FY 1998 POSITRON CORPORATION FORM 10-KSB
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
ANNUAL REPORT
UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commissions file number: 0-24092
Positron
A Texas Corporation
1304 Langham Creek Drive, Suite 310, Houston, Texas 77084
(281) 492-7100
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.[X]
Issuer's revenues for fiscal year ended December 31, 1998: $2,008,000
As of March 18, 1999, there were 14,571,838 shares of the Registrant's Common
Stock, $.01 par value outstanding.
Documents incorporated by reference: None
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FY 1998 POSITRON CORPORATION FORM 10-KSB
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PART I
The Company is including the following cautionary statement in this Annual
Report on Form 10-KSB to make applicable and take advantage of the safe harbor
provision of the Private Securities Litigation Reform Act of 1995 for any
forward looking statements made by, or on behalf of the Company. Forward looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements
which are other than statements of historical facts. Certain statements
contained herein are forward looking statements and, accordingly, involve risks
and uncertainties which could cause actual results or outcomes to differ
materially from those expressed in the forward looking statements. The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitations, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished. In addition to other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward looking statements: the ability
of the Company to attain widespread market acceptance of its POSICAM(TM)
systems; the ability of the Company to obtain acceptable forms and amounts of
financing to fund future operations; demand for the Company's services; and
competitive factors. The Company disclaims any obligation to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
Item 1. Description of Business
General
Positron Corporation (the "Company") was incorporated in the State of Texas on
December 20, 1983, and commenced commercial operations in 1986. The Company
designs, manufactures, markets and services, advanced medical imaging devices
utilizing positron emission tomography ("PET") technology under the trade-name
POSICAM(TM) systems. Unlike other currently available imaging technologies, PET
technology permits the measurement of the biological processes of organs and
tissues as well as producing anatomical and structural images. POSICAM(TM)
systems, which incorporate patented and proprietary technology, enable
physicians to diagnose and treat patients in the areas of cardiology, neurology
and oncology. The Food and Drug Administration ("FDA") approved the initial
POSICAM(TM) system for marketing in 1985, and as of December 31, 1997, the
Company has sold twenty one (21) POSICAM(TM) systems, of which fifteen (15) are
in leading medical facilities in the United States, two (2) are installed in
international medical institutions, one (1) is awaiting governmental approval
for installation at a facility in Japan and three (3) are no longer operational.
The Company presently markets its POSICAM(TM) systems at list prices of up to
$2.0 million depending upon the configuration and equipment options of the
particular system.
The following table provides summary information regarding the Company's
installed base of POSICAM(TM) systems, which were operational as of December 31,
1998:
<TABLE>
<CAPTION>
Date of
Site Location Clinical Application Installation
<S> <C> <C> <C>
Prototype:
U.T. Health Science Center Houston, TX Neurology/Cardiology 1985
POSICAM(TM) Systems:
Saint Joseph's Hospital Atlanta, GA Cardiology 1988
Cleveland Clinic Foundation Cleveland, OH Neurology/Cardiology 1988
Memorial Hospital Jacksonville, FL Oncology/Cardiology 1988
Kennestone Hospital Marietta, GA Cardiology 1989
Medical City Dallas Dallas, TX Cardiology 1990
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FY 1998 POSITRON CORPORATION FORM 10-KSB
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Yale/Veterans Adm. New Haven, CT Neurology/Oncology/Cardiology 1991
Beth Israel New York, NY Cardiology 1991
Our Lady of The Lake Baton Rouge, LA Cardiology 1992
Crawford Long Hospital Atlanta, GA Cardiology 1992
Hermann Hospital Houston, TX Neurology/Oncology/Cardiology 1993
Hadassah Medical Organization Israel Neurology/Oncology/Cardiology 1995
Bio-Metabolic, Inc. Detroit, MI Cardiology/Oncology 1995
Bergan Mercy Hospital Omaha, NE Cardiology/Oncology 1995
Buffalo Cardiology & Pulmonary
Associates Buffalo, NY Cardiology 1995
University of Madrid Spain Cardiology/Oncology/Neurology 1995
Baptist Hospital Nashville, TN Cardiology/Oncology 1996
Imatron Japan Cardiology/Oncology 1997
</TABLE>
PET technology is an advanced imaging technique, which permits the measurement
of the biological processes of organs and tissues as well as producing
anatomical and structural images. Other advanced imaging techniques, such as
magnetic resonance imaging ("MRI") and computerized axial tomography ("CAT"),
produce anatomical and structural images, but do not image or measure biological
processes. The ability to measure biological abnormalities in tissues and organs
allows physicians to detect disease at an early stage and provides physicians
with information, which would otherwise be unavailable, to diagnose and manage
the treatment of disease. The Company believes that PET technology can lower the
total cost of managing certain diseases by providing a means for early diagnosis
and reduction of expensive invasive or unnecessary procedures, such as
angiograms or biopsies which, in addition to being costly and painful, may not
be necessary or appropriate.
Commercial utilization of PET technology commenced in the mid-1980s and the
Company is one of several commercial manufacturers of PET imaging systems in the
United States. Although the other manufacturers are substantially larger, the
Company believes that its POSICAM(TM) systems have proprietary operational and
performance characteristics, which may give it certain performance advantages
over other commercially available PET systems. Such performance advantages
include the POSICAM(TM) systems high count-rate sensitivity, which results in
faster imaging, an enhanced ability to use certain types of
radiopharmaceuticals, which minimize patient exposure to radiation, and its
ability to minimize false positive and false negative diagnoses of disease. The
industry in which the Company is engaged is, however, subject to rapid and
significant technological change. There can be no assurance that the POSICAM(TM)
systems can be upgraded to meet future innovations in the PET industry or that
new technologies will not emerge, or existing technologies will not be improved,
which would render the Company's products obsolete or non-competitive. (See
"Item 1. Description of Business-Risks Associated with Business
Activities-Substantial Competition and Effects of Technological Change.")
The Company's primary focus to date has been on the clinical cardiology market,
where its POSICAM(TM) systems have been used to assess diseases, such as the
effect of arterial blockages and heart damage due to heart attacks. In 1994 and
1995, the Company made technological advances which allowed it to market its
products to the neurological and oncological markets. Neurological applications
of POSICAM(TM) systems include diagnoses of certain brain disorders, such as
epileptic seizures, dementia, stroke, Alzheimer's disease, Pick's disease and
Parkinson's disease. In oncology, POSICAM(TM) systems are used in the diagnosis
and evaluation of tumors of the bone and various organs and tissues such as the
brain, liver, colon and breast.
Medical Imaging Industry Overview
Diagnostic imaging allows a physician to assess disease, trauma or dysfunction
without the necessity of surgery. The diagnostic imaging industry includes
Ultrasound, X-ray, MRI, CAT, and Nuclear Medicine (which includes PET and
Single-Photon Emission Computed Tomography (SPECT). MRI technology uses powerful
magnetic fields to provide anatomical and structural images of the brain, the
spine and other soft tissues, as well as determining the location and size of
tumors. CAT scans use X-ray beams to obtain anatomical and structural images of
bones and organs. Nuclear medicine focuses on providing information about the
function and biological processes of organs and tissues through the use of
radiopharmaceuticals.
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FY 1998 POSITRON CORPORATION FORM 10-KSB
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The first prototype PET scanner was developed in the mid 1970s and the first
commercial PET scanner was constructed in 1978. Approximately 95 PET systems are
currently operational in the United States and approximately 140 PET systems are
in commercial use internationally. Of the PET systems currently operational in
the United States, 15 systems were sold by the Company.
PET Technology
The PET imaging process begins with the injection of a radiopharmaceutical (a
drug containing a radioactive agent) by a trained medical person into a
patient's bloodstream. The injected radiopharmaceutical undergoes a process of
radioactive decay, whereby positrons (positively charged electrons) are
converted into light energy, or photons. These photons are detected by the
POSICAM(TM) systems. The source of the photons is determined and is
reconstructed into a color image of the scanned organ utilizing proprietary
computer software. Since certain functional processes in the organ, such as
blood flow, metabolism or other biochemical processes determine the
concentration of the radiopharmaceutical, the brightness or color at each point
in the PET image directly maps the vitality of the respective function at that
point within the organ.
PET imaging is an accurate non-invasive method of diagnosing or assessing the
severity of coronary artery disease. Unlike other imaging technologies, PET
technology allows a physician to determine whether blood flow to the heart
muscle is normal, thereby identifying narrowed coronary arteries, and whether
damaged heart muscle is viable and may benefit from treatment such as bypass
surgery or angioplasty.
In neurology, PET imaging is now being used as a surgical planning tool to
locate the source of epileptic disturbances in patients with uncontrollable
seizures. In other neurological applications, PET is used in the diagnosis of
dementia, Alzheimer's disease, Pick's disease and Parkinson's disease and in the
evaluation of stroke severity.
In oncology, PET imaging is currently used to measure the metabolism of tumor
masses after surgery or chemotherapy. Clinical experience has shown that PET is
more accurate than CAT scans or MRI in determining the effectiveness of
chemotherapy and radiotherapy in the treatment of cancer. Scans used to assess
suspected breast cancer are still in the experimental stage. Whole body scans,
however, are now performed with PET to survey the body for cancer.
The radiopharmaceuticals (together with the radioactive substances contained
therein) employed in PET scanning are used by the organ in its natural processes
(such as blood flow and metabolism) without affecting its normal function, and
quickly dissipate from the body. Radiopharmaceuticals used in PET procedures
expose patients to a certain amount of radiation, which is measured in units of
rads. Exposure to radiation can cause damage to living tissue, and the greater
the radiation exposure the greater the potential for damage. Certain PET
procedures expose a patient to less radiation than would be associated with
other imaging technologies. A PET cardiac scan, using the radiopharmaceutical
Rubidium-82, results in exposure of approximately 0.096 rad, while a
neurological, PET scan results in exposure of approximately 0.39 rad. In
contrast, a typical chest X-ray results in exposure of approximately 0.15 rad
and a CAT scan results in exposure to between approximately 0.5 rad and 4.0 rad,
depending on the procedure.
Radiopharmaceuticals used in PET technology can be created from many natural
substances including carbon, oxygen, nitrogen and fluorine. The PET procedure to
be performed determines the type of radiopharmaceutical used.
Radiopharmaceuticals are made ready for use at a clinic or hospital by either a
cyclotron or generator. Cyclotrons require an initial capital investment in a
range up to $2 million, additional capital investment for site preparation, and
significant annual operating expenses. A generator requires an initial capital
investment of approximately $50,000, no additional capital investment for site
preparation, and monthly operating expenses of approximately $25,000. While
POSICAM(TM) systems have been designed to be used with both cyclotron and
generator processed radiopharmaceuticals, they have proprietary design features
which enhance their ability to use generator processed radiopharmaceuticals,
thereby allowing a clinic or hospital which intends to focus on certain cardiac
PET applications to avoid the significant capital and operating expenses
associated with a cyclotron.
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FY 1998 POSITRON CORPORATION FORM 10-KSB
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Marketing Strategy
The Company initially targeted clinical cardiology as its marketing strategy
based on research conducted at the University of Texas Health Science Center in
Houston, Texas which showed the commercial potential of clinician cardiology
applications of PET imaging. With the development of the POSICAM(TM) HZ and
POSICAM(TM) HZL series, Positron is pursuing the full oncology, cardiology and
neurology related PET application markets.
The Company relies on referrals from users of the Company's existing base of
installed scanners, clinical presentations at professional conferences by
customers of the Company, and published articles in trade journals to market its
systems.
The POSICAM(TM) System
At the heart of the POSICAM(TM) system is its detector assembly which detects
positron emissions and electronic circuits that pinpoint the location of these
positron emissions. POSICAM(TM) systems are easy to use and are not physically
confining, thereby not intimidating to patients. POSICAM(TM) scans are commonly
performed on an outpatient basis.
The Company's POSICAM(TM) system compares favorably with PET systems produced by
other manufacturers based upon count rate and sensitivity. Count rate and
sensitivity of an imaging system determines its ability to detect, register and
assimilate the greatest number of meaningful positron emission events in the
shortest period of time. The favorable count rate and sensitivity of the
POSICAM(TM) systems results in good diagnostic accuracy as measured by fewer
false positives and false negatives. Further benefits of high count rate and
sensitivity include faster imaging and the ability to use short half-life
radiopharmaceuticals, thereby reducing patient exposure to radiation and
potentially reducing the capital cost to some purchasers through the elimination
of the need for a cyclotron for certain cardiac applications.
The detector assembly consists of crystals, which scintillate (give off light)
when exposed to positron emissions, and photomultiplier tubes, which are coupled
to the crystals and convert the scintillations into electrical impulses. The
Company employs its own patented staggered crystal array design for the
POSICAM(TM) detectors which, unlike competing PET systems, permits the
configuration of the detector crystals into overlapping series to create a
higher quality image by eliminating image sampling gaps. This feature is
important since under-sampling or gaps in sampling can contribute to an
inaccurate diagnosis. The crystal array design also reduces "dead time" - the
time interval following the detection and registering of a positron emission
during which a subsequent event cannot be detected.
The POSICAM(TM) system creates a high number of finely spaced image slices. An
image slice is a cross-sectional view that is taken at an arbitrary angle to the
angle of the organ being scanned, and not necessarily the angle a physician
wishes to view. The POSICAM(TM) computer can then adjust the cross-sectional
view to create an image from any designated angle. The high number of finely
spaced image slices created by the POSICAM(TM) system enhances the accuracy of
the created image.
An integral part of a POSICAM(TM) system is its proprietary data acquisition
microprocessor and its application system software. The Company's software can
reconstruct an image in five seconds or less. The Company has expended
substantial effort and resources to develop the computer software to insure that
it is user-friendly and clinically oriented. The only personnel needed to
perform clinical studies with the POSICAM(TM) systems are a trained nurse, a
trained technician and an overseeing physician for patient management and
safety.
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FY 1998 POSITRON CORPORATION FORM 10-KSB
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POSICAM(TM) HZ and HZL. In addition to the basic POSICAM(TM) system, the Company
offers two advanced versions of its basic system which are known as the
POSICAM(TM) HZ and the POSICAM(TM) HZL. Oncologists and neurologists require
enhanced resolution and a large field of view to detect small tumors and
otherwise scan large organs, such as the liver. The POSICAM(TM) HZ and HZL
employ new detector concepts to satisfy these needs while maintaining the high
count rate sensitivity of the basic POSICAM(TM). In May 1991, the Company
received approval from the FDA to market the POSICAM(TM)HZ and in May 1993, the
Company received a patent for the innovative light guide and detector staggering
concepts used in the POSICAM(TM) HZ and HZL. In July 1993 the Company received
FDA approval to market in the United States the POSICAM(TM) HZL, which has an
even larger field of view than the POSICAM(TM) HZ facilitating whole body
scanning and the scanning of large organs. As the market for PET systems matures
and price sensitivity among purchasers increases, the Company believes that
interest in the POSICAM(TM) HZ, which costs less than the POSICAM(TM) HZL, may
increase. The Company also believes that the special features of the POSICAM(TM)
HZL enhance its usefulness in oncology and neurology applications.
Customer Service and Warranty
The Company has five (5) field service engineers in the United States who have
primary responsibility for supporting and maintaining the Company's installed
equipment base. In addition, the Company has field engineers involved in site
planning, customer training, sales of hardware upgrades, sales and
administration of service contracts, telephone technical support and customer
service.
The company typically provides a one-year warranty to purchasers of POSICAM(TM)
systems. However, in the past, the Company offered multi-year warranties to
facilitate sales of its systems. Following the warranty period, the Company
offers purchasers a comprehensive service contract under which the Company
provides all parts and labor, system software upgrades and unlimited service
calls. The Company currently provides service to all of its POSICAM(TM) systems,
ten (10) of which are under formal service contracts. Two (2) of the service
contracts are automatically renewed on a month-to-month basis and one (1)
automatically renews on a year-to-year basis. Of the remaining eight (8) service
contracts, three (3) expire during 1999, two (2) expire in 2000, and two(2)
expire in 2001. The Company is currently negotiating to extend all of the
service contracts which expire in 1999; however, there can be no assurance that
such extension will be obtained.
The Company's service goal is to maintain maximum system uptime. Success of a
clinical site is largely dependent on patient volume during normal working hours
and therefore equipment uptime and reliability are key factors in this success.
Records compiled by the Company show an average uptime more than 95% for all
installed POSICAM(TM) systems during 1998 and 1997.
