FY 2003 POSITRON CORPORATION FORM 10-KSB
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
Commissions file number: 0-24092
POSITRON
[GRAPHIC OMITED]
Positron Corporation
A Texas Corporation
1304 Langham Creek Drive, Suite 300, Houston, Texas 77084
(281) 492-7100
IRS Employer Identification Number: 76-0083622
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK,
$.01 PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.[X]
Issuer's revenues for fiscal year ended December 31, 2003: $5,068,000.
Aggregate market value of common stock held by non-affiliates of the Registrant
as of March 18, 2004: $2,127,432.
As of March 18, 2004, there were 53,185,803 shares of the Registrant's common
stock, $.01 par value outstanding
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (check one): Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Positron Corporation (the "Company") was incorporated in the State of Texas on
December 20, 1983, and commenced commercial operations in 1986. The Company
designs, manufactures, markets and services advanced medical imaging devices
utilizing positron emission tomography ("PET") technology under the trade-name
POSICAM(TM) systems. Unlike other currently available imaging technologies, PET
technology permits the measurement of the biological processes of organs and
tissues as well as producing anatomical and structural images. POSICAM(TM)
systems, which incorporate patented and proprietary technology, enable
physicians to diagnose and treat patients in the areas of cardiology, neurology
and oncology. The Food and Drug Administration ("FDA") approved the initial
POSICAM(TM) system for marketing in 1985, and as of December 31, 2003, the
Company has sold twenty seven (27) POSICAM(TM) systems, of which thirteen (13)
are in leading medical facilities in the United States and seven (7) are
installed in international medical institutions. The Company has reacquired two
systems, which are being held in inventory for resale. The Company presently
markets its POSICAM(TM) systems at list prices of up to $1.7 million depending
upon the configuration and equipment options of the particular system.
The following table provides summary information regarding the Company's
installed base of POSICAM(TM) systems, which were operational as of December 31,
2003:
Install
Site Location Clinical Application Date
-------------------------------------------- ----------------- ----------------------------- ----
Memorial Hospital Jacksonville, FL Cardiology/Oncology/Neurology 1988
Beth Israel New York, NY Cardiology/Oncology/Neurology 1991
Crawford Long Hospital Atlanta, GA Cardiology/Oncology 1992
Hermann Hospital Houston, TX Cardiology/Oncology/Neurology 1993
Bergan Mercy Hospital Omaha, NE Cardiology/Oncology/Neurology 1995
Buffalo Cardiology & Pulmonary Assoc. Williamsville, NY Cardiology/Oncology 1995
Hadassah Hospital Israel Cardiology/Oncology/Neurology 1995
Baptist Hospital Nashville, TN Cardiology/Oncology/Neurology 1996
Nishidai Clinic (3 systems) Japan Cardiology/Oncology/Neurology 2000
National Institute of Radiological Sciences Japan Cardiology/Oncology/Neurology 2000
Heart Center of the Niagara Niagara Falls, NY Cardiology/Oncology/Neurology 2000
McAllen PET Imaging Center Laredo, TX Cardiology/Oncology 2001
Nishidai Clinic (2 systems) Japan Cardiology/Oncology/Neurology 2002
Crawford Long Hospital Atlanta, GA Cardiology/Oncology 2002
Lancaster Cardiology Medical Group Lancaster, CA Cardiology/Oncology 2003
Health Imaging Services Cullman, AL Cardiology/Oncology 2003
Hermann Hospital Houston, TX Cardiology/Oncology 2003
PET technology is an advanced imaging technique, which permits the measurement
of the biological processes of organs and tissues, as well as producing
anatomical and structural images. Other advanced imaging techniques, such as
magnetic resonance imaging ("MRI") and computed tomography ("CT"), produce
anatomical and structural images, but do not image or measure biological
processes. The ability to measure biological abnormalities in tissues and
organs allows physicians to detect disease at an early stage, and provides
information, which would otherwise be unavailable, to diagnose and treat
disease. The Company believes that PET technology can lower the total cost of
diagnosing and tracing certain diseases by providing a means for early diagnosis
and reducing expensive, invasive or unnecessary procedures, such as angiograms
or biopsies which, in addition to being costly and painful, may not be necessary
or appropriate.
Commercialization of PET technology commenced in the mid-1980s and the Company
is one of several commercial manufacturers of PET imaging systems in the United
States. Although the other manufacturers are substantially larger, the Company
believes that its POSICAM(TM) systems have proprietary operational and
performance characteristics, which may provide certain performance advantages
over other commercially available PET systems. Such performance advantages
include: (i) high count-rate capability and high sensitivity, which result in
faster, more accurate imaging; (ii) enhanced ability to use certain types of
radiopharmaceuticals, which reduces reliance on a cyclotron and enhances patient
throughput; (iii) ability to minimize patient exposure to radiation; and (iv)
ability to minimize false positive and false negative diagnoses of disease. The
medical imaging industry in which the Company is engaged is, however, subject to
rapid and significant technological change. There can be no assurance that the
POSICAM(TM) systems can be upgraded to meet future innovations in the PET
industry or that new technologies will not emerge, or existing technologies will
not be improved, which would render the Company's products obsolete or
non-competitive. See "Item 1. Description of Business - Risks Associated with
Business Activities-Substantial Competition and Effects of Technological
Change".
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The Company's initial focus was the clinical cardiology market, where its
POSICAM(TM) systems have been used to assess the presence and extent of coronary
artery disease, such as the effect of arterial blockages and heart damage due to
heart attacks. In 1994 and 1995, the Company made technological advances which
allowed it to market its products to the neurological and oncological markets.
Neurological applications of POSICAM(TM) systems include diagnoses of certain
brain disorders, such as epileptic seizures, dementia, stroke, Alzheimer's
disease, Pick's disease and Parkinson's disease. In oncology, POSICAM(TM)
systems are used in the diagnosis and evaluation of melanoma and tumors of the
bone and various organs and tissues such as the brain, lungs, liver, colon,
breasts and lymphatic system.
MEDICAL IMAGING INDUSTRY OVERVIEW
Diagnostic imaging allows a physician to assess disease, trauma or dysfunction
without the necessity of surgery. The diagnostic imaging industry includes
ultrasound, X-ray, MRI, CT, and nuclear medicine (which includes PET and
Single-Photon Emission Computed Tomography ("SPECT")). MRI technology uses
powerful magnetic fields to provide anatomical and structural images of the
brain, the spine and other soft tissues, as well as determining the location and
size of tumors. CT scans use X-ray beams to obtain anatomical and structural
images of bones and organs. Nuclear medicine focuses on providing information
about the function and biological processes of organs and tissues through the
use of radiopharmaceuticals.
The first prototype PET scanner was developed in the mid 1970s and the first
commercial PET scanner was constructed in 1978. Approximately 1,200 dedicated
PET systems are currently operational in the United States and approximately 400
additional dedicated PET systems are in commercial use internationally.
PET TECHNOLOGY
The PET imaging process begins with the injection of a radiopharmaceutical (a
drug containing a radioactive agent) by a trained medical person into a
patient's bloodstream. After being distributed within the patient's body, the
injected radiopharmaceutical undergoes a process of radioactive decay, whereby
positrons (positively charged electrons) are emitted and subsequently converted
along with free electrons into two gamma rays or photons. These paired gamma
events are detected by the POSICAM(TM) systems as coincidence events. The
source of the photons is determined and is reconstructed into a color image of
the scanned organ utilizing proprietary computer software. Since certain
functional processes, such as blood flow, metabolism or other biochemical
processes, determine the concentration of the radiopharmaceutical throughout the
body, the intensity or color at each point in the PET image directly maps the
vitality of the respective function at that point within an organ.
In cardiology, PET imaging is an accurate, non-invasive method of diagnosing or
assessing the severity of coronary artery disease. Unlike other imaging
technologies, PET technology allows a physician to determine whether blood flow
to the heart muscle is normal, thereby identifying narrowed coronary arteries,
and whether damaged heart muscle is viable and may benefit from treatment such
as bypass surgery or angioplasty. In addition, dynamic and gated imaging can
display and measure the ejection fraction and wall motion of the heart.
In neurology, PET imaging is now being used as a surgical planning tool to
locate the source of epileptic disturbances in patients with uncontrollable
seizures. In other neurological applications, PET is used in the diagnosis of
dementia, Alzheimer's disease, Pick's disease and Parkinson's disease, and in
the evaluation of stroke severity.
In oncology, PET imaging has historically been used to measure the metabolism of
tumor masses after surgery or chemotherapy. Clinical experience has shown that
PET is more accurate than CT scans or MRI in determining the effectiveness of
chemotherapy and radiotherapy in the treatment of cancer. PET scans are becoming
commonly used to assess suspected breast cancer and whether the lymph system has
become involved. Whole body PET scans are now routinely performed to survey the
body for cancer. This application enables oncologists to see the total picture
of all metastases in a patient, thereby allowing them to properly tailor the
course of treatment.
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The radiopharmaceuticals employed in PET imaging are used by organs in their
natural processes, such as blood flow and metabolism, without affecting their
normal function, and quickly dissipate from the body. Radiopharmaceuticals used
in PET procedures expose patients to a certain amount of radiation, which is
measured in units of milliRads. Exposure to radiation can cause damage to
living tissue, and the greater the radiation exposure, the greater the potential
for damage. Certain PET procedures expose a patient to less radiation than
would be associated with other imaging technologies. A PET cardiac scan, using
the radiopharmaceutical Rubidium-82, results in exposure of approximately 96
milliRads, while a neurological PET scan using 18-FDG, results in exposure of
approximately 390 milliRads. In contrast, a typical chest X-ray results in
exposure of approximately 150 milliRads and a CT scan results in exposure of
approximately 500 to 4,000 milliRads, depending on the procedure.
Radiopharmaceuticals used in PET technology can be created using many natural
substances including carbon, oxygen, nitrogen and fluorine. The PET
procedure to be performed determines the type of radiopharmaceutical used.
Radiopharmaceuticals are made ready for use at a clinic, hospital, or commercial
nuclear pharmacy by either a cyclotron or generator. Cyclotrons require an
initial capital investment of up to $2 million, an additional capital investment
for site preparation, and significant annual operating expenses. Generators
require an initial capital investment of approximately $60,000, no additional
capital investment for site preparation, and monthly operating expenses of
approximately $30,000. While POSICAM(TM) systems have been designed flexibly to
be used with both cyclotron and generator-produced radiopharmaceuticals, they
have proprietary design features that enhance their ability to use generator-
produced radiopharmaceuticals. As a result, clinics or hospitals intending to
focus on certain cardiac PET applications can avoid the significant capital and
operating expenses associated with a cyclotron.
MARKETING STRATEGY
The Company's initial marketing strategy targeted clinical cardiology based on
research conducted at the University of Texas. This research showed the
commercial potential of clinical cardiology applications of PET imaging. With
the development of the POSICAM(TM) HZ, POSICAM(TM) HZL series and now the
mPower(TM) series of systems, Positron is pursuing the full oncology, cardiology
and neurology related PET application markets. The Company believes that it can
capture additional market share by leveraging its strong reputation in the
cardiology marketplace to continue to strengthen its leadership position in this
sector, while building its expertise and reputation in the oncology and
neurology application markets.
To market its systems, Positron relies on referrals from users of its existing
base of installed scanners, trade show exhibits, trade journal advertisements,
clinical presentations at professional and industry conferences, and published
articles in trade journals. The Company uses both sales personnel and key
distributors who have geographic or market expertise. Positron incurs minimal
expense for sales until there is a completed sale. Positron continued to
broaden its communications with the market in support of sales through its
developing distribution network and using the internet and directed mailings. We
believe that this approach will be cost effective and allow Positron to compete
cost effectively with larger competitors. There is no assurance that the
Company's marketing strategy is sufficiently aggressive to compete against
larger, better funded competitors.
THE POSICAM(TM) SYSTEM
At the heart of the POSICAM(TM) system is its detector assembly, which detects
the gammas from positron emissions, and electronic circuits that pinpoint the
location of each emission. POSICAM(TM) systems are easy to use and are neither
physically confining nor intimidating to patients. POSICAM(TM) scans are
commonly performed on an outpatient basis.
The Company's POSICAM(TM) system compares favorably with PET systems produced by
other manufacturers based upon count rate and sensitivity. The count-rate and
sensitivity of an imaging system determine its ability to detect, register and
assimilate the greatest number of meaningful positron emission events in the
shortest period of time. The high count-rate capability and sensitivity of the
POSICAM(TM) systems result in good diagnostic accuracy as measured by fewer
false positives and false negatives. Further benefits of high count-rate and
sensitivity include faster imaging and the ability to use short half-life
radiopharmaceuticals, thereby reducing patient exposure to radiation and
potentially reducing the capital cost to some purchasers by eliminating the need
for a cyclotron for certain cardiac applications.
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The detector assembly consists of crystals, which scintillate (emit light) when
exposed to gamma photons from positron-electron annihilations, in combination
with photomultiplier tubes, which are coupled to the crystals and convert the
scintillations into electrical impulses. The Company employs its own patented
staggered crystal array design for the POSICAM(TM) detectors. Unlike competing
PET systems, this feature permits the configuration of the detector crystals to
collect overlapping slices and more accurately measure the volume of interest by
eliminating image sampling gaps. This is important since under-sampling, or
gaps in sampling, can contribute to an inaccurate diagnosis. The crystal design
also reduces "dead time" - the time interval following the detection and
registration of an event during which a subsequent event cannot be detected.
The basic unit of identification within each crystal module is small, thereby
reducing the probability of multiple hits during a dead period for higher levels
of radioactive flux (activity in the patient).
The POSICAM(TM) system creates a high number of finely spaced image slices. An
image slice is a cross-sectional view that is taken at an arbitrary angle to the
angle of the organ being scanned, and not necessarily the angle a physician
wishes to view. The POSICAM(TM) computer can then adjust the cross-sectional
view to create an image from any desired angle. The high number of finely
spaced image slices created by the POSICAM(TM) system enhances the accuracy of
the interpreted image set.
An integral part of a POSICAM(TM) system is its proprietary data acquisition
microprocessor and its application system software. The Company's software can
reconstruct an image in five seconds or less. The Company has expended
substantial effort and resources to develop computer software that is
user-friendly and clinically oriented. The only personnel needed to perform
clinical studies with the POSICAM(TM) systems are a trained nurse, a trained
technician and an overseeing physician for patient management and safety.
POSICAM(TM) HZ, HZL AND MPOWER(TM)
In addition to the basic POSICAM(TM) system, the Company offers two advanced
versions, the POSICAM(TM) HZ and the POSICAM(TM) HZL, which are now being
further enhanced to become the mPower(TM) product line. Oncologists and
neurologists require enhanced resolution and a large field of view to detect
small tumors and scan large organs, such as the liver. The mPower(TM) systems
employ new detector concepts to satisfy these needs while maintaining the high
count rate capability and sensitivity of the basic POSICAM(TM). In May 1991,
the Company received approval from the FDA to market the POSICAM(TM) HZ, and in
May 1993, the Company received a patent for the innovative light guide and
detector staggering concepts used in the POSICAM(TM) HZ and HZL. In July 1993,
the Company received FDA approval to market in the United States the POSICAM(TM)
HZL, which has a larger axial field of view than the POSICAM(TM) HZ,
facilitating whole body scanning and the scanning of large organs. In July
2002, the Company received FDA approval to market in the United States the
POSICAM(TM) mPower(TM) system.
The Company believes that the special features of the POSICAM(TM) HZL and
mPower(TM) systems enhance their usefulness in oncology and neurology
applications. Furthermore, many price sensitive hospitals and health care
providers may seek to leverage external resources for the delivery of PET
diagnostic services for their patients. To respond to this market need, the
Company intends to expand into the mobile PET market, for which the Company has
previously received 510(k) approval from the FDA. In addition, the POSICAM(TM)
system has been registered with the State of Texas Department of Health, Bureau
of Radiation Control, as a Device suitable for both stationary and mobile use.
CUSTOMER SERVICE AND WARRANTY
The Company has three (3) field service engineers in the United States who have
primary responsibility for supporting and maintaining the Company's installed
equipment base. In addition, the Company has field engineers involved in
site planning, customer training, sales of hardware upgrades, sales and
administration of service contracts, telephone technical support and customer
service.
The Company typically provides a one-year warranty to purchasers of POSICAM(TM)
systems. However, in the past, the Company offered multi-year warranties to
facilitate sales of its systems. Following the warranty period, the Company
offers purchasers a comprehensive service contract under which the Company
provides all parts and labor, system software upgrades and unlimited service
calls. The Company offers to provide service to all of its POSICAM(TM) systems,
six (6) of which are under formal service contracts: one (1) service contract is
automatically renewed on a month-to-month basis; and four (4) expire in 2004.
The Company intends to negotiate the extension of all of the service contracts
expiring in 2004; however, there can be no assurance that such extensions will
be obtained.
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The Company's service goal is to maintain maximum system uptime. Success of a
clinical site is largely dependent on patient volume during normal working hours
and, therefore, equipment uptime and reliability are key factors in this
success. Records compiled by the Company show an average uptime of more than
95% for all installed POSICAM(TM) systems during 2003 and 2002.
COMPETITION
The Company faces competition from three other commercial manufacturers of PET
systems and from other imaging technologies. The Company does not believe that
MRI and CT scan imaging represent significant competing technologies, but rather
complementary technologies to PET, since PET, MRI and CT scans each provide
information not available from the others. However, magnetic resonance
angiography ("MRA") is seen by some cardiologists to be competitive with PET
myocardial perfusion imaging ("MPI").
The Company's primary competition from commercial manufacturers of PET systems
comes from General Electric Medical Systems ("GEMS") a division of General
Electric Company ("GE"), Siemens Medical Systems, Inc. in a joint venture with
CTI, Inc. of Knoxville, Tennessee ("CTI/Siemens"), and ADAC Medical Systems,
which was acquired by Philips Medical ("ADAC/Philips"). GE, CTI/Siemens and
ADAC/Philips have substantially greater financial, technological and personnel
resources than the Company. See "Item 1. Description of Business-Risk
Associated with Business Activities-Substantial Competition and Effects of
Technological Change". In addition, two Japanese manufacturers, Hitachi and
Shimadzu, have manufactured and sold PET scanners in Japan but not in the United
States. These manufacturers represent additional sources of competition that
have greater financial, technological and personnel resources than the Company.
GE and CTI/Siemens each introduced a scanner in 2001 that combined CT scanning
and PET in one gantry. This scanner type could put Positron at a competitive
disadvantage. High field MRI technology, an advanced version of MRI, is in the
development stage, but is a potential competitor to PET in certain neurology and
oncology applications. Presently, high field MRI may be useful in performing
certain research (non-clinical) applications such as blood flow studies to
perform "brain mapping" to localize the portions of the brain associated with
individual functions (such as motor activities and vision). However, high field
MRI does not have the capability to assess metabolism. The Company cannot
presently predict the future competitiveness of high field MRI.
