File No. 333-30316
PROSPECTUS
POSITRON CORPORATION
78,732,990 SHARES
COMMON STOCK
The selling stockholders identified in this prospectus are offering
78,732,990 shares of common stock, 27,560,000 of which underlie warrants to
purchase common stock which have not yet been exercised. All these securities
are being registered for resale only. Positron will not receive any of the
proceeds from the sale of shares by the selling stockholders.
Positron's common stock is traded on the over-the-counter securities market
("pink sheets"), and quoted on the NASD's Electronic Bulletin Board under the
symbol "POSC.OB" As of April 25, 2000, the last reported sales price for the
common stock on the Electronic Bulletin Board was $0.75 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 3.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS PROSPECTUS IS APRIL 28, 2000
--
Relates to Form SB-2
Registration No. 333-30316
Filed under Rule 424(b)(3) and (c)
SUPPLEMENT TO PROSPECTUS OF POSITRON CORPORATION
The following information supplements the prospectus, dated February 25,
2000, of Positron Corporation related to 78,732,990 shares of its Common Stock.
This supplement should be read in conjunction with the prospectus.
The following information was included in our annual report on Form 10KSB for
the year ended December 31, 1999, as filed with the Securities and Exchange
Commission on March 30, 2000.
THE DATE OF THIS SUPPLEMENT IS APRIL 28, 2000
--
AUDITED FINANCIAL INFORMATION
The financial data presented below for the year ended, and as of, December
31, 1999 and for the year ended December 31, 1998 are derived from our audited
consolidated financial statements. Such audited consolidated financial
statements reflect all adjustments which are, in the opinion of management,
necessary and of a normal recurring nature to present fairly the operating
results for the interim periods reported. The statements of operations,
statements of stockholders' equity and statements of cash flows are derived from
our audited financial statements.
S-2
<PAGE>
<TABLE>
<CAPTION>
POSITRON CORPORATION
BALANCE SHEET
DECEMBER 31, 1999
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
- -----------
<S> <C>
Current assets:
Cash and cash equivalents $ 7,180
Accounts receivable, net 101
Inventories 683
Prepaid expenses 108
Other current assets 150
---------
Total current assets 8,222
Plant and equipment, net 110
---------
Total assets $ 8,332
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $3,766
Unearned revenue 168
---------
Total current liabilities 3,934
Other liabilities 45
Commitments and contingencies
Stockholders' equity:
Series A Preferred Stock: $1.00 par value; 8%
cumulative, convertible, redeemable; 5,450,000
shares authorized; 980,942 and 1,557,403 shares
issued and outstanding at December 31, 1999 and
1998, respectively 981
Common stock: $0.01 par value; 100,000,000 shares
authorized, 57,534,710 and 5,166,542 shares issued
and 57,474,554 and 5,106,386 shares outstanding at
December 31, 1999 and 1998, respectively 575
Additional paid-in capital 53,917
Subscriptions receivable (30)
Accumulated deficit (51,075)
Treasury stock: 60,156 shares at cost (15)
-------
Total stockholders' equity 4,353
---------
Total liabilities and stockholders'
equity $ 8,332
=========
</TABLE>
See notes to financial statements.
S-3
<PAGE>
<TABLE>
<CAPTION>
POSITRON CORPORATION
STATEMENTS OF OPERATIONS
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
Revenues:
Fee per scan $ - $ 455
Service and component 1,529 1,553
------------ -----------
Total revenues 1,529 2,008
------------ -----------
Costs of sales and services:
Fee per scan - 118
Service, warranty and component 1,343 402
------------ -----------
Total costs of sales and service 1,343 520
------------ -----------
Gross profit 186 1,488
Selling, general and administrative 1,261 1,700
Research and development 602 -
------------ -----------
Loss from operations (1,677) (212)
------------ -----------
Other income (expenses):
Interest expense (81) (525)
Interest income 189 -
Gain on disposal of property and equipment - 29
Other expense (27) (16)
------------ -----------
Total other income (expense), net 81 (512)
------------ -----------
Net loss before extraordinary gain (1,596) (724)
Extraordinary gain on extinguishment of debt 205 -
------------ -----------
Net loss $ (1,391) $ (724)
============ ===========
Basic and dilutive net loss per common share
Before extraordinary item $ (0.05) $ (0.14)
Extraordinary item 0.01 -
------------ -----------
Net loss per common share $ (0.04) $ (0.14)
============ ===========
Weighted average common shares outstanding
(basic and dilutive) 31,103,642 5,150,131
============ ===========
</TABLE>
See notes to financial statements.
