-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NRyY6TlK+yJ1GjS6CjeSIz+p40dbrl05kZpKr714ZE7UL8qNHMuQJZE8yL8RiodF v7eQbM6MtQHARhxR0TKvKA== 0000720477-98-000030.txt : 19980817 0000720477-98-000030.hdr.sgml : 19980817 ACCESSION NUMBER: 0000720477-98-000030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMATRON INC CENTRAL INDEX KEY: 0000720477 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 942880078 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12405 FILM NUMBER: 98689753 BUSINESS ADDRESS: STREET 1: 389 OYSTER POINT BLVD CITY: S SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 4155839964 MAIL ADDRESS: STREET 1: 389 OYSTER POINT BLVD CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 10-Q 1 FORM 10-Q FORM 10Q JUNE 30, 1998 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 1998. Commission file number 0-12405 IMATRON INC. New Jersey I.D. No. 94-2880078 389 Oyster Point Blvd, South San Francisco, CA 94080 (650) 583-9964 Indicate by check mark whether the Registrant (1) had filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- At June 30, 1998, 86,125,980 shares of the Registrant's common stock (no par value) were issued and outstanding. Total Number of Pages: 19 ================================================================================ 1 FORM 10Q JUNE 30, 1998 ================================================================================ IMATRON INC. TABLE OF CONTENTS - -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION PAGE Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets - 3 June 30, 1998 (unaudited) and December 31, 1997 (restated). Condensed Consolidated Statements of Operations - 4 Three Month and Six Month Periods Ended June 30, 1998 (unaudited) and 1997 (unaudited and restated). Condensed Consolidated Statements of Cash Flows - 5 Six Month Periods Ended June 30, 1998 (unaudited) and 1997 (unaudited and restated). Notes to Condensed Consolidated Financial 7 Statements (unaudited). Item 2. Management's Discussion and Analysis of Financial 14 Condition and Results of Operations. PART II. OTHER INFORMATION 18 SIGNATURES 19 ================================================================================ 2 FORM 10Q JUNE 30, 1998 ==================================================================================================================================== IMATRON INC. Condensed Consolidated Balance Sheets (Amounts in thousands) (Unaudited)
June 30, December 31, 1998 1997 ------------ ------------ ASSETS: Current assets Cash and cash equivalents $ 2,614 $ 8,400 Short-term investments -- 180 Accounts receivable (net of allowance for doubtful accounts of $2,845 at June 30, 1998 and $2,490 at December 31, 1997: Trade accounts receivable 8,700 7,944 Accounts receivable from affiliate 1,387 1,438 Inventories 16,434 12,926 Prepaid expenses 566 397 Net current assets of discontinued operations 338 4,697 --------- --------- Total current assets 30,039 35,982 Property and equipment, net 2,509 2,394 Other assets 1,566 1,214 Long-term net assets of discontinued operations 3,408 3,575 --------- --------- Total assets $ 37,522 $ 43,165 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities Accounts payable $ 3,087 $ 2,962 Other accrued liabilities 6,819 6,961 Capital lease obligations - due within one year 56 56 --------- --------- Total current liabilities 9,962 9,979 Deferred income on sale leaseback transactions 1,126 1,376 Deferred income on service contract 360 420 Capital lease obligations 36 65 --------- --------- Total liabilities 11,484 11,840 --------- --------- Minority interest in discontinued operations- Note 12 1,170 14,255 --------- --------- Shareholders' equity Common stock, no par value; authorized-150,000 shares; issued and outstanding - 86,729 shares in 1998 and 78,815 shares in 1997 105,748 90,728 Deferred compensation (190) (232) Additional paid-in capital 9,340 9,290 Notes receivable from stockholder (336) -- Accumulated deficit (89,694) (82,716) --------- --------- Total shareholders' equity 24,868 17,070 --------- --------- Total liabilities and shareholders' equity $ 37,522 $ 43,165 ========= ========= The accompanying notes are an integral part of these condensed consolidated financial statements. ==================================================================================================================================== 3
FORM 10Q JUNE 30, 1998 ==================================================================================================================================== IMATRON INC. Condensed Consolidated Statements of Operations (Amounts in thousands, except per share amounts) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 1998 1997 1998 1997 -------- -------- -------- -------- Revenues: (Restated) (Restated) Product sales $ 9,892 $ 7,931 $ 10,841 $ 15,722 Service 1,487 1,032 3,046 2,156 Development contracts -- 1,250 1,250 2,500 -------- -------- -------- -------- Total revenues 11,379 10,213 15,137 20,378 -------- -------- -------- -------- Cost of revenues: Product sales 6,324 4,698 7,375 10,139 Service 1,745 905 3,213 1,613 -------- -------- -------- -------- Total cost of revenues 8,069 5,603 10,588 11,752 -------- -------- -------- -------- Gross profit 3,310 4,610 4,549 8,626 Operating expenses: Research and development 2,053 2,454 4,039 4,626 Marketing and sales 1,155 931 2,033 1,605 General and administrative 1,044 786 2,126 1,397 -------- -------- -------- -------- Total operating expenses 4,252 4,171 8,198 7,628 -------- -------- -------- -------- Total operating income (loss) (942) 439 (3,649) 998 Other income, net 39 237 131 456 Interest expense (5) (7) (11) (46) -------- -------- -------- -------- Income (loss)from continuing operations before provision for income taxes (908) 669 (3,529) 1,408 Provision for income taxes -- -- -- -- -------- -------- -------- -------- Income (loss) from continuing operations (908) 669 (3,529) 1,408 Loss from discontinued operations - Note 11 (1,191) (1,696) (2,575) (3,269) Non-cash return to minority interest (437) (436) (874) (872) -------- -------- -------- -------- Net loss $ (2,536) $ (1,463) $ (6,978) $ (2,733) ======== ======== ======== ======== Basic and diluted loss per common share: Income (loss) from continuing operations-basic $ (0.01) $ 0.01 $ (0.04) $ 0.02 ======== ======== ======== ======== Income (loss) from continuing operations-diluted $ (0.01) $ 0.01 $ (0.04) $ 0.02 ======== ======== ======== ======== Net loss-basic and diluted $ (0.03) $ (0.02) $ (0.09) $ (0.03) ======== ======== ======== ======== Weighted average number of shares used in con- tinuing operation per share calculation-basic 81,689 78,370 80,231 78,239 ======== ======== ======== ======== Weighted average number of shares used in con- tinuing operation per share calculation-diluted 81,689 80,745 80,231 80,629 ======== ======== ======== ======== Weighted average number of shares used in net loss per share calculation-basic and diluted 81,689 78,370 80,231 78,239 ======== ======== ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements. ==================================================================================================================================== 4
FORM 10Q JUNE 30, 1998 ==================================================================================================================================== IMATRON INC. Condensed Consolidated Statements of Cash Flows (Amounts in thousands) (Unaudited)
Six Months Ended June 30, -------------------------- 1998 1997 -------- -------- Cash flows from operating activities: Net loss $ (6,978) $ (2,733) Adjustments to reconcile net loss to net cash used in operating activities: Net loss from discontinued operations 2,575 3,269 Depreciation and amortization 381 327 Amortization of deferred compensation 42 29 Non-cash return to minority interest 874 872 Common stock issued for services 255 158 Warrant issued for services 50 -- Provision for bad debt 355 90 Changes in operating assets and liabilities: Accounts and notes receivable (1,060) (4,245) Inventories (3,508) (1,215) Prepaid expenses and deposits (169) 834 Other assets (352) 10 Accounts payable 125 (102) Other accrued liabilities (142) 1,021 Deferred income (310) (251) -------- -------- Net cash used in continuing operations (7,862) (1,936) Net cash provided by (used in) discontinued operations 1,951 (1,014) -------- -------- Net cash used in operating activities (5,911) (2,950) Cash flows from investing activities: Capital expenditures (496) (231) Purchases of available-for-sale securities (885) (8,647) Maturities of available-for-sale securities 1,065 13,183 -------- -------- Net cash provided by (used in) investing activities (316) 4,305 -------- -------- Cash flows from financing activities: Payments of obligations under capital leases (29) (29) Proceeds from issuance of common stock 470 735 -------- -------- Net cash provided by financing activities 441 706 -------- -------- Net increase / (decrease) in cash and cash equivalents (5,786) 2,061 -------- -------- Cash and cash equivalents, at beginning of the period 8,400 9,338 -------- -------- Cash and cash equivalents, at end of the period $ 2,614 $ 11,399 ======== ======== ==================================================================================================================================== 5
FORM 10Q JUNE 30, 1998 ====================================================================================================================================
Supplemental Disclosure of Non cash Investing and Financing Activities: Deferred compensation of common stock option grant of consolidated subsidiary $ -- $ 186 ======== ======== Conversion of HeartScan's Preferred Stock to Imatron Common Stock $ 13,959 $ -- ======== ======== Note receivable from stockholder $ 336 $ -- ======== ======== Cash paid for interest on capital lease obligations: Continuing operations $ 10 $ 15 ======== ======== Discontinued operations $ 195 $ 232 ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements ==================================================================================================================================== 6
FORM 10Q JUNE 30, 1998 ================================================================================ IMATRON INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual consolidated financial statements. In the opinion of management, adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report to Shareholders for the year ended December 31, 1997. Certain reclassifications have been made to the 1997 amounts to conform to the current year presentation. 2. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Imatron Inc. and its subsidiary (the Company) HeartScan Imaging, Inc. (HeartScan). All intercompany accounts and transactions have been eliminated in consolidation. For all periods presented, the Financial Statements reflect the Company's HeartScan segment as discontinued operation. 3. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS 130) which is effective for financial statements for periods beginning after December 15, 1997, and establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Company has adopted SFAS 130 as of January 1, 1998. The Company, however, does not have any components of comprehensive income as defined by SFAS 130 and therefore, for the six months ended June 30, 1998 and 1997, comprehensive income is equivalent to the Company's net loss. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of a Business Enterprise" (SFAS 131) which is effective for financial statements beginning after December 15, 1997, and establishes standards for disclosures about segments of an enterprise. The Company has adopted SFAS 131 as of January 1, 1998. The reportable segments under SFAS 131 do not differ from the segments as reported in the Company's December 31, 1997 consolidated annual financial statements either in their definition as segments or in the basis of measurement of segment profit or loss. