees and, more specifically, to him.
Dr. Haas has demanded that the Company pay him all past due salary as well as
the nine months' severance pay specified in his employment agreement if his
contract is determined to have been terminated without cause. Additionally, Dr.
Haas resigned his position as a member of the Board of Directors. The Company
has indicated to Dr. Haas that it believes no amounts are due him under his
employment agreement. As of August 15, 1997, the Company is unable to predict
the outcome of the disagreement between Dr. Haas and the Company.
Dr. Wood assumed the duties of President and Chief Executive Officer
upon the resignation of Dr. Haas.
1987 Stock Option Plan
The Company has in effect an Amended and Restated 1987 Stock Option
Plan (the "1987 Plan") which was adopted by the Board of Directors and
shareholders of the Company effective June 1, 1987, and which was amended on
March 13, 1991, and further amended in March 1992, September 1992 and November
1993. The plan currently provides for options exercisable for up to a total of
188,522 shares of Common Stock. The 1987 Plan provides that incentive options
which satisfy the requirements of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") may be granted to executives and other key
employees (including officers who may be members of the Board of Directors) of
the Company and that nonqualified options may be granted to such directors,
executive employees and other key employees (including officers who may be
members of the Board of Directors of the Company), each as the Board of
Directors shall determine from time to time. If any options granted under the
1987 Plan expire or terminate without being exercised, the shares covered
thereby are added back to the shares reserved for issuance under the 1987 Plan.
The Compensation Committee of the Board of Directors administers the
1987 Plan. The 1987 Plan provides that options may be granted at no less than
75% of the fair market value of the Common Stock on the date of the grant (or
110% of the fair market value for options granted to participants who own 10% or
more of the Company's outstanding Common Stock).
The Compensation Committee determines, at its discretion, the persons
to be granted options, option prices, date of grant and vesting periods,
although no option may extend for longer than ten years (five years for
incentive stock options granted to 10% or greater shareholders). Payment of the
exercise price is made by check or in such other form as may be acceptable to
the Board of Directors including, under certain circumstances, the delivery of
Common Stock. No options may be granted under the 1987 Plan after June 1, 1997.
Options are not transferable by the optionee, other than by will or the
applicable laws of descent and distribution. In the event of termination of
employment, the option expires on the earlier of its stated expiration or three
months (six months in the case of the optionee's death) after termination of
employment.
11
<PAGE>
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.
On February 23, 1995, the exercise price of all outstanding options
under the 1987 Plan was amended to reflect a new exercise price of $2.625 per
share, which was the market price of the Common Stock on such date. In addition,
on such date an additional 62,500 options were awarded under the 1987 Plan at
the $2.625 exercise price leaving only 12,431 options available for future
awards under the 1987 Plan.
1994 Incentive and Non-statutory Option Plan
On June 3, 1994, the shareholders of the Company approved the 1994
Incentive and Non-statutory Option Plan (the "1994 Plan"). The 1994 Plan is an
arrangement under which certain individuals may be granted options for incentive
stock options and non-statutory stock options as described below. Subject to
adjustment as set forth in the 1994 Plan, the aggregate number of shares of the
Common Stock that may be the subject of awards is 610,833. Of the 610,833 shares
of Common Stock available under the 1994 Plan, 160,000 have been reserved for
issuance to non-employee directors. As of December 31, 1996, 345,481 options had
been granted to employees and 113,724 options had been 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 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.
12
<PAGE>
A participant is fully vested in the current value of that portion of
his or her accounts attributable to Deferral Contributions. A participant's
interest in that portion of his or her accounts attributable to Employer
Contributions is generally fully vested after five years of employment.
Distributions under the 401(k) Plan are made upon termination of employment,
retirement, disability and death. In addition, participants may make withdrawals
in the event of severe hardship or after the participant attains age fifty-nine
and one-half.
The 401(k) Plan is intended to qualify under Section 401 of the Code,
so that contributions made under the 401(k) Plan, and income earned on
contributions, are not taxable to participants until withdrawal from the 401(k)
Plan.
The Company's contributions to the 401(k) Plan for the accounts of Mr.
Haas was $0 in 1997, and $2,339 in 1996, respectively. The Company's
contributions to the 401(k) Plan on behalf of all employees in the years ended
December 31, 1997 and 1996 was $11,490 and $36,306 respectively. Dr. Wood is not
eligible to participate in the Company's 401(k) Plan.
Policy with Respect to $1 Million Deduction Limit
It is the Company's policy, where practical, to avail itself of all
proper deductions under the Code. Amendments to the Code in 1993, limit, in
certain circumstances, the deductibility of compensation in excess of $1 million
paid to each of the five highest paid executives in one year. The total
compensation of the executive officers did not exceed this deduction limitation
in Fiscal 1996, and is unlikely to exceed it in 1997.
13
<PAGE>
<TABLE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
AND COMPARATIVE PER SHARE DATA
Following are financial statements and the notes thereto of the Company
for the six months ended June 30, 1998.
POSITRON CORPORATION
BALANCE SHEETS
--------------------
(In thousands, except per share data)
June 30, December 31,
1998 1997
-------- --------
(Unaudited) (Note)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 70 $ 160
Accounts receivable, net 386 253
Inventories 331 408
Prepaid expenses 221 131
-------- --------
Total current assets 1,008 952
Plant and equipment, net 590 715
-------- --------
Total assets $ 1,598 $ 1,667
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable, trade $ 1,327 $ 1,573
Accrued liabilities 3,045 3,205
Note payable to an affiliate 767 767
Other note payable 1,152 930
Unearned revenue 60 60
-------- --------
Total current liabilities 6,351 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 June 30, 1998 and
December 31, 1997, respective 1,564 1,595
Series B Preferred Stock: $1.00 par value, cumulative, convertible
redeemable; 25,000 shares authorized, issued and outstanding at
June 30, 1998 and December 31, 1997 25 25
Common Stock: $0.01 par value; 15,000,000 shares authorized, 5,159,592
and 5,128,990 shares issued and outstanding at June 30, 1998 and
December 31, 1997, respectively 52 51
Additional paid-in capital 42,221 42,191
Accumulated deficit (49,200) (48,960)
Treasury Stock: 60,156 shares at cost (15) (15)
-------- --------
Total stockholders' deficit (5,353) (5,113)
-------- --------
Total liabilities and stockholders' deficit $ 1,598 $ 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>
14
</TABLE>
<PAGE>
<TABLE>
POSITRON CORPORATION
STATEMENTS OF OPERATIONS
------------------------
(In thousands, except share data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Fee per scan $ 199 $ 86 $ 307 $ 208
Service and component 414 391 780 889
----------- ----------- ----------- -----------
Total revenues 613 477 1,087 1,097
----------- ----------- ----------- -----------
Costs of sales and services:
Fee per scan 40 39 60 78
Service, warranty and component 91 82 178 279
----------- ----------- ----------- -----------
Total costs of sales and services 131 121 238 357
----------- ----------- ----------- -----------
Gross profit 482 356 849 740
----------- ----------- ----------- -----------
Operating expenses:
Research and development 8 141 18 616
Selling and marketing 2 143 16 343
General and administrative 399 343 894 1,247
----------- ----------- ----------- -----------
Total operating expenses 409 627 928 2,206
----------- ----------- ----------- -----------
Income (loss) from operations 73 (271) (79) (1,466)
----------- ----------- ----------- -----------
Other income (expenses):
Other expense -- (48) -- (99)
Interest expense (78) (102) (161) (191)
----------- ----------- ----------- -----------
Total other expense (78) (150) (161) (290)
----------- ----------- ----------- -----------
Net income (loss) $ (5) $ (421) $ (240) $ (1,756)
=========== =========== =========== ===========
Basic and dilutive net loss per common share $ 0.00 $ (0.09) $ (0.05) $ (0.38)
=========== =========== =========== ===========
Weighted average common shares outstanding 5,144,291 4,831,653 5,139,191 4,629,255
=========== =========== =========== ===========
<FN>
See accompanying notes.
</FN>
15
</TABLE>
<PAGE>
<TABLE>
POSITRON CORPORATION
STATEMENTS OF CASH FLOWS
------------------------
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended
June 30, December 31,
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (240) $(1,756)
Adjustment to reconcile net loss to net cash used in operating activities (72) 1,438
------- -------
Net cash used in operating activities (312) (318)
------- -------
Cash flows from investing activities:
Capital expenditures -- (44)
------- -------
Net cash used in investing activities -- (44)
------- -------
Cash flows from financing activities:
Proceeds from other notes payable, net of repayments 222 --
Proceeds from conversion of warrants to common stock -- (8)
------- -------
Net cash used in financing activities 222 (8)
------- -------
Net decrease in cash and cash equivalents (90) (370)
Cash and cash equivalents, beginning of year 160 382
------- -------
Cash and cash equivalents, end of year $ 70 $ 12
======= =======
<FN>
See accompanying notes.
</FN>
16
</TABLE>
<PAGE>
POSITRON CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
1. Basis of Presentation
The accompanying unaudited interim financial statements have been
prepared in accordance with generally accepted accounting principles
and the rules of the U.S. Securities and Exchange Commission, and
should be read in conjunction with the audited financial statements and
notes thereto contained in the Company's Annual Report of Form 10-KSB
for the year ended December 31, 1997. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for
a fair presentation of financial position and the results of Operations
for the interim periods presented have been reflected herein. The
results of Operations for interim periods are not necessarily
indicative of the results to be expected for the full year. Notes to
the financial statements which would substantially duplicate the
disclosure contained in the audited financial statements for the most
recent fiscal year ended December 31, 1997, as reported in the Form
10-KSB, have been omitted.