S-4
<PAGE>
<TABLE>
<CAPTION>
POSITRON CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
SERIES A SERIES B ADDITIONAL SUBSCRIP-
PREFERRED STOCK PREFERRED STOCK COMMON STOCK PAID-IN TION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE
---------- -------- ---------- -------- ---------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 1,594,999 $1,595 25,000 $25 5,128,990 $51 $42,191 $ -
Net loss - - - - - - - -
Conversion of Series A Pre-
ferred Stock to common stock (37,552) (38) - - 37,552 1 37 -
Warrants issued for note ex-
tension (1,150,000 shares) - - - - - - 198 -
---------- -------- ---------- -------- ---------- ------- ---------- ------------
Balance at December 31, 1998 1,557,447 1,557 25,000 25 5,166,542 52 42,426 -
Net loss - - - - - - - -
Sale of common stock to
Imatron at $0.00001 per
share - - - - 9,000,000 90 (90) -
Sale of common stock at $0.30
per share, net of offering
costs of $1,257,000 - - - - 42,166,663 421 10,972 (30)
Conversion of Series B pre-
ferred stock to common stock - - (25,000) (25) 625,000 6 19 -
Warrants issued to settle note
payable - - - - - - 20 -
Conversion of Series A pre-
ferred stock to common stock (576,505) (576) - - 576,505 6 570 -
---------- -------- ---------- -------- ---------- ------- ---------- ------------
Balance at December 31, 1999 980,942 $981 - $ - 57,534,710 $ 575 $53,917 $(30)
========== ======== ========== ======== ========== ======= ========== ============
S-5
<PAGE>
ACCUMULATED TREASURY
DEFICIT STOCK TOTAL
------------- ---------- --------
<S> <C> <C> <C>
Balance at December 31, 1997 $(48,960) $(15) $(5,113)
Net loss (724) - (724)
Conversion of Series A Pre-
ferred Stock to common stock - - -
Warrants issued for note ex-
tension (1,150,000 shares) - - 198
------------- ---------- --------
Balance at December 31, 1998 (49,684) (15) (5,639)
Net loss (1,391) - (1,391)
Sale of common stock to
Imatron at $0.00001 per
share - - -
Sale of common stock at $0.30
per share, net of offering
costs of $1,257,000 - - 11,363
Conversion of Series B pre-
ferred stock to common stock - - -
Warrants issued to settle note
payable - - 20
Conversion of Series A pre-
ferred stock to common stock - - -
------------- ---------- --------
Balance at December 31, 1999 $(51,075) $(15) $4,353
============= ========== ========
</TABLE>
See notes to financial statements.
S-6
<PAGE>
<TABLE>
<CAPTION>
POSITRON CORPORATION
STATEMENTS OF CASH FLOWS
__________
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,391) $(724)
Adjustment to reconcile net loss to net cash
used in operating activities:
Extraordinary gain on forgiveness of debt (205) -
Depreciation expense 54 250
Common stock and warrants issued for interest
expense 20 198
Net gain from sale and disposal of property
and equipment - (29)
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable (2) 154
Decrease (increase) in inventories (292) 17
Decrease (increase) in prepaid expenses (50) 73
Increase in other current assets (150) -
Decrease in accounts payable and accrued
liabilities (752) (30)
Decrease in other liabilities (23) (177)
Increase in unearned revenue 26 82
-------- --------
Net cash used in operating activities (2,765) (186)
-------- --------
Cash flows from investing activities:
Proceeds from sale of equipment - 364
Capital expenditures (34) -
-------- --------
Net cash provided by (used in) investing
activities (34) 364
-------- --------
Cash flows from financing activities:
Proceeds from notes payable to affiliates - 600
Repayment of notes payable to affiliates (1,392) -
Repayment of other notes payable - (930)
Proceeds from sale of common stock 11,363 -
-------- --------
Net cash provided by (used in) financing
activities 9,971 (330)
-------- --------
Net increase (decrease) in cash and cash equivalents 7,172 (152)
Cash and cash equivalents, beginning of year 8 160
-------- --------
Cash and cash equivalents, end of year $ 7,180 $ 8
========= ========
</TABLE>
S-7
<PAGE>
POSITRON CORPORATION
NOTES TO FINANCIAL STATEMENTS
__________
1. DESCRIPTION OF BUSINESS
-------------------------
Positron Corporation (the "Company") was incorporated on December 20, 1983 in
the state of Texas and commenced commercial operations during 1986. The Company
designs, manufactures, markets and services its POSICAMTM system advanced
medical imaging devices, utilizing positron emission tomography ("PET")
technology. These systems utilize the Company's patented and proprietary
technology, an imaging technique which assesses the biochemistry, cellular
metabolism and physiology of organs and tissues, as well as producing anatomical
and structural images. Targeted markets include medical facilities and
diagnostic centers located throughout the world. POSICAMTM systems are used by
physicians as diagnostic and treatment evaluation tools in the areas of
cardiology, neurology and oncology. The Company faces competition principally
from three other companies which specialize in advanced medical imaging
equipment.
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.