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) which will be effective for fiscal years beginning after June 15, 1999. The Company does not believe that the impact of this statement will have a material effect on thefinancial position or results of operations upon the adoption of this accounting standard. ================================================================================ 7 FORM 10Q JUNE 30, 1998 ================================================================================ 4. INVENTORIES Inventories consist of (in thousands of dollars): June 30, December 31, 1998 1997 ------------ ------------ Purchased parts and sub-assemblies $ 3,463 $ 3,212 Service parts 1,509 1,398 Work-in-process 4,404 3,611 Finished goods 7,058 4,705 ============ ============ TOTAL $ 16,434 $ 12,926 ============ ============ 5. LOSS PER SHARE The Company adopted SFAS No. 128, "Earnings per Share", as of December 31, 1997. SFAS No. 128 establishes standards for computing and presenting earnings per share. Basic earnings per share is computed based on the weighted average number of common shares outstanding, and diluted earnings per share is computed based on the weighted average number of common shares and dilutive potential common shares outstanding during the period. Stock options and warrants have not been included in the computation of diluted earnings per share as their effect would have been antidilutive. All prior period net loss per share data was restated by the Company upon the adoption of SFAS 128. Basic and diluted earnings per share were calculated as follows (in thousands):
Three Months ended Six Months ended June 30 June 30 ------------------------ ------------------------ 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Income (loss) from continuing operations: Income (loss) from continuing operations $ (908) $ 669 $ (3,529) $ 1,408 =========== =========== =========== =========== Weighted average common shares Outstanding - basic 81,689 78,370 80,231 78,239 Weighted average dilutive potential securities - stock options and warrants -- 2,375 -- 2,390 ----------- ----------- ----------- ----------- Weighted average common and dilutive potential common shares outstanding - dilutive 81,689 80,745 80,231 80,629 =========== =========== =========== =========== Income (loss) from continuing operations - basic $ (0.01) $ 0.01 $ (0.04) $ 0.02 =========== =========== =========== =========== Income (loss) from continuing operations - diluted $ (0.01) $ 0.01 $ (0.04) $ 0.02 =========== =========== =========== =========== Antidilutive options and warrants not included in calculation 2,159 -- 2,267 -- =========== =========== =========== ===========
================================================================================ 8 FORM 10Q JUNE 30, 1998 ================================================================================
Three Months ended Six Months ended June 30 June 30 ------------------------ ------------------------ 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Net loss from discontinued operation: Net loss from discontinued operation $ (1,191) $ (1,696) $ (2,575) $ (3,269) =========== =========== =========== =========== Weighted average common shares Outstanding - basic 81,689 78,370 80,231 78,239 Weighted average dilutive potential securities - stock options -- -- -- -- ----------- ----------- ----------- ----------- Weighted average common and dilutive potential common shares outstanding - dilutive 81,689 78,370 80,231 78,239 =========== =========== =========== =========== Net loss from discontinued operations - basic and dilutive $ (0.01) $ (0.02) $ (0.03) $ (0.04) =========== =========== =========== =========== Antidilutive options and warrants not included in calculation 2,159 2,375 2,267 2,390 =========== =========== =========== =========== Net loss: Net loss $ (2,536) $ (1,463) $ (6,978) $ (2,733) =========== =========== =========== =========== Weighted average common shares Outstanding - basic 81,689 78,370 80,231 78,239 Weighted average dilutive potential securities - stock options and warrants -- -- -- -- ----------- ----------- ----------- ----------- Weighted average common and dilutive potential common shares outstanding - dilutive 81,689 78,370 80,231 78,239 =========== =========== =========== =========== Net loss - basic and dilutive $ (0.03) $ (0.02) $ (0.09) $ (0.03) =========== =========== =========== =========== Antidilutive options and warrants not included in calculation 2,159 2,375 2,267 2,390 =========== =========== =========== ===========
6. STOCK OPTION REPRICING On February 24, 1998, the Company offered employees holding options under the 1993 Stock Option Plan, the opportunity to exchange such options for options with an exercise price equal to $2.56 per share, the fair market value of the Company's stock on that date. Outstanding options to purchase 760,597 shares with an exercise price greater than fair market value on February 24, 1998 were repriced at $2.56 per share. ================================================================================ 9 FORM 10Q JUNE 30, 1998 ================================================================================ 7. DIRECTORS' STOCK OPTION PLAN On July 13, 1998 at the annual meeting, the shareholders approved the Company's Amended and Restated Directors' Stock Option Plan, and an increase in the number of authorized shares of common stock thereunder, from 500,000 to 1,000,000 shares. 