<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1997.
OR
[ ] 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
000-22501
SPECTRUMEDIX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 25-1686354
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2124 Old Gatesburg Road, State College, Pennsylvania 16803
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (814) 867-8600
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 preceding 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 NO X**
---- ----
** The Registrant has not been subject to the filing requirements of the
Securities Exchange Act of 1934 for the past 90 days.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 1997: 3,381,526.
<PAGE> 2
SPECTRUMEDIX CORPORATION
QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Financial Statements
Condensed Balance Sheets - September 30, 1997
and March 31, 1997..................................... 1
Condensed Statements of Operations - Six and
Three Months Ended September 30, 1997 and
September 30, 1996.................................... 2
Condensed Statements of Stockholders' Equity -
Six Months Ended September 30, 1997 and
September 30, 1996..................................... 3
Condensed Statements of Cash Flows - Six Months
Ended September 30, 1997 and September 30, 1996........ 4
Notes to Financial Statements............................ 5
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition.................. 9
Risk Factors...................................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 21
Item 2. Changes in Securities and Use of Proceeds................ 21
Item 3. Defaults Upon Senior Securities.......................... 21
Item 4. Submission of Matters to a Vote of Security Holders...... 21
Item 5. Other Information........................................ 21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits......................................... 21
(b) Reports on Form 8-K.............................. 21
</TABLE>
(i)
<PAGE> 3
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements
SPECTRUMEDIX CORPORATION
(FORMERLY PREMIER AMERICAN TECHNOLOGIES CORP.)
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997*
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,158,824 $ 352,290
Accounts receivable, net 18,148 80,953
Inventories 203,474 109,450
----------- -----------
TOTAL CURRENT ASSETS 3,380,446 542,693
----------- -----------
PROPERTY AND EQUIPMENT, net 71,788 59,346
----------- -----------
OTHER ASSETS:
Original issue discount on bridge financing notes, net of
amortization of $1,311,601 for March 31, 1997 - 1,264,399
Deferred initial public offering costs - 328,228
Deferred bridge financing costs, net of amortization of
$47,718 for March 31, 1997 - 15,906
Patent fees 78,798 41,460
License and license options 175,015 25,015
Security deposit 8,479 8,479
----------- -----------
TOTAL OTHER ASSETS 262,292 1,683,487
----------- -----------
TOTAL ASSETS $ 3,714,526 $ 2,285,526
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 470,778 $ 564,445
Accrued payroll and payroll taxes 64,121 314,720
Notes payable - officers - 74,166
Notes payable - bridge financing - 1,610,000
Notes payable - others - 390,728
Convertible note payable 300,000 300,000
Customer deposits 32,944 -
Other accrued liabilities 410,415 536,847
----------- -----------
TOTAL CURRENT LIABILITIES 1,278,258 3,790,906
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.00115 par value, 2,000,000 shares
authorized, none issued or outstanding - -
Common stock, $.00115 par value, 23,000,000 shares
authorized, 3,381,526 (September 30, 1997) and
2,173,100 (March 31, 1997) shares issued and outstanding 3,889 2,499
Additional paid-in capital 8,276,429 3,013,053
Accumulated deficit (5,844,050) (4,520,932)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 2,436,268 (1,505,380)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) $ 3,714,526 $ 2,285,526
=========== ===========
</TABLE>
* Derived from audited financial statements.
(1)
<PAGE> 4
SPECTRUMEDIX CORPORATION
(FORMERLY PREMIER AMERICAN TECHNOLOGIES CORP.)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 123,421 $ 220,026 $ 36,337 $ 147,422
COST OF REVENUES 176,071 172,406 78,772 102,582
----------- ----------- ----------- -----------
GROSS (LOSS) PROFIT (52,650) 47,620 (42,435) 44,840
----------- ----------- ----------- -----------
EXPENSES:
Research and development costs 422,756 171,359 227,517 97,855
General and administrative expenses 432,989 366,499 177,173 212,053
Interest expense 129,286 106,716 60,424 79,539
Amortization of original issue discount
and deferred bridge financing costs 1,280,305 93,538 -- 93,538
Less: Grant proceeds (16,400) -- (16,400) --
----------- ----------- ----------- -----------
TOTAL EXPENSES 2,248,936 738,112 448,714 482,985
----------- ----------- ----------- -----------
OPERATING LOSS (2,301,586) (690,492) (491,149) (438,145)
OTHER INCOME:
Interest income 1,331 -- 1,331 --
----------- ----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEMS (2,300,255) (690,492) (489,818) (438,145)
EXTRAORDINARY ITEMS (Note 4) 977,136 -- 977,136 --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(1,323,119) $ (690,492) $ 487,318 $ (438,145)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 2,219,067 1,696,563 2,264,533 1,696,563
=========== =========== =========== ===========
INCOME (LOSS) PER SHARE:
Loss before extraordinary items $ (1.04) $ (.41) $ (.22) $ (.26)
Extraordinary items .44 -- .44 --
----------- ----------- ----------- -----------
NET LOSS $ (.60) $ (.41) $ .22 $ (.26)
=========== =========== =========== ===========
</TABLE>
(2)
<PAGE> 5
SPECTRUMEDIX CORPORATION
(FORMERLY PREMIER AMERICAN TECHNOLOGIES CORP.)
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE - April 1, 1996 1,571,343 $1,807 $ 349,553 $(1,862,530) $(1,511,170)
Issuance of common shares valued at
approximately $4.60 share in lieu of
interest payments 20,871 24 95,976 -- 96,000
Issuance of common shares in a private
placement bridge financing 104,349 120 479,880 -- 480,000
Bridge financing offering costs -- -- (85,308) -- (85,308)
Net loss -- -- -- (640,492) (640,492)
--------- ------ ---------- ----------- -----------
BALANCE - September 30, 1996 1,696,563 $1,951 $ 840,101 $(2,503,022) $(1,660,970)
========= ====== ========== =========== ===========
BALANCE - April 1, 1997 2,173,100 $2,499 $3,013,053 $(4,520,932) $(1,505,380)
Proceeds from sale of 1,200,600 units
pursuant to an initial public offering;
less related costs of $1,674,684 1,200,600 1,381 5,227,385 -- 5,228,766
Issuance of common shares valued
at $4.60 per share in lieu of interest
payments 7,826 9 35,991 -- 36,000
Net loss -- -- -- (1,323,118) (1,323,118)
--------- ------ ----------- ----------- -----------
BALANCE - September 30, 1997 3,381,526 $3,889 $ 8,276,429 $(5,844,050) $ 2,436,268
========= ====== =========== =========== ===========
</TABLE>
(3)
<PAGE> 6
SPECTRUMEDIX CORPORATION
(FORMERLY PREMIER AMERICAN TECHNOLOGIES CORP.)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
1997 1996
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
Cash flows from operating activities:
Net loss $(1,323,118) $ (640,492)
----------- -----------
Adjustments to reconcile net loss to net cash used by
operating activities:
Amortization of original issue discount and deferred bridge
financing costs 1,280,305 93,538
Depreciation and amortization 15,404 10,143
Interest paid with issuance of common stock 36,000 96,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 62,805 (16,726)
(Increase) decrease in inventory (94,024) 4,790
Increase in other assets (187,338) (13,065)
Increase (decrease) in accounts payable (93,667) 192,207
Increase (decrease) in customer deposits 32,944 (57,657)
Decrease in other accrued liabilities (126,432) (35,518)
Increase (decrease) in accrued payroll and payroll taxes payable (250,599) 48,834
----------- -----------
Total adjustments 675,398 322,546
----------- -----------
Net cash used by operating activities (647,720) (317,946)
----------- -----------
Cash flows used by investing activities:
Purchase of equipment (27,846) (25,198)
----------- -----------
Cash flows from financing activities:
Proceeds from initial public offering 6,903,450 --
Initial public offering costs (1,346,456) --
Proceeds from bridge financing notes -- 300,000
Repayment of bridge financing notes (1,610,000) --
Proceeds from notes payable - others 500,164 185,384
Costs of private placement of common stock -- (85,308)
Bridge financing costs -- (52,285)
Proceeds from officers' notes 1,238 33,000
Repayment of officers' notes (75,404) (30,761)
Repayment of notes payable - others (890,892) --
Decrease in bank overdraft -- (6,886)
----------- -----------
Net cash provided by financing activities 3,482,100 343,144
----------- -----------
Net increase in cash and cash equivalents 2,806,534 --
Cash and cash equivalents, at beginning of period 352,290 --
----------- -----------
Cash and cash equivalents, at end of period $ 3,158,824 $ --
=========== ===========
</TABLE>
Non-cash investment and financing activities:
During the six months ended September 30, 1997, deferred
initial public offering, costs of $1,674,684 were offset against the
proceeds of the offering.
