Positron Corporation 10-QSB 09-30-2006
 
 FORM 10-QSB
 SEPTEMBER 30, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006.

£
TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO ______________.


Commission file number: 0-24092

Positron Corporation

(Exact name of small business issuer as specified in its charter)

Texas
76-0083622
(State of incorporation)
(IRS Employer Identification No.)

1304 Langham Creek Drive, Suite 300, Houston, Texas 77084
(Address of principal executive offices)

(281) 492-7100
(Issuer's telephone number)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark 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
T
No
£
  

As of November 14, 2006, there were 85,205,202 shares of the Registrant’s Common Stock, $.01 par value outstanding.
 
Transitional Small Business Disclosure Format (check one).  Yes   £      No   T
 
1
 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
POSITRON CORPORATION
TABLE OF CONTENTS
Form 10-QSB for the quarter ended September 30, 2006

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 FORM 10-QSB
 SEPTEMBER 30, 2006
 
PART 1 - FINANCIAL INFORMATION

ITEM 1. Financial Statements

POSITRON CORPORATION

BALANCE SHEET
(In thousands, except share data)
 
   
September
30, 2006
(Unaudited)
  
December
31, 2005
  
ASSETS
          
Current assets:
          
Cash and cash equivalents
 
$
57
  
$
209
  
Accounts receivable
    
51
    
--
  
Inventories
    
200
    
202
  
Prepaid expenses
    
--
    
66
  
Receivable from affiliated entities
    
287
    
--
  
Other current assets
    
--
    
21
  
               
Total current assets
    
595
    
498
  
               
Investment In Joint Ventures
    
572
    
230
  
Property and equipment, net
    
88
    
120
  
Deferred loan costs
    
196
    
12
  
Other assets
    
87
    
45
  
Total assets
  
$
1,538
  
$
905
  
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
              
Current liabilities:
              
Accounts payable, trade and accrued liabilities
  
$
1,384
  
$
1,709
  
               
Unearned revenue
    
211
    
66
  
Deposits for Unissued Series G Preferred Stock
    
--
    
195
  
Convertible notes payable to affiliated entity, less discount of $890
    
--
    
627
  
               
Total current liabilities
    
1,595
    
2,597
  
               
Convertible notes payable to affiliated entities
    
--
    
1,216
  
Convertible notes payable, less discount of $1,267
    
33
    
--
  
Derivative liabilities for convertible debentures
    
2,195
    
--
  
               
Total liabilities
    
3,823
    
3,813
  
               
Stockholders’ equity (deficit):
              
Series A Preferred Stock: $1.00 par value; 8% cumulative, convertible, redeemable; 5,450,000 shares authorized; 464,319 shares issued and outstanding
    
464
    
464
  
Series B Preferred Stock: $1.00 par value; convertible, redeemable 9,000,000 shares authorized; 1,639,861 shares issued and outstanding
    
1,640
        
Series C Preferred Stock: $1.00 par value; 6% cumulative, convertible, redeemable; 840,000 shares authorized; 770,000 shares issued and outstanding
    
--
    
770
  
Series G Preferred Stock: $1.00 par value; 8% cumulative, convertible, redeemable; 3,000,000 shares authorized; 204,482 shares issued and outstanding
    
204
    
--
  
Common Stock: $0.01 par value; 800,000,000 and 100,000,000 shares authorized; 85,205,202 shares issued and 85,145,046 outstanding, and 77,835,202 shares issued and 77,775,046 shares outstanding
    
852
    
778
  
Additional paid-in capital
    
61,730
    
57,364
  
Subscription receivable
    
--
    
(30
)
Accumulated deficit
    
(67,160
)
  
(62,239
)
Treasury Stock: 60,156 common shares at cost
    
(15
)
  
(15
)
               
Total stockholders’ equity (deficit)
    
(2,285
)
  
(2,908
)
               
Total liabilities and stockholders’ equity
  
$
1,538
  
$
905
  
 
See accompanying notes
 
 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
POSITRON CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
   
Three Months Ended
  
Nine Months Ended
  
   
September
30, 2006
  
September
30, 2005
  
September
30, 2006
  
September 30,
2005
  
Revenues:
  
 
  
 
          
System sales
  
$
200
  
$
--
  
$
200
  
$
--
  
Upgrades
    
--
    
3
    
--
    
37
  
Service and component
    
223
    
175
    
687
    
525
  
                           
Total revenues
    
423
    
178
    
887
    
562
  
                           
Costs of revenues:
                          
System sales
    
50
    
84
    
50
    
260
  
Upgrades
    
--
    
--
    
--
    
8
  
Service, warranty and component
    
210
    
50
    
538
    
176
  
                           
Total costs of revenues
    
260
    
134
    
588
    
444
  
                           
Gross profit
   
163
    
44
    
299
    
118
  
                           
Operating expenses:
                          
Research and development
    
162
    
92
    
422
    
352
  
Selling and marketing
    
37
    
127
    
482
    
570
  
General and administrative
    
287
    
457
    
1,194
    
1,165
  
Stock based compensation
    
(61
)
  
(61
)
  
159
    
(163
)
                           
Total operating expenses
    
425
    
615
    
2,257
    
1,924
  
                           
Loss from operations
    
(262
)
  
(571
)
  
(1,958
)
  
(1,806
)
                           
Other income (expense)
                          
Interest Income
    
--
    
--
    
--
    
1
  
Interest expense
    
(281
)
  