Competition
The Company faces competition from two (2) other commercial manufacturers of PET
systems and from other imaging technologies, primarily SPECT. The Company does
not believe that MRI and CAT scan imaging represent significant competing
technologies. The Company views MRI and CAT scan imaging to be complementary
technologies to PET, in that PET, MRI and CAT scans each provide information not
available from the others.
The Company's primary competition from commercial manufacturers of PET systems
comes from General Electric Company ("GE") and Siemens Medical Systems, Inc.
("Siemens"-in a joint venture with CTI, Inc. of Knoxville, Tennessee). GE and
Siemens have substantially greater financial, technological and personnel
resources than the Company. See "Item 1. Description of Business--Risk
Associated with Business Activities--Substantial Competition and Effects of
Technological Change and General Electric Transaction". In addition, two
Japanese manufacturers, Hitachi and Shimadzu, have manufactured and sold PET
scanners in Japan but not in the United States.
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The primary competing technology in the nuclear medicine industry is SPECT. The
Company believes that the primary reason SPECT competes successfully with PET is
the lower cost of the SPECT systems. A SPECT system can cost between $175,000
and $750,000 as compared with up to $2.0 million (depending on configuration and
equipment options) for a POSICAM(TM) system. However, the Company believes its
POSICAM(TM) system is a better diagnostic tool in that the Company's systems are
able to create more accurate images than SPECT imaging. Unlike SPECT, the
radioactive substances used by the Company's system is based on naturally
occurring substances within the body and allow the POSICAM(TM) systems to
directly measure the metabolic processes and changes occurring within the
scanned organ, thus providing a more accurate image.
High field MRI technology, an advanced version of MRI, is in the development
stage, but is a potential competitor to PET in certain neurology and oncology
applications. Presently, high field MRI may be useful in performing certain
research (non-clinical) applications such as blood flow studies to perform
"brain mapping" to localize the portions of the brain associated with individual
functions (such as motor activities and vision). However, high field MRI does
not have the capability to assess metabolism. The Company cannot presently
predict the future competitiveness of high field MRI.
Several manufacturers of SPECT systems are now offering multi-head systems,
which have been modified to operate in coincidence mode, similar to a PET
scanner. These systems achieve spatial resolutions similar to that of PET
scanners, but their sensitivity and count rate are only a small fraction of that
achieved by true PET scanners, making the images "noisy" and more difficult to
interpret. The Company believes these systems are useful for only a very limited
class of clinical PET studies using only the FDG radiotracer. In addition, SPECT
coincidence systems offer limited, if any, corrections for patient attenuation
and scatter, which affects the accuracy of diagnosis.
Third-Party Reimbursement
POSICAM(TM) systems are purchased or leased primarily by medical institutions,
which provide health care services to their patients. Such institutions or
patients typically bill or seek reimbursement from various third-party payors
such as Medicare, Medicaid, other governmental programs and private insurance
carriers for the charges associated with the provided healthcare services. The
Company believes that the market success of PET imaging depends largely upon
obtaining favorable coverage and reimbursement policies from such programs and
carriers.
Medicare/Medicaid reimbursement. Prior to March 1995, Medicare and Medicaid did
not provide reimbursement for certain PET imaging. Decisions as to such policies
for major new medical procedures are typically made by the U.S. Health Care
Financing Administration ("HCFA"), based in part on recommendations made to it
by the Office of Health Technology Assessment ("OHTA"). Historically, OHTA has
not completed an evaluation of a procedure unless all of the devices and/or
drugs used in the procedure have received approval or clearance for marketing by
the FDA. Decisions as to the extent of Medicaid coverage for particular
technologies are made separately by the various state Medicaid programs, but
such programs tend to follow Medicare national coverage policies. Medicare and
Medicaid reimbursement for PET imaging have been, and the Company believes will
continue to be, very restrictive. The Company believes that restrictive
reimbursement policies have had a very significant adverse affect on widespread
use of PET imaging and have, therefore, adversely affected the Company's
business, financial condition, results of operations and cash flows.
In 1996, HCFA approved reimbursement for one PET procedure in Cardiology. In
1998, four additional procedures in Cardiology, Oncology and Neurology were
approved. In February 1999, three additional procedure reimbursements were
approved in Oncology. However, whether HCFA will continue to approve additional
reimbursable procedures, whether private insurers will follow HCFA's lead and/or
whether the procedure reimbursement level will be sufficient to simulate the PET
market are unknown at this time.
Private insurer reimbursement. Most insurance carriers currently consider PET
imaging to be an investigational procedure and do not reimburse for procedures
involving PET imaging. The Company believes that certain private insurance
carriers, while they do not have broad PET reimbursement policies, reimburse for
PET scans on a case-by-case basis.
If third-party coverage for PET procedures using the POSICAM(TM) system remains
unavailable, it will likely have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.
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Manufacturing
The Company believes that it currently has the ability to assemble its
POSICAM(TM) scanners in a 2,700 square foot area of its 5,400 square foot
corporate facility located in Houston, Texas. Scanners are generally produced by
assembling parts furnished to the Company by outside suppliers. The Company
believes that it can assemble a typical POSICAM(TM) system in two months, with
an additional month required for testing before delivery. Due to the Company's
current financial condition, the Company relocated its manufacturing area in
April 1998 and the Company has not yet produced any POSICAM(TM) systems at its
present facility.
An essential component of the Company's POSICAM(TM) systems is bismuth germinate
oxide ("BGO") crystals, which detect the positron emissions forming the basis
for a PET image, and photomultiplier tubes, which convert the light energy
emitted by such crystals into electrical impulses for use in the image
reconstruction process. BGO crystals are specially manufactured and are
available from a supplier, located in the United States, that is a subsidiary of
a Japanese company, and another supplier located in France. While the Company
primarily relies on a single source for its BGO crystals, it has in the past
purchased crystals from the second manufacturer and believes that it could
resume such purchases at acceptable prices without significant delays.
The Company purchases photomultiplier tubes from a French supplier. In the event
that the supply of French photomultiplier tubes were to be interrupted, the
Company believes it has the ability to source similar product from an alternate
manufacturer in the United States. The Company believes that multiple vendor
sources exist in the United States for all other parts, for which no individual
vendor is critical to production. However, due to the Company's current
financial condition, many of its suppliers are requiring advanced payments for
materials.
Research and Development
The Company's POSICAM(TM) systems are based upon proprietary technology
initially developed at the University of Texas Health Science Center ("UTHSC")
in Houston, Texas, under a $24 million research program begun in 1979 and funded
by UTHSC and The Clayton Foundation for Research (Clayton Foundation), a
Houston-based, non-profit organization. Further product development and
commercialization of the system has been funded by the Company.
The Company's research and development expenses for the year ended December 31,
1997 were $1,305,000. Deterioration of its financial condition prevented the
Company from performing research and development in 1998. In addition to the
Company's sponsored and funded research and development programs, the Company in
the past has supplemented its research and development with a technology
transfer agreement with UTHSC and currently is participating in collaborative
research efforts with selected clinical and research customers, and research
grants funded through the federal government's Small Business Innovative
Research (SBIR) program.
Patent and Royalty Arrangements
The Company acquired the know-how and patent rights for positron imaging
("Licensed Technology") from the Clayton Foundation, K. Lance Gould (formerly a
director of the Company) and Nizar A. Mullani (formerly a director of the
Company). The Company is currently obligated to pay royalties of 3% of the gross
revenues from sales, uses, leases, licensing or rentals of the Licensed
Technologies, 1% each to the Clayton Foundation, K. Lance Gould and to Nizar A.
Mullani.
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The Company's current 3% royalty is based on agreements with Nizar A. Mullani
and K. Lance Gould to reduce the royalty payments due to them by the Company in
consideration of payments to be made to them under consulting agreements and
promissory notes. The consulting agreements provide that if the Company defaults
in its payment obligations thereunder, then Mr. Mullani and Dr. Gould would be
entitled to receive a regrant of the royalties that they previously released. On
April 12, 1998, the Company received a demand letter from Mr. Mullani alleging
default under his consulting agreement and demanding the regrant of an
additional 1% royalty interest. Although the Company has not received any such
demand from Dr. Gould, the Company believes that a payment default may have
occurred under Dr. Gould's consulting agreement and that as a result thereof,
Dr. Gould may be entitled to the regrant of an additional 0.5% royalty,
resulting in an increase of the Company's royalty obligations from 3% to 4.5%.
Increase in royalty obligations resulting from Mr. Mullani's claim could have a
material adverse effect on the Company's future financial performance. In
December 1998, the Company reached an agreement in principle with Dr. Gould
regarding payment of back royalties, waiver of demand rights regarding defaults
under the consulting contract and retaining the reduced royalty payment level
going forward.
Two of the Company's patents, issued in January 1986 and February 1987 and
expiring in January 2003 and February 2004, respectively, relate to the
staggered crystal array design of its POSICAM systems. One additional patent
issued in June 1987 and expiring in June 2004 relates to technology, which the
company, by obtaining the patent, has reserved the right to use. The Company
maintains certain of its patents in Germany and has applied for certain patents
in Japan.
The Company seeks to protect its trade secrets and proprietary know how through
confidentiality agreements with its employees and consultants. The Company
requires each employee and consultant to enter into a confidentiality agreement
containing provisions prohibiting the disclosure of confidential information to
anyone outside the Company, and requiring disclosure to the Company of any
ideas, developments, discoveries or investigations conceived during employment
or service as a consultant and the assignment to the Company of patents and
proprietary rights to such matters related to the business and technology of the
Company.
Government Regulations
The Company's POSICAM(TM) systems and radiopharmaceuticals used in connection
with them are subject to regulation by the FDA. The FDA regulates and approves
the clinical testing, manufacturing, labeling, distribution and promotion of
medical devices in the United States prior to their commercialization. In
addition, various foreign countries in which the Company's products are or may
be marketed, impose certain regulatory requirements.
The Company's POSICAM(TM) systems are regulated as medical devices by the FDA
and require pre-market clearance by the FDA. Pursuant to the Medical Device
Amendments of May 1976, the FDA classifies medical devices in commercial
distribution as a class I, class II, or class III device. This classification
scheme is based on the controls necessary to reasonably ensure the safety and
effectiveness of the medical devices. Class I devices are those devices whose
safety and effectiveness can reasonably be ensured through general controls,
such as adequate labeling, pre-market notification and adherence to the Good
Manufacturing Practice (GMP) regulations. Class II devices are those devices
whose safety and effectiveness can reasonably be assured through the use of
special controls, such as performance standards, post market surveillance,
patient registries and FDA guidelines. Class III devices require pre-market
approval from the FDA and are generally devices which support or sustain human
life or present a potential risk of illness or injury. The POSICAM(TM) systems
are considered to be class II devices. However, as of December 31, 1998, the FDA
has not promulgated a performance standard for PET systems. Therefore,
POSICAM(TM) systems are not currently subject to such controls, nor are they
subject to post market surveillance, patient registries and FDA guides.
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FY 1998 POSITRON CORPORATION FORM 10-KSB
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Before it can be commercially marketed, a class II device must be approved by
the FDA. If a medical device is "substantially equivalent" to a legally marketed
class II device, the manufacturer or distributor may seek FDA clearance by
filing what is known as a 510(k) pre-market notification which must be supported
by data and test results. If the FDA determines that the device is substantially
equivalent, then it may be marketed in the United States. The FDA may, however,
require additional data or additional test results, or may determine that a
device is "not substantially equivalent." Requests for additional data or test
results or a "not substantially equivalent" determination could delay the
Company's market introduction of new products and could have a material adverse
effect on the Company's financial results and operations. The FDA is not
required to respond to 510(k) pre-market notifications within a specific time
period. The FDA recently began requiring a more rigorous demonstration of
substantial equivalence and in many cases the time periods required for product
approvals has increased. If the FDA determines that a new product is "not
substantially equivalent," then the manufacturer must undergo a lengthy
Pre-Marketing Approval process which generally involves clinical trials and
submission of data to prove safety and effectiveness before approval is granted.
The Company's original POSICAM(TM) system received 510(k) clearance in September
1985. In November 1989, the Company was granted 510(k) clearance for a modified
POSICAM(TM) system, and also received approval for a mobile van configuration.
In 1991, the Company applied for and received 510(k) clearance of its
POSICAM(TM) HZ system, and in July 1993 the Company received 510(k) approval for
the POSICAM(TM) HZL.
The Company is also required to register as a medical device manufacturer with
the FDA. As such, the Company may be inspected from time to time by the FDA for
compliance with the FDA's GMP regulations. These regulations require that the
Company manufacture its products and maintain its documents in a prescribed
manner with respect to manufacturing, testing and control activities. Further,
the Company is required to comply with various FDA labeling requirements. The
Medical Device Reporting regulation required that the Company provide
information to the FDA on deaths or serious injuries alleged to have been
associated with the use of its devices, as well as product malfunctions that
would likely cause or contribute to death or serious injury if the malfunction
were to recur. To date, no such deaths, injuries or product malfunctions have
occurred. In addition, the FDA prohibits an approved device from being marketed
for unapproved applications. To date the Company has not received any notices of
noncompliance from the FDA concerning GMP regulations.
During February 1995, the FDA conducted a GMP compliance inspection at the
Company's manufacturing facility that resulted in the Company receiving a FDA
warning letter. Several issues were noted for corrective action in that letter,
and the Company expeditiously took action to address the FDA's concerns. In
February 1996, the FDA began a follow-up inspection of the Company's corrective
actions. In February 1996, February 1997 and July 1998 the FDA conducted
follow-up inspections of the Company's facilities. As of December 31, 1998, the
Company has not been informed of the results of such follow-up inspections. If
the FDA finds that the Company has not corrected the deficiencies noted in the
warning letter it could, among other things, issue another warning letter,
prohibit new product introductions, institute a product recall or prohibit the
Company from shipping products until all deficiencies are corrected to the FDA's
satisfaction. The Company is cooperating fully and intends to continue to work
with the FDA in all compliance matters.
The Company is required under Texas law to register with the Texas Department of
Health with respect to the Company's maintaining radiopharmaceuticals on
premises for testing and for research and development purposes. The Texas
Department of Health has the authority to inspect the Company's records and
facilities to ensure compliance with these regulations. The Company has in the
past received notice of minor violations, which have been satisfactorily
resolved with no punitive action. The Company believes that adequate measures
have been taken to prevent their recurrence.
Sales of medical devices outside of the United States may be subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approval by a foreign country may be longer than that
required for FDA approval and the requirements may differ.
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FY 1998 POSITRON CORPORATION FORM 10-KSB
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PET imaging centers must comply with regulations promulgated, in most states, by
an agency of the state government, under authority delegated by the Nuclear
Regulatory Commission governing the possession and use of radiopharmaceuticals
for medical diagnostic procedure. In order to secure approval, a PET imaging
center must submit an acceptable site for its scanner, employ adequate radiation
safety and quality procedures, and provide a nuclear physician who meets certain
training and experience standards. Cyclotrons are considered industrial devices
and are therefore not covered by any FDA regulations. Currently, there are no
state or federal regulations concerning the sale, marketing, or ownership of
cyclotrons. However, operational licenses are required by state radiation
regulatory divisions. The licensing and/or registration of cyclotrons by a state
is typically handled by the state's Department of Health or Bureau of Radiation
Control.
Many states have "certificate of need" regulations that require a purchaser or
user of expensive diagnostic equipment such as PET systems to obtain regulatory
approval before it may purchase and install such equipment. A primary purpose of
these regulations is to contain health costs by restricting the number of
similar units in a particular locality. The Company has yet to experience a
situation where a customer was unable to obtain such approval. However,
restrictions of this mature may increase in the future through the passage of
legislation and the adoption of regulatory changes as a part of overall health
care reform.
Backlog
The Company had no backlog for its POSICAM(TM) systems at December 31, 1998.
Product Liability and Insurance
Medical device companies are subject to a risk of product liability and other
liability claims in the event that the use of their products results in personal
injury claims. The Company has not experienced any product liability claims to
date. The Company maintains liability insurance with coverage of $1 million per
occurrence and an annual aggregate maximum of $2 million.
Employees
As of December 31, 1998, the Company employed ten (10) full-time persons: two
(2) are employed in the Company's engineering department, five (5) in field
service, two (2) in manufacturing, and one (1) in the executive and
administration department.
On January 1, 1996, the Company entered into an employment agreement with Werner
J. Haas, Ph.D., pursuant to which Dr. Haas agreed to serve as President and
Chief Executive Officer of the Company for a term of two years. The employment
agreement provided for the payment of an annual base salary of $200,000, bonuses
in an amount to be determined at the discretion of the Company's Board of
Directors, and participation in any employee benefit plan adopted by the Company
for its employees.