(4)
<PAGE> 7
SPECTRUMEDIX CORPORATION
(FORMERLY PREMIER AMERICAN TECHNOLOGIES CORP.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
NOTE 1 - GENERAL
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly (a) the financial position as
of September 30, 1997, (b) the results of operations for the six and
three months ended September 30, 1997 and September 30, 1996 and (c)
changes in stockholders' equity and cash flows for the six months ended
September 30, 1997 and September 30, 1996.
Refer to the audited financial statements for the fiscal year ended
March 31, 1997, which were included in the Company's Registration
Statement on Form SB-2 (Registration No. 333-6650), as amended, filed
with the Securities and Exchange Commission on September 16, 1997, for
details of accounting policies and accounts, none of which have changed
significantly in composition since that date except as noted below.
Financial results for the interim period ended September 30, 1997 may
not be indicative of the financial results for the fiscal year ended
March 31, 1998.
The Company has available carryforward losses applicable to the
reduction of future Federal income taxes aggregating approximately
$6,000,000 at March 31, 1997 and which expire between the years 2007
and 2013.
NOTE 2 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
---------- ---------
<S> <C> <C>
Raw materials $140,817 $ 76,527
Work-in-process 62,657 32,923
---------- ---------
$203,474 $109,450
========== =========
</TABLE>
NOTE 3 - INITIAL PUBLIC OFFERING
During September 1997, the Company sold 1,200,600 units, each unit
consisting of one share of the Company's Common Stock and one
Redeemable Common Stock Purchase Warrant (the "Redeemable Warrants"),
at a price of $5.75 per unit. A total of $6,903,450 was realized, which
was the proposed maximum under the Registration Statement on Form SB-2
filed with the Securities and Exchange Commission on September 16,
1997.
The Redeemable Warrants are exercisable for a period of four years
commencing September 16, 1998 at $7.50 per share. The Redeemable
Warrants are subject to redemption by the Company at a redemption price
of $.01 per Redeemable Warrant upon 30 days' written notice given at
any time after September 16, 1998 in the event that the market price of
the Company's Common Stock, as defined, equals or exceeds $10.00 per
share.
Gross proceeds of $6,903,450, less related initial public offering
costs of $1,674,684, yielded net proceeds of $5,228,766.
(5)
<PAGE> 8
SPECTRUMEDIX CORPORATION
(FORMERLY PREMIER AMERICAN TECHNOLOGIES CORP.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
NOTE 3 - INITIAL PUBLIC OFFERING (CONTINUED)
In addition to the units sold under the Registration Statement on Form
SB-2, the Company granted to the Underwriter an option to purchase
104,400 units at a price equal to $9.49 per unit (the "Underwriter's
Unit Purchase Options"). Each of the Underwriter's Unit Purchase
Options is exercisable during a period of four years commencing
September 16, 1998. The Units each consist of one share of Common Stock
and one Class B Redeemable Warrant to purchase one share of Common
Stock at an exercise price of $12.38. The Class B Redeemable Warrants
are identical to the Redeemable Warrants except that the Class B
Redeemable Warrants have an exercise price of $12.38 per share (165% of
the exercise price of the Redeemable Warrants) and are subject to
redemption in the event the market price of the Common Stock equals or
exceeds $16.50 per share (165% of the redemption threshold of the
Redeemable Warrants).
NOTE 4 - EXTRAORDINARY ITEMS
During September 1997, in connection with reaching settlements with
different vendors, note holders and other third parties, and in making
revisions to estimates of certain accrued expenses, the Company
recognized debt forgiveness income of $977,136. This amount represents
the excess of obligations previously recorded over the amount of
settlement with the respective creditors.
NOTE 5 - CONVERTIBLE NOTE PAYABLE
During the fiscal year ended March 31, 1995, the Company issued a
convertible note for $300,000. The note provides for 10% interest per
annum, and was payable on August 4, 1997. The note may be converted, at
the option of the payee, to a maximum of 104,348 common shares at or
prior to maturity.
The note was converted into 104,348 common shares during October 1997.
NOTE 6 - COMMITMENTS
In July 1996, the Company entered into an agreement to lease office and
factory space in State College, Pennsylvania for one year at an annual
rent of $101,750. The Company exercised its option to renew the lease
through June 30, 1998. The Company has a security deposit with the
lessor of $8,479.
In April 1995, the Company entered into a three-year employment
agreement with an individual to act as its Director of Software and
Hardware Development. The agreement provides for a salary of $55,000
annually, plus bonuses at the discretion of the Company.
In March 1997, the Company entered into a three-year employment
agreement with its Chairman of the Board of Directors, President and
Chief Executive Officer. The agreement provides for an annual
compensation of $96,000 and the payment of an annual bonus of up to 25%
of base salary plus $24,000, through the term of the agreement, in
consideration for past services rendered.
NOTE 7 - LEGAL PROCEEDINGS
GRYNBERG MATTER:
Jack J. Grynberg v. Premier American Technologies Corp. and Steve
Guzofsky. In March 1996, a complaint was filed in the District Court
for the City and County of Denver, Colorado alleging common law fraud
and violation of the Colorado Securities Act in connection with the
plaintiff's 1992 investment
(6)
<PAGE> 9
SPECTRUMEDIX CORPORATION
(FORMERLY PREMIER AMERICAN TECHNOLOGIES CORP.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
in the Company. The plaintiff seeks rescissionary damages in the sum of
$45,000, interest, costs and attorney fees. Punitive damages sought by
the plaintiff, were struck by the court in an order dated March 6,
1997. The Company believes, based in part on its discussions with its
litigation counsel, that it has meritorious defenses to these claims
and it intends to defend the litigation vigorously. The Company has
accrued an $87,400 expense (which includes accrued legal costs and
accrued interest costs) in connection with this litigation. While
management believes that the resolution of this matter will not have a
material adverse effect on the Company's business, financial condition
and results of operations, the results of these proceedings are
uncertain and there can be no assurance to that effect.
RUBIN MATTER:
Robert M. Rubin v. SpectruMedix Corporation et. al. On April 21, 1997,
a complaint was filed in the Supreme Court of the State of New York
alleging breach of contract. Specifically, the plaintiff alleges that
the Company defaulted under a note issued to plaintiff in the amount of
$175,000 (the "Rubin Note") and that the Company is liable and indebted
to plaintiff in the principal amount of $175,000, together with
interest thereon. In May 1997, the Company paid all amounts due under
the Rubin Note and is no longer in default thereunder. The remaining
issue in the case is whether, pursuant to a related agreement, the
plaintiff is entitled to 152,174 shares of Common Stock or,
alternatively, $875,000. The Company believes, based in part on its
discussions with litigation counsel, that it has meritorious defenses
to the above-described claims and it intends to defend the litigation
vigorously. However, due to the nature of the litigation and because
the lawsuit is in the initial stages, the Company cannot determine the
total expense or possible loss, if any, that may ultimately be incurred
either in the context of a trial or as a result of a negotiated
settlement. While management believes that the resolution of this
matter will not have a material adverse effect on the Company's
business, financial condition or results of operations, the results of
these proceedings are uncertain and there can be no assurance to that
effect. Regardless of the ultimate outcome of the litigation, it could
result in significant diversion of time by the Company's personnel.