2. Company Operations
Since its inception the Company has been unable to sell its POSICAM
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 six months ended June 30, 1998 were
$4,455,000 and $240,000, respectively. The Company has an accumulated
deficit of $49,200,000 at June 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 June 30, 1998, the Company had cash and cash equivalents in the
amount of $70,000 compared to $160,000 at December 31, 1997. During
1997 and the first six 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 June 30, 1998.
Additionally, the Company currently has no shares of its Common Stock
available for issuance and all other authorized shares have either been
issued or reserved for issuance in respect of outstanding options and
warrants or convertible securities. The lack of such available shares
significantly restricts the Company's ability to raise capital through
the issuance of additional equity securities. While the Company
believes that its shareholders will approve an increase in the number
of authorized shares of Common Stock at its Annual Meeting of
Shareholders, no assurance can be given that such increase in
authorized shares will be approved by the Company's shareholders.
3. Net Loss Per Share
Net loss per common share for the three and six months ended June 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.
17
<PAGE>
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 June 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 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 the Company's assets.
Under the terms of the agreement, Imatron will acquire a majority
ownership of the outstanding Common Stock of the Company on a
fully-diluted and as-if-converted basis, 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 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 last year. Imatron Japan, an affiliate of Imatron, Inc. 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 will also 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 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 in the third quarter of this year
if such shareholder approval is obtained.
In connection with the above transactions, the Company, Imatron and two
current lenders, Uro-Tech, Ltd. ("Uro-Tech") and ProFutures Bridge
Capital Fund, L.P. ("ProFutures"), entered into certain agreements
18
<PAGE>
whereby (a) ProFutures waived all past defaults and extended the
maturity of its loan ( with a current balance of approximately
$706,000) to October 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 and $100,000 for each of the months of August and September
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
$260,000 at June 30, 1998) to Imatron's loan, and (d) ProFutures's 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 the Company will be
unable to continue as a going concern and that the Company's assets
will be seized by its secured creditors.
19
<PAGE>
Following are financial statements and the notes thereto of the Company
for the year ended December 31, 1997.
<TABLE>
POSITRON CORPORATION
BALANCE SHEETS
--------------------
(In thousands, except share data)
<CAPTION>
December 31,
1997 1996
-------- --------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 160 $ 382
Accounts receivable, net 253 520
Notes receivable -- 324
Inventories 408 2,633
Prepaid expenses 131 159
Other current assets -- 426
-------- --------
Total current assets 952 4,444
Plant and equipment, net 715 967
Intangible assets, net -- 106
-------- --------
Total asset $ 1,667 $ 5,517
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable, trade $ 1,573 $ 1,113
Accrued liabilities 3,205 2,654
Revolving line of credit -- 75
Note payable to an affiliate 767 663
Other note payable 930 1,335
Unearned revenue 60 267
-------- --------
Total current liabilities 6,535 6,107
-------- --------
Other liabilities 245 68
-------- --------
Commitments and contingencies
Stockholders' deficit:
Series A Preferred Stock: $1.00 par value; 8% cumulative, convertible,
redeemable; 5,450,000 shares authorized; 1,594,999 and 2,404,624
shares issued and outstanding at December 31, 1997 and 1996,
respectively 1,595 2,405
Series B Preferred Stock: $1.00 par value, 8% cumulative, convertible,
redeemable; 25,000 shares authorized, issued and outstanding at
December 31, 1997 and 1996 25 25
Common stock: $0.01 par value; 15,000,000 shares authorized,
5,128,990 and 4,312,182 shares issued and outstanding at
December 31, 1997 and 1996 51 43
Additional paid-in capital 42,191 41,374
Accumulated deficit (48,960) (44,505)
Treasury stock: 60,156 shares at cost (15) --
-------- --------
Total stockholders' deficit (5,113) (658)
-------- --------
Total liabilities and stockholders' deficit $ 1,667 $ 5,517
======== ========
<FN>
See notes to financial statements.
</FN>
20
</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
----------- -----------
Total costs of sales and services 1,499 2,098
----------- -----------
Gross profit 2,027 1,477
----------- -----------
Operating expenses:
Research and development 1,305 2,227
Selling, general and administrative 4,653 5,263
General
Total operating costs 5,958 7,490
----------- -----------
Loss from operations (3,931) (6,013)
----------- -----------
Other expenses:
Interest expenses (334) (197)
Other expense (190) (165)
----------- -----------
Total other expense (524) (362)
----------- -----------
Net loss $ (4,455) $ (6,375)
=========== ===========
Basic and dilutive net loss per common share $ (0.91) $ (1.67)
=========== ===========
Weighted average common shares outstanding 4,884,870 3,811,026
=========== ===========
<FN>
See notes to financial statements.
</FN>
21
</TABLE>
<PAGE>
<TABLE>
POSITRON CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 1997 and 1996
(In thousands, except share data)
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 -- $ -- -- -- 3,637,320 $ 36
Net loss -- -- -- -- -- --
Issuance of Series A Preferred Stock 2,641,989 2,642 -- -- -- --
Issuance of Series B Preferred Stock -- -- 25,000 25 -- --
Conversion of Series A Preferred Stock to
Common Stock (670,694) (670) -- -- 670,694 7
Conversion of Warrants to Common Stock -- -- -- -- 4,168 --
Conversion of note payable to an affiliate
to Series A Preferred Stock 433,329 433 -- -- -- --
Balance at December 31, 1996 2,404,624 2,405 25,000 25 4,312,182 43
Net loss -- -- -- -- -- --
Conversion of Series A Preferred Stock to
Common Stock (809,625) (810) -- -- 809,625 8
Conversion of Warrants to Common Stock -- -- -- -- 7,183 --
Treasury stock received upon settlement of
note receivable -- -- -- -- -- --
Balance at December 31, 1997 1,594,999 $ 1,595 25,000 $ 25 5,128,990 $ 51
========= ======= ====== ==== ========= ====
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated Treasury
Capital Deficit Stock Total
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ 39,309 $ (38,130) $ -- $ 1,215
Net loss -- (6,375) -- (6,375)
Issuance of Series A Preferred Stock 52 -- -- 2,694
Issuance of Series B Preferred Stock 1,125 -- -- 1,150
Conversion of Series A Preferred Stock to
Common Stock 663 -- -- --
Conversion of Warrants to Common Stock 8 -- -- 8
Conversion of note payable to an affiliate to
Series A Preferred Stock 217 -- -- 650
Balance at December 31, 1996 41,374 (44,505) -- (658)
Net loss -- (4,455) -- (4,455)
Conversion of Series A Preferred Stock to
Common Stock 802 -- -- --
Conversion of Warrants to Common Stock 15 -- -- 15
Treasury stock received upon settlement of note
receivable -- -- (15) (15)
Balance at December 31, 1997 $ 42,191 $ (48,960) $ (15) $ (5,113)
======== ========= ===== ========
<FN>
See notes to financial statements.
</FN>
22
</TABLE>
<PAGE>
<TABLE>
POSITRON CORPORATION
STATEMENTS OF CASH FLOWS
------------------------
(In thousands)
<CAPTION>
Year Ended December 31,
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,455) $(6,375)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 255 112
Provision for doubtful accounts and notes receivable 456 760
Provision for obsolescence of inventory 1,224 --
Provision to reduce intangible assets to net realizable value 81 --
Amortization of intangible assets 25 25
Provision for loss on exchange of system -- 1,000
Change in assets and liabilities, operating:
Decrease (increase) in accounts receivable (87) 404
Decrease in inventories 1,001 33
Decrease in prepaid expenses 26 124
Decrease (increase) in other current assets 426 (368)
Increase (decrease) in accounts payable, trade 460 (642)
Increase (decrease) in accrued liabilities 553 (233)
Increase (decrease) in revolving line of credit (75) 75
Increase (decrease) in other liabilities 177 (11)
------- -------
Net cash provided by (used in) operating activities 67 (5,096)
------- -------
Cash flows from investing activities:
Capital expenditures (3) (51)
------- -------
Net cash used in investing activities (3) (51)
------- -------
Cash flows from financing activities:
Proceeds from note payable to an affiliate 104 240
Proceeds from other notes payable -- 1,400
Repayment of other notes payable (405) (65)
Proceeds from issuance of Series A preferred stock -- 3,375
Series A preferred stock issuance costs -- (681)
Proceeds from issuance of Series B preferred stock -- 1,250
Series B preferred stock issuance costs -- (100)
Proceeds from conversion of warrants to common stock 15 8
------- -------
Net cash provided by (used in) financing activities (286) 5,427
------- -------
Net increase (decrease) in cash and cash equivalents (222) 280
Cash and cash equivalents, beginning of year 382 102
------- -------
Cash and cash equivalents, end of year $ 160 $ 382
======= =======
<FN>
See notes to financial statements.
</FN>
23
</TABLE>
<PAGE>
POSITRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. Description of Business
The Company was incorporated on December 20, 1983 in the state of Texas and
commenced commercial operations during 1986. The Company designs, manufactures,
markets and services its POSICAMTM system, advanced medical imaging devices,
utilizing positron emission tomography ("PET") technology. These systems utilize
the Company's patented and proprietary technology, an imaging technique which
assesses the biochemistry, cellular metabolism and physiology of organs and
tissues, as well as producing anatomical and structural images. Targeted markets
include medical facilities and diagnostic centers located throughout the world.
POSICAMTM systems are used by physicians as diagnostic and treatment evaluation
tools in the areas of cardiology, neurology and oncology. The Company faces
competition principally from two other companies which specialize in advanced
medical imaging equipment.
Since its inception the Company has been unable to sell its POSICAMTM systems in
sufficient quantities to be profitable. Consequently, the Company has sustained
substantial losses. Net losses for the years ended December 31, 1997 and 1996
were $4,455,000 and $6,375,000, respectively, and at December 31, 1997 the
Company has an accumulated deficit of $48,960,000. The magnitude of the selling
prices of the Company's systems and the limited number of systems sold or placed
in service each year has caused the Company's revenues to fluctuate
significantly year to year.