(284
)
  
(851
)
  
(637
)
Derivative gains (losses)
    
73
    
--
    
(1,815
)
  
--
  
Equity in losses of joint ventures
    
(179
)
  
--
    
(297
)
  
--
  
                           
Total other income (expense)
    
(387
)
  
(284
)
  
(2,963
)
  
(636
)
                           
Net loss
  
$
(649
)
$
(855
)
$
(4,921
)
$
(2,442
)
                           
Basic and diluted loss per common share
  
$
(0.01
)
$
(0.01
)
$
(0.06
)
$
(0.04
)
                           
                           
Weighted average number of basic and diluted common shares outstanding
    
82,056
    
76,325
    
80,019
    
61,050
  

See accompanying notes

 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
POSITRON CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
   
Nine Months Ended
  
   
September
30, 2006
  
September
30, 2005
  
           
Cash flows from operating activities:
          
Net loss
  
$
(4,921
)
$
(2,442
)
Adjustment to reconcile net loss to net cash used in operating activities
              
Depreciation
   
38
    
58
  
Amortization of loan costs, debt discount and beneficial conversion features
    
630
    
441
  
Stock based compensation
    
159
    
(164
)
Loss on derivative liabilities
    
1,815
    
--
  
Common stock issued for services
    
361
    
--
  
Equity in losses of joint ventures
    
297
    
--
  
Changes in operating assets and liabilities:
              
Accounts receivable
    
(51
)
  
--
  
Inventory
    
2
    
(94
)
Prepaid expenses
    
66
    
27
  
Other current assets
    
22
    
(12
)
Field service parts and supplies
    
5
    
(1
)
Accounts payable and accrued liabilities
    
78
    
205
  
Unearned revenue
    
145
    
(28
)
               
Net cash used in operating activities
    
(1,354
)
  
(2,010
)
               
Cash flows from investing activities:
              
Investment in joint ventures
    
(638
)
  
--
  
Purchase of property and equipment
    
(4
)
  
(19
)
Purchase of software license
    
(50
)
  
--
  
               
Net cash used in investing activities
    
(692
)
  
(19
)
               
Cash flows from financing activities:
              
Proceeds from notes payable to an affiliated entity
    
200
    
2,050
  
Proceeds from issuance of convertible securities, net
    
1,080
    
--
  
Proceeds from issuance Series G Preferred Stock, net
    
901
    
--
  
Advance to affiliated entities
    
(287
)
  
--
  
               
Net cash provided by financing activities
    
1,894
    
2,050
  
               
Net (decrease) increase in cash and cash equivalents
    
(152
)
  
21
  
               
Cash and cash equivalents, beginning of period
    
209
    
133
  
               
Cash and cash equivalents, end of period
  
$
57
  
$
154
  
Supplemental cash flow information:
              
Interest paid
  
$
--
  
$
--
  
Income taxes paid
    
--
    
--
  
Non-cash disclosures
              
Issuance of common stock to satisfy severance obligation
  
$
25
  
$
--
  
Convertible debenture discount with corresponding increase to paid in capital for value of warranty
  
$
919
  
$
--
  
Convertible debenture discount with corresponding increase to derivative liabilities for beneficial conversion feature
  
$
2,268
  
$
--
  
Issuance of Series B Preferred Stock to satisfy accrued interest obligation
 
$
380
  
$
--
  
Conversion of debentures to Series B Preferred Stock
  
$
2,934
  
$
--
  
Conversion of Series C Preferred Stock to Series B Preferred Stock
  
$
770
  
$
--
  

See accompanying notes
 
 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
POSITRON CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
 
1.
Basis of Presentation

The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles and the rules of the U.S. Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Annual Report on Form 10-KSB for Positron Corporation (the “Company”) for the year ended December 31, 2005. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year ended December 31, 2005, as reported in the Form 10-KSB, have been omitted.

2.
Accounting Policies

Revenue Recognition

Revenues from POSICAMTM 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.

Stock-Based Compensation

Effective January 1, 2006 the Company adopted the revision to SFAS 123 (“SFAS 123R”), “Share-Based Payment”, that focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions utilizing the modified prospective method. This statement replaces SFAS 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123R requires companies to expense the fair value of employee stock options and similar awards.

3.
Going Concern

Since its inception, the Company has been unable to sell POSICAM™ systems in quantities sufficient to be operationally profitable. Consequently, the Company has sustained substantial losses. At September 30, 2006, the Company had an accumulated deficit of $67,160,314 and a stockholders’ deficit of $2,284,987. 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 from year to year.

The Company utilized net proceeds of $901,000 from the issuance of Series G Preferred Stock and $1,080,000 from notes payable to fund its operating activities for the nine month period ended September 30, 2006. As a result, the Company had cash and cash equivalents of $57,000 at September 30, 2006. At the same date, the Company had accounts payable and accrued liabilities of $1,384,000. In addition, debt service and working capital requirements for the upcoming year may reach beyond current cash balances. The Company plans to continue to raise funds as required through equity and debt financings to sustain business operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

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.

 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
4.
Inventories

Inventories at September 30, 2006 and December 31, 2005 consisted of the following (in thousands):

   
September
30, 2006
  
Dec. 31,
2005
  
Raw materials
  
$
211
  
$
235
  
Work in process
    
39
    
17
  
Subtotal
    
250
    
252
  
Less reserve for obsolescence
    
(50
)
  
(50
)
Total
  
$
200
  
$
202
  

5.
Investment in Joint Ventures

Neusoft Positron Medical Systems Co. Ltd.