On February 18, 1997, Dr. Haas informed the Board of Directors of the Company
that he considered his contract to have been terminated by the Company without
cause as a result of the Company's failure to pay the February 15, 1997 payroll
to any of its management level employees and specifically to him. Dr. Haas has
demanded that the Company pay to him all past due salary as well as the nine
months severance pay specified in his employment agreement if his contract is
determined to have been terminated without cause. Additionally, Dr. Haas
resigned his position as a member of the Company's Board of Directors. The
Company has indicated to Dr. Haas that it believes no amounts are due him under
his employment agreement. As of December 31, 1998, the Company is unable to
predict the outcome of the disagreement between Dr. Haas and the Company.
Gary B. Wood, Ph.D., currently a member of the Company's Board of Directors, had
assumed the duties of President and Chief Executive Officer upon the resignation
of Werner Haas. Effective January 22, 1999, S. Lewis Meyer, CEO of Imatron,
assumed the duties of Chairman of the Company's Board of Directors. Gary H.
Brooks, CFO of Imatron, assumed the responsibilities of President, CFO and
Secretary of the Company.
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FY 1998 POSITRON CORPORATION FORM 10-KSB
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Risks Associated with Business Activities
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, 1998
and 1997 were $724,000 and $4,455,000, respectively. At December 31, 1998, the
Company had an accumulated deficit of approximately $49,684,000. There can be no
assurances that the Company will ever achieve the level of revenues needed to be
profitable in the future and if profitability is achieved, that it will be
sustained. Due to the sizable sales price of each POSICAM(TM) system and the
limited number of systems that are sold or placed in service in each fiscal
period, the Company's revenues have fluctuated, and may likely continue to
fluctuate significantly from quarter to quarter and from year to year.
Recruiting and Retention of Qualified Personnel. The Company's success is
dependent to a significant degree upon the efforts of its executive officers and
key employees. The loss or unavailability of the services of any of its key
personnel could have a material adverse effect on the Company. The Company's
success is also dependent upon its ability to attract and retain qualified
personnel in all areas of its business, particularly management, research and
marketing. Given the Company's current financial situation, there can be no
assurance that the Company will be able to continue to hire and retain a
sufficient number of qualified personnel. If the Company is unable to retain and
attract such qualified personnel, its business, operating results and cash flows
could be adversely affected.
Working Capital Deficiency. At December 31, 1998, the Company had cash and cash
equivalents in the amount of $8,000 compared to $160,000 at December 31, 1997.
Throughout much 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 and
remained unpaid at December 31, 1998. Additionally, the Company is in arrears to
many of its vendors and suppliers. As of December 31, 1998, such amount owed to
vendors and suppliers totaled approximately $1,253,000.
The Company will also require additional debt or equity financing to sustain its
operations beyond December 1998. The Company intends to rely upon Imatron's
undertaking (to use its best efforts to arrange additional third party equity
financing for the Company) in order to fulfill its current financing needs.
There are no assurances that Imatron will be successful in arranging additional
third party equity financing for the Company or, if such equity financing is
obtained, that the terms of such equity financing will be favorable to the
Company or its shareholders.
As a result of the Company's liquidity problems, its auditors, Ham, Langston &
Brezina, L.L.P., have added an emphasis paragraph to their opinion on the
Company's financial statements indicating that substantial doubt exists about
the Company's ability to continue as a going concern.
The Company had a special meeting of its shareholders on December 18, 1998 at
which time it approved the Imatron Transaction and the increase in the number of
authorized common shares.
Imatron Transaction. In May 1998, the Company entered into an agreement (the
"Imatron Transaction") with Imatron Inc. of South San Francisco ("Imatron"),
whereby in January 1999 Imatron acquired 9,000,000 shares of the Company's
Common Stock representing a majority ownership of the Company. Positron received
a nominal cash amount from Imatron in payment for the shares. In conjunction
with the execution of definitive agreements, Imatron began making working
capital advances available to Positron up to $600,000 in order to enable it to
meet a portion of its current obligations. As of December 31, 1998, the Company
had borrowed $600,000. The loan bears interest at 1/2% over the prime rate, is
due March 1, 2000 (with interest being payable monthly), and is secured by all
of Positron's assets. Under the planned arrangement, Positron will remain an
independent public company.
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FY 1998 POSITRON CORPORATION FORM 10-KSB
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Imatron, in addition to providing limited working capital financing, agreed and
has been working to support Positron's marketing program particularly with
regard to Imatron's affiliate, Imatron Japan, Inc. by agreeing to take, after
the share issuance closing date (January 22, 1999), all reasonable efforts to
cause the placement of 10 POSICAM(TM) systems over the next three years. In late
1997, Positron 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 several other high tech companies. Imatron has a 24
percent minority interest in Imatron Japan. Imatron has also agreed to help
facilitate the recapitalization of Positron to support its re-entry into the
medical imaging market by using its best efforts after the share issuance
closing date to arrange for additional third-party equity financing for Positron
over an eighteen-month period in an aggregate amount of not less than
$8,000,000. There can be no assurances, however, that any such sales will
actually be consummated or that Imatron will be able to successfully assist the
Company in raising additional capital.
As part of the consummation of the transaction in January 1999, all the
Company's directors and officers of Positron, except for Dr. Wood, resigned and
S. Lewis Meyer and Gary H. Brooks were nominated by Imatron to fill those
vacancies. Positron shareholders approved an amendment to Positron's Articles of
Incorporation to increase its authorized common stock to 100,000,000 shares.
Also, in connection with the above transactions, Positron, Imatron and two
lenders to Positron, Uro-Tech, Ltd. and ProFutures Bridge Capital Fund, L.P.
("ProFutures"), entered into certain agreements whereby (a) ProFutures waived
all past defaults and extended the maturity of its loan to December 5, 1998, in
return for a $50,000 payment, the issuance of warrants to purchase 1,150,000
shares of Positron common stock at $0.25 per share (in addition to the issuance
of previously bargained for warrants to purchase an additional 100,000 shares of
Positron common stock at $0.25 per share), and minimum loan repayments of
$50,000 for each of the months of April, May, June and July, 1998 and $100,000
for each of the months of August and September 1998, (b) Imatron agreed to
subordinate its loan to ProFutures' loan, (c) Uro-Tech, Ltd. agreed to
subordinate its loan (with a current balance of approximately $767,000 plus
accrued interest payable of approximately $260,000 at June 30, 1998) to
Imatron's loan, and (d) ProFutures and Imatron agreed that all amounts above the
first $1,000,000 of any third-party equity financing obtained by Imatron would
be applied equally to reduce Positron's debt to both ProFutures and Imatron. The
Company retired in full the Profutures loan in December 1998 in part with
proceeds received from the sale of the machine being leased to Buffalo
Cardiology and Pulmonary Associates.
If Imatron is unsuccessful in its efforts to raise capital for the Company,
management believes that the Company may be unable to continue as a going
concern and that the Company's assets may be seized by its secured creditors.
NASDAQ SmallCap Market Eligibility Failure to Meet Maintenance Requirements:
Delisting of Securities from the NASDAQ System. The Company's Common Stock was
previously listed on the NASDAQ SmallCap Market. The Board of Governors of the
National Association of Securities Dealers, Inc. ("NASD") has established
certain standards for the continued listing of a security on the NASDAQ SmallCap
Market. The standards required for the Company to maintain such listing include,
among other things, that the Company have total capital and surplus of at least
$2,000,000. As of December 31, 1998, the Company had a total capital and surplus
deficit of $5,639,000. The Company failed to maintain its NASDAQ stock market
listing and will not meet the substantially more stringent requirements to be
re-listed until such time as it is able to raise capital by sale of additional
equity securities or increase sales of its POSICAM(TM) systems. There can be no
assurances that the Company will ever meet the capital and surplus requirements
needed to be re-listed under the NASDAQ SmallCap Market System.
Trading of the Company's Common Stock is currently conducted in the "pink
sheets" or the NASD's Electronic Bulletin Board. Trading in the Common Stock is
covered by rules promulgated under the Exchange Act for non-NASDAQ and
non-exchange listed securities. Under such rules, broker/dealers who recommend
such securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Securities are exempt from these rules if the market price is at least
$5.00 per share. As of December 31, 1998, the closing price of the Company's
Common Stock was $0.13.
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<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
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The SEC has adopted regulations that generally define a penny stock to be any
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. The Company's common stock is currently subject to such
penny stock rules. The regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith. As a penny stock, the
market liquidity for the Company's Common Stock is severely affected due to the
limitations placed on broker/dealers that sell the Common Stock in the public
market.
Substantial Competition and Effects of Technological Change. The industry in
which the Company is engaged is subject to rapid and significant technological
change. There can be no assurance that POSICAM(TM) systems can be upgraded to
meet future innovations in the PET industry or that new technologies will not
emerge, or existing technologies will not be improved, which would render the
Company's products obsolete or non-competitive. The Company faces competition in
the United States PET market primarily from General Electric Company and Siemens
Medical Systems, Inc., two major commercial manufacturers, each of which has
significantly greater financial and technical resources and production and
marketing capabilities than the Company. In addition, there can be no assurance
that other established medical concerns, any of which would likely have greater
resources than the Company, will not enter the market. The Company also faces
competition from other imaging technologies which are more firmly established
and have a greater market acceptance, including single-photon emission computed
tomography (SPECT). There can be no assurance that the Company will be able to
compete successfully against any of its competitors.
No Assurance of Market Acceptance. The POSICAM(TM) systems involve new
technology that competes with more established diagnostic techniques. The
purchase and installation of a PET system involves a significant capital
expenditure on the part of the purchaser. A potential purchaser of a PET system
must have an available patient base that is large enough to provide the
utilization rate needed to justify such capital expenditure. There can be no
assurance that PET technology or the Company's POSICAM(TM) systems will be
accepted by the target markets or that the Company's sales of POSICAM(TM)
systems will increase or that the Company will ever be profitable.
Patents and Proprietary Technology. The Company holds certain patent and trade
secret rights relating to various aspects of its PET technology, which are of
material importance to the Company and its future prospects. There can be no
assurance, however, that the Company's patents will provide 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 material adverse effect on the Company's business, financial
conditions, results of operations and cash flows.
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FY 1998 POSITRON CORPORATION FORM 10-KSB
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Certain Financing Arrangements. In order to sell its POSICAM(TM) systems, the
Company has from time to time found it necessary to participate in ventures with
certain customers or otherwise assist customers in their financing arrangements.
The venture arrangements have involved lower cash prices for the Company's
systems in exchange for interests in the ventures, thus exposing the Company to
the attendant business risks of the ventures. The Company has, in certain
instances, sold its systems to financial intermediaries, which have, in turn,
leased the system. Such transactions may not give rise to the same economic
benefit to the Company as would have occurred had the Company made a direct cash
sale at its normal market prices on normal sale terms. There can be no assurance
that the Company will not find it necessary to enter similar transactions to
effect future sales. The nature and extent of the Company's interest in such
ventures or the existence of remarketing or similar obligations could require
the Company to account for such transactions as financing arrangements rather
than "sales" for financial reporting purposes. Such treatment could have the
effect of delaying the recognition of revenue on such transactions and may
increase the volatility of the Company's financial results.
Product Liability and Insurance. The use of the Company's products entails risks
of product liability. There can be no assurance that product liability claims
will not be successfully asserted against the Company.
The Company maintains liability insurance coverage in the amount of $1 million
per occurrence and an annual aggregate maximum of $2 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,
1998, approximately $561,000 of preferred stock dividends are undeclared and
unpaid by the Company.
Item 2. Description of Property
The Company occupies a 5,400 square foot facility in Houston, Texas. That
facility includes area for system assembly and testing, a computer room for
hardware and software product design, and office space. The facility is leased
month to month at a rate of approximately $2,700 per month. The Company
estimates the space to be sufficient for 1999.
Item 3. Legal Proceedings
The City of Houston, Katy Independent School District (KISD) and Harris County
together brought a consolidated action against the Company for delinquent taxes
and other assessments relating to tax years 1995 through 1997. In February 1998
judgement was entered against the Company in the amount of approximately
$240,000. In November 1998 the Company negotiated a payment schedule with each
of the City, KISD and the County in order to retire the judgement as to each
entity and also for payments of assessments relating to the 1998 tax year, which
were also delinquent but which no action has been brought. The Company has been
maintaining the payment schedule relating both to the judgement relating to
prior tax years and to the 1998 tax year.
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<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
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The Company acquired the know-how and patent rights for positron imaging from
the Clayton Foundation, K. Lance Gould (formerly a director of the Company) and
Nizar A. Mullani (formerly a director of the Company). Pursuant to royalty
agreements, the Company was obligated to pay royalties 4.5% of the gross
revenues from sales, uses, leases, licensing or rentals of the relevant
technology, in the aggregate to the Foundation, and to Messrs. Gould and Nizani.
In 1993 each of the individual royalty holders agreed to receive reduced royalty
payments in connection with receiving certain loans and entering into consulting
agreements with the Company, reducing the total aggregate royalty payments due
to 3%. The consulting agreements provide that if the Company defaults in its
payment obligations under the respective consulting agreements, Mr. Mullani and
Dr. Gould respectively would be entitled to reinstatement of their earlier
higher royalties. On April 12, 1998 the Company received a demand letter from
Mr. Mullani alleging defaults under his consulting agreement and demanding the
reinstatement of an additional 1% royalty interest. While the Company did not
receive a formal demand from Dr. Gould, the Company believes that a payment
default may have occurred under Dr. Gould's consulting contract as well. In
December 1998 the Company reached an agreement in principle with Dr. Gould
regarding payment of back royalties, waiver of demand rights regarding defaults
under the consulting contract, and retaining the reduced royalty payment level
going forward, as well as several other pending issues between parties. Increase
in royalty obligations resulting from Mr. Mullani's claim could have a material
adverse effect on the Company's future financial performance.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on December 18, 1998, at
which more than two-thirds of the outstanding voting power of the Common Stock
and Series A Preferrred Stock voting together as one class considered and
approved an amendment of the Company's Articles of Incorporation to increase the
authorized Common Stock from 15,000,000 shares to 100,000,000 shares. In
addition, more than a plurality of the voting power of the Common Stock and the
Series A Preferred voting together and represented in person or by proxy elected
Dr. Gary Wood as the Company's sole director, and more than a majority of the
voting power ratified the designation of Ham, Langston & Brezina, L.L.P. as
independent auditors for the fiscal year ended December 31, 1997.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
In December 1993, the Company completed an initial public offering of 1,750,000
shares of Common Stock and 1,946,775 redeemable warrants (the "Redeemable
Warrants") to purchase Common Stock (the "Initial Public Offering"). Prior to
the Initial Public Offering there was no public market for Company's Common
Stock. The Company's Common Stock and Redeemable Warrants are currently traded
in the over-the-counter securities market, and quoted on the NASDAQ OTC Bulletin
Board under the symbols POSC, respectively. The Company's Common Stock and
Redeemable Warrants were previously traded on the NASDAQ SmallCap Market but
were delisted in 1997 because the Company was unable to comply with various
financial and compliance requirements for continued inclusion on the NASDAQ
SmallCap Market. See "Item 1. Description of Business - Risks Associated with
Business Activities."
The following range of the high and low reported closing sales prices for the
Company's Common Stock for each quarter in 1998 and 1997, all as reported on the
NASDAQ OTC Bulletin Board or the NASDAQ SmallCap Market.
1998 1997 1996
--------------- --------------- ---------------
High Low High Low High Low
------ ------ ------ ------ ------ ------
First Quarter $0.625 $0.266 $3.375 $1.250 $3.563 $1.375
Second Quarter $0.609 $0.188 $1.938 $0.375 $4.188 $3.250
Third Quarter $0.453 $0.213 $1.438 $0.422 $5.500 $2.000
Fourth Quarter $0.500 $0.040 $0.953 $0.172 $3.250 $1.500
There were approximately 212 shareholders of record of Common Stock as of
December 31, 1998, including broker-dealers holding shares beneficially owned by
their customers.
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FY 1998 POSITRON CORPORATION FORM 10-KSB
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The Company has never paid cash dividends on its Common Stock. The Company does
not intend to pay cash dividends on its Common Stock in the foreseeable future.
The Series A Preferred Stock and Series B Preferred Stock Statements of
Designation prohibit the payment of Common Stock dividends until all required
dividends have been paid on each series of preferred stock. As of December 31,
1998, approximately $561,000 of preferred stock dividends are undeclared and
unpaid by the Company.
