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: May 31, 1998
------------
( ) 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
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Magna-Lab Inc.
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(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 780, Syosset, N.Y. 11791
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(Address of principal executive offices)
(516) 595-2111
---------------------------
(Issuer's telephone number)
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(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 - June 30, 1998
Class A Common Stock, $.001 Par Value 19,422,142
------------------------------------- ----------
Class B Common Stock, $.001 Par Value 764,858
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Class Shares
Transitional Small Business Disclosure Format (check one) Yes ( ) No (X)
<PAGE>
MAGNA-LAB INC. and Subsidiary
CONTENTS
PART 1 - FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 1
CONSOLDATED STATEMENTS OF OPERATIONS 2
CONSOLDATED STATEMENTS OF CASH FLOWS 3
CONSOLDATED STATEMENT OF STOCKHOLDERS' EQUITY 4
NOTES TO CONSOLDATED 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
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. and Subsidiary
CONSOLIDATED BALANCE SHEETS
May 31, 1998 (unaudited) and February 28, 1998
May 31, February 28,
1998 1998
------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 248,000 $ 599,000
Accounts receivable, net of allowance for doubtful accounts of $356,000 - -
Inventory, net of allowance for estimated
non-realizable value of approximately $532,000 - -
--------------- --------------
Total current assets 248,000 599,000
--------------- --------------
PROPERTY AND EQUIPMENT, less accumulated depreciation
and amortization and write-offs of approximately $792,000 17,000 17,000
--------------- --------------
OTHER ASSETS - -
--------------- --------------
$ 265,000 $ 616,000
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 194,000 $ 254,000
Accrued and other current liabilities 490,000 511,000
--------------- --------------
Total current liabilities 684,000 765,000
--------------- --------------
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, 19,422,142 and
19,322,142 shares issued and outstanding, respectively. 19,000 19,000
Common stock, Class B, par value $.001 per share,
3,750,000 shares authorized, 1,875,000 shares issued,
764,858 shares outstanding (after forfeiture and cancellation of
1,000,000 shares effective February 28, 1998). 1,000 1,000
Capital in excess of par value 15,354,000 15,334,000
Accumulated deficit (15,793,000) (15,503,000)
--------------- --------------
Total stockholders' equity (419,000) (149,000)
--------------- --------------
$ 265,000 $ 616,000
=============== ==============
See accompanying notes to financial statements
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
MAGNA-LAB INC. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended May 31,
1998 1997
-------------- ---------------
<S> <C> <C>
REVENUES $ - $ -
-------------- ---------------
COSTS AND EXPENSES:
Selling and marketing - 39,000
General and administrative 81,000 197,000
Research and development 222,000 42,000
-------------- ---------------
303,000 278,000
-------------- ---------------
OTHER INCOME (EXPENSE)
Other income 10,000 -
Interest expense - (3,000)
Interest income 3,000 -
-------------- ---------------
13,000 (3,000)
-------------- ---------------
NET LOSS $ (290,000) $ (281,000)
============== ===============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 19,422,000 4,890,000
============== ===============
NET LOSS PER SHARE $ (0.02) $ (0.06)
See accompanying notes to financial statements
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
MAGNA-LAB INC. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(unaudited)
Three Months ended May 31,
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (290,000) $ (281,000)
--------------- ---------------
Adjustments:
Depreciation and amortization - 1,000
Effect on cash of changes in operating assets and liabilities:
Accounts payable and accrued liabilities (61,000) 270,000
--------------- ---------------
Total adjustments (61,000) 271,000
--------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES (351,000) (10,000)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
None - -
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES - -
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
None - -
--------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES - -
--------------- ---------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (351,000) (10,000)
CASH AND CASH EQUIVALENTS:
Beginning of period 599,000 10,000
--------------- ---------------
End of period $ 248,000 $ -
=============== ===============
SUPPLEMENTAL INFORMATION ON NON-CASH TRANSACTIONS
Common stock issued to settle account payable $ 20,000 $ -
=============== ===============
See accompanying notes to financial statements
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
MAGNA-LAB INC. and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the quarter ended May 31, 1998 (unaudited)
Common Stock
------------------------------------------------- Capital in
Class A Class B Excess
---------------------- ------------------- Of Par Accumulated
Shares Amount Shares Amount Value (a) Deficit
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, February 28, 1998 19,322,142 $ 19,000 764,858 $ 1,000 $15,334,000 $(15,503,000)
CONVERT B SHARES TO A - - - - - -
SHARES ISSUED TO SETTLE LIABILITY 100,000 - - - 20,000 -
NET LOSS - - - - - (290,000)
--------------------------------------------------------------------------------------
BALANCES, May 31, 1998 (unaudited) 19,422,142 $ 19,000 764,858 $ 1,000 $15,354,000 $(15,793,000)
=========== ============ ======== =========== ============ =============
See accompanying notes to financial statements
</TABLE>
4
<PAGE>
MAGNA-LAB INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - 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
disclosures 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 more complete information and
financial statements and notes thereto included in the Company's annual report
on Form 10-KSB for the year ended February 28, 1998.
