CTI MOLECULAR IMAGING INC - 10-Q Quarterly Report

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United States
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 December 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		62-1377363
(State of Incorporation)		(I.R.S. Employer Identification No.)


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

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

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 x No o

APPLICABLE ONLY TO CORPORATE ISSUERS

As of February 2, 2004, the registrant had outstanding 45,426,459 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
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 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 (unaudited):
	Condensed Consolidated Balance Sheets at December 31, 2003 and September 30, 2003		4
	Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2003 and 2002		5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 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		19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		43
Item 4.	Controls and Procedures		43
	PART II Other Information
Item 1.	Legal Proceedings		44
Item 2.	Changes in Securities and Use of Proceeds		45
Item 3.	Defaults Upon Senior Securities		45
Item 4.	Submission of Matters to a Vote of Security Holders		45
Item 5.	Other Information		45
Item 6.	Exhibits and Reports on Form 8-K		46
SIGNATURE			47
CERTIFICATIONS			48
EXHIBIT INDEX			50

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 December 31, 2003;

• our critical accounting policies;

• the timing of the exercisability of the Siemens option to purchase an additional ownership interest in CTI PET Systems, Inc. (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 and the market acceptance of CTI’s products and services;

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

• competition, pricing, the seasonality of capital equipment sales, the timing of orders from and shipments to distribution partners and customers, and the availability of financing services for customers;

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

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

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

• 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;

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

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

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 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 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


			December 31,			September 30,
			2003			2003

(In thousands, except share and per share data)			(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	44,429		$	49,978
	Accounts receivable — trade, less allowance for doubtful accounts of $3,345 at December 31, 2003 and $3,475 at September 30, 2003			46,406			72,240
	Accounts receivable — related party, less allowance for doubtful accounts of $186 at at December 31, 2003 and September 30, 2003			37,090			42,430
	Inventories			90,015			70,852
	Deferred tax asset			19,705			17,751
	Prepaid expenses and other current assets			6,779			7,691

		Total current assets		244,424			260,942

Property and equipment, net				113,736			107,293
Goodwill				25,076			25,040
Other assets				27,900			31,773

		Total assets	$	411,136		$	425,048

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Cash management clearing		$	6,266		$	12,017
	Accounts payable			32,723			34,490
	Current maturities of long-term debt and capital lease obligations			4,056			5,501
	Accrued payroll and benefits			11,662			16,708
	Customer advances — trade			8,180			6,537
	Customer advances — related party			887			326
	Accrued warranty expense			5,052			5,262
	Income taxes payable			—			3,724
	Other accrued expenses			2,059			3,884

		Total current liabilities		70,885			88,449

Deferred revenues				1,735			2,332
Deferred tax liability				9,739			8,999
Long-term debt and capital lease obligations, less current maturities				19,185			18,688

		Total liabilities		101,544			118,468

Commitments and contingencies (Note 5)
Minority interest				47,255			46,727
Shareholders’ equity:
	Preferred stock, Series C, $.01 par value, 50,000 shares authorized, no shares issued or outstanding at December 31, 2003 and September 30, 2003 (Note 11)			—			—
	Common stock, $.01 par value; 500,000,000 shares authorized, 46,453,371 shares issued and 44,621,406 shares outstanding at December 31, 2003; 46,290,459 shares issued and 44,458,494 shares outstanding at September 30, 2003			465			463
	Additional paid-in capital			244,831			243,400
	Retained earnings			21,925			21,207
	Unearned compensation			(3,995	)		(4,516	)
	Other comprehensive income — currency translation adjustment			74			262
	Treasury stock, at cost, 1,831,965 shares			(963	)		(963	)

		Total shareholders’ equity		262,337			259,853

		Total liabilities and shareholders’ equity	$	411,136		$	425,048

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
			December 31,

			2003			2002

(In thousands, except share and per share data)			(unaudited)
Revenues ⁽¹⁾			$	74,107		$	60,559
Cost of revenues ⁽²⁾ ⁽³⁾				43,735			32,646

		Gross margin		30,372			27,913

Operating expenses:
	Selling, general and administrative expenses ⁽³⁾			15,260			12,204
	Research and development expenses ⁽³⁾			10,190			6,629
	Stock-based compensation expense			511			556

		Total operating expenses		25,961			19,389

Income from operations				4,411			8,524
Interest expense, net				485			76
Other income				(595	)		(441	)