CONCENTRATION OF CREDIT RISK
----------------------------
Cash and accounts receivables are the primary financial instruments that subject
the Company to concentrations of credit risk. The Company maintains its cash in
banks or other financial institutions selected based upon management's
assessment of the bank's financial stability. Cash balances periodically exceed
the $100,000 federal depository insurance limit.
Amounts receivable arise primarily from transactions with customers in medical
industry located in many parts of the world, but concentrated in the United
States. The Company provides a reserve for accounts where collectibility is
Uncertain. Collateral is generally not required for credit granted.
INVENTORY
---------
Inventories are stated at the lower of cost or market and include material,
labor and overhead. Cost is determined using the first-in, first-out (FIFO)
method of inventory valuation.
PROPERTY AND EQUIPMENT
------------------------
Property 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 repairs are
charged to expense as incurred.
S-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------
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.
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,
1999 and 1998 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 in both periods.
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, 1998 financial
statements have been reclassified in order to conform to current year
presentation.
S-9
<PAGE>
COMPREHENSIVE INCOME
---------------------
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standard ("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.
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 13).
3. ACCOUNTS RECEIVABLE
--------------------
Accounts receivable at December 31, 1999 consisted of the following (in
thousands):
Accounts receivable - equipment sales $ 942
Accounts receivable - maintenance 101
---------
1,043
Less allowance for doubtful accounts (942)
---------
$ 101
=========
4. INVENTORIES
----------
Inventories at December 31, 1999 consisted of the following (in thousands):
Raw materials $ 842
Work in progress 145
Finished goods 69
---------
1,056
Less reserve for obsolescence (373)
---------
$ 683
=========
5. PROPERTY AND EQUIPMENT
------------------------
Property and equipment at December 31, 1999 consisted of the following (in
thousands):
Furniture and fixtures $ 86
Computers and peripherals 134
Machinery and equipment 203
---------
Total property and equipment 423
Less accumulated depreciation (313)
---------
$ 110
=========
S-10
<PAGE>
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
--------------------------------------------
Accounts payable and accrued liabilities at December 31, 1999 consisted of the
following (in thousands):
Trade accounts payable $ 312
Accrued rent 812
Accrued professional fees 240
Accrued royalties 610
Accrued property tax 71
Accrued warranty costs 1,192
Accrued compensation 446
Other accrued liabilities 83
---------
$ 3,766
=========
Accrued compensation and accrued royalties are currently subject to disputes
(See Note 14).
7. COMMON STOCK
-------------
In January 1999, the Company completed the Imatron Transaction under which
Imatron acquired a majority interest in the Company (See Note 13).
In August 1999 the Company concluded a private placement of 42,166,664 shares of
common stock for a total price of $12,700,000. In connection with the private
placement, Positron also issued 21,460,000 warrants to acquire the Company's
common stock at exercise prices of $0.05 and $0.30 per share.
In December 1998, the Company's stockholders approved an amendment to its
articles of incorporation to increase the authorized shares of common stock from
15,000,000 shares to 100,000,000 shares.
8. OPTIONS AND WARRANTS
----------------------
Following is an analysis of options and warrants and related activity:
OPTIONS
-------
In 1987, the Company established a common stock option plan (the "1987 Plan")
covering directors, officers and other key employees. In November 1993, the
Company canceled all options outstanding under the 1987 Plan. In connection
with such cancellations, the board of directors authorized the reissuance of
38,522 options to purchase shares of common stock at 75 percent of the IPO price
following the closing of an initial public offering. Such options vested and
became exercisable on January 3, 1995. In addition, in February 1994, the board
of directors authorized the issuance of an additional 150,000 options at the
same exercise price. Options granted under the 1987 Plan expired on the earlier
of three months after termination of employment or ten years from the grant
date.
Effective June 3, 1994, the shareholders of the Company approved the 1994
Incentive and Nonstatutory Option Plan (the "1994 Plan"). The 1994 Plan as
amended, provides for the issuance of an aggregate of 601,833 Common Stock
options to key employees, directors, and certain consultants and advisors of the
Company. The 1994 Plan also provides that the exercise price of Incentive
Options shall not be less than the fair market value of the shares on the date
of the grant. The exercise price per share of Nonstatutory options shall not be
less than the par value of the Common Stock or 50% of the fair market value of
the common stock on the date of grant. The 1994 Plan is administered by the
Compensation Committee of the Board of Directors. The committee has the
authority to determine the individuals to whom awards will be made, the amount
of the awards, and all other terms and conditions of the awards. As of December
S-11
<PAGE>
31, 1999, options to purchase an aggregate of 144,389 shares of common stock at
prices ranging from $2.625 to $4.125 per share, had been granted to certain key
employees.
8. OPTIONS AND WARRANTS, CONTINUED
----------------------------------
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. The terms of the 1994 Plan regarding issuances to
non-employee directors were suspended during the years ended December 31, 1999
and 1998. As of December 31, 1999, options to purchase an aggregate of 163,724
shares of common stock at prices ranging from $2.625 to $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.