THIRD-PARTY REIMBURSEMENT
POSICAM(TM) systems are purchased or leased primarily by medical institutions
and clinics, which provide health care services to their patients. Such
institutions or patients typically bill or seek reimbursement from various
third-party payers such as Medicare, Medicaid, other governmental programs and
private insurance carriers for the charges associated with the provided
healthcare services. The Company believes that the market success of PET
imaging depends largely upon obtaining favorable coverage and reimbursement
policies from such programs and carriers.
MEDICARE/MEDICAID REIMBURSEMENT. Prior to March 1995, Medicare and Medicaid did
not provide reimbursement for PET imaging. Decisions as to such policies for
major new medical procedures are typically made by the Center for Medicare
and Medicaid Services ("CMS") formerly the U.S. Health Care Financing
Administration, based in part on recommendations made to it by the Office of
Health Technology Assessment ("OHTA"). Historically, OHTA has not completed an
evaluation of a procedure unless all of the devices and/or drugs used in the
procedure have received approval or clearance for marketing by the FDA.
Decisions as to the extent of Medicaid coverage for particular technologies are
made separately by the various state Medicaid programs, but such programs
tend to follow Medicare national coverage policies. In 1999, CMS approved
reimbursement on a trial basis for limited cardiac, oncological, and
neurological diagnostic procedures. In December 2000, CMS expanded its coverage
in cardiology, oncology and neurology for centers utilizing true PET scanners.
In July 2001, CMS further expended its coverage of these procedures and
virtually eliminated reimbursement for SPECT imagers performing PET scans. This
helped to strengthen the market for "true" PET scanners. In 2001, CMS also
implemented its procedures to differentiate hospital based outpatient services
from free-standing outpatient services. Under this new program, hospital based
PET centers are to be paid less for providing PET services than free-standing
centers. This program was to be finalized in 2002. Although expanding, Medicare
and Medicaid reimbursement for PET imaging continues to be restrictive. Although
the CMS broadened coverage in 2000, the agency has maintained that it intends to
evaluate the effectiveness of PET and may change its policy toward reimbursement
at some future date. The Company believes that restrictive reimbursement
policies have had a very significant adverse affect on widespread use of PET
imaging and have, therefore, adversely affected the Company's business,
financial condition, results of operations and cash flows.
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In 1996, CMS approved reimbursement for one PET procedure in cardiology. In
1998, four additional procedures in cardiology, oncology and neurology were
approved. In February 1999, three additional procedure reimbursements were
approved in oncology. In December 2000, six additional procedure reimbursements
were approved in oncology, one in cardiology and one in neurology. In 2001,
further refinements of the reimbursement policies were introduced with expansion
in oncology. Whether CMS will continue to approve additional reimbursable
procedures, and whether private insurers will follow CMS's lead are unknown at
this time. PET scanner demand in the US increased markedly after the
announcement of increasing reimbursement. It is unknown at this time if the
increase in demand will be sustained as reimbursement expands.
In March 2000, the FDA issued a "Draft Guidance" finding 18-FDG and 13-NH3
(radiopharmaceuticals used in the Company's PET scanner) to be safe and
effective for broad oncology and cardiology indications. There is no
assurance, however, that the FDA's findings in the future will not change or
that additional radiopharmaceuticals will be approved.
PRIVATE INSURER REIMBURSEMENT. Until the expansion of coverage of CMS, most
insurance carriers considered PET imaging to be an investigational procedure and
did not reimburse for procedures involving PET imaging. However, this
perspective has begun to change as a result of Medicare's expanding acceptance
of reimbursements for certain PET procedures. The Company believes that certain
private insurance carriers are expanding coverage as experience is gained with
PET imaging procedures. While they may not have broad PET reimbursement
policies in place today, those providing some reimbursement for PET scans do so
on a case-by-case basis.
Any limitation of Medicare, Medicaid or private payer coverage for PET
procedures using the POSICAM(TM) system will likely have a material adverse
effect on the Company's business, financial condition, results of operations and
cash flows.
MANUFACTURING
The Company believes that it currently has the ability to assemble its
POSICAM(TM) scanners in its 7,963 square foot facility located in Houston,
Texas. Scanners are generally produced by assembling parts furnished to the
Company by outside suppliers. The Company believes that it can assemble and
test a typical POSICAM(TM) system in two to three months.
There are several essential components of the Company's POSICAM(TM) and
mPower(TM) systems which are obtained from limited or sole sources, including
bismuth germinate oxide ("BGO") crystals, which detect gamma photons from
positron emissions, and photomultiplier tubes, which convert light energy
emitted by such crystals into electrical impulses for use in the image
reconstruction process. During 2000, the Company qualified a second vendor for
BGO crystal assemblies. This has reduced the Company's exposure in this critical
component. While the Company attempts to make alternate supply arrangements for
photomultiplier tubes and other critical components, in the event that the
supply of any of these components is interrupted, there is no assurance that
those arrangements can be made and will provide sufficient quantities of
components on a timely or uninterrupted basis. Further, there is no assurance
that the cost of supplies will not rise significantly or that components from
alternate suppliers will continue to meet the Company's needs and quality
control requirements.
RESEARCH AND DEVELOPMENT
The Company's POSICAM(TM) systems are based upon proprietary technology
initially developed at the University of Texas Health Science Center ("UTHSC")
in Houston, Texas, under a $24 million research program begun in 1979 and funded
by UTHSC and The Clayton Foundation for Research ("Clayton Foundation"), a
Houston-based, non-profit organization. Since that time, the Company has funded
further product development and commercialization of the system. These research
and development activities are costly and critical to the Company's ability to
develop and maintain improved systems. The Company's research and development
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expenses were approximately $671,000 and $1,036,000 for the years 2003 and 2002,
respectively. The Company's inability to conduct such activities in the future
may have a material adverse affect on the Company's business as a whole.
PATENT AND ROYALTY ARRANGEMENTS
The Company acquired the know-how and patent rights for positron imaging from
three entities: the Clayton Foundation, K. Lance Gould (formerly a director) and
Nizar A. Mullani (also formerly a director.) Pursuant to agreements with each
of them, the Company was obligated to pay royalties of up to 4.0% in the
aggregate of gross revenues from sales, uses, leases, licensing or rentals of
the relevant technology. Royalty obligations amounting to approximately
$310,000 were included in liabilities at December 31, 2003.
Two of the Company's patents, issued in January 1986 and February 1987 and
expiring in January 2003 and February 2004, respectively, relate to the
staggered crystal array design of its original POSICAM(TM) systems. One
additional patent issued in June 1987 and expiring in June 2004 relates to
technology, which the Company, by obtaining the patent, has reserved the right
to use. The Company maintains certain of its patents in Germany and has applied
for certain patents in Japan.
The Company seeks to protect its trade secrets and proprietary know-how through
confidentiality agreements with its consultants. The Company requires each
consultant to enter into a confidentiality agreement containing provisions
prohibiting the disclosure of confidential information to anyone outside the
Company, and requiring disclosure to the Company of any ideas, developments,
discoveries or investigations conceived during service as a consultant and the
assignment to the Company of patents and proprietary rights to such matters
related to the business and technology of the Company.
BACKLOG
As of December 31, 2003, the Company had no outstanding orders for mPower(TM)
systems.
PRODUCT LIABILITY AND INSURANCE
Medical device companies are subject to a risk of product liability and other
liability claims in the event that the use of their products results in personal
injury claims. The Company has not experienced any product liability claims to
date. The Company maintains liability insurance with coverage of $1 million
per occurrence and an annual aggregate maximum of $2 million.
EMPLOYEES
As of December 31, 2003, the Company employed twelve (12) full-time employees
and two (2) part-time consultants: three (3) in engineering, three (3) in
customer support, three (3) in manufacturing, one (1) in sales and marketing,
and four (4) in the executive and administration department. None of the
Company's employees are represented by a union.
RISKS ASSOCIATED WITH BUSINESS ACTIVITIES
HISTORY OF LOSSES. To date the Company has been unable to sell POSICAM(TM)
systems in quantities sufficient to be operationally profitable. Consequently,
the Company has sustained substantial losses. During the year ended December
31, 2003, the Company had a net income of approximately $892,000, compared to a
net loss of $2,967,000 during 2002. During 2003, $2,376,000 of income was the
result of a non-recurring sale of the Company's Cardiac PET Software. At
December 31, 2003, the Company had an accumulated deficit of approximately
$56,775,000. There can be no assurances that the Company will ever achieve the
level of revenues needed to be operationally profitable in the future and if
profitability is achieved, that it will be sustained. Due to the sizable sales
price of each POSICAM(TM) system and the limited number of systems that have
been sold or placed in service in each fiscal period, the Company's revenues
have fluctuated, and may likely continue to fluctuate significantly from quarter
to quarter and from year to year. The opinion of the Company's independent
auditors for the year ended December 31, 2003 expressed substantial doubt as to
the Company's ability to continue as a going concern. The Company will need to
increase system sales to become profitable or obtain additional capital.
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RECRUITING AND RETENTION OF QUALIFIED PERSONNEL. The Company's success is
dependent to a significant degree upon the efforts of its executive officers and
key employees. The loss or unavailability of the services of any of its key
personnel could have a material adverse effect on the Company. The Company's
success is also dependent upon its ability to attract and retain qualified
personnel in all areas of its business, particularly management, research and
development, sales and marketing and engineering. There can be no assurance
that the Company will be able to continue to hire and retain a sufficient number
of qualified personnel. If the Company is unable to retain and attract such
qualified personnel, its business, operating results and cash flows could be
adversely affected.
WORKING CAPITAL At December 31, 2003, the Company had cash and cash
equivalents of $5,000 compared to $107,000 at December 31, 2002. The Company
concluded a private placement in August 1999, which resulted in an equity
infusion of approximately $11,400,000 net to the Company. In 2001, the Company
received $2,000,000 in proceeds on a note payable to a stockholder secured by
substantially all of the Company's assets. In spite of the equity infusion and
loan proceeds, the Company believes that it is possible that it may continue to
experience operating losses and accumulate deficits in the foreseeable future.
If we are unable to obtain financing to meet our cash needs we may have to
severely limit or cease our business activities or may seek protection from our
creditors under the bankruptcy laws.
NASDAQ SMALLCAP MARKET ELIGIBILITY FAILURE TO MEET MAINTENANCE REQUIREMENTS:
DELISTING OF SECURITIES FROM THE NASDAQ SYSTEM. The Company's common stock was
previously listed on the NASDAQ SmallCap Market. The Board of Governors of the
National Association of Securities Dealers, Inc. ("NASD") has established
certain standards for the continued listing of a security on the NASDAQ SmallCap
Market. The standards required for the Company to maintain such listing
include, among other things, that the Company have total capital and surplus of
at least $2,000,000. In 1997, the Company failed to maintain its NASDAQ stock
market listing and may not meet the substantially more stringent requirements to
be re-listed for some time in the future. There can be no assurances that the
Company will ever meet the capital and surplus requirements needed to be
re-listed under the NASDAQ SmallCap Market System.
Trading of the Company's common stock is currently conducted on the NASD's
Electronic Bulletin Board. Trading in the common stock is covered by rules
promulgated under the Exchange Act for non-NASDAQ and non-exchange listed
securities. Under such rules, broker/dealers who recommend such securities to
persons other than established customers and accredited investors must make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities are
exempt from these rules if the market price is at least $5.00 per share. As of
December 31, 2003, the closing price of the Company's common stock was $0.04.
In addition, the SEC has adopted regulations that generally define a penny stock
to be any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. The Company's common stock is currently subject
to such penny stock rules. The regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith. As a penny stock, the
market liquidity for the Company's common stock is severely affected due to the
limitations placed on broker/dealers that sell the common stock in the public
market.
SUBSTANTIAL COMPETITION AND EFFECTS OF TECHNOLOGICAL CHANGE. The industry in
which the Company is engaged is subject to rapid and significant technological
change. There can be no assurance that POSICAM(TM) systems can be upgraded to
meet future innovations in the PET industry or that new technologies will not
emerge, or existing technologies will not be improved, which would render the
Company's products obsolete or non-competitive. The Company faces competition
in the United States PET market primarily from GE, CTI/Siemens and ADAC/Philips,
each of which has significantly greater financial and technical resources and
production and marketing capabilities than the Company. In addition, there can
be no assurance that other established medical imaging companies, any of which
would likely have greater resources than the Company, will not enter the market.
The Company also faces competition from other imaging technologies, which are
more firmly established and have a greater market acceptance, including SPECT.
There can be no assurance that the Company will be able to compete successfully
against any of its competitors.
NO ASSURANCE OF MARKET ACCEPTANCE. The POSICAM(TM) systems involve new
technology that competes with more established diagnostic techniques. The
purchase and installation of a PET system involves a significant capital
expenditure on the part of the purchaser. A potential purchaser of a PET system
must have an available patient base that is large enough to provide the
utilization rate needed to justify such capital expenditure. There can be no
assurance that PET technology or the Company's POSICAM(TM) systems will be
accepted by the target markets, or that the Company's sales of POSICAM(TM)
systems will increase or that the Company will be profitable.
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PATENTS AND PROPRIETARY TECHNOLOGY. The Company holds certain patent and trade
secret rights relating to various aspects of its PET technology, which are of
material importance to the Company and its future prospects. There can be no
assurance, however, that the Company's patents will provide meaningful
protection from competitors. Even if a competitor's products were to infringe
on patents held by the Company, it would be costly for the Company to enforce
its rights, and the efforts at enforcement would divert funds and resources from
the Company's operations. Furthermore, there can be no assurance that the
Company's products will not infringe on any patents of others.
In addition, the Company requires each of its consultants to enter into a
confidentiality agreement designed to assist in protecting the Company's
proprietary rights. There can be no assurance that these agreements will provide
meaningful protection or adequate remedies for the Company's trade secrets or
proprietary know-how in the event of unauthorized use or disclosure of such
information, or that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets and proprietary know-how.
GOVERNMENT REGULATION. Various aspects of testing, manufacturing, labeling,
selling, distributing and promoting our systems and the radiopharmaceuticals
used with them are subject to regulation on the federal level by the FDA and in
Texas by the Texas Department of Health and other similar state agencies. In
addition, sales of medical devices outside the United States may be subject to
foreign regulatory requirements that vary widely from country to country. The
FDA regulates medical devices based on their device classification. Positron's
device is listed as a Class II medical device, the safety and effectiveness for
which are regulated by the use of special controls such as published
performance standards. To date, the FDA has not published performance standards
for PET systems. If the FDA does publish performance standards for PET systems,
there can be no assurance that the standards will not have a potentially adverse
effect on our product, including substantial delays in manufacturing or
disrupting the Company's marketing activities. Other FDA controls, reporting
requirements and regulations also apply to manufacturers of medical devices,
including: reporting of adverse events and injuries, and the mandatory
compliance with the Quality System Regulations commonly known as Good
Manufacturing Practices.
In addition to the regulatory requirements affecting the day-to-day operations
of the Company's product, the FDA requires medical device manufacturers to
submit pre-market clearance information about their proposed new devices and/or
proposed significant changes to their existing device prior to their
introduction into the stream of commerce. This process, commonly referred to as
a 510(k) Clearance, is an extensive written summary of performance information,
comparative information with existing medical devices, product labeling
information, safety and effectiveness information, intended use information, and
the like. Until the FDA has had the opportunity to thoroughly review and
"clear" the submission, commercial distribution of the product is specifically
disallowed. Although the FDA is required to respond to all pre-market
notifications within ninety days of receiving them, the FDA often takes longer
to respond. Once the FDA has cleared the device, it notifies the manufacturer
in terms of a "substantial equivalence" letter. The manufacturer may begin
marketing the new or modified device when it receives the substantial
equivalence letter. If the FDA requires additional information or has specific
questions, or if the Company is notified that the device is not "substantially
equivalent" to a device that has already been cleared, the Company may not begin
to market the device. A non-substantial equivalence determination or request
for additional information of a new or significantly modified product could
materially affect the Company's financial results and operations. There can be
no assurance that any additional product or enhancement that the Company may
develop will be approved by the FDA. Delays in receiving regulatory approval
could have a material adverse effect on the Company's business. The Company
submitted an application for such a 510(k) clearance on June 18, 2002 and was
granted a new 510(k) on July 12, 2002, number K022001.
Moreover, the FDA routinely inspects medical device manufacturers to determine
compliance with Quality System Regulations, and conducted such a routine
inspection of the Company's operation in February 2004. The inspection resulted
in issuance of nine inspectional observations. The Company is in the process of
addressing all nine inspectional observations and providing responses to the
FDA. The Company is cooperating fully and intends to continue to work with the
FDA on all compliance matters. However, there can be no assurance that any of
the Company's corrective actions or responses to the FDA will be determined
adequate by the FDA, or that any such corrective actions and responses will meet
expected dates of completion for compliance.
In addition to complying with federal requirements, the Company is required
under Texas state law to register with the State Department of Health with
respect to maintaining radiopharmaceuticals on premises for testing, research
and development purposes. Positron submitted a new application to the Texas
Department of Health for a Radioactive Material License on July 10, 2000 and was
granted a Radioactive Material License with an expiration date of July 31, 2007.
While in the past the Company has received notice of only minor violations which
were promptly and easily corrected, and while the Company believes that it has
taken adequate measures to prevent the recurrence of any violations, there is no
assurance that violations may not occur in the future, which could have a
material adverse effect on the Company's operations. In addition, Texas state
law requires a safety evaluation of devices that contain radioactive materials.
The Company submitted an application for such an evaluation to the Texas
Department of Health, Bureau of Radiation Control. As a result, Positron's
medical diagnostic scanner has been placed on the Registry of Radioactive Sealed
Sources and Devices as of September 20, 2001.
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The Company's operations and the operations of PET systems are subject to
regulation under federal and state health safety laws, and purchasers and users
of PET systems are subject to federal and state laws and regulations regarding
the purchase of medical equipment such as PET systems. All laws and
regulations, including those specifically applicable to the Company, are subject
to change. The Company cannot predict what effect changes in laws and
regulations might have on its business. Failure to comply with applicable laws
and regulatory requirements could have material adverse effect on the Company's
business, financial conditions, results of operations and cash flows.
Further, sales of medical devices outside the country may be subject to foreign
regulatory requirements. These requirements vary widely from country to
country. There is no assurance that the time and effort required to meet those
varying requirements may not adversely affect Positron's ability to distribute
its systems in some countries.
CERTAIN FINANCING ARRANGEMENTS. In order to sell its POSICAM(TM) systems, the
Company has from time to time found it necessary to participate in ventures with
certain customers or otherwise assist customers in their financing arrangements.