OTHER:
In addition, one party has filed a security interest on the assets of
the Company under the Uniform Commercial Code for an obligation of
approximately $110,000. In the event that such party should execute its
security interest, the Company's assets could be subject to seizure. In
such event, the Company would be materially adversely affected. In the
event the Company should become party to any litigation relating to
this obligation, the costs of defending against such claims could be
substantial, and the Company could be materially adversely affected.
NOTE 8 - STOCK OPTIONS AND WARRANTS
On April 20, 1992, four days after the Company's inception, the Company
issued to its Chairman, options to purchase 127,827 shares of common
stock. The options have an exercise price of $.00115 per share, which
was the market value of the Company's common stock on that date as
determined by its Board of Directors. The options vested on the
issuance date and expire on April 20, 2012. To date, none of the
options have been exercised.
The Company has issued options and warrants to purchase 136,522 shares
of common stock, to consultants and noteholders at various dates
through October 1995 exercisable at $2.88 per share, expiring at
various dates through October 2000. To date none of the options and
warrants have been exercised.
(7)
<PAGE> 10
SPECTRUMEDIX CORPORATION
(FORMERLY PREMIER AMERICAN TECHNOLOGIES CORP.)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
On March 12, 1997, the Company adopted a Stock Incentive Plan ("the
Plan"), which is intended to serve as a comprehensive equity incentive
program for officers and employees in the Company's service,
non-employee members of the Board of Directors, and independent
consultants. A total of 500,000 shares of Common Stock have been
authorized for issuance under the Plan. However, no participant may
receive option grants or direct stock issuances for more than 100,000
shares in the aggregate per calendar year. On June 16, 1997, the
Company granted options to purchase 217,403 shares of Common Stock
under this Plan. These options are exercisable at the fair market value
of the Company Common Stock on the date of grant.
(8)
<PAGE> 11
SPECTRUMEDIX CORPORATION
(FORMERLY PREMIER AMERICAN TECHNOLOGIES CORP.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1997 AND 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Quarterly Report on Form 10-QSB. Except for the historical
information contained herein, the discussion in this Report contains certain
forward-looking statements, within the meaning of Section 27A of the Securities
Act and Section 27E of the Exchange Act, that involve risks and uncertainties,
such as statements of the Company's plans, objectives, expectations and
intentions. Forward-looking statements are based on management's current
expectations and are subject to a number of risks and uncertainties that could
cause actual results to differ materially from expected results. The cautionary
statements made in this Quarterly Report should be read as being applicable to
all related forward-looking statements wherever they appear in this Quarterly
Report. Factors that could cause or contribute to such differences include those
discussed in "Risk Factors," as well as those discussed elsewhere herein.
OVERVIEW
During the period from April 1992 (inception) through June 1992, the
Company was engaged in organizational activities, including negotiating
agreements with the Bankruptcy Court in Harrisburg, Pennsylvania to lease, on a
temporary basis, the assets and facilities of Nuclide Corporation ("Nuclide")
and Measurement and Analysis Systems, Inc. ("MAAS"). In December 1992, via court
order, the Company acquired the assets of Nuclide and MAAS. In April 1993, the
Company acquired all the assets of LabData Corporation, subsequently known as
Laboratory Software Associates ("LabData"), including an inventory of computer
hardware and a complete line of data acquisition and instrument control
software. Since June 1992, the Company has devoted substantially all of its
resources to upgrade and improve the Company's existing line of instrumentation
(Mass Spectrometers, Luminoscopes, etc.), electronic components and software and
to initiate the Company's strategy of carving out new and commercially promising
areas of application for its instrumentation and its scientific expertise and
capabilities, as well as finding new technologies that lie within its technical
purview for licensing and commercialization. The result of these efforts is the
present availability for sale of a fully upgraded line of magnetic sector mass
spectrometers, new and improved Luminoscope add-ons, and high-performance
software for a variety of applications in the petrochemical, environmental and
geochemical areas, among others. In addition, the Company has acquired (i) a
license for a DNA Sequencer that is in the process of being brought to the
commercial marketplace and (ii) an option for an instrument-intensive diagnostic
technique that the Company believes will have significant consequences for the
prevention and therapy of many diseases. As most of the Company's products are
still under development, limited revenues have been derived from the sale of
these products and the Company does not expect to receive substantial revenues
from the sale of its products until at least 1998, at the earliest.
The Company has financed its operations primarily through the private
sale and issuance of equity securities and proceeds from an initial public
offering (the "Public Offering") of equity securities during September 1997. The
Company expects to enter into collaborative agreements for the financing of its
research and development efforts and for the commercialization of its products.
The Company was awarded a grant from the United States Department of Energy
during September 1997 which will pay the Company $75,000 over a period of six
months, subject to certain terms and conditions. However, no assurance can be
given that the Company will obtain significant revenues therefrom.
The Company has not been profitable since inception and had an
accumulated deficit of $5,844,050 at September 30, 1997. Successful future
operations depend upon the Company's ability to develop and commercialize its
products. The Company will require additional funds to complete the development
of its products and to fund operating losses that are expected to be incurred in
the next several years.
(9)
<PAGE> 12
SPECTRUMEDIX CORPORATION
(FORMERLY PREMIER AMERICAN TECHNOLOGIES CORP.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1997 AND 1996
RESULTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The Company had total revenues of $123,421 and $220,026 for the six
months ended September 30, 1997 and 1996, respectively. Revenues for both
periods reflect sales of products from old product lines. To date, the Company
has received limited revenues from the sale of products, and it does not expect
to receive significant product revenue for several years, if at all. The
decrease in revenues of $96,605, or approximately 44%, was due primarily to the
increased focus of the Company on its various research and development,
commercialization and fundraising efforts, which resulted in the shifting of key
personnel from sales and marketing into such activities, and secondarily to the
historical lack of any full time sales and marketing staff.
Of the total revenues discussed above, revenues derived from the sale
of the Company's services totaled $37,542 and $45,787 for the six months ended
September 30, 1997 and 1996, respectively. The decrease in service revenue was
$8,245, or approximately 18%. This decrease was due primarily to the increased
focus of the Company on its various research and development, commercialization
and fundraising efforts, which resulted in the shifting of key personnel from
sales and marketing into such activities, and secondarily to the historical lack
of any full time sales and marketing staff.
Research and development expenses increased 147% in 1997 to $422,756
from $171,359 in 1996, due primarily to increased expenditures for the Company's
new licensed technologies. The proceeds of the Bridge Financing during the
second half of the fiscal year ended March 31, 1997, enabled the Company to
increase its research and development activities, which are dependent primarily
on cash availability. The Company anticipates that research and development
expenses will increase for fiscal year 1998 as a result of expenses relating to
its option and research and development agreements with the University of
California, Berkeley and its license agreement with Ames Laboratory/Iowa State
University and the ability to fund such activities from the proceeds of the
Public Offering.
General and administrative expenses were $432,989 and $366,499 during
the six months ended September 30, 1997 and 1996, respectively, an increase of
$66,490, or approximately 18%. Approximately 71% and 69% of general and
administrative expenses for the six months ended September 30, 1997 and 1996,
respectively, were attributable to payroll, payroll taxes, employee benefits and
professional and consulting services. The Company expects its general and
administrative expenses to increase in the future as a result of further Company
expansion.