Effective June 15, 1999, the shareholders of the Company adopted the 1999 Stock
Option Plan (the "1999 Plan") and terminated the 1994 Stock Option Plan,
effective October 6, 1999. The 1994 Plan provided for the grant of options to
officers, directors, key employees and consultants of the Company. The 1999
Plan provides for the grant of options to officers, employees (including
employee directors) and consultants. Both the 1994 Plan and the 1999 Plan are
administered by the Board of Directors. The administrator is authorized to
determine the terms of each option granted under the plans, including the number
of shares, exercise price, term and exercisability. Options granted under the
plans may be incentive stock options or nonqualified stock options. The
exercise price of incentive stock options may not be less than 100% of the fair
market value of the common stock as of the date of grant (110% of the fair
market value in the case an optionee owns more than 10% of the total combined
voting power of all classes of Positron capital stock). Options may not be
exercised more than ten years after the date of grant (five years in the case of
10% stockholders). During 1999, 1,462,500 stock options were awarded under the
1999 Plan.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
---------------------------------------------
Effective October 6, 1999, the shareholders of the Company approved the 1999
Non-Employee Directors' Stock Option Plan (the "Directors' Plan") which provides
for the automatic grant of an option to purchase 25,000 shares of common stock
to non-employee directors upon their election or appointment to the Board, and
subsequent annual grants also in the amount of 25,000 shares of common stock.
The exercise price of the options is 85% of the fair market value of the common
stock on the date of grant. The Directors' Plan is administered by the Board.
Options granted under the Directors' Plan become exercisable in one of two ways:
either in four equal annual installments, commencing on the first anniversary of
the date of grant, or immediately but subject to the Company's right to
repurchase, which repurchase right lapses in four equal annual installments,
commencing on the first anniversary of the date of grant. To the extent that an
option is not exercisable on the date that a director ceases to be a director of
the Company, the unexercisable portion terminates. Options covering 25,000
shares of common stock have been issued under Directors' Plan at December 31,
1999.
1999 STOCK BONUS INCENTIVE PLAN
-----------------------------------
In October 1999 the Board adopted an Employee Stock Bonus Incentive Plan (the
"Stock Bonus Plan"), effective November 1, 1999. The Stock Bonus Plan provides
for the grant of bonus shares to any Positron employee or consultant to
recognize exceptional service and performance beyond the service recognized by
the employee's salary or consultant's fee. The Board has authorized up to an
aggregate of 1,000,000 shares of common stock for issuance as bonus awards under
S-12
<PAGE>
the Stock Bonus Plan. The Stock Bonus Plan is currently administered by the
Board. Each grant of bonus shares is in an amount determined by the Board, up
to a maximum of the participant's salary. The shares become exercisable
according to a schedule to be established by the Board at the time of grant.
Bonuses covering 7,000 shares have been awarded but not issued under the Stock
Bonus Plan at December 31, 1999.
1999 EMPLOYEE STOCK PURCHASE PLAN
-------------------------------------
The shareholders of the Company approved the 1999 Employee Stock Purchase Plan
(the "Purchase Plan") in October 1999. A total of 500,000 shares of common
stock has been reserved for issuance under the Purchase Plan, none of which has
yet been issued. The Purchase Plan permits eligible employees to purchase
common stock at a discount through payroll deductions during offering periods of
up to 27 months. Offering periods generally will begin on the first trading day
of a calendar quarter. The initial offering period began on January 1, 2000.
The price at which stock is purchased under the Purchase Plan will be equal to
85% of the fair market value of common stock on the first or last day of the
offering period, whichever is lower. No shares have been issued under the
Purchase Plan at December 31, 1999.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
SHARES ISSUABLE
UNDER OUTSTANDING WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
----------------- -----------------
<S> <C> <C>
Balance at January 1, 1998 572,678 $2.80
Granted -
Exercised -
Forfeited -
----------------
Balance at December 31, 1998 572,678 $2.80
Granted 1,487,500 $0.28 - $1.03
Exercised -
Forfeited -
----------------
Balance at December 31, 1999 2,060,178 $1.33
================
</TABLE>
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 564,186 shares and $2.24 per share at December 31, 1999.
Following is a summary of stock options outstanding at December 31, 1999.
S-13
<PAGE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF TERM EXERCISE EXERCISE
EXERCISE PRICE SHARES (IN YEARS) PRICE SHARES PRICE
- --------------- --------- ---------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
2.625 - $3.375 492,980 5.20 $2.63 376,194 $2.63
3.376 - $4.125 79,698 5.66 $3.91 59,242 $3.92
0.280 - $1.031 1,487,500 9.60 $0.40 128,750 $0.36
--------- -------
0.280 - $4.125 2,060,178 $1.07 564,186 $2.24
========= ========
</TABLE>
In addition to options granted to employees, during the year ended December 31,
1999 the Company issued warrants for 4,500,000 shares of the Company's common
stock to certain officers of the Company. Options and warrants resulted in
proforma compensation as shown below.