The Company has entered into a joint venture with a Chinese company for the production of its PET scanners. On June 30, 2005 the Company entered into a Joint Venture Contract with Neusoft Medical Systems Co., Inc. of Shenyang, Lianoning Province, People's Republic of China ("Neusoft"). Pursuant to the Joint Venture Contract the parties formed a jointly-owned company, Neusoft Positron Medical Systems Co., Ltd. (the "JV Company"), to engage in the manufacturing of PET and CT/PET medical imaging equipment. The JV Company received its business license and was organized in September 2005.

The Company and Neusoft are active in researching, developing, manufacturing, marketing and/or selling Positron Emission Tomography ("PET") technology and both parties seek to mutually benefit from each other's strengths, and intend to cooperate in the research, development and manufacturing of PET technology. The purpose and scope of the JV Company's technology business is to research, develop and manufacture Positron Emission Tomography systems (PET), and an integrated X-ray Computed Tomography system (CT) and PET system (PET/CT), and to otherwise provide relevant technical consultation and services.

The parties to the joint venture contributed an aggregate of US $2,000,000 in capital contributions. Neusoft's aggregate contribution to the capital of the JV Company is 67.5% of the total registered capital of the Company, or US$ 1,350,000, and was made in cash. The Company's aggregate contribution to the capital of the JV Company is 32.5% of the total registered capital of the Company, or US$ 650,000, of which US$ 250,000 was made in cash, and US$ 400,000 was made in the form of a technology license. The Company has transferred to the JV Company certain of its PET technology, while Neusoft made available to the JV Company certain CT technology for the development and production of an integrated PET/CT system. The parties will share the profits, losses and risks of the JV Company in proportion to and, in the event of losses, to the extent of their respective contributions to the registered capital of the JV Company.
 
 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
CONDENSED FINANCIAL STATEMENTS FOR THE JV COMPANY

NEUSOFT POSITRON MEDICAL SYSTEMS CO., LTD.
CONDENSED BALANCE SHEET
September 30, 2006
(In thousands)

ASSETS
      
       
Current assets:
      
Cash and cash equivalents
  
$
366
  
Other current assets
    
516
  
Total current assets
    
882
  
         
Intangibles and other assets
    
652
  
         
Total assets
  
$
1,534
  
         
CAPITAL
        
         
Capital
    
1,534
  
         
Total capital
  
$
1,534
  


NEUSOFT POSITRON MEDICAL SYSTEMS CO., LTD.
CONDENSED STATEMENT OF OPERATIONS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006
(in thousands)
 
Revenue
  
$
--
  
         
Expense
        
General and administrative expense
    
406
  
Total expense
    
406
  
         
Net loss
  
$
(406
)

Imaging PET Technologies Inc.

The Company and Quantum Molecular Pharmaceuticals Inc., a Canadian radiopharmaceutical corporation (“Quantum”) acquired all of the operating assets of IS2 Medical Systems Inc., a developer and manufacturer of nuclear imaging devices based in Ottawa, Ontario, Canada (“IS2”) through a minority-owned subsidiary of the Company, Imaging PET Technologies, Inc. (“IPT”). The Company and Quantum hold 49.9% and 50.1%, respectively, of the total registered capital of IPT. On May 8, 2006, to finalize certain obligations of Quantum related to the Quantum Molecular Technologies Joint Venture, the Company agreed to issue Series B Convertible Preferred Stock (the “Series B”), convertible into 65,000,000 shares of the Company’s common stock, to IPT in exchange for a promissory note in the amount of $1,300,000. See, Quantum Molecular Technologies Joint Venture, below.

 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
On June 5, 2006, IPT completed the acquisition of IS2. Pursuant to an assumption agreement with IS2 and assignment agreements with IS2’s secured debt holders, IPT acquired all of IS2’s operating assets and assumed certain of its liabilities.

CONDENSED FINANCIAL STATEMENTS FOR IPT

IMAGING PET TECHNOLOGIES, INC.
CONDENSED BALANCE SHEET
September 30, 2006
(in thousands)

ASSETS
      
       
Current assets:
      
Cash and cash equivalents
  
$
156
  
Inventories
    
1,867
  
Other current assets
    
611
  
Total current assets
    
2,634
  
         
Fixed and other assets
    
143
  
         
Total assets
  
$
2,777
  
         
LIABILITIES AND CAPITAL
        
         
Current liabilities:
        
Accounts payable and other current liabilities
  
$
1,485
  
Total current liabilities
    
1,485
  
         
Non-current liabilities
    
4
  
         
Total liabilities
    
1,489
  
         
Capital
    
1,288
  
         
Total liabilities and capital
  
$
2,777
  

IMAGING PET TECHNOLOGIES, INC.
CONDENSED STATEMENT OF OPERATIONS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2006
(in thousands)
 
Revenue
  
$
1,650
  
         
Cost of goods sold
    
1,347
  
         
Gross profit
    
303
  
         
Expenses
        
Operating expenses
    
597
  
Other expenses
   
38
  
         
Net loss
  
$
(332
)
 
 
 FORM 10-QSB
 SEPTEMBER 30, 2006

 
Quantum Molecular Technologies Joint Venture

On May 8, 2006, the Company amended certain aspects of the Quantum Molecular Technologies Joint Venture (“QMT”) formed with Quantum Molecular Pharmaceuticals, Inc. and IMAGIN Diagnostics Centres, Inc. on December 28, 2005. QMT is developing certain next generation technologies including PET-enabled surgical tools and solid-state photo detector technology, which have implications in both molecular imaging and PET and could have further application in the military and aerospace segments. The first solid-state detector technology patent has been filed by QMT.

