U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: August 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-21320
Magna-Lab Inc.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
New York 11-3074326
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
P.O. Box 1313, Brentwood. NY 11717
----------------------------------------
(Address of principal executive offices)
(516) 595-2111
---------------------------
(Issuer's telephone number)
Not applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 ( ) No (X)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date -January 22, 1998
Class A Common Stock, $.001 Par Value 19,325,391
- ----------------------------------------------------- ---------------
Class B Common Stock, $.001 Par Value 1,761,609
- ----------------------------------------------------- ----------------
Class Shares
Transitional Small Business Disclosure Format (check one) Yes ( ) No (X)
<PAGE>
MAGNA-LAB INC.
CONTENTS
PART 1 - FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. - FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS 1
CONDENSED STATEMENTS OF OPERATIONS 2
CONDENSED STATEMENTS OF CASH FLOWS 3
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY 4
NOTES TO CONDENSED FINANCIAL STATEMENTS 5 - 8
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION 9 - 11
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS 11
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS 11
ITEM 5. - OTHER INFORMATION 11
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K 11
All items which are not applicable or to which the answer is negative have been
omitted from this report.
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MAGNA-LAB INC.
CONDENSED BALANCE SHEETS
August 31, 1997 (unaudited) and February 28, 1997
August 31, February 28,
1997 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ - $ 10,000
Accounts receivable - 61,000
Inventory, net of allowance for estimated
non-realizable value of approximately $532,000 - -
Deposits and other, net of amounts written off - -
------------- ------------
Total current assets - 71,000
------------- ------------
PROPERTY AND EQUIPMENT, less accumulated depreciation
and amortization and write offs of approximately $793,000
and $791,000, respectively 16,000 18,000
------------- ------------
OTHER ASSETS - -
------------- ------------
$ 16,000 $ 89,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to related party, overdue $ 22,000 $ 75,000
Accounts payable 1,277,000 1,126,000
Accrued and other current liabilities 1,125,000 908,000
------------- ------------
Total current liabilities 2,424,000 2,109,000
------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, 5,000,000
shares authorized, no shares issued - -
Common stock, Class A, par value $.001 per share,
40,000,000 shares authorized, 4,253,431 and
3,765,851 shares issued and outstanding, respectively. 4,000 4,000
Common stock, Class B, par value $.001 per share,
3,750,000 shares authorized, 1,875,000 shares issued,
1,761,569 and 1,824,149 shares outstanding, respectively. 2,000 2,000
Capital in excess of par value 13,464,000 13,464,000
Accumulated deficit (15,878,000) (15,490,000)
------------- ------------
Total stockholders' equity (2,408,000) (2,020,000)
------------- ------------
$ 16,000 $ 89,000
============= ============
See accompanying notes to financial statements
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
MAGNA-LAB INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended Six months ended
August 31, August 31,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
REVENUES
Sales $ - $ 400,000 $ - $ 400,000
Royalties - 250,000 - 250,000
------------- ------------- ------------- -------------
- 650,000 - 650,000
COST OF SALES - 259,000 - 259,000
------------- ------------- ------------- -------------
GROSS PROFIT - 391,000 - 391,000
------------- ------------- ------------- -------------
OPERATING EXPENSES:
General and administative 104,000 388,000 302,000 673,000
Selling and marketing - 182,000 39,000 312,000
Research and development - 244,000 42,000 562,000
------------- ------------- ------------- -------------
104,000 814,000 383,000 1,547,000
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (104,000) (423,000) (383,000) (1,156,000)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest and financing expense (2,000) (4,000) (5,000) (6,000)
Interest income - 17,000 - 45,000
------------- ------------- ------------- -------------