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 1999 and
1998 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 1999 and 1998: (i)average dividend yield of 0.00%; (ii) expected
volatility of 80.00%; (iii) expected life of three (3) years; and (iv) estimated
risk-free interest rate of 6.00%.
The pro forma disclosures as if the Company adopted the cost recognition
requirements of SFAS 123 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
As Reported Pro Forma As Reported Pro Forma
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $1,391 $2,169 $(749) $(749)
=========== ============= =========== ===========
Basic and dilutive net
loss per common share
Before extraordinary
item $(0.05) $(0.08) $(0.14) $(0.14)
Extraordinary item 0.01 0.01 - -
----------- ------------- ----------- -----------
Net loss per common
share $(0.04) $(0.07) $(0.14) $(0.14)
=========== ============= =========== ===========
</TABLE>
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.
S-14
<PAGE>
In connection with its initial public offering, the Company issued 3,898,550
Redeemable Warrants (the "Redeemable Warrants"). The Redeemable Warrants as
originally issued were exercisable for an aggregate of 3,893,550 shares of
Common Stock at an exercise price of $8.25 per share. Because of their
anti-dilution provisions the Redeemable Warrants were exercisable for an
aggregate of 5,646,798 shares of Common Stock at a purchase price of $5.60 per
share at December 31, 1997. The Redeemable Warrants expired December 31, 1998.
In April 1998, in connection with the Imatron transaction, the Company granted
Profutures Bridge 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. During 1998 the Company recognized interest
expense of $198,000 related to the value of these 1,150,000 warrants. The
Profutures loan was repaid in 1999.
During 1999, the Company issued a total of 4,500,000 warrants to an officer and
a director (See Note 12). The Company also issued 21,460,000 warrants in
connection with a private placement of its common stock (See Note 8).
A summary of warrant activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES EXERCISE PRICE PRICE
-------------- ---------------- --------------
<S> <C> <C> <C>
Balance at January 1, 1998 7,892,537 $1.84-$3,572.27 $5.25
Warrants issued in connection
with extension of the
Profutures Loan 1,150,000 $0.25 $0.25
Expired (6,166,192) $5.60 $-
--------------
Balance at December 31, 1998 2,876,345 $0.25-$3,572.27 $2.50
Warrants issued to directors
and employees 4,500,000 $0.30 $0.30
Warrants issued in connection
with private placement of
common stock 21,460,000 $0.05-$0.30 $0.18
Warrants issued to extend and
retire Uro-Tech Loan 100,000 $1.00 $1.00
Cancelled (67,500) $2.00 $-
--------------
Balance at December 31, 1999 28,868,845 $0.01-$3,572.27 $0.43
==============
</TABLE>
All outstanding warrants are currently exercisable. A summary of outstanding
stock warrants at December 31, 1999 follows:
S-15
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF REMAINING
COMMON STOCK CONTRACTUAL EXERCISE
EQUIVALENTS EXPIRATION DATE LIFE (YEARS) PRICE
- ------------ --------------- ------------ ---------
<C> <S> <C> <C>
100,000 September 2001 1.8 $ 1.00
10,650,000 August 2004 4.7 0.05
10,810,000 August 2004 4.7 0.30
250,000 January 2007 7.1 1.84
1,250,000 March 2008 8.3 0.25
4,500,000 June 2009 9.5 0.30
1,308,845 Various Various Various
- ------------
28,868,845
============
</TABLE>
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, 1999 or 1998.
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.
As of December 31, 1999 and 1998, stated dividends that are undeclared and
unpaid on the Series A Preferred Stocks total $274,000. The Company anticipates
that such dividends, if and when declared, will be paid in the shares of Series
A Preferred Stock.
S-16
<PAGE>
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 was initially convertible into 25 shares of
Common Stock and during the year ended December 31, 1999, all 25,000 shares of
Series B Preferred Stock were converted into a total of 625,000 shares of common
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, 1997, the Company had net
operating loss ("NOL") carryforwards for income tax purposes of approximately
$43,600,000 which expire in 2000 through 2019. Under the provisions of Section
382 of the Internal Revenue Code the greater than 50% ownership changes that
occurred in the Company in connection with the Imatron Transaction and in
connection with the private placement of the Company's common stock severely
limits the Company's ability to utilize its 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, 1999 are as follows (in thousands):
Deferred tax assets:
Net operating losses $ 14,824
Allowance for doubtful accounts and
notes receivable 320
Inventory basis difference 127
Accrued liabilities and reserves 1,006
Valuation allowance (16,257)
----------
Total deferred tax assets 20
Deferred tax liabilities:
Basis of property and equipment (20)
----------
Net deferred tax asset (liability) $ -
==========
The difference between the income tax benefit in the accompanying statement of
operations and the amount that would result if the U.S. Federal statutory rate
of 34% were applied to pre-tax loss is as follows (amounts in thousands):
1999 1998
------------------ -------------------
AMOUNT % AMOUNT %
-------- ------ -------- ------
Benefit for income tax at
federal statutory rate $472 34.0 $254 34.0
Non-deductible expenses - - (67) (9.0)
Increase in valuation
allowance (472) (34.0) (187) (25.0)
-------- ------ -------- ------
$ - - $ - -
======== ====== ======== ======
S-17
<PAGE>
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 $12,000 in
both 1999 and 1998. The board of directors of the Company may authorize
additional discretionary contributions; however, no additional Company
contributions have been made as of December 31, 1999.