NOTE 2 - DISCUSSION OF THE COMPANY'S ACTIVITIES/PRODUCTS AND CASH REQUIREMENTS;
GOING CONCERN CONSIDERATION:
BACKGROUND/HISTORY - Since commencement of operations on February 10, 1992,
Magna-Lab Inc. and Subsidiary (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.
Since receiving US marketing clearance for the MAGNA-SL in September 1994 from
the Food and Drug Administration, the Company sold and delivered four MAGNA-SL
scanners. Three such sales were made to a related party with which the Company
had entered into a sales, marketing and distribution agreement. The third
scanner delivered to this related party has not been paid for by such related
party and the Company has recorded a 100% valuation allowance for this
receivable. The Company is presently unable to support this product and the
passage of time may make it impossible to realize any value from this product.
CURRENT ACTIVITIES - In February 1997, the Company commenced a plan of
restructuring of the Company's operations (the "Plan") to reposition itself into
a development and royalty company in the near-term. The Company's activities
under the Plan in the fiscal year ended February 28, 1998 included elimination
of Company-directed production, marketing, administration and systems
engineering and development related to the MAGNA-SL and attempting to strengthen
the relationship with Elscint Cryomagnetics, Ltd. ("Elscint" - See Note 5) which
was begun in June 1996. A critical component of the repositioning involves a new
development initiative in Cardiac MRI (the "Cardiac MRI Initiative") through a
joint collaboration with the Cardiac Institute of the Mount Sinai School of
Medicine (New York City) ("MSSM"), as well as raising sufficient financing to
pursue the Cardiac MRI Initiative. The Company has received a proposal from
Elscint (the "Elscint Proposal") to support the license element of the Plan and
has continued to have discussions with Elscint regarding certain work that is
integral to the Plan. The Company has, however, been unable to finalize the
Elscint Proposal because of various difficulties in its negotiations with
Elscint, including a lack of adequate funds and the Company's belief that plans
submitted by Elscint did not represent an adequate opportunity for the Company's
shareholders.
In accordance with the Plan, in March 1997, the majority of the Company's
workforce including the entire sales and marketing staff, the production and
engineering and administrative staff were terminated. Further, the Company,
shortly thereafter, vacated its production, development and executive facility
and ceased the need for other assets including leased assets with remaining
non-cancelable terms, and took other measures. The Company recorded a
restructuring charge of approximately $1.5 million in the fourth quarter ended
February 28, 1997 for write downs of fixed assets, inventories and deposits made
with strategic vendors which are non-refundable, as well as accruals for lease
termination and other costs. While the ultimate amount may differ from this
estimate, the Company presently believes that such restructuring charge is
adequate. At May 31, 1998, only the Company's President and Chief Scientific
Officer is in the full time employ of the Company.
When the Company vacated its principal production, development and executive
facility, it 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 MSSM. The Company's operations were,
therefore, severely curtailed.
5
<PAGE>
In December 1997, the Company's efforts to raise additional financing to
initiate the Cardiac MRI Initiative were successful in raising $1.884 million in
a private placement of 15,072,000 shares of common stock (the "December 1997
Financing"). Such financing was conditioned on the Company initiating a program
to pay its liabilities on a reduced basis (the "Debt Reduction Program" - See
Note 9). Since December 1997, the Company has: (1) initiated and advanced the
Cardiac MRI Initiative, (2) continued the Debt Reduction Program and (3)
continued to have discussions with Elscint with the objective of advancing the
Elscint Proposal. The December 1997 Financing is believed to be sufficient to
fund the Company's operations until approximately July 1998, assuming success in
its Debt Reduction Program and discussions with Elscint. Thereafter, or sooner
if these assumptions are incorrect, the Company will require significant
additional financing to support the Plan. It is expected that the Company's
ability to obtain such additional financing will be dependent upon the success
of the Debt Reduction Program, negotiations regarding the Elscint Proposal and
the development activities with MSSM.