At December 31, 1997, the Company had cash and cash equivalents in the amount of
$160,000 compared to $382,000 at December 31, 1996. During both 1996 and 1997,
the Company was unable to meet certain obligations as they came due and the
Company's liquidity problems have become critical. As a result of the Company's
severe liquidity problem, salary payments owed to certain management level
employees totaling approximately $700,000 were unpaid at December 31, 1997.
To deal with its critical liquidity problem, in June 1998 the Company entered
into a preliminary agreement (the "Imatron Transaction") with Imatron, Inc.
("Imatron"), whereby Imatron plans to acquire a majority ownership in the
Company (See Note 15). If the Imatron Transaction is not completed or if the
Imatron Transaction is completed and Imatron is unsuccessful in its efforts to
raise capital for the Company, management believes that the Company will be
unable to continue as a going concern and that the Company's assets will be
seized by its secured creditors.
The Company currently has no shares of its Common Stock available for issuance
and all authorized shares have either been issued or reserved for issuance in
respect of outstanding options and warrants or convertible securities. The lack
of such available shares significantly restricts the Company's ability to raise
capital through the issuance of additional equity securities. While the Company
believes that its shareholders will approve an increase in the number of
authorized shares of Common Stock at its Annual Meeting of Shareholders, no
assurance can be given that such increase in authorized shares will be approved
by the Company's shareholders.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with an original maturity of three months or less.
Inventory
Inventories are stated at the lower of cost or market and include material,
labor and overhead. Cost is determined using the first-in, first-out (FIFO)
method of inventory valuation.
25
<PAGE>
Plant and Equipment
Plant and equipment are recorded at cost and depreciated for financial statement
purposes using the straight-line method over estimated useful lives of five to
seven years. Gains or losses on dispositions are included in the statement of
operations in the period incurred. Maintenance and repair cost are charged to
expense as incurred.
Intangible Assets
Intangible assets, consisting principally of patent costs, are amortized using
the straight-line method over an estimated useful life of 10 years.
Impairment of Long-Lived Assets
Periodically, the Company evaluates the carrying value of its plant and
equipment, and long-lived assets by comparing the anticipated undiscounted
future net cash flows associated with those assets to the related net book
value. As of December 31, 1997, no significant impairment was indicated.
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
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.
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.
26
<PAGE>
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
====== ======
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.
26
<PAGE>
5. Plant and Equipment
Plant and equipment at December 31, 1997 and 1996, consisted of the following:
1997 1996
------ ------
(In thousands)
Furniture and fixtures $ 327 $ 327
Computers and peripherals 775 772
Leasehold improvements 17 17
Leased assets 782 782
Machinery and equipment 518 518
------ ------
Total plant and equipment 2,419 2,416
Less accumulated depreciation (1,704) (1,449)
------ ------
$ 715 $ 967
====== ======
6. Accrued Liabilities:
Accrued liabilities at December 31, 1997 and 1996 consisted of the following:
1997 1996
------ ------
(In thousands)
Royalties $ 368 $ 234
Research grants 8 58
Warranty 1,337 1,343
Compensation 752 130
Other 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
upon maturity. The Company obtained an effective extension of the Uro-Tech Loan
in connection with the Imatron Transaction (See Note 15). The Uro-Tech Loan is
collateralized by liens and security interests encumbering most of the Company's
assets including the Company's know-how, patents and proprietary rights
pertaining to its PET technology. As part of the private placement of Series A
Preferred Stock, $650,000 of the outstanding principal balance of the Uro-Tech
Loan was converted into Series A Preferred Stock. As of December 31, 1997 and
1996, approximately $767,000 and $663,000 was payable to Uro-Tech, Ltd. In
connection with the loan from Uro-Tech, the Company granted Uro-Tech warrants to
purchase 67,500 shares of Common Stock, at an exercise price of $2.00 per share
exercisable through February 7, 2001.
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.
27
<PAGE>
Accordingly, under terms specified in the loan agreement, after November 30,
1997, the interest rate increased to 18% per annum. As of December 31, 1997 and
1996, approximately $930,000 and $1,335,000, respectively, was outstanding under
the ProFutures Loan. Subsequent to December 31, 1997, the Company was granted an
extension of the maturity of the ProFutures Loan (See Note 15). The ProFutures
Loan is collateralized by liens and security interest encumbering all of the
assets of the Company, including know-how, patents and proprietary rights
pertaining to its PET technology. In addition, the Company granted ProFutures a
ten year warrant to purchase 250,000 shares of its Common Stock at an exercise
price of $2.40 per share. At April 1, 1997 the Company was unable to repay the
loan to ProFutures and, in accordance with the ProFutures Loan, granted to
ProFutures additional warrants for the purchase of 100,000 shares of its Common
Stock at $1.84 per share. Concurrently, the exercise price of the previously
issued warrant for 250,000 shares of the Company's Common Stock at $2.40 per
share was reduced $1.84 per share.
10. Common Stock - Options and Warrants
Options
In 1987, the Company established a Common Stock option plan (the "1987 Plan")
covering directors, officers and other key employees. In November 1993, the
Company canceled all options outstanding under the 1987 Plan. In connection with
such cancellations, the board of directors authorized the reissuance of 38,522
options to purchase shares of Common Stock at 75 percent of the IPO price
following the closing of an initial public offering. Such options vested and
became exercisable on January 3, 1995. In addition, in February 1994, the board
of directors authorized the issuance of an additional 150,000 options at the
same exercise price. Options granted under the 1987 Plan expired on the earlier
of three months after termination of employment or ten years from the grant
date.
Effective June 3, 1994, the shareholders of the Company approved the 1994
Incentive and Nonstatutory Option Plan (the "1994 Plan"). The 1994 Plan, as
amended, provides for the issuance of an aggregate of 601,833 Common Stock
options to key employees, directors, and certain consultants and advisors of the
Company. The 1994 Plan also provides that the exercise price of Incentive
Options shall not be less than the fair market value of the shares on the date
of the grant. The exercise price per share of Nonstatutory options shall not be
less than the par value of the Common Stock or 50% of the fair market value of
the Common Stock on the date of grant. The 1994 Plan is administered by the
Compensation Committee of the Board of Directors. The committee has the
authority to determine the individuals to whom awards will be made, the amount
of the awards, and all other terms and conditions of the awards. As of December
31, 1997, options to purchase an aggregate of 144,389 shares of Common Stock at
a range of $2.626 - $4.125 per share, had been granted to certain key employees.
The 1994 Plan also provides that each non-employee director automatically
receives options to purchase 10,500 shares of Common Stock at the date such
individual becomes a non-employee director. Each non-employee director who is a
director on the first business day following each Annual Shareholder Meeting
also receives an option to purchase a number of shares of Common Stock having a
value of $15,000 as determined by the fair market value of the Common Stock on
the date of grant. As of December 31, 1997, options to purchase an aggregate of
163,724 shares of Common Stock at a range of $2.625-$4.125 per share had been
granted to non-employee directors. All 1994 Plan options expire within ten years
of the date of the grant.
28
<PAGE>
A summary of stock option activity is as follows:
Shares Issuable
Under Outstanding Weighted Average
Options Exercise Price
Balance at January 1, 1996 584,204 $ 2.80
Granted --
Exercised --
Forfeited (11,526) $ 2.77
-------
Balance at December 31, 1996 572,678 $ 2.80
Granted --
Exercised --
Forfeited --
-------
Balance at December 31, 1997 572,678 $ 2.80
=======
The Company has elected to apply the disclosure only requirements of Statement
of Financial Accounting No. 123, Accounting for Stock-Based Compensation ("SFAS
123") which, if fully adopted by the Company, would change the method the
Company applies in recognizing the cost of the Plan. Adoption of the cost
recognition provisions of SFAS 123 is optional and the Company has decided not
to elect those provisions. As a result, the Company continues to apply
Accounting Principles Board Opinion No. 25 ("APB 25") and related
interpretations in accounting for the measurement and recognition of the Plan's
cost.
The shares exercisable for vested options and the corresponding weighted average
exercise price was 435,436 shares and $2.80 per share at December 31, 1997 and
1996.
Following is a summary of stock options outstanding at December 31, 1997.
Options Outstanding Options Exercisable
--------------------------------------- ----------------------
Weighted Avg
Range of Remaining Term Weighted Avg Weighted Avg
Exercise Price Shares (in Years) Exercise Price Shares Exercise Price
- -------------- ------- -------------- -------------- ------- --------------
$2.625--$3.375 492,980 7.20 $2.63 376,194 $2.63
$3.376--$4.125 79,698 7.66 $3.91 59,242 $3.92
------- -------
$2.625--$4.125 572,678 7.27 $2.80 435,436 $2.80
======= =======
The Company did not grant or reprice any options during the year ended December
31, 1997 or 1996.
Under SFAS 123, compensation cost is measured at the grant based on the fair
value of the awards and is recognized over the service period, which is usually
the vesting period. The fair value of options granted during 1996 was estimated
on the date of grant using the Black Scholes option-pricing model with the
following assumptions used to calculate fair value of options awarded in 1996:
(i) average dividend yield of 0.00%; (ii) expected volatility of 83.36%; (iii)
expected life of five (5) years; and (iv) estimated risk-free interest rate,
which is different for grants awarded on different grant dates, ranging from
5.66% to 7.15%.
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)
29
<PAGE>
The effects of applying SFAS 123 in this proforma disclosure are not indicative
of future results. SFAS 123 does not apply to awards prior to 1995. Additional
awards in future years are not anticipated by the Company.