NET LOSS $ (106,000) $ (410,000) $ (388,000) $ (1,117,000)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 4,890,000 4,590,000 4,890,000 4,590,000
============= ============= ============= =============
NET LOSS PER SHARE $ (0.02) $ (0.09) $ (0.08) $ (0.24)
============= ============= ============= =============
See accompanying notes to financial statements
</TABLE>
2
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<TABLE>
<CAPTION>
MAGNA-LAB INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(unaudited)
Six months ended August 31,
1997 1996
--------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (388,000) $ (1,117,000)
--------------- ---------------
Adjustments:
Depreciation and amortization 1,000 52,000
Effect on cash of changes in operating assets and liabilities:
Inventory - (292,000)
Accounts Receivable 64,000 (245,000)
Deposits and other - 60,000
Accounts payable and accrued liabilities 377,000 (119,000)
Customer deposits - (174,000)
--------------- ---------------
Total adjustments 442,000 718,000
NET CASH GENERATED (USED) IN OPERATING ACTIVITIES 54,000 (1,835,000)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and software - (97,000)
All other, net -
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES - (97,000)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repay Note payable to shareholder (64,000) -
Deferred debt and offering costs; other - (8,000)
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (64,000) 200,000
--------------- ---------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (10,000) (777,000)
CASH AND CASH EQUIVALENTS:
Beginning of period 10,000 903,000
--------------- ---------------
End of period $ - $ 126,000
=============== ===============
See accompanying notes to financial statements
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
MAGNA-LAB INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended August 31, 1997
(unaudited)
Common Stock Capital in
--------------------------------------------------- Excess
Class A Class B Of Par Accumulated
Shares Amount Shares Amount Value (a) Deficit
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, February 28, 1997 3,765,851 $ 4,000 1,824,149 $ 2,000 $13,464,000 $(15,490,000)
CONVERT B TO A SHARES 62,580 - (62,580) -
SHARES DEEMED ISSUED IN PLACEMENT 300,000 -
SHARES DEEMED ISSUED IN DISPUTE 125,000 -
NET LOSS (388,000)
-----------------------------------------------------------------------------------
BALANCES,
August 31, 1997 (unaudited) 4,253,431 $ 4,000 1,761,569 $ 2,000 $13,464,000 $(15,878,000)
========== ========= ========== ========= ============ =============
(a) Includes amounts considered "subscribed" in the Balance Sheet at February
28, 1997.
See accompanying notes to financial statements
</TABLE>
4
<PAGE>
MAGNA-LAB INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ACTIVITIES:
Since commencement of operations on February 10. 1992, Magna-Lab Inc.
(the "Company") has developed and intended to manufacture and market the
MAGNA-SL, the first of a planned series of anatomy specific MRI (Magnetic
Resonance Imaging) products which are smaller and cost less to own install and
operate than present "whole body" MRI systems. The Company's efforts to market
and sell the MAGNA-SL did not generate sufficient revenues to sustain the
Company's planned operations.
In February 1997, the Board of Directors retained a consultant and
approved a plan of restructuring of the Company's operations conceived with the
assistance of the consultant (the "Plan"). The Plan has, as its objective,
restructuring of the Company's existing business by elimination of production,
marketing and certain system engineering by strengthening the existing
relationship with Elscint Cryomagnetics, Ltd. ("Elscint" - see Form 10-KSB for
the year ended February 28,1997 for a discussion of the relationship with
Elscint), and repositioning the Company into a royalty and development company
in the near term. The repositioning involves a significant new development
initiative in Cardiac MRI through a joint collaboration with the Mount Sinai
School of Medicine (the "Cardiac MRI Initiative"). The Company has received a
proposal from Elscint (the "Elscint Proposal") for certain work that is integral
to the Plan but the Company has been unable to finalize the proposal because of
lack of funds. The Company has concluded an agreement with the Mount Sinai
School of Medicine for the Cardiac MRI Initiative but has been unable to fund
its obligations under the agreement until January 1998. See Note 11 - Subsequent
Events.