The venture arrangements have involved lower cash prices for the Company's
systems in exchange for interests in the venture. These arrangements expose the
Company to the attendant business risks of the ventures. The Company has, in
certain instances, sold its systems to financial intermediaries, which have, in
turn, leased the system. Such transactions may not give rise to the same
economic benefit to the Company as would have occurred had the Company made a
direct cash sale at its regular market price on normal sale terms. There can be
no assurance that the Company will not find it necessary to enter similar
transactions to effect future sales. Moreover, the nature and extent of the
Company's interest in such ventures or the existence of remarketing or similar
obligations could require the Company to account for such transactions as
"financing arrangements" rather than "sales" for financial reporting purposes.
Such treatment could have the effect of delaying the recognition of revenue on
such transactions and may increase the volatility of the Company's financial
results.
PRODUCT LIABILITY AND INSURANCE. The use of the Company's products entails
risks of product liability. There can be no assurance that product liability
claims will not be successfully asserted against the Company. The Company
maintains liability insurance coverage in the amount of $1 million per
occurrence and an annual aggregate maximum of $2 million. However, there can be
no assurance that the Company will be able to maintain such insurance in the
future or, if maintained, that such insurance will be sufficient in amount to
cover any successful product liability claims. Any uninsured liability could
have a material adverse effect on the Company.
NO DIVIDENDS. The Company has never paid cash dividends on its common stock and
does not intend to pay cash dividends on its common stock in the foreseeable
future.
SIGNIFICANT TRANSACTIONS. The Company entered into a loan arrangement on June
29, 2001 with Imatron, a stockholder of the Company, for the purpose of
borrowing up to $2,000,000 to fund operating activities. This loan was
collateralized by substantially all the assets of the Company. Interest was
charged on the outstanding principal balance at an annual rate of 10% and was
payable monthly. As of June 29, 2003 the principal balance of the loan was
$2,000,000. Principal on the loan amounting to $1,000,000 and $500,000 was to
be repaid within five (5) business days of December 31, 2001 and March 31, 2002,
respectively. The remaining $500,000 of loan principal and all unpaid interest
was due and payable no later than June 30, 2002.
In conjunction with the loan, the Company granted Imatron warrants to purchase
6,000,000 shares of common stock, at an exercise price of $.30 per share that
were exercisable through June 30, 2006. The warrants issued to Imatron had an
approximate value of $200,000 at the date of issue. Such cost was treated as a
loan origination cost and amortized to expense over the twelve-month term of the
note payable, using the effective interest method.
Imatron had previously acquired 9,000,000 shares of the Company's common stock
on January 22, 1999.
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General Electric Company ("GE") acquired Imatron on December 19, 2001.
Effective June 29, 2003, the Company entered into a Technology Purchase
Agreement to transfer its Cardiac PET Software to GE in exchange for
cancellation of the indebtedness under this loan and the surrender of the
9,000,000 shares of common stock and the warrant to purchase 6,000,000 shares of
common stock. The Company recognized a gain of $2,376,000 related to the sale
of this technology. This gain resulted from the cancellation of the Company's
obligation for $2,000,000 in principal and accrued interest of $376,000 under
the loan. The Company's future commitment to provide assistance to GE for the
purpose of fully utilizing and exploiting this technology, as well as the
compensation for these services, were provided for in a separate service
agreement discussed below.
As part of the transactions contemplated by the Technology Purchase Agreement,
the Company entered into a Software License Agreement. Pursuant to terms of the
Software License Agreement, the Company received an irrevocable license from GE
to continue using, modifying, distributing and otherwise exploiting the Cardiac
PET Software in perpetuity.
In conjunction with the Technology Purchase Agreement, the Company also entered
into an Agreement for Services for the purpose of assisting GE in fully
utilizing and exploiting the Cardiac PET Software. The Company agreed to
provide services for a period of six quarters (eighteen months) for a fee of
$50,000 per each 3-month period during the term of this agreement. GE committed
to pay the fee for the first two quarters of $50,000 (total of $100,000) within
two business days of July 29, 2003 and will make payment of any subsequent
quarters in advance of such quarter. GE may terminate the Agreement for
Services at any time after it has paid the fees for at least four quarters.
ITEM 2. DESCRIPTION OF PROPERTY
The Company is headquartered in Houston, Texas, where it currently leases a
7,963 square foot facility. That facility includes area for system assembly and
testing, a computer room for hardware and software product design, and office
space. The rental rate for the facility was $6,744 per month through April 30,
2001 and the monthly rate increased to $7,171 for the period from May 1, 2001
through October 31, 2003. The Company reduced its space under lease and lowered
the monthly rent to $4,671 for the period from November 1, 2003 through March
31, 2004. The lease expires on March 31, 2004. The Company anticipates that
the facility will be sufficient for its 2004 operating activities.
ITEM 3. LEGAL PROCEEDINGS
PROFUTURES CAPITAL BRIDGE FUND, L.P.
On September 26, 2000, ProFutures Bridge Capital Fund, L.P. ("ProFutures") filed
a complaint against the Company in Colorado state court for declaratory relief
and breach of contract (the "Complaint"). The Complaint alleged that the
Company breached four stock purchase warrants issued to ProFutures on the basis
that the Company failed to notify ProFutures of dilutive events and failed to
register the full number of shares ProFutures was allegedly entitled to purchase
under the warrants when, on February 14, 2000, the Company registered 1,500,000
shares of stock underlying ProFutures' warrants instead of 4,867,571. The
Complaint further alleged that the Company's issuance of shares of common stock
to Imatron, Inc. on or about January 22, 1999, (the "Imatron Transaction") was a
dilutive event pursuant to the anti-dilution provisions contained in the four
stock purchase warrants. The Complaint sought declarations that the
consideration received by the Company in the Imatron Transaction increased the
number of shares issuable under the warrants, the Company breached the warrants
by failing to notify ProFutures of the Imatron Transaction and its effect on
ProFutures' warrants at the time of the Imatron Transaction and that the Company
further breached the warrants by failing to register the number of shares
ProFutures alleged were purchasable under its warrants. The Complaint sought an
unspecified amount of monetary damages.
The Colorado State level case of ProFutures v. Positron, District Court, City
and County of Denver, Colorado, Case No. 00CV7146, was tried before the Court in
June 2002. The Court issued its Findings of Fact, Conclusions of Law and
Judgment on November 13, 2002. The Court agreed with Positron's determination
of the value of the consideration paid for the shares issued to Imatron and that
there was no evidence of fraud by Positron. The Court agreed with ProFutures
that Positron breached the 1996 stock purchase warrant with ProFutures by
failing
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to give ProFutures written notice stating the adjusted exercise price and the
new number of shares deliverable as a result of the Imatron Transaction and by
failing to register the shares to which ProFutures was entitled under the
warrant as a result of the Imatron Transaction. Nevertheless, the Court also
found that ProFutures' alleged damages were uncertain and speculative and that
ProFutures was not entitled to recover actual damages. Therefore ProFutures was
awarded $1 in nominal damages. ProFutures has appealed the trial Court's
findings and Positron has cross-appealed. Those appeals are presently pending
before the Court of Appeals, State of Colorado.
In the federal case of ProFutures v. Positron, et al., United States District
Court for the District of Colorado, Case No. 02-N-0154, the Complaint alleged
two causes of action against the Company: fraudulent transfer and injunctive
relief. The allegations arose out of a June 2001 loan agreement between
Positron and Imatron. The action was dismissed in 2002 without prejudice.
10P10, L.P.
In December 2001, 10P10, L.P., the Company's previous landlord for its premises
located at 16350 Park Ten Place, Suite 150, Houston, Texas, filed a complaint
(Cause No. 2001-65534 in the 165th Judicial District Court of Harris County,
Texas) against the Company alleging breach of lease agreement. The Company
disputes the amount of lease commissions and construction costs charged by
10P10, L.P. in conjunction with the subleasing of the premises. Although 10P10,
L.P. asserted a claim in excess of $150,000, a subsequent analysis of the
transactions under the lease has resulted in the reduction of the lease
obligation alleged by 10P10, L.P. to approximately $97,000. Although the
Company disputes the amount of the claim, due to the pending lawsuit,
approximately $97,000 is recorded as an accrued liability as of December 31,
2003. The case is set for trial on a two week docket beginning in September
2004.
Radiology Corporation of America, Inc.
A judgment in the amount of $75,000 has been entered against the Company in
Texas state court in favor of Radiology Corporation of America, Inc., a vendor
to the Company. In satisfaction of the judgment the Company and the creditor
have agreed that the judgment may be satisfied by five monthly payments of
$15,000 each commencing March 10, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal year
2003.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In December 1993, the Company completed an initial public offering of 1,750,000
shares of common stock and 1,946,775 redeemable warrants (the "Redeemable
Warrants") to purchase common stock (the "Initial Public Offering"). Prior to
the Initial Public Offering there was no public market for the Company's common
stock. The Redeemable Warrants expired in December 1998. The Company's common
stock is currently traded in the over-the-counter securities market, and quoted
on the NASD's Electronic Bulletin Board under the symbol POSC. The Company's
common stock and, prior to their expiration, the Redeemable Warrants, were
previously traded on the NASDAQ SmallCap Market but were delisted in 1997
because the Company was unable to comply with various financial and compliance
requirements for continued inclusion on the NASDAQ SmallCap Market. See "Item
1. Description of Business - Risks Associated with Business Activities."
The following range of the high and low reported closing sales prices for the
Company's common stock for each quarter in 2003 and 2002, all as reported on the
NASDAQ OTC Bulletin Board. These quotations reflect interdealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
2003 2002
------------ ------------
High Low High Low
----- ----- ----- -----
First Quarter $0.01 $0.01 $0.11 $0.08
Second Quarter $0.08 $0.01 $0.13 $0.05
Third Quarter $0.20 $0.04 $0.13 $0.06
Fourth Quarter $0.08 $0.03 $0.08 $0.01
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There were approximately 260 shareholders of record of common stock as of March
18, 2004, including broker-dealers holding shares beneficially owned by their
customers.
The Company has never paid cash dividends on its common stock. The Company does
not intend to pay cash dividends on its common stock in the foreseeable future.
The Series A Preferred Stock Statement of Designation prohibits the Company from
paying any common stock dividends until all required dividends have been paid on
the Series A Preferred Stock. As of December 31, 2003, approximately $345,000
of preferred stock dividends are undeclared and unpaid by the Company.
In consideration for the issuance by the Company's President and CEO, Gary H.
Brooks, to the Company of a promissory note in the principal amount of $75,000,
on October 30, 2002, the Company granted Gary H. Brooks warrants to purchase
500,000 shares of common stock, at an exercise price of $0.05 per share that are
exercisable through October 31, 2007. The issuance of the warrants was exempt
from the registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof, since the issuance constituted a sale not
involving a public offering.
The Company's equity plan information required by this item is set forth under
Item 11 of Part III below.
ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
The Company was incorporated in December 1983 and commenced commercial
operations in 1986. Since that time, the Company has generated revenues
primarily from the sale and service contract revenues derived from the Company's
POSICAM(TM) system, 13 of which are currently in operation in certain medical
facilities in the United States and 7 are operating in international medical
institutions. The Company has never been able to sell its POSICAM(TM) systems
in sufficient quantities to achieve operating profitability.
In May 1998, the Company entered into a series of agreements (the "Imatron
Transaction") with Imatron, a New Jersey corporation and technology-based
company engaged principally in the business of designing, manufacturing and
marketing a high performance computed tomography system, pursuant to which on
January 22, 1999, Imatron acquired majority ownership of the Company. In
conjunction with the execution of definitive agreements in May 1998, Imatron
began making working capital advances available to the Company of up to $500,000
in order to enable the Company to meet a portion of its current obligations.
The loan agreement was thereafter amended by oral agreement to increase the
working capital advances available under the loan agreement up to an additional
$100,000. As of December 31, 1998, the Company had borrowed $600,000 pursuant
to those agreements. The loan bore interest at 1/2% over the prime rate and was
secured by all of Positron's assets.
Pursuant to the agreement, Imatron acquired 9,000,000 shares of the Company's
common stock on January 22, 1999, representing, at that time, a majority
ownership of the outstanding common stock of the Company on a fully-diluted and
as-if-converted basis, excluding out-of-the-money warrants and options
determined at that time. In exchange, the Company received from Imatron (a)
nominal cash; (b) an immediate loan of up to $500,000 in working capital to
assist the Company in meeting then current financial obligations; (c) an
agreement that Imatron would undertake all reasonable efforts to have its
affiliate, Imatron Japan, Inc. assist the Company in the sale of 10 POSICAM(TM)
systems over the next three years; (d) an agreement that Imatron would help
facilitate the recapitalization of the Company to support its re-entry into the
medical imaging market by using its best efforts to arrange for additional
third-party equity financing for the Company over an eighteen-month period in an
aggregate amount of not less than $8,000,000; and (e) a new management team
selected by Imatron.
Consummation of the issuance of shares to Imatron was conditioned upon, among
other things (a) the resignation of each officer of Positron, (b) the
resignation of at least three of the four Positron directors and the appointment
of Imatron's nominees to fill such vacancies, and (c) Positron shareholder
approval of an amendment to Positron's Articles of Incorporation to increase its
authorized common stock to 100,000,000 shares of common stock. All of those
conditions were met, and the shares were issued on January 22, 1999. Through
Imatron's efforts, private placements were concluded in August 1999 resulting in
a net equity infusion of approximately $11.4 million to Positron.
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As part of the consummation of the Imatron Transaction in January 1999, all of
the Company's officers resigned and all directors, except for Gary B. Wood,
resigned from the Board. S. Lewis Meyer was appointed as Chairman of the
Company's Board of Directors. Mr. Meyer is neither an employee nor an executive
officer of the Company. Gary H. Brooks was also appointed to serve on the
Company's Board of Directors. Additionally, Mr. Brooks was appointed as
President, Secretary, and Acting Chief Financial Officer. The Company's
shareholders approved an amendment to Positron's Articles of Incorporation to
increase its authorized common stock to 100,000,000 shares.
The Company entered into a loan arrangement on June 29, 2001 with Imatron for
the purpose of borrowing up to $2,000,000 to fund operating activities. This
loan was collateralized by substantially all the assets of the Company.
Interest was charged on the outstanding principal balance at an annual rate of
10% and was payable monthly. As of June 29, 2003 the principal balance of the
loan was $2,000,000. Principal on the loan amounting to $1,000,000 and $500,000
was to be repaid within five (5) business days of December 31, 2001 and March
31, 2002, respectively. The remaining $500,000 of loan principal and all unpaid
interest was due and payable no later than June 30, 2002.
In conjunction with the loan, the Company granted Imatron warrants to purchase
6,000,000 shares of common stock, at an exercise price of $.30 per share that
were exercisable through June 30, 2006. The warrants issued to Imatron had an
approximate value of $200,000 at the date of issue. Such cost was treated as a
loan origination cost and amortized to expense over the twelve-month term of the
note payable, using the effective interest method.
Imatron had previously acquired 9,000,000 shares of the Company's common stock
on January 22, 1999. General Electric Company ("GE") acquired Imatron on
December 19, 2001.
Effective June 29, 2003, the Company entered into a Technology Purchase
Agreement to transfer its Cardiac PET Software to GE in exchange for
cancellation of the indebtedness under this loan and the surrender of the
9,000,000 shares of common stock and the warrant to purchase 6,000,000 shares of
common stock. The Company recognized a gain of $2,376,000 related to the sale
of this technology. This gain resulted from the cancellation of the Company's
obligation for $2,000,000 in principal and accrued interest of $376,000 under
the loan. The Company's future commitment to provide assistance to GE for the
purpose of fully utilizing and exploiting this technology, as well as the
compensation for these services, were provided for in a separate service
agreement discussed below.
As part of the transactions contemplated by the Technology Purchase Agreement,
the Company entered into a Software License Agreement. Pursuant to terms of the
Software License Agreement, the Company received an irrevocable license from GE
to continue using, modifying, distributing and otherwise exploiting the Cardiac
PET Software in perpetuity.
In conjunction with the Technology Purchase Agreement, the Company also entered
into an Agreement for Services for the purpose of assisting GE in fully
utilizing and exploiting the Cardiac PET Software. The Company agreed to
provide services for a period of six quarters (eighteen months) for a fee of
$50,000 per each 3-month period during the term of this agreement. GE committed
to pay the fee for the first two quarters of $50,000 (total of $100,000) within
two business days of July 29, 2003 and will make payment of any subsequent
quarters in advance of such quarter. GE may terminate the Agreement for
Services at any time after it has paid the fees for at least four quarters.
RESULTS OF OPERATIONS
The operations of the Company for the year ended December 31, 2003 resulted in
net income of $892,000 compared to a net loss of $2,967,000 in 2002. The
operating results in 2003 included a $2,376,000 gain on the sale of its Cardiac
PET Software.
REVENUES. The Company generated $3,459,000 in revenues from the sale of three
systems in the year ended December 31, 2003 compared to revenues of $3,319,000
from the sale of three systems in 2002. Revenues from service and components
increased by $246,000 to $1,609,000 in 2003 compared to $1,363,000 in 2002, as a
result of upgrades of several systems for customers in 2003.
COST OF SALES AND SERVICES. The Company incurred costs of $3,229,000 on the
sale of three systems in 2003 compared to costs of $3,301,000 related to the
sale of three systems in 2002. Service and component costs
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inceased by $184,000 to $797,000 in 2003 from $613,000 in 2002. Operating
results in 2002 included inventory write-downs of $180,000.
OPERATING EXPENSES. Selling, general and administrative expenses decreased
$495,000 to $1,752,000 in 2003 from $2,247,000 in 2002. The $495,000 decrease
in costs was primarily attributable to the reduction in charges for legal
services provided in conjunction with the litigation involving ProFutures
Capital Bridge Fund, L.P. The Company decreased research and development
expenses by $365,000 to $671,000 in 2003 from $1,036,000 in 2002. The $365,000
decrease in costs primarily resulted from a reduction in personnel.
OTHER INCOME (EXPENSES). Interest expense decreased $221,000 to $103,000 in
2003 from $324,000 in 2002, primarily as a result of cancellation of the
$2,000,000 note payable to a stockholder on June 29, 2003. The operating
results in 2003 included a gain of $2,376,000 on the sale of its Cardiac PET
Software. The Company recognized $50,000 in income in 2002 on the forfeiture of
a purchase deposit on a system.
NET OPERATING LOSS CARRYFORWARDS
The Company has incurred losses since its inception and, therefore, has not been
subject to federal income taxes. As of December 31, 2003, the Company had net
operating loss ("NOL") carryforwards for income tax purposes of approximately
$10,000,000, which expire in 2004 through 2022. Under the provisions of Section
382 of the Internal Revenue Code the greater than 50% ownership changes that
occurred in the Company in connection with the Imatron Transaction and in
connection with the private placement of the Company's common stock limited the
Company's ability to utilize its NOL carryforward to reduce future taxable
income and related tax liabilities.