Activities during the quarter ended May 31, 1998 included advancement of the
Cardiac Initiative through collaborative research with MSSM, discussion with
Elscint and business planning/capital raising activities.
The Company is continuing its efforts to: (1) raise additional capital, (2)
complete the Elscint Proposal or enter into a strategic arrangement with others,
(3) complete the Debt Reduction Program and (4) move forward with the Cardiac
MRI Initiative. There is no assurance that any of these efforts will be
successful or that the Company will be able to continue even its significantly
reduced operations, for which the Company will require additional capital.
GOING CONCERN CONSIDERATION - As indicated in the accompanying unaudited
consolidated financial statements, as of May 31, 1998, the Company had negative
working capital, approximately $684,000 of liabilities, negative net worth of
approximately ($419,000) and a development agenda which requires additional
financing. Further, as indicated in the accompanying unaudited consolidated
financial statements, the Company has incurred a cumulative loss of
approximately $15.8 million since inception and has no present revenue. Losses
have continued since May 31, 1998. These factors, among others, indicate that
the Company is in need of significant additional financing and/or a strategic
business arrangement in order to continue the Plan. The Company believes that
its cash resources at May 31, 1998 are sufficient to fund its operations until
approximately July 1998, after which it will be required to raise additional
capital to continue its planned operations.
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 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 were forfeited at March 31, 1998 because
certain performance objectives were not met, from shares outstanding in
computing net loss 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 - RELATIONSHIP WITH THE CARDIAC INSTITUTE OF THE MOUNT SINAI SCHOOL OF
MEDICINE:
In May 1997, the Company entered into a three-year agreement with the Cardiac
Institute of the Mount Sinai School of Medicine (New York City) and Dr. Valentin
Fuster (as principal investigator) ("MSSM") for a collaborative research
arrangement devoted to utilizing MRI in cardiac arterial imaging (the "Cardiac
MRI Initiative"). Under the agreement, the Company is required to make payments
to MSSM of $600,000 in each of the first and second years and $300,000 in the
third year. The start of the annual periods was delayed and payments of $300,000
have been made to MSSM during the fiscal year ended February 28, 1998. The
Company has also agreed to pay royalties, as defined in the agreement, to MSSM
for the sole and exclusive right to use, make, have made, sell and otherwise
exploit the results of the collaboration.
The Company accrues for the cost of the collaboration with MSSM as research and
development expense monthly, subsequent to the delayed start of payments
mentioned above. For the quarter ended May 31, 1998, $150,000 was charged to
research and development expense for this arrangement.
6
<PAGE>
NOTE 5 - RELATIONSHIP WITH ELSCINT:
In June 1996, the Company and Elscint entered into an agreement covering a
strategic business arrangement in which Elscint would manufacture the MAGNA-SL
for marketing and sale by Elscint in certain non-United States territories,
principally Europe, the Peoples Republic of China, parts of the Middle East and
other territories. The Company would be paid royalties on each system
manufactured and sold by Elscint. To maintain its rights under the agreement,
Elscint was required to sell a minimum number of systems as defined therein, or
to cure, as defined therein, shortfalls. Additionally, Elscint and the Company
agreed to cooperate in various other matters. The Company agreed to provide
certain ongoing research and development support which is no longer practical
given the Company's resources. Elscint was granted a right of first negotiation
on certain new products.