The Plan involves termination, in March 1997, of the majority of the
Company's workforce including the entire sales and marketing staff, the
production department and portions of the engineering staff. Further, the Plan
includes elimination of the Company's production, development and executive
facility, reductions in the need for other assets including leased assets with
remaining non-cancelable terms, and other measures. The Plan also includes
raising new financing in order to support the Cardiac MRI Initiative and the
financial resources needed to go forward with the Elscint Proposal. The Company
recorded a restructuring charge of approximately $1.5 million to the fourth
quarter ending February 28, 1997 for write downs of fixed assets, inventory (see
next paragraph) and deposits made with strategic vendors which are
non-refundable, as well as accruals for lease termination and other costs. The
ultimate amount may differ from this estimate.
Pursuant to the Plan and after its further attempts to raise
substantial additional working capital were unsuccessful, on March 5, 1997, the
Company informed 10 of its 20 employees that they were being indefinitely laid
off and between March 5 and March 15, 1997, another 4 employees were laid off
due to insufficient funds for their payroll. The remaining employees were
offered the opportunity to continue with the Company in exchange for deferred
compensation pending successful completion of continuing efforts to complete a
financing. At August 31, 1997, unpaid payroll to terminated and continuing
employees totaled approximately $340,000. At January 15, 1998, only Lawrence A.
Minkoff, Ph.D., the Company's Chairman, President and Chief Executive Officer,
is in the full time employ of the Company. The remaining employees have
terminated their full time relationship with the Company and approximately four
of them serve or have indicated that they may serve as part time employees or
consultants to the Company. When the Company vacated its principal production,
development and executive facility it agreed to a judgment against it by the
landlord for unpaid rent in amounts exceeding $50,000 and for additional rent
totaling approximately $70,000 in settlement of the unexpired term of the lease.
The Company then placed certain inventory and equipment in storage and several
key individuals continued the search for new capital and the advancement of the
development collaboration with the Mount Sinai School of Medicine. The Company's
operations have, therefore, been severely curtailed. Additionally, virtually all
of the Company's creditors have threatened or initiated legal action to recover
amounts due them which the Company has no ability to pay (See - Note 11
Subsequent Events and Part II, Item 1 - Legal Proceedings).
As indicated in the attached financial statements, as of August 31,
1997 Magna-Lab Inc. (the "Company") had no substantial current assets,
approximately $2.4 million of liabilities and no cash. Further, the Company has
incurred a loss of approximately $388,000 for the six months ended August 31,
1997 as indicated in the accompanying condensed financial statements and losses
have continued since August 31, 1997. These factors, among others, indicate that
the
5
<PAGE>
Company is in need of very significant additional financing or a strategic
business arrangement in order to continue any aspect of its planned operations
in the fiscal year beginning March 1, 1997. (See Note 11 Subsequent Events
regarding, among other things, completion of certain financing in December 1997
and January 1998).
While the Company had severely curtailed its operations during the
quarter ended May 31, 1997, it continued, in the quarter ended August 31, 1997,
to search for new capital in order to continue its operations pursuant to the
Plan. In October 1997, the Company reached agreement with an investor group to
provide certain limited funding to the Company predicated on the Company's
ability to reduce its recorded liabilities (through creditor concessions) by a
very material amount. See Note 11 Subsequent Events.
In May 1997, the Company entered into an agreement with Mount Sinai
School of Medicine (New York City) and Dr. Valentin Fuster (as principal
investigator) for a collaborative research arrangement devoted to utilizing MRI
in cardiac arterial imaging and requiring payments totaling approximately $1.5
million over three years. The initial required payment of $150,000 was made in
December 1997 and charged to research and development costs at that time.
The Company is continuing its efforts to (1) raise additional capital,
(2) enter into a strategic arrangement with others, and (3) move forward with
the new product opportunity in cardiac MRI and the Elscint proposal. There is no
assurance that any of these efforts will be successful or that the Company will
be able to continue even its severely curtailed operations, for which the
Company will require additional capital. See Note 11 Subsequent Events.
