<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
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 0-21667
PHOTOELECTRON CORPORATION
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Massachusetts 04-3035323
--------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 Forbes Road, Lexington, Massachusetts 02421
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip code)
(781) 861-2069
--------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
--------------------
Indicate by check mark whether the registrant: (1) has filed all documents and
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 [X] No
--------------------
8,477,407 shares of Common Stock, $.01 par value, were outstanding as of
November 1, 2000.
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PHOTOELECTRON CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I-- FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements........................................................... 3
Consolidated Balance Sheets at September 30, 2000 and January 1, 2000....................... 3
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2000 and October 2, 1999...................................................... 5
Consolidated Statements of Cash Flow for the Nine Months Ended
September 30, 2000 and October 2, 1999...................................................... 6
Notes to Consolidated Financial Statements.................................................. 8
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations....... 10
PART II-- OTHER INFORMATION
Item 5 Other Information........................................................................... 14
Item 6 Exhibits and Reports on Form 8-K............................................................ 14
</TABLE>
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PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, January 1,
------------- ----------
2000 2000
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 2,021,935 $ 134,104
Accounts receivable....................................................... 265,821 87,500
Inventories............................................................... 1,275,989 1,437,557
Prepaid expenses.......................................................... 348,407 146,799
Investments Held to Maturity.............................................. 4,019,249 --
Other current assets...................................................... 6,088 32,272
------------ ------------
Total current assets................................................. 7,937,489 1,838,232
PROPERTY AND EQUIPMENT
Computer equipment........................................................ 976,687 960,324
Lab and production equipment.............................................. 1,068,792 975,408
Clinical site equipment................................................... 1,023,572 978,898
Furniture and fixtures.................................................... 183,104 177,883
Leasehold improvements.................................................... 864,420 805,886
------------ ------------
PROPERTY, PLANT, EQUIPMENT AND LEASEHOLD IMPROVEMENT........................... 4,116,575 3,898,399
------------ ------------
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION................................. 3,259,653 2,872,636
------------ ------------
Net property and equipment................................................ 856,922 1,025,763
------------ ------------
LONG TERM ASSETS
Deferred offering costs................................................... 1,234,662 --
============ ============
Total assets......................................................... $ 10,029,073 $ 2,863,995
============ ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES
Accounts payable.......................................................... $ 198,469 $ 256,982
Accrued expenses.......................................................... 146,564 364,495
Accrued payroll and benefits.............................................. 81,084 75,690
Accrued warranty expense.................................................. 350,000 266,000
Deferred revenue.......................................................... -- 87,500
Convertible subordinated notes............................................ -- 761,770
Convertible note payable.................................................. -- 804,311
------------ ------------
Total current liabilities............................................ 776,117 2,616,748
------------ ------------
LONG TERM LIABILITIES
10% senior convertible debentures......................................... 10,789,769 --
------------ ------------
Total long term liabilities.......................................... 10,789,769 --
------------ ------------
SHAREHOLDERS'(DEFICIT) EQUITY
Preferred stock, $0.01 par value
Authorized--2,500,000
Issued and outstanding--none at September 30, 2000
and January 1, 2000, respectively.............................. -- --
Common stock, $0.01 par value
Authorized--20,000,000
</TABLE>
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<TABLE>
<S> <C> <C>
Issued and outstanding--8,425,754 and 7,768,754 at September 30, 2000
and January 1, 2000, respectively.................................... 84,258 77,688
Capital in excess of par value--preferred stock........................... -- --
Capital in excess of par value--common stock.............................. 42,547,685 38,641,184
Deferred compensation..................................................... (91,236) (9,986)