		Income before income taxes and minority interest		4,521			8,889

Provision (benefit) for income taxes:
	Current			2,880			3,500
	Deferred			(1,181	)		(8	)

				1,699			3,492

Income before minority interest				2,822			5,397
Amount applicable to minority interest, net of taxes				2,105			2,013

		Net income	$	717		$	3,384

Earnings per share (Note 2):
	Basic		$	0.02		$	0.08
	Diluted		$	0.02		$	0.07
Weighted average shares:
	Basic			44,331,007			42,103,795
	Diluted			46,321,070			46,660,775

⁽¹⁾ Includes revenues through related parties			$	33,471		$	25,254
⁽²⁾ Includes cost of revenues through related parties			$	22,479		$	14,674
⁽³⁾ Excludes stock-based compensation expense as follows:
		Cost of revenues	$	56		$	66
		Selling, general and administrative expenses		348			389
		Research and development expenses		107			101

			$	511		$	556

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


					Three Months Ended
					December 31,

					2003			2002

(In thousands, except share and per share data)					(unaudited)
Cash flows provided by operating activities:
	Net income				$	717		$	3,384
	Adjustments to reconcile net income to net cash provided by operating activities:
		Minority interest in income of subsidiaries				2,105			2,013
		Depreciation and amortization				3,984			2,575
		Accretion of discount on marketable securities				—			(31	)
		Deferred tax benefit				(1,181	)		(8	)
		Provision for bad debts				190			340
		Equity in income of equity investees				(78	)		(122	)
		Stock-based compensation expense				511			556
		Loss on disposal of machinery and equipment				33			—
		Tax benefit realized from exercises of employee stock options				320			—
		Changes in operating assets and liabilities:
			Accounts receivable			30,130			17,856
			Inventories			(20,713	)		(11,856	)
			Prepaid expenses and other current assets			459			305
			Accounts payable			(1,766	)		(1,250	)
			Accrued payroll and benefits			(5,045	)		(4,033	)
			Customer advances			2,204			261
			Accrued warranty expense			(210	)		(794	)
			Income taxes payable			(4,139	)		(5,513	)
			Other accrued expenses			(1,825	)		(564	)

				Net cash provided by operating activities		5,696			3,119

Cash flows used in investing activities:
	Additions to property and equipment					(10,055	)		(8,099	)
	Purchase of marketable securities					—			(6,095	)
	Proceeds from sale of marketable securities					—			6,750
	Proceeds from the sale of other assets					4,781			—
	Additions to other assets					(84	)		(78	)

				Net cash used in investing activities		(5,358	)		(7,522	)

Cash flows (used in) provided by financing activities:
	(Decrease) increase in cash management clearing					(5,751	)		1,661
	Proceeds from exercise of stock options					314			1,464
	Proceeds from issuance of common stock					808			1,287
	Issuance of long-term debt					—			321
	Principal payments on long-term debt and capital lease obligations					(947	)		(947	)
	Draws on line of credit					7,785			16,992
	Payments under line of credit					(7,785	)		(16,421	)

				Net cash (used in) provided by financing activities		(5,576	)		4,357

Effect of foreign currency exchange rates on cash and cash equivalents						(311	)		489

Net (decrease) increase in cash and cash equivalents						(5,549	)		443
Cash and cash equivalents, beginning of year						49,978			84,553

Cash and cash equivalents, end of period					$	44,429		$	84,996

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

CTI MOLECULAR IMAGING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share data)

1. Organization and Presentation

The unaudited condensed consolidated financial statements include the accounts of CTI Molecular Imaging, Inc. (CTI) and all of its subsidiaries (the Company). All of the subsidiaries are wholly owned except for CTI PET Systems, Inc. (CPS) in which CTI owns 50.1%. The balance of CPS is owned by Siemens Medical Solutions USA, Inc. (Siemens).

The Company’s products and services can be broadly classified into three principal categories: Positron Emission Tomography (PET) scanners, detector materials, and other PET products and services. CPS manages the development, production and distribution of the ECAT® line of PET scanners. Detector Materials develops and manufactures detector materials used in PET scanners manufactured by CPS. CTI Solutions includes the production and distribution of radiopharmaceuticals and the direct sale and service by CTI of PET scanners, cyclotron systems, workstations and other PET related products. The CTI Solutions segment was formed effective October 1, 2003 and reflects the combination of the former CTI Services and PETNET segments, which previously were separately reported.