There can be no assurances that management's plans described in the
preceding paragraphs will be realized. These factors, among others, indicate
that the Company may be unable to continue operations as a going concern.
NOTE 2 - BASIS OF PRESENTATION:
The accompanying financial statements have been prepared in accordance with the
instructions to Form 10-QSB and do not include all of the information and
footnotes required by generally accepted accounting principles. All adjustments
which are of a normal recurring nature and, in the opinion of management,
necessary for a fair presentation have been included. These statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's annual report on Form 10-KSB for the year ended February 28, 1997.
NOTE 3 - LOSS PER SHARE OF COMMON STOCK:
Net loss per share is computed based on the weighted average number of Class A
Common and Class B Common shares outstanding after subtracting certain
(1,000,000) Class B shares, which are forfeitable at March 31, 1998 unless
certain events occur, from shares outstanding in computing net loss per share.
Such forfeitable shares would not be deducted in computing net income per share.
Dilutive options and warrants outstanding would be considered in the computation
of net income per share under the treasury stock method when their effect is to
reduce reported net income per share.
NOTE 4 - DEPOSITS:
In August 1993, the Company made a $480,000 non-refundable deposit payment
pursuant to an agreement with an unaffiliated European supplier of MRI
components (consoles). Such agreement, as amended in July 1994, provides for
purchases of consoles and the license of certain technology underlying consoles.
The Company has agreed to purchase initial consoles which, as amended, would
result in an additional payment of approximately $240,000 (which has been paid)
beyond the $480,000 paid as a deposit. The unamortized deposit of approximately
$332,000 remaining at February 28, 1997 has been written off to restructuring
charges in the statement of operations for the fiscal year ended February 28,
1997.
NOTE 5 - ROYALTY INCOME IN AUGUST 31, 1996 PERIOD AND THIRD PARTY CLAIM - In
June 1996, the Company entered into a license and distribution agreement with
Elscint as described in greater detail in the Form 10-KSB for the year ended
February 28, 1997. Revenues of $250,000 recorded in the quarter and six months
ended August 31, 1996 reflect initial, non-refundable royalties under the
agreement with Elscint. The Company and Elscint are having discussions about
revisions to the agreement as discussed elsewhere herein and in the Form 10-KSB.
6
<PAGE>
As discussed in the Company's Form 10-KSB for the year ended February 28, 1997 a
third party had claimed, and the Company disputed, a fee in connection with the
Elscint agreement referred to in the preceding paragraph. On August 27, 1997,
this dispute was settled by the issuance of 125,000 unregistered shares of Class
A common stock to this third party. Such amount had been charged to operations
as part of restructuring charges in the fiscal year ended February 28, 1997. No
adjustment to the wieghted average shares used to compute loss per share was
made for the quarter and six months ended August 31, 1997 since it occurred so
close to the end of the quarter that its effect would be insignificant.
NOTE 6 - PROPERTY AND EQUIPMENT:
Details of property and equipment at August 31, 1997 are as follows:
Machinery and equipment $760,000
Purchased software 49,000
809,000
Less: accumulated depreciation and amortization 392,000
amounts written off in restructuring charge 401,000
---------
$ 16,000
NOTE 7 - NOTES PAYABLE:
In February 1997, the Company issued an interest bearing (10%) note payable to a
shareholder on March 15, 1997 for $75,000, secured by certain amounts receivable
from the taxing authorities of the United Kingdom and the machine delivered to a
related party in December 1996 but not paid for by that party. In June 1997,
upon collection of the receivable from the taxing authorities of the United
Kingdom, the Company repaid approximately $64,000 of this note and interest
payable. The remainder, plus penalty interest remains due.