Whereas the Company originally held 20% of the interests of QMT, Quantum and IMAGIN assigned 100% of their interests in QMT to the Company. Additionally, the investment amount Quantum and IMAGIN originally committed to in the amount of $4,000,000 was restated to $2,400,000 to reflect the assignment of the QMT interests and participation by the Company in the IPT joint venture and subsequent financing. The investment will be in the form of installment payments, the first of which is due on October 1, 2006. In exchange for the assignment of QMT interests and the investments, the Company will issue Series B Convertible Preferred Stock, convertible into 345,000,000 shares of the Company’s common stock to Quantum and IMAGIN, pro rata. The installment payments are secured by the pledge of the Series B, which have been authorized but not yet issued by the Company.

6.
Other Assets

Other assets at September 30, 2006 and December 31, 2005 consisted of the following (in thousands):

   
Sept. 30,
2006
  
Dec. 31,
2005
  
Field service parts and supplies
  
$
39
  
$
45
  
Software license
    
48
    
--
  
Total
  
$
87
  
$
45
  

7.
Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities at September 30, 2006 and December 31, 2005 consisted of the following (in thousands):

   
Sept. 30,
2006
  
Dec. 31,
2005
  
Trade accounts payable
  
$
416
  
$
441
  
Accrued royalties
    
366
    
352
  
Sales taxes payable
    
255
    
236
  
Accrued interest
    
25
    
260
  
Accrued compensation
    
120
    
159
  
Accrued property taxes
    
111
    
113
  
Accrued professional fees
    
50
    
80
  
Customer deposits
    
15
    
15
  
Other accrued liabilities
    
26
    
53
  
Total
  
$
1,384
  
$
1,709
  
 
 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
Accrued compensation includes severance payments payable to the Company's former Chief Executive Officer, Gary H. Brooks. Mr. Brooks resigned effective September 29, 2005. In connection with his resignation, the Company agreed to make severance payments to Mr. Brooks of $18,583.33 per month for a period of six months, and to extend the expiration date of options held by Mr. Brooks through September 30, 2006, and warrants held by Mr. Brooks until the later of (i) October 31, 2007 for 7,000,000 warrants and June 30, 2009 for 500,000 warrants, and (ii) the date on which a registration statement filed with the Securities Exchange Commission permitting a sale of the shares underlying such warrants shall have become effective and shall have remained effective for a period of six months. The Company owed approximately $55,000 on this severance obligation at September 30, 2006.

8.
Convertible Notes Payable to Affiliated Entities

Notes payable to affiliated entities at September 30, 2006 and December 31, 2005 consisted of the following (in thousands):

   
Sept. 30,
2006
  
Dec. 31,
2005
  
IMAGIN Diagnostic Centres, Inc., less discount of $610
  
$
--
  
$
1,096
  
Positron Acquisition Corp., less discount of $6
    
--
    
627
  
Quantum Molecular Pharmaceuticals, Inc., less discount of $280
    
--
    
120
  
               
Total
  
$
--
  
$
1,843
  
 
In January 2006, the Company received the final $100,000 installment of funds from the October 31, 2005 sale of $400,000 worth of 10% convertible promissory notes to IMAGIN Diagnostic Centres, Inc.
 
On March 17, 2006, IMAGIN Diagnostic Centres, Inc. assigned to Positron Acquisition Corp. its interest in 770,000 shares of the Company’s Series C Preferred Stock, 4,026,000 shares of the Company’s common stock and the Company’s secured convertible notes in the aggregate principal amount of $696,850, which are convertible into 696,850 shares of the Company’s Series D Preferred Stock and in turn are convertible into 27,874,000 shares of the Company’s common stock.
 
The Company converted all outstanding convertible notes payable and accrued interest due to affiliated entities to Series B Preferred Stock (see note 9). Following is a description of each conversion:

The Company and Imagin Diagnostic Centres, Inc converted principal and interest of $1,164,192 outstanding upon the Series E Convertible Promissory Notes and principal and interest of $877,669 of Convertible Secured Notes into 690,930.5 shares of Series B Preferred Stock.

The Company and Positron Acquisition Corp. converted principal and interest of $818,066 outstanding upon the Series D Secured Convertible Promissory Notes and 770,000 shares of Series C Preferred Stock into 762,358 shares of Series B Preferred Stock. Positron Acquisition Corp. subsequently converted 40,000 shares of Series B Preferred Stock into 4,000,000 shares of the Company’s Common Stock.

 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
The Company and Quantum Molecular Pharmaceuticals, Inc. converted principal and interest of $453,144 outstanding upon the Series F Secured Convertible Promissory Notes into 226,572 shares of Series B Preferred Stock.