The Company was obligated to complete certain development tasks and
enhancements, which, if not completed by November 1996, could result in
termination of the agreement by Elscint. Elscint has informed the Company that
it is not satisfied with the completion of certain of the tasks agreed to by the
parties and has reserved all of its rights including to complete the tasks
itself at the Company's expense or to terminate the agreement and seek damages
from the Company. Elscint has presented to the Company the Elscint Proposal (See
Note 2) to assume the uncompleted tasks and make a major alteration and
improvement of certain systems comprising the MAGNA-SL. The Elscint Proposal
requires a development payment of $500,000 plus certain support activities from
the Company. The Company initially agreed to proceed with the Elscint Proposal
but has been unsatisfied with certain aspects of Elscint's expressed plans and
has had difficulties in making the required payments to initiate or complete the
Proposal. The Company is still in discussions with Elscint regarding the Elscint
Proposal but there can be no assurance that this proposal will go forward (See
Note 9).
NOTE 6 - PROPERTY AND EQUIPMENT:
Details of property and equipment at May 31, 1998 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 400,000
--------
$ 17,000
--------
NOTE 7 - ACCRUED LIABILITIES:
Included in accrued liabilities at May 31, 1998 are approximately $150,000 for
accrued restructuring costs.
NOTE 8 - OTHER
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.
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
DEBT REDUCTION PROGRAM - By November 30, 1997, the Company had recorded
liabilities of approximately $2,528,000 (unaudited), no cash and no other assets
which were realizable in the near-term. After a period of seeking new investment
into the Company to advance the Plan, new investors were identified. The new
investors indicated their willingness to invest in the Company's Plan if certain
conditions were met including the reduction of recorded liabilities by a very
material amount. In approximately October, 1997, with the assistance of
reorganization counsel retained for this purpose, the Company commenced the Debt
Reduction Program. Under the Debt Reduction Program, the Company commenced a
7
<PAGE>
program of contacting its creditors, informing them of the Company's dire
financial condition, advising such creditors of the Debt Reduction Program
agreed to with the potential new investors and the Company's willingness to
settle liabilities for a reduced amount.
The Company has offered its trade and other creditors the opportunity to settle
the Company's obligations to them for a reduced amount. As of May 31, 1998,
certain vendor claims have been agreed to be settled for reduced amounts and
efforts are still in process to settle remaining amounts in an orderly manner.
In total, approximately $1,650,000 of liabilities at November 30, 1997 has been
either paid or agreed to be reduced. The difference between recorded payables
and accruals and amounts paid for settlement has been included in other income
in the consolidated financial statements.
The Company has received statements of account from one vendor for amounts
(approximately $132,000 plus claimed interest) materially in excess of amounts
recorded by the Company (approximately $22,000) for amounts alleged to be due
from this vendor. The vendor statements indicate billings of approximately
$83,000 in January 1997 and $16,000 in April 1997 for components fabricated
which were not received by the Company. The Company does not have a record of
being billed for such amounts nor for receipt of such fabricated components.
This matter is being investigated for resolution.
The Company's Debt Reduction Program is ongoing and the Company is the subject
of several threatened, and certain actual, legal actions for nonpayment of
obligations. While several large legal actions have been settled, various other
creditors have threatened the Company with litigation to recover amounts due
them and some of these parties have retained counsel who have contacted the
Company regarding these claims. While the Company has had success in reducing
its liabilities and negotiating with its creditors and others in accordance with
the Plan and the Debt Reduction Plan, the ultimate liabilities in these matters
are not known and the vendors, in some cases, may seek damages in excess of
amounts recorded in the consolidated financial statements. The Company believes,
but no assurance can be made, that its liability will not exceed amounts
recorded in the consolidated financial statements.
WARRANTY, SERVICE, PRODUCT LIABILITY - The Company has been unable to honor its
obligations for warranty and service for the MAGNA-SL since approximately March
1997. Additionally, product liability claims relating to the MAGNA-SL may be
asserted against the Company. If such claims are asserted against the Company,
there can be no assurance that the Company will have sufficient resources to
defend against any such claim or satisfy any such successful claim. In the event
of an uninsured or inadequately insured product liability claim, the Company's
business and financial condition could further be materially adversely affected.
AGREEMENT WITH ELSCINT - Elscint has informed the Company on several occasions,
including in May 1998, that it believes the Company to be in default of its
obligations under the June 1996 agreement with Elscint described in Note 5.
Elscint may assert damages against the Company. The Company has not recorded any
liability to its consolidated financial statements for this contingency because
it is unable to determine what, if any, liability it could have to Elscint after
any defenses and counterclaims which it may make against Elscint. The Company's
intention is, and it continues to work toward, a negotiated settlement of the
business issues (including the "Elscint Proposal" described in Note 2) with
Elscint.
