CTI MOLECULAR IMAGING INC - 10-Q Quarterly Report

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

(Mark One)


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2003


o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File Number: 000-49867

CTI MOLECULAR IMAGING, INC.

(exact name of registrant as specified in its charter)


Delaware (State of Incorporation)		62-1377363 (I.R.S. Employer Identification No.)


810 Innovation Drive, Knoxville, Tennessee 37932
(Address of Principal Executive Offices)	(Zip Code)

(865) 218-2000
(Registrant’s Telephone Number, Including Area Code)

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS

As of May 1, 2003, the registrant had outstanding 44,781,006 shares of common stock, par value $0.01.

TABLE OF CONTENTS


		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
	ITEM 4. Controls and Procedures
Part II: Other Information
	ITEM 1. Legal Proceedings
	ITEM 2. Changes in Securities and Use of Proceeds
	ITEM 3. Defaults Upon Senior Securities
	ITEM 4. Submission of Matters to a Vote of Security Holders
	ITEM 5. Other Information
	ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATIONS
EXHIBIT INDEX
EX-99.1 SECTION 906 CERTIFICATION OF THE CEO
EX-99.2 SECTION 906 CERTIFICATION OF THE CFO

CTI Molecular Imaging, Inc.
Quarterly Report on Form 10-Q

Table of Contents


		Page

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS			3
	PART I
	Financial Information
Item 1.	Condensed Consolidated Financial Statements:
	Condensed Consolidated Balance Sheets at March 31, 2003 and September 30, 2002		4
	Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended March 31, 2003 and 2002		5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2003 and 2002		6
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		49
Item 4.	Controls and Procedures		50
	PART II
	Other Information
Item 1.	Legal Proceedings		51
Item 2.	Changes in Securities and Use of Proceeds		51
Item 3.	Defaults Upon Senior Securities		52
Item 4.	Submission of Matters to a Vote of Security Holders		52
Item 5.	Other Information		52
Item 6.	Exhibits and Reports on Form 8-K		52
SIGNATURE			53
CERTIFICATIONS			54
EXHIBIT INDEX			56

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements.” Forward-looking statements relate to expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or that necessarily depend upon future events. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” and similar expressions. Specifically, this report contains, among others, forward-looking statements about:

• our expectations regarding financial condition or results of operations for periods after March 31, 2003;

• our future sources of and needs for liquidity and capital resources;

• our critical accounting policies;

• the timing of the exercisability of the Siemens option to purchase an additional ownership interest in CPS and the effect of the Siemens option, or its exercise, on our business;

• our expectations regarding the size and growth of the market for our products and services;

• our business strategies and our ability to grow our business;

• our ability to enhance existing, or develop new products and services and the impact of any such enhancements or developments;

• the development of new applications for PET and the impact of any such new applications;

• the implementation or interpretation of current or future regulations and legislation;

• our ability to develop new proprietary radiopharmaceuticals;

• the number and scope of procedures involving our products and services for which third-party reimbursement is available, and the reimbursement levels of third-party payors;

• our ability to maintain contracts and relationships with key suppliers, customers, distributors or research and development collaboration partners; and

• our ability to maintain our existing, or to develop additional, valuable intellectual property rights.

The forward-looking statements contained in this report reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties. Many important factors could cause our actual results or achievements to differ materially from any future results or achievements expressed in or implied by our forward-looking statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict. Important factors that could cause actual results or achievements to differ materially from the results or achievements reflected in our forward-looking statements include, among other things, the factors discussed in Part I, Item 2 of this report under the sub-heading “Factors Affecting Operations and Future Results.”

You should read this report, the information incorporated by reference into this report and the documents filed as exhibits to this report completely and with the understanding that our actual future results or achievements may be materially different from what we currently expect or anticipate.

The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.

We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

CTI MOLECULAR IMAGING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS


			March 31,			September 30,
(In thousands, except share and per share data)			2003			2002

			(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	75,949		$	84,553
	Marketable securities			3,553			6,704
	Accounts receivable — trade, less allowance for doubtful accounts of $2,120 at March 31, 2003 (unaudited) and $1,576 at September 30, 2002, respectively			43,390			33,817
	Accounts receivable — related party, less allowance for doubtful accounts of $242 at at March 31, 2003 (unaudited) and September 30, 2002			31,193			39,918
	Inventories			83,584			69,295
	Income tax receivable			1,054			—
	Deferred tax asset			15,032			9,827
	Prepaid expenses and other current assets			8,081			6,112

		Total current assets		261,836			250,226

Property and equipment, net				95,577			77,667
Deferred tax asset				—			187
Goodwill				12,545			12,385
Other assets				10,944			11,244

		Total assets	$	380,902		$	351,709

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Cash management clearing		$	2,994		$	2,121
	Accounts payable			32,392			26,591
	Current maturities of long-term debt and capital lease obligations			4,462			4,008
	Accrued payroll and benefits			11,300			12,914
	Customer advances — trade			12,193			16,487
	Customer advances — related party			1,201			1,214
	Accrued warranty expense			3,142			3,740
	Income taxes payable			—			4,552
	Other accrued expenses			1,922			2,339

		Total current liabilities		69,606			73,966

Deferred revenues				1,489			1,420
Deferred tax liability				236			—
Long-term debt and capital lease obligations, less current maturities				28,820			26,730

		Total liabilities		100,151			102,116

Commitments and contingencies (Note 5)
Minority interest				37,865			30,104
Shareholders’ equity:
	Common stock, $.01 par value; 500,000,000 shares authorized, 45,956,912 shares issued and 44,124,947 shares outstanding at March 31, 2003 (unaudited); 44,048,117 shares issued and 42,216,152 shares outstanding at September 30, 2002			460			440
	Additional paid-in capital			239,603			226,910
	Retained earnings			8,548			644
	Unearned compensation			(5,437	)		(7,526	)
	Other comprehensive income — currency translation adjustment			675			(16	)
	Treasury stock, at cost, 1,831,965 shares			(963	)		(963	)

		Total shareholders’ equity		242,886			219,489

		Total liabilities and shareholders’ equity	$	380,902		$	351,709

The accompanying notes are an integral part of these condensed consolidated financial statements.