9.
Series B Preferred Stock

On September 30, 2006 the Board of Directors authorized a new series of preferred stock designated Series B Preferred Stock. The number of shares authorized was 9,000,000. Each share of Series B Preferred Stock $1.00 par value is convertible into 100 shares of the Company’s Common Stock. The Series B Preferred Stock is senior to the Company’s Common Stock and junior in priority to the Company’s A, C, D, E and F Preferred Stock in liquidation. Holders of the Series B Preferred Stock are entitled to 100 votes per share on all matters requiring shareholder vote. While Series B Preferred Stock is outstanding no Common Stock dividends may be paid or declared by the Company. The Series B Preferred Stock may be redeemed in whole or in part, at the option of the Company, at any time at a price of $1.00 per share. As of September 30, 2006, 1,639,860.5 shares of Series B Preferred Stock were outstanding and the Company had commitments to issue an additional 4,100,000 shares of Series B Preferred Stock.

10.
Stockholders’ Equity

As discussed in Note 8, the Company and various holders of Secured Convertible Promissory Notes and Series C Preferred Stock converted the debt and equity into 1,679,861 shares of Series B Preferred Stock. Subsequently, 40,000 shares of Series B Preferred Stock were converted to 4,000,000 shares of the Company’s common stock.

The Company’s former Chief Executive Officer, Gary H. Brooks, exercised options for the purchase of 500,000 shares of common stock in the first quarter of 2006. The exercise of these options resulted in an increase in stockholders’ equity and a decrease in the severance obligation (Note 7) by $25,000.

The Company cancelled subscriptions receivable totaling $30,000 that were due from a former Director and a former Chief Executive Officer. Cancellation of the subscriptions receivable reduced additional paid-in capital.

At the Annual Meeting of Shareholders held May 18, 2006, the shareholders of the Company approved an amendment and restatement to the Articles of Incorporation to increase the number of authorized shares of Common Stock to 800,000,000.

11.
Series G Preferred Stock
 
During the nine months ended September 30, 2006, the Company issued 204,482 Units in a private placement. Each Unit consists of one share of a new series of preferred stock designated Series G Preferred Stock and a warrant exercisable for 50 shares of common stock (the "Units"). The purchase price was $5.50 per Unit, with $5.00 of the Unit purchase price allocated to the purchase of the share of Series G Preferred Stock and $0.50 allocated to the purchase of the warrant, for a total offering amount of $1,124,650. The net proceeds of the private placement were approximately $1,096,000.

 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
Each share of Series G Preferred Stock is convertible into 100 shares of common stock. Eight percent dividends accrue on the Series G Preferred Stock and may be paid in cash or in Common Stock in the Company's discretion. The Series G Preferred Stock is senior to the Company's common stock and junior in priority to the Registrant's Series A, C, D, E and F Preferred Stock in liquidation. Except as required by law and in the case of various actions affecting the rights of the Series G Preferred Stock, holders of the Series G Preferred Stock are not entitled to vote on matters requiring shareholder vote. While the Series G Preferred Stock is outstanding or any dividends thereon remain unpaid, no common stock dividends may be paid or declared by the Company. The Series G Preferred Stock may be redeemed in whole or in part, at the option of the Company, at any time at a price of $5.00 per share plus any undeclared and/or unpaid dividends to the date of redemption. 

12.
Secured Convertible Notes Payable

Pursuant to the terms of a Security Agreement and a Registration Rights Agreement (the “Agreements”) dated May 23, 2006, the Company agreed to issue to private investors (the “Investors”) callable secured convertible notes (the “Debentures”) in the amount of $2,000,000, with interest at the rate of 6% annually. The Debentures are convertible into shares of the Company’s Common Stock at the product of the “Applicable Percentage” and the average of the lowest three (3) trading prices for the common stock during the twenty (20) day period prior to conversion. Applicable Percentage is 50%; provided, however that the percentage shall be increased to (i) 55% in the event that a Registration Statement is filed within thirty days of the closing of the transaction and (ii) 65% in the event the Registration Statement becomes effective within one hundred and twenty days of the closing of the transaction. The Company filed a Registration Statement on June 20, 2006. The Company may repay principal and interest in cash in the event that the price of the Company’s Common Stock is below $0.20 on the last business day of a month. Pursuant to the terms of the Agreements, the Company issued to the Investors warrants to purchase 30,000,000 shares of Common Stock at an exercise price of $0.15 per share. These warrants are exercisable seven (7) years from the closing of the transaction.

On May 23, 2006 the Company issued Debentures in the amount of $700,000 with a maturity date of May 23, 2009. On June 21, 2006 the Company issued Debentures in the amount of $600,000 with a maturity date of June 21, 2009. Pursuant to the terms of the Agreements, the Company shall issue Debentures and receive the third traunch in the amount of $700,000 when the Registration Statement is declared effective by the Securities and Exchange Commission. Legal and other fees incurred in conjunction with the Debentures issued on May 23, 2006 and June 21, 2006 were $130,000 and $90,000, respectively and are being amortized over the maturity periods of the Debentures.

As a result of the beneficial conversion features contained in the Convertible Debentures, the derivatives embedded in the Debentures have been classified as derivative liabilities. Fair value of the embedded derivatives is determined using the Black Sholes Valuation Method. The combined liabilities recorded during the nine months ended September 30, 2006 totaled $2,195,000. Of such amount, $380,600 was recorded as debt discount and is being amortized over the term of the Debentures and $1,814,000 was charged to loss on derivative obligations during the nine months ended September 30, 2006. The Company recorded a gain on derivative obligations of $73,000 for the three months ended September 30, 2006. Additionally, the Company recorded a discount of $919,400 against the Convertible Debentures for the fair market value of the warrants issued. The discount, which was recorded as an increase to additional paid-in capital, is being amortized to interest expense over the term of the Debentures, utilizing the effective interest method.
 