AGREEMENT WITH ACT MEDICAL, INC. - In May 1998, the Company entered into an
agreement with ACT Medical, Inc. ("ACT") under which it is contemplated that ACT
will provide the Company with design review, pre-production prototypes,
regulatory compliance services, production prototypes and ultimately production
of the first product under the Cardiac Initiative. The Company made a payment to
ACT of $12,000 in May 1998 to initiate the relationship. This relationship will
involve costs of several hundred thousand dollars and will be dependent upon the
Company's ability to obtain additional capital.
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 OR PLAN OF OPERATIONS -
BACKGROUND/HISTORY - Since commencement of operations on February 10, 1992,
Magna-Lab Inc. and subsidiary (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.
Since receiving US marketing clearance for the MAGNA-SL in September 1994
from the Food and Drug Administration, the Company sold and delivered four
MAGNA-SL scanners. Three such sales were made to a related party with which the
Company had entered into a sales, marketing and distribution agreement. The
third scanner delivered to this related party has not been paid for by such
related party and the Company has written off this receivable. The Company is
presently unable to support this product and the passage of time may make it
impossible to realize any value from this product.
See Note 8 to Consolidated Financial Statements (Item 7.) included in the
Company's Form 10-KSB for the year ended February 28, 1998 for a discussion of
financings completed since the Company's inception including a private placement
of 15,072,000 shares of class A common stock in the fiscal year ended February
28, 1998.
CURRENT ACTIVITIES AND PLAN OF OPERATION - In February 1997, the Company
commenced a plan of restructuring of the Company's operations (the "Plan") to
reposition itself into a development and royalty company in the near-term. The
Company's activities under the Plan in the fiscal year ended February 28, 1998
included elimination of Company-directed production, marketing, administration
and system engineering and development related to the MAGNA-SL and attempting to
strengthen the relationship with Elscint Cryomagnetics, Ltd. ("Elscint" - see
Note 5 to Consolidated Financial Statements) which was begun in June 1996. A
critical component of the repositioning involves a new development initiative in
Cardiac MRI (the "Cardiac MRI Initiative") through a joint collaboration with
the Cardiac Institute of the Mount Sinai School of Medicine (New York City)
("MSSM"), as well as raising sufficient financing to pursue the Cardiac MRI
Initiative. The Company has received a proposal from Elscint (the "Elscint
Proposal") to support the license element of the Plan and has continued to have
discussions with Elscint regarding certain work that is integral to the Plan.
The Company has, however, been unable to finalize the Elscint Proposal because
of various difficulties in its negotiation with Elscint, including the Company's
lack of adequate funds and the Company's belief that plans submitted by Elscint
did not represent a sufficient enough opportunity for the Company's
shareholders.
In accordance with the Plan, in March 1997, the majority of the Company's
workforce including the entire sales and marketing staff, the production and
engineering and administrative staff were terminated. Further, the Company,
shortly thereafter, vacated its production, development and executive facility
and ceased the need for other assets including leased assets with remaining
non-cancelable terms, and took other measures. The Company recorded a
restructuring charge of approximately $1.5 million to the fourth quarter ended
February 28, 1997 for write downs of fixed assets, inventories, deposits made
with strategic vendors which are non-refundable, as well as accruals for lease
termination and other costs. While the ultimate amount may differ from this
estimate, the Company presently believes that such restructuring charge is
adequate. At February 28, 1998, only the Company's President and Chief
Scientific Officer is in the full time employ of the Company. The Company
utilizes consultants in the management of the affairs of the Company, including
its Chairman and Chief Executive Officer.
When the Company vacated its principal production, development and
executive facility, it 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 MSSM. The Company's operations were,
therefore, severely curtailed.
9
<PAGE>
In December 1997, the Company's efforts to raise additional financing to
initiate the Cardiac MRI Initiative were successful in raising $1.884 million in
a private placement of 15,072,000 shares of common stock (the "December 1997
Financing"). Such financing was conditioned on the Company initiating a program
to pay its liabilities on a reduced basis (the "Debt Reduction Program"). Since
December 1997, the Company has: (1) initiated and advanced the Cardiac MRI
Initiative, (2) continued the Debt Reduction Program and (3) continued to have
discussions with Elscint with the objective of advancing the Elscint Proposal.