8. RELATED PARTY TRANSACTIONS In June 5, 1998, the Company provided a one year loan of $336,000 to the Company's President and Chief Executive Officer for the purchase of 600,000 shares of common stock under the Company's stock option plan. These options were due to expire on June 14, 1998. Interest is charged at the applicable short-term federal rates as prescribed by the Internal Revenue Service and is due quarterly. The loan is full recourse and collateralized by 600,000 shares of common stock and personal property. 9. COLLABORATION AGREEMENTS On April 1, 1998, Imatron's obligations and Siemens' funding under the Memorandum of Understanding terminated. In addition, Siemens surrendered its exclusive distribution rights and Imatron assumed worldwide distribution for its C-150 scanners. Imatron continues to provide scanner service support to Siemens' customers under the service support agreement signed with Siemens. For an agreed upon amount, Imatron provides all pre-installation site planning, installation and application support, as well as, warranty and maintenance services, as a subcontractor to Siemens. Revenues for services are recognized ratably over the life of the contracts while other service revenues are recognized upon completion of work. On May 1, 1998 , the Company entered into a letter of intent whereby Imatron will acquire a majority ownership of Positron Corporation ("Positron"). Positron designs, manufactures, markets, and services POSICAM(TM) systems, which are medical imaging devices utilizing positron emission tomography ("PET") technology. In conjunction with the execution of the letter of intent, the Company began making working capital advances to Positron of up to $500,000 in order to enable it to meet a portion of its current obligations. The financing bears interest at 1/2% over the prime rate, is due March 1, 2000, and is secured by all of Positron's assets. Positron has been operating under severe liquidity and working capital constraints. At June 30, 1998, Imatron advanced to Positron $467,688 relating to this agreement which was included in other assets. Under the terms of the proposed agreement, Imatron will acquire a majority ownership of the outstanding common stock of Positron Corporation on a fully diluted and as-if-converted basis, excluding out-of-the-money warrants and options determined at the time of issuance for $100. Consummation of the issuance of shares to Imatron is conditioned upon, among other things, Positron shareholders' approval. The Company anticipates that the acquisition will close in the fourth quarter of this year. 10. CONVERSION OF HEARTSCAN PREFERRED STOCK On June 26, 1996, Imatron completed a private placement offering whereby 100,000 shares of HeartScan Series A Preferred Stock were sold at $160 per share and realized net proceeds of $14,798,000. The preferred stock is convertible into Imatron common stock at a conversion price equal to the greater of $1.50 per share or a 27% discount on the weighted average closing price of Imatron common stock for the 90-day period immediately preceding June 26, 1998 and every 90 days thereafter until June 26, 2000. The preferred stock holders may convert their shares on June 26, 1998 and every three months thereafter until June 26, 2000. ================================================================================ 10 FORM 10Q JUNE 30, 1998 ================================================================================ On June 26, 1998, pursuant to the optional exchange provision in the HeartScan Preferred Stock Purchase Agreement, holders of HeartScan Series A Preferred stock converted their 94,331 shares into 6,891,763 shares of Imatron common stock at a discounted rate of $2.19 (based on 90-day weighted average price per share of $3.00) per share. The Company reflected this transaction in the Consolidated Balance sheet as an increase in common stock and a decrease in minority interest in the amount of $13,959,000. As of June 30, 1998, the minority interest has a balance of $838,909 representing 5,669 shares of HeartScan Series A Preferred Stock that have not converted. At June 30, 1998, Imatron has a 93.7% interest in HeartScan. 11. DISCONTINUED OPERATION - SALE OF HEARTSCAN SUBSIDIARY On July 13, 1998 (the measurement date), the Company adopted a formal plan to sell its HeartScan subsidiary in order for the Company to focus more comprehensively on the core business of manufacturing and servicing quality Ultrafast CT scanners. On July 22, 1998, a letter of understanding was reached to sell substantially all of the assets of HeartScan to Lifetest America, Inc. for approximately $7.4 million in cash and assumption of equipment-related lease liabilities. The agreement also includes an option to increase the purchase price by having Lifetest assume an additional $1.5 million in equipment secured debt associated with an Ultrafast CT scanner operated by HeartScan-Iberia. The transaction is expected to close during the third quarter of 1998. Accordingly, the operating results of the HeartScan operations are reflected as discontinued operations for all periods presented in the company's statements of operations and as net assets of discontinued operations in the June 30, 1998 and December 31, 1997 balance sheets. Total revenues for HeartScan for the three month periods ended June 30, 1998 and 1997 were $1,100,000 and $538,000, respectively. Total revenues for HeartScan for the six month periods ended June 30, 1998 and 1997 were $2,122,000 and $1,044,000, respectively. A summary of net assets of discontinued operation are as follows (in thousands): June 30, December 31, 1998 1997 ------------ ------------ Cash and cash equivalents $ 1,687 $ 6,025 Accounts receivable-net and other current assets 382 334 Other current liabilities ( 95) ( 94) Lease obligations - current (1,636) (1,568) ------------ ------------ Net current assets of discontinued operation $ 338 $ 4,697 ============ ============ Property, plant and equipment, net 7,102 7,966 Other assets 5 5 Lease obligations - long term portion (3,699) (4,396) ------------ ------------ Long-term net assets of discontinued operation $ 3,408 $ 3,575 ============ ============ The Company expects that the discontinued operation will continue to operate at a loss through the disposal date. However, management's current best estimate indicates that a gain will result from disposal of the discontinued operation. 