 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
13.
Loss Per Share

Basic loss per common share is based on the weighted average number of common shares outstanding in each period and earnings adjusted for preferred stock dividend requirements. Diluted earnings per common share assume that any dilutive convertible preferred shares outstanding at the beginning of each period were converted at those dates, with related interest, preferred stock dividend requirements and outstanding common shares adjusted accordingly. It also assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options and warrants for which market price exceeds exercise price, less shares which could have been purchased by the Company with related proceeds. The convertible preferred stock and outstanding stock options and warrants were not included in the computation of diluted earnings per common share for the three and nine month periods ended September 30, 2006 and 2005 since it would have resulted in an antidilutive effect.

The following table sets forth the computation of basic and diluted earnings per share.

   
Three Months Ended
  
Nine Months Ended
  
   
Sept. 30,
2006
  
Sept. 30,
2005
  
Sept. 30,
2006
  
Sept. 30,
2005
  
   
(In Thousands, except per share data)
  
Numerator
                  
Basic and diluted loss
  
$
(649
)
$
(855
)
$
(4,921
)
$
(2,442
)
                           
Denominator
                          
Basic and diluted earnings per share-weighted average shares outstanding
    
82,056
    
76,325
    
80,019
    
61,050
  
                           
Basic and diluted loss per common share
  
$
(0.01
)
$
(0.01
)
$
(0.06
)
$
(0.04
)
 
14. 
Litigation
 
From time to time the Company may be involved in various legal actions in the normal course of business for which the Company maintains insurance. The Company is currently not aware of any material litigation affecting the Company.

15.
Stock Based Compensation
 
In connection with the May 2004 transaction with IMAGIN, the Company re-priced various options and warrants to employees that are subject to the variable accounting rules. The market price of the Company’s common stock decreased $0.03 from $0.12 at December 31, 2004 to $0.09 at September 30, 2005. Due to the decline in price, application of the variable accounting rules resulted in the reversal of stock based compensation by $163,000 during the nine month period ended September 30, 2005.

Effective January 1, 2006 the Company adopted the revision to SFAS 123 (“SFAS 123R”), “Share-Based Payment”, that focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions utilizing the modified prospective method. This statement replaces SFAS 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123R requires companies to expense the fair value of employee stock options and similar awards. The Company estimates the amount of stock-based compensation expense related to currently outstanding options to be approximately ($61,000) and $159,000 for the three and nine months ended September 30, 2006, respectively.

 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
The expected life of the options is determined using a simplified method, computed as the average of the option vesting periods and the contractual term of the option. For performance based options that vest upon the occurrence of an event, the Company uses an estimate of when the event will occur as the vesting period used in the Black-Scholes calculation for each option grant.

Based on the Company’s previous two years’ forfeitures, the Company has adjusted the calculated value of the options for the three and nine months ended September 30, 2006 using a 32.1% average estimated forfeiture rate.

16.
Stock Based Incentive Plan

On April 10, 2006, the Company’s Board of Directors adopted a 2006 Stock Incentive Plan (“2006 Plan”). The 2006 Plan is administered by the Board and provides for the direct issuance of stock and grants of nonqualified stock options to directors, officers, employees and consultants. The administrator is authorized to determine the terms of each award granted under the plan, including the number of shares, exercise price, term and exercisability. Stock and options may be granted for services rendered or to be rendered. A total of 5,000,000 shares of common stock have been authorized for issuance under the 2006 Plan. The Company issued 870,000 and 2,870,000 shares of common stock to consultants under the 2006 Plan during the three and nine months ended September 30, 2006, respectively. Accordingly the Company recorded consulting expense equal to the fair market value of the shares issued of $68,900 and $292,000, respectively.

17.
Related Party Transactions

In September 2006, the Company sold Imagin Nuclear Partners (“INP”), a wholly-owned subsidiary of Imagin Molecular Corporation, a refurbished HZL Pet Imaging machine. The sales price of the machine was $200,000. The Company also billed $18,000 for time and expense related to installation. As of September 30, 2006 INP owes the Company $167,290.

As of September 30, 2006 the Company has a receivable in the amount of $119,795 from Neusoft Positron Medical Systems Co. Ltd., for parts and materials purchased on behalf of the joint venture.

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

We are including the following cautionary statement in this Quarterly Report on Form 10-QSB to make applicable and utilize the safe harbor provision of the Private Securities Litigation Reform Act of 1995 regarding 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.

Our expectations, beliefs and projections are expressed in good faith and are believed by us to have a reasonable basis, including without limitations, our examination of historical operating trends, data contained in our records and other data available from third parties, but there can be no assurance that our expectations, beliefs or projections will result, or be achieved, or be accomplished.

Comparison of the Results of Operations for the Three Months ended September 30, 2006 and 2005

We experienced a loss of $649,000 for the three months ended September 30, 2006 compared to a loss of $855,000 for the same quarter in 2005. The decrease in the loss in 2006 is due primarily to an increase in gross profit from $44,000 in 2005 to $163,000 in 2006. A decrease in operating costs from $615,000 to $425,000 for the three months ended September 30, 2005 and 2006, respectively, also contributed to the decrease in the loss.