NOTE 8 - STOCKHOLDERS' EQUITY:
In May 1997, the The Board of Directors of the Company determined that the
purposes of the 1992 Stock Option Plan were not being adequately achieved with
respect to those employees and consultants holding options that were exercisable
above the then current market value and that it was essential to the best
interests of the Company and the Company's shareholders that the Company retain
and motivate such employees and consultants. The Board concluded that such
retention was particularly important given the Company's severely strained
financial situation and the sacrifices made by the key employees to work without
current pay and put forth their own resources to support the Company's Plan. The
Board further determined that it would be in the best interests of the Company
and the Company's shareholders to provide such optionees the opportunity to
exchange their above market value options for options exercisable at the then
current market value. In May 1997, upon approval of the Board of Directors of
the Company, the Company offered the holders of outstanding options under the
1992 Stock Option Plan who were identified by the Board to have a continuing
role in the Company's Plan of restructure with exercise prices above $2.00 per
share, the opportunity to exchange such options for new stock options at an
exercise price of $0.25 per share. The bid price for the Class A Common stock on
Nasdaq on that date was $0.22. Any holder accepting this offer was required to
give up existing options. In addition, in recognition of their efforts to
advance the Plan, the completion of the agreement with Mount Sinai School of
Medicine, and the early successful results of the work with Mount Sinai School
of Medicine, the Board awarded (subject to shareholders approval which has not
yet been obtained) new options to purchase an aggregate of 900,000 shares of
Class A common stock at $0.25 per share to officers and directors of the Company
and to the consultant. Each of the new options were granted for a five year
period of exercise with options for 650,000 shares exercisable immediately and
options for 250,000 shares exercisable ratably over a three year period.
NOTE 9 - ACCRUED LIABILITIES:
Included in accrued liabilities at August 31, 1997 are approximately $340,000
for accrued payroll and approximately $184,000 in accrued restructuring costs.
During the quarter and six months ended August 31, 1997, approximately $50,000
of was charged to the restructuring accrual.
7
<PAGE>
NOTE 10 - OTHER
Related party matters - A director of the Company, who is also a principal owner
of a company which owns stock in the Company, is a partner in a law firm which
provides legal services to the Company. Amounts owing to such firm are included
in the financial statements at approximately $290,000 at August 31, 1997.
Restructuring charge recouped in May 1997 quarter - During the quarter ended May
31, 1997, inventories which had been written off to restructuring charge at
February 28, 1997 totaling approximately $60,000 were returned to vendors for
credit. This amount has been credited to general and administrative costs during
the quarter ended May 31, 1997.
Litigation matters - As a result of the Company's distressed financial
condition, it is subject to the risk of litigation related to unsettled payables
as further discussed in Form 10-KSB for the year ended February 28, 1997.
Vendor claims - The Company has received statements of account with one vendor
for amounts (approximately $132,000 plus claimed interest) materially in excess
of amounts recorded by the Company (approximately $22,000) for goods received
from this vendor. The vendor statements indicate billings of approximately
$83,000 in January 1997 and $16,000 in April 1997. The Company does not have a
record of being billed for such amounts nor for receipt of such materials. This
matter is being investigated for resolution.
NOTE 11 SUBSEQUENT EVENTS:
Subsequent to the completion of the quarter ended August 31, 1997, the following
events, pursuant to the Plan of restructuring outlined above, have occurred
which are material to the Company's financial position and results of
operations:
(a) Private placement with accredited investors - Pursuant to a private offering
to accredited investors beginning in November 1997, in January 1998 the Company
completed the offering of 15,072,000 shares of class A common stock to a group
of accredited investors for gross proceeds of approximately $1,884,000. The
proceeds are to be used to advance the Plan of restructuring outlined above,
including the initial funding of the agreement with the Mount Sinai School of
Medicine.
(b) Negotiated settlements with creditors - In connection with the January 1998
private placement of securities outlined in (a) above, the Company has offered
its trade and other creditors the opportunity to settle the Company's obligation
to them for a reduced amount. As of January 15, 1998, certain vendor and
employee claims have been agreed to be settled and efforts are still in process
to settle remaining amounts in an orderly manner.