12. RESTATEMENT In June 1996, Imatron completed a private placement offering whereby 100,000 shares of HeartScan Series A Preferred Stock were sold at $160 per share and realized net proceeds of $14,798,000. The preferred stock is convertible on a ten-to-one basis into HeartScan common shares at any time. Mandatory conversion of the preferred stock into common stock would occur upon the successful completion of a HeartScan initial public offering. The HeartScan Series A Preferred Stock may be exchanged at the sole option of the holder ================================================================================ 11 FORM 10Q JUNE 30, 1998 ================================================================================ into Imatron common stock at an exchange price of $5.00 per share until the earlier of a) two year period following closing of the Preferred Stock offering; or b) a HeartScan initial public offering. If there is no initial public offering within 24 months of the Preferred Stock closing, holders may convert the HeartScan Series A Preferred Stock into Imatron common stock, at a conversion price equal to the greater of $1.50 per share or a 27% discount from the weighted average closing price of Imatron common stock for the 90 day Period immediately preceding 24 months of the Preferred Stock closing and each date that is 3 months thereafter to and including the 48th month of the Preferred Stock closing. In March 1997, subsequent to the Company finalizing its 1996 consolidated financial statements, the Securities and Exchange Commission ("SEC") announced its position on accounting for the issuance of convertible preferred stock with a nondetachable conversion feature that is deemed "in the money" at the date of issue (a "beneficial conversion feature"). The beneficial conversion feature is initially recognized and measured by allocating a portion of the preferred stock proceeds equal to the intrinsic value of that feature to additional paid-in-capital. The intrinsic value is calculated at the date of issue as the difference of the conversion price and the quoted market price of the Company's common stock, into which the security is convertible, multiplied by the number of shares into which the security is convertible. The discount resulting from the allocation of proceeds to the beneficial conversion feature is treated as a dividend and is recognized as a return to the preferred shareholders over the minimum period in which the preferred shareholders can realize that return (i.e. from the date the securities are issued to the date they are first convertible). The accounting for the beneficial conversion feature requires the use of an unadjusted quoted market price (i.e. no valuation discounts allowed) as the fair value used in order to determine the intrinsic value dividend. Additionally preferred dividends of a subsidiary are included in minority interest as a charge against income. Prior to applying the accounting described above in its previously issued financial statements, the Company had not recognized an intrinsic value dividend on the HeartScan preferred stock which was issued in June 1996. The discounted conversion features of this preferred stock into Imatron common stock (the immediate conversion at $5.00 per share and the conversion in two years from the date of the preferred stock issuance at a 27% discount) was provided to the preferred shareholders, in essence to provide them with an exit strategy in the absence of a HeartScan IPO. Thus, the Company did not believe a discount should be recognized on a contingently issuable security. Furthermore, at the time of agreeing to the terms of the transaction the $5 per share immediate conversion price was above the market price of the Company's common stock but at the time the HeartScan preferred stock was actually issued, the market price had increased to $5.75 and thereafter, it dropped below $5 again. Accordingly, the Company did not believe that any calculation of the discount should include the impact of this short-term market fluctuation. In December 1997, the staff of the SEC gave a speech further refining its March 1997 announcement. Based on discussions with the staff of the SEC in April 1998, the staff concluded that the Company should retroactively apply its announcement because it should be applied to contingently issuable securities and, as discussed in the December speech, the portion attributable to the discount that could have been obtained immediately on conversion (even though the shares had not been registered yet) should be recognized on the day the preferred shares were issued. The balance of the discount based on a market value of $5.75 per common share is being recognized over two years from the date of issuance. ================================================================================ 12 FORM 10Q JUNE 30, 1998 ================================================================================ The consolidated financial statements for the three and six months ended June 30, 1997 have been restated to give effect to the accounting treatment described above. The restatement at June 30, 1997 resulted in (1) a reclassification in the consolidated balance sheet of $2,618,000 reducing minority interests and increasing additional paid-in capital (equity) and (2) the recognition of a minority interest charge in the consolidated statement of operations amounting to $436,000 and $872,000 for the three and six months