Deficit accumulated during development stage.............................. (44,077,520) (38,461,639)
------------ ------------
Total shareholders' (deficit) equity................................. (1,536,813) 247,247
------------ ------------
Total liabilities and shareholders' (deficit) equity................. $ 10,029,073 $ 2,863,995
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period
------
from Inception
--------------
Three Months Ended Nine Months Ended (January 4, 1989
----------------------------- ------------------------- ---------------
to September 30,
----------------
2000)
----
September 30, October 2, September 30, October 2,
------------- ---------- ------------- ----------
2000 1999 2000 1999
------- ------- ------- -------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 167,960 $ 262,500 $ 1,120,509 $ 534,634 $ 3,058,517
Cost of Goods Sold........................ 62,150 142,233 401,967 266,653 1,308,407
------------ ------------ ------------ ---------- -----------
Gross Margin.............................. 105,810 120,267 718,542 267,981 1,750,110
------------ ------------ ------------ ---------- -----------
Operating Expenses
Research and Development
expenses.......................... $ 811,460 $ 768,785 $ 2,284,286 $ 3,006,462 $ 30,020,154
Sales, general and
administrative expenses........... 899,184 724,905 2,608,587 2,756,885 15,071,637
------------ ------------ ------------ ------------ ------------
Total operating expenses........ 1,710,644 1,493,690 4,892,873 5,763,347 45,091,791
------------ ------------ ------------ ------------ ------------
Operating loss....................... (1,604,834) (1,373,423) (4,174,331) (5,495,366) (43,341,681)
Interest income........................... 93,114 16,558 131,042 126,067 2,079,942
Interest expense.......................... (331,594) (14,257) (1,572,592) (42,984) (2,815,781)
------------ ------------ ------------ ------------ ------------
Interest (expense) income, net............ (238,480) 2,301 (1,441,550) 83,083 (735,839)
============ ============ ============ ============ ============
Net loss.................................. $ (1,843,314) $ (1,371,122) $ (5,615,881) $ (5,412,283) $(44,077,520)
============ ============ ============ ============ ============
Basic and diluted net loss per share...... $ (0.23) $ (0.18) $ (0.72) $ (0.70)
============ ============ ============ ============
Weighted average basic and diluted
shares................................. 7,873,775 7,754,254 7,834,904 7,744,072
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Period
------
from Inception
--------------
(January 4, 1989
----------------
Nine Months Ended to September 30,
-------------------------- ----------------
2000)
-----
September 30, October 2,
------------- ----------
2000 1999
----- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................... $ (5,615,881) $(5,412,283) $(44,077,520)
Adjustments to reconcile net loss to net cash used in operating activities
--Depreciation and amortization...................................... 387,017 403,344 3,268,244
Amortization of noncash offering expenses.......................... 64,503 -- 64,503
Noncash interest converted to subordinated notes................... 82,828 -- 1,190,367
Noncash salary converted to common stock........................... -- -- 250,000
Noncash commission expense......................................... 7,481 -- 7,481
Noncash consulting expense......................................... 186,842 -- 186,842
Noncash research and development expense converted to
subordinated notes............................................... -- -- 9,000
Noncash compensation expense....................................... 23,556 -- 1,216,135
Noncash interest expense on bridge financing....................... 638,696 -- 638,696
Noncash interest expense on 10% senior convertible debentures...... 851,068 -- 851,068
Changes in current accounts--
Inventories.......................................................... 161,568 (427,312) (1,275,719)
Accounts receivable.................................................. (178,321) 80,129 (265,821)
Prepaid expenses..................................................... (201,608) 77,785 (40,207)
Other current assets................................................. 26,184 101,351 74,123
Accounts payable..................................................... (58,513) (86,132) 198,469
Accrued expenses..................................................... (128,537) 73,333 376,700
Deferred revenue..................................................... 87,500 (87,500) --
------------ ---------- ------------
Net cash used in operating activities.............................. (3,840,617) (5,102,285) (37,293,847)
------------ ---------- ------------
Cash flows from investing activities:
(Purchases) Maturation of held to maturity investments............... (4,019,249) 1,993,056 (4,019,249)
Purchases of equipment and leasehold improvements.................... (218,176) (268,375) (4,091,729)
Loan to officer...................................................... -- -- (80,211)
Proceeds from sale of equipment and leasehold improvements........... -- -- 9,845
------------ ---------- ------------
Net cash (used in) provided by investing activities................ (4,237,425) 1,724,681 (8,181,344)
------------ ---------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock............................... 1,863,251 257,067 20,426,787