Item 6. Management's Discussion and Analysis or Plan of Operation
General
The Company was incorporated in December 1983 and commenced commercial
operations in 1986. Since that time, the Company has generated revenues
primarily from the sale and service contract revenues derived from the Company's
POSICAM(TM) system, 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. Should
the Imatron Transaction, discussed below, be unsuccessful the Company does not
have sufficient capital to repay secured creditors as obligations mature and
will, in all likelihood, be unable to continue in operations.
Imatron Transaction. In May 1998, the Company entered into the Imatron
Transaction with Imatron, pursuant to which on January 22, 1999, Imatron
acquired a majority ownership of the Company. In conjunction with the execution
of definitive agreements, Imatron began making working capital advances
available to Positron up to $500,000 in order to enable it to meet a portion of
its current obligations. As of December 31, 1998, the Company had borrowed
$600,000. The loan agreement has been amended by oral agreement to increase the
working capital advances available to the Company under the Agreement up to an
additional $100,000. The loan bears interest at 1/2% over the prime rate, is due
March 1, 2000 (with interest being payable monthly), and is secured by all of
Positron's assets.
Pursuant to the agreement, Imatron acquired a 9,000,000 shares of Common Stock
on January 22, 1999, representing 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 that time. Positron received
a nominal cash acquisition price from Imatron in payment for the shares plus a
series of affirmative commitments.
Imatron, in addition to providing limited working capital financing, agreed to
support Positron's marketing program particularly with regard to Imatron's
affiliate, Imatron Japan, Inc. by agreeing to take, after the share purchase,
all reasonable efforts to cause the placement of 10 POSICAM(TM) systems over the
next three years. Positron recently shipped a POSICAM(TM) system to Imatron
Japan as the first delivery under a three-year distribution agreement entered
into last year. Imatron Japan, an affiliate of Imatron, Inc. is a major
distributor for Imatron's Ultrafast CT and the products of several other high
tech companies. Imatron has a 24 percent minority interest in Imatron Japan.
Imatron also agreed to help facilitate the recapitalization of Positron to
support its re-entry into the medical imaging market by using its best efforts
to arrange for additional third-party equity financing for Positron over an
eighteen-month period in an aggregate amount of not less than $8,000,000. There
can be no assurances, however, that any such sales will actually be consummated
or that Imatron will be able to successfully assist the Company in raising
additional capital. Consummation of the issuance of shares to Imatron was
conditioned upon, among other things (a) the resignation of each officer of
Positron, (b) the resignation of at least three of the four Positron directors
and the appointment of Imatron's nominees to fill such vacancies, and (c)
Positron shareholder approval of an amendment to Positron's Articles of
Incorporation to increase its authorized common stock to 100,000,000 shares of
common stock. All of those conditions were met, and the shares were issued on
January 22, 1999.
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17
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
In connection with the above transactions, Positron, Imatron and two of the
lenders to Positron, Uro-Tech, Ltd. and ProFutures, entered into certain
agreements whereby (a) ProFutures waived all past defaults and extended the
maturity of its loan (with a current balance of approximately $570,000 at
September 30, 1998) to December 5, 1998, in return for a $50,000 payment, the
issuance of warrants to purchase 1,150,000 shares of Positron common stock at
$0.25 per share (in addition to the issuance of previously bargained for
warrants to purchase an additional 100,000 shares of Positron common stock at
$0.25 per share), and minimum loan repayments of $50,000 for each of the months
of April, May, June and July 1998, $100,000 for the month of August 1998 and
$50,000 for each of the months of September, October and November 1998, (b)
Imatron agreed to subordinate its loan to ProFutures' loan, (c) Uro-Tech, Ltd.
agreed to subordinate its loan (with a current balance of approximately $767,000
plus accrued interest payable of approximately $286,000 at September 30, 1998)
to Imatron's loan, and (d) ProFutures and Imatron agreed that all amounts above
the first $1,000,000 of any third-party equity financing obtained by Imatron
would be applied equally to reduce Positron's debt to both ProFutures and
Imatron. Consistent with the amendment to the Imatron Agreement, the Company and
ProFutures amended their agreements to provide further waivers of any past
defaults and further extended the maturity of the ProFutures Loan to December 5,
1998 and minimum loan repayments of $50,000 for each of the months of September,
October and November 1998. Imatron agreed to continue to subordinate its loan to
the ProFutures Loan, and Uro-Tech, Ltd. agreed to subordinate its loan to
Imatron's loan. The ProFutures loan was fully paid and retired in December 1998,
in part from proceeds received from the sale of the system being leased by
Buffalo Cardiology and Pulmonary Associates.
If Imatron is unsuccessful in its efforts to raise capital for the Company,
management believes that the Company may be unable to continue as a going
concern and that the Company's assets may be seized by its secured creditors.
Results of Operations
During the year ended December 31, 1998, the Company continued to experience
deterioration in its financial condition; however, the Company's net loss
decreased to $724,000 in 1998 from $4,455,000 in 1997. The decrease in net loss
is primarily the result of significant staff reductions and efforts to curtail
costs. Further analysis follows:
Revenues: System sales decreased to $0 in 1998 from $1,129,000 in 1997. The
Company sold no systems in 1998 and only one POSICAM(TM) system in 1997. Fee per
scan revenues decreased to $455,000 in 1998 from $602,000 in 1997 as a result of
the sale of the previously leased system to Buffalo Cardiology & Pulmonary
Associates. Service and component revenue decreased by $242,000 to $1,553,000 in
1998 as compared to $1,795,000 in 1997, due primarily to a conversion of one
system from full service contract to "time and material contract".
Cost of Sales and Services: Cost of system sales decreased to $0 in 1998 from
$698,000 in 1997 due to the fact that no POSICAM(TM) systems were sold in 1998.
Costs of fee per scan decreased to $118,000 in 1998 from $156,000 in 1997 due to
lower maintenance costs on the Company's only fee per scan system. The primary
cost associated with fee per scan is depreciation expense, which remained
constant. Service, warranty and component cost decreased $63,000 to $402,000 in
1998 from $465,000 in 1997 due primarily to the corresponding drop in service
revenues. The Company recognized a $1,224,000 provision for inventory
obsolescence during the fourth quarter of 1997 based upon management's
assessment that improvements would need to be made to the Company's POSICAMTM
systems in order to meet current technological requirements by potential
customers.
Operating Expenses: Research and development expenses decreased to $0 in 1998
from $1,305,000 in 1997 due to diversion of R&D staff time to customer service
support. The company continued to reduce personnel levels significantly in 1998
as liquidity problems squeezed Company resources. Selling, general and
administrative expenses declined to $1,700,000 in 1998 from $3,609,000 in 1997
also due to staff reductions.
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18
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
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Other Expenses: Interest expense increased to $525,000 in 1998 from $334,000 in
1997 due primarily to interest expense associated with the Company's loan from
ProFutures (the "ProFutures Loan"). The ProFutures Loan was initially funded in
November 1996 and had a balance in excess of $1,000,000 throughout much of 1997.
The interest rate on the ProFutures Loan increased from 12% to 18% during 1997
and that increase in interest rate combined with a higher average debt level
resulted in a significant increase in interest expense. The Company retired in
full the ProFutures loan in December 1998 in part with proceeds received from
the sale of the machine being leased to Buffalo Cardiology and Pulmonary
Associates (see "Imatron Transaction" section above).
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.
On the other hand, since the closing of the Company's 1993 initial public
offering, the sale in February, March and May of 1996 of 3,075,318 shares of
Series A Convertible Preferred Stock and the sale of 9,000,000 shares to
Imatron, each resulted in more than a 50% change in the ownership percentages of
shareholders. The provisions of Section 382 of the Internal Revenue Code
severely limit the annual utilization of the net operating loss carry forwards.
In addition, the utilization of the losses to reduce future income taxes is
dependent upon the generation of sufficient taxable income prior to the
expiration of the net operating loss carry forwards. The carry forwards will
begin to expire in the year 1999.
Liquidity and Capital Reserves
Since its inception the Company has been unable to sell POSICAM(TM) systems at
quantities sufficient to be profitable. Consequently, the Company has sustained
substantial losses. Net losses for the years ended December 31, 1998 and 1997
were $724,000 and $4,455,000, respectively. At December 31, 1998, the Company
had an accumulated deficit of approximately $49,684,000. Due to the sizable
prices of the Company's systems and the limited number of systems sold or placed
in service each year, the Company's revenues have fluctuated significantly year
to year.
At December 31, 1998, the Company had cash and cash equivalents in the amount of
$8,000 compared to $160,000 at December 31, 1997. Throughout much of 1997 and
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 and remained unpaid
at December 31,1998. Additionally, the Company is in arrears to many of its
vendors and suppliers. As of December 31, 1998, such amount owed to vendors and
suppliers totaled approximately $1,327,000. This amount excludes the nine months
severance demand made by Dr. Haas. See comments in section Employees above.
Even though the Company successfully retired Profutures Loan in December 1998,
on an on-going basis the Company will require additional debt or equity
financing to sustain its operations. The Company is relying on Imatron's
undertaking to use its best efforts to arrange additional third party equity
financing for the Company to fulfill its current financing needs. There are no
assurances that Imatron will be successful in arranging additional third party
equity financing for the Company or, if such equity financing is obtained, that
the terms of such equity financing will be favorable to the Company or its
shareholders.
As a result of the Company's liquidity problems, its auditors, Ham, Langston &
Brezina, L.L.P., have added an explanatory paragraph to their opinion on the
Company's financial statements indicating that substantial doubt exists about
the Company's ability to continue as a going concern.
Impact of Year 2000
The Year 2000 ("Y2K") issue results from computer programs having been written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculation causing a disruption of business activities.
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19
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
The Company has performed only a preliminary assessment of the Y2K issue using a
broad overview and management's current understanding of its information and
non-information systems and its informal understanding of the information and
non-information systems of its significant suppliers and major customers. None
of the detailed tasks necessary to properly assess the Y2K issue (such as direct
coordination with vendors, customers and manufacturers) have been performed.
Based on a preliminary assessment, the Company believes that it will not need
significant modifications to its computer software or hardware and that its
existing computer systems (including information systems, non-information
systems using date sensitive embedded chips and its POSICAMTM systems) will
function properly with respect to dates in the year 2000 and thereafter. Based
upon such preliminary assessment, the Company also currently believes that costs
to modify the Company's existing computer hardware and software systems in
regard to the Y2K issue will not be significant and should not exceed $10,000.
However, the Y2K issue is extremely complex and the costs to properly assess its
impact on the Company and to correct associated problems may be very
significant.
Based on the Company's preliminary assessment of its relationships with
significant suppliers and major customers to understand the extent to which the
Company is vulnerable to any failure by third parties to remedy their own Y2K
issues, management believes that the Company does not have significant exposure
with respect to third parties. However, the Company's preliminary assessments
indicated that the worst case scenario with regard to the Y2K issue would be
delays in receiving parts and materials needed for manufacturing and delays by
customers in making payments for fee-per-scan and maintenance services. In the
Company's current financial position, such circumstances could threaten the
Company's continued existence.
Due to the Company's current severe liquidity problems, the Company has not had
the financial resources to perform a complete assessment of Y2K issues, assess
the potential cost or develop any contingency plan with regard to Y2K issues
that may arise. The Company is unable to predict at the current time, when and
to what extent it may continue to pursue its assessment of potential Y2K issues
and the development of any related contingency plans. If the Company can obtain
necessary financial resources, it will complete its assessment of the Y2K issues
facing the Company during the third quarter of 1999.
Information Regarding and Factors Affecting Forward Looking Statements
The Company is including the following cautionary statement in this Annual
Report on Form 10-KSB to make applicable and take advantage of the safe harbor
provision of the Private Securities Litigation Reform Act of 1995 for any
forward looking statements made by, or on behalf of the Company. Forward looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements
which are other than statements of historical facts. Certain statements
contained herein are forward looking statements and, accordingly, involve risks
and uncertainties which could cause actual results or outcomes to differ
materially from those expressed in the forward looking statements.
The Company's expectations, beliefs and projections are expressed in good faith
and are believed by the Company to have a reasonable basis, including without
limitations, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectation, beliefs or
projections will result or be achieved or accomplished. In addition to other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward looking statements: the ability
of the Company to attain widespread market acceptance of its POSICAM(TM)
systems; the ability of the Company to obtain acceptable forms and amounts of
financing to fund future operations; demand for the Company's services; and
competitive factors. The Company disclaims any obligation to update any forward
looking statements to reflect events or circumstances after the date hereof.
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20
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
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Item 7. Financial Statements
The required Financial Statements and the notes thereto are contained in a
separate section of this report beginning with the page following the signature
page.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
On April 7, 1998, Coopers & Lybrand L.L.P. ("Coopers & Lybrand"), by means of a
letter addressed to the Chairman of the Board and Chief Executive Officer of
Positron Corporation informed the Company that it had resigned as the Company's
independent auditors. The resignation arises from Coopers & Lybrand's desire to
terminate its relationship with the Company because of the Company's current
financial condition.
The report of Coopers & Lybrand for either of the of the past two years did not
contain an opinion or disclaimer of opinion, or qualification or modification as
to uncertainty, audit scope, or accounting principles, except: (i) Coopers &
Lybrand's report on the financial statements of the Company as of and for the
years ended December 31, 1996, contained a separate paragraph stating that "the
Company has suffered recurring losses from operations and has a net capital
deficiency that raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty"; and (ii) The financial statements
as of and for the fiscal year ended December 31, 1997 have not been audited.
This decision to resign was made by Coopers & Lybrand and was neither approved
nor disapproved by the Company's Board of Directors.
During the two most recent fiscal periods ended December 31, 1998 and December
31, 1997 and from December 31, 1997 to the date of Coopers & Lybrand's
resignation, there were: (i) no disagreements between the Company and Coopers &
Lybrand on any matter of accounting principles or practice, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of Coopers & Lybrand would have caused it to make reference
thereto in its report; and (ii) no reportable events as defined in paragraph
304(a)(1)(iv) of Regulation S-B.
Coopers & Lybrand has provided the Securities and Exchange Commission with a
letter agreeing to the disclosure contained herein.
Coopers and Lybrand was replaced by Ham, Langston & Brezina, L.L.P. on June 26,
1998.
Prior to the engagement of Ham, Langston & Brezina, L.L.P. as independent
auditors, the Company had not consulted them regarding the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements or any other financial presentation whatsoever.
No disagreements exist between the Company and Ham, Langston & Brezina, L.L.P.
on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
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21
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and key employees of the Company consist of
the following individuals:
Name Age Position
S. Lewis Meyer 54 Director, Chairman of the Board
(appointed/effective January 22,1999)
Gary H. Brooks 50 Director, President, Chief Financial
Officer and Secretary
(appointed/effective January 22, 1999)
Gary B. Wood, Ph.D. 47 Director, Chief Executive Officer
(resigned as CEO effective January 22, 1999)
K. Lance Gould. M.D. 57 Director
(resigned effective December 18, 1998)
John H. Laragh, M.D. 69 Director
(resigned effective December 18, 1998)
Ronald B. Schilling, Ph.D. 56 Director
(resigned effective December 18, 1998)
William S. Kiser, M.D. 68 Director (resigned effective
May 1, 1998)
Howard R. Baker 45 Executive Vice President (resigned
effective April 14, 1998)
David O. Rodrigue 49 Chief Financial Officer and Secretary
(resigned effective January 21, 1998)
S. Lewis Meyer was appointed a director and Chairman of the Board of the Company
effective January 22, 1999. He also serves as President, Chief Executive Officer
and Director of Imatron to which he was appointed 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. Prior thereto, he was President and Chief Executive Officer of
American Health Services Corp. (now Insight Health Services Corp.), a developer
and operator of diagnostic imaging and treatment centers. During his tenure at
American Health Services Corp., it was one of the fifty fastest growing public
companies in the United States.
In addition to his duties as Chairman of the Company's Board of Director and as
President and Chief Executive Officer of Imatron, Mr. Meyer serves as a Director
for BSD Medical Corp. and Finet Holdings Corp., publicly held companies engaged
in the design and manufacture of medical hypothermia equipment and electronic
real estate and mortgage banking services, respectively.
Mr. Meyer received his 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 was appointed President, CFO and Secretary of the Company on
January 22, 1999. He also serves as Vice President of Finance/Administration,
Chief Financial Officer, and Secretary of Imatron to which he was appointed in
December of 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 responsible positions in accounting and finance at several Fortune
500 companies including Ford, Rockwell, Bendix, and ITT.