(c) Settlement of liabilities to employees - In December 1997, the Company
offered to settle claims by non-executive employees of the Company for unpaid
payroll and expenses of approximately $133,000, representing the approximate
amount recorded by the Company for such liabilities. Over 90% of this amount has
been agreed for settlement and efforts are ongoing to settle the remainder.
Executive employees of the Company were offered the opportunity to settle the
liability for amounts due them for compensation for a reduced amount aggregating
approximately $150,000. Approximately 75% of this amount has been agreed to by
the executives and efforts are continuing to settle the remainder.
(d) Settlement of litigation with a vendor - In October 1997 a judgment for
$300,000 was entered against the Company in the action commenced by a vendor to
recover amounts alleged to be due from the Company (see Note 12 to financial
statements at February 28, 1997). In December 1997, the Company and the vendor
agreed to settle this judgment for a total of $150,000, substantially less than
the amount that had been accrued to the August 31, 1997 condensed balance sheet.
(e) Settlement of judgment in favor or a former landlord - Amounts due to a
former landlord, including amounts under a judgment rendered against the
Company, have been settled for approximately $150,000.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
(B) MANAGEMENT'S ANALYSIS AND DISCUSSION OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION -
HISTORY - During the fiscal year ended February 28, 1994, the Company realized
net proceeds of approximately $5.4 million in connection with the initial public
offering of its equity securities. At that time, it was estimated that the
proceeds of the public offering would last the Company for approximately one
year and that the Company may be dependent upon the receipt of additional
financing in order to continue its activities beyond that time. During the
fiscal year ended February 28, 1995, the Company raised an aggregate of $1.65
million through the private placement of notes payable in 1995 and warrants.
During the fiscal year ended February 29, 1996, the Company raised $500,000
(approximately $410,000 net proceeds) in a bridge loan transaction and
approximately $4.6 million in net proceeds from a public offering of equity
securities. During the year ended February 28, 1997, the Company raised
approximately $75,000 in a secured note payable to a shareholder due in March
1997 (which note has been partially repaid but is in default at August 31, 1997
as to approximately $13,000 of principal plus accrued interest and penalty
interest) and approximately $100,000 in a private placement with accredited
investors of 300,000 shares of the Company's Class A Common Stock.
In January 1997, the Company ran out of cash and since then, and until
completion of a private placement of Class A common stock in December 1997 and
January 1998 (See Note 11 Subsequent Events) has had no financial resources
available to it.
FINANCIAL POSITION AT AUGUST 31, 1997 - FINANCIAL CONDITION AND GOING CONCERN
MATTERS - Reference is made to the Form 10-KSB for the year ended February 28,
1997 for a discussion of conditions leading to the Company's financial
situation.
During the six months ended August 31, 1997, the Company was
unsuccessful in its efforts to raise additional capital, the amounts receivable
from the related party have not been paid, inventory produced for that party has
not gone forward into further production, and, as such, the Company ceased
virtually all operations.
In February 1997, the Board of Directors retained a consultant and
approved a plan of restructuring of the Company's operations conceived with the
assistance of the consultant (the "Plan"). The Plan has, as its objective,
restructuring of the Company's existing business by elimination of production,
marketing and certain system engineering by strengthening the existing
relationship with Elscint Cryomagnetics, Ltd. ("Elscint" - see Form 10-KSB for
the year ended February 28,1997 for a discussion of the relationship with
Elscint), and repositioning the Company into a royalty and development company
in the near term. The repositioning involves a significant new development
initiative in Cardiac MRI through a joint collaboration with the Mount Sinai
School of Medicine (the "Cardiac MRI Initiative"). The Company has received a
proposal from Elscint (the "Elscint Proposal") for certain work which is
integral to the Plan but the Company has been unable to finalize the proposal
because of lack of funds. The Company has concluded an agreement with the Mount
Sinai School of Medicine for the Cardiac MRI Initiative but has been unable to
fund its obligations under the agreement until January 1998. See Note 11 -
Subsequent Events.