Interest expense of $129,286 and $106,716 for the six months ended
September 30, 1997 and 1996, respectively, resulted from borrowings. Interest
expense increased primarily as a result of additional borrowings associated with
the Company's recent financings and capitalized interest from previous
borrowings. The obligations which caused such interest expense were repaid
during September 1997 and October 1997.
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
The Company had total revenues of $36,337 and $147,422 for the three
months ended September 30, 1997 and 1996, respectively, a decrease of $111,085,
or approximately 75%. Of the total revenues, revenues derived from the sale of
the Company's services totaled $25,124 and $28,949 for the three months ended
September 30, 1997 and 1996, respectively, a decrease of $3,825, or
approximately 13%. The decrease in both total revenues and services revenues was
due primarily to the increased focus of the Company on its various research and
development, commercialization and fundraising efforts, which resulted in the
shifting of key personnel from sales and marketing into such activities, and
secondarily to the historical lack of any full time sales and marketing staff.
(10)
<PAGE> 13
SPECTRUMEDIX CORPORATION
(FORMERLY PREMIER AMERICAN TECHNOLOGIES CORP.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1997 AND 1996
Research and development expenses increased 133% to $227,517 for the
three months ended September 30, 1997 from $97,855 for the three months ended
September 30, 1996. The increase was due primarily to increased expenditures for
the Company's new licensed technologies.
General and administrative expenses decreased 16% to $177,173 for the
three months ended September 30, 1997 from $212,053 for the three months ended
September 30, 1996. This decrease was due to the incurrence of moving expenses
during the second fiscal quarter of 1996 in connection with the Company's
relocation to its new facilities and to decreased professional fees in the
second fiscal quarter of 1997.
Interest expense of $60,424 and $79,539 for the three months ended
September 30, 1997 and 1996, respectively, resulted from borrowings. Interest
expense during the three months ended September 30, 1997 increased over the
three months ended September 30, 1996 primarily as a result of additional
borrowings associated with the Company's recent financings and capitalized
interest from previous borrowings.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily
through the sale of equity securities, and loans received under notes payable
aggregating approximately $2,650,000. From July 1996 through February 1997, the
Company sold in a private placement offering 16.1 units, each unit consisting of
$100,000 of 10% promissory notes and 34,783 shares of Common Stock for an
aggregate purchase price of $1,610,000. The shares have been valued at
approximately $4.60 per share and an original issue discount on the notes of
$2,576,000 had been recorded (resulting in an annualized effective interest rate
of 170%).
In July 1997, the Company renegotiated the terms of the Bridge
Financing with its noteholders. Under the revised terms, one-half the face
amount of the promissory notes ($805,000) was converted into warrants (the
"Warrants") to purchase Units (each Unit consisting of Common Stock and one
Redeemable Warrant). The Warrants to purchase 322,000 Units (16.1 Units
multiplied by 20,000) are exercisable for four years commencing September 16,
1998 at an exercise price of $5.75 per Unit (the initial public offering price).
The annualized effective interest rate on the promissory notes increased to
approximately 330% as a result of this change and the maturity date of the
remaining notes was extended to September 30, 1997. The outstanding principal
and interest due under the promissory notes was paid in September 1997. As a
result of this Bridge Financing restructuring, the Company realized an
extraordinary gain from extinguishment of debt of $805,000 in the fiscal quarter
ended September 30, 1997. Additional obligations of approximately $172,000 were
also written off or otherwise settled during the three month period ended
September 30, 1997. A portion of the proceeds of the Bridge Financing was used
to expedite the commercialization effort on the DNA Sequencer and to complete
the manufacture of the instrumentation prototypes for the diagnostic kinetics
project. In addition to the purchase of materials for these projects, the
Company has hired additional scientists and lab technicians. In addition to the
sales of the Company's new products, the sales of the Company's current product
lines are expected to continue and increase due to recent and future hiring of a
dedicated sales force and the fact that the new product lines are expected to
greatly stimulate the sales of core product instrumentation.
The Company expects its cash requirements to increase in future
periods. The Company will require additional funds to conduct research and
development, pay various required license and milestone fees, establish third
party collaborations and market its products. The Company's capital requirements
depend on many factors, including the status of the development of its products,
obtaining manufacturing capabilities to produce its products in volume,
prosecuting and enforcing its intellectual property rights, competing
technological and market developments, and the ability of the Company to develop
new collaborative and licensing arrangements.
(11)
<PAGE> 14
SPECTRUMEDIX CORPORATION
(FORMERLY PREMIER AMERICAN TECHNOLOGIES CORP.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1997 AND 1996
The Company believes that the $5,228,766 net proceeds from the Public
Offering (gross proceeds of $6,903,450 less related costs of $1,674,684)
received during September 1997, will be sufficient to meet the Company's
operating expenses and capital requirements for at least 12 months from the date
hereof. The Company will attempt to raise any required additional funds through
equity or debt financings, collaborative arrangements with corporate partners or
from other sources if and when available. There can be no assurance that any
such additional funding will be available on favorable terms from any of these
sources, if at all.
In August 1994, the Company issued to Gross Foundation, Inc. ("Gross") a
convertible promissory note in the principal amount of $300,000 (the "Note").
The Note accrued interest at the rate of 10% per annum and was due and payable
on August 4, 1997. During October 1997, the Note was converted into 104,348
shares of the Company's Common Stock.
(12)
<PAGE> 15
RISK FACTORS
In addition to the other information contained herein, the discussion
in this Quarterly Report on Form 10-QSB contains certain forward-looking
statements, within the meaning of Section 27A of the Securities Act and Section
27E of the Exchange Act, that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions.
Actual results could differ materially from those discussed in the forward-
looking statements as a result of certain factors, including those set forth
below and elsewhere in this Report. Factors that could cause or contribute to
such differences include those discussed below as well as those cautionary
statements and other factors set forth elsewhere herein.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY; ABILITY TO
CONTINUE AS A GOING CONCERN. The Company has incurred operating losses since its
inception in 1992. At September 30, 1997, the Company had an accumulated deficit
of $5,844,050. The Company's current revenues from operations are limited and
are not sufficient to fund its operating expenses. The Company will need to
either substantially expand the sales of its existing products and services or
successfully develop and commercialize its new products to reach profitability.
No assurance can be given that the Company will be able to accomplish either
such objective. The Company will be required to conduct significant research,
development, testing and regulatory compliance activities which, together with
projected general and administrative expenses, are expected to result in
operating losses for at least the next several years. The Company may not
achieve significant revenues or profitable operations. To date the Company's
operations have been characterized by chronic underfunding and limited ability
to maintain inventories of key components, parts and supplies. The Company is
dependent upon the proceeds of its initial public offering (the "Public
Offering") to continue its operations. In addition, the proceeds of the Public
Offering may not be sufficient to allow the Company to materially alter its
reliance on "just-in-time" manufacturing and the inherent dependence upon
sources of components, parts and supplies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
As a result of the Company's previous financial condition, the
Company's independent certified public accountants have included an emphasis of
matter disclosure in their report on the Company's financial statements for the
period ended March 31, 1997. The Company's independent certified public
accountants' report on the financial statements includes an explanatory
paragraph stating that the net losses, accumulated deficit and negative working
capital raise substantial doubt about the Company's ability to continue as a
going concern. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
EARLY STAGE OF DEVELOPMENT. Since the Company's incorporation in April
1992, the Company has been engaged in organizational activities, acquisition of
assets, hiring of personnel and financing activities. Since operations began in
July 1992, the Company has engaged in the following activities: manufacturing,
research and development, limited sales and marketing, capital raising,
exploration of strategic relationships and collaborations, and other general
corporate activities. The Company has generated limited revenues to date. While
the Company is able to finance certain of its current operations from revenues,
it requires substantial additional financing to continue to increase its
marketing capabilities and increase its research and development activities to
expand the applications of its core technology, to acquire additional
technologies, and to develop new products. As the Company is in the development
stage, its operations are subject to all of the risks inherent in the
establishment of a new business enterprise and the commercialization of new
products. The likelihood of the success of the Company must be considered in
light of the problems, expenses, difficulties, complications and delays
frequently encountered in connection with a new business, and, accordingly, is
highly speculative.