LIQUIDITY AND CAPITAL RESERVES
Since its inception the Company has been unable to sell POSICAM(TM) systems in
quantities sufficient to be operationally profitable. Consequently, the Company
has sustained substantial losses. At December 31, 2003, the Company had an
accumulated deficit of $56,775,000. Due to the sizable prices of the Company's
systems and the limited number of systems sold or placed in service each year,
the Company's revenues have fluctuated significantly year to year.
At December 31, 2003, the Company had cash and cash equivalents of $5,000
compared to $107,000 at December 31, 2002. The Company concluded a private
placement in August 1999, which resulted in an equity infusion of approximately
$11,400,000 net to the Company. In 2001, the Company received $2,000,000 in
proceeds on a note payable to a stockholder secured by substantially all of the
Company's assets. In spite of the equity infusion and loan proceeds, the
Company believes that it is possible that it may continue to experience
operating losses and accumulate deficits in the foreseeable future. If we are
unable to obtain financing to meet our cash needs we may have to severely limit
or cease our business activities or may seek protection from our creditors under
the bankruptcy laws.
The opinion of the Company's independent auditor for the year ended December 31,
2003, expressed substantial doubt as to the Company's ability to continue as a
going concern. The Company will need to increase system sales to become
profitable or obtain additional capital.
RELATED PARTY TRANSACTIONS
IMATRON TRANSACTION. In May 1998, the Company entered into an agreement (the
"Imatron Transaction") with Imatron. Pursuant to the agreement, Imatron
acquired 9,000,000 shares of the Company's common stock on January 22, 1999,
representing at that time, a majority ownership of the outstanding common stock
of the Company on a fully-diluted and as-if-converted basis, excluding
out-of-the-money warrants and options determined at that time. In exchange, the
Company received from Imatron (a) nominal cash; (b) an immediate loan of up to
$500,000 in working capital to assist the Company in meeting then current
financial obligations; (c) an agreement that Imatron would undertake all
reasonable efforts to have its affiliate, Imatron Japan, Inc. assist the Company
in the sale of 10 POSICAM(TM) systems over the next three years; (d) an
agreement that Imatron would help facilitate the recapitalization of the Company
to support its re-entry into the medical imaging market by using its best
efforts to arrange for additional third-party equity financing for the Company
over an eighteen-month period in an aggregate amount of not less than
$8,000,000; and (e) a new management team selected by Imatron. During the year
ended December 31, 2001, Imatron loaned the Company $2,000,000 (Note 7). On
December 19, 2001, Imatron was acquired by General Electric Company. General
Electric Company is a competing manufacturer of PET imaging systems.
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Effective June 29, 2003, the Company entered into a Technology Purchase
Agreement to transfer its Cardiac PET Software to GE in exchange for
cancellation of the indebtedness under this loan and the surrender of the
9,000,000 shares of common stock and the warrant to purchase 6,000,000 shares of
common stock. The Company recognized a gain of $2,376,000 related to the sale
of this technology. This gain resulted from the cancellation of the Company's
obligation for $2,000,000 in principal and accrued interest of $376,000 under
the loan. The Company's future commitment to provide assistance to GE for the
purpose of fully utilizing and exploiting this technology, as well as the
compensation for these services, were provided for in a separate service
agreement discussed below.
As part of the transactions contemplated by the Technology Purchase Agreement,
the Company entered into a Software License Agreement. Pursuant to terms of the
Software License Agreement, the Company received an irrevocable license from GE
to continue using, modifying, distributing and otherwise exploiting the Cardiac
PET Software in perpetuity.
In conjunction with the Technology Purchase Agreement, the Company also entered
into an Agreement for Services for the purpose of assisting GE in fully
utilizing and exploiting the Cardiac PET Software. The Company agreed to
provide services for a period of six quarters (eighteen months) for a fee of
$50,000 per each 3-month period during the term of this agreement. GE committed
to pay the fee for the first two quarters of $50,000 (total of $100,000) within
two business days of July 29, 2003 and will make payment of any subsequent
quarters in advance of such quarter. GE may terminate the Agreement for
Services at any time after it has paid the fees for at least four quarters.
PROMISSORY NOTES. The Company was involved in two separate loan arrangements
during 2002 for the purpose of obtaining operating funds on a short-term basis.
On October 30, 2002, the Company received a promissory note in the principal
amount of $75,000 from its President & CEO. On November 4, 2002, the Company
received a promissory note in the principal amount of $25,000 from a
stockholder. These promissory notes were unsecured, bore interest at 7% per
annum, and the principal and accrued interest was due and payable on demand, on
not less than five calendar days' written notice, but in no event later than
November 30, 2002. Both promissory notes were repaid in full in November of
2002.
In conjunction with the promissory note for $75,000, the Company granted its
President & CEO warrants to purchase 500,000 shares of common stock, at an
exercise price of $0.05 per share that are exercisable through October 31, 2007.
The warrants had an approximate value of $14,000 at the date of issue. Such
cost is treated as a loan origination cost and was amortized to expense in 2002
over the term of the note, using the effective interest method.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities", which amends
and clarifies accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities. The
changes in this Statement improve financial reporting by requiring that
contracts with comparable characteristics be accounted for similarly, and will
result in more consistent reporting of contracts as either derivatives or hybrid
instruments. The implementation of SFAS No. 149 did not impact the Company's
financial position or results of operations.
In May 2003, The FASB issued SFAS No. 150, "Accounting for Certain Financial
instruments with Characteristics of both Liabilities and Equity", which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires the issuer to classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. The implementation of SFAS No. 150 did
not impact the Company's financial position or results of operations.
In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of
Variable Interest Entities" (FIN No. 46R), which addresses consolidation by
business enterprises of variable interest entities. FIN No. 46R clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest, the equity investors have
voting rights that are not proportionate to their economic interests or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN No. 46R
applies to small business issuers no later than the end of the first reporting
period after December, 2004. The Company plans to early adopt the provisions of
FIN No. 46R in the first quarter of 2004. As of December 31, 2003, the Company
did not have any variable interest entities that must be consolidated.
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CRITICAL ACCOUNTING POLICIES
In response to the Securities and Exchange Commission's Release No. 33-8040,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies," we
have identified critical accounting policies based upon the significance of the
accounting policy to our overall financial statement presentation, as well as
the complexity of the accounting policy and our use of estimates and subjective
assessments. We have concluded our critical accounting policies are as follows:
INVENTORY
Inventories are stated at the lower of cost or market and include material,
labor and overhead. Cost is determined using the first-in, first-out (FIFO)
method of inventory valuation.
REVENUE RECOGNITION
Revenues from POSICAM(TM) system contracts are recognized when all significant
costs have been incurred and the system has been shipped to the customer.
Revenues from maintenance contracts are recognized over the term of the
contract. Service revenues are recognized upon performance of the services.
INFORMATION REGARDING AND FACTORS AFFECTING FORWARD LOOKING STATEMENTS
The Company is including the following cautionary statement in this Annual
Report on Form 10-KSB to make applicable and take advantage of the safe harbor
provision of the Private Securities Litigation Reform Act of 1995 for any
forward looking statements made by, or on behalf of the Company. Forward
looking statements include statements concerning plans, objectives, goals,
strategies, future events or performance and underlying assumptions and other
statements which are other than statements of historical facts. Certain
statements contained herein are forward looking statements and, accordingly,
involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed in the forward looking statements.
The Company's expectations, beliefs and projections are expressed in good faith
and are believed by the Company to have a reasonable basis, including without
limitations, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished. In addition to other
factors and matters discussed elsewhere herein, the following are important
factors that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward looking statements: the ability
of the Company to attain widespread market acceptance of its POSICAM(TM)
systems; the ability of the Company to obtain acceptable forms and amounts of
financing to fund future operations; demand for the Company's services; and
competitive factors. The Company disclaims any obligation to update any forward
looking statements to reflect events or circumstances after the date hereof.
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ITEM 7. FINANCIAL STATEMENTS
The required Financial Statements and the notes thereto are contained in a
separate section of this report beginning with the page following the signature
page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Ham, Langston & Brezina, L.L.P. has been the Company's principal independent
accountants since 1997. No disagreements exist between the Company and Ham,
Langston & Brezina, L.L.P. on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
ITEM 8A. CONTROLS AND PROCEDURES
As of December 31, 2003, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e)).
Based upon that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective at a reasonable level in timely alerting them to
material information relating to the Company that is required to be included in
the Company's periodic filings with the Securities and Exchange Commission.
There have been no changes in the Company's internal controls over financial
reporting that occurred during the Company's most recent fiscal quarter that has
materially affected or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, do not expect that the Company's disclosure controls or
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met due to
numerous factors, ranging from errors to conscious acts of an individual, or
individuals acting together. In addition, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in a cost-effective control system, misstatements due to error
and/or fraud may occur and not be detected.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and key employees of the Company as of March
18, 2004 consist of the following individuals:
NAME AGE POSITION
----------------- --- ---------------------------------------------------
Gary H. Brooks 55 Director, President, Chief Executive Officer, Chief
Financial Offier and Secretary (appointed CEO
effective February 1, 2002)
Sachio Okamura 51 Director (appointed April 1, 2001)
Mario Leite Silva 31 Director (appointed May 10, 2002)
Gary H. Brooks has served as a director since January 22, 1999, on which date he
was also appointed as President, Secretary and Acting Chief Financial Officer of
the Company. In February 2002, Mr. Brooks was appointed Chief Executive Officer
of the Company. Prior to joining the Company on a full-time basis, Mr. Brooks
served as Vice President of Finance and Administration, Chief Financial Officer
and Secretary for Imatron since December 1993. Prior to joining Imatron, he was
Chief Financial Officer and Director for five years at Avocet, a privately-held
sports electronics manufacturer located in Palo Alto, California. Mr. Brooks
received his B.A. in Zoology in 1971 from the University of California,
Berkeley, and an M.B.A. in Finance and Accounting in 1973 from the University of
California, Los Angeles.
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Mario Filipe Moreira Leite da Silva was appointed as a Director of Positron
Corporation in May of 2002. Mr. da Silva currently holds the positron of
Director of Financim - Financiamentos Molbil rios, S.G.P.S., S.A. From May 2001
to April 2002, he served as Finance and Organization Director for Imediata
Group. Mr. da Silva served as Controller/Finance Director with Grundig from
October 1999 to May 2001. From July 1998 to September 1999, he was Team Manager
for the auditing department at Price Waterhouse Coopers. From October 1996 to
June 1998, Mr. da Silva served as a finance auditor and economic consultant for
Price Waterhouse. Mr. da Silva began his professional career with BNC - Banco
Nacional de Cr dito Imobili rio from September 1995 to October 1996. Mr. da
Silva received and Degree in Economy from the Faculty of Economy, Porto
University, and a Masters Degree in Entrepreneurial Sciences, Speciality in
Finance from the Faculty of Economy, Porto University.
Sachio Okamura has served as a director since his appointment to the Board of
the Company on April 1, 2001. Mr. Okamura has performed bio-medial consulting
services for Okamura Associates, Inc. from 1993 through the present date. These
consulting services have included regulatory, distribution, licensing, joint
venture, investment, merger and acquisition activities involving businesses in
the United States and Japan. Mr. Okamura was in charge of bio-medical business
development for various offices of Mitsubishi Corporation from 1978 through
1993. Mr. Okamura received a BS in Biochemistry in 1975 from the University of
California, Davis and a Master of International Business fro the American
Graduate School of International Management in 1978.
S. Lewis Meyer, former Chairman of the Board, resigned as a director on March 3,
2003.
Michael L. Golden served as Chief Financial Officer until his resignation on May
15, 2003.
Ross K. Hartz served as Vice President of Engineering until his death on March
14, 2004.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers and directors, and persons who own more than 10% of
the Company's Common Stock to file reports of ownership on Form 3 and changes in
ownership on Form 4 or Form 5 with the Securities and Exchange Commission (the
"SEC"). Such executive officers, directors and 10% stockholders are also
required by SEC rules to furnish the Company with copies of all Section 16(a)
forms they file. Based solely upon its review of copies of such forms received
by it, or on written representations from certain reporting persons that no
Forms 5 were required for those persons, the Company believes that following
reports of Forms 3 and 4 were not timely filed: Gary H. Brooks filed late two
Forms 4s reporting a total of two transactions; and General Electric Co. filed
late one Form 4 reporting one transaction.
CODE OF ETHICS
The Board of Directors has adopted a Code of Business Conduct and Ethics that
applies to all of our employees, officers and directors, and a Code of Ethics
for Chief Executive Officers and Senior Financial Officers. Copies of these
codes are attached as an exhibit to this report.
AUDIT COMMITTEE
The Company's full Board of Directors acts as the Company's audit committee.
The Board has determined that Mario Leite Silva is an "audit committee financial
expert" as defined in Item 401(e) of Regulation S-B.
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ITEM 10. EXECUTIVE COMPENSATION
The following tables set forth certain information with respect to compensation
paid by the Company and certain information regarding stock options issued to
certain of the individuals who have acted as executive officers of the Company
during 2003, 2002 and 2001.
SUMMARY COMPENSATION TABLE
Name and Principal Fiscal Other Annual Restricted Options/ LTIP All Other
Position Year Salary ($) (a) Bonus(a) Compensation Stock Awards SARs Payouts Compensation(b)
------------------------ ------ ----------- --------- ------------- ------------ --------- ------- ----------------
Gary H. Brooks, 2003 $ 216,000 -- -- -- 500,000 -- $ 1,851
President, Chief 2002 $ 223,000 -- -- -- -- -- $ 5,177
Executive Officer and 2001 $ 211,000 -- -- -- -- -- $ 1,582
Secretary
Wayne E. Webster(c)
Vice President 2002 $ 217,000 -- -- -- -- -- $ 3,752
Marketing, Sales, & 2001 $ 157,000 -- -- -- 1,460,000 -- $ 1,610
Service
Ross K. Hartz(d) 2003 $ 78,000 -- $ 37,471 -- 300,000 -- $ 1,130
Vice President 2002 $ 143,000 $ 23,000 -- -- -- -- $ 2,144
of Engineering 2001 $ 156,685 -- -- -- -- -- $ 2,350
Michael L. Golden(e) 2003 $ 40,000 -- -- -- -- -- $ 531
Chief Financial Officer 2002 $ 99,000 -- -- -- -- -- $ 1,491
2001 $ 94,000 -- -- -- -- -- $ 1,416
(a) Amounts shown include cash compensation earned with respect to the year
shown above.
(b) Represents the Company's matching contributions to its 401(k) plan.
(c) Wayne E. Webster served as an officer of the Company through December 31,
2002.
(d) Ross K. Hartz received $37,471 in disability payments in 2003 related to a
prolonged illness.
(e) Michael L. Golden served as an officer of the Company through May 15, 2003.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to stock options
granted to each of the Company's Chief Executive Officer and the four other
highest paid executive officers (the "Named Executive Officers") during the
fiscal year ended December 31, 2003. In accordance with the rules of the
Securities and Exchange Commission, also shown below is the potential realizable
value over the term of the option (the period from the grant date to the
expiration date) based on assumed rates of stock appreciation of 5% and 10%,
compounded annually. These amounts are based on certain assumed rates of
appreciation and do not represent the Company's estimate of future stock price.
Actual gains, if any, on stock option exercises will be dependent on the future
performance of the Common Stock.
POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF
SHARES % OF TOTAL STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM (3)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED (1) FISCAL YEAR (2) PER SHARE DATE 5% 10%
-------------- ----------- ---------------- --------- ---------- ------------- --------------
Gary H. Brooks 500,000 26.95% $ 0.05 04/30/13 $ - $ -
Ross K. Hartz 300,000 16.17% $ 0.05 04/30/13 $ - $ -
(1) All options were granted under the Company's 1999 Employee Stock Option
Plan and have exercise prices equal to the fair market value on the grant
date.
(2) Based on options to purchase an aggregate of 1,855,000 shares granted in
fiscal 2003.
(3) Pursuant to the rules of the Securities and Exchange Commission, the dollar
amounts set forth in these columns are the result of calculations based on
the set rates of 5% and 10%, and therefore are not intended to forecast
possible future appreciation, if any, of the price of the Common Stock.
OPTION EXERCISES AND HOLDINGS
The following table provides information with respect to option exercises
in fiscal 2003 by the Named Executive Officers and the value of such officers'
unexercised options at December 31, 2003:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($) (1)
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------- --------------- ------------ ----------- ------------- ----------- -------------
Gary H. Brooks - $ - 250,001 249,999 $ - $ -
Ross K. Hartz - $ - 480,000 150,000 $ - $ -
(1) Market value of unexercised options is based on the price of the last
reported sale of the Company's Common Stock on the NASDAQ OTC Bulletin
Board of $0.04 per share on December 31, 2003 (the last trading day for
fiscal 2003), minus the exercise price.
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COMPENSATION OF DIRECTORS
Beginning January 22, 1999 through current date, non-employee directors were not
separately compensated for their services on the Board although they continued
to be reimbursed for their reasonable expenses associated with attending board
and committee meetings.
On and after October 6, 1999, each non-employee director is eligible to receive
an initial option to purchase 25,000 shares of common stock under Positron's
1999 Non-employee Directors' Stock Option Plan upon their election or
appointment to the Board. The exercise price is equal to 85% of the fair market
value of the common stock on the date of grant. In addition, so long as the
Plan is in effect and there are shares available for grant, each director in
service on January 1 of each year (provided the director has served continuously
for at least the preceding 30 days) is eligible to receive an option to purchase
25,000 shares of common stock at an exercise price equal to 85% of the fair
market value of the common stock on the date of grant. Initial options as well
as annual options granted under the Plan are subject to one or two schedules,
either vesting over four years or vesting fully on the date of grant. In the
latter event, the common stock acquired upon exercise of such options are
subject to a right of repurchase in favor of Positron which lapses in four equal
annual installments, beginning on the first anniversary of the date of grant.