Proceeds from issuance of preferred stock............................ -- -- 13,385,370
Proceeds from issuance of convertible notes.......................... 1,450,000 -- 7,572,000
Proceeds from issuance of 10% senior convertible debentures.......... 7,360,000 -- 7,360,000
Proceeds from issuance of warrants................................... -- -- 236,453
Deferred offering expenses........................................... (707,378) -- (1,180,384)
Payments under capital lease obligations............................. -- -- (40,735)
Payments of subordinated notes....................................... -- 28,570 (262,363)
------------ ---------- ------------
Net cash provided by (used in) financing activities................ 9,965,873 285,637 47,497,128
------------ ---------- ------------
Increase (decrease) in cash and cash equivalents....................... 1,887,831 (3,091,967) 2,021,935
------------ ---------- ------------
Cash and cash equivalents, beginning of period......................... 134,104 3,686,457 --
------------ ---------- ------------
Cash and cash equivalents, end of period............................... 2,021,935 594,490 2,021,935
============ ========== ============
Noncash financing activities:
Non cash deferred offering expenses.................................. $ 591,787 $ $ 591,787
============ ========== ============
Conversion of subordinated note payable to
10% senior convertible debenture...................................... $ 3,098,909 $ $ 3,098,909
============ ========== ============
Conversion of salary expense to common stock......................... $ $ $ 250,000
============ ========== ============
Conversion of convertible subordinated notes to common stock......... $ $ $ 5,278,892
============ ========== ============
Conversion of common stock to preferred stock........................ $ $ $ 3,846,015
============ ========== ============
Capital lease obligation incurred for equipment...................... $ $ $ 40,383
============ ========== ============
Conversion of preferred stock to common stock........................ $ $ $ 28,923
============ ========== ============
Conversion of convertible subordinated notes to warrants............. $ $ $ 47,000
============ ========== ============
</TABLE>
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<PAGE>
The fair value of warrants issued in connection with the $2,250,000
bridge financing from PYC Corporation, in the amount of $638,696, has been
recognized as non-cash interest expense.
The total deferred offering costs of $1,299,165 consist of deferred
cash offering costs in the amount of $707,378 and deferred non-cash offering
costs in the amount of $591,787.
The fair value of warrants issued in connection with capital financing,
to a consultant, in the amount of $186,842 has been recognized as non-cash
general and administrative expense.
The accompanying notes are an integral part of these financial statements.
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<PAGE>
PHOTOELECTRON CORPORATION
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
1. Unaudited Results--The interim unaudited consolidated financial statements
contained herein have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In management's
opinion, the unaudited information includes all adjustments (consisting of
normal recurring entries) necessary for a fair presentation of the financial
position, results of operations, and cash flows for the periods presented. The
results of operations for the interim periods shown on this report are not
necessarily indicative of the results expected for the full year. The interim
financial statements should be read in conjunction with the financial statements
and notes for the year ended January 1, 2000 included in the Company's annual
report on Form 10-K filed with the Securities and Exchange Commission.
2. Net Loss per Share--During the third quarter of 2000 and 1999, basic and
diluted net loss per share were calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- --------------------------
September 30, October 2, September 30, October 2,
-------------- ----------- -------------- -----------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic:
Net loss..................... $(1,843,314) $(1,371,122) $(5,615,881) $(5,412,283)
Weighted average shares...... 7,873,775 7,754,254 7,834,904 7,744,072
Basic net loss per share..... $ (0.23) $ (0.18) $ (0.72) $ (0.70)
</TABLE>
The computation of diluted earnings per share for September 30, 2000 and October
2, 1999 excludes the effect of assuming the exercise of certain outstanding
stock options and the conversion of convertible securities because the effect
would be anti-dilutive, due to the Company's net loss during the year. As of
September 30, 2000, there were 1,055,417 of such options outstanding, with
exercise prices ranging from $0.40--$9.00 per share with expiration dates
ranging from December 1, 2000 to July 30, 2009. As of September 30, 2000, there
were securities convertible into 3,677,445 shares of common stock, with
conversion prices ranging from $2.45--$4.74 per share with expiration dates
ranging from January 27, 2002 to June 30, 2005.
3. Comprehensive Income--During the first quarter of 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This pronouncement sets forth requirements for disclosure
of the Company's comprehensive income and accumulated other comprehensive
income. There were no items of other comprehensive income; therefore
comprehensive income equals net income.