Warrants
Prior to the Company's initial public offering, the Company issued warrants to
the purchasers of the then outstanding Series E Preferred Stock (the "1993
Warrants"). Subject to adjustment for certain transactions, the 1993 Warrants,
as originally issued, were exercisable for an aggregate of 353,531 shares of
Common Stock at an exercise price of $9.90. Because of certain specified
anti-dilution provisions, the 1993 Warrants were exercisable for an aggregate of
519,394 shares of Common Stock at a purchase price of $5.60 per share as of
December 31, 1997. The 1993 Warrants are exercisable at any time until November
30, 1998 and are entitled to the benefit of adjustments in the exercise price
and in the number of shares of Common Stock or other securities deliverable upon
the exercise thereof in the event of a stock dividend, stock split,
reclassification, reorganization, consolidation, merger, sale of all
substantially all of the property of the Company, or other dilutive
transactions.
The 1993 Warrants are redeemable at the option of the Company at a price equal
to $.10 per share of the Common Stock covered by the 1993 Warrant, on 30 days
written notice, provided that the market price of the Common Stock equals or
exceeds $12.544 for the 20 consecutive trading days ending within 10 days prior
to the notice of redemption. The Company also granted the holders of the 1993
Warrants certain registration rights with respect to the 1993 Warrants and the
Common Stock for which the 1993 Warrants are exercisable.
In connection with its initial public offering, the Company issued 3,898,550
Redeemable Warrants (the "Redeemable Warrants"). The Redeemable Warrants as
originally issued were exercisable for an aggregate of 3,893,550 shares of
Common Stock at an exercise price of $8.25 per share. Because of their
anti-dilution provisions the Redeemable Warrants were exercisable for an
aggregate of 5,646,798 shares of Common Stock at a purchase price of $5.60 per
share as of December 31, 1997. The Redeemable Warrants are entitled to the
benefit of adjustment in the exercise price and in the number of shares of
Common Stock or other securities deliverable upon the exercise thereof in the
event of a stock dividend, stock split, reclassification, reorganization,
consolidation, merger, sale of all or substantially all of the property of the
Company, or other dilutive transactions. The Company has the right to reduce the
exercise price or increase the number of shares of Common Stock issuable upon
the exercise of the Redeemable Warrants.
Each Redeemable Warrant expires on December 3, 1998 (the "Expiration Date"),
subject to extension. The Company may at any time extend the Expiration Date of
all outstanding Redeemable Warrants for such increased period of time as it may
determine.
The Company has the right at any time after March 3, 1995, to redeem the
Redeemable Warrants in whole or in part for cancellation at a price of $1.25
each, by written notice to each Redeemable Warrant holder. Such notice may only
be given within 10 days following any period of 20 consecutive trading days
during which the average closing bid for the Common Stock (if then trading on
the over-the-counter market) or the 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.
30
<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 of involuntary liquidation, dissolution or winding up of the Company,
and the preferences and relative rights among each series of preferred stock.
In February, March and May of 1996, the Company issued 3,075,318 shares of
Series A 8% Cumulative Convertible Redeemable Preferred Stock $1.00 par value
("Series A Preferred Stock") and Redeemable Common Stock Purchase Warrants to
purchase 1,537,696 shares of the Company's Common Stock. The net proceeds of the
private placement were approximately $2,972,000. Each share of the Series A
Preferred Stock is immediately convertible into one share of Common Stock. Each
Redeemable Common Stock Purchase Warrant is exercisable at a price of $2.00 per
share of Common Stock. Each Redeemable Common Stock Purchase Warrant is
exercisable at a price of $2.00 per share of Common Stock. Eight percent (8%)
dividends on the Series A Preferred Stock may be paid in cash or the Series A
Preferred Stock at the discretion of the Company. The Series A Preferred Stock
is senior to the Company's Series B Preferred Stock and Common Stock in
liquidation. Holders of the Series A Preferred Stock may vote on an as if
converted basis on any matter requiring shareholder vote. While the Series A
Preferred Stock is outstanding or any dividends thereon remain unpaid, no Common
Stock dividends may be paid or declared by the Company.
31
<PAGE>
In conjunction with the issuance of the aforementioned Series A Preferred Stock,
Uro-Tech converted amounts receivable from the Company totaling $650,000 into
433,329 shares of Series A Preferred Stock and 216,671 Redeemable Stock Purchase
Warrants.
Series B Preferred Stock
In July 1996, the Company issued 25,000 shares of Series B 8% Cumulative
Convertible Redeemable Preferred Stock $1.00 par value ("Series B Preferred
Stock") and Common Stock Purchase Warrants to purchase up to 100,000 shares of
its Common Stock, par value $.01 per share. The Series B Preferred Stock plus
Common Stock Purchase Warrants sold for approximately $50.00 per share of Series
B Preferred Stock. Subject to adjustment for certain antidilution events, each
share of Series B Preferred Stock is initially convertible into 25 shares of
Common Stock and each Common Stock Purchase Warrant is exercisable for one share
of Common Stock at an exercise price of $2.00 per share. Eight percent (8%)
dividends on the Company's Series B Preferred Stock may be paid in cash or in
Series B Preferred Stock, at the discretion of the Company. The series B
Preferred Stock is junior to the Series A Preferred Stock, but senior to the
Company's Common Stock in liquidation. The Series B Preferred Stock has no
voting rights other than those afforded by law. As a class, however, the holders
of the Series B Preferred Stock may vote on matters directly affecting the
Series B Preferred Stock or mergers and/or consolidations of the Company with
another company.
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.
12. Income Taxes
The Company has incurred losses since its inception and, therefore, has not been
subject to federal income taxes. As of December 31, 1997, the Company had net
operating loss ("NOL") carryforwards for income tax purposes of approximately
$42,100,000 which expire in 1999 through 2012. Since the closing of the
Company's IPO resulted in more than a 50 percent change in shareholder ownership
percentages, the provisions of Section 382 of the Internal Revenue Code limit
the Company's ability to utilize the NOL carryforwards to reduce future taxable
income and tax liabilities. Additionally, because United States tax laws limit
the time during which NOL carryforwards may be applied against future taxable
income, the Company will not be able to take full advantage of its NOL for
federal income tax purposes should the Company generate taxable income.
32
<PAGE>
The composition of deferred tax assets and the related tax effects at December
31, 1997 and 1996 are as follows:
December 31,
1996 1997
------- -------
(in thousands)
Deferred tax assets:
Net operating losses $14,620 $13,169
Allowance for doubtful accounts and notes
receivable 527 367
Inventory basis difference 767 860
Accrued liabilities and reserves 454 456
Valuation allowance (16,330) (14,816)
------- -------
Total deferred tax assets 38 36
------- -------
Deferred tax liabilities:
Property and equipment 16 18
Other 22 18
------- -------
Total deferred tax liability...... 38 36
------- -------
Net deferred tax asset (liability) $ -- $ --
======= =======
The difference between the income tax benefit in the accompanying statement of
operations and the amount that would result if the U.S. Federal statutory rate
of 34% were applied to pre-tax loss is as follows (amounts in thousands):
1997 1996
-------------- --------------
Amount % Amount %
------ ---- ------ ----
Benefit for income tax at
federal statutory rate $1,514 34.0 $2,167 34.0
Increase in valuation allowance (1,514 (34.0) (2,167) (34.0)
------ ---- ------ ----
$ -- -- $ -- --
====== ==== ====== ====
13. 401(k) Plan
The Positron Corporation 401(k) Plan and Trust (the "Plan") covers all of the
Company's employees who are United States citizens, at least 21 years of age and
have completed at least one quarter of service with the Company. Pursuant to the
Plan, employees may elect to reduce their current compensation by up to the
statutorily prescribed annual limit and have the amount of such reduction
contributed to the Plan. The Plan provides for the Company to make contributions
in an amount equal to 25 percent of the participant's deferral contributions, up
to 6 percent of the employee's compensation, as defined in the Plan agreement.
The Company's contribution expense was approximately $12,000 and $35,000 in 1997
and 1996, respectively. The board of directors of the Company may authorize
additional discretionary contributions; however, no additional Company
contributions have been made as of December 31, 1997.
14. Related Party Transactions
The Company has an incentive compensation plan for certain key employees and its
Chairman. The incentive compensation plan provides for annual bonus payments
based upon achievement of certain corporate objectives as determined by the
Company's compensation committee, subject to the approval of the board of
directors. To date, the Company has not paid any bonuses pursuant to the
incentive compensation plan.
Pursuant to agreements entered into in November 1993, the Company extended loans
to a current board member and a former board member in order to provide each of
them with funds to satisfy their respective personal income tax liability
arising out of the conversion of certain Positron Corporation Promissory Notes
33
<PAGE>
into Common stock. Such agreements were entered into by the Company in
connection with the IPO and in consideration of certain concessions made by the
board member and former board member concerning the conversion terms under their
respective Notes. Pursuant to the agreements, each of the loans were made on
substantially the following terms: (i) limited to a principal amount not to
exceed $175,000, (ii) interest payable at a rate of six percent per year, (iii)
an initial term of three years with the principal balance being due and payable
upon the expiration of the term, (iv) limited recourse against the borrower, and
(v) collateralized by Positron Corporation Common Stock owned by the borrower.
In accordance with such agreements, on April 15, 1994, the Company extended a
$165,817 loan to a current board member and a $158,552 loan to the former board
member.
Both of the notes receivable matured in April 1997 but were not repaid by the
debtors and, accordingly, 60,176 shares of the Company's Common Stock reverted
back to the Company and are included in treasury stock at December 31, 1997. In
connection with this transaction, the Company recognized bad debt expense of
$309,000.