 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
The Company earned revenue of $200,000 from the sale of a refurbished HZL PET Imaging machine during the three months ended September 30, 2006. The unit which was sold to Imagin Nuclear Partners Corporation had been purchased by the Company during the second quarter. Revenue earned under service contracts was $223,000 during the third quarter. Total revenues for the three month period ended September 30, 2005 were $178,000 of which $175,000 came from service contracts and $3,000 from system upgrades. The increase in service revenue is attributable to several customers executing service contracts after the expiration of their warranties received with the original purchase of their PET systems.

The Company generated gross profits of $163,000 during the three months ended September 30, 2006 compared to gross profits of $44,000 for the same three months in 2005. Costs of sales of the refurbished HZL PET Imaging system were $50,000 which was the Company’s acquisition cost of the unit. Additional costs to refurbish the unit were paid for by Imagin Nuclear Partners. Cost of system revenues for the three months ended September 30, 2005 were $84,000 related to system sales. Cost of revenues associated with service contracts were $210,000 and $50,000 for the three month periods ending September 30, 2006 and 2005, respectively.

Operating expenses decreased $190,000 to $425,000 for the three months ended September 30, 2006 from $615,000 for the same period in 2005. Sales and marketing expense for the three months ended September 30, 2006 decreased to $37,000 from $127,000 for the same period in 2005. This significant decrease resulted primarily from cost cutting efforts by Company management, particularly of sales personnel and related costs. Sales and marketing salaries for the third quarter of 2006 were $16,000 compared to $122,000 during the third quarter of 2005. General and administrative expenses decreased $170,000 to $287,000 during the quarter ended September 30, 2006 from $457,000 in the same period in 2005. The decrease is attributable in large part to a reduction in salaries which were $207,000 during the three months ended September 30, 2005 compared to $90,000 for the same period in 2006. Legal, professional and insurance costs also decreased significantly from a total of $128,000 in 2005 to $27,000 in 2006. The decreases reflect management’s cost cutting efforts necessary to offset declining revenues since there have not been any sales of new systems since 2004.

Interest expense which includes discounts of beneficial conversion features of convertible debt remained consistent from period to period. During the three months ended September 30, 2006 equity in losses of joint ventures was $179,000. The Company’s investments in the joint ventures were made subsequent to the quarter ended September 30, 2005 and therefore no equity adjustments were recorded during the third quarter 2005. Other income for the three months ended September 30, 2006 also includes derivative gains of $73,000.

Comparison of the Results of Operations for the Nine Months ended September 30, 2006 and 2005

The company had net losses of $4,921,000 and $2,442,000 for the nine months ended September 30, 2006 and September 30, 2005, respectively. The increase in the loss in 2006 resulted primarily from increases in general and administrative expenses and derivative losses.

System sales revenues of $200,000 during the nine months ended September 30, 2006 were from the sales of a refurbished system as discussed previously. No system sales revenue was generated during the nine months ended September 30, 2005. Service and component revenues for the first nine months of 2006 were $687,000 compared to $525,000 for the same period in 2005. Increased service revenue is attributed to new service contracts with customers whose warranties on their PET systems expired.

Gross profit for the nine months ended September 30, 2006 was $299,000 or 33.7% compared to $118,000 or 21.0% for the same period in 2005. The refurbished system was sold at a gross profit margin of 75% which contributed to the overall increase for the period. Additionally, the Company has experienced several problems with one particular customer’s system. As a result, the Company has not only incurred significant costs relating to the service but also has allowed the customer to suspend monthly service fees until the problems are corrected. The lost revenues for the quarter approximated $25,000.

 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
Operating expenses increased $333,000 to $2,257,000 for the nine months ended September 30, 2006 from $1,924,000 for the same period in 2005. Research and development expenses increased by $70,000 to $422,000 for the nine months ended September 30, 2006 compared to the same period in 2005. The increase is due mainly to costs associated with the Neusoft Joint Venture. Sales and marketing expenses decreased to $482,000 for the nine months ended September 30, 2006 from $570,000 for the same period in 2005. Decreases in sales and marketing personnel cost attributed in large part to the overall decrease. General and administrative salaries of $247,000 in 2006 are a significant decrease from $425,000 in 2005. Legal and insurance costs in 2006 were $150,000 less than in 2005. General and administrative consulting costs were $287,000 during the nine months ended September 30, 2006 compared to $0 for the same period in 2005. The increase in consulting fees reflects management’s decision to reduce headcount and outsource some critical functions. The company recorded stock based compensation of $159,000 for the nine months ended September 30, 2006. A reversal of stock based compensation of $163,000 relating to the application of the variable accounting rules to the re-pricing of warrants and options was recorded in the first nine months of 2005.

Interest expense of $851,000 for the nine months ended September 30, 2006 is an increase of $214,000 over interest expense of $637,000 for the nine months ended September 30, 2005. The Company issued $1,500,000 of new convertible secured debentures during the nine months ended September 30, 2006. Interest expense in the first nine months of 2006 includes amortization of loan costs, debt discounts and beneficial conversion features on new and existing debt. The Company also recorded derivative losses of $1,815,000 resulting from embedded derivatives with the issuance of convertible debentures during the nine months ended September 30, 2006. For the nine months ended September 30, 2006 the Company recorded equity in the losses of joint ventures of $297,000. These joint ventures did not have any operating activity during the nine months ended September 30, 2005.