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22
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
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Mr. Brooks also serves as Chief Financial Officer of Imatron's subsidiary,
HeartScan Imaging, Inc.
Mr. Brooks received his B.A. in Zoology in 1970 from the University of
California, Berkeley, and a M.B.A. in Finance and Accounting in 1973 from the
University of California, Los Angeles.
Gary B. Wood, Ph.D., has served as director and Chairman of the Board of
Directors of the Company from April 1990. From October 1, 1994 to December 31,
1995, he also acted as President and Chief Executive Officer of the Company
until Werner Haas was appointed President and Chief Executive Officer in January
1996. Upon the resignation of Dr. Werner J. Haas in February 1997, Dr. Wood
again assumed the duties of President and CEO pending the selection of a new
President and CEO.
Mr. Wood is also 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 OmniMed)
founded in 1983. Both OmniMed and Uro-Tech specialize in investing in the
biotechnology and health care industries. Dr. Wood holds a BS and MS in
Electrical Engineering (with special emphasis in Biomedical Instrumentation),
and an interdisciplinary Doctorate of Philosophy from Texas Tech University.
Certain of the entities controlled by Dr. Wood are principal shareholders of the
Company.
K. Lance Gould, M.D., one of the inventors of the Company's POSICAM(TM) system,
served as Company Director from 1984 until December 1998 and as Special Medical
Consultant to the Company from 1984 until the present. For more than the last
five years, Dr. Gould has served as a Professor of Medicine at the University of
Texas Medical School in Houston. Dr. Gould holds a BA in Physics from Oberlin
College and a M.D. from Western Reserve Medical School.
John H. Laragh, M.D. served as a director from December 1993 to December 1998.
Dr. Laragh has been Chief of the Division of Cardiology of the Department of
Medicine at the Cornell University Medical College since 1976, and Director of
the Cardiovascular Center at the New York Hospital Cornell Medical Center since
1975. Dr. Laragh holds a BA and a M.D. from Cornell University.
Ronald B. Schilling, Ph.D., served as a director from March 1995 to until
December 1998. Since 1992 he has served as President and Chief Executive Officer
of Prime-X, General Imaging, Inc., a sensor imaging technology company, and
served as a consultant to other medical technology companies. From 1987 to 1992,
Dr. Schilling was Senior Vice President and General Manager at Toshiba America
Medical Systems, Inc., a medical technology company. Dr. Schilling holds a
B.S.E.E. in electrical engineering from City College of New York, an M.S.E.E.
from Princeton University, and Ph.D. from the New York Polytechnic Institute.
Item 10. Executive Compensation
The following tables set forth certain information with respect to compensation
paid by the Company during the years ended 1998, 1997 and 1996 and certain
information regarding stock options issued to certain of the individuals who
have acted as executive officers of the Company during 1998 and 1997.
<TABLE>
Summary Compensation Table
<CAPTION>
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (I)
-------------------------------------------------------------------------------------------
Restricted Options/
Name and Principal Fiscal Salary Bonus Other Annual Stock SARs LTIP All Other
Position Year ($) ($) compensation Award(s) (#) Payouts ($)Compensation
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gary B. Wood Ph.D. 1998 93,333 - - - - - -
President and Chief 1997 33,333 - - - - - -
Executive Officer(1) 1996 13,750 19,800 98,000 (2) - - - -
Howard Baker 1998 163,027 - - - - - -
Executive Vice 1997 91,000 - - - - - -
President 1996 153,500 10,700 2,375 - 12,500(3) - -
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23
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
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<FN>
(1) October 1, 1994 to December 31, 1995 and February 1, 1997 to Present.
(2) Represents $80,000 in consulting fees paid to Dr. Wood and $18,000 in directors fees.
(3) Represents options to acquire Common Stock awarded under the 1994 Incentive and Non-statutory Option Plan.
</FN>
</TABLE>
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<CAPTION>
(a) (b) (c) (d) (e)
-------------------------- ---------------------------
Number of Unexercised Value of Unexercised In-the-
Options/SARs at Fiscal Year- Money Options/SARs at Fiscal
End Year-End
- ------------------------ ------------ -------- ----------- ------------ ----------- ------------
Shares Value
Acquired on Realized Exercisable Unexercisable Exercisable Unexercisable
Name Exercise (#) ($) (#) (#) ($) ($)
- ------------------------ ------------ -------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gary B. Wood, Ph.D. 0 0 71,440 0 0(1) 0(1)
<FN>
(1) Based upon the exercise price in effect on December 31, 1998 and the closing price of $0.250 for the Company's Common Stock
on December 31, 1998, 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 1998 or 1997 for their
services as directors of the Company. As of December 31, 1998 approximately
$540,000 was owed to Directors or former Directors of the Company.
Pursuant to the 1994 Incentive and Non-statutory Option Plan (the "1994 Plan"),
each non-employee director is automatically granted a one time stock option to
purchase 10,500 shares of Common Stock at the time such person is elected to the
Board of Directors. In addition, pursuant to the 1994 Plan, each non-employee
director upon his reelection at the Annual Shareholder Meeting will
automatically receive an option to purchase a number of shares of Common Stock
equal to the quotient derived by dividing $15,000 by the fair market value of
Common Stock on the date of the grant. All options so granted under the 1994
Plan to non-employee directors are automatically granted as of the first
business day following the date such person is elected or reelected, as
applicable, as a director and have an exercise price no less than the fair
market value of Common Stock determined as of the business day preceding the
date of the grant.
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<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
One-third of the options granted to non-employee directors under the 1994 Plan
are exercisable as of the date of the grant, an additional one-third of such
options becomes exercisable upon the first anniversary of such date with the
remaining one-third becoming exercisable upon the second anniversary of such
date. If a non-employee director ceases to be a director for any reason other
than as a result of death, disability or not being reelected as a director (in
the case where such person is willing to serve as a director but such person has
not been renominated for election or, if renominated, the shareholders failed to
reelect such person as a director) then that director's option will become void
to the extent it is not then exercisable and the portion, if any, of the option
that is exercisable at such time will remain exercisable for the lesser of the
remaining term of the option or one year. In addition, if any non-employee
director ceases to be a director as a result of death, disability or not being
reelected as a director (in the case where such person is willing to serve as a
director but such person has not been renominated for election or, if
renominated, the shareholders failed to reelect such person as a director) then
the option held by that director to the extent not then exercisable, will become
fully vested and exercisable and the options will remain exercisable for a
period of the lesser of the remainder of the term of the option or one year. The
terms of 1994 Plan regarding issuances to non-employee directors have been
suspended for the years ended December 31, 1998 and 1997.
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 Company's Board of Directors. The
Company has indicated to Dr. Haas that it believes no amounts are due him under
his employment agreement. As of December 1998, the Company is unable to predict
the outcome of the disagreement between Dr. Haas and the Company.
Dr. Wood assumed the duties of President and Chief Executive Officer upon the
resignation of Dr. Haas and continued until January 22, 1999 when Gary H. Brooks
assumed the position of President.
1987 Stock Option Plan
The Company adopted 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 was amended on March 13, 1991, and was
further amended in March 1992, September 1992 and November 1993. The plan
provided for options up to a total of 188,522 shares of Common Stock. . No
options could be granted under the 1987 Plan after June 1, 1997. The 1987 Plan
provides that incentive options which satisfy the requirements of Section 422 of
the Internal Revenue Code could 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 could 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 determined
from time to time. If any options granted under the 1987 Plan expire or
terminate without being exercised, the shares covered thereby were added back to
the shares reserved for issuance under the 1987 Plan.
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FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
The Compensation Committee of the Board of Directors administered the 1987 Plan.
The 1987 Plan provides that options could 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 determined, at its discretion, the persons to be
granted options, option prices, date of grant and vesting periods, although no
option could extend for longer than ten years (five years for incentive stock
options granted to 10% or greater stockholders). Payment of the exercise price
is made by check or in such other form as may be acceptable to the Board of
Directors. Common Stock Options are not transferable by the optionee, other than
by will or the applicable laws of descent and distribution. In the event of
termination of employment, the option expires on the earlier of its stated
expiration or three months (six months in the case of the optionee's death)
after termination of employment.
In the event of a recapitalization, reorganization or other change in the
Company's capital structure or a merger or consolidation or the sale or transfer
of all or part of its assets, the 1987 Plan provided for adjustment of the
shares of Common Stock covered by the 1987 Plan and outstanding options granted
pursuant to the 1987 Plan.
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.
1994 Incentive and Non-statutory Option Plan
On June 3, 1994, the shareholders of the Company approved the 1994 Incentive and
Non-statutory Option Plan (the "1994 Plan"). The 1994 Plan is an arrangement
under which certain individuals may be granted options for incentive stock
options and Non-statutory stock options as described below. Subject to
adjustment as set forth in the 1994 Plan, the aggregate number of shares of the
Company's Common Stock that may be the subject of awards is 610,833. Of the
610,833 shares of Common Stock available under the 1994 Plan 160,000 have been
reserved for issuance to non-employee directors. As of December 31, 1998,
345,481 options had been granted to employees and 113,724 options had been
granted to non-employee directors.
The Compensation Committee of the Board of Directors administers the 1994 Plan.
The Compensation Committee consists of two or more directors who, except for
automatic grants for non-employee directors under Section 7 of the 1994 Plan,
are not eligible and have not, within a one year prior to the appointment of the
Compensation Committee, received equity securities of the Company under the 1994
Plan or any other incentive plan of the Company. The Compensation Committee
currently consists of Dr. Wood.
Under the 1994 Plan, the Compensation Committee has wide discretion and
flexibility, enabling the Compensation Committee to administer the 1994 Plan in
the manner that it determines is in the best interest of the Company. The
Compensation Committee has the authority to designate recipients of options
under the 1994 Plan, to interpret and construe the provisions of the 1994 Plan
and any options granted thereunder, and to do all things necessary or
appropriate to administer the 1994 Plan in accordance with its terms.
401(k) Plan
The Company has a 401(k) Retirement Plan and Trust (the "401(k) Plan") which
became effective as of January 1, 1989. Employees of the Company who have
completed one-quarter year of service and have attained age 21 are eligible to
participate in the 401(k) Plan. Subject to certain statutory limitations, a
participant may elect to have his or her compensation reduced by up to 20% and
have the Company contribute such amounts to the 401(k) Plan on his or her behalf
("Deferral Contributions"). The Company makes contributions in an amount equal
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<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
to 25% of the participant's Deferral Contributions up to 6% of his/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/her individual accounts and such participant is permitted to
direct the investment of such accounts.
A participant is fully vested in the current value of that portion of his/her
accounts attributable to Deferral Contributions. A participant's interest in
that portion of his/her accounts attributable to Employer Contributions is
generally fully vested after five years of employment. Distributions under the
401(k) Plan are made upon termination of employment, retirement, disability and
death. In addition, participants may make withdrawals in the event of severe
hardship or after the participant attains age fifty-nine and one-half.
The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue
Code of 1986, so that contributions made under the 401(k) Plan, and income
earned on contributions, are not taxable to participants until withdrawal from
the 401(k) Plan.
The Company's contributions to the 401(k) Plan on behalf of all employees in the
years ended December 31, 1998 and 1997 was $11,490 and $36,306 respectively. Dr.
Wood is not eligible to participate in the Company's 401(k) Plan.
Policy with Respect to $1 Million Deduction Limit
It is the Company's policy, where practical, to avail itself of all proper
deductions under the Internal Revenue Code. Amendments to the Internal Revenue
in 1993, limit, in certain circumstances, the deductibility of compensation in
excess of $1 million paid to each of the five highest paid executives in one
year. The total compensation of the executive officers did not exceed this
deduction limitation in fiscal year 1998 or 1997.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of December 31, 1998,
regarding the ownership of Common Stock of: (i) each person who is known by the
Company to be the beneficial owner of more than five percent of the outstanding
shares of Common Stock; (ii) each director and executive officer of the Company;
and (iii) all executive officers and directors of the Company as a group.
Included in the "Number of Shares of Common Stock" are shares attributable to
options or warrants that are exercisable as of, or will be exercisable within 60
days after, December 31, 1998.
<TABLE>
<CAPTION>
Common Stock Preferred Stock A Preferred Stock B
------------------------- ------------------------- -------------------------
Beneficial Owner(1) Shares % Outstanding Shares % Outstanding Shares % Outstanding
- ------------------- ------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Auer & Co.(2) 600,000 11.3% 399,996 25.1%
c/o ASB Capital Mgt.
1101 Pennsylvania Avenue
NW, Suite 300
Washington, DC 20004
DHB Capital 25,000 100%
11 Old Westbury Rd.
Old Westbury, NY 11568
Uro-Tech, Ltd.(3) 865,523 15.5% 433,329 27.2%
5430 LBJ Freeway
Dallas, Texas 75240
Gary B. Wood, Ph.D.(5) 80,793 1.6%
Omni-MedCorporation
5430 LBJ Freeway
Dallas, Texas 75240
All Directors and Executive 225,041 4.4%
Officers as a Group (5 persons)
<FN>
* Less than 1%
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FY 1998 POSITRON CORPORATION FORM 10-KSB
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(1) Except as otherwise indicated, each stockholder has sole investment and
sole voting power with respect to the shares of Common Stock or Series
A Preferred Stock shown.
(2) Includes 600,000 shares issuable upon the conversion of 400,000 shares
of Series A 8% Cumulative Convertible Redeemable Preferred Stock and
200,000 warrants to purchase Common Stock.
(3) Includes 424,787 shares of Common Stock owned by Uro-Tech, Ltd., a
Texas limited partnership, the general partner of which is OmniMed
Corporation ("OmniMed"). Includes 156,565 shares of Common Stock
issuable upon the exercise of Series E Warrants held by Uro-Tech, Ltd.
Includes 650,000 shares issuable upon the conversion of 433,333 shares
of Series A 8% Cumulative Convertible Redeemable Preferred Stock and
216,671 warrants to purchase Common Stock acquired upon the conversion
of $650,000 in principal amount of the Uro-Tech Loan. Also includes
67,500 shares issuable upon the conversion of warrants acquired in
connection with the Uro-Tech Loan. Dr. Wood is Chairman of the Board of
Directors, and beneficially owns 63.7% of the outstanding voting
securities, of OmniMed. All shares beneficially owned by OmniMed have
been included in the total number of shares beneficially owned by Dr.
Wood.
(4) Includes 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.
</FN>
</TABLE>
Item 12. Certain Relationships and Related Transactions
Royalty Payments
In 1984, the Company licensed for use in the United States the know-how and
patent rights relating to positron imaging (the "Licensed Technology") possessed
by the Clayton Foundation, K. Lance Gould (a forner director of the Company) and
Nizar A. Mullani (a former director of the Company). The Company is currently
obligated to pay royalties of 3% of the gross revenues from sales, uses, leases,
licensing or rentals of the Licensed Technologies, 1% each to the Clayton
Foundation, K. Lance Gould and Nizar A. Mullani. The Company has not made any
royalty payments since 1993. As of December 31, 1998 approximately $368,000 was
owed to Messrs-Gould & Mullani and the Foundation for past due royalties.
The Company's current 3% royalty is based on agreements with Nizar A. Mullani
and K. Lance Gould to reduce the royalty payments due to them by the Company in
consideration of payments to be made to them under consulting agreements and
promissory notes. The consulting agreements provide that if the Company defaults
in its payment obligations thereunder, then Mr. Mullani and Dr. Gould would be
entitled to receive a regrant of the royalties that they previously released. On
April 12, 1998, the Company received a demand letter from Mr. Mullani alleging
default under his consulting agreement and demanding the regrant of an
additional 1% royalty interest. Although the Company has not received any such
demand from Dr. Gould, the Company believes that a payment default may have
occurred under Dr. Gould's consulting agreement and that as a result thereof,
Dr. Gould may be entitled to the regrant of an additional 0.5% royalty,
resulting in an increase of the Company's royalty obligations from 3% to 4.5%.
Increase in royalty obligations resulting from Mr. Mullani's claim could have a
material adverse effect on the Company's future financial performance. In
December 1998, the Company reached an agreement in principle with Dr. Gould
regarding payment of back royalties, waiver of demand rights regarding defaults
under the consulting contract and retaining the reduced royalty payment level
going forward.
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FY 1998 POSITRON CORPORATION FORM 10-KSB
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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 a further agreement with Dr. Gould
under which the Company became obligated to extend loans to Dr. Gould in order
to provide him with funds to satisfy his personal income tax liability arising
out of the conversion of his 9% Convertible Promissory Notes into Common Stock.