CTI MOLECULAR IMAGING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


				Three Months Ended						Six Months Ended
				March 31,						March 31,

(In thousands, except share and per share data)				2003			2002			2003			2002

				(unaudited)						(unaudited)
Revenues ⁽¹⁾				$	81,964		$	55,258		$	142,523		$	102,815
Cost of revenues ^{(2) (3)}					49,384			32,542			82,030			60,962

			Gross margin		32,580			22,716			60,493			41,853

Operating expenses:
	Selling, general and administrative expenses ⁽³⁾				12,429			8,458			24,633			15,682
	Research and development expenses ⁽³⁾				7,435			4,869			14,064			9,453
	Stock-based compensation expense				325			8,134			881			8,236

		Total operating expenses			20,189			21,461			39,578			33,371

Income from operations					12,391			1,255			20,915			8,482
Warrant liability mark to market expense					—			6,761			—			8,902
Interest expense, net					199			1,134			275			2,296
Other (income)					(238	)		(220	)		(679	)		(394	)

Income (loss) before income taxes and minority interest					12,430			(6,420	)		21,319			(2,322	)

Provision (benefit) for income taxes:
	Current				4,180			3,020			7,680			5,158
	Deferred				414			(845	)		406			(556	)

					4,594			2,175			8,086			4,602

Income (loss) before minority interest					7,836			(8,595	)		13,233			(6,924	)
Amount applicable to minority interest, net of taxes					3,316			3,249			5,329			4,915

Net income (loss)					4,520			(11,844	)		7,904			(11,839	)

Accretion of preferred stocks					—			490			—			704
Dividends on preferred stocks					—			495			—			848

Net income (loss) attributable to common shareholders				$	4,520		$	(12,829	)	$	7,904		$	(13,391	)

Earnings (loss) per share (Note 2):
	Basic			$	0.11		$	(0.46	)	$	0.19		$	(0.48	)
	Diluted			$	0.10		$	(0.46	)	$	0.17		$	(0.48	)
Weighted average shares:
	Basic				42,929,659			28,160,987			42,467,888			28,121,253
	Diluted				46,582,627			28,160,987			46,610,690			28,121,253
⁽¹⁾Includes revenues through related parties				$	37,131		$	27,342		$	62,385		$	54,537
⁽²⁾Includes cost of revenues through related parties				$	23,911		$	13,654		$	38,585		$	31,051
⁽³⁾Excludes stock-based compensation expense as follows:
			Cost of revenues	$	46		$	18		$	112		$	18
			Selling, general and administrative expenses		195			8,032			584			8,134
			Research and development expenses		84			84			185			84

				$	325		$	8,134		$	881		$	8,236

The accompanying notes are an integral part of these condensed consolidated financial statements.

CTI MOLECULAR IMAGING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


					Six Months Ended
					March 31,

					2003			2002

(In thousands, except share and per share data)					(unaudited)
Cash flows provided by operating activities:
	Net income (loss)				$	7,904		$	(11,839	)
	Adjustments to reconcile net income to net cash provided by operating activities:
		Minority interest in income of subsidiaries				5,329			4,915
		Depreciation and amortization				5,205			3,062
		Accretion of discount on marketable securities				(52	)		—
		Deferred tax (benefit) provision				406			(556	)
		Provision for bad debts				652			1,410
		Equity in loss (income) of equity investees				5			(210	)
		Stock-based compensation expense				881			8,236
		Provision to mark to market warrant liability				—			8,902
		(Gain) loss on disposal of machinery and equipment				(168	)		155
		Changes in operating assets and liabilities, net of effect of consolidation of joint venture
			Accounts receivable			(432	)		4,319
			Inventories			(12,289	)		(17,700	)
			Other receivables			102			330
			Prepaid expenses and other current assets			(441	)		(198	)
			Accounts payable			5,543			4,071
			Accrued payroll and benefits			(1,662	)		(1,412	)
			Customer advances			(4,307	)		2,000
			Accrued warranty expense			(598	)		137
			Income taxes receivable (payable)			(4,518	)		(2,399	)
			Other accrued expenses			(199	)		(661	)

				Net cash provided by operating activities

	•		our expectations regarding financial condition or results of operations for periods after March 31, 2003;

	•		our future sources of and needs for liquidity and capital resources;

	•		our critical accounting policies;

	•		the timing of the exercisability of the Siemens option to purchase an additional ownership interest in CPS and the effect of the Siemens option, or its exercise, on our business;

	•		our expectations regarding the size and growth of the market for our products and services;

	•		our business strategies and our ability to grow our business;

	•		our ability to enhance existing, or develop new products and services and the impact of any such enhancements or developments;

	•		the development of new applications for PET and the impact of any such new applications;

	•		the implementation or interpretation of current or future regulations and legislation;

	•		our ability to develop new proprietary radiopharmaceuticals;

	•		the number and scope of procedures involving our products and services for which third-party reimbursement is available, and the reimbursement levels of third-party payors;

	•		our ability to maintain contracts and relationships with key suppliers, customers, distributors or research and development collaboration partners; and

	•		our ability to maintain our existing, or to develop additional, valuable intellectual property rights.