12. RELATED PARTY TRANSACTIONS
----------------------------
The Company has an incentive compensation plan for certain key employees and its
Chairman. The incentive compensation plan provides for annual bonus payments
based upon achievement of certain corporate objectives as determined by the
Company's compensation committee, subject to the approval of the board of
directors. To date, the Company has not paid any bonuses pursuant to the
incentive compensation plan.
During 1995 and 1996, in order to fund its activities, the Company borrowed a
total of $1,313,000 from Uro-Tech, Ltd., a Texas limited partnership controlled
by a former officer and director of the Company. At March 31, 1996, $650,000 of
the note was converted to 433,329 shares of Series A Preferred Stock and 216,671
Redeemable Stock Purchase Warrants. In addition, in connection with the loan,
Uro-Tech was granted warrants to purchase 67,500 shares of common stock
exercisable at $2.00 until February 7, 2001. The loan bore interest at 13.8%
per year, matured on April 30, 1997 and was thereafter extended in connection
with the Imatron Transaction. The Uro-Tech loan was collateralized by liens and
security interests encumbering most of the Company's assets, which security
interests were thereafter subordinated to a loan from Imatron as part of the
Imatron Transaction.
12. RELATED PARTY TRANSACTIONS, CONTINUED
----------------------------------------
The Company fully retired the Uro-Tech Loan, including all principal and
interest due, in September 1999 for a cash payment of $935,000 and in connection
therewith and Uro-Tech's forgiveness of amounts due it by the Company of
$205,000, replaced and cancelled the warrant to purchase 67,500 common shares at
an exercise price of $2.00 with a warrant to purchase 100,000 common shares at
an exercise price of $1.00. The replacement warrant is exercisable through
September 20, 2001 and was valued at $20,000.
Effective January 22, 1999, the Company granted an officer and a director of the
Company warrants to purchase 3,000,000 shares and 1,500,000 shares,
respectively, of the Company's common stock at an exercise price of $0.30 per
share. The warrants the officer and the director can purchase vest immediately
but are subject to the Company's right of repurchase, which right lapses 25% on
grant and the remainder quarterly over the next three years. In the event the
officer's employment is terminated by the Company without cause or on a change
of control, the Company's repurchase right regarding such warrants lapses
entirely and any other equity participation the officer has in the Company's
securities lapses immediately.
13. IMATRON AGREEMENT
------------------
In May 1998, the Company entered into an agreement (the "Imatron Transaction")
with Imatron Inc. ("Imatron"), whereby Imatron ultimately acquired a majority
ownership of the Company in January 1999. 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.
S-18
<PAGE>
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 shares to Imatron) and was issued
nine million shares of the Company's common stock in return for a nominal cash
payment in the amount of $100.
14. 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 $250,000
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 $250,000. As of December 31, 1999,
the Company is unable to predict the outcome of the disagreement between Dr.
Haas and the Company.
ROYALTY AGREEMENTS
-------------------
The Company acquired the know-how and patent rights for positron imaging from
three entities - the Clayton Foundation, K. Lance Gould (formerly a director)
and Nizar A. Mullani (also formerly a director). Pursuant to agreements with
each of them, the Company was obligated to pay royalties of 4.5% in the
aggregate of gross revenues from sales, uses, leases, licensing or rentals of
the relevant technology. In 1993 each royalty holder agreed to reduce royalty
payments to 3% in the aggregate in exchange for receiving certain loans and
entering into certain consulting agreements. The consulting agreements provided
that if the Company defaulted in its obligations under those agreements, Dr.
Gould and Mr. Mullani would be entitled to reinstatement of their earlier
royalties. In April 1998 the Company received a demand letter from Mr. Mullani
alleging defaults under his consulting agreement. The Company also believed
that such defaults, if any, may also have occurred regarding Dr. Gould's
agreement, although he made no formal demand. During 1999 the Company reached
agreement with Dr. Gould regarding payment of royalties in the past and in the
future. The Company has had similar discussions with the Clayton Foundation and
Mr. Mullani, but has not yet reached agreements with these parties. Based on
the demands of Mr. Mullani, the accrual of royalties payable has been adjusted
to reflect his increased royalty percentage and at December 31, 1999 total
royalties payable under the Company's royalty agreements total $610,000.