Such agreement was entered into by the Company in consideration of certain
concessions made by Dr. Gould concerning the conversion terms under his 9%
Convertible Promissory Notes. Pursuant to the agreement, the loans, would be on
substantially the following terms if made: (I) limited to a principal amount not
to exceed $175,000, (ii) interest payable at the rate of six percent per annum,
(iii) an initial term of three years, (iv) limited recourse against the
borrower, and (v) collateralized by Common Stock owned by the borrower. In
accordance with such agreement, on April 15, 1994, the Company extended a
$165,817 loan to Dr. Gould. This loan was not repaid upon maturity and was fully
reserved by the Company at December 31, 1998.
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 1998 and 1997. In January 1998, the Company and Dr. Wood agreed to extend
the term of such consulting agreement to December 31, 1998.
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, matured on December 5, 1998 based on extensions obtained in connection
with the Imatron Transaction, 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.
Imatron Loan
In May 1998, Imatron began making working capital advances to the Company
pursuant to a Loan and Security Agreement of up to $500,000 in order to enable
the Company to meet a portion of its current obligations. The parties
subsequently orally agreed to extend the maximum advances permissible under the
Loan and Security to $600,000. As of December 31, 1998, Imatron had advanced
$600,000 to the Company pursuant to the Loan and Security Agreement. The loan
bears interest at 1/2% over the prime rate, is due March 1, 2000 (with interest
being payable monthly during the term), and is secured by all the Company's
assets. Pursuant to the agreement entered into between Imatron and the Company
also in May 1998 ( See Part I), Imatron acquired majority ownership of the
Company in January 1999. Immediately thereafter, the Chief Executive Officer and
Chief Financial Officer of Imatron were appointed to the Company's Board of
Directors and were also appointed respectively as its Chairman, and as its
President, Chief Financial Officer, and Secretary.
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FY 1998 POSITRON CORPORATION FORM 10-KSB
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Item 13. Exhibits, Lists and Reports on Form 8-K
Exhibits:
3.1 Articles of Incorporation of the Registrant (incorporated herein by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
3.2 By-laws of the Registrant, as amended (incorporated herein by reference
to Exhibit 3.2 to the Company's Registration Statement on Form SB-2
(File No. 33-68722)).
4.1 Specimen Stock Certificate (incorporated herein by reference to Exhibit
4.1 of the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1994).
4.2 Form of Redeemable Warrant (included as part of Exhibit 10.71)
4.3 Statement of Designation Establishing Series A 8% Cumulative
Convertible Redeemable Preferred Stock of Positron Corporation, dated
February 28, 1996 (incorporated herein by reference to Exhibit 4.3 of
the Company's Annual Report on Form 10-KSB for the year ended December
31, 1995).
4.4 Warrant Agreement dated as of February 29, 1996, between Positron
Corporation and Continental Stock Transfer & Trust Company
(incorporated herein by reference to Exhibit 4.4 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995).
4.5 Specimen Redeemable Warrant Certificate to Purchase Shares of Common
Stock (incorporated herein by reference to Exhibit 4.5 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995).
4.6 Stock Purchase Warrant dated as of February 7, 1996 issued by Positron
Corporation to Boston Financial & Equity Corporation (incorporated
herein by reference to Exhibit 4.6 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995).
4.7 Statement of Designation Establishing Series B 8% Cumulative
Convertible Redeemable Preferred Stock of Positron Corporation, dated
July 9, 1996.
4.8 Form of Warrant Agreement dated as of July 10, 1996, between Positron
Corporation and Brooks Industries Profit Sharing Plan.
10.1 Lease Agreement dated as of July 1, 1991, by and between Lincoln
National Pension Insurance Company and Positron Corporation
(incorporated herein by reference to Exhibit 10.1 to the Company's
Registration Statement on Form SB-2 (File No. 33-68722)).
10.2 Agreement dated as of March 1, 1993, by and between Positron
Corporation and Oxford Instruments (UK) Limited (incorporated herein by
reference to Exhibit 10.2 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.3 International Distribution Agreement dated as of November 1, 1992, by
and between Positron Corporation and Batec International , Inc.
(incorporated herein by reference to Exhibit 10.3 to the Company's
Registration Statement on Form SB-2 (File No. 33-68722)).
10.4+ 1994 Incentive and Nonstatutory Option Plan.
10.5+ Amended and Restated 1987 Stock Option Plan (incorporated herein by
reference to Exhibit 10.5 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.6+ Retirement Plan and Trust (incorporated herein by reference to Exhibit
10.6 to the Company's Registration Statement on Form SB-2 (File No.
33-68722)).
10.7 Amended and Restated License Agreement dated as of June 30, 1987, by
and among The Clayton Foundation for Research, Positron Corporation, K.
Lance Gould, M.D., and Nizar A. Mullani (incorporated herein by
reference to Exhibit 10.7 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.8 Clarification Agreement to Exhibit 10.7 (incorporated herein by
reference to Exhibit 10.8 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.9 Royalty Assignment dated as of December 22, 1988, by and between K.
Lance Gould and Positron Corporation (incorporated herein by reference
to Exhibit 10.10 to the Company's Registration Statement on Form SB-2
(File No. 33-68722)).
10.10 Royalty Assignment dated as of December 22, 1988, by and between Nizar
A. Mullani and Positron Corporation (incorporated herein by reference
to Exhibit 10.11 to the Company's Registration Statement on Form SB-2
(File No. 33-68722)).
10.11 Royalty Assignment dated as of December 22, 1988, by and between The
Clayton Foundation and Positron Corporation (incorporated herein by
reference to Exhibit 10.12 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.12+ Stock Purchase Warrant dated October 31, 1993, issued to Gary B. Wood
(incorporated herein by reference to Exhibit 10.15 to the Company's
Registration Statement on Form SB-2 (File No. 33-68722)).
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<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
10.13 Amendment No. 1 to Exhibit 10.22 (incorporated herein by reference to
Exhibit 10.23 to the Company's Registration Statement on Form SB-2
(File No. 33-68722)).
10.14+ Consulting Agreement dated as of January 15, 1993, by and between
Positron Corporation and K. Lance Gould, M.D. (incorporated herein by
reference to Exhibit 10.24 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.15 Stock Purchase Warrant dated February 25, 1993, issued to K. Lance
Gould (incorporated herein by reference to Exhibit 10.26 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.16+ Consulting Agreement dated February 23, 1995, effective December 15,
1994, by and between Positron Corporation and F. David Rollo, M.D.
Ph.D., FACNP.
10.17+ Consulting Agreement dated as of January 15, 1993, by and between
Positron Corporation and Nizar A. Mullani (incorporated herein by
reference to Exhibit 10.31 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.18+ Consulting Agreement dated as of November 12, 1993, by and between
Positron Corporation and OmniMed Corporation (incorporated herein by
reference to Exhibit 10.35 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.19 Contract No. 1318 dated as of December 30, 1991, by and between
Positron Corporation and The University of Texas Health Science Center
at Houston (incorporated herein by reference to Exhibit 10.39 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.20+ Letter Agreement dated July 30, 1993 between Positron Corporation and
Howard Baker (incorporated herein by reference to Exhibit 10.52 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.21 Technology Transfer Agreement dated as of September 17, 1990, by and
between Positron Corporation and Clayton Foundation for Research
(incorporated herein by reference to Exhibit 10.54 to the Company's
Registration Statement on Form SB-2 (File No. 33-68722)).
10.22 Stock Purchase Warrant dated as of October 31, 1993 issued to Gerald
Hillman (incorporated herein by reference to Exhibit 10.56 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.23 Stock Purchase Warrant dated as of October 31, 1993 issued to The Dover
Group (incorporated herein by reference to Exhibit 10.57 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.24 Stock Purchase Warrant dated as of October 31, 1993 issued to John
Wilson (incorporated herein by reference to Exhibit 10.63 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.25+ Stock Purchase Warrant dated as of October 31, 1993 issued to Robert
Guezuraga (incorporated herein by reference to Exhibit 10.64 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.26 Stock Purchase Warrant dated as of October 31, 1993 issued to Richard
Ronchetti (incorporated herein by reference to Exhibit 10.65 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.27 Form of Amended and Restated Registration Rights Agreement dated as of
November 3, 1993, by and among Positron and the other signatories
thereto (1993 Private Placement) (incorporated herein by reference to
Exhibit 10.73 to the Company's Registration Statement on Form SB-2
(File No. 33-68722).
10.28 Registration Rights Agreement dated as of July 31, 1993, by and among
Positron and the other signatories thereto (other than the 1993 Private
Placement) (incorporated herein by reference to Exhibit 10.74 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.29 Software Licenses dated as of March 1, 1993, by and between Positron
Corporation and Oxford Instruments (UK) Limited (incorporated herein by
reference to Exhibit 10.81 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.30 Distribution Agreement dated as of June 1, 1993, by and between
Positron Corporation and Elscint, Ltd. (incorporated herein by
reference to Exhibit 10.82 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.31+ Employment Agreement dated as of August 19, 1993, by and between
Positron Corporation and Richard E. Hitchens (incorporated herein by
reference to Exhibit 10.83 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
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FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
10.32+ Employment Agreement dated as of August 19, 1993, by and between
Positron Corporation and Howard R. Baker (incorporated herein by
reference to Exhibit 10.84 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.33 Amended and Restated Warrant Agreement dated as of April 14, 1994, by
and between Positron Corporation and Continental Stock Transfer and
Trust Company (including form of Warrant Certificate).
10.34 First Amendment to Amended and Restated Registration Rights Agreement,
dated as of November 19, 1993, by and among Positron Corporation and
the other signatories thereto (incorporated herein by reference to
Exhibit 10.91 to the Company's Registration Statement on Form SB-2
(File No. 33-68722)).
10.35 Agreement made and entered into as of October 31, 1993, by and between
Positron Corporation and Nizar A. Mullani (incorporated herein by
reference to Exhibit 10.97 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.36 Agreement made and entered into as of October 31, 1993, by and between
Positron Corporation and K. Lance Gould (incorporated herein by
reference to Exhibit 10.98 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.37 Agreement made and entered into as of November 15, 1993, by and between
Positron Corporation and Nizar A. Mullani (incorporated herein by
reference to Exhibit 10.100 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.38 Agreement made and entered into as of November 15, 1993, by and between
Positron Corporation and K. Lance Gould (incorporated herein by
reference to Exhibit 10.101 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.39 First Amendment made and entered as of January 25, 1994, by and between
Emory University d/b/a Crawford Long Hospital and Positron Corporation
(incorporated herein by reference to Exhibit 10.102 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1993).
10.40+ Employment Agreement dated January 1, 1996 by and between Werner J.
Haas, Ph.D. and Positron Corporation (incorporated herein by reference
to Exhibit 10.40 of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995).
10.41 Loan and Security Agreement made as of November 14, 1995, between
Positron Corporation and Uro-Tech, Ltd. (incorporated herein by
reference to Exhibit 10.41 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.42 First Modification and Extension Agreement made as of January 3, 1996,
by Positron Corporation and Uro-Tech, Ltd. (incorporated herein by
reference to Exhibit 10.42 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.43 Second Modification and Extension Agreement made as of February 26,
1996 by Positron Corporation and Uro-Tech, Ltd. (incorporated herein by
reference to Exhibit 10.43 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.44 Uro-Tech Loan Conversion Agreement dated as of November 14, 1995,
between Positron Corporation and Uro-Tech, Ltd. (incorporated herein by
reference to Exhibit 10.44 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.45 Promissory Note dated September 14, 1995, in the principal amount of
$1,500,000 payable to Uro-Tech, Ltd. (incorporated herein by reference
to Exhibit 10.45 of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995).
10.46 Promissory Note dated September 14, 1995, in the principal amount of
$1,000,000 payable to Uro-Tech, Ltd. (incorporated herein by reference
to Exhibit 10.46 of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995).
10.47 Revolving Finance agreement with Boston Financial & Equity Corporation
(incorporated herein by reference to Exhibit 10.47 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995).
10.48 Security Agreement Boston Financial & Equity Corporation (incorporated
herein by reference to Exhibit 10.48 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995).
10.49 Supplement to Security Agreement Security Interest in Inventory
(incorporated herein by reference to Exhibit 10.49 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995).
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FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
10.50 Inter-Creditor Agreement (incorporated herein by reference to Exhibit
10.50 of the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995).
10.51 Loan Agreement between Positron Corporation and ProFutures Bridge
Capital Fund, L.P. dated November 1, 1996.
10.52 Promissory Note dated November 14, 1996, in the principal amount of
$1,400,000 payable to ProFutures Bridge Capital Fund, L.P.
10.53 InterCreditor Agreement dated November 14, 1996 among Uro-Tech, Ltd.,
Boston Financial & Equity Corporation and ProFutures Bridge Capital
Fund, L.P.
10.54 Amendment to BF&E loan
10.55 Amendment to Uro-Tech loan
10.56 Acquisition Agreement between General Electric Company and Positron
Corporation dated July 15, 1996.
10.57 Loan Agreement between Positron Corporation and Imatron, Inc..
10.58 Sales and Marketing Agreement With Beijing Chang Feng Medical.
10.59 Stock Purchase Agreement between Positron Corporation and Imatron, Inc.
10.60 Promissory Note from Positron Corporation to Imatron, Inc.
27.0* Financial Data Schedule
* Filed herewith
+ Management contract or compensatory plan or arrangement identified
pursuant to Item 13(a).
Form 8-K Reports:
One current report on form 8-K was filed by the Company during the fourth
quarter of 1998, on December 4, 1998 reporting the expiration on December 3,
1998 of its redeemable warrants at an exercise price of $5.60 per share. The
last trade of the redeemable warrants prior to their expiration occurred
December 1, 1998 on the Over-The-Counter Bulletin Board for a price of $0.001
per warrant.
- --------------------------------------------------------------------------------
33
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
POSITRON CORPORATION
Date: April 14, 1999 By: /s/ Gary H. Brooks
-------------------------------------------
Gary H. Brooks
President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ S. Lewis Meyer April 14, 1999
- ---------------------------------------------------------
S. Lewis Meyer
Director and Chairman of the Board
/s/ Gary H. Brooks April 14, 1999
- ---------------------------------------------------------
Gary H. Brooks
Director , President, Chief Financial Officer and
Secretary
/s/ Gary B. Wood, Ph.D. April 14, 1999
- ---------------------------------------------------------
Gary B. Wood, Ph.D.
Director
- --------------------------------------------------------------------------------
34
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
for the years ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
35
<PAGE>
TABLE OF CONTENTS
-----------------
Page
------
Report of Independent Accountants 37
Balance Sheet as of December 31, 1998 38
Statements of Operations for the years
ended December 31, 1998 and 1997 39
Statements of Stockholders' Deficit
for the years ended December 31, 1998 and 1997 40
Statements of Cash Flows for the years
ended December 31, 1998 and 1997 41
Notes to Financial Statements 42
- --------------------------------------------------------------------------------
36
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
Report of Independent Accountants
Board of Directors and Stockholders
Positron Corporation
We have audited the accompanying balance sheet of Positron Corporation as of
December 31, 1998 and the related statements of operations, stockholders'
deficit and cash flows for each of the two years in the period then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Positron Corporation as of
December 31, 1998, and the results of its operations and its cash flows for each
of the two years in the period then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue has a going concern. Management's plan with regard to this matter is
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Ham, Langston & Brezina, L.L.P.