The December 1997 Financing is believed to be sufficient to fund the Company's
operations through approximately July 1998, assuming success in its Debt
Reduction program and discussions with Elscint. Thereafter, or sooner if these
assumptions are incorrect, the Company will require significant additional
financing to support the Plan. It is expected that the Company's ability to
obtain such additional financing will be dependent upon the success of the Debt
Reduction Program, negotiations regarding the Elscint Proposal and the
development activities with MSSM.
The Company is continuing its efforts to (1) raise additional capital, (2)
complete the Elscint Proposal or enter into a strategic arrangement with others,
(3) complete the Debt Reduction Program and (4) move forward with the Cardiac
MRI Initiative. There is no assurance that any of these efforts will be
successful or that the Company will be able to continue even its significantly
reduced operations, for which the Company will require additional capital.
The Company does not have the financial resources to complete the next
twelve months. The Company believes, based upon its resources at May 31, 1998
and anticipated operations, that it has the financial resources to fund its
operations through approximately July 1998 without substantial additional
capital or a strategic business arrangement.
GOING CONCERN CONSIDERATION - As indicated in the accompanying consolidated
financial statements, as of May 31, 1998, the Company had negative working
capital, approximately $685,000 of liabilities, negative net worth of
approximately ($419,000) and a development agenda which requires additional
financing. Further, as indicated in the accompanying consolidated financial
statements, the Company has incurred a cumulative loss of approximately $15.8
million since inception and has no present revenue. Losses have continued since
May 31, 1998. These factors, among others, indicate that the Company is in need
of significant additional financing and/or a strategic business arrangement in
order to continue the Plan in the fiscal year beginning March 1, 1998. The
Company believes that its cash resources at May 31, 1998 are sufficient to fund
its operations through approximately July 1998, after which it will be required
to raise additional capital to continue its planned operations.
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's belief about its financing plans and prospects, Elscint
Proposal and arrangements with Mount Sinai School of Medicine, ACT Medical,
Inc., as well as other information contained in this report (including its
prospects for surviving as a going concern) are based upon present conditions
and anticipated developments. This belief is further based upon estimates and
assumptions including, among other things, completion of additional financing
necessary to fund the planned activities, timely and successful completion of
development milestones, competitive and intellectual property factors,
cooperation of creditors and others with the Debt Reduction Program, and
successful efforts to conclude an arrangement with Elscint or others, among
other matters. In the event that the Company's estimates and assumptions prove
materially incorrect, the Company does not presently have the financial
resources to fund planned operations. The foregoing information constitutes
forward-looking statements within the meaning of Section 21E under the
Securities Exchange Act of 1934, as amended.
RESULTS OF OPERATIONS -
Operations in the quarter ended May 31, 1998 resulted in a net loss of
approximately $290,000. The loss results principally from the Cardiac Initiative
development activities in collaboration with the Mount Sinai School of Medicine.
Cost of the MSSM portion of the collaboration were approximately $150,000 of the
net loss for the quarter. In May 1998, the Company initiated a design
review/regulatory/contract manufacturing relationship with a third party and
paid $12,000 to initiate that relationship. General and administrative expenses
consisted of executive, administrative and business development consultants as
well as certain occupancy, storage and professional costs.
10
<PAGE>
Operations in the quarter ended May 31, 1997 resulted in a net loss of
approximately $281,000. 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. Their payroll, which was accrued but not paid
during the quarter, is the principal cost in the accompanying Statement of
Operations. 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.
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, 1998 for discussion of legal proceedings commenced or threatened against the
Company (including by Devcom, by the Company's former landlord Heartland Rental
Properties Partnership and by Elscint) as well as for discussion of the
settlements of the DevCom and Heartland Rental Properties Partnership legal
proceedings. The Company continues to be subject to judgments for lesser amounts
and other litigation and/or threatened litigation.
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
(b) The Company did not file reports on Form 8-K during the quarter
ended May 31, 1998.
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: July 15, 1998 By: /s/ Daniel M. Mulvena
------ -------------------------------
Daniel M. Mulvena , Chairman of the
Board of Directors, Chief Executive
Officer (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
entirety by reference to such financial statements.
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<CIK> 0000895464
<NAME> Magna-Lab Inc.
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