COMPENSATION ARRANGEMENTS
Effective January 22, 1999, the Company entered into an employment agreement
with Gary H. Brooks. Pursuant to the Agreement, he was appointed initially as
President of the Company with an initial employment term ending June 15, 2000,
with a rolling six month basis thereafter. From January 22, 1999 until June 15,
1999, and then from June 15, 1999 through August 31, 1999, his base salary was
$1,000 and $3,417 per month respectively, reflecting his less than full-time
commitments to the office during these periods. Effective September 1, 1999 and
with his full-time assignment with the Company, his salary increased to $185,000
on an annualized basis. In addition to participation in the Company's group
benefit plans and a monthly automobile allowance, Mr. Brooks was given the
opportunity to purchase for $20,000 a warrant to purchase 3,000,000 shares of
the Company's common stock exercisable at $0.30 per share. The warrant, and the
underlying common stock, are subject to the Company's repurchase right, which
lapses 25% immediately and the remainder annual over the next three years. The
base salary for Mr. Brooks was increased to $205,000 effective June 15, 2000 and
was increased again to $217,000 effective January 1, 2002. The Board can
terminate Mr. Brooks' employment without cause on thirty days' written notice
and the payment of base salary for the remainder of the employment term or six
months, whichever is greater.
COMPENSATION PLANS
KEY EMPLOYEE INCENTIVE COMPENSATION. The Company has an incentive compensation
plan for certain key employees and its Chairman. The incentive compensation
plan provides for annual bonus payments based upon achievement of certain
corporate objectives as determined by the Company's compensation committee,
subject to the approval of the board of directors. During 2003, the Company did
not pay any bonus pursuant to the incentive compensation plan.
EMPLOYEE STOCK OPTION PLAN. Positron's Board administers the 1999 Employee Stock
Option Plan, which was adopted by the Board effective June 15, 1999. The 1999
Plan provides for the grant of options to officers, employees (including
employee directors) and consultants. The administrator is authorized to
determine the terms of each option granted under the plan, including the number
of shares, exercise price, term and exercisability. Options granted under the
plan may be incentive stock options or nonqualified stock options. The exercise
price of incentive stock options may not be less than 100% of the fair market
value of the common stock as of the date of grant (110% of the fair market value
in the case of an optionee who owns more than 10% of the total combined voting
power of all classes of Positron capital stock). Options may not be exercised
more than ten years after the date of grant (five years in the case of 10%
stockholders). Upon termination of employment for any reason other than death or
disability, each option may be exercised for a period of 90 days, to the extent
it is exercisable on the date of termination. In the case of a termination due
to death or disability, an option will remain exercisable for a period of one
year, to the extent it is exercisable on the date of termination. As of December
31, 2003, a total of 5,467,500 options have been granted under the 1999 Stock
Option Plan, of which 12,500 have been exercised and 2,032,093 are outstanding,
and of which 573,734 are subject to vesting and 1,458,359 are fully vested. As
of December 31, 2003, a total of 147,495 fully vested options remain outstanding
under Positron's 1994 Stock Option Plan, which was terminated effective October
6, 1999.
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NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN. The 1999 Non-employee Directors'
Stock Option Plan provides for the automatic grant of an option to purchase
25,000 shares of common stock to non-employee directors upon their election or
appointment to the Board, and subsequent annual grants also in the amount of
25,000 shares of common stock. The exercise price of the options is 85% of the
fair market value of the common stock on the date of grant. The Directors' Plan
is administered by the Board. Options granted under the Directors' Plan become
exercisable in one of two ways: either in four equal annual installments,
commencing on the first anniversary of the date of grant, or immediately but
subject to the Company's right to repurchase, which repurchase right lapses in
four equal annual installments, commencing on the first anniversary of the date
of grant. To the extent that an option is not exercisable on the date that a
director ceases to be a director of the company, the unexercisable portion
terminates As of December 31, 2003, a total of 300,000 fully vested options have
been granted and 125,000 remain outstanding under the Directors' Plan.
1999 STOCK BONUS INCENTIVE PLAN. In October 1999, the Board adopted an Employee
Stock Bonus Incentive Plan, which provides for the grant of bonus shares to any
Positron employee or consultant to recognize exceptional service and performance
beyond the service recognized by the employee's salary or consultant's fee. The
Board has authorized up to an aggregate of 1,000,000 shares of common stock for
issuance as bonus awards under the Stock Bonus Plan. The Stock Bonus Plan is
currently administered by the Board. Each grant of bonus shares is in an amount
determined by the Board, up to a maximum of the participant's salary. The
shares become exercisable according to a schedule to be established by the Board
at the time of grant. As of December 31, 2003, no options have been granted
under the 1999 Stock Bonus Incentive Plan.
1999 EMPLOYEE STOCK PURCHASE PLAN. A total of 500,000 shares of common stock
have been reserved for issuance under Positron's Employee Stock Purchase Plan
(the "Purchase Plan"), none of which has as yet been issued. The Purchase Plan
permits eligible employees to purchase common stock at a discount through
payroll deductions during offering periods of up to 27 months. Offering periods
generally will begin on the first trading day of a calendar quarter. The initial
offering period began on January 1, 2000. The price at which stock is purchased
under the Purchase Plan will be equal to 85% of the fair market value of common
stock on the first or last day of the offering period, whichever is lower.
401(K) PLAN. The Company has a 401(k) Retirement Plan and Trust (the "401(k)
Plan") which became effective as of January 1, 1989. Employees of the Company
who have completed one-quarter year of service and have attained age 21 are
eligible to participate in the 401(k) Plan. Subject to certain statutory
limitations, a participant may elect to have his or her compensation reduced by
up to 20% and have the Company contribute such amounts to the 401(k) Plan on his
or her behalf ("Deferral Contributions"). The Company makes contributions in an
amount equal to 25% of the participant's Deferral Contributions up to 6% of
his/her compensation ("Employer Contributions"). Additionally, the Company may
make such additional contributions, as it shall determine each year in its
discretion. All Deferral and Employer Contributions made on behalf of a
participant are allocated to his/her individual accounts and such participant is
permitted to direct the investment of such accounts.
A participant is fully vested in the current value of that portion of his/her
accounts attributable to Deferral Contributions. A participant's interest in
that portion of his/her accounts attributable to Employer Contributions is
generally fully vested after five years of employment. Distributions under the
401(k) Plan are made upon termination of employment, retirement, disability and
death. In addition, participants may make withdrawals in the event of severe
hardship or after the participant attains age fifty-nine and one-half. The
401(k) Plan is intended to qualify under Section 401 of the Internal Revenue
Code of 1986, so that contributions made under the 401(k) Plan, and income
earned on contributions, are not taxable to participants until withdrawal from
the 401(k) Plan.
The Company's contributions to the 401(k) Plan on behalf of all employees in the
years ended December 31, 2003 and 2002 was approximately $18,000 and $34,000,
respectively.
POLICY WITH RESPECT TO $1 MILLION DEDUCTION LIMIT
It is the Company's policy, where practical, to avail itself of all proper
deductions under the Internal Revenue Code. Amendments to the Internal Revenue
in 1993, limit, in certain circumstances, the deductibility of compensation in
excess of $1 million paid to each of the five highest paid executives in one
year. The total compensation of the executive officers did not exceed this
deduction limitation in fiscal year 2003 or 2002.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables, based in part upon information supplied by officers,
directors and principal shareholders, set forth certain information regarding
the ownership of the Company's voting securities as of March 18, 2004 by (i) all
those known by the Company to be beneficial owners of more than five percent of
any class of the Company's voting securities; (ii) each director; (iii) each
named executive officer; and (iv) all executive officers and directors of the
Company as a group. Unless otherwise indicated, each of the shareholders has
sole voting and investment power with respect to the shares beneficially owned,
subject to community property laws where applicable.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS(A)
Name and Address Number of Shares of % of Outstanding
of Beneficial Owner Common Stock Common Stock(b)
----------------------------------------------------------------------------
Gary H. Brooks 3,841,668(c) 7.2%
(a) Security ownership information for beneficial owners is taken from
statements filed with the Securities and Exchange Commission pursuant to
Sections 13(d), 13(g) and 16(a) and information made known to the Company.
(b) Based on 53,185,803 common shares outstanding on March 18, 2004.
(c) Includes 50,000 shares owned directly, 3,500,000 shares issuable upon the
exercise of warrants that are exercisable as of March 18, 2004 and vested
options to purchase 291,668 shares of common stock as of March 18, 2004.
Mr. Brooks can be contacted through the Houston, Texas office.
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table presents the security ownership of the Company's Directors
and Named Executive Officers:
Beneficial Percent
Title of Class Name of Beneficial Owner Ownership(aa) of Class(bb)
-------------- ----------------------------------------------- ------------- ------------
Common Gary H. Brooks 3,841,668(cc) 7.2%
Common Sachio Okamura 260,000(dd) *
Common Mario Leite Silva 75,000(ee) *
-------------
Common All Directors and Executive Officers as a Group 4,176,668 7.9%
=============
* Does not exceed 1% of the referenced class of securities.
(aa) Ownership is direct unless indicated otherwise.
(bb) Calculation based on 53,185,803 common shares outstanding as of March 18,
2004.
(cc) Includes 50,000 shares owned directly, 3,500,000 shares issuable upon the
exercise of warrants that are exercisable as of March 18, 2004 and vested
options to purchase 291,668 shares of common stock as of March 18, 2004.
(dd) Includes 260,000 shares issuable upon the exercise of warrants and options
that are exercisable as of March 18, 2004 or that will become exercisable
within 60 days thereafter.
(ee) Includes 75,000 shares issuable upon the exercise of options that are
exercisable as of March 18, 2004 or that will become exercisable within 60
days thereafter.
All officers and directors of the Company can be contacted through the Houston,
Texas office.
The following table summarizes share and exercise information about the
Company's equity compensation plans as of December 31, 2003.
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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Number of Securities
Remaining Available for
Number of Securities to Weighted-Average Future Issuance Under
be Issued Upon Exercise Exercise Price of Equity Compensation
of Outstanding Options, Outstanding Options, Plans (excluding securities
Plan Category Warrants and Rights Warrants and Rights included in 1st column)
Equity Compensation Plans Approved by
Security Holders (1) 2,304,588 $ 0.32 3,682,912(2)
Equity Compensation Plans Not Approved
by Security Holders 0 -- 0
----------------------------------------------------------------------------
TOTAL 2,304,588 $ 0.32 3,682,912
============================================================================
(1) Consists of 1999 Stock Option Plan, the 1999 Non-Employee Directors' Stock
Option Plan, the 1999 Stock Bonus Incentive Plan, and the 1999 Employee
Stock Purchase Plan, each as amended to date.
(2) Includes 1,807,912 shares available for issuance under the 1999 Stock
Option Plan, 375,000 shares available for issuance under the 1999
Non-Employee Directors' Plan, 1,000,000 shares available for issuance under
the 1999 Stock Bonus Incentive Plan, and 500,000 shares available under the
1999 Employee Stock Purchase Plan.
Please see the discussion set forth above in Item 10 for a description of the
material terms of the Company's equity compensation plans.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NOTE PAYABLE TO PRESIDENT AND CEO
On October 30, 2002, the Company received a promissory note in the principal
amount of $75,000 from its President & CEO. The promissory note was unsecured,
bore interest at 7% per annum, and the principal and accrued interest was due
and payable on demand, on not less than five calendar days' written notice, but
in no event later than November 30, 2002. The promissory note was repaid in
full in November of 2002. In consideration for the promissory note, the Company
granted its President & CEO warrants to purchase 500,000 shares of common stock,
at an exercise price of $0.05 per share that are exercisable through October 31,
2007.
NOTES PAYABLE TO STOCKHOLDERS
On November 4, 2002, the Company received a promissory note in the principal
amount of $25,000 from a stockholder. The promissory note was unsecured, bore
interest at 7% per annum, and the principal and accrued interest was due and
payable on demand, on not less than five calendar days' written notice, but in
no event later than November 30, 2002. The promissory note was repaid in full
in November of 2002.
Effective June 29, 2003, the Company entered into a Technology Purchase
Agreement to transfer its Cardiac PET Software to GE in exchange for
cancellation of the indebtedness under this loan and the surrender of the
9,000,000 shares of common stock and the warrant to purchase 6,000,000 shares of
common stock. The Company recognized a gain of $2,376,000 related to the sale
of this technology. This gain resulted from the cancellation of the Company's
obligation for $2,000,000 in principal and accrued interest of $376,000 under
the loan. The Company's future commitment to provide assistance to GE for the
purpose of fully utilizing and exploiting this technology, as well as the
compensation for these services, were provided for in a separate service
agreement discussed below.
As part of the transactions contemplated by the Technology Purchase Agreement,
the Company entered into a Software License Agreement. Pursuant to terms of the
Software License Agreement, the Company received an irrevocable license from GE
to continue using, modifying, distributing and otherwise exploiting the Cardiac
PET Software in perpetuity.
In conjunction with the Technology Purchase Agreement, the Company also entered
into an Agreement for Services for the purpose of assisting GE in fully
utilizing and exploiting the Cardiac PET Software. The Company
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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agreed to provide services for a period of six quarters (eighteen months) for a
fee of $50,000 per each 3-month period during the term of this agreement. GE
committed to pay the fee for the first two quarters of $50,000 (total of
$100,000) within two business days of July 29, 2003 and will make payment of any
subsequent quarters in advance of such quarter. GE may terminate the Agreement
for Services at any time after it has paid the fees for at last four quarters.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
Exhibits:
3.1 Articles of Incorporation of the Registrant (incorporated herein by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
3.2 By-laws of the Registrant, as amended (incorporated herein by
reference to Exhibit 3.2 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
4.1 Specimen Stock Certificate (incorporated herein by reference to
Exhibit 4.1 of the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1994).
4.2 Form of Redeemable Warrant (included as part of Exhibit 4.5)
4.3 Statement of Designation Establishing Series A 8% Cumulative
Convertible Redeemable Preferred Stock of Positron Corporation, dated
February 28, 1996 (incorporated herein by reference to Exhibit 4.3 of
the Company's Annual Report on Form 10-KSB for the year ended December
31, 1995).
4.4 Warrant Agreement dated as of February 29, 1996, between Positron
Corporation and Continental Stock Transfer & Trust Company
(incorporated herein by reference to Exhibit 4.4 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995).
4.5 Specimen Redeemable Warrant Certificate to Purchase Shares of common
stock (incorporated herein by reference to Exhibit 4.5 of the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995).
4.6 Stock Purchase Warrant dated as of February 7, 1996 issued by Positron
Corporation to Boston Financial & Equity Corporation (incorporated
herein by reference to Exhibit 4.6 of the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995).
4.7 Statement of Designation Establishing Series B 8% Cumulative
Convertible Redeemable Preferred Stock of Positron Corporation, dated
July 9, 1996.
4.8 Form of Warrant Agreement dated as of July 10, 1996, between Positron
Corporation and Brooks Industries Profit Sharing Plan.
4.9 Warrant Agreement dated as of June 15, 1999 between Positron
Corporation and Gary Brooks (incorporated herein by reference to
Exhibit 4.9 to the Company's Registration Statement on Form SB-2 (File
No. 333-30316)).
4.10 Stock Purchase Warrant dated as of June 15, 1999 issued by Positron
Corporation to Gary H. Brooks (incorporated herein by reference to
Exhibit 4.10 to the Company's Registration Statement on Form SB-2
(File No. 333-30316)).
4.11 Warrant Agreement dated as of June 15, 1999 between Positron
Corporation and S. Lewis Meyer (incorporated herein by reference to
Exhibit 4.11 to the Company's Registration Statement on Form SB-2
(File No. 333-30316)).
4.12 Stock Purchase Warrant dated as of June 15, 1999 issued by Positron
Corporation to S. Lewis Meyer (incorporated herein by reference to
Exhibit 4.12 to the Company's Registration Statement on Form SB-2
(File No. 333-30316)).
4.13 Stock Purchase Warrant dated as of September 20, 1999 issued by
Positron Corporation to Uro-Tech, Ltd. as replacement for 1995 Warrant
(incorporated herein by reference to Exhibit 4.13 to the Company's
Registration Statement on Form SB-2 (File No. 333-30316)).
4.14 Form of Stock Purchase Agreement executed in connection with July 1999
Private Placement (incorporated by reference to Exhibit 5.1 to the
Company's Report on 8-K dated August 18, 1999.)
4.15 Form of common stock Purchase Warrant in connection with July 1999
Private Placement (incorporated by reference to Exhibit 5.2 to the
Company's Report on 8-K dated August 18, 1999.)
10.1 Lease Agreement dated as of July 1, 1991, by and between Lincoln
National Pension Insurance Company and Positron Corporation
(incorporated herein by reference to Exhibit 10.1 to the Company's
Registration Statement on Form SB-2 (File No. 33-68722)).
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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10.2 Agreement dated as of March 1, 1993, by and between Positron
Corporation and Oxford Instruments (UK) Limited (incorporated herein
by reference to Exhibit 10.2 to the Company's Registration Statement
on Form SB-2 (File No. 33-68722)).
10.3 International Distribution Agreement dated as of November 1, 1992, by
and between Positron Corporation and Batec International, Inc.
(incorporated herein by reference to Exhibit 10.3 to the Company's
Registration Statement on Form SB-2 (File No. 33-68722)).
10.4+ 1994 Incentive and Nonstatutory Option Plan (incorporated herein by
reference to Exhibit A to Company's Proxy Statement dated May 2,
1994).
10.5+ Amended and Restated 1987 Stock Option Plan (incorporated herein by
reference to Exhibit 10.5 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.6+ Retirement Plan and Trust (incorporated herein by reference to Exhibit
10.6 to the Company's Registration Statement on Form SB-2 (File No.
33-68722)).
10.7 Amended and Restated License Agreement dated as of June 30, 1987, by
and among The Clayton Foundation for Research, Positron Corporation,
K. Lance Gould, M.D., and Nizar A. Mullani (incorporated herein by
reference to Exhibit 10.7 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.8 Clarification Agreement to Exhibit 10.7 (incorporated herein by
reference to Exhibit 10.8 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.9 Royalty Assignment dated as of December 22, 1988, by and between K.
Lance Gould and Positron Corporation (incorporated herein by reference
to Exhibit 10.10 to the Company's Registration Statement on Form SB-2
(File No. 33-68722)).
10.10 Royalty Assignment dated as of December 22, 1988, by and between
Nizar A. Mullani and Positron Corporation (incorporated herein by
reference to Exhibit 10.11 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.11 Royalty Assignment dated as of December 22, 1988, by and between The
Clayton Foundation and Positron Corporation (incorporated herein by
reference to Exhibit 10.12 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.12 Stock Purchase Warrant dated October 31, 1993, issued to Gary B. Wood
(incorporated herein by reference to Exhibit 10.15 to the Company's
Registration Statement on Form SB-2 (File No. 33-68722)).
10.13 Amendment No. 1 to Exhibit 10.22 (incorporated herein by reference to
Exhibit 10.23 to the Company's Registration Statement on Form SB-2
(File No. 33-68722)).
10.14 Consulting Agreement dated as of January 15, 1993, by and between
Positron Corporation and K. Lance Gould, M.D. (incorporated herein by
reference to Exhibit 10.24 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.15 Stock Purchase Warrant dated February 25, 1993, issued to K. Lance
Gould (incorporated herein by reference to Exhibit 10.26 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.16+ Consulting Agreement dated February 23, 1995, effective December 15,
1994, by and between Positron Corporation and F. David Rollo, M.D.