Houston, Texas
March 26, 1999
- --------------------------------------------------------------------------------
37
<PAGE>
<TABLE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
POSITRON CORPORATION
BALANCE SHEET
AS OF DECEMBER 31, 1998
(Amounts In thousands, except share data)
ASSETS
<S> <C>
Current Assets:
Cash and cash equivalents $ 8
Accounts receivable, net 99
Inventories 391
Prepaid expenses 58
--------
Total current assets 556
Plant and equipment net 130
--------
Total assets $ 686
========
LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities:
Note payable to an affiliate $ 792
Accounts payable and accrued liabilities 4,723
Unearned revenue 142
--------
Total current liabilities 5,657
Long-term Debt to an affiliate 600
Other liabilities 68
--------
Total Liabilities 6,325
--------
Stockholders' deficit:
Series A Preferred Stock: $1.00 par value; 8% cumulative, convertible, redeemable;
5,450,000 shares authorized; 1,557,403 shares issued outstanding at December 31, 1998 1,557
Series B Preferred Stock: $1.00 par value, 8% cumulative, convertible, redeemable;
25,000 shares authorized, issued and outstanding at December 31, 1998 25
Common stock: $0.04 par value; 100,000,000 shares authorized 5,166, 542 shares
Issued and 5,106,386 shares outstanding at December 31, 1998 52
Additional paid-in capital 42,426
Accumulated deficit (49,684)
Treasury stock: 60,156 shares at cost (15)
--------
Total stockholders' deficit (5,639)
Total liabilities and stockholders' deficit $ 686
========
<FN>
See Notes to Financial Statements
</FN>
- ------------------------------------------------------------------------------------------------------------------------------------
38
</TABLE>
<PAGE>
<TABLE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
POSITRON CORPORATION
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
(Amounts In thousands, except share data)
1998 1997
----------------- ----------------
<S> <C> <C>
Revenues:
System sales $ -- $ 1,129
Fee per scan 455 602
Service and component 1,553 1,795
----------------- ----------------
Total revenues 2,008 3,526
----------------- ----------------
Costs of sales and services:
System sales -- 698
Fee per scan 118 156
Service, warranty and component 402 465
Provision for inventory obsolescence -- 1,224
----------------- ----------------
Total costs of sales and service 520 2,543
----------------- ----------------
Gross profit 1,488 983
----------------- ----------------
Operating expenses:
Research and development -- 1,305
Selling, general and administrative 1,700 3,609
----------------- ----------------
Total operating costs 1,700 4,914
----------------- ----------------
Loss from operations (212) (3,931)
----------------- ----------------
Other expenses:
Interest expense (525) (334)
Gain on disposal of property and equipment 29 --
Other expense (16) (190)
----------------- ----------------
Total other expense, net (512) (524)
----------------- ----------------
Net loss $ (724) $ (4,455)
================= ================
Basic and dilutive net loss per common share $ (0.14) $ (0.91)
================= ================
Weighted average common shares outstanding 5,150,131 4,884,870
================= ================
<FN>
See notes to financial statements.
</FN>
- ------------------------------------------------------------------------------------------------------------------------------------
39
</TABLE>
<PAGE>
<TABLE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
POSITRON CORPORATION
STATEMENT OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1998 AND 1997
(Amounts in thousands, except share data)
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, 1997 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
Net loss -- -- -- -- -- --
Conversion of Series A Preferred Stock to
Common Stock ( 37,552) ( 38) -- -- 37,552 1
Warrants issued for note extension (1,150,000) -- -- -- -- -- --
--------- ------- ------ ---- --------- ----
Balance at December 31, 1998 1,557,447 $ 1,557 25,000 $ 25 5,166,542 $ 52
========= ======= ====== ==== ========= ====
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated Treasury
Capital Deficit Stock Total
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 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)
Net loss -- ( 724) -- ( 724)
Conversion of Series A Preferred Stock to
Common Stock 37 -- -- --
Warrants issued for note extension (1,150,000) 198 -- -- 198
-------- --------- ----- --------
Balance at December 31, 1998 $ 42,426 $ (49,684) $ (15) $ (5,639)
======== ========= ===== ========
<FN>
See notes to financial statements.
</FN>
- ------------------------------------------------------------------------------------------------------------------------------------
40
</TABLE>
<PAGE>
<TABLE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
POSITRON CORPORATION
STATEMENTS OF CASH FLOW
YEAR ENDED DECEMBER 31,
(Amounts in thousands)
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (724) $ (4,455)
Adjustment to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation 250 255
Warrants issued for interest expense 198 --
Provision for doubtful accounts and notes receivable -- 456
Provision for obsolescence of inventory -- 1,224
Net gain from sale and disposal of property and equipment (29) --
Provision to reduce intangible assets to net realizable value -- 81
Amortization of intangible assets -- 25
Change in assets and liabilities, operating:
Decrease in accounts receivable 154 120
Decrease in inventories 17 1,001
Decrease in prepaid expenses 73 28
Decrease in other current assets -- 426
Increase (decrease) in accounts payable and accrued liabilities (30) 1,011
Decrease in revolving line of credit -- (75)
Increase (decrease) in other liabilities (177) 177
Increase (decrease) in unearned revenue 82 (207)
-------------- --------------
Net cash provided by (used in) operating activities (186) 67
-------------- --------------
Cash flows from investing activities:
Proceeds from sale of equipment 364 --
Capital expenditures -- (3)
-------------- --------------
Net cash provided by (used in) investing activities 364 (3)
-------------- --------------
Cash flows from financing activities:
Proceeds from note payable to an affiliate 600 104
Repayment of other notes payable (930) (405)
Proceeds from conversion of warrants to common stock -- 15
-------------- --------------
Net cash used in financing activities (330) (286)
-------------- --------------
Net decrease in cash and cash equivalents $ (152) $ (222)
Cash and cash equivalents, beginning of year 160 382
-------------- --------------
Cash and cash equivalents, end of year $ 8 $ 160
============== ==============
<FN>
See notes to financial statements.
</FN>
- ------------------------------------------------------------------------------------------------------------------------------------
41
</TABLE>
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. Description of Business
Positron Corporation (the "Company") was incorporated on December 20,
1983 in the state of Texas and commenced commercial operations during
1986. The Company designs, manufacturers, markets and services its
POSICAMTM system advanced medical imaging devices, utilizing positron
emission tomography ("PET") technology. These systems utilize the
Company's patented and proprietary technology, an imaging technique which
assesses the biochemistry, cellular metabolism and physiology of organs
and tissues, as well as producing anatomical and structural images.
Targeted markets include medical facilities and diagnostic centers
located throughout the world. POSICAMTM systems are used by physicians as
diagnostic and treatment evaluation tools in the areas of cardiology,
neurology and oncology. The Company faces competition principally from
two other companies which specialize in advanced medical imaging
equipment.
Since its inception the Company has been unable to sell its POSICAMTM
systems in sufficient quantities to be profitable. Consequently, the
Company has sustained substantial losses. Net losses for the years ended
December 31, 1998 and 1997 were $749,000 and $4,455,000, respectively,
and at December 31, 1998 the Company has an accumulated deficit of
$49,709,000. The magnitude of the selling prices of the Company's systems
and the limited number of systems sold or placed in service each year has
caused the Company's revenues to fluctuate significantly from year to
year.
At December 31, 1998, the Company had cash and cash equivalents of only
$8,000 compared to $160,000 at December 31, 1997. During both 1998 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 and dating
back more than a year were unpaid at December 31, 1998. Additionally, the
Company is subject to certain unasserted claims which have not been
resolved.
To deal with its critical liquidity problem, during January 1999 the
Company completed an agreement (the "Imatron Transaction") with Imatron,
Inc. ("Imatron"), whereby in Imatron acquired a majority ownership in the
Company and plans to raise capital for continued operation of the Company
(See Note 14). If 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..
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.
Inventories
Inventories are stated at the lower of cost or market and include
material, labor and overhead. Cost is determined using the first-in,
first-out (FIFO) method of inventory valuation.
Plant and Equipment
Plant and equipment are recorded at cost and depreciated for financial
statement purposes using the straight-line method over estimated useful
lives of three to seven years. Gains or losses on dispositions are
included in the statement of operations in the period incurred.
Maintenance and repair costs are charged to expense as incurred.
- --------------------------------------------------------------------------------
42
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
Impairment of Long-Lived Assets
Periodically, the Company evaluates the carrying value of its plant and
equipment, and long-lived assets, which includes patents and other
intangible assets, by comparing the anticipated future net cash flows
associated with those assets to the related net book value. If an
impairment is indicated as a result of such reviews, the Company would
remove the impairment based on the fair market value of the assets, using
techniques such as projected future discounted cash flows or third party
valuations. As of December 31, 1998 an adjustment to intangible assets
was indicated and recorded.
Revenue Recognition
Revenues from POSICAMTM system contracts are recognized when all
significant costs have been incurred and the system has been shipped to
the customer. Revenues from fee per scan contracts are recognized upon
performance of patient scans. Revenues from maintenance contracts are
recognized over the term of the contract. Service revenues are recognized
upon performance of the services.
Research and Development Expenses
All costs related to research and development are charged to expense as
incurred.
Warranty Costs
The Company accrues for the cost of product warranty on POSICAMTM systems
at the time of shipment. Warranty periods generally range up to a maximum
of one year but may extend for longer periods. Actual results could
differ from the amounts estimated.
Net Loss Per Common Share
Basic and dilutive net loss per common share for the years ended December
31, 1998 and 1997 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.
Reclassifications
Certain amounts presented in the Company's December 31, 1997 financial
statements have been reclassified in order to conform to current year
presentation.
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income".
Comprehensive income includes such items as unrealized gains or losses on
certain investment securities and certain foreign currency translation
adjustments. The Company's financial statements include none of the
additional elements that affect comprehensive income. Accordingly,
comprehensive income and net income are identical.
- --------------------------------------------------------------------------------
43
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
Segment Information
Effective January 1, 1998 the Company adopted SFAS 131, "Disclosures
About Segments of an Enterprise and Related Information". 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 believes that it operates in only one
business segment and does not have geographically diversified business
operations. Accordingly, the adoption of SFAS 131 did not have a
significant impact on the Company (See Note 15).
3. Accounts Receivable
Accounts receivable at December 31, 1998 consisted of the following:
(dollars in thousands)
Accounts receivable - equipment sales $1,011
Accounts receivable - maintenance 99
------------
1,110
Less allowance for doubtful accounts (1,011)
------------
$ 99
============
4. Inventories
Inventories at December 31, 1998 consisted of the following: (dollars in
thousands)
Raw materials $1,126
Finished goods 438
------------
1,564
Less reserve for obsolescence (1,173)
------------
$391
============
Due to improvements in technology that will slow movement of the
Company's inventory, the Company recorded a reserve for obsolescence of
$1,224,000 at December 31, 1997 to reduce inventories to their estimated
net realizable value.
5. Plant and Equipment
Plant and equipment at December 31, 1998 consisted of the following:
(dollars in thousands)
Furniture and fixtures $ 86
Computers and peripherals 93
Leasehold improvements 17
Machinery and equipment 203
------------
399
Less accumulated depreciation (269)
------------
$130
============
During the year ended December 31, 1998, the Company sold certain leased
assets and disposed of various assets not in use. The net effect of these
sales and dispositions resulted in the Company reporting $29,000 gain in
the accompanying statement of operations.
- --------------------------------------------------------------------------------
44
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
6. Accounts Payable and Accrued Liabilities
Accrued liabilities at December 31, 1998 consisted of the following:
(dollars in thousands)
Trade $ 677
Rent 282
Interest 370
Professional fees 229
Property tax 347
Warranty 1,337
Compensation 980
Royalties 384
Other 117
------------
$4, 723
============
7. Notes Payable and Long-Term Debt to Affiliates
Notes payable and long-term debt to affiliates at December 31, 1998
consisted of the following (dollars in thousands):
Notes payable to Uro-Tech, Ltd (the "Uro-Tech Loan")
bearing interest at 13.8% per year and due July 31,
1998, (based upon extensions granted in connection
with the Imatron Transaction). This note is
collateralized by liens and security interests
encumbering substantially all of the Company's
assets, including the Company's know-how, patents and
proprietary rights pertaining to its PET technology.
This note is subordinated to the Imatron Loan
described below and was not paid upon maturity. $792
Note payable to Imatron, Inc. (the "Imatron Loan")
bearing interest at prime (7.75% at December 31,
1998) plus1/2percent per year and due March 1, 2000.
Interest is due monthly on this note and is
collateralized by liens and security interest
encumbering substantially all the Company's assets,
including the Company's know-how, patents and
proprietary rights pertaining to its PET technology. 600
---------
1,392
Less current portion 792
---------
$600
=========
In connection with the Uro-Tech Loan, the Company granted Uro-Tech, Ltd.
Warrants to purchase 67,500 shares of common stock at an exercise price
of $2.00 per share, exercisable through February 7, 2001.
All notes payable and long-term debt outstanding at December 31, 1998 are
due during the years ending December 31, 1999 and 2000.
8. 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.
- --------------------------------------------------------------------------------
45
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
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 o f
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, 1998, options to
purchase an aggregate of 144,389 shares of common stock at a range of
$2.626 - $4.125 per share, have been granted to certain key employees.
The 1994 Plan also provides that each non-employee director automatically
receives options to purchase 10,500 shares of common stock at the date
such individual becomes a non-employee director. Each non-employee
director who is a director on the first business day following each
Annual Shareholder Meeting also receives an option to purchase a number
of shares of common stock having a value of $15,000 as determined by the
fair market value of the common stock at the date of grant. As of
December 31, 1998, 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.
There were no stock option grants, exercises or forfeitures during the
years ended December 31, 1998 or 1997. At December 31, 1998, 1997 and
1996 the Company had 572,678 stock options outstanding at a weighted
average exercise price of $2.80 per share.
The Company has elected to apply the disclosure only provisions of
Statement of Financial Accounting No. 123, Accounting for Stock-Based
Compensation ("SFAS 123") which, if fully adopted by the Company, would
change the method the Company applies in recognizing the cost of the
Plan. Adoption of the cost recognition provisions of SFAS 123 is optional
and the Company has decided not to elect those provisions. As a result,
the Company continues to apply Accounting Principles Board Opinion No. 25
("APB 25") and related interpretations in accounting for the measurement
and recognition of the Plan's cost.
The shares exercisable for vested options and the corresponding weighted
average exercise price was 435,436 shares and $2.80 per share at December
31, 1998 and 1997.
Following is a summary of stock options outstanding at December 31, 1998.
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 6.20 $2.63 376,194 $2.63
$3.376--$4.125 79,698 6.66 $3.91 59,242 $3.92
------- -------
$2.625--$4.125 572,678 6.27 $2.80 435,436 $2.80
======= =======
The Company did not grant or reprice any options during the year ended
December 31, 1998 or 1997.
Under SFAS 123, compensation cost is measured at the grant date based on
the fair value of the awards and is recognized over the service period,
which is usually the vesting period. The fair value of options granted
during 1998 and 1997 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 1998 and 1997: (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%.
- --------------------------------------------------------------------------------
46
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
The pro forma disclosures as if the Company adopted the cost recognition
requirements of SFAS 123 are as follows (in thousands):
1998 1997
------------------------- --------------------------
As Reported Pro Forma As Reported Pro Forma
------- ------- ------- -------
Net loss $ ( 749) $( 749) $(4,455) $(4,485)
Earnings per common share $ (0.15) $ (0.15) $ (0.91) $ (0.93)
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 expired November 30,1998.
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 the 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 at December 21, 1997. The Redeemable
Warrants expired December 31, 1998.
In April 1998, in connection with the Imatron transaction, the Company
granted ProFuturesBridge Capital, L.P. ("ProFutures") warrants to
purchase 1,150,000 shares of the Company's common stock at $0.25 per
share in return for the extension of a loan agreement (See Note 14).
During 1998 the Company recognized interest expense of $198,000 related
to the value of these 1,150,000 warrants.
A summary of warrant activity is as follows:
Number of
Shares Exercise Price
--------- -----------------
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
Warrants converted to Common Stock (7,183)
---------
Balance at December 31, 1997 7,892,537 $1.84-- $3,572.27
Warrants issued in connection with the
ProFutures Loan 1,150,000 $0.25
Expired (6,166,192) $5.60
---------
Balance at December 31, 1998 2,876,345 $0.25-- $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, 1998 or 1997.
- --------------------------------------------------------------------------------
47
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
9. Preferred Stock
The Company's Articles of Incorporation authorize the board of directors
to issue 10,000,000 shares of preferred stock from time to time in one or
more series. The board of directors is authorized to determine, prior to
issuing any such series of preferred stock and without any vote or action
by the shareholders, the rights, preferences, privileges and restrictions
of the shares of such series, including dividend rights, voting rights,
terms of redemption, the provisions of any purchase, retirement or
sinking fund to be provided for the shares of any series, conversion and
exchange rights, the preferences upon any distribution of the assets of
the Company, including in the event of voluntary or involuntary
liquidation, dissolution or winding up of the Company, and the
preferences and relative rights among each series of preferred stock.