4. Senior Convertible Debt--In June 2000, the Company raised $10,458,909 in a
private placement of 10% senior convertible debentures. The Company is using the
net proceeds of the private placement for repayment of short-term debt bridge
financing and general corporate purposes, including, without limitation, to
support the accelerated testing and marketing of the Company's new products.
The placement agent for the offering received cash for commission and expenses
in the amount of $515,200 plus $52,818 for fees and the actual disbursements of
counsel to the placement agent. In addition, the Company issued to the placement
agent warrants to purchase 184,000 shares of the Company's common stock. The
Company recorded the fair value of the warrants in the amount of $577,954 as
deferred offering costs. The Company also issued to an affiliate of the
placement agent warrants to purchase 11,000 shares of the Company's common stock
in consideration for a commitment to make a bridge loan to the Company. The fair
value of these warrants in the amount of $22,750 was recorded as interest
expense on the 10% senior convertible debentures. The warrants issued to the
placement
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<PAGE>
agent and to the affiliate of the placement agent are exercisable at any time
for five years from June 30, 2000, the final closing date of the offering, at an
exercise price of $4.00 per share.
As part of the $10,458,909 raised in the offering, the Company issued to PYC
Corporation a 10% senior convertible debenture with a face amount of
$2,312,755.56 in exchange for the total amount due under the November 1999 $2.25
million line of credit bridge financing between the Company and PYC Corporation.
As of April 7, 2000, the Company had drawn down $2,250,000 under the line of
credit and had issued to PYC Corporation warrants to purchase an aggregate of
450,000 shares of the Company's common stock with an exercise price equal to the
average closing price of the Company's common stock for the ten trading days
preceding the draw made on the line of credit. The weighted average exercise
price of the warrants is $3.29 per share. The fair value of the warrants issued,
in the amount of $33,790, $276,751 and $361,945 has been recognized as non-cash
interest expense in the 4th quarter of 1999, 1st quarter of 2000, and 2nd
quarter of 2000, respectively. In addition, the Company issued to Peter M.
Nomikos a 10% senior convertible debenture with a face amount of $786,153.34,
the total amount due to Mr. Nomikos under the Amended and Restated 8%
Subordinated Convertible Note Due on Demand as of August 1, 1996.
Interest expense attributable to a beneficial conversion feature resulting from
the excess of the fair market value of the Company's common stock over the
conversion price on the date of issuance of the debt, which amounted to
$408,594, has been recognized in interest expense in the accompanying financial
statements in accordance with the provision of EITF 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios."
The holders of the debentures are entitled to receive interest payments at the
rate of 10% per annum on the outstanding principal amount of the debentures. At
the option of the Company, interest may be paid when due by adding the amount
payable to the outstanding principal amount of the debentures. The Company
increased the principal of the 10% senior convertible debentures in the amount
of $65,585 and $265,275 of accrued interest on July 1, 2000 and September 30,
2000, respectively. Additionally, the Company recorded the beneficial conversion
feature associated with these debentures in the amount of $22,545 and $66,319 as
interest expense on July 1, 2000 and September 30, 2000, respectively. The
principal amount of the debentures, together with all accrued and unpaid
interest, is due and payable on May 1, 2005. The holders of the debentures have
the option, at any time prior to May 1, 2005, to convert the debentures, in
whole or in part, into shares of the Company's common stock at a price of $4.00
per share.
5. SUBSEQUENT EVENT--On October 19, 2000, the Company elected Dr. Leonard
Laster to the Board of Directors of the Company to fill a vacancy created by the
September 30, 2000 resignation of George N. Hatsopoulos from the Board. Dr.
Laster was also elected to the Audit Committee of the Board.
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<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "expects,"
"anticipates," "believes" and words of similar import, constitute "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward looking statements are subject to various
risks and uncertainties, including those referred to in the Company's annual
report on Form 10-K for the fiscal year ended January 1, 2000, that could cause
actual future results and events to differ materially from those currently
anticipated. Readers are cautioned not to place undue reliance on these
forward-looking statements.