The Plan involves termination, in March 1997, of the majority of the
Company's workforce including the entire sales and marketing staff, the
production department and portions of the engineering staff. Further, the Plan
includes elimination of the Company's production, development and executive
facility, reductions in the need for other assets including leased assets with
remaining non-cancelable terms, and other measures. The Plan also includes
raising new financing in order to support the Cardiac MRI Initiative and the
financial resources needed to go forward with the Elscint Proposal. The Company
recorded a restructuring charge of approximately $1.5 million to the fourth
quarter ending February 28, 1997 for write downs of fixed assets, inventory (see
next paragraph) and deposits made with strategic vendors which are
non-refundable, as well as accruals for lease termination and other costs. The
ultimate amount may differ from this estimate.
9
<PAGE>
Pursuant to the Plan and after its further attempts to raise
substantial additional working capital were unsuccessful, on March 5, 1997, the
Company informed 10 of its 20 employees that they were being indefinitely laid
off and between March 5 and March 15, 1997, another 4 employees were laid off
due to insufficient funds for their payroll. The remaining employees were
offered the opportunity to continue with the Company in exchange for deferred
compensation pending successful completion of continuing efforts to complete a
financing. At August 31, 1997, unpaid payroll to terminated and continuing
employees totaled approximately $340,000. At January 15, 1998, only Lawrence A.
Minkoff, Ph.D., the Company's Chairman, President and Chief Executive Officer,
is in the full time employ of the Company. The remaining employees have
terminated their full time relationship with the Company and approximately four
of them serve or have indicated that they may serve as part time employees or
consultants to the Company. When the Company vacated its principal production,
development and executive facility it agreed to a judgment against it by the
landlord for unpaid rent in amounts exceeding $50,000 and for additional rent
totaling approximately $70,000 in
settlement of the unexpired term of the lease. The Company then placed certain
inventory and equipment in storage and several key individuals continued the
search for new capital. The Company's operations have, therefore, been severely
curtailed. Additionally, virtually all of the Company's creditors have
threatened or initiated legal action to recover amounts due them which the
Company has no ability to pay (See - Part II, Item 1 - Legal Proceedings and
Note 11 Subsequent Events).
As indicated in the attached financial statements, as of August 31,
1997 Magna-Lab Inc. (the "Company") had no substantial current assets ,
approximately $2.4 million of liabilities and no cash. Further, the Company has
incurred a loss of approximately $388,000 for the six months ended August 31,
1997, as indicated in the accompanying condensed financial statements, and
losses have continued since August 31, 1997. These factors, among others,
indicate that the Company is in need of very significant additional financing or
a strategic business arrangement in order to continue any aspect of its planned
operations in the fiscal year beginning March 1, 1997.
While the Company has ceased virtually all operations during the
quarter ended May 31, 1997, it continued to search for new capital in order to
continue its operations pursuant to the Plan.
Pursuant to a private placement to accredited investors begun in
November 1997, in January 1998 the Company completed the offering of 15,072,000
shares of class A common stock to a group of accredited investors for gross
proceeds of approximately $1,884,000. The proceeds are to be used to advance the
Plan of restructuring outlined above, specifically to fund the launch of the
Cardiac MRI initiative, to reduce indebtedness and to provide working capital.
Based on vendor and executive employee concessions to date and anticipated, the
Company expects that the proceeds of this offering will last it no longer than
six months, after which it would require additional capital to pursue the Plan.
The Company is continuing its efforts to (1) raise additional capital,
(2) enter into a strategic arrangement with others, and (3) move forward with
the new product opportunity in cardiac MRI and the Elscint proposal. The Company
will require additional capital in addition to that raised in December 1997 and
January 1998, if it is to pursue its plans.
There can be no assurances that management's plans described in the
preceding paragraphs will be realized. These factors, among others, indicate
that the Company may be unable to continue operations as a going concern.