UNCERTAINTY REGARDING COMPLETION OF LICENSES TO KEY TECHNOLOGIES. The
Company's technologies under development in the area of diagnostic kinetics are
the subject of an option held by the Company from the University of California,
Berkeley. Such option specifies maximum royalty rates and milestone payments,
which the Company deems reasonable. Although the option agreement entitles the
Company to exercise its option and acquire an exclusive license to the
underlying patents and technologies, no assurance can be given that the Company
will be successful in securing such license or that the terms thereof will
ultimately be deemed attractive for the commercialization of such equipment. The
Company does not expect to exercise its option with the University of
California, Berkeley until the second half of 1997, at the earliest.
(13)
<PAGE> 16
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS. The
Company's success depends on its ability to obtain patents, protect its trade
secrets and operate without infringing upon the proprietary rights of others.
The Company's existing and potential competitors have applied for a substantial
number of patents. There can be no assurance that any of the Company's future
patent applications will be approved, that the Company will develop additional
proprietary products that are patentable, or that any patents issued to the
Company will provide the Company with any significant protection or will not be
successfully challenged by third parties. Furthermore, there can be no assurance
that others will not design around the patented products developed by the
Company. There can be no assurance that the Company's products will not be found
to infringe upon the patents of others. The area of gene sequencing, in
particular, is subject to intense competition and active filing of patent
applications. Any of such patent applications filed by one or more third parties
may conflict with the Company's products under development. If the Company's
products are found to infringe upon the patents or otherwise impermissibly
utilize the intellectual property of others, the Company's development,
manufacture and sale of such products could be severely restricted or
prohibited. Any such infringement could have a material adverse effect on the
Company's prospects, business, results of operations or financial condition. The
Company may be required to obtain licenses from such third parties or otherwise
obtain licenses to utilize patents or proprietary rights of others. No assurance
can be given that any licenses required under any such patents or proprietary
rights could be obtained on terms acceptable to the Company, or at all. If the
Company does not obtain such licenses, the development, manufacture or sale of
products requiring such licenses could be materially adversely affected. If the
Company does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or could find
that the development, manufacture or sale of such products could be foreclosed.
Litigation may be necessary to defend against or assert claims of infringement,
to enforce the Company's or its licensors' patents, to protect trade secrets or
know-how owned by the Company, or to determine the scope and validity of the
proprietary rights of others, and could result in substantial cost to and
diversion of effort by, and may have a material adverse impact on, the Company.
The Company's competitive position is also dependent upon unpatented
trade secrets. Although the Company takes measures to protect its trade secrets,
trade secrets are difficult to protect. There can be no assurance that others
will not independently develop substantially equivalent proprietary information
or techniques or otherwise gain access to the Company's trade secrets. The
Company pursues a policy of having its employees, consultants and advisors
execute confidentiality agreements to maintain the proprietary nature of its
technology. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets or other
proprietary information in the event of unauthorized use or disclosure of such
information.
TECHNOLOGICAL UNCERTAINTY; UNCERTAINTY OF PRODUCT DEVELOPMENT AND
COMMERCIALIZATION; EARLY STAGE OF PRODUCT DEVELOPMENT. The science and
technology of the Company's products, particularly the Company's DNA Sequencer,
is rapidly evolving. Many of the Company's products and proposed products will
require significant further research, development, testing and possibly
regulatory clearances and are subject to the risks of failure inherent in the
development of products based on innovative technologies. The Company's
development efforts in the area of diagnostic kinetics involve a new area of
medicine which necessarily involves unforeseeable risks and uncertainties. These
risks include the possibility that any or all of the products or proposed
products are found to be ineffective or unsafe, or otherwise fail to receive
necessary regulatory clearances, if any, that the proposed products, although
effective, are uneconomical to market, that such products will not satisfy cost
and performance criteria, that third parties hold proprietary rights that
preclude the Company from marketing such products, or that third parties market
a superior or equivalent product. Accordingly, the Company is unable to predict
whether its research and development activities will result in any commercially
viable products other than the Company's mass spectrometers. Further, the
Company cannot predict with certainty when or if the Company will be able to
commercialize certain of its proposed products or that such products will
satisfactorily perform all of the functions for which they have been designed or
prove to be sufficiently reliable in long-term applications.
NEW CONCEPT AND EMERGING MARKETS; UNCERTAINTY OF MARKET ACCEPTANCE. The
production of the DNA Sequencer, diagnostic kinetics instruments and other
proposed products of the Company represents new manufacturing processes which
are untested on a commercial scale. Although the Company believes that its
technologies and products will, if ultimately commercialized, represent
significant technological advances, demand for the Company's proposed products,
all of which are based upon new designs, concepts and manufacturing processes,
is subject to a high degree of uncertainty. Many potential customers of the
Company, including original equipment manufacturers ("OEM") and commercial end
users, may be reluctant to utilize or sell the Company's
(14)
<PAGE> 17
proposed products until a sufficient number of other OEMs and commercial end
users have already committed to do so. The Company currently has limited
marketing experience and limited financial, personnel and other resources to
undertake the extensive marketing activities that will be necessary to market
its proposed products. The Company's ability to generate revenues from the sale
of its proposed products will be dependent upon, among other things, its ability
to build an effective sales organization. In its limited marketing efforts to
date, the Company has relied solely upon the efforts of its executive officers.
If the Company is unable to market and distribute its products directly, the
Company may have to enter into arrangements with others, such as joint ventures,
licensing or similar arrangements or distribution agreements. Any such
contractual arrangements may result in a lack of control by the Company over any
or all of the marketing and distribution of such products and may increase its
marginal costs. There can be no assurance that the Company will be able to
formalize any marketing arrangements or that its marketing efforts will be
successful.
LIMITED MANUFACTURING EXPERIENCE AND CAPABILITIES; RISKS ASSOCIATED
WITH EXPANSION OF MANUFACTURING OPERATIONS; POSSIBLE DEPENDENCE ON THIRD PARTY
MANUFACTURERS. The Company maintains limited manufacturing facilities and will
need to expand such facilities to effectively manufacture its products on a
profitable basis. Although certain members of the Company's management have
manufacturing experience, the expansion of the Company's manufacturing
facilities and capabilities will subject the Company to numerous risks,
including unanticipated technological problems or delays. Such expansion will
also require additional sources of capital, which may not be available on
commercially reasonable terms, if at all. In the event that the Company is
unable to expand its manufacturing facilities and capabilities, the Company may
be required to enter into arrangements with others for the manufacture and
packaging of its proposed products. There can be no assurance that the Company
will be able to enter into any such arrangements on commercially reasonable
terms, or at all, or that the Company will ever be able to establish the
capability to manufacture its products on a commercial basis, in which case the
Company's business, results of operations and financial condition would be
materially adversely affected.
ASSETS ENCUMBERED; POTENTIAL LITIGATION. Substantially all of the
Company's assets are encumbered by liens granted in favor of certain of the
Company's creditors. One party has filed a security interest on the assets of
the Company under the Uniform Commercial Code for an obligation of approximately
$110,000. In the event that such party should execute its security interest, the
Company's assets could be subject to seizure. In such event, the Company would
be materially adversely affected. In the event the Company should become party
to any litigation relating to this obligation, the costs of defending against
such claims could be substantial, and the Company could be materially adversely
affected.