LEASE AGREEMENTS
-----------------
The Company operates in leased facilities under an operating lease that expires
in March 2001 and contains no renewal options. The lease requires monthly
payments of $4,244.
S-19
<PAGE>
Prior to 1998, 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. However, the
Company was unable to obtain a release from its original lease and has been
notified by its former landlord that all amounts due under its original lease
will be due according to the lease terms. Company management believes that the
landlord has leased its space to new tenants at favorable lease rates and that
its exposure is limited to any shortfall in lease payments experienced by the
former landlord. The Company believes that its maximum exposure related to the
lease with its former landlord is approximately $1,355,000, 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 tenants. Accordingly, the Company's potential loss related to
its former lease should fall in the range from $200,000 to $1,355,000 and the
Company has accrued approximately $812,000 related to this matter.
Rental expense for operating leases amounted to approximately $78,000 and
$110,000 for the years ended December 31, 1999 and 1998, respectively.
Additionally, during the year ended December 31, 1999, the Company revised its
estimated liability of exposure under an abandoned lease with an unexpired lease
term by $562,000. 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, 1999, are summarized as follows:
YEAR ENDED DECEMBER 31, AMOUNT (IN THOUSANDS)
- ------------------------ ---------------------
2000 $ 593
2001 555
2002 271
--------
Total minimum lease payments $ 1,419
========
The above lease payment schedule consists primarily of payments due under the
Company's lease with its former landlord.
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, 1999 and 1998 the Company had a limited
number of customers as follows:
1999 1998
----- -----
Number of customers 14 12
Customers accounting for more than 10% of
revenues 5 2
Percent of revenues derived from
largest customer 14% 23%
16. SUPPLEMENTAL CASH FLOW DATA
------------------------------
Supplemental disclosure of cash flow information (in thousands):
1999 1998
----- -----
Cash paid for interest $246 $163
S-20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
WE HAVE MADE FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS SUPPLEMENT THAT
ARE SUBJECT TO RISKS AND UNCERTAINTIES. FORWARD-LOOKING STATEMENTS INCLUDE
INFORMATION CONCERNING OUR POSSIBLE OR ASSUMED FUTURE RESULTS OF OPERATIONS.
ALSO, WHEN WE USE SUCH WORDS AS "BELIEVE," "EXPECT," "ANTICIPATE," "PLAN,"
"COULD," "INTEND" OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD-LOOKING
STATEMENTS. YOU SHOULD NOTE THAT AN INVESTMENT IN OUR SECURITIES INVOLVES
CERTAIN RISKS AND UNCERTAINTIES THAT COULD AFFECT OUR FUTURE FINANCIAL RESULTS.
OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH IN "RISK FACTORS" BEGINNING ON PAGE 3 OF THE PROSPECTUS OF WHICH THIS
PROSPECTUS SUPPLEMENT IS A PART.
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS.
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, 13 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.
In May 1998, the Company entered into a series of agreements (the "Imatron
Transaction") with Imatron Inc., a New Jersey corporation and technology-based
company engaged principally in the business of designing, manufacturing and
marketing a high performance computed tomography system, pursuant to which on
January 22, 1999, Imatron acquired majority ownership of the Company. In
conjunction with the execution of definitive agreements in May 1998, Imatron
began making working capital advances available to the Company of up to $500,000
in order to enable the Company to meet a portion of its current obligations. The
loan agreement was thereafter amended by oral agreement to increase the working
capital advances available under the Agreement up to an additional $100,000. As
of December 31, 1998, the Company had borrowed $600,000 pursuant to those
agreements. The loan bore interest at 1/2% over the prime rate, was due March
1, 2000 (with interest being payable monthly), and was secured by all of
Positron's assets.
Pursuant to the agreement, Imatron acquired 9,000,000 shares of the Company's
Common Stock on January 22, 1999, representing at that time a majority ownership
of the outstanding common stock of Positron 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 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 purchase, all reasonable efforts to cause the placement of 10
S-21
<PAGE>
POSICAM(TM) systems over the next three years. 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. 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 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. Through Imatron's efforts, private placements were
concluded in August 1999 resulting in an equity infusion of approximately $11.4
million net to Positron.
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.
In connection with the above transactions, Positron, Imatron and two of the
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, $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 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. Since then, the Imatron loan and the Uro-Tech loan
have also been repaid and retired, in part from proceeds received from the
private placement that concluded in August 1999.
RESULTS OF OPERATIONS
During the year ended December 31, 1999, the Company experienced a net loss of
$1,391,000 in 1999 from $724,000 in 1998. The increase in net loss is primarily
the result of the re-launch of Positron, which began with the equity infusion in
August 1999. In the fourth quarter, this resulted in significantly higher
overhead with no sales. In addition, a complete review of all balance sheet
accounts resulted in additional reserves in some accounts, with emphasis on
potential exposure in obsolete inventory and rent.