ended June 30, 1997. The Company's net loss increased from $1,027,000 to $1,463,000 for the three months ended June 30, 1997 and $1,861,000 to $2,733,000 for the six months ended June 30, 1997. The restatement of the previously issued consolidated financial statements, in order to apply the accounting described herein for the intrinsic value of the beneficial conversion features, does not affect the cash flows of the Company. The minority interest is recognized as an increase in minority interest in the balance sheet. If the preferred shareholders elect to convert their shares to Imatron common stock, the minority interest will then convert to Imatron equity. ================================================================================ 13 FORM 10Q JUNE 30, 1998 ================================================================================ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Condensed Consolidated Financial Statements and related Notes thereto contained elsewhere with this document. Operating results for the three-month and six-month periods ended June 30, 1998 are not necessarily indicative of the results that may be expected for any future periods, including the full fiscal year. Reference should also be made to the Annual Consolidated Financial Statements, Notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. This Form 10-Q contains forward-looking statements which are subject to risks and uncertainties. The Company's actual results may differ significantly from the results projected in the forward-looking statements as a result of certain risk factors set forth in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. The Company expressly disclaims any obligation to update any forward-looking statements. Results of Continuing Operations: Three months ended June 30, 1998 versus 1997 Overall revenues for the second quarter ended June 30, 1998 of $11,379,000 increased $1,166,000 or 11% compared to 1997 revenues of $10,213,000. Net product revenues increased to $9,892,000 in 1998 from $7,931,000 in 1997 primarily because of an increase in scanner shipments to six in 1998 as compared to five in 1997. Service revenues increased to $1,487,000 in 1998 from $1,032,000 in 1997 due to an increase in scanners under service contracts. The increase primarily resulted from the scanner service support agreement entered into with Siemens. Development contract revenue of $1,250,000 recorded in 1997 represented non-refundable payment received from Siemens to compensate the Company for its research and development efforts for which Siemens received certain rights under the three year Memorandum of Understanding. There were no payments received from Siemens for the second quarter of 1998 as the Memorandum of Understanding expired on April 1, 1998. Total cost of revenues as a percent of revenues for the second quarter of 1998 was higher at 71% as compared with 55% in 1997. Product cost of revenues as a percent of product revenues increased to 64% in 1998 from 59% in 1997 due to shipment of scanners with lower gross margins resulting from added options included in the sales package. Service cost of revenues as a percent of service revenue increased to 117% in 1998 from 88% in 1997 due to additional employees and an increase in travel expenses related to the establishment of service centers in Europe which support the scanner service contracts under the Siemens service agreement. In addition, revenues on spares shipped to Imatron Japan KK, a major customer have been deferred and the related costs were recognized due to the customer's difficulty in remitting payment as a result of the economic and currency uncertainties in Japan. As Imatron Japan KK is a major customer, the Company has continued to ship spare parts inventory and has extended credit beyond the normal terms to ensure the continued service for its 25 scanners purchased from the Company. Operating expenses of $4,252,000 increased $81,000 or 2% compared to 1997 expenses of $4,171,000. Research and development expenses of $2,053,000 decreased from $2,454,000 in 1997 due to a decrease in inhouse research for new product development programs as a result of the termination of the three year Memorandum of Understanding with Siemens. Marketing and sales expenses increased to $1,155,000 in 1998 from $931,000 in 1997 primarily due to increases in outside commissions related to scanner sales and headcount partially offset by a decrease in expenses related to studies conducted on the C-150 scanners. Administrative expenses increased $258,000 to $1,044,000 due to an increase in bad debt expense relating to certain distributors. Other income decreased to $39,000 in 1998 from $237,000 for the second quarter of 1997. The decrease was attributable to lower cash balances and investments in ================================================================================ 14 FORM 10Q JUNE 30, 1998 ================================================================================ interest-bearing securities primarily due to the operating loss incurred. Interest expense represents interest incurred on capital lease obligations on certain office equipment. The Company incurred a non-cash charge to income of $437,000 and $436,000 recorded as return to minority interest expense in the second quarter of 1998 and 1997, respectively, in connection with certain beneficial conversion features granted to the holders of the HeartScan convertible Series A Preferred Stock (see Note 12 to the Notes to the Condensed Consolidated Financial Statements). Six months ended June 30, 1998 versus 1997 Overall revenues for the six months ended June 30, 1998 of $15,137,000 decreased $5,241,000 or 26% compared to revenues of $20,378,000 for the same period in 1997. Net product revenues decreased to $10,841,000 in 1998 from $15,722,000 in 1997 due to seven scanners shipped