DEPENDENCE ON THIRD PARTY SUPPLIERS OF RAW MATERIALS AND COMPONENTS;
RELATIONSHIPS WITH SUPPLIERS, CREDITORS AND CUSTOMERS. The Company's existing
and proposed products require high quality raw materials and components which
the Company currently purchases and will continue to purchase from third party
suppliers. The Company believes that adequate sources of supply exist for all of
the raw materials and components that it will need and that such items are
available on commercially reasonable terms. Certain raw materials or components
may, however, from time to time, be difficult to obtain and may cause production
delays or require the Company to find alternate means of production. Thus, the
Company's ability to manufacture its products will depend on its ability to
establish and maintain commercial relationships with at least certain of such
suppliers. The Company does not currently maintain supply agreements with any of
its suppliers.
The Company's production will also be dependent upon its suppliers
satisfying the Company's performance and quality specifications and dedicating
sufficient production capacity to meet the Company's scheduled delivery times.
There can be no assurance that the Company will be able to establish any
commercial relationships with suppliers or, if it is able to do so, that such
suppliers will be able to satisfy the Company's scheduled delivery or
performance requirements or have sufficient production capacity to satisfy such
requirements during any period of sustained demand. Failure or delay by the
Company's suppliers in supplying the Company with needed raw materials and
components would materially adversely affect the Company's operating margins and
the Company's ability to manufacture and deliver products on a timely and
competitive basis, which could, in turn, have a material adverse effect on the
Company.
EFFECT OF CHRONIC INADEQUATE CAPITALIZATION ON RELATIONSHIPS WITH
SUPPLIERS, CREDITORS AND CUSTOMERS. Since inception, the Company has been
characterized by chronic inadequate capitalization.
(15)
<PAGE> 18
Accordingly, the Company's lack of working capital has at times prevented the
Company from making timely payments to suppliers and creditors or from repairing
relationships with such entities. Such financial difficulties have also
prevented the Company from providing parts and service to certain of its
customers in a timely manner. As a result, the Company's relationships with its
customers have also been damaged. The deterioration of these relationships may
make the Company's strategy for expansion more difficult and may adversely
affect the development of the Company's business. There can be no assurance that
the Company will be able to reestablish relationships with its suppliers,
creditors and customers or that the Company will successfully implement its
expansion plan.
CUSTOMER CONCENTRATION. Approximately 55%, 85% and 44% of the Company's
net sales for the years ended March 31, 1995, 1996 and 1997, respectively, were
derived from sales to the Company's top five customers. During the fiscal year
ended March 31, 1997 the Company's product sales amounted to approximately 13%
to one customer and 11% to another customer. During the fiscal year ended March
31, 1996, product sales consisted of approximately 63% to one customer and 11%
to another customer. During the fiscal year ended March 31, 1995, product sales
amounted to approximately 21% to one customer and 12% to each of two customers.
The loss of, or significant adverse change in, the relationship between the
Company and these customers could have a material adverse effect on the
Company's business, financial condition and results of operations. The loss of
or reduction in orders from any significant customer, losses arising from
customer disputes regarding shipments, fees, merchandise condition or related
matters, or the Company's inability to collect accounts receivable from any
major customer could have a material adverse impact on the Company's business,
financial condition and results of operations.
COMPETITION AND TECHNOLOGICAL CHANGES. The Company's success depends
upon establishing and maintaining a competitive position in the research,
development and commercialization of products and technologies in its areas of
focus. The medical and industrial instrumentation industry is highly competitive
and requires substantial capital. The Company competes with, and will compete
with, numerous international, national and regional companies, many of which
have significantly larger operations and greater financial, marketing, human and
other resources than the Company. Accordingly, such competitors may have
substantial competitive advantages over the Company, including the ability to
negotiate favorable supply and distribution agreements and the ability to
negotiate more favorable terms with developers of technology, including
universities. In addition, the Company plans to develop additional products and
acquire additional technologies in order to expand the Company's product and
technology portfolio. No assurance can be given that the Company will
successfully compete in any market in which it conducts or may conduct
operations or that developments by such competitors will not render the
Company's current or future products or technologies uncompetitive or obsolete.
The industry in which the Company competes is characterized by rapid
technological change. Although the basic technology of mass spectrometry has not
changed significantly in many years, its applications and enhancements, as well
as competing measurement and analysis technologies, are constantly developing.
There can be no assurance that the Company's products will not be rendered
obsolete as a result of technological developments. The Company is actively
engaged in research and development to improve its products through the
introduction of enhancements and various additional applications, which by its
nature is uncertain. Accordingly, there can be no assurance that the Company
will be able to develop such new products or improvements.
NEED FOR ADDITIONAL FINANCING. Based on the Company's operating plan,
the Company believes that the net proceeds of the Public Offering, together with
revenues from continuing operations, will be sufficient to satisfy its capital
requirements and finance its plans for expansion for at least the next 12
months. Such belief is based on certain assumptions, and there can be no
assurance that such assumptions are correct. After such 12- month period, the
Company anticipates that it will require additional financing in order to meet
its current plans for expansion. Such financing may take the form of the
issuance of common or preferred equity securities or debt securities, or may
involve bank financing. The Company may also be forced to enter into third party
licensing, manufacturing or distribution agreements to support its capital
needs. There can be no assurance that the Company will be able to obtain such
additional capital on a timely basis, on favorable terms, or at all. In any of
such events, the Company may be unable to implement its product development and
commercialization strategy and its operations would be severely and adversely
affected.
(16)
<PAGE> 19
DEPENDENCE UPON KEY EMPLOYEES AND CONSULTANTS; RECRUITMENT OF
ADDITIONAL PERSONNEL. The Company is dependent upon the efforts and abilities of
Dr. Joseph K. Adlerstein, its Chairman of the Board of Directors, Chief
Executive Officer and President, and Bernard Sonnenschein, its Secretary and
Treasurer, and on other members of its scientific and management staff. Dr.
Adlerstein and Mr. Sonnenschein are the only executive officers of the Company.
In addition, the Company is dependent on collaborators at research institutions
and on the Company's scientific advisors and consultants. Recruiting and
retaining qualified personnel, collaborators, advisors and consultants will be
critical to the Company's success. To date, the Company has been able to attract
and retain the personnel necessary for its operations. However, there can be no
assurance that the Company will be able to do so in the future, particularly in
light of the Company's expansion plans. If the Company is unable to attract and
retain personnel with necessary skills when needed, its business and expansion
plans could be materially adversely affected.
Dr. Adlerstein and Mr. Sonnenschein are substantial stockholders of the
Company, holding approximately 19% and 18%, respectively, of the outstanding
shares. The Company has entered into an employment agreement with Dr.
Adlerstein. The loss or unavailability of the services of either Dr. Adlerstein
or Mr. Sonnenschein for any significant period of time could have a material
adverse effect on the Company's business prospects. The Company has obtained,
and is the sole beneficiary of, key-person life insurance in the amount of
$1,000,000 on the life of Dr. Adlerstein.
PRODUCT WARRANTIES. The Company generally warranties parts and services
for each of its products for one year from the date of purchase. Although there
have been few requests for extensive servicing and repairs for products that
have already been sold by the Company during the warranty period, a large number
of requests for such servicing could have a material adverse effect on the
Company by requiring additional expenditures for parts as well as the repair
efforts of the Company's personnel.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS. A portion of the
Company's future products may be regulated by the United States Food and Drug
Administration (the "FDA"). Such regulations extend to manufacturing practices,
the conduct of clinical investigations, pre-market approval, record keeping and
reporting requirements and labeling, among other matters. To date the Company
has not yet obtained clearance from the FDA for commercial marketing of its
primary products. In addition, other products that the Company might develop may
also be subject to FDA regulation. There can be no assurance that the Company
will be able to obtain FDA clearance for commercial marketing of its products.