Ph.D., FACNP.
10.17+ Consulting Agreement dated as of January 15, 1993, by and between
Positron Corporation and Nizar A. Mullani (incorporated herein by
reference to Exhibit 10.31 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.18+ Consulting Agreement dated as of November 12, 1993, by and between
Positron Corporation and OmniMed Corporation (incorporated herein by
reference to Exhibit 10.35 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.19 Contract No. 1318 dated as of December 30, 1991, by and between
Positron Corporation and The University of Texas Health Science Center
at Houston (incorporated herein by reference to Exhibit 10.39 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.20+ Letter Agreement dated July 30, 1993 between Positron Corporation and
Howard Baker (incorporated herein by reference to Exhibit 10.52 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.21 Technology Transfer Agreement dated as of September 17, 1990, by and
between Positron Corporation and Clayton Foundation for Research
(incorporated herein by reference to Exhibit 10.54 to the Company's
Registration Statement on Form SB-2 (File No. 33-68722)).
10.22 Stock Purchase Warrant dated as of October 31, 1993 issued to Gerald
Hillman (incorporated herein by reference to Exhibit 10.56 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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10.23 Stock Purchase Warrant dated as of October 31, 1993 issued to The
Dover Group (incorporated herein by reference to Exhibit 10.57 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.24 Stock Purchase Warrant dated as of October 31, 1993 issued to John
Wilson (incorporated herein by reference to Exhibit 10.63 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.25+ Stock Purchase Warrant dated as of October 31, 1993 issued to Robert
Guezuraga (incorporated herein by reference to Exhibit 10.64 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.26 Stock Purchase Warrant dated as of October 31, 1993 issued to Richard
Ronchetti (incorporated herein by reference to Exhibit 10.65 to the
Company's Registration Statement on Form SB-2 (File No. 33-68722)).
10.27 Form of Amended and Restated Registration Rights Agreement dated as
of November 3, 1993, by and among Positron and the other signatories
thereto (1993 Private Placement) (incorporated herein by reference to
Exhibit 10.73 to the Company's Registration Statement on Form SB-2
(File No. 33-68722).
10.28 Registration Rights Agreement dated as of July 31, 1993, by and among
Positron and the other signatories thereto (other than the 1993
Private Placement) (incorporated herein by reference to Exhibit 10.74
to the Company's Registration Statement on Form SB-2 (File No.
33-68722)).
10.29 Software Licenses dated as of March 1, 1993, by and between Positron
Corporation and Oxford Instruments (UK) Limited (incorporated herein
by reference to Exhibit 10.81 to the Company's Registration Statement
on Form SB-2 (File No. 33-68722)).
10.30 Distribution Agreement dated as of June 1, 1993, by and between
Positron Corporation and Elscint, Ltd. (incorporated herein by
reference to Exhibit 10.82 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.31+ Employment Agreement dated as of August 19, 1993, by and between
Positron Corporation and Richard E. Hitchens (incorporated herein by
reference to Exhibit 10.83 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.32+ Employment Agreement dated as of August 19, 1993, by and between
Positron Corporation and Howard R. Baker (incorporated herein by
reference to Exhibit 10.84 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.33 Amended and Restated Warrant Agreement dated as of April 14, 1994, by
and between Positron Corporation and Continental Stock Transfer and
Trust Company (including form of Warrant Certificate).
10.34 First Amendment to Amended and Restated Registration Rights
Agreement, dated as of November 19, 1993, by and among Positron
Corporation and the other signatories thereto (incorporated herein by
reference to Exhibit 10.91 to the Company's Registration Statement on
Form SB-2 (File No. 33-68722)).
10.35 Agreement made and entered into as of October 31, 1993, by and
between Positron Corporation and Nizar A. Mullani (incorporated herein
by reference to Exhibit 10.97 to the Company's Registration Statement
on Form SB-2 (File No. 33-68722)).
10.36 Agreement made and entered into as of October 31, 1993, by and
between Positron Corporation and K. Lance Gould (incorporated herein
by reference to Exhibit 10.98 to the Company's Registration Statement
on Form SB-2 (File No. 33-68722)).
10.37 Agreement made and entered into as of November 15, 1993, by and
between Positron Corporation and Nizar A. Mullani (incorporated herein
by reference to Exhibit 10.100 to the Company's Registration Statement
on Form SB-2 (File No. 33-68722)).
10.38 Agreement made and entered into as of November 15, 1993, by and
between Positron Corporation and K. Lance Gould (incorporated herein
by reference to Exhibit 10.101 to the Company's Registration Statement
on Form SB-2 (File No. 33-68722)).
10.39 First Amendment made and entered as of January 25, 1994, by and
between Emory University d/b/a Crawford Long Hospital and Positron
Corporation (incorporated herein by reference to Exhibit 10.102 of the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1993).
10.40+ Employment Agreement dated January 1, 1996 by and between Werner J.
Haas, Ph.D. and Positron Corporation (incorporated herein by reference
to Exhibit 10.40 of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995).
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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10.41 Loan and Security Agreement made as of November 14, 1995, between
Positron Corporation and Uro-Tech, Ltd. (incorporated herein by
reference to Exhibit 10.41 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.42 First Modification and Extension Agreement made as of January 3,
1996, by Positron Corporation and Uro-Tech, Ltd. (incorporated herein
by reference to Exhibit 10.42 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.43 Second Modification and Extension Agreement made as of February 26,
1996 by Positron Corporation and Uro-Tech, Ltd. (incorporated herein
by reference to Exhibit 10.43 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.44 Uro-Tech Loan Conversion Agreement dated as of November 14, 1995,
between Positron Corporation and Uro-Tech, Ltd. (incorporated herein
by reference to Exhibit 10.44 of the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995).
10.45 Promissory Note dated September 14, 1995, in the principal amount of
$1,500,000 payable to Uro-Tech, Ltd. (incorporated herein by reference
to Exhibit 10.45 of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995).
10.46 Promissory Note dated September 14, 1995, in the principal amount of
$1,000,000 payable to Uro-Tech, Ltd. (incorporated herein by reference
to Exhibit 10.46 of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995).
10.47 Revolving Finance agreement with Boston Financial & Equity
Corporation (incorporated herein by reference to Exhibit 10.47 of the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995).
10.48 Security Agreement Boston Financial & Equity Corporation
(incorporated herein by reference to Exhibit 10.48 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995).
10.49 Supplement to Security Agreement Security Interest in Inventory
(incorporated herein by reference to Exhibit 10.49 of the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995).
10.50 Inter-Creditor Agreement (incorporated herein by reference to Exhibit
10.50 of the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995).
10.51 Loan Agreement between Positron Corporation and ProFutures Bridge
Capital Fund, L.P. dated November 1, 1996 (incorporated by reference
to Exhibit 10.51 to the Company's Report on Form 10-KSB for the year
ended December 1996).
10.52 Promissory Note dated November 14, 1996, in the principal amount of
$1,400,000 payable to ProFutures Bridge Capital Fund, L.P.
(incorporated by reference to Exhibit 10.52 to the Company's Report on
Form 10-KSB for the year ended December 1996).
10.53 InterCreditor Agreement dated November 14, 1996 among Uro-Tech, Ltd.,
Boston Financial & Equity Corporation and ProFutures Bridge Capital
Fund, L.P. (incorporated by reference to Exhibit 10.53 to the
Company's Report on Form 10-KSB for the year ended December 1996).
10.54 Amendment to BF&E loan (incorporated by reference to Exhibit 10.54 to
the Company's Report on Form 10-KSB for the year ended December 1996).
10.55 Amendment to Uro-Tech loan (incorporated by reference to Exhibit
10.55 to the Company's Report on Form 10-KSB for the year ended
December 1996).
10.56 Acquisition Agreement between General Electric Company and Positron
Corporation dated July 15, 1996 (incorporated by reference to Exhibit
10.56 to the Company's Report on Form 10-KSB for the year ended
December 31, 1996).
10.57 Loan Agreement between Positron Corporation and Imatron, Inc.
10.58 Sales and Marketing Agreement With Beijing Chang Feng Medical
(incorporated by reference to Exhibit 10.58 to the Company's Report on
Form 10KSB/A-Z for the year ended December 31, 1996).
10.59 Stock Purchase Agreement between Positron Corporation and Imatron,
Inc. (incorporated hereby by reference to Annex A to the Company's
Proxy Statement dated December 18, 1998).
10.60 Promissory Note from Positron Corporation to Imatron, Inc.
10.61 Employment Agreement dated as of January 22, 1999 by and between
Positron Corporation and Gary H. Brooks (incorporated by reference to
Exhibit 10.61 to the Company's Registration Statement on Form SB-2
(file No. 333-30316)).
10.62 Agreement and Release dated as of November 30, 1999 by and among
Positron Corporation, K. Lance Gould and University of Texas Medical
Center (incorporated herein by reference to Exhibit 10.62 to the
Company's Registration Statement on Form SB-2 (File No. 333-30316)).
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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10.63 1999 Stock Option Plan (incorporated herein by reference to Exhibit
10.63 to the Company's Registration Statement on Form SB-2 (File No.
333-30316)).
10.64 1999 Non-Employee Directors' Stock Option Plan (incorporated herein
by reference to Exhibit 10.64 to the Company's Registration Statement
on Form SB-2 (File No. 333-30316)).
10.65 1999 Stock Bonus Incentive Plan (incorporated herein by reference to
Exhibit 10.65 to the Company's Registration Statement on Form SB-2
(File No. 333-30316)). 10.66 1999 Employee Stock Purchase Plan
(incorporated herein by reference to Exhibit 10.66 to the Company's
Registration Statement on Form SB-2 (File No. 333-30316)).
10.67 Stock Purchase Warrant dated September 1, 1999 issued by Positron to
S. Okamura and Associates, Inc. (incorporated herein by reference to
Exhibit 10.67 to the Company's Registration Statement on Form SB-2
(File No. 333-30316)).
10.68 Stock Purchase Warrant dated August 18, 1999 issued by Positron to
Morris Holdings Ltd. (incorporated herein by reference to Exhibit
10.68 to the Company's Registration Statement on Form SB-2 (File No.
333-30316)).
10.69 Stock Purchase Warrant dated January 20, 2000 issued by Positron to
Vistula Finance Limited (incorporated herein by reference to Exhibit
10.69 to the Company's Registration Statement on Form SB-2 (File No.
333-30316)).
10.70 Loan Agreement with Imatron Inc dated June 29, 2001 (incorporation
herein by reference to the Company's Report on 8-K dated July 12,
2001).
10.71 Employment Agreement dated as of January 17, 2001 by and between
Positron Corporation and Wayne E. Webster.
10.72 Technology Purchase Agreement, dated as of June 29, 2003, by and
between General Electric Company and Positron Corporation.
10.73 Software License Agreement, dated as of June 29, 2003, by and between
General Electric Company and Positron Corporation.
10.74 Agreement for Services, dated as of June 29, 2003, by and between
General Electric Company and Positron Corporation.
14.1 Code of Business Conduct and Ethics
24.1 Powers of Attorney (included on signature page hereto)
31.1 Certification of Periodic Financial Report Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002*
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002#
+ Management contract or compensatory plan or arrangement identified
pursuant to Item 13(a).
* Filed herewith
# Furnished herewith
Form 8-K Reports:
No current report on Form 8-K was filed by the Company during the fourth quarter
of 2003.
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
POSITRON CORPORATION
Date: March 29, 2004 By: /s/ Gary H. Brooks
--------------------------------
Gary H. Brooks
Chairman, CEO & CFO
--------------------------------------------------------------------------------
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Gary
H. Brooks, his attorney-in-fact, with the power of substitution, for him in any
and all capacities, to sign any amendments to this Report on Form 10-KSB, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting to said
attorney-in-fact, or his substitute or substitutes, the power and authority to
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact, or
his substitute or substitutes, may do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ Gary H. Brooks
-------------------------------------
Gary H. Brooks March 29, 2004
Chairman, CEO & CFO
/s/ Sachio Okamura
-------------------------------------
Sachio Okamura March 29, 2004
Director
March 29, 2004
-------------------------------------
Mario Leite Silva
Director
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table shows the fees paid or accrued by the Company for the audit
and other services provided by Ham, Langston & Brezina, L.L.P. for fiscal 2003
and 2002.
Fiscal 2003 Fiscal 2002
------------ ------------
Audit fees (1) $ 39,343 $ 39,329
Audit-related fees $ --- $ ---
Tax fees (2) $ 3,500 $ 3,500
All other fees $ --- $ ---
(1) Audit fees represent fees for professional services provided in connection
with the audit of our financial statements and review of our quarterly financial
statements and audit services provided in connection with other statutory or
regulatory filings.
(2) For fiscal 2003 and 2002, respectively, tax fees principally included tax
compliance fees of $3,500 and $3,500.
All audit related services, tax services and other services are and were
pre-approved by the Company's Board of Directors, which concluded that the
provision of such services by Ham, Langston & Brezina, L.L.P. was compatible
with the maintenance of that firm's independence in the conduct of its auditing
functions.
--------------------------------------------------------------------------------
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FY 2003 POSITRON CORPORATION FORM 10-KSB
--------------------------------------------------------------------------------
POSITRON CORPORATION
____________
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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FINANCIAL STATEMENTS
TABLE OF CONTENTS
__________
PAGE
----
Report of Independent Accountants 36
Balance Sheet as of December 31, 2003 37
Statements of Operations for the years ended December 31, 2003 and 2002 38
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2003 39
and 2002
Statements of Cash Flows for the years ended December 31, 2003 and 2002 40
Notes to Financial Statements 41
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Positron Corporation
We have audited the accompanying balance sheet of Positron Corporation as of
December 31, 2003 and the related statements of operations, stockholders' equity
(deficit) and cash flows for the two years in the period then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Positron Corporation as of
December 31, 2003, and the results of its operations and its cash flows for the
two years in the period then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company has suffered recurring losses from operations and low
inventory turnover. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Ham, Langston & Brezina, L.L.P.
Houston, Texas
March 22, 2004
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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POSITRON CORPORATION
BALANCE SHEET
DECEMBER 31, 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
------
Current assets:
Cash and cash equivalents $ 5
Accounts receivable, net of allowance of $81 3
Inventories 1,161
Prepaid expenses 175
Other current assets 12
---------
Total current assets 1,356
Property and equipment, net 222
---------
Total assets $ 1,578
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable, trade and accrued liabilities $ 1,898
Customer deposits 170
Unearned revenue 95
Capital lease obligation 9
---------
Total current liabilities 2,172
Stockholders' equity (deficit):
Series A Preferred Stock: $1.00 par value; 8% cumulative, convertible, redeemable;
5,450,000 shares authorized; 510,219 shares issued and outstanding. 510
Common stock: $0.01 par value; 100,000,000 shares authorized;
53,245,959 shares issued and 53,185,803 shares outstanding. 532
Additional paid-in capital 55,184
Subscription receivable (30)
Accumulated deficit (56,775)
Treasury Stock: 60,156 shares at cost (15)
---------
Total stockholders' equity (deficit) (594)
---------
Total liabilities and stockholders' equity $ 1,578
=========
See notes to financial statements
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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POSITRON CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended
December 31,
------------------
2003 2002
-------- --------
Revenue:
System sales $ 3,459 $ 3,319
Service and components 1,609 1,363
-------- --------
Total revenue 5,068 4,682
Costs of sales and services:
System sales 3,229 3,301
Service, warranty and components 797 613
Write-down of inventory to net realizable value -- 180
-------- --------
Total costs of sales and services 4,026 4,094
-------- --------
Gross profit 1,042 588
Selling, general and administrative 1,752 2,247
Research and development 671 1,036
-------- --------
Loss from operations (1,381) (2,695)
Other income (expenses):
Interest expense (103) (324)
Interest income -- 2
Gain on sale of Cardiac PET Software 2,376 --
Other income -- 50
-------- --------
Total other income (expense) 2,273 (272)
-------- --------
Net income (loss) $ 892 $(2,967)
======== ========
Basic and diluted income (loss) per common share $ 0.02 $ (0.05)
======== ========
Weighted average shares outstanding
Basic 57,616 62,173
Diluted 58,859 62,173
See notes to financial statements
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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POSITRON CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
Series A Additional Subscrip-
Preferred Stock Common Stock Paid-In tion Accumulated Treasury
Shares Amount Shares Amount Capital Receivable Deficit Stock Total
------- ------- ----------- ------- ---------- ------------ ----------- -------- --------
Balance at
December 31, 2001 510,219 $ 510 62,233,459 $ 622 $ 55,079 $ (30) $ (54,700) $ (15) $ 1,466
Net loss -- -- -- -- -- -- (2,967) -- (2,967)
Warrants issued
pursuant to
promissory note -- -- -- -- 14 -- -- -- 14
------- ------- ----------- ------- ---------- ------------ ----------- -------- --------
Balance at
December 31, 2002 510,219 510 62,233,459 622 55,093 (30) (57,667) (15) (1,487)
Net income -- -- -- -- -- -- 892 -- 892
Shares surrendered
In conjunction with
Sale of Cardiac
PET Software -- -- (9,000,000) (90) 90 -- -- -- --
Exercise of stock
options -- -- 12,500 -- 1 -- -- -- 1
------- ------- ----------- ------- ---------- ------------ ----------- -------- --------
Balance at
December 31, 2003 510,219 $ 510 53,245,959 $ 532 $ 55,184 $ (30) $ (56,775) $ (15) $ (594)
======= ======= =========== ======= ========== ============ =========== ======== ========
See notes to financial statements
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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POSITRON CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended
December 31,
------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income (loss) $ 892 $(2,967)
Adjustments to reconcile net income (loss) to net cash used in operating
activities
Gain on sale of Cardiac PET Software (2,376) --
Depreciation expense 86 91
Bad debt expense 81 --
Amortization of loan costs -- 114
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 995 (895)
Decrease in inventories 2,123 1,603
Decrease (increase) in prepaid expenses 57 (29)
Decrease in other current assets 71 35
Increase in accounts payable and accrued liabilities 298 27
(Decrease) increase in customer deposits (2,218) 1,692
Decrease in unearned revenue (83) (140)
-------- --------
Net cash used in operating activities (74) (469)
Cash flows from investing activities:
Capital expenditures (5) (19)
-------- --------
Net cash used in investing activities (5) (19)
Cash flows from financing activities:
Repayment of capital lease obligation (24) (40)
Purchase of common stock 1 --
-------- --------
Net cash used in financing activities (23) (40)
-------- --------
Net decrease in cash and cash equivalents (102) (528)
Cash and cash equivalents, beginning of year 107 635
-------- --------
Cash and cash equivalents, end of year $ 5 $ 107
======== ========
See notes to financial statements
--------------------------------------------------------------------------------
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------------------------
DESCRIPTION OF BUSINESS
-------------------------
Positron Corporation (the "Company") was incorporated on December 20, 1983
in the state of Texas and commenced commercial operations during 1986. The
Company designs, manufactures, markets and services its POSICAM(TM) system
advanced medical imaging devices, utilizing positron emission tomography
("PET") technology. These systems utilize the Company's patented and
proprietary technology, an imaging technique which assesses the
biochemistry, cellular metabolism and physiology of organs and tissues, as
well as producing anatomical and structural images. Targeted markets
include medical facilities and diagnostic centers located throughout the
world. POSICAM(TM) systems are used by physicians as diagnostic and
treatment evaluation tools in the areas of cardiology, neurology and
oncology. The Company faces competition principally from three other
companies which specialize in advanced medical imaging equipment.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
-----------------------------------------------
For the purposes of reporting cash flows, the Company considers highly
liquid, temporary cash investments with an original maturity period of
three months or less to be cash equivalents. Short-term investments include
certificates of deposits, commercial paper and other highly liquid
investments that do not meet the criteria of cash equivalents. Cash
equivalents and short-term investments are stated at cost plus accrued
interest which approximates fair value.