The Company has certain consulting agreements with its Chairman and a member of
its board. Each agreement provides for monthly consulting payments of $6,667 and
expires in 1998.
15. Commitments and Contingencies
On January 1, 1996, the Company entered into an employment agreement with Werner
J. Haas, Ph.D. pursuant to which Dr. Haas agreed to serve as President and Chief
Executive Officer of the Company for a term of two years. The employment
agreement provided for the payment of an annual base salary of $200,000, bonuses
in an amount to be determined at the discretion of the Board of Directors of the
Company, and participation in any employee benefit plan adopted by the Company
for its employees.
On February 18, 1997, Dr. Haas informed the Board of Directors of the Company
that he considered his contract to have been terminated by the Company without
cause as a result of the Company's failure to pay the February 15, 1997 payroll
to any of its management level employees and specifically to him. Additionally,
Dr. Haas resigned as a member of the Company's Board of Directors. Dr. Haas has
demanded that the Company pay him all past due salary as well as the nine months
severance pay specified in his employment agreement if his contract is
determined to have been terminated without cause. The Company has indicated to
Dr. Haas that it believes no amounts are due him under his employment agreement.
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 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
34
<PAGE>
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. As of July 31,
1998, the Company is unable to predict the outcome of this disagreement with its
former landlord.
16. Subsequent Events
In June 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 June 30, 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.
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 intake, 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 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 has 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 shareholders 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 shareholder approval is obtained.
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 October 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 and $100,000 for each of the months of August and September 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
35
<PAGE>
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.
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
===== =====
36
<PAGE>
PROFORMA FINANCIAL DATA
The board of directors of the Company is currently considering the sale of
9,000,000 shares of its Common Stock (or such other number of shares that
constitutes 51% of the Company's outstanding voting securities on a fully
diluted basis, exclusive of out of the money warrants, and/or options, and/or
convertible securities calculated as of the closing date, but not less than
9,000,000 shares) in a transaction (the "Imatron Transaction") with Imatron,
Inc. ("Imatron"), a New Jersey corporation with principal offices in San
Francisco, California. The total consideration to be paid by Imatron for such
shares is $100 plus the reimbursement of certain costs to be incurred by the
Company as a result of the transaction, which costs are estimated not to exceed
$25,000. The following Unaudited Proforma Statements of Operations for the six
months ended June 30, 1998 and the year ended December 31, 997 give effect to
the Imatron Transaction as if it had occurred on January 1, 1997. An Unaudited
Proforma Condensed Balance Sheet as of June 30, 1998 is not presented because
the impact of the Imatron Transaction on the balance sheet is not material.
The Unaudited Proforma Statements of Operations are presented for informational
purposes only and are not necessarily indicative of the results of operations
that would have been achieved had the transaction been completed at January 1,
1997, nor are they indicative of the Company's future results of operations.
The Unaudited Proforma Statements of Operations should be read in conjunction
with the historical financial statements of the Company and related notes
thereto.
37
<PAGE>
<TABLE>
POSITRON CORPORATION
PROFORMA STATEMENT OF OPERATIONS
--------------------------------
(In thousands, except share data)
<CAPTION>
Six Months
Ended Year Ended
June 30 December 31,
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
System sales $ -- $ 1,129
Fee per scan 307 602
Service and component 780 1,795
------------ ------------
Total revenues 1,087 3,526
------------ ------------
Costs of sales and services:
System sales -- 698
Fee per scan 60 156
Service, warranty and component 178 645
------------ ------------
Total costs of sales and service 238 1,499
------------ ------------
Gross profit 849 2,027
------------ ------------
Operating expenses:
Research and development 18 1,305
Selling, general and administrative expenses 910 4,753
------------ ------------
Total operating costs 928 6,058
------------ ------------
Loss from operations (79) (4,031)
------------ ------------
Other expenses:
Interest expense (161) (335)
Other expense -- (190)
------------ ------------
Total other expense (161) (424)
------------ ------------
Net loss $ (240) $ (4,455)
============ ============
Basic and dilutive net loss per common share
as reported $ (0.05) $ (0.91)
============ ============
Proforma basic and dilutive net loss per common share $ (0.02) $ (0.32)
============ ============
Weighted average common shares outstanding 5,139,191 4,884,870
Additional shares to be issued in connection with the
proposed Imatron Transaction(1) 9,000,000 9,000,000
------------ ------------
Proforma weighted average shares outstanding 14,139,191 13,884,870
============ ============
<FN>
See notes to unaudited proforma statements of operations.
</FN>
38
</TABLE>
<PAGE>
POSITRON CORPORATION
NOTES TO UNAUDITED STATEMENTS OF OPERATIONS
-------------------------------------------
1. Basis of Presentation
The following Unaudited Proforma Statements of Operations for the six months
ended June 30, 1998 and the year ended December 31, 1997 give effect to
the Imatron Transaction as if it had occurred at January 1, 1997.
The Company believes that the assumptions used in preparing the unaudited
proforma statements of operations provide a reasonable basis for presenting all
of the significant effects of the Imatron Transaction (other than any synergies
anticipated by the Company, and nonrecurring charges directly attributable to
the sale), and that the proforma adjustments give effect to those assumptions in
the Unaudited Proforma Statements of Operations.
2. Earnings Per Share
Net loss per share of Common Stock was computed by dividing the net income
available to holders of Common Stock by the weighted average number of shares of
Common Stock outstanding during the period. Due to the net loss, all of the
Common Stock equivalents were excluded from this calculation due to their
anti-dilutive effect.
3. Proforma Adjustments
Proforma adjustments to the Unaudited Proforma Statements of Operations are as
follows:
1. Reflects the issuance of 9,000,000 shares of Common Stock in
connection with the Imatron Transaction.
2. Reflects the calculation of earnings per share assuming the
sale of 9,000,000 shares of Common Stock to Imatron.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Risks Associated with Business Activities
Potential Default Under ProFutures Loan. The ProFutures Loan matures on October
5, 1998 and, at that time, approximately $450,000 will be due under the
ProFutures Loan. Unless the maturity date of the ProFutures Loan is extended or
the Company is successful in obtaining additional debt or equity financing in an
amount necessary to discharge the ProFutures Loan prior to its maturity, the
Company will be unable to pay when due the ProFutures Loan and a payment default
thereunder will occur. The ProFutures Loan is secured by liens and security
interests encumbering all of the assets of the Company, including know-how,
patents and proprietary rights pertaining to its PET technology. Upon a payment
default under the ProFutures Loan, the Company anticipates that the lender
thereunder will seek to foreclose its liens and security interests encumbering
the Company's assets. Such foreclosure would have a material adverse affect on
the Company and its securityholders and would prevent the Company from
continuing as a going concern. The Company does not currently have the means to
repay the ProFutures Loan at its October 5, 1998 maturity and it is unlikely
that the Company will be able to obtain additional debt or equity financing
necessary to repay the ProFutures Loan by such maturity date . The Company
currently intends to seek an extension of the maturity date of the ProFutures
Loan although there are no assurances that an extension will be obtained, or if
obtained, that the Company will not be required to grant the lender thereunder
additional concessions, consideration or securities, the terms of which may be
materially adverse to the Company and its securityholders. Absent 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 by
such 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. There can be no
assurance that the Company will ever achieve the level of revenues needed to be
profitable in the future, or, if profitability is achieved, that it will be
sustained. Due to the sizeable sales price of each POSICAM(TM) system and the
limited number of systems that are sold or placed in service in each fiscal
period, the Company's revenues have fluctuated, and may likely continue to
fluctuate, significantly from quarter to quarter and from year to year.
Recruiting and Retention of Qualified Personnel. The Company's success is
dependent to a significant degree upon the efforts of its executive officers and
key employees. The loss or unavailability of the services of any of its key
personnel could have a material adverse effect on the Company. The Company's
success is also dependent upon its ability to attract and retain qualified
personnel in all areas of its business, particularly management, research and
marketing. Given the Company's current financial situation, there can be no
assurance that the Company will be able to continue to hire and retain a
sufficient number of qualified personnel. If the Company is unable to retain and
attract such qualified personnel, its business and operating results could be
adversely affected.
Working Capital Deficiency. At December 31, 1997, the Company had cash and cash
equivalents in the amount of $160,000 compared to $382,000 at December 31, 1996.
Throughout much of 1997 and the first 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.
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
40
<PAGE>
technical resources and production and marketing capabilities than the Company.
In addition, there can be no assurance that other established medical concern,
any of which would likely have greater resources than the Company, will not
enter the market. The Company also faces competition from other imaging
technologies which are more firmly established and have a greater market
acceptance, including single-photon emission computed tomography ("SPECT").
There can be no assurance that the Company will be able to compete successfully
against any of its competitors.
No Assurance of Market Acceptance. The POSICAM(TM) systems involve new
technology that competes with more established diagnostic techniques. The
purchase and installation of a PET system involves a significant capital
expenditure on the part of the purchaser. A potential purchaser of a PET system
must have an available patient base that is large enough to provide the
utilization rate needed to justify such capital expenditure. There can be no
assurance that PET technology or the Company's POSICAM(TM) systems will be
accepted by the target markets or that the Company's sales of POSICAM(TM)
systems will increase or that the Company will ever be profitable.
Patents and Proprietary Technology. The Company holds certain patent and trade
secret rights relating to various aspects of its PET technology, which are of
material importance to the Company and it future prospects. There can be no
assurance, however, that the Company's patents will provide the meaningful
protection from competitors. Even if a competitor's products were to infringe on
patents held by the Company, it would be costly for the Company to enforce its
rights and the enforcement of its rights would divert funds and resources from
the Company's operations. Furthermore, there can be no assurance that the
Company's products will not infringe on any patents of others.