Even if FDA clearance is received, government regulation may have an adverse
impact on the timing and cost of new product introductions, may interfere with
the marketing of existing products and may require the recall of products from
customer locations.
The Company is subject to a variety of United States and foreign
government regulations related to the discharge or disposal of toxic, volatile
or otherwise hazardous chemicals used in its manufacturing process. The failure
by the Company to comply with present or future environmental regulations could
result in fines, suspension of production or cessation of operations. Such
regulations could also require the Company to acquire equipment or to incur
other substantial expenses to comply with environmental regulations. If
substantial additional expenses were incurred by the Company, product costs
could significantly increase, thus materially and adversely affecting the
Company's results of operations. Additionally, the Company is subject to a
variety of government regulations relating to its operations, such as
environmental, labor and export control regulations. While the Company believes
it has obtained all permits necessary to conduct its business, the failure to
comply with present and future regulations could result in fines being imposed
on the Company or suspension or cessation of operations. Any failure by the
Company to control the use of, or adequately restrict the discharge of,
hazardous substances could subject the Company to future liabilities, and could
have a material adverse effect on the Company's business and results of
operations.
PRODUCT RECALLS AND LIABILITY. Products such as those sold by the
Company may be subject to recall for unforeseen reasons. In addition, certain
projected applications of the Company's products entail the risk of product
liability claims. The Company performs extensive testing of its products at each
stage of their design to minimize the risk of recall or product liability
claims. A recall or product liability claim could materially adversely affect
the Company's operation and reputation. The Company does not maintain any
insurance related to recalls or product liability and, accordingly, a product
recall of the Company's principal products or successful product liability
claims against the Company would have a material adverse effect on the Company.
(17)
<PAGE> 20
CONTROL BY MANAGEMENT AND CURRENT STOCKHOLDERS; NO INDEPENDENT
DIRECTORS. The Company's current management owns approximately 37% of the
outstanding shares of Common Stock. Management may, therefore, have the ability
to elect a majority of the directors of the Company and to control the outcome
of all issues submitted to a vote of the stockholders of the Company. The
Company currently has only two directors, Dr. Adlerstein and Mr. Sonnenschein,
both of whom are insiders and principal stockholders. Accordingly, such
individuals are in a position to control the actions and decisions of the Board
of Directors.
POSSIBLE VOLATILITY OF STOCK PRICE. There can be no assurance that an
active trading market for the Common Stock or Redeemable Warrants will be
sustained in the future. The market price of the shares of Common Stock and the
Redeemable Warrants, like that of many other small cap and emerging technology
companies, is likely to be highly volatile.
ABSENCE OF DIVIDENDS. The Company has not paid any cash dividends on
the Common Stock since inception and does not intend to pay any dividends to its
stockholders in the foreseeable future. The Company currently intends to
reinvest earnings, if any, in the development and expansion of its business.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.
2,173,100 shares of the Company's outstanding shares of Common Stock are
"restricted securities." 1,786,131 shares of such restricted securities will be
available for sale pursuant to Rule 144 as described below commencing December
15, 1997, 92,610, 180,874 and 1,512,647 of which are subject to a 13-month,
12-month and 24-month, respectively, restriction against transfer commencing
September 16, 1997. Another 108,701 shares may be sold pursuant to Rule 144
commencing March 15, 1997, 7,828 of which are subject to a 13-month restriction
against transfer and the remainder of which are subject to a 12-month
restriction against transfer, both commencing September 16, 1997. The remaining
278,268 shares may be sold pursuant to Rule 144 commencing January 1998, subject
to a 12-month restriction against transfer commencing September 16, 1997. The
officers, directors and certain stockholders of the Company, who own an
aggregate of 1,512,647 of the 2,173,100 above-referenced shares have agreed not
to sell, assign or transfer any securities of the Company owned by them until
September 16, 1999 without the prior consent of Patterson Travis, Inc., the
underwriter of the Public Offering (the "Underwriter").
Effective April 29, 1997, Rule 144 provides, in essence, that a person
holding "restricted securities" for a period of one year may sell only an amount
every three months equal to the greater of (a) one percent of the Company's
issued and outstanding shares or (b) the average weekly volume of sales during
the four calendar weeks preceding the sale. The amount of "restricted
securities" which a person who is not an affiliate of the Company may sell is
not so limited, since non-affiliates may sell without volume limitation their
shares held for two years if there is adequate current public information
available concerning the Company. In such an event, "restricted securities"
would be eligible for sale to the public at an earlier date. The sale in the
public market of such shares of Common Stock may adversely affect prevailing
market prices of the Common Stock.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. At September 30, 1997,
there were outstanding stock options to purchase an aggregate of 127,827 shares
of Common Stock at an exercise price of $0.00115 per share, stock options and
warrants to purchase an aggregate of 306,962 shares of Common Stock at an
exercise price of $2.88 per share, stock options to purchase an aggregate of
217,403 shares of Common Stock at an exercise price of $4.60 per share and
outstanding warrants to purchase 322,000 Units at an exercise price of $5.75 per
Unit. Except for warrants to purchase 73,562 shares of Common Stock issued to
Gross Foundation Inc. and the warrants to purchase 322,000 Units, these options
and warrants are subject to a 24-month lock-up restriction. The warrants to
purchase 322,000 Units are subject to 12-month lock-up restriction. 174,000 of
the shares issued to Gross Foundation, Inc. are subject to a 13-month lock-up
restriction and the remaining shares are subject to a 24-month lock-up
restriction. The exercise of such outstanding options and warrants will dilute
the percentage ownership of the Company's stockholders, and any sales in the
public market of shares of Common Stock underlying such securities may adversely
affect prevailing market prices for the Common Stock. Moreover, the terms upon
which the Company will be able to obtain additional equity capital may be
adversely affected since the holders of such outstanding securities can be
expected to exercise their respective rights therein at a time when the Company
would, in all likelihood, be able to obtain any needed capital on terms more
favorable to the Company than those provided in such securities.
(18)
<PAGE> 21
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
REDEEMABLE WARRANTS. The Company will be able to issue shares of its Common
Stock upon exercise of the Redeemable Warrants only if there is then a current
prospectus relating to such Common Stock and only if such Common Stock is
qualified for sale or exempt from qualification under applicable state
securities laws of the jurisdictions in which the various holders of the
Redeemable Warrants reside. The Company has undertaken and intends to file and
keep current a prospectus which will permit the purchase and sale of the Common
Stock underlying the Redeemable Warrants, but there can be no assurance that the
Company will be able to do so. Although the Company intends to seek to qualify
for sale the shares of Common Stock underlying the Redeemable Warrants in those
states in which the securities are to be offered, no assurance can be given that
such qualification will occur. The Redeemable Warrants may be deprived of any
value and the market for the Redeemable Warrants may be limited if a current
prospectus covering the Common Stock issuable upon the exercise of the
Redeemable Warrants is not kept effective or if such Common Stock is not
qualified or exempt from qualification in the jurisdictions in which the holders
of the Redeemable Warrants then reside.
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF REDEEMABLE WARRANTS. The
Redeemable Warrants may be redeemed by the Company at a redemption price of $.01
per Redeemable Warrant upon 30 days written notice given at any time after
September 16, 1998 in the event that the market price of the Common Stock equals
or exceeds $10.00 per share. "Market price" shall mean: (i) the average closing
sale price of the Common Stock, for any 10 consecutive trading days within a
period of 30 consecutive trading days ending within five days of the date of
notice of redemption, as reported on the National Association of Securities
Dealers, Inc. ("NASD") Automated Quotation System or the NASD Electronic
Bulletin Board or (ii) the average of the last reported sales price of the
Common Stock for the 10 consecutive business days ending within five days of the
date of notice of redemption, on the primary exchange on which the Common Stock
is traded, if traded on a national securities exchange. Notice of redemption of
the Redeemable Warrants could force the holders to exercise the Redeemable
Warrants and pay the exercise price at a time when it may be disadvantageous for
them to do so, to sell the Redeemable Warrants at the current market price when
they might otherwise wish to hold the Redeemable Warrants, or to accept the
redemption price which would be substantially less than the market value of the
Redeemable Warrants at the time of redemption.