CONCENTRATIONS OF CREDIT RISK
--------------------------------
Cash and accounts receivables are the primary financial instruments that
subject the Company to concentrations of credit risk. The Company maintains
its cash in banks or other financial institutions selected based upon
management's assessment of the bank's financial stability. Cash balances
periodically exceed the $100,000 federal depository insurance limit.
Accounts receivable arise primarily from transactions with customers in the
medical industry located throughout the world, but concentrated in the
United States and Japan. The Company provides a reserve for accounts where
collectibility is uncertain. Collateral is generally not required for
credit granted.
INVENTORY
---------
Inventories are stated at the lower of cost or market and include material,
labor and overhead. Cost is determined using the first-in, first-out (FIFO)
method of inventory valuation.
PROPERTY AND EQUIPMENT
------------------------
Property and equipment are recorded at cost and depreciated for financial
statement purposes using the straight-line method over estimated useful
lives of three to seven years. Gains or losses on dispositions are included
in the statement of operations in the period incurred. Maintenance and
repairs are charged to expense as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
----------------------------------
Periodically, the Company evaluates the carrying value of its plant and
equipment, and long-lived assets, which includes patents and other
intangible assets, by comparing the anticipated future net cash flows
associated with those assets to the related net book value. If an
impairment is indicated as a result of such reviews, the Company would
remove the impairment based on the fair market value of the assets, using
techniques such as projected future discounted cash flows or third party
valuations.
--------------------------------------------------------------------------------
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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REVENUE RECOGNITION
--------------------
Revenues from POSICAM(TM) system contracts are recognized when all
significant costs have been incurred and the system has been shipped to the
customer. Revenues from maintenance contracts are recognized over the term
of the contract. Service revenues are recognized upon performance of the
services.
ADVERTISING
-----------
Nondirect-response advertising costs are charged to operations the first
time the advertising takes place. The cost of direct-response advertising
is not significant. Advertising expenses for 2003 and 2002 were $46,000 and
$91,000, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
------------------------------------
All costs related to research and development are charged to expense as
incurred.
WARRANTY COSTS
---------------
The Company accrues for the cost of product warranty on POSICAM(TM) systems
at the time of shipment. Warranty periods generally range up to a maximum
of one year but may extend for longer periods. Actual results could differ
from the amounts estimated.
EARNINGS PER COMMON SHARE
----------------------------
Basic earnings per share are calculated by dividing net income by the
weighted average common shares outstanding during the period. Diluted
earnings per share is calculated by dividing net income by the weighted
average number of common shares used in the basic earnings per share
calculation plus the number of common shares that would be issued assuming
conversion of all potentially dilutive securities outstanding, less common
shares which could have been repurchased by the Company with the related
proceeds.
ESTIMATES
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
---------------------------------------
The Company includes fair value information in the notes to the financial
statements when the fair value of its financial instruments is different
from the book value. When the book value approximates fair value, no
additional disclosure is made.
NEW ACCOUNTING PRONOUNCEMENTS
-------------------------------
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities", which
amends and clarifies accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. The changes in this Statement improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly, and will result in more consistent reporting of contracts as
either derivatives or hybrid instruments. The implementation of SFAS No.
149 did not impact the Company's financial position or results of
operations.
In May 2003, The FASB issued SFAS No. 150, "Accounting for Certain
Financial instruments with Characteristics of both Liabilities and Equity",
which establishes standards for how an issuer classifies and
--------------------------------------------------------------------------------
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FY 2003 POSITRON CORPORATION FORM 10-KSB
--------------------------------------------------------------------------------
measures certain financial instruments with characteristics of both
liabilities and equity. It requires the issuer to classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. The implementation of SFAS No. 150 did not impact the Company's
financial position or results of operations.
In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of
Variable Interest Entities" (FIN No. 46R), which addresses consolidation by
business enterprises of variable interest entities. FIN No. 46R clarifies
the application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity investors do not
have the characteristics of a controlling financial interest, the equity
investors have voting rights that are not proportionate to their economic
interests or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support
from other parties. FIN No. 46R applies to small business issuers no later
than the end of the first reporting period after December, 2004. The
Company plans to early adopt the provisions of FIN No. 46R in the first
quarter of 2004. As of December 31, 2003, the Company did not have any
variable interest entities that must be consolidated.
2. GOING CONCERN CONSIDERATION
-----------------------------
Since its inception the Company has been unable to sell POSICAM(TM) systems
in quantities sufficient to be operationally profitable. Consequently, the
Company has sustained substantial losses. At December 31, 2003, the Company
had an accumulated deficit of $56,775,000 and a stockholders' deficit of
$594,000. Due to the sizable prices of the Company's systems and the
limited number of systems sold or placed in service each year, the
Company's revenues have fluctuated significantly year to year.
The Company utilized a significant amount of its available cash and the
$2,000,000 in proceeds from a note payable to a stockholder to fund its
operating activities in 2003 and 2002. As a result, the Company had cash
and cash equivalents of only $5,000 at December 31, 2003. At the same date,
the Company had accounts payable and accrued liabilities of $1,898,000.
There can be no assurance that the Company will be successful in
implementing its business plan and ultimately achieving operational
profitability. The Company's long-term viability as a going concern is
dependent on its ability to 1) achieve adequate profitability and cash
flows from operations to sustain its operations, 2) control costs and
expand revenues from existing or new business and 3) meet current
commitments and fund the continuation of its business operation in the near
future.
3. ACCOUNTS RECEIVABLE
--------------------
Accounts receivable at December 31, 2003 consisted of the following (in
thousands):
Billed trade receivables $ 84
Allowance for doubtful accounts (81)
-----
Accounts receivable, net $ 3
=====
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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4. INVENTORIES
-----------
Inventories at December 31, 2003 consisted of the following (in thousands):
Raw materials $ 888
Work in progress 373
--------
Subtotal 1,261
Less reserve for obsolescence (100)
--------
Total $ 1,161
========
5. PROPERTY AND EQUIPMENT
------------------------
Property and equipment at December 31, 2003 consisted of the following (in
thousands):
Furniture and fixtures $ 138
Computers and peripherals 297
Machinery and equipment 123
--------
Subtotal 558
Less accumulated depreciation (336)
--------
Total $ 222
========
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
--------------------------------------------
Accounts payable and accrued liabilities at December 31, 2003 consisted of
the following (in thousands):
Trade accounts payable $ 508
Accrued property taxes 323
Accrued royalties 310
Accrued professional fees 180
Accrued compensation 151
Sales taxes payable 135
Other accrued liabilities 134
Accrued rent 97
Accrued warranty costs 60
--------
Total $ 1,898
========
7. SALE OF CARDIAC PET SOFTWARE
--------------------------------
The Company entered into a loan arrangement on June 29, 2001 with Imatron
Inc. ("Imatron"), a stockholder of the Company, for the purpose of
borrowing up to $2,000,000 to fund operating activities. This loan was
collateralized by substantially all the assets of the Company. Interest was
charged on the outstanding principal balance at an annual rate of 10% and
was payable monthly. As of June 29, 2003 the principal balance of the loan
was $2,000,000. Principal on the loan amounting to $1,000,000 and $500,000
was to be repaid within five (5) business days of December 31, 2001 and
March 31, 2002, respectively. The remaining $500,000 of loan principal and
all unpaid interest was due and payable no later than June 30, 2002.
In conjunction with the loan, the Company granted Imatron warrants to
purchase 6,000,000 shares of common stock, at an exercise price of $.30 per
share that were exercisable through June 30, 2006. The warrants issued to
Imatron had an approximate value of $200,000 at the date of issue. Such
cost was treated as a loan origination cost and amortized to expense over
the twelve-month term of the note payable, using the effective interest
method.
Imatron had previously acquired 9,000,000 shares of the Company's common
stock on January 22, 1999. General Electric Company ("GE") acquired Imatron
on December 19, 2001.
--------------------------------------------------------------------------------
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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Effective June 29, 2003, the Company entered into a Technology Purchase
Agreement to transfer its Cardiac PET Software to GE in exchange for
cancellation of the indebtedness under this loan and the surrender of the
9,000,000 shares of common stock and the warrant to purchase 6,000,000
shares of common stock. The Company recognized a gain of $2,376,000 related
to the sale of this technology. This gain resulted from the cancellation of
the Company's obligation for $2,000,000 in principal and accrued interest
of $376,000 under the loan. The Company's future commitment to provide
assistance to GE for the purpose of fully utilizing and exploiting this
technology, as well as the compensation for these services, were provided
for in a separate service agreement discussed below.
As part of the transactions contemplated by the Technology Purchase
Agreement, the Company entered into a Software License Agreement. Pursuant
to terms of the Software License Agreement, the Company received an
irrevocable license from GE to continue using, modifying, distributing and
otherwise exploiting the Cardiac PET Software in perpetuity.
In conjunction with the Technology Purchase Agreement, the Company also
entered into an Agreement for Services for the purpose of assisting GE in
fully utilizing and exploiting the Cardiac PET Software. The Company agreed
to provide services for a period of six quarters (eighteen months) for a
fee of $50,000 per each 3-month period during the term of this agreement.
GE committed to pay the fee for the first two quarters of $50,000 (total of
$100,000) within two business days of July 29, 2003 and will make payment
of any subsequent quarters in advance of such quarter. GE may terminate the
Agreement for Services at any time after it has paid the fees for at least
four quarters.
8. OPTIONS AND WARRANTS
----------------------
Following is an analysis of options and warrants and related activity:
OPTIONS
-------
Effective June 3, 1994, the shareholders of the Company approved the 1994
Incentive and Nonstatutory Option Plan (the "1994 Plan"). The 1994 Plan as
amended, provides for the issuance of an aggregate of 601,833 common stock
options to key employees, directors, and certain consultants and advisors
of the Company. The 1994 Plan also provides that the exercise price of
Incentive Options shall not be less than the fair market value of the
shares on the date of the grant. The exercise price per share of
Nonstatutory options shall not be less than the par value of the common
stock or 50% of the fair market value of the common stock on the date of
grant. The 1994 Plan is administered by the Compensation Committee of the
Board of Directors. The committee has the authority to determine the
individuals to whom awards will be made, the amount of the awards, and all
other terms and conditions of the awards.
The 1994 Plan also provides that each non-employee director automatically
receives options to purchase 10,500 shares of common stock at the date such
individual becomes a non-employee director. Each non-employee director who
is a director on the first business day following each Annual Shareholder
Meeting also receives an option to purchase a number of shares of common
stock having a value of $15,000 as determined by the fair market value of
the common stock at the date of grant. The terms of the 1994 Plan regarding
issuances to non-employee directors were suspended during the years ended
December 31, 1999 and 1998. All 1994 Plan options expire within ten years
of the date of the grant.
Effective June 15, 1999, the shareholders of the Company adopted the 1999
Stock Option Plan (the "1999 Plan") and terminated the 1994 Stock Option
Plan, effective October 6, 1999. The 1994 Plan provided for the grant of
options to officers, directors, key employees and consultants of the
Company. The 1999 Plan provides for the grant of options to officers,
employees (including employee directors) and consultants. The 1999 Plan is
administered by the Board of Directors. The administrator is authorized to
determine the terms of each option granted under the plan, including the
number of shares, exercise price, term and exercisability. Options granted
under the plan may be incentive stock options or nonqualified stock
options. The exercise price of incentive stock options may not be less than
100% of the fair market value of the common stock as of the date of grant
(110% of the fair market value in the case an optionee owns more than 10%
of the total combined voting power of all classes of Positron capital
stock). Options may not be exercised more than ten years after the date of
grant (five years in the case of 10% stockholders). As of December 31,
2003, a total of 5,467,500 stock options have been awarded under the 1999
Plan.
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
---------------------------------------------
Effective October 6, 1999, the shareholders of the Company approved the
1999 Non-Employee Directors' Stock Option Plan (the "Directors' Plan")
which provides for the automatic grant of an option to purchase 25,000
shares of common stock to non-employee directors upon their election or
appointment to the Board, and subsequent annual grants also in the amount
of 25,000 shares of common stock. The exercise price of the options is 85%
of the fair market value of the common stock on the date of grant. The
Directors' Plan is administered by the Board. Options granted under the
Directors' Plan become exercisable in one of two ways: either in four equal
annual installments, commencing on the first anniversary of the date of
grant, or immediately but subject to the Company's right to repurchase,
which repurchase right lapses in four equal annual installments, commencing
on the first anniversary of the date of grant. To the extent that an option
is not exercisable on the date that a director ceases to be a director of
the Company, the unexercisable portion terminates. Options covering 300,000
shares of common stock have been granted under the Directors' Plan at
December 31, 2003.
1999 STOCK BONUS INCENTIVE PLAN
-----------------------------------
In October 1999 the Board adopted an Employee Stock Bonus Incentive Plan
(the "Stock Bonus Plan"), effective November 1, 1999. The Stock Bonus Plan
provides for the grant of bonus shares to any Positron employee or
consultant to recognize exceptional service and performance beyond the
service recognized by the employee's salary or consultant's fee. The Board
has authorized up to an aggregate of 1,000,000 shares of common stock for
issuance as bonus awards under the Stock Bonus Plan. The Stock Bonus Plan
is currently administered by the Board. Each grant of bonus shares is in an
amount determined by the Board, up to a maximum of the participant's
salary. The shares become exercisable according to a schedule to be
established by the Board at the time of grant. No shares have been issued
under the Stock Bonus Plan at December 31, 2003.
1999 EMPLOYEE STOCK PURCHASE PLAN
-------------------------------------
The shareholders of the Company approved the 1999 Employee Stock Purchase
Plan (the "Purchase Plan") in October 1999. A total of 500,000 shares of
common stock have been reserved for issuance under the Purchase Plan, none
of which has yet been issued. The Purchase Plan permits eligible employees
to purchase common stock at a discount through payroll deductions during
offering periods of up to 27 months. Offering periods generally will begin
on the first trading day of a calendar quarter. The initial offering period
began on January 1, 2000. The price at which stock is purchased under the
Purchase Plan will be equal to 85% of the fair market value of common stock
on the first or last day of the offering period, whichever is lower. No
shares have been issued under the Purchase Plan at December 31, 2003.
A summary of stock option activity is as follows:
SHARES PRICE RANGE
ISSUABLE OR WEIGHTED
UNDER AVERAGE
OUTSTANDING EXERCIS
OPTIONS PRICE
------------ -------------
Balance at December 31, 2001 3,169,995 $ 0.48
Granted 75,000 $0.07 - $0.08
Exercised -- --
Forfeited (1,056,250) $0.26 - $1.06
------------
Balance at December 31, 2002 2,188,745 $ 0.54
Granted 1,905,000 $0.01 - $0.05
Exercised ( 12,500) $ 0.05
Forfeited (1,776,657) $0.05 - $1.06
------------
Balance at December 31, 2003 2,304,588 $ 0.32
============
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--------------------------------------------------------------------------------
The Company has elected to apply the disclosure only provisions of
Statement of Financial Accounting No. 123, Accounting for Stock-Based
Compensation ("SFAS 123") which, if fully adopted by the Company, would
change the method the Company applies in recognizing the cost of the Plan.
Adoption of the cost recognition provisions of SFAS 123 is optional and the
Company has decided not to elect those provisions. As a result, the Company
continues to apply Accounting Principles Board Opinion No. 25 ("APB 25")
and related interpretations in accounting for the measurement and
recognition of the Plan's cost.
The shares exercisable for vested options and the corresponding weighted
average exercise price was 1,730,854 shares and $0.42 per share at December
31, 2003.
Following is a summary of stock options outstanding at December 31, 2003.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF TERM EXERCISE EXERCISE
EXERCISE PRICE SHARES (IN YEARS) PRICE SHARES PRICE
--------------- ---------- ---------- --------- --------- --------
2.625 140,500 1.20 $ 2.63 140,500 $ 2.63
3.750 - $4.125 6,995 1.66 $ 3.94 6,995 $ 3.94
0.280 - $1.030 557,500 5.60 $ 0.34 557,500 $ 0.34
0.530 - $0.940 148,750 6.50 $ 0.62 147,500 $ 0.62
0.111 25,000 7.25 $ 0.11 25,000 $ 0.11
0.068 - $0.077 50,000 8.17 $ 0.07 50,000 $ 0.07
0.010 - $0.050 1,375,843 9.25 $ 0.05 803,359 $ 0.05
---------- ---------
2,304,588 $ 0.32 1,730,854 $ 0.42
========== =========
Under SFAS 123, compensation cost is measured at the grant date based on
the fair value of the awards and is recognized over the service period,
which is usually the vesting period. The fair value of options granted
during 2003 and 2002 was estimated on the date of grant using the Black
Scholes option-pricing model with the following assumptions used to
calculate fair value: (i) average dividend yield of 0.00%; (ii) expected
volatility of 100.00%; (iii) expected life of two (2) years; and (iv)
estimated risk-free interest rate of 6.00% and 7.00%, respectively.
The pro forma disclosures as if the Company adopted the cost recognition
requirements of SFAS 123 are as follows (in thousands):
2003 2002
------------------------ --------------------------
As Reported Pro Forma As Reported Pro Forma
------------ ---------- ------------- -----------
Net income (loss) $ 892 $ 803 $ (2,967) $ (3,169)
============ ========== ============= ===========
Basic and dilutive net income
(loss) per common share $ 0.02 $ 0.01 $ (0.05) $ (0.05)
============ ========== ============= ===========
The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future results. SFAS 123 does not apply to awards prior to
1995. Additional awards in future years are not anticipated by the Company.
WARRANTS
--------
During 2003, warrants to purchase 6,000,000 shares of common stock were
surrendered in conjunction with the sale of the Company's Cardiac PET
Software (Note 7).