The Company was founded in 1989 and soon after focused its development
efforts on miniature x-ray technology. From this technology, the Company
developed its PRS(TM) system. The Company's latest commercial version of the PRS
system is the PRS400(TM) system. The key component of the PRS400 system is a
miniature x-ray source, designed to be placed inside a tumor or the residual
surgical cavity after tumor removal. The x-ray source generates x-rays at the
tip of a long, needle-like probe that can be placed directly into the target
area. The PRS400 system produces low energy photons that are rapidly absorbed in
the tissue immediately surrounding the probe, minimizing irradiation of
surrounding healthy body tissue. The PRS400 system is protected by thirteen U.S.
patents, with an additional ten patents pending. During 1999, the PRS400 system
was integrated into new treatment systems designed to address an expanding range
of clinical applications. These new products, known as the ACCUBEAM(TM) system
and the INTRABEAM(TM) system, have been developed in collaboration with Carl
Zeiss Oberkochen ("Carl Zeiss"), the Company's strategic partner.
The Company has experienced significant operating losses in each year since
its inception, due primarily to substantial research and development
expenditures. As of September 30, 2000, the Company had an accumulated deficit
of approximately $44.1 million and expects to continue to incur losses until
such time as its commercialization efforts yield offsetting revenues. There can
be no assurance that the PRS400 system will ever gain commercial acceptance, or
that the Company will ever generate significant revenues or achieve
profitability. The Company's ability to achieve profitable operations will be
dependent in a large part on whether it can successfully commercialize the PRS,
ACCUBEAM and INTRABEAM systems and make the transition to a manufacturing and
marketing company. The Company anticipates that its research and development,
sales and general and administrative expenses will decrease minimally during
2000.
On July 27, 1998, the Company obtained a Section 510(k) marketing clearance
for the PRS400 system which the Company developed for introduction as its first
commercial product. Simultaneous with completion of PRS400 system product
development, the Company completed the implementation of programs designed to
ensure compliance with the FDA's cGMP standards. The Company also completed the
process of seeking certification to the Medical Device Directive Annex II,
enabling self-certification of the European Community Mark (CE). On December 18,
1998, the Company initiated commercial distribution of the PRS system. In
September 1999, the Company obtained a Section 510(k) marketing clearance from
the FDA to market the system for radiotherapy treatments, regardless of
treatment site.
In August 1999, the Company entered into a strategic alliance with Carl
Zeiss, an international technology leader whose medical systems division
specializes in high technology equipment such as surgical microscopes for
various medical disciplines and state-of-the-art image-guided surgery equipment.
The Company appointed Carl Zeiss as its exclusive distributor for the PRS400
system throughout the world (except for Japan where Toshiba Medical Systems is
the Company's distributor of the PRS400 system) for intracranial applications
and spinal radiotherapy and as its non-exclusive distributor for the PRS400
system in the same territory for all other clinical
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<PAGE>
applications. In addition, Carl Zeiss agreed to assist the Company in the
development of new intraoperative radiotherapy products and to provide service
and support for the Company's products. The alliance with Carl Zeiss gives the
Company access to a global sales force with an established record of sales of
high technology equipment within the medical field.
In November 1999, the Company announced the launch of two products jointly
developed with Carl Zeiss: (i) the ACCUBEAM system, a device for the treatment
of brain tumors that combines the Company's miniature x-ray source with Carl
Zeiss's stereotactic guided, motorized MKM surgical microscope system; and (ii)
the INTRABEAM system, a multi-purpose system for intraoperative radiotherapy
that combines the Company's miniature x-ray source with an articulated support
stand from Carl Zeiss.
In addition to establishing its strategic alliance with Carl Zeiss, the
Company joined the Surgical Navigation Network or SNN, a consortium of medical
equipment companies that has established a shared, open-standard, image-based
software system to support their products. By participating in the SNN
consortium and utilizing its software system, the Company can integrate its
miniature x-ray source with the products of other SNN members, including
Philips, Agfa IMPAX, Aesculap and XLTEK. In addition, the SNN participants agree
to promote each other's products on a non-exclusive basis, thus enhancing the
Company's distribution capabilities. The software used by SNN is written and
supported by SNS. SNS is currently working to integrate the Company's technology
into the software platform shared by the other SNN member companies.
In June 2000, the Company raised $10,458,909 in a private placement of 10%
senior convertible debentures to "accredited investors" (as defined in
Regulation D under the Securities Act of 1933, as amended). The Company is using
the net proceeds of the private placement for general administrative expenses,
repayment of short-term debt bridge financing and for general corporate
purposes, including, without limitation, to support the accelerated testing and
marketing of the Company's new products.