Series A Preferred Stock
In February, March and May of 1996, the Company issued 3,075,318 shares
of Series A 8% Cumulative Convertible Redeemable Preferred Stock $1.00
par value ("Series A Preferred Stock") and Redeemable Common Stock
Purchase Warrants to purchase 1,537,696 shares of the Company's Common
Stock. The net proceeds of the private placement were approximately
$2,972,000. Each share of the Series A Preferred Stock is immediately
convertible into one share of Common Stock. Each Redeemable Common Stock
Purchase Warrant is exercisable at a price of $2.00 per share of Common
Stock. Eight percent (8%) dividends on the Series A Preferred Stock may
be paid in cash or in Series A Preferred Stock at the discretion of the
Company. The Series A Preferred Stock is senior to the Company's Series B
Preferred Stock and Common Stock in liquidation. Holders of the Series A
Preferred stock may vote on an as if converted basis on any matter
requiring shareholder vote. While the Series A Preferred Stock is
outstanding or any dividends thereon remain unpaid, no Common Stock
dividends may be paid or declared by the Company. The Series A Preferred
Stock may be redeemed in whole or in part, at the option of the Company,
at any time subsequent to March 1998 at a price of $1.46 per share plus
any undeclared and/or unpaid dividends to the date of redemption.
Redemption requires at least 30 days advanced notice and notice may only
be given if the Company's common stock has closed above $2.00 per share
for the twenty consecutive trading days prior to the notice.
In conjunction with the issuance of the aforementioned Series A Preferred
Stock, Uro-Tech converted amounts receivable from the Company totaling
$650,000 into 433,329 shares of Series A Preferred Stock and 216,671
Redeemable Stock Purchase Warrants.
Series B Preferred Stock
In July 1996, the Company issued 25,000 shares of Series B 8% Cumulative
Convertible Redeemable Preferred stock $1.00 par value ("Series B
Preferred Stock") and Common Stock Purchase Warrants to purchase up to
100,000 shares of its Common stock, par value $.01 per share. The Series
B Preferred Stock plus Common Stock Purchase Warrants sold for
approximately $50.00 per share of Series B Preferred stock. Subject to
adjustment for certain antidilution events, each share of Series B
Preferred Stock is initially convertible into 25 shares of Common Stock
and each Common Stock Purchase Warrant is exercisable for one share of
Common Stock at an exercise price of $2.00 per share. Eight percent (8%)
dividends on the Company's Series B Preferred Stock may be paid in cash
or in Series B Preferred Stock, at the discretion of the Company. The
Series B Preferred Stock is junior to the Series A Preferred Stock, but
senior to the Company's Common Stock in liquidation. The Series B
Preferred Stock has no voting rights other than those afforded by law. As
a class, however, the holders of the Series B Preferred Stock may vote on
matters directly affecting the Series B Preferred Stock or mergers and/or
consolidations of the Company with another company. The Series B
Preferred Stock may be redeemed in whole or in part, at the option of the
Company, at any time subsequent to July 1998 at a price of $50 per share
plus any undeclared and/or unpaid dividends to the date of redemption.
Redemption requires at least 30 days advanced notice and notice may only
be given if the Company's common stock has closed above $2.00 per share
for the twenty consecutive trading days prior to the notice.
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48
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
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, 1998, stated dividends that are undeclared and unpaid
on the Series A and Series B Preferred Stocks are as follows: (amounts in
dollars)
Series A $ 311
Series B 250
---------
Total $ 561
=========
The Company anticipates that such dividends, when declared, will be paid
in the shares of Series A and Series B Preferred Stock.
10. Income Taxes
The Company has incurred losses since its inception and, therefore, has
not been subject to federal income taxes. As of December 31, 1998, the
Company had net operating loss ("NOL") carryforwards for income tax
purposes of approximately $43,500,000 which expire in 1999 through 2018.
Under the provisions of Section 382 of the Internal Revenue Code the
greater than 50% ownership change in the Company in connection with the
Imatron Transaction severely limits the Company's ability to utilize the
NOL carryforward to reduce future taxable income and related tax
liabilities. Additionally, because United States tax laws limit the time
during which NOL carryforwards may be applied against future taxable
income, the Company will not be able to take full advantage of its NOL
for federal income tax purposes should the Company generate taxable
income.
The composition of deferred tax assets and the related tax effects at
December 31, 1998 as follows: (amounts in thousands)
Deferred tax assets:
Net operating losses $14,807
Allowance for doubtful
accounts and notes receivable 343
Inventory basis difference 767
Accrued liabilities and reserves 584
Valuation allowance (16,517)
-----------------
Total deferred tax assets 16
Deferred tax liability:
Property and equipment 16
-----------------
Net deferred tax asset (liability) $ --
=================
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49
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FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
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)
1998 1997
-------------- --------------
Amount % Amount %
------ ------ ------ ------
Benefit for income tax at
federal statutory rate $ 246 34.0 $1,514 34.0
Non-deductible expenses (64) (9.0) -- --
Increase in valuation allowance (182) (25.0) (1,514) (34.0)
------ ------ ------ ------
Total tax benefit $ -- -- $ -- --
====== ====== ====== ======
11. 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 $11,490 and $36,306 in
1998 and 1997, respectively. The board of directors of the Company may
authorize additional discretionary contributions, although, no additional
Company contributions have been made as of December 31, 1998.
12. Related Party Transactions
The Company has an incentive compensation plan for certain key employees
and its former 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 members in
order to provide each of them with funds to satisfy their respective
personal income tax liability arising out of the conversion of certain
Positron Corporation Promissory Notes into Common Stock. Such agreements
were entered into by the Company in connection with the IPO and in
consideration of certain concessions made by the board member and former
board member concerning the conversion terms under their respective
Notes. Pursuant to the agreements, each of the loans were made on
substantially the following terms: (i) limited to a principal amount not
to exceed $175,000, (ii) interest payable at a rate of six percent per
year, (iii) an initial term of three years with the principal balance
being due and payable upon the expiration of the term, (iv) limited
recourse against the borrower, and (v) collateralized by Positron
Corporation Common Stock owned by the borrower. In accordance with such
agreements, on April 15, 1994, the Company extended a $165,817 loan to a
current board member and a $158,552 loan to the former board member.
Both of the notes receivable matured in April 1997 but were not repaid by
the debtors and, accordingly, 60,156 shares of the Company's common stock
reverted back to the Company and are included in treasury stock at
December 31, 1998. In connection with this transaction, the Company
recognized bad debt expense of $309,000 during 1997.
The Company formerly had certain consulting agreements with its Chairman
and a member of its board. Each agreement provided for monthly consulting
payments of $6,667 and expired in 1998.
- --------------------------------------------------------------------------------
50
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FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
13. Commitments and Contingencies
Employment Agreement with Former Employee
On January 1, 1996, the Company entered into an employment agreement with
Werner J. Haas, Ph.D. pursuant to which Dr. Haas agreed to serve as
President and Chief Executive Officer of the Company for a term of two
years. The employment agreement provided for the payment of an annual
base salary of $200,000, bonuses in an amount to be determined at the
discretion of the Board of Directors of the Company, and participation in
any employee benefit plan adopted by the Company for its employees.
On February 18, 1997, Dr. Haas informed the Board of Directors of the
Company that he considered his contract to have been terminated by the
Company without cause as a result of the Company's failure to pay the
February 15, 1997 payroll to any of its management level employees and
specifically to him. Additionally, Dr. Haas resigned as a member of the
Company's Board of Directors. Dr. Haas has demanded that the Company pay
him all past due salary as well as the nine months severance pay
specified in his employment agreement if his contract is determined to
have been terminated without cause. The Company's maximum exposure with
regard to Dr. Haas' employment agreement is approximately $175,000 should
Dr. Haas establish that he was terminated without cause. The Company
believes, and has indicated to Dr. Haas, that no amounts are due him
under his employment agreement. Accordingly, the Company's potential loss
with regard to this matter should fall within a range up to $175,000. As
of December 31, 1998, the Company is unable to predict the outcome of the
disagreement between Dr. Haas and the Company.
Royalty Agreements
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
two former directors of the Company and two other unrelated entities.
During the years ended December 31, 1998 and 1997 the Company incurred
royalties of $16,000 and $42,000, respectively.
The Company's royalties were reduced to the 3% level based upon
consideration, provided to two of the payees, under consulting agreements
and promissory notes. However, the consulting agreements provide that if
the Company defaults in its payment obligations thereunder, then the
payees would be entitled to receive regrant of the royalties that they
previously released. In April 1998, the Company received a demand letter
from one of the payees alleging default under his consulting agreement in
1997 and demanding regrant of an additional 1% royalty interest. Although
the Company has not received a demand from the second payee, the Company
believes that a payment default may have occurred under his consulting
agreement and that as a result thereof, he may be entitled to the regrant
of an additional 0.5% royalty interest. The Company has accrued
approximately $100,000 in recognition of the additional roylaties due. In
December 1998, the Company reached an agreement in principle with one of
the payees regarding payment of back royalties, waiver of demand rights
regarding defaults under a consulting contract and retention of the
reduced royalty payment level going forward. If the parties fail to reach
a settlement, with the other payee such payee will be entitled to receive
an aggregate 2% royalty resulting in an increase of the Company's royalty
obligations from 3% to 4%. Such increase in royalty obligations could
have a material adverse effect on the Company's future financial
performance.
Lease Agreements
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. In March 1998, the
Company, under severe cash flow constraints, was forced to leave its
long-term office and manufacturing facility lease and move its operations
to a facility with significantly reduced space and a more affordable
lease payment. The Company entered into a series of six-month leases at a
monthly rate of $2,671 and the Company's current lease expires in August
1998. However, the Company was unable to obtain a release from its
original lease and has been notified by its former landlord that all
delinquent amounts due under its original lease are currently payable.
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<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
Company management believes that the landlord has leased its space to new
tenants at favorable lease rates and that its exposure is limited to any
shortfall in lease payments experienced by the former landlord. The
Company believes that its maximum exposure related to the lease with its
former landlord is $950,000, based on the remaining future payments due
at the date the lease was abandoned. However, the Company believes that
the amounts due the landlord will be offset by payments from the current
tenant and should not exceed $75,000. Accordingly, the range from $75,000
to $950,000 and the Company has accrued approximately $250,000 related to
this matter. As of December 31, 1998, the Company is unable to predict
the outcome of this disagreement with its former landlord.
Rental expense for operating leases amounted to approximately $110,000
and $256,000 for the years ended December 31, 1998 and 1997,
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, 1998, are summarized as
follows: (amounts in thousands)
1998 $ 361
1999 421
2000 210
--------
Total minimum lease payments $ 992
========
The above lease payment schedule consists primarily of payments due under
the Company's lease with its former landlord.
Impact of Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have time sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculation causing a
disruption of business activities.
The Company has performed only a preliminary assessment of the Year 2000
issue using a broad overview and management's current understanding of
its information and non-information systems and its informal
understanding of the information and non-information systems of its
significant suppliers and major customers. None of the details tasks
necessary to properly assess the Year 2000 issue (such as direct
coordination with vendors, customers and manufacturers) have been
performed.
Based on a preliminary assessment, the Company believes that no
significant modifications to its computer software or hardware will be
required and that its existing computer systems (including information
systems, non-information systems using date sensitive embedded chips and
its POSICAMTM systems) will function properly with respect to dates in
the year 2000 and thereafter. Based upon such preliminary assessment, the
Company also currently believes that costs to modify the Company's
existing computer hardware and software systems in regard to the Year
2000 issue will not be significant and should not exceed $10,000.
However, the Year 2000 issue is extremely complex and the costs to
properly assess its impact on the Company and to correct associated
problems may be significant.
Based on the Company's preliminary assessment of its relationships with
significant suppliers and major customers to understand the extent to
which the Company is vulnerable to any failure by third parties to remedy
their own Year 2000 issues, management believes that the Company does not
have significant exposure with respect to third parties. However, the
Company's preliminary assessments indicated that the worst case scenario
with regard to the Year 2000 issue would be delays in receiving parts and
materials needed for manufacturing and delays by customers in making
payments for fee-per-scan and maintenance services. In the Company's
current financial position, such circumstances could threaten the
Company's continued existence.
- --------------------------------------------------------------------------------
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<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
Due to the Company's current severe liquidity problems, the Company has
not had the financial resources to perform a complete assessment of Year
2000 issues, assess the potential cost or develop any contingency plan
with regard to Year 2000 issues that may arise. The Company is unable to
predict at the current time, when and to what extent it may further
pursue its assessment of potential Year 2000 issues and the development
of any contingency plans in respect thereof. If the Company is able to
obtain necessary financial resources, a complete assessment of the Year
2000 issues facing the Company will likely be completed in the third
quarter of 1999.
Past Due Property Taxes
In February 1998, certain taxing authorities filed legal actions against
the Company to collect certain past due property taxes, penalty and
interest totaling $241,307. In connection with such legal actions, the
taxing authorities filed liens covering substantially all inventory,
furniture, fixtures and equipment of the Company. The Company has accrued
all past due property taxes and is currently operating under a payment
agreement with the taxing authorities.
Dispute Regarding POSICAM(TM) System
Arbitration procedures have been initiated against the Company by a
Chinese Company ("Complainant") regarding purchase of a POSICAM(TM)
system ("System"). In September 1996 the Company contracted with the
Complainant to supply a System, with Complainant providing a down payment
of approximately $300,000 and a commitment to provide a letter of credit
for the remaining purchase price, fundable upon shipment of the System.
The Company used the down payment to purchase the beginning inventory for
and begin construction of the System. The Complainant failed to provide a
letter of credit, and the Company was not able to complete and deliver
the System. The Complainant demanded return of its deposit and initiated
arbitration in September 1998 with the China International Economic and
Trade Arbitration Commission, Shanghai Commission. The Company believes
that the claims raised are without merit, and intends to vigorously
defend its interests. It is not possible at present to predict the
outcome of this proceeding, although an unfavorable ruling could have a
material adverse effect on the Company's business and financial
performance. The Company believes that its maximum exposure in this
matter is $300,000.
14. Imatron Agreement
In May 1998, the Company entered into an agreement (the "Imatron
Transaction") with Imatron Inc. ("Imatron"), pursuant to which in January
1999, Imatron acquired a majority ownership of the Company. In
conjunction with the Imatron Transaction, Imatron has made working
capital advances to the Company of $600,000 to enable the Company to meet
a portion of its current obligations.
Upon consummation of the Imatron Transaction in January 1999, Imatron
acquired 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 the shares of Imatron) and was issued nine million of the Company's
common stock in return for a nominal cash payment in the amount of $100.
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
all reasonable efforts to cause the placement of 10 POSICAM(TM) systems
over the next three years. During 1998 the Company shipped a POSICAM(TM)
system to Imatron Japan as the first delivery under a three-year
distribution agreement entered into during 1997. Imatron Japan, an
affiliate of Imatron, is a major distributor for Imatron's Ultrafast CT
and for the products of certain other high technology companies. Imatron
owns a 24 percent minority interest in Imatron Japan.
- --------------------------------------------------------------------------------
53
<PAGE>
FY 1998 POSITRON CORPORATION FORM 10-KSB
- --------------------------------------------------------------------------------
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.
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 in return for a $50,000
payment and the issuance of warrants to purchase 1,150,000 shares of the
Company's common stock at $0.25 per share. The ProFutures Loan was
subsequently repaid in November 1998; (b) Imatron agreed to subordinate
its loan to the ProFutures Loan, (c) Uro-Tech agreed to subordinate its
loan (with a current balance of approximately $792,000 plus accrued
interest payable of approximately $272,000 at December 31, 1998) to
Imatron's loan
If 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.
15. Segment Information and Major Customers
As discussed in Note 1, the Company believes that all of its material
operations are conducted in the servicing and sales of medical imaging
devices and it currently reports as a single segment.
During the years ended December 31, 1998 and 1997 the Company had a
limited number of customers as follows:
1998 1997
------ ------
Total number of customers 12 12
Customers accounting for more than 10% revenues 2 2
Percent of revenues derived from largest customer 23% 32%
16. Supplemental Cash Flow Data
1998 1997
------ ------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 163 $ 277
====== ======
- --------------------------------------------------------------------------------
54
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Positron
Corporation's consolidated condensed statements of income and consolidated
condensed balance sheets and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000844985
<NAME> Positron Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 1110
<ALLOWANCES> 1011
<INVENTORY> 391
<CURRENT-ASSETS> 556
<PP&E> 399
<DEPRECIATION> 269
<TOTAL-ASSETS> 686
<CURRENT-LIABILITIES> 5657
<BONDS> 0
0
1582
<COMMON> 52
<OTHER-SE> (7273)
<TOTAL-LIABILITY-AND-EQUITY> 686
<SALES> 0
<TOTAL-REVENUES> 2008
<CGS> 0
<TOTAL-COSTS> 520
<OTHER-EXPENSES> 13
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 525
<INCOME-PRETAX> (724)
<INCOME-TAX> 0
<INCOME-CONTINUING> (724)
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<NET-INCOME> (724)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