The Company requires each employee and/or consultant to enter into a
confidentiality agreement, but there can be no assurance that these agreements
will provide meaningful protection or adequate remedies for the Company's trade
secrets or proprietary know-how in the event of unauthorized use or disclosure
of such information or that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets and proprietary know-how.
Government Regulation. The Company's POSICAM(TM) systems and the
radiopharmaceuticals used in connection with them are subject to regulation by
the FDA. The FDA regulates and must approve the clinical testing, manufacturing,
labeling, distribution, and promotion of medical devices in the United States.
There can be no assurance that any additional product or enhancement that the
Company may develop will be approved by the FDA. Delays in receiving regulatory
approval could have a material adverse effect on the Company's business. In
addition, various foreign countries in which the Company's products are or may
be marketed impose additional regulatory requirements. Further, the Company's
operations and the operations of PET systems are subject to regulation under
federal and state health safety laws, and purchasers and users of PET systems
are subject to federal and state laws and regulations regarding the purchase of
medical equipment such as PET systems. All laws and regulations, including those
specifically applicable to the Company, are subject to change. The Company
cannot predict what effect changes in laws and regulations might have on its
business. Failure to comply with applicable laws and regulatory requirements
could have a material adverse effect on the Company's business, financial
conditions, results of operations and cash flows.
Certain Financing Arrangements. In order to sell its POSICAM(TM) systems, the
Company has from time to time found it necessary to participate in ventures with
certain customers or otherwise assist customers in their financing arrangements.
The venture arrangements have involved lower cash prices for the Company's
systems in exchange for interests in the ventures, thus exposing the Company to
the attendant business risks of the ventures. The Company has, in certain
instances, sold its systems to financial intermediaries, which have, in turn,
leased the system to users. Such transactions may not give rise to the same
economic benefit to the Company as would have occurred had the Company made a
direct cash sale at its normal market prices on normal sale terms. There can be
no assurance that the Company will not find it necessary to enter into similar
transactions to effect future sales. The nature and extent of the Company's
interest in such ventures or the existence of remarketing or similar obligations
could require the Company to account for such transactions as financing
arrangements rather than "sales" for financial reporting purposes. Such
treatment could have the effect of delaying the recognition of revenue on such
transactions and may increase the volatility of the Company's financial results.
Product Liability and Insurance. The use of the Company's products entails risks
of product liability. There can be no assurance that product liability claims
will not be successfully asserted against the Company. The Company maintains
liability insurance coverage in the amount of $2 million per occurrence and an
annual aggregate maximum
41
<PAGE>
of $3 million. However, there can be no assurance that the Company will be able
to maintain such insurance in the future or, if maintained, that such insurance
will be sufficient in amount to cover any successful product liability claims.
Any uninsured liability could have a material adverse effect on the Company.
No Dividends. The Company has never paid cash dividends on its Common Stock and
does not intend to pay cash dividends on its Common Stock in the foreseeable
future. The Series A Preferred Stock and Series B Preferred Stock Statements of
Designation prohibit the payment of Common Stock dividends until all required
dividends have been paid on each series of preferred stock. As of December 31,
1997, approximately $433,000 of preferred stock dividends are undeclared and
unpaid by the Company.
Management's Discussion and Analysis of Plan of Operation
General. The Company was incorporated in December 1983 and commenced commercial
operations in 1986. Since that time, the Company has generated revenues
primarily from the sale and service contract revenues derived from the Company's
POSICAM(TM) systems; 15 of which are currently in operation in certain medical
facilities in the United States. The Company has never been able to sell its
POSICAM(TM) systems in sufficient quantities to achieve profitability and should
the Company be unable to complete the Imatron Transaction discussed below, the
Company does not have sufficient capital to repay secured creditors as
obligations mature and will, in all likelihood, be unable to continue in
operation.
Imatron Transaction. In June 1998, the Company entered into the Imatron
Agreement, whereby Imatron will acquire a majority ownership of the Company. In
conjunction with the execution of definitive agreements, Imatron began making
working capital advances available to the Company up to $500,000 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 the Company's assets.
Under the terms of the agreement, Imatron will acquire ownership of 51% of the
outstanding Common Stock of the Company on a fully-diluted and as-if-converted
basis, excluding out-of-the-money warrants and options determined at the time of
issuance of shares of Common Stock to Imatron. If such shares were issued to
Imatron on June 30, the Company would have been obligated to issue at least
9,000,000 shares of Common Stock. The Company will receive a nominal cash
payment of $100 from Imatron in payment for the shares of Common Stock.
In addition to providing limited working capital financing, Imatron has agreed
to support the Company's marketing program, particularly with regard to
Imatron's affiliate, Imatron Japan, Inc. ("Imatron Japan") by agreeing to take,
after the share issuance closing date, all reasonable efforts to cause the
placement of 10 POSICAM(TM) positron emission tomography ("PET") cameras over
the next three years. The Company recently shipped a POSICAM(TM) PET camera to
Imatron Japan as the first delivery under a three-year distribution agreement
entered into last year. Imatron Japan is a major distributor for Imatron's
Ultrafast CT and several other high tech companies. Imatron has a 24% minority
interest in Imatron Japan. Imatron has also agreed to help facilitate the
recapitalization of the Company to support its re-entry into the medical imaging
market by using its best efforts after the share issuance closing date to
arrange for additional third-party equity financing for the Company over an
18-month period in an aggregate amount of not less than $8,000,000. There can be
no assurances, however, that any such sales will actually be consummated or that
Imatron will be able to successfully assist the Company in raising additional
capital.
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 directors of the Company and the
appointment of Imatron's nominees to fill such vacancies, and (c) shareholder
approval of an amendment to the Company's Articles of Incorporation to increase
its authorized Common Stock to at least 100,000,000 shares of Common Stock. The
Company anticipates that the share issuance to Imatron will close immediately
after the Annual Meeting if the required shareholder approval is obtained.
In connection with the above transactions, the Company, Imatron and two current
lenders to the Company, Uro-Tech, Ltd. 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
42
<PAGE>
$845,000) (the "ProFutures Loan") to October 5, 1998, in return for a $50,000
payment, the issuance of warrants to purchase 1,150,000 shares of Common Stock
at $0.25 per share (in addition to the issuance of previously bargained for
warrants to purchase an additional 100,000 shares of Common Stock at $0.25 per
share), and minimum loan repayments of $50,000 for each of the months of April,
May, June and July 1998 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 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.
Results of Operations
1997 Compared to 1996. During the year ended December 31, 1997, the Company
continued to experience deterioration in its financial condition; however, the
Company's net loss decreased from ($6,375,000) in 1996 to ($4,455,000) in 1997.
The decrease in net loss is primarily the result of significant staff reductions
and efforts to curtail costs, partially offset by increases in valuation
reserves to reduce inventories to their estimated net realizable value. Further
analysis follows:
Revenues. System sales increased from $650,000 in 1996 to $1,129,000 in 1997,
although the Company sold only one POSICAM(TM) system in each year. The $479,000
increase is attributable to the fact that the system sold in 1996 was a
refurbished system and sold for a much lower price than the new HZ series system
sold in 1997. Fee per scan revenues increased from $415,000 in 1996 to $602,000
in 1997 as a result of improved performance under the Company's only fee per
scan contract. Service and component revenue decreased by $715,000 in 1997 as
compared to 1996 due primarily to a $750,000 system upgrade performed on an
older POSICAM(TM) system in 1996.
Cost of Sales and Services. Cost of system sales increased from $316,000 in 1996
to $698,000 in 1997 due to the fact that the POSICAM(TM) system sold in 1997 was
a new system while the POSICAM(TM) system sold in 1996 was simply refurbished
and, accordingly, was of lesser cost. Cost of fee per scan decreased from
$172,000 in 1996 to $156,000 in 1997 due to lower maintenance costs on the
Company's only fee per scan system. The primary cost associated with fee per
scan is deprecation expense, which remained constant. Service, warranty and
component cost increased from $610,000 in 1996 to $645,000 in 1997, even though
corresponding revenues decreased by $715,000. This increase is attributable to a
$180,000 charge recognized in 1997 to reduce service inventory to its estimated
net realizable value. 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 $4,753,000 also due to staff reductions. However, the savings from
staff reductions were partially offset by two significant 1997 charges as
follows: (i) an inventory obsolescence reserve of $1,224,000 was recorded to
reduce inventory to be used in the manufacturing process to its estimated net
realizable value and (ii) bad debt expense associated with uncollectible notes
receivable of $309,000.
Other Expenses. Interest expense increased from $197,000 in 1996 to $335,000 in
1997 due primarily to interest expense associated with the ProFutures Loan. The
ProFutures Loan was initially funded in November 1996 and had a balance in
excess of $1,000,000 throughout much of 1997. The interest rate on the
ProFutures Loan increased from 12% to 18% during 1997 and that increase in
interest rate combined with a higher average debt level resulted in a
significant increase in interest expense.
43
<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 Preferred Stock, each of which resulted in more
than a 50% change in the ownership percentages of shareholders, the provisions
of Section 382 of the Code severely limit the annual utilization of the net
operating loss carry forwards. If the Imatron Transaction is completed, the
utilization of net operating losses arising since the 1996 issuance of Series A
Preferred Stock will be limited. In addition, the utilization of the losses to
reduce future income taxes is dependent upon the generation of sufficient
taxable income prior to the expiration of the net operating loss carry forwards.
The carry forwards will begin to expire in the year 1999.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997.