in 1998 compared to ten in 1997. Certain Asian countries are experiencing banking and currency difficulties that have lead to economic slowdowns or recessions in those countries. This, in turn, has resulted in reduced demand for the Company's products. For instance, the purchasing power of the Company's Asian customers has declined as a result of, among other things, difficulties in obtaining credit and the decline in value of their currencies . These customers have canceled or delayed orders for the Company's products and may cancel or delay additional orders. Scanner sales in this region have decreased to one shipment to Japan in 1998 from four shipments to Japan, Singapore and Korea in 1997. Service revenues increased 41% to $3,046,000 in 1998 from $2,156,000 in 1997 due to an increase in scanners under service contract. The increase primarily resulted from the service support agreement entered into with Siemens. Development contract revenue decreased to $1,250,000 in 1998 from $2,500,000 in 1997 due to the terms of the three year Memorandum of Understanding entered into with Siemens wherein the Company received $1,250,000 quarterly from Siemens to compensate the Company for its research and development efforts. The Memorandum of Understanding expired on April 1, 1998. Total cost of revenues as a percent of revenues for the first six months of 1998 was higher at 70% as compared with 58% in 1997. Product cost of revenues as a percent of product revenues increased to 68% in 1998 from 64% in 1997 due to shipment of seven scanners with lower gross margins compared to ten shipments in 1997. Service cost of revenues as a percent of service revenue increased to 105% in 1998 from 75% in 1997 due to additional employees and an increase in travel expenses related to the establishment of service centers in Europe to support the scanner service contracts under the Siemens service agreement. In addition, revenues on spare parts shipped to Imatron Japan KK, a major customer, were deferred and related costs were recognized due to the customer's difficulty in paying as a result of the economic and currency uncertainties in Asia. As a major customer, the Company have extended credit beyond the normal terms to ensure the continued service for its 25 scanners purchased from the Company. Operating expenses of $8,198,000 increased $570,000 or 7% compared to 1997 expenses of $7,628,000. Research and development expenses of $4,039,000 in 1998 decreased from $4,626,000 in 1997 due to a decrease in inhouse research for new product development programs as a result of the termination of the three year Memorandum of Understanding with Siemens. Marketing and sales expenses increased to $2,033,000 from $1,605,000 in 1997 primarily due to increases in headcount and outside commissions related to scanner sales, partially offset by a decrease in expenses related to studies conducted on the C-150 scanners. Administrative expenses increased to $2,126,000 in 1998 from $1,397,000 in 1997 due to increases in salaries, investor relations and bad debt expenses relating to certain distributors. Other income decreased to $131,000 for the first six months of 1998 from $456,000 in the comparable period of 1997. The decrease were attributable to lower cash balances and investments in interest-bearing securities primarily due to the operating loss incurred. Interest expense represents interest incurred on capital lease obligations on certain office equipment. The Company incurred a non-cash charge to income of $874,000 and $872,000 recorded as return to minority interest expense for the six months ended 1998 and 1997, respectively, in connection with certain beneficial conversion features granted to the holders of the HeartScan convertible Series A Preferred Stock (see Note 12 to the Notes to the Condensed Consolidated Financial Statements). ================================================================================ 15 FORM 10Q JUNE 30, 1998 ================================================================================ Liquidity and Capital Resources: At June 30, 1998, working capital decreased to $20,077,000 compared to December 31, 1997 working capital of $31,683,000 primarily as a result of the net loss sustained by the Company. The current ratio decreased to 3.0:1 at June 30, 1998 from 4.6:1 at December 31, 1997. The Company's total assets decreased to $37,522,000 compared to December 31, 1997 total assets of $43,165,000. Cash used in continuing operations was $7,862,000 for the second quarter of 1998 compared to $1,936,000 during the same period in 1997. This increase primarily resulted from increases in net loss from operations and inventory offset by reduced growth in accounts receivables. The increase in inventory and decrease in growth in accounts receivable resulted from a decrease in scanner shipments to seven in the second quarter of 1998 from ten during the same period in 1997. Inventory also increased to meet scanner orders placed for delivery in third quarter of 1998. Cash provided by discontinued operations was $1,951,000 in the second quarter of 1998 compared to cash used amounting to $1,014,000 due to decreased operating losses of HeartScan amounting to $2,575,000 for the first six months of 1998 compared to $3,269,000 for the same period in 1997 and increased depreciation expense. Significant uses of cash in investing activities included purchases of securities available for sale and capital equipment. Key financing activities for the second quarter ended 1998 included repayments of obligations under the capital lease offset by proceeds from exercise of stock options and warrants. The Company's liquidity is affected by many factors, some based on the normal ongoing operations of the business and others related to the uncertainties of the industry and global economies. Although the cash requirements will