REVENUES: The Company generated no revenue from system sales during fiscal
years 1999 and 1998. Fee per scan revenues decreased to $0 in 1999 from
$455,000 in 1998 due to Buffalo Cardiology & Pulmonary Associates' purchase of
S-22
<PAGE>
its leased scanner from the Company in the fourth quarter of 1998. Component
revenue for fiscal year 1999 was $112,000 versus $0 for 1998. Overall service,
warranty and component revenue decreased by $24,000 to $1,529,000 in 1999 as
compared to $1,553,000 in 1998 due to normal fluctuations in service.
COST OF SALES AND SERVICES: Cost of system sales were $0 in 1999 and 1998 due to
the fact that no systems were sold during these two years. Costs of fee per
scan decreased to $0 in 1999 from $118,000 in 1998 due to Buffalo Cardiology &
Pulmonary Associates' purchase of its leased scanner from the Company. Service,
warranty and component cost increased by $941,000 to $1,343,000 in 1999 from
$402,000 in 1998 due primarily to the Company's staff expansion in 1999 as it
began to rebuild infrastructure to expand operations. The Company took a charge
of $358,000 to reduce obsolete net inventory through the disposal of inventory
previously carried at $1,158,000 gross with a reserve of $800,000.
OPERATING EXPENSES: Prior to Positron's equity infusion in August 1999, the
Company operated in a limited customer service mode due to liquidity problems.
As a result of Positron's equity financing, however, the Company began
rebuilding infrastructure to expand operations. Consequently, research and
development expenses increased to $602,000 in 1999 from $0 in 1998. In 1998,
the Company's R&D staff was utilized in the customer service support function.
Selling, general and administrative expenses decreased to $1,261,000 in 1999
from $1,700,000 in 1998 due to streamlining administrative overhead, and
Positron's shift from a limited customer service mode to a fully functioning
design, manufacturing, marketing and customer service operation in 1999. As a
result of the Company's build-up of staff and infrastructure to expand
operations and stimulate product demand, sales and marketing expenses increased
to approximately $260,000 in 1999 from $0 in 1998, which is included in total
SG&A expenses.
OTHER EXPENSES: Net interest income was $108,000 in 1999 versus interest expense
of $525,000 in 1998 due primarily to the interest income on the equity capital
in the second half of 1999, the reduction of interest expense resulting from the
payoff of the Imatron and Uro-Tech loans in August 1999, and the payoff of the
ProFutures loan in December 1998.
The Company recognized extraordinary income in 1999 of $205,000 on the partial
forgiveness of accrued interest on the Uro-Tech note. This note, plus the
remaining accrued interest, was paid in full in August 1999.
NET OPERATING LOSS CARRY FORWARDS
The Company has incurred losses since its inception and, therefore, has not been
subject to federal income taxes. As of December 31, 1997, the Company had net
operating loss ("NOL") carryforwards for income tax purposes of approximately
$43,600,000 which expire in 2000 through 2019. 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 and in connection with the
private placement of the Company's common stock severely limits the Company's
ability to utilize its 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.
LIQUIDITY AND CAPITAL RESERVES
Since its inception the Company has been unable to sell POSICAM(TM) systems in
quantities sufficient to be profitable. Consequently, the Company has sustained
S-23
<PAGE>
substantial losses. Net losses for the years ended December 31, 1999 and 1998
were $1,391,000 and $724,000, respectively. At December 31, 1999, the Company
had an accumulated deficit of $51,075,000. 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, 1999, the Company had cash and cash equivalents in the amount of
$7,180,000 compared to $8,000 at December 31, 1998. Particularly during fiscal
years 1997, 1998 and the first half of 1999, the Company had minimal amounts of
working capital and was unable to timely meet some of its obligations as they
came due. Consequently, the Company was in arrears to many of its vendors and
suppliers. However, as a result of the equity infusion in August 1999, the
Company was able to implement a program to meet its obligations and thereby
remedy many of the arrearages. As of December 31, 1999, such amount owed to
vendors and suppliers totaled approximately $388,000 compared to $1,253,000 at
December 31, 1998. The Company also deferred paying salaries and certain other
benefits to certain management level employees. As of December 31, 1999, such
amount owed to management level employees totaled $446,000 compared to
approximately $700,000 at December 31, 1998. While the Company has remedied
many of those arrearages and adopted a program to meet all of its obligations,
there is no assurance that everyone to whom payments are still owed will
cooperate with this program.
Due to Imatron's efforts, the private placements, which concluded in August
1999, resulted in an equity infusion of approximately $11.4 million net to
Positron. It is possible, however, that the Company will continue to experience
operating losses and accumulate deficits in the future. Nonetheless, the
qualification from Positron's independent accountants regarding the uncertainty
of its ability to continue as a going concern, contained in the Company's 1998
year-end financial statements, has been removed.
S-24
<PAGE>