During the six months ended June 30, 1998, the Company continued to experience
deterioration in its financial condition; however, the Company's net loss
decreased $1,516,000 from $1,756,000 for the six months ended June 30, 1997 to
$240,000 for the six months ended June 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 six months
of 1998 or 1997. Fee per scan revenue increased $99,000 from $208,000 during the
first six months of 1997 to $307,000 for the first six months of 1998 due
primarily to a greater number of scans being performed by Buffalo Cardiology
during the six months ended June 30, 1998. In addition, there was a decrease in
service and component sales revenue of $109,000 during the same period due to
less service work performed during the six months ended June 30, 1998. This
reduction in service work is directly attributable to staff reductions and
normal fluctuations in service.
Gross profit during the first six months of 1998 was $849,000 compared to
$740,000 for the six months ended June 30, 1997. This increase in gross profit
of $109,000 is due primarily to lower service costs brought on by staff
reductions during the six months ended June 30, 1998.
Total operating expense decreased approximately $1,278,000 or 58% from
$2,206,000 for the six months ended June 30, 1997 to $928,000 for the six months
ended June 30, 1998. The decrease primarily results from significant staff
reductions and related reductions in administrative overhead costs during the
six months ended June 30, 1998.
Interest expense decreased from $191,000 for the six months ended June 30, 1997
to $161,000 for the six months ended June 30, 1998 due primarily to the
reduction in the Company's debt level in the first six months of 1998 as
compared to the first six months of 1997.
Liquidity and Capital Reserves
Since its inception the Company has been unable to sell POSICAM(TM) systems at
quantities sufficient to be profitable. Consequently, the Company has sustained
substantial losses. Net losses for the year ended December 31, 1997 and the six
months ended June 30, 1998 were $4,455,000 and $240,000, respectively. At June
30, 1998, the Company had an accumulated deficit of approximately $49,200,000.
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 June 30, 1998, the Company had cash and cash equivalents in the amount of
$70,000 compared to $160,000 at December 31, 1997. 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,
1997 salary payments and other benefits to certain management level employees
totaling approximately $600,000 were unpaid at June 30, 1998.
The Company's only current plan with regard to its liquidity problems is to
attempt to complete the Imatron Transaction discussed in Selected Notes to the
Financial Statements. If the Imatron Transaction is not completed, or if the
Imatron Transaction is completed and Imatron is unsuccessful in its efforts to
raise capital for the Company, management believes the Company will be unable to
continue as a going concern and that the Company's assets will be seized by its
secured creditors.
44
<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 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 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 ongoing assessments, the Company believes that no significant
modifications of existing computer software will be required. The Company
believes that its 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.
The Company is currently assessing its relationships with significant suppliers
and major customers to determine the extent to which the Company is vulnerable
to any third party's failure to remedy their own Year 2000 issues. Based on
preliminary assessments, management believes that significant exposure does not
exist with respect to third parties.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." These pronouncements are effective
for fiscal years beginning after December 15, 1997. SFAS 130 requires a company
to display an amount representing comprehensive income, as defined by the
statement, as part of the Company's basic financial statements. Comprehensive
income will include items such as unrealized gains or losses on certain
investment securities and foreign currency items. The adoption of SFAS 130
should not materially affect the Company's financial statements.
SFAS 131 requires a company to disclose financial and other information, as
defined by the statement, about its business segments, their products and
services, geographic areas, major customers, revenues, profits, assets and other
information. The Company has not yet assessed what impact SFAS 131 will have on
its financial statement reporting.
Information Regarding and Factors Affecting Forward-Looking Statements
Certain statements contained in this report on, including without limitation
statements containing the words "believes", "anticipates", "expects" and words
of similar import, are forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other matters
which may cause the actual results, performance or achievements of the Company
or industry results to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such risks, uncertainties and other matters include, but are not
limited to the factors described below. In addition, the Company's ability to
achieve anticipated results or meet any specific goals or milestones will be
subject to other factors affecting the Company's business that are beyond the
Company's control, including, but not limited to, general economic conditions,
the effect of government regulation on the conduct of the Company's business,
insurance reimbursements and changes in technology. Given these uncertainties,
readers are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such statements
or publicly announce any updates or revisions to any of the forward-looking
statements contained herein to reflect any change in the Company's expectation
with regard thereto or any change in events, conditions, circumstances or
assumptions underlying such statements.
45
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
In December 1993, the Company completed an initial public offering of 1,750,000
shares of Common Stock and 1,946,775 redeemable warrants (the "Redeemable
Warrants") to purchase Common Stock. Prior to the initial public offering, there
was no public market for the Common Stock. Initially after the initial public
offering, the Common Stock and Redeemable Warrants were quoted on the Nasdaq
National Market under the symbols POSI and POSIW, respectively. Subsequently,
the Common Stock and Redeemable Warrants were quoted on the Nasdaq SmallCap
Market. The standards required for the Company to maintain such listing include,
among other things, that the Company have total capital and surplus of at least
$2,000,000. As of June 30, 1998, the Company had a total capital and surplus
deficit of $(5,353,000). The Company failed to maintain its Nasdaq stock market
listing and will not meet the substantially more stringent requirements to be
re-listed until such time as it is able to raise capital by sale of additional
equity securities or increased sales of its POSICAM(TM) systems. There can be no
assurance that the Company will ever meet the capital and surplus requirements
needed to be re-listed under the Nasdaq SmallCap Market System.
Trading of the Common Stock is currently conducted in the "pink sheets"of the
NASD's Electronic Bulletin Board. Trading in the Common Stock is covered by
rules promulgated under the Securities Exchange Act of 1934 for non-Nasdaq and
non-exchange listed securities. Under such rules, broker/dealers who recommend
such securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities are exempt from these rules if the market price is at least
$5.00 per share. As of June 30, 1998, the closing price of the Common Stock was
$0.25.
The following sets forth the range of the high and low reported closing sales
prices of the Common Stock for the four quarters of 1997 and 1996 and the first
three quarters of 1998 (through August 17, 1998), all as reported on the Nasdaq
National Market or Nasdaq SmallCap Market as appropriate.
1998 1997 1996
--------------- --------------- ---------------
High Low High Low High Low
------ ------ ------ ------ ------ ------
First Quarter $0.625 $0.266 $3.375 $1.250 $3.563 $1.375
Second Quarter 0.609 0.188 1.938 0.375 4.188 3.250
Third Quarter 0.453 0.213 1.438 0.422 5.500 2.000
Fourth Quarter -- -- 0.953 0.172 3.250 1.500
There were approximately 220 holders of record of shares of Common Stock as of
August 20, 1998. The Company estimated that there were also approximately 800
beneficial holders of Common Stock as of August 20, 1998.
The Company has never paid cash dividends on its Common Stock. The Company does
not intend to pay cash dividends on its Common Stock in the foreseeable future.
46
<PAGE>
PRINCIPAL SHAREHOLDERS AND MANAGEMENT OWNERSHIP
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 5% of the outstanding shares of
Common Stock; (ii) each director and executive officer of the Company; and (iv)
all executive officers and directors of the Company as a group. Included in the
"Number of Shares of Common Stock" column are shares attributable to options or
warrants that are exercisable as of, or will be exercisable within 60 days
after, June 30, 1998.
<TABLE>
<CAPTION>
Number of Percent of Number of Percent of
Number of Percent of Shares of Outstanding Shares of Outstanding
Shares Outstanding Series A Series A Series B Series B
Name of Beneficial of Common Common Preferred Preferred Preferred Preferred
Owner(1) Stock Stock Stock Stock Stock Stock
- ----------------------------- ----------- ----------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Auer & Co.(2) 600,000 11.3% 400,000 25.1%
c/o ASB Capital Mgt.
1101 Pennsylvania Avenue NW,
Suite 300
Washington, DC 20004
DHB Capital 11,568 * 25,000 100%
11 Old Westbury Rd.
Old Westbury, New York 11568
Uro-Tech, Ltd.(3) 865,523 15.5% 433,329 27.2%
5430 LBJ Freeway
Dallas, Texas 75240
K. Lance Gould, M.D.(4) 103,830 2.1%
Positron Corporation
16350 Park Ten Place
Houston, Texas 77084
Gary B. Wood, Ph.D.(5) 80,793 1.6%
OmniMed Corporation
5430 LBJ Freeway
Dallas, Texas 75240
John H. Laragh, M.D.(6) 31,709 *
Positron Corporation
1304 Langham Creek Drive
Suite 310
Houston, Texas 77084
Ronald B. Schilling, Ph.D.(7) 8,709 *
Positron Corporation
16350 Park Ten Place
Houston, Texas 77084
All Directors and Executive 225,041 4.4% 433,329 27.2%
Officers as a Group
(4 persons)
<FN>
* Less than 1%
(1) Except as otherwise indicated, each shareholder has sole investment and
sole voting power with respect to the shares of Common Stock or Series
A Preferred Stock shown.
(2) Includes 600,000 shares of Common Stock issuable upon the conversion of 400,000 shares of Series A
Preferred Stock and 200,000 warrants to purchase Common Stock.
(3) Includes 424,787 shares of Common Stock owned by Uro-Tech, Ltd., a
Texas limited partnership, the general partner of which is OmniMed
Corporation ("OmniMed"). Includes 156,565 shares of Common Stock
issuable upon the exercise of Series E Warrants held by Uro-Tech, Ltd.
Includes 650,000 shares of Common Stock issuable upon the conversion of
433,329 shares of Series A Preferred Stock and 216,671 warrants to
purchase
47
<PAGE>
Common Stock acquired upon the conversion $650,000 in principal amount
of the Uro-Tech Loan (as defined herein). Also includes 67,500 shares
issuable upon the conversion of warrants acquired in connection with
the Uro-Tech Loan. Dr. Wood is Chairman of the Board of Directors, and
beneficially owns 63.7% of the outstanding voting securities, of
OmniMed. All shares beneficially owned by OmniMed have been included in
the total number of shares of Common Stock beneficially owned by Dr.
Wood.