fluctuate based on timing and extent of these factors, management believes that cash, and cash equivalents existing at June 30, 1998 together with the proceeds from impending sale of HeartScan , and the estimated proceeds from ongoing sales of products and services in 1998 will provide the Company with sufficient cash for operating activities and capital requirements through December 31, 1998. Currently, the Company does not have significant capital commitments in 1998. To satisfy the Company's capital and operating requirements beyond 1998, profitable operations, additional public or private financing or the incurrence of debt may be required. If future public or private financing is required by the Company, holders of the Company's securities may experience dilution. There can be no assurance that equity or debt sources, if required, will be available or, if available, will be on terms favorable to the Company or its shareholders. The Company does not believe that inflation has had a material effect on its revenues or results of operations. This Form 10Q contains forward-looking statements which involve risk and uncertainties. The company's actual results may differ significantly from the results discussed in the forward-looking statements as a result of certain risk factors set forth in the company's Annual Report on Form 10-K for the year ended December 31, 1997. Discontinued operation: On July 13, 1998, the Company announced its intention to divest its HeartScan subsidiary. Accordingly, the Company restated its financial statements to reflect the classification of HeartScan as discontinued operation for all periods presented (See Note 11 to the Company's 1998 Consolidated Financial Statements). During the first six months of 1998 and 1997, the Company reported losses from discontinued operation of $2,575,000 and $3,269,000, respectively, which relate to the discontinued operations of the HeartScan subsidiary. The decrease in operating loss was primarily due to an increase in number of patient scans and the closure of the Seattle center which had been consistently operating at a loss. ================================================================================ 16 FORM 10Q JUNE 30, 1998 ================================================================================ The Company expects that the discontinued operation will continue to operate at a loss through the disposal date. However, management's current best estimate indicates that a gain will result from disposal of the discontinued operation. Year 2000 Compliance: Many currently installed computer systems and software products are coded to accept only 2 digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept 4 digit entries to distinguish 21st century dates from the 20th century dates. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with such Year 2000 requirements. The Company is utilizing both internal and external resources to identify, correct or reprogram, and test its internal systems, for the Year 2000 compliance. The total cost of compliance and its effect on the Company's future results of operations is being determined as part of the detailed conversion process. The Company is currently seeking to ensure that the software and operating systems included in its Ultrafast CT scanner is Year 2000 compliant. Failure (or perceived failure) of such product to be Year 2000 compliant could significantly adversely affect sales of the Company. Additionally, year 2000 issues could cause a significant number of companies, including current company customers, to reevaluate their current system needs and as a result consider deferring purchase of Ultrafast CT scanner. Any of the foregoing could result in a material adverse effect on the Company's business, operating results and financial condition. ================================================================================ 17 FORM 10Q JUNE 30, 1998 ================================================================================ PART II. OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities Not applicable. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a vote of Security Holders The Company's Annual Meeting of Shareholders was held on July 13, 1998. At the meeting all existing directors were re-elected. In addition, a proposal to approve the Company's Amended and Restated Directors' Stock Option Plan and to increase the number of authorized shares of common stock thereunder, from 500,000 to 1,000,000 shares was approved. The proposal received 63,464,338 shares for, 5,068,104 against and 703,496 abstentions. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: No. 27 - Financial Data Schedule as of June 30, 1998. (b) Form 8-K Reports: Agreements with and regarding Positron Corporation. ================================================================================ 18 FORM 10Q JUNE 30, 1998 ================================================================================ SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 13, 1998 IMATRON INC. (Registrant) /s/Gary H. Brooks --------------------------------------- Gary H. Brooks Vice President, Finance/Administration, Chief Financial Officer and Secretary ================================================================================ 19 EX-27 2 FINANCIAL DATA SCHEDULE JUNE 30, 1998
5 The Schedule Contains Summary Financial Information Extracted From Imatron Inc.'s Consolidated Condensed Statements Of Income And Consolidated Condensed Balance Sheets And Is Qualified In Its Entirety By Reference To Such Financial Statements. 0000720477 Imatron Inc. 1,000 U.S.Dollars 6-MOS Dec-31-1998 Jan-1-1998 Jun-30-1998 1 2614 0 12932 (2845) 16434 30039 8974 (6465) 37522 9962 0 0 0 105748 0 37522 15137 15137 10588 10588 0 0 11 (3529) 0 (3529) (2575) 0 0 (6978) (.09) (.09)
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