PREFERRED STOCK; POSSIBLE ANTI-TAKEOVER EFFECTS. The Company's
Certificate of Incorporation, as amended, authorizes the Board of Directors to
issue up to 2,000,000 shares of preferred stock, par value $0.00115 per share.
The preferred stock may be issued in one or more series, the terms of which may
be determined at the time of issuance by the Board of Directors, without further
action by stockholders, and may include voting rights (including the right to
vote as a series on particular matters), preferences as to dividends and
liquidation, conversion and redemption rights, and sinking fund provisions. No
preferred stock is currently outstanding, and the Company has no present plans
for the issuance of any preferred stock. The Company has agreed not to issue any
shares of preferred stock without the Underwriter's consent until September 16,
1999. However, the issuance of any such preferred stock could materially
adversely affect the rights of holders of Common Stock and, therefore, could
reduce the value of the Common Stock. In addition, specific rights granted to
future holders of preferred stock could be used to restrict the Company's
ability to merge with, or sell its assets to, a third party. The ability of the
Board of Directors to issue preferred stock could discourage, delay, or prevent
a takeover of the Company, thereby preserving control of the Company by the
current stockholders.
NO ASSURANCE OF PUBLIC TRADING MARKET. Prior to the Public Offering,
there was no established trading market for the Units, Common Stock and
Redeemable Warrants and there is no assurance that a regular trading market for
such securities on The Nasdaq Stock Market, or any other exchange, will be
sustained in the future. Although the Company's securities are included on the
OTC Bulletin Board, there can be no assurance that a regular trading market for
the securities will be sustained in the future. The OTC Bulletin Board is an
unorganized, inter-dealer, over-the-counter market which provides significantly
less liquidity than The Nasdaq Stock Market, and quotes for stocks included on
the OTC Bulletin Board are not listed in the financial sections of newspapers as
are those for The Nasdaq Stock Market. Therefore, prices for securities traded
solely on the OTC Bulletin Board may be difficult to obtain and purchasers of
the Units may be unable to resell the securities offered hereby at or near their
original offering price or at any price. In the event the securities are not
included on the OTC Bulletin Board, quotes for the securities may be included in
the "pink sheets" for the over-the-counter market. See "--`Penny Stock'
Regulations May Impose Certain Restrictions on Marketability of Securities."
(19)
<PAGE> 22
"PENNY STOCK" REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON
MARKETABILITY OF SECURITIES. The Securities and Exchange Commission (the
"Commission") has adopted regulations which generally define "penny stock" to be
any equity security that is not traded on a national securities exchange or
Nasdaq and that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exceptions. If the
Company's securities that are currently included on the OTC Bulletin Board are
trading at less than $5.00 per security at any time, the Company's securities
may become subject to rules that impose additional sales practice requirements
on broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally, such investors have assets in
excess of $1,000,000 or an individual annual income exceeding $200,000, or,
together with the investor's spouse, a joint income of $300,000). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require, among other things, the delivery, prior to the transaction, of a
risk disclosure document mandated by the Commission relating to the penny stock
market and the risks associated therewith. The broker-dealer must also disclose
the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market-maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Consequently, the
penny stock rules may restrict the ability of broker-dealers to sell the
Company's securities and may affect the ability of stockholders to sell the
Company's securities in the secondary market. See "-- No Assurance of Public
Trading Market."
(20)
<PAGE> 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities and Use of Proceeds.
The effective date of the Registration Statement (File No. 333-6650)
for which this statement is made is September 16, 1997. The Company has been
assigned a CUSIP number of 84763K. The offering to which this statement relates
(the "Offering") commenced on September 17, 1997, did not terminate before any
securities were sold and, as of the date hereof, has not terminated. The
managing underwriter of the Offering was Patterson Travis, Inc. Pursuant to the
offering, the Company registered (i) Common Stock, classified as an "equity"
security, (ii) Units, classified as "other" securities and (iii) Redeemable
Warrants, also classified "other" securities. Each Unit consists of one share of
Common Stock and one Redeemable Warrant to purchase one additional share of
Common Stock. The Redeemable Warrants are exercisable at a price per share of
$7.50 for a period of four years commencing September 16, 1998 and are subject
to redemption by the Company price of $0.01 per Redeemable Warrant upon 30 days'
written notice given at any time after September 16, 1998 in the event that the
market price of the Common Stock equals or exceeds $10.00 per share.
The Company registered and sold 1,200,600 Units for an aggregate price
of $6,903,450. In connection with the Offering, the issuer allowed underwriting
discounts and commissions of $690,345 and incurred aggregate expenses of
$797,104, broken down as follows: a non-accountable expense allowance of
$207,104, a consulting fee in the amount of $100,000 and offering expenses of
$490,000. Net offering proceeds to the Company after deducting expenses were
$5,416,001. Of the net proceeds, approximately $120,000 has been used to pay
professional fees, approximately $1,620,000 has been used to repay indebtedness,
including approximately $75,000 of indebtedness to officers and directors of the
Company, and approximately $580,000 has been used towards repayment of accounts
payable. The remaining proceeds are to be allocated as set forth in the
prospectus (the "Prospectus") included in the Registration Statement. This use
of proceeds does not represent a material change in the use of proceeds
described in the Prospectus.
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 and Reports on Form 8-K.
(a) Exhibits.
The following documents are referenced or included in this
report:
Exhibit No.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No current Reports on Form 8-K were filed during the Quarter
Ended September 30, 1997.
(21)
<PAGE> 24
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed in its
behalf by the undersigned thereunto duly authorized.
SPECTRUMEDIX CORPORATION
DATED: November 12, 1997 By: /s/ JOSEPH K. ADLERSTEIN
------------------------------------------
Joseph K. Adlerstein
President, Chief Executive Officer and
Chairman of the Board (Principal Executive
Officer)
DATED: November 12, 1997 By: /s/ BERNARD SONNENSCHEIN
------------------------------------------
Bernard Sonnenschein
Treasurer, Secretary and Director
(Principal Financial and Accounting
Officer)
(22)
<PAGE> 25
INDEX TO EXHIBITS
Exhibit
No. Description
--- -----------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE UNAUDITED CONDENSED BALANCE SHEET AND UNAUDITED CONDENSED STATEMENT
OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,158,824
<SECURITIES> 0
<RECEIVABLES> 18,148
<ALLOWANCES> 0
<INVENTORY> 203,474
<CURRENT-ASSETS> 3,380,446
<PP&E> 164,140
<DEPRECIATION> 92,352
<TOTAL-ASSETS> 3,714,526
<CURRENT-LIABILITIES> 1,278,258
<BONDS> 0
0
0
<COMMON> 3,889
<OTHER-SE> 2,432,379
<TOTAL-LIABILITY-AND-EQUITY> 3,714,526
<SALES> 36,337
<TOTAL-REVENUES> 36,337
<CGS> 78,772
<TOTAL-COSTS> 448,714
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,424
<INCOME-PRETAX> (489,818)
<INCOME-TAX> 0
<INCOME-CONTINUING> (489,818)
<DISCONTINUED> 0
<EXTRAORDINARY> 977,136
<CHANGES> 0
<NET-INCOME> 487,318
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0
</TABLE>