Financial Condition

The Company had cash and cash equivalents of $57,000 on September 30, 2006. On the same date, accounts payable and accrued liabilities outstanding totaled $1,384,000. The Company did not sell any new imaging systems in the nine-month period ended September 30, 2006. Sales of imaging systems and/or additional debt or equity financings will eventually be necessary to resolve the Company’s liquidity issues and allow it to continue to operate as a going concern. However, there is no assurance that the Company will be successful in selling new systems or securing additional debt or equity financing.

Since inception, we have been unable to sell our POSICAMTM systems in quantities sufficient to be operationally profitable. Consequently, we have sustained substantial losses. Due to the sizable selling prices of our systems and the limited number of systems sold or placed into service each year, revenues have fluctuated significantly from year to year. We have an accumulated deficit of $67,160,000 at September 30, 2006. The Company will need to increase system sales to achieve profitability in the future.

These events raise doubt as to our ability to continue as a going concern. The report of our independent public accountants, which accompanied our financial statements for the year ended December 31, 2005, was qualified with respect to that risk. If we are unable to obtain debt or equity 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.

New Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standard (“FAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FAS No. 133 and 140.” FAS No. 155 resolves issues addressed in FAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets,” and permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of FAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends FAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. FAS No. 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. The Company is currently evaluating the effect of the adoption of FAS No. 155 but believes it will not have a material impact on its financial position or results of operations.

 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
In March 2006, the FASB issued FAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FAS No. 140.” FAS No. 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract under a transfer of the servicer’s financial assets that meets the requirements for sale accounting, a transfer of the servicer’s financial assets to a qualified special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale or trading securities in accordance with FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates. Additionally, FAS No. 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, permits an entity to choose either the use of an amortization or fair value method for subsequent measurements, permits at initial adoption a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights and requires separate presentation of servicing assets and liabilities subsequently measured at fair value and additional disclosures for all separately recognized servicing assets and liabilities. FAS No. 156 is effective for transactions entered into after the beginning of the first fiscal year that begins after September 15, 2006. The Company is currently evaluating the effect of the adoption of FAS No. 156 but believes it will not have a material impact on its financial position or results of operations.

Critical Accounting Policies

Revenue Recognition

Revenues from POSICAMTM 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.

Stock-Based Compensation

Effective January 1, 2006 the Company adopted the revision to SFAS 123 (“SFAS 123R”), “Share-Based Payment”, that focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions utilizing the modified prospective method. This statement replaces SFAS 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123R requires companies to expense the fair value of employee stock options and similar awards.

ITEM 3 - CONTROLS AND PROCEDURES

As of September 30, 2006, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chairman of the Board 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 Chairman of the Board and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective at a reasonable level. There has been no change in the Company’s internal control 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.
 
 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
The Company’s management, including the Chairman of the Board and Chief Financial Officer, do not expect that the Company’s disclosure controls or internal control over financial reporting 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 II OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

From time to time the Company may be involved in various legal actions in the normal course of business for which the Company maintains insurance. The Company is currently not aware of any material litigation affecting the Company.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On September 30, 2006, the Company reorganized the structure of debt and convertible equity of its three largest finance partners: Positron Acquisition Corporation (“PAC”); Quantum Molecular Pharmaceuticals, Inc. (“QMP”); and Imagin Diagnostic Centres, Inc. (“IDC”). Through this reorganization, the Company converted all of its outstanding convertible debt held by PAC, QMP and IDC, together with all accrued interest and dividends on the convertible notes and the Series C, Series D and Series E Preferred Stock into a new class of the Company’s Series B Convertible Preferred Stock. The Company has designated 9,000,000 shares out of its 10,000,000 shares of authorized preferred stock as Series B Convertible Preferred Stock, $1.00 par value (“Series B Preferred Stock”). Each share of the Series B Preferred Stock is convertible into 100 shares of Common Stock. The Series B Preferred Stock is senior to the Company's Common Stock and junior in priority to the Company's Series A Preferred Stock in liquidation. Holders of the Series B Preferred Stock are entitled to 100 votes per share on any matter requiring shareholder vote.

The Company and IDC converted the $1,164,192 of principal and interest outstanding upon the Series E Convertible Notes and the $877,669 of principal and interest outstanding upon the Convertible Secured Notes held by IDC into 690,930.5 shares of Series B Preferred Stock. The Company and PAC converted the $818,066 of principal and interest outstanding upon the Series D Secured Convertible Promissory Notes and the 770,000 shares of Series C Preferred Stock into 762,358 shares of Series B Preferred Stock. PAC subsequently converted 40,000 shares of Series B Preferred Stock into 4,000,000 shares of the Company’s Common Stock. The Company and QMP converted the $453,144 of principal and interest outstanding upon the Series F Secured Convertible Promissory Notes into 226,572 shares of Series B Preferred Stock.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5 - OTHER INFORMATION

None

ITEM 6 - EXHIBITS

4.1 Statement of Designation Establishing Series B Convertible Preferred Stock*

* Filed herewith
 
 
 FORM 10-QSB
 SEPTEMBER 30, 2006
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 
POSITRON CORPORATION
   
   
   
Date:November 14, 2006
/s/ Patrick G. Rooney
 
Patrick G. Rooney
 
Chairman of the Board
   
   
Date:November 14, 2006
/s/ Corey N. Conn
 
Corey N. Conn
 
Chief Financial Officer


EXHIBIT INDEX


Exhibit
Description of the Exhibit

Chairman of the Board Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

Chief Financial Officer Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1
Chairman of the Board Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.#

Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.#

* Filed herewith

# Furnished herewith
 

20