(4) Includes 9,936 shares of Common Stock issuable upon exercise of a
warrant held by Dr. Gould, and 11,709 shares of Common Stock issuable
upon exercise of an option awarded to Dr. Gould under the 1994 Plan and
250,000 shares of Common Stock issuable upon exercise of an option
awarded to Dr. Gould for services rendered by Dr. Gould in connection
with the sale of a POSICAMTM system.
(5) Includes 7,304 shares of Common Stock issuable upon exercise of a
warrant held by Dr. Wood and 50,000 shares of Common Stock issuable
upon exercise of an option granted to Mr. Wood on March 24, 1995.
Includes 7,000 shares of Common Stock issuable upon the exercise of an
option granted to Dr. Wood in June 1994 and 1,209 shares of Common
Stock issuable up to exercise of an option granted to Dr. Wood in June
1995. Includes 15,280 shares of Common Stock beneficially owned by
OmniMed. Dr. Wood owns 63.7% of the outstanding voting securities of
OmniMed.
(6) Includes 11,709 shares of Common Stock issuable upon exercise of
options awarded to Dr. Laragh under the 1994 Plan and 20,000 shares of
Common Stock issuable upon exercise of an option awarded to Dr. Laragh
on March 24, 1995.
(7) Includes 8,709 shares of Common Stock issuable upon exercise of options
award to Mr. Schilling under the 1994 Plan.
</FN>
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Royalty Payments
In 1984, the Company licensed for use in the United States the know-how and
patent rights relating to positron imaging (the "Licensed Technology") possessed
by the Clayton Foundation, K. Lance Gould (a current director of the Company)
and Nizar A. Mullani (a former director of the Company). The Company is
currently obligated to pay royalties of 3% of the gross revenues from sales,
uses, leases, licensing or rentals of the Licensed Technologies, consisting of
1% to each of the Clayton Foundation, K. Lance Gould and Nizar A. Mullani. The
Company has not made any royalty payments since 1993. As of August 15, 1997,
approximately $ 225,000 was owned to the aforementioned individuals for past due
royalties.
Conversion of Debt
On January 15, 1993, the Company and Dr. K. Lance Gould entered into an
agreement (the "Gould Agreement") pursuant to which (i) Dr. Gould exchanged a 9%
Convertible Promissory Note in the principal amount of $281,250 issued to him on
December 22, 1988 for a new 9% Convertible Promissory Note in the principal
amount of $281,250, (ii) in exchange for past due royalties in the amount of
$36,951 and accrued interest in the amount of $101,643, the Company issued Dr.
Gould a second 9% Convertible Promissory Note in the principal amount of
$138,594 with an original maturity date of October 31, 1993 (which was
subsequently extended to December 15, 1993), (iii) the Company issued to Dr.
Gould a warrant expiring July 25, 1996, to purchase 9,936 shares of Common Stock
at an exercise price of $25.59 per share, and (iv) the Company agreed to pay Dr.
Gould's legal fees in the amount of $15,125 in connection with the negotiation
of the Gould Agreement. Pursuant to the conversion features of these 9%
Convertible Promissory Notes, upon the closing of the Company's initial public
offering, the 9% Convertible Promissory Notes converted into 50,889 shares of
Common Stock.
In November 1993, the Company entered into an agreement with Dr. Gould under
which the Company became obligated to extend loans to Dr. Gould in order to
provide him with funds to satisfy his personal income tax liability arising out
of the conversion of his 9% Convertible Promissory Notes into Common Stock. Such
agreement was entered
48
<PAGE>
into by the Company in consideration of certain concessions made by Dr. Gould
concerning the conversion terms under his 9% Convertible Promissory Notes.
Pursuant to the agreement, the loans would be on substantially the following
terms if made: (i) limited to a principal amount not to exceed $175,000, (ii)
interest payable at the rate of 6% per annum, (iii) an initial term of three
years, (iv) limited recourse against the borrower, and (v) collateralized by
Common Stock owned by the borrower. In accordance with such agreement, on April
15, 1994, the Company extended a $165,817 loan to Dr. Gould. The current
outstanding balance is $165,817. In April 1997, the Company and Dr. Gould agreed
to a one-year extension of his loan.
Consultants
The Company and Dr. Wood have entered into a Consulting Agreement whereby Dr.
Wood provides certain managerial, financial, marketing and organizational
services to the Company. The Company incurred fees of approximately $80,000 in
both 1997 and 1996. In January 1995, the Company and Dr. Wood agreed to extend
the term of such consulting agreement to December 31, 1998.
The Company entered into a Consulting Agreement with Dr. Gould in August 1984.
On January 15, 1993, pursuant to the Agreement, the Company and Dr. Gould
entered into a new consulting agreement (the "Gould Consulting Agreement")
effective upon the closing of the Company's initial public offering. The Gould
Consulting Agreement provided for a term of ten years (which term was reduced by
agreement in May 1993 to three years) and provides for the Company to pay him
consulting fees at an annual rate of $80,000, payable monthly, subject to
adjustment based upon changes in the consumer price index. In addition, the
Company reimburses Dr. Gould for approved expenses in connection with rendered
services. In the event that the Company fails to make payments to Dr. Gould when
due under the Gould Consulting Agreement or fails to make any required royalty
payments to Dr. Gould, the Company may be required, at Dr. Gould's option to
convey to Dr. Gould a 0.5% royalty on sales of POSICAMTM systems.
Uro-Tech Loan
During the last quarter of 1995 and the first quarter of 1996, in order to fund
its activities the Company borrowed a total of $1,313,000 from Uro-Tech, Ltd. ,
(the "UroTech Loan"). The Uro-Tech Loan, as amended, bears interest at 13.8% per
annum and matures on December 31, 1997, and is secured by liens and security
interests encumbering most of the Company's assets including the Company's
know-how, patents and proprietary rights pertaining to its PET technology. In
connection with the loan from Uro-Tech, the Company granted Uro-Tech warrants to
purchase 67,500 shares of Common Stock, at an exercise price of $2.00 per share
exercisable through February 7, 2001.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
a registered class of the Company's equity securities to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Based on the Company's review of forms furnished to the Company and
representations from reporting persons, the Company believes that all filing
requirements applicable to the Company's executive officers, directors and 10%
beneficial owners were complied with during 1997.
SHAREHOLDER PROPOSALS
Any shareholder of the Company desiring to present a proposal for action at the
Annual Meeting of Shareholders to be held in 1999 must deliver the proposal to
the executive offices of the Company by no later than December 11, 1998, unless
the Company notifies the shareholders otherwise. The Company's management will
have discretionary authority with respect to proxies submitted to the 1999
Annual Meeting of Shareholders on any matter which the Company does not receive
notice of by February 25, 1999.
49
<PAGE>
ANNUAL REPORT ON FORM 10-KSB
A copy of the Company's Annual Report on Form 10-KSB for the year ended December
31, 1997, as filed with the Securities and Exchange Commission, is enclosed
herewith as a part of the enclosed Annual Report to Shareholders. An additional
copy of the Annual Report on Form 10-KSB will be sent to any shareholder without
charge upon written request made to the Company at 1304 Langham Creek Drive,
Suite 310, Houston, Texas 77084, Attention: Corporate Communications.
OTHER MATTERS
The Board of Directors does not intend to bring any other matters before the
Annual Meeting and does not know of any matters which will be brought before the
Annual Meeting by others. However, if any other matters properly come before the
Annual Meeting, it is the intention of the persons named in the accompanying
proxy to vote such proxy in accordance with their judgment on such matters.
By Order of the Board of Directors
Gary B. Wood
Secretary
Houston, Texas
_______________, 1998
50
<PAGE>
POSITRON CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD _________ , 1998
The undersigned hereby (i) acknowledges receipt of the Notice of Annual
Meeting of Shareholders of Positron Corporation (the "Company") to be held on
_________, 1998, and the Proxy Statement in connection therewith, each dated as
of __________, 1998, and (ii) constitutes and appoints Gary B. Wood and
________________, and each of them, his attorneys and proxies, with full power
of substitution to each, to vote, and to act with respect to, all shares of
Common Stock, par value $.01 per share, and Series A 8% Cumulative Convertible
Redeemable Preferred Stock of the Company standing in the name of the
undersigned or with respect to which the undersigned is entitled to vote and act
at the annual meeting, as indicated on the reverse side of this card:
Dated this ______ day of ______________, 1998
Signature(s) of shareholder(s)
Please sign exactly as your name appears on your stock certificate. When signing
on behalf of a corporation, partnership, estate, trust or in other
representative capacity, please sign your full name and title. For joint
accounts, each joint owner must sign.
PLEASE DATE, SIGN AND MAIL YOUR PROXY PROMPTLY.
51
<PAGE>
1. ELECTION OF DIRECTOR:
WITHHOLD AUTHORITY to vote
FOR nominee listed below |_| for nominee listed below |_|
Gary B. Wood
2. PROPOSAL TO AMEND ARTICLES OF INCORPORATION:
FOR |_| AGAINST |_| ABSTAIN |_|
3. APPROVAL OF DESIGNATION OF HAM, LANGSTON & BREZINA, L.L.P., as
independent auditors for the fiscal year ended December 31,
1997:
FOR |_| AGAINST |_| ABSTAIN |_|
4. IN THE DISCRETION of the proxies on any other matters as may
properly come before the meeting or any Adjournment(s)
thereof.
THIS PROXY WILL BE VOTED AS SPECIFIED ABOVE. IF NO CONTRARY
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED "FOR" EACH OF THE PROPOSALS SET
FORTH ABOVE. IN ORDER FOR THIS CARD TO BE VALID IT MUST BE SIGNED ON THE REVERSE
SIDE OF THIS CARD.
If you plan to attend the annual meeting, check this box: |_|
52