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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A summary of warrant activity is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES EXERCISE PRICE PRICE
----------- --------------- -------
Balance at December 31, 2001 30,620,000 $ 0.05-$2.40 $ 0.25
Issued (see Note 12) 600,000 $ 0.05-$0.15 $ 0.07
-----------
Balance at December 31, 2002 31,220,000 $ 0.05-$2.40 $ 0.24
Warrants surrendered in connection with
sale of Cardiac PET Software (6,000,000) $ 0.30 $ 0.30
Expired (100,000) $ 0.15 $ 0.15
-----------
Balance at December 31, 2003 25,120,000 $ 0.05 - $2.40 $ 0.23
===========
All outstanding warrants are currently exercisable. A summary of
outstanding stock warrants at December 31, 2003 follows:
REMAINING
NUMBER OF COMMON CONTRACTUAL EXERCISE
STOCK EQUIVALENTS EXPIRATION DATE LIFE (YEARS) PRICE
----------------- ---------------- ------------ --------
7,650,000 August 2004 0.7 $ 0.05
10,970,000 August 2004 0.7 $ 0.30
250,000 January 2007 3.1 $ 2.40
500,000 October 2007 3.8 $ 0.05
1,250,000 March 2008 4.3 $ 0.25
4,500,000 June 2009 5.5 $ 0.30
-----------------
25,120,000
=================
No compensation expense related to options and warrants was recognized by
the Company in the accompanying statement of operations during the years
ended December 31, 2003 or 2002.
9. PREFERRED STOCK
----------------
The Company's Articles of Incorporation authorize the Board of Directors to
issue 10,000,000 shares of preferred stock from time to time in one or more
series. The Board of Directors is authorized to determine, prior to issuing
any such series of preferred stock and without any vote or action by the
shareholders, the rights, preferences, privileges and restrictions of the
shares of such series, including dividend rights, voting rights, terms of
redemption, the provisions of any purchase, retirement or sinking fund to
be provided for the shares of any series, conversion and exchange rights,
the preferences upon any distribution of the assets of the Company,
including in the event of voluntary or involuntary liquidation, dissolution
or winding up of the Company, and the preferences and relative rights among
each series of preferred stock.
SERIES A PREFERRED STOCK
---------------------------
In February, March and May of 1996, the Company issued 3,075,318 shares of
Series A 8% Cumulative Convertible Redeemable Preferred Stock $1.00 par
value ("Series A Preferred Stock") and Redeemable common stock Purchase
Warrants to purchase 1,537,696 shares of the Company's Common Stock. The
net proceeds of the private placement were approximately $2,972,000.
Subject to adjustment based on issuance of shares at less than fair market
value, each share of the Series A Preferred Stock was initially convertible
into one share of common stock. Each Redeemable common stock Purchase
Warrant is exercisable at a price of $2.00 per share of common stock. Eight
percent (8%) dividends on the Series A Preferred Stock may be paid in cash
or in Series A Preferred Stock at the discretion of the Company. The Series
A Preferred Stock is senior to the Company's common stock in liquidation.
Holders of the Series A Preferred stock may vote on an as if converted
basis on any matter requiring shareholder vote. While the Series A
Preferred Stock is outstanding or any dividends thereon remain unpaid, no
common stock dividends may be paid or declared by the Company. The Series A
Preferred Stock may be redeemed in whole or in part, at the option of the
Company, at any time subsequent to March 1998 at a price of $1.46 per share
plus any undeclared and/or unpaid dividends to the date of redemption.
Redemption requires at least 30 days advanced notice and notice may only be
given if the Company's common stock has closed above $2.00 per share for
the twenty consecutive trading days prior to the notice.
As of December 31, 2003, stated dividends that are undeclared and unpaid on
the Series A Preferred Stock total $345,000. The Company anticipates that
such dividends, if and when declared, will be paid in shares of Series A
Preferred Stock.
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--------------------------------------------------------------------------------
10. INCOME TAXES
-------------
The Company has incurred losses since its inception and, therefore, has not
been subject to federal income taxes. As of December 31, 2003, the Company
had net operating loss ("NOL") carryforwards for income tax purposes of
approximately $10,000,000, which expire in 2004 through 2022. Under the
provisions of Section 382 of the Internal Revenue Code the greater than 50%
ownership changes that occurred in the Company in connection with the
Imatron Transaction and in connection with the private placement of the
Company's common stock limited the Company's ability to utilize its NOL
carryforward to reduce future taxable income and related tax liabilities.
The composition of deferred tax assets and the related tax effects at
December 31, 2003 are as follows (in thousands):
Deferred tax assets:
Net operating losses $ 3,357
Accrued liabilities and reserves 320
Inventory basis difference 140
----------
3,817
Valuation allowance ( 3,814 )
----------
Total deferred tax assets $ 3
==========
Deferred tax liability:
Basis of property and equipment $ (3)
==========
Net deferred tax asset $ 0
==========
The difference between the income tax benefit in the accompanying statement
of operations and the amount that would result if the U.S. Federal
statutory rate of 34% were applied to pre-tax income (loss) is as follows
(amounts in thousands):
2003 2002
---------------- ----------------
AMOUNT % AMOUNT %
-------- ------ -------- ------
Benefit (provision) for income
tax at federal statutory rate $ (303) (34.0) $ 1,008 34.0
Other 35 4.0 (64) (2.1)
Change in valuation allowance 268 30.0 (944) (31.9)
-------- ------ -------- ------
$ - -- $ -- --
======== ====== ======== ======
11. 401(K) PLAN
------------
The Positron Corporation 401(k) Plan and Trust (the "Plan") covers all of
the Company's employees who are United States citizens, at least 21 years
of age and have completed at least one quarter of service with the Company.
Pursuant to the Plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit and have the
amount of such reduction contributed to the Plan. The Plan provides for the
Company to make contributions in an amount equal to 25 percent of the
participant's deferral contributions, up to 6 percent of the employee's
compensation, as defined in the Plan agreement. The Company's contribution
expense was approximately $18,000 and $34,000 in 2003 and 2002,
respectively. The Board of Directors of the Company may authorize
additional discretionary contributions; however, no additional Company
contributions have been made as of December 31, 2003.
12. RELATED PARTY TRANSACTIONS
----------------------------
KEY EMPLOYEE INCENTIVE COMPENSATION
--------------------------------------
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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The Company has an incentive compensation plan for certain key employees
and its Chairman. The incentive compensation plan provides for annual bonus
payments based upon achievement of certain corporate objectives as
determined by the Company's compensation committee, subject to the approval
of the board of directors. During 2003 the Company did not pay any bonus
pursuant to the incentive compensation plan.
IMATRON TRANSACTION
--------------------
In May 1998, the Company entered into an agreement (the "Imatron
Transaction") with Imatron. Pursuant to the agreement, Imatron acquired
9,000,000 shares of the Company's common stock on January 22, 1999,
representing at that time, a majority ownership of the outstanding common
stock of the Company on a fully-diluted and as-if-converted basis,
excluding out-of-the-money warrants and options determined at that time. In
exchange, the Company received from Imatron (a) nominal cash; (b) an
immediate loan of up to $500,000 in working capital to assist the Company
in meeting then current financial obligations; (c) an agreement that
Imatron would undertake all reasonable efforts to have its affiliate,
Imatron Japan, Inc. assist the Company in the sale of 10 POSICAM(TM)
systems over the next three years; (d) an agreement that Imatron would help
facilitate the recapitalization of the Company to support its re-entry into
the medical imaging market by using its best efforts to arrange for
additional third-party equity financing for the Company over an
eighteen-month period in an aggregate amount of not less than $8,000,000;
and (e) a new management team selected by Imatron. During the year ended
December 31, 2001, Imatron loaned the Company $2,000,000 (Note 7). On
December 19, 2001, Imatron was acquired by General Electric Company.
General Electric Company is a competing manufacturer of PET imaging
systems.
Effective June 29, 2003, the Company entered into a Technology Purchase
Agreement to transfer its Cardiac PET Software to GE in exchange for
cancellation of the indebtedness under this loan and the surrender of the
9,000,000 shares of common stock and the warrant to purchase 6,000,000
shares of common stock. The Company recognized a gain of $2,376,000 related
to the sale of this technology. This gain resulted from the cancellation of
the Company's obligation for $2,000,000 in principal and accrued interest
of $376,000 under the loan. The Company's future commitment to provide
assistance to GE for the purpose of fully utilizing and exploiting this
technology, as well as the compensation for these services, were provided
for in a separate service agreement discussed below.
As part of the transactions contemplated by the Technology Purchase
Agreement, the Company entered into a Software License Agreement. Pursuant
to terms of the Software License Agreement, the Company received an
irrevocable license from GE to continue using, modifying, distributing and
otherwise exploiting the Cardiac PET Software in perpetuity.
In conjunction with the Technology Purchase Agreement, the Company also
entered into an Agreement for Services for the purpose of assisting GE in
fully utilizing and exploiting the Cardiac PET Software. The Company agreed
to provide services for a period of six quarters (eighteen months) for a
fee of $50,000 per each 3-month period during the term of this agreement.
GE committed to pay the fee for the first two quarters of $50,000 (total of
$100,000) within two business days of July 29, 2003 and will make payment
of any subsequent quarters in advance of such quarter. GE may terminate the
Agreement for Services at any time after it has paid the fees for at least
four quarters.
NOTE PAYABLE TO PRESIDENT AND CEO
--------------------------------------
On October 30, 2002, the Company received a promissory note in the
principal amount of $75,000 from its President & CEO. The promissory note
was unsecured, bore interest at 7% per annum, and the principal and accrued
interest was due and payable on demand, on not less than five calendar
days' written notice, but in no event later than November 30, 2002. The
promissory note was repaid in full in November of 2002. In consideration
for the promissory note, the Company granted its President & CEO warrants
to purchase 500,000 shares of common stock, at an exercise price of $0.05
per share that are exercisable through October 31, 2007. The warrants had
an approximate value of $14,000 at the date of issue. Such cost is treated
as loan origination cost and was amortized to expense in 2002 over the term
of the note, using the effective interest method.
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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NOTE PAYABLE TO STOCKHOLDER
------------------------------
On November 4, 2002, the Company received a promissory note in the
principal amount of $25,000 from a stockholder. The promissory note was
unsecured, bore interest at 7% per annum, and the principal and accrued
interest was due and payable on demand, on not less than five calendar
days' written notice, but in no event later than November 30, 2002. The
promissory note was repaid in full in November of 2002.
13. COMMITMENTS AND CONTINGENCIES
-------------------------------
ROYALTY AGREEMENTS
-------------------
The Company acquired the know-how and patent rights for positron imaging
from three entities: the Clayton Foundation, K. Lance Gould (formerly a
director) and Nizar A. Mullani (also formerly a director.) Pursuant to
agreements with each of them, the Company was obligated to pay royalties of
up to 4.0% in the aggregate of gross revenues from sales, uses, leases,
licensing or rentals of the relevant technology. Royalty obligations
amounting to approximately $310,000 were included in liabilities at
December 31, 2003.
LEASE AGREEMENTS
-----------------
Prior to 1998, the Company leased its office and manufacturing facility and
certain office equipment under leases with unexpired terms ranging from one
to four years. In March 1998, the Company, under severe cash flow
constraints, was forced to leave its long-term office and manufacturing
facility lease space and move its operations to a facility with
significantly reduced space and a more affordable lease payment. Although
the Company entered into an agreement with the landlord regarding vacating
the space, a dispute subsequently arose with the landlord as to
interpretation of that agreement. The landlord has filed suit against the
Company claiming that the Company owes approximately $150,000, plus
attorney's fees, to the landlord under the terms of the agreement. A
subsequent analysis of the transactions under the lease has resulted in the
reduction of the lease obligation alleged by 10P10, L.P. to approximately
$97,000. Although the Company disputes the sums claimed by the landlord,
due to the pending lawsuit, $97,000 is recorded as an accrued liability as
of December 31, 2003. Operating expenses were reduced by approximately
$57,000 and $180,000 in 2003 and 2002, respectively as a result of credits
and charges associated with the abandoned lease.
The Company operates in leased facilities under an operating lease that
expires in March 2004 and contains no renewal options. The rental rate for
the facility was $6,744 per month through April 30, 2001 and the monthly
rate increased to $7,171 for the period from May 1, 2001 through October
31, 2003. The Company reduced its space under lease and lowered the monthly
rent to $4,671 for the period from November 1, 2003 through March 31, 2004.
The cost of leasing the Company's operating facility amounted to
approximately $74,000 and $86,000 in 2003 and 2002, respectively. Total
minimum lease payments of approximately $17,000 remain due under the lease
contract in 2004.
In August 2000, the Company leased a marketing display exhibit under a
three year lease with monthly rental payments of $3,850. As a capital
lease, the display exhibit had a fair value of approximately $117,000 at
the inception of the lease and the incremental borrowing rate is 11%.
Amortization of the capital lease is included in depreciation expense.
Future minimum lease payments of approximately $9,000 are currently due
under this capital lease.
LITIGATION
----------
PROFUTURES CAPITAL BRIDGE FUND, L.P.
On September 26, 2000, ProFutures Bridge Capital Fund, L.P. ("ProFutures")
filed a complaint against the Company in Colorado state court for
declaratory relief and breach of contract (the "Complaint"). The Complaint
alleged that the Company breached four stock purchase warrants issued to
ProFutures on the basis that the Company failed to notify ProFutures of
dilutive events and failed to register the full number of shares ProFutures
was allegedly entitled to purchase under the warrants when, on February 14,
2000, the Company registered 1,500,000 shares of stock underlying
ProFutures' warrants instead of 4,867,571. The Complaint further alleged
that the Company's issuance of shares of common stock to Imatron, Inc. on
or about January 22, 1999, (the "Imatron Transaction") was a dilutive event
pursuant to the anti-dilution provisions contained in the four stock
purchase warrants. The Complaint sought declarations that the consideration
received by the Company in the Imatron Transaction increased the number of
shares issuable under the warrants, the Company breached the warrants by
failing to notify ProFutures of the Imatron Transaction and its effect on
ProFutures' warrants at the time of the Imatron Transaction and that the
Company further breached the warrants by failing to register the number of
shares ProFutures alleged were purchasable under its warrants. The
Complaint sought an unspecified amount of monetary damages.
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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The Colorado State level case of ProFutures v. Positron, District Court,
City and County of Denver, Colorado, Case No. 00CV7146, was tried before
the Court in June 2002. The Court issued its Findings of Fact, Conclusions
of Law and Judgment on November 13, 2002. The Court agreed with Positron's
determination of the value of the consideration paid for the shares issued
to Imatron and that there was no evidence of fraud by Positron. The Court
agreed with ProFutures that Positron breached the 1996 stock purchase
warrant with ProFutures by failing to give ProFutures written notice
stating the adjusted exercise price and the new number of shares
deliverable as a result of the Imatron Transaction and by failing to
register the shares to which ProFutures was entitled under the warrant as a
result of the Imatron Transaction. Nevertheless, the Court also found that
ProFutures' alleged damages were uncertain and speculative and that
ProFutures was not entitled to recover actual damages. Therefore ProFutures
was awarded $1 in nominal damages. ProFutures has appealed the trial
Court's findings and Positron has cross-appealed. Those appeals are
presently pending before the Court of Appeals, State of Colorado.
In the federal case of ProFutures v. Positron, et al., United States
District Court for the District of Colorado, Case No. 02-N-0154, the
Complaint alleged two causes of action against the Company: fraudulent
transfer and injunctive relief. The allegations arose out of a June 2001
loan agreement between Positron and Imatron. The action was dismissed in
2002 without prejudice.
10P10, L.P.
In December 2001, 10P10, L.P., the Company's previous landlord for its
premises located at 16350 Park Ten Place, Suite 150, Houston, Texas, filed
a complaint (Cause No. 2001-65534 in the 165th Judicial District Court of
Harris County, Texas) against the Company alleging breach of lease
agreement. The Company disputes the amount of lease commissions and
construction costs charged by 10P10, L.P. in conjunction with the
subleasing of the premises. Although 10P10, L.P. asserted a claim in excess
of $150,000, a subsequent analysis of the transactions under the lease has
resulted in the reduction of the lease obligation alleged by 10P10, L.P. to
approximately $97,000. Although the Company disputes the amount of the
claim, due to the pending lawsuit, approximately $97,000 is recorded as an
accrued liability as of December 31, 2003. The case is set for trial on a
two week docket beginning in September 2004.
Radiology Corporation of America, Inc.
A judgment in the amount of $75,000 has been entered against the Company in
Texas state court in favor of Radiology Corporation of America, Inc., a
vendor to the Company. In satisfaction of the judgment the Company and the
creditor have agreed that the judgment may be satisfied by five monthly
payments of $15,000 each commencing March 10, 2004.
14. EARNINGS PER SHARE
--------------------
The following information details the computation of basic and diluted
earnings per share:
Year Ended December
31, (In thousands,
except for per share
data)
-----------------------
2003 2002
---------- -----------
Numerator:
Basic and diluted net income (loss): $ 892 $ (2,967)
Denominator:
Denominator for basic earnings per share-weighted
average shares 57,616 62,173
Effect of dilutive securities
Convertible Series A Preferred Stock 510 ---
Stock Warrants 582 ---
Stock Options 151 ---
---------- -----------
Denominator for diluted earnings per share-adjusted weighted
Average shares and assumed conversions 58,859 62,173
========== ===========
Basic and diluted income (loss) per common share $ 0.02 $ (0.05)
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FY 2003 POSITRON CORPORATION FORM 10-KSB
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All common stock equivalents in the year ended December 31, 2002 were
excluded from the above calculation as their effect was anti-dilutive.
15. SEGMENT INFORMATION AND MAJOR CUSTOMERS
-------------------------------------------
The Company believes that all of its material operations are conducted in
the servicing and sales of medical imaging devices and it currently reports
as a single segment.
During the years ended December 31, 2003 and 2002 the Company had a limited
number of customers as follows:
2003 2002
----- -----
Number of customers 16 15
Customers accounting for more than
10% of revenues 3 2
Percent of revenues derived from
largest customer 35% 47%
Percent of revenues derived from
second largest customer 24% 27%
16. SUPPLEMENTAL CASH FLOW DATA
------------------------------
2003 2002
------ -----
Supplemental disclosure of cash flow information (in thousands):
Cash paid for interest $ 4 $ 10
Cash paid for income taxes $ --- $ --
Non-cash investing and financing activities (in thousands):
Extinguishment of debt and accrued interest and cancellation
of warrants and common stock in asset sale $2,376 $ --
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