2. Summary of Significant Accounting Policies

Interim Financial Statements — The unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on December 23, 2003. Information in the accompanying condensed consolidated financial statements and notes to the financial statements for the three month periods ended December 31, 2003 and 2002 are unaudited. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented have been included. Operating results for the three month period ended December 31, 2003 are not necessarily indicative of the results that may be expected for the year ending September 30, 2004 or any future period.

Principles of Consolidation — All significant intercompany balances and transactions have been eliminated. The Company periodically enters into arrangements in which it holds a majority of the equity ownership. In some instances, the Company also has influence over a majority of the board of directors or managers. The Company determines accounting for these investments under Statement of Financial Accounting Standard (SFAS) No. 94 and Accounting Principles Board (APB) Opinion No. 18 and, where appropriate, evaluates its and the minority shareholders’ participating rights in accordance with Emerging Issues Task Force (EITF) Issue 96-16 to determine whether consolidation or equity method accounting is appropriate in each case.

CTI owns a majority interest in CPS. Under the terms of the CPS operating agreement, CTI has influence over a majority of the board of directors. Decisions deemed participating rights, including approval of operating budgets and management compensation, are determined by a majority vote of the board of directors. The board of directors of CPS consists of two directors selected by CTI, two directors selected by Siemens, and a fifth director selected by Siemens from a list of persons selected by CTI. Neither Siemens nor any member of the board of directors of CPS who was selected or nominated by Siemens has any substantive participating or veto rights with regard to significant operating, budget, capital and other decisions. CPS is consolidated in the Company’s financial statements.

CTI Solutions through our subsidiary, PETNET Pharmaceuticals, Inc. (PETNET), owns 90.0% and 51.0% interests in radiopharmacies in Denver and Houston, respectively. Under the terms of the Denver and Houston radiopharmacy operating agreements, CTI Solutions has control over all significant operating decisions and these radiopharmacies are consolidated in our financial statements. CTI Solutions accounted for the Houston joint venture

under the equity method in the financial statements for the three months ended December 31, 2002 in accordance with EITF 96-16. In March 2003, an amendment to the joint venture agreement was adopted that removed the participating rights of the minority partner. Accordingly, CTI Solutions is now deemed to have control over the significant operating decisions of the joint venture and the entity is consolidated in the Company’s financial statements effective March 1, 2003.

In cases where the minority shareholder is deemed to have “veto rights” or has equal representation on the board of directors, the Company accounts for these investments using the equity method as the Company does not have control over significant operating decisions. The Company has invested in four radiopharmacies that are accounted for under the equity method. The Company is assessing the potential impact of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51. See the Recent Accounting Pronouncements section of this note below.

Revenue Recognition — The Company records revenues in accordance with the guidance of the SEC’s Staff Accounting Bulletin No. 104 (SAB 104), which supercedes SAB 101 in order to encompass EITF Issue 00-21, Revenue Arrangements with Multiple Deliverables (EITF 00-21). Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the contract price is fixed or determinable, and collectibility is reasonably assured. No right of return privileges are granted to customers after shipment.

The Company accounts for sales of scanning equipment and related installation and associated training services as multiple-element arrangements. The Company recognizes revenue for the elements separately as (i) the sales of the equipment, installation and training services represent separate earnings processes, (ii) revenue is allocated among the elements based on the fair value of the elements and (iii) installation and associated training are not deemed essential to the functionality of the equipment (as other companies are available to provide the installation and associated training services and are sometimes employed by CTI to do so). The Company determines the value of the equipment and installation and training services based on sales of the equipment both with and without installation and training. The Company derives its revenues from sales of scanners, calibration sources, spare parts, detector materials, cyclotrons, radiopharmaceuticals and the provision of services on equipment sold, including site planning and installation, repair and maintenance, training, technical support and assistance with licensing. Revenues derived from the sale of scanners, calibration sources, spare parts, and detector materials are recognized upon either shipment or arrival at destination depending on shipment terms.

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

	•		our critical accounting policies;

	•		the timing of the exercisability of the Siemens option to purchase an additional ownership interest in CTI PET Systems, Inc. (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 and the market acceptance of CTI’s products and services;

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

	•		competition, pricing, the seasonality of capital equipment sales, the timing of orders from and shipments to distribution partners and customers, and the availability of financing services for customers;

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

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

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

	•		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;

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

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