The Company believes, based upon its resources after the January 1998
private placement and anticipated operations and further anticipated vendor
settlements, that it does not have the financial resources to fund its
operations for more than six months without substantial additional capital or a
strategic business arrangement. This belief, which is based upon estimates and
the Company's belief about its financial requirements, as well as other
information contained in this report, are based upon present resources,
conditions, developments and anticipated operations. This belief is based upon
estimates and assumptions including, among other things, levels of existing
liabilities and discussions with creditors, as well as existing and projected
operating costs, efficiencies and scheduling. The foregoing information
constitutes forward-looking statements within the meaning of Section 21E under
the Securities Exchange Act of 1934, as amended.
10
<PAGE>
RESULTS OF OPERATIONS -
Operations in the quarter and six months ended August 31, 1997 resulted
in a net loss of approximately $106,000 and $388,000, respectively. The majority
of the workforce was terminated between March 5 and March 15, 1997, however, six
senior managers and executives continued to devote their efforts to the
Company's Plan of restructure during the majority of the quarter ended May 31,
1997 and approximately three executives continued to devote their efforts to the
Plan during the quarter ended August 31, 1997. Their payroll, which was accrued
but not paid during the six months, is the principal cost in the accompanying
Statement of Operations for the three and six months ended August 31, 1997. Net
loss also includes the reversal of approximately $60,000 of restructuring charge
as a result of the return for credit of inventory which was written off to
restructuring charge at February 28, 1997.
Operations in the quarter and six months ended August 31, 1996 resulted
in a net loss of approximately $410,000 and $1,117,000, respectively. The loss
results from the low level of shipments (one unit in the quarter and six months
ended August 31, 1997) and the ongoing selling, general, administrative and
research/development costs of the Company at that time, offset partially by
initial royalties recorded upon executing the license and distribution agreement
with Elscint.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF SECTION
27A OF THER SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
Reference is made to Part I - Item 3 of Form 10-KSB for the year ended February
28, 1997 for discussion of a legal proceeding commenced against the Company,
including by Devcom and by the Company's former landlord Heartland Rental
Properties Partnership). See paragraphs (d) and (e) of Note 11 - Subsequent
Events, above, for disclosure of the settlements of these two legal proceedings.
The Company continues to be subject to judgments for lesser amounts and other
litigation and/or threatened litigation.
ITEM 2. - CHANGES IN SECURITIES AND USEOF PROCEEDS
See paragraph (a) of Note 11 - Subsequent Events and Part 1. Item 2,
Management's Analysis and Discussion of Financial Condition and Results of
Operations, for a discussion of a private placement of equity securities (under
Rule 506 Regulation D).
ITEM 5. - OTHER INFORMATION
See Note 11 - Subsequent Events, above, for a discussion of significant Company
developments during the October 1998 through January 1998 period.
In May 1997, the Company entered into an agreement with Mount Sinai School of
Medicine and Dr. Valentin Fuster (as principal investigator) for a collaborative
research arrangement devoted to utilizing MRI in cardiac arterial imaging and
requiring payments totaling approximately $1.5 million over three years. The
initial required payment of $150,000 was made by the Company in January 1998.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No.
(11) Statement re: computation of loss per share - A
statement regarding the computation of loss per share
is omitted because computation can be clearly
determined from the material contained in this
Quarterly Report
on Form 10-QSB.
(27) Financial Data Schedule
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAGNA-LAB INC.
(Registrant)
Date: January 26, 1998 By: /s/ Lawrence A. Minkoff
------------------ ---------------------------------
Lawrence A. Minkoff , Chairman of the
Board of Directors, Chief Executive
Officer and President (Principal Executive
Officer), Acting Treasurer (Principal
Financial and Accounting Officer)
12
<PAGE>
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This schedule contains summary financial information
extracted from the Balance Sheet, Statements of Operations
and Statements of Cash Flows, and is qualified in its
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<NAME> Magna-Lab Inc.
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