The placement agent for the offering received cash for commission and
expenses in the amount of $515,200 plus $52,818 for fees and the actual
disbursements of counsel to the placement agent. In addition, the Company issued
to the placement agent warrants to purchase 184,000 shares of the Company's
common stock. The Company also issued to an affiliate of the placement agent
warrants to purchase 11,000 shares of the Company's common stock in
consideration for a commitment to make a bridge loan to the Company. The
warrants issued to the placement agent and to the affiliate of the placement
agent are exercisable at any time for five years from June 30, 2000, the final
closing date of the offering, at an exercise price of $4.00 per share.
As part of the $10,458,909 raised in the offering, the Company issued to
PYC Corporation a 10% senior convertible debenture with a face amount of
$2,312,755.56 in exchange for the total amount due under the November 1999 $2.25
million line of credit bridge financing between the Company and PYC Corporation.
In addition, the Company issued to Peter M. Nomikos a 10% senior convertible
debenture with a face amount of $786,153.34, the total amount due to Mr. Nomikos
under the Amended and Restated 8% Subordinated Convertible Note Due on Demand as
of August 1, 1996.
The holders of the debentures are entitled to receive interest payments at
the rate of 10% per annum on the outstanding principal amount of the debentures.
The principal amount of the debentures, together with all accrued and unpaid
interest, is due and payable on May 1, 2005. The holders of the debentures have
the option, at any time prior to May 1, 2005, to convert the debentures, in
whole or in part, into shares of the Company's common stock at a price of $4.00
per share.
The debentures and warrants issued in the offering were not registered
under the Securities Act of 1933, as amended, or the securities laws of any
state. The offering was made in reliance upon the exemptions from the
registration provisions afforded by Section 4(2) of the Securities Act and Rule
506 of Regulation D thereunder. The Company has filed a registration statement
on Form S-3 with respect to the resale of shares of the Company's common stock
issuable upon conversion of the debentures, as well as the shares of the
Company's common stock issuable upon the exercise of the warrants issued to the
placement agent and the affiliate of the placement agent.
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<PAGE>
This registration statement, which is SEC File No. 333-44252, became effective
at 4:00 p.m. on Thursday, September 21, 2000.
In September 2000, PYC Corporation, the Company's largest shareholder,
exercised a warrant to purchase 575,000 shares of the Company's common stock at
an exercise price of $3.00 per share for a total of $1,725,000. The warrant was
originally issued in conjunction with a 1992 subordinated debt financing.
Results of Operations
Three Months Ended September 30, 2000 and October 2, 1999
Revenue. The Company had revenue of $167,960 in the third quarter of 2000,
as compared with $262,500 in the third quarter of 1999. The 2000 revenue can be
attributed to a partial shipment of an INTRABEAM(TM) system in addition to the
shipment of a microdensitometer.
Backlog. The Company ended the third quarter of 2000 with a backlog of
$319,500 reflecting the timing of orders received, as compared to a backlog of
$0 for the third quarter of 1999. The Company expects to ship the backlog prior
to the end of the current fiscal year.
Research and development expenses. The Company's research and development
expenses increased by $42,675 from $768,785 in the third quarter of 1999 to
$811,460 in the third quarter of 2000. The increase reflects the Company's
continued investment into the core miniature x-ray technology for alternative
markets and applications.
Selling, general and administrative expenses. The Company's selling,
general and administrative expenses increased by $174,279 from $724,905 in the
third quarter of 1999 to $899,184 in the third quarter of 2000. The increase is
primarily attributable to a focused marketing effort specifically targeted
towards promoting the Company's existing product lines in the medical community.
Interest income. Interest income increased by $76,556 from $16,558 in the
third quarter of 1999 to $93,114 in the third quarter of 2000. This increase
resulted from investing the funds received from the Company's 10% senior
convertible debenture private placement which was completed on June 30, 2000.
Interest expense. Interest expense increased by $317,337 from $14,257 in
the third quarter of 1999 to $331,594 in the third quarter of 2000. The interest
expense in the third quarter of 2000 is non-cash interest expense incurred as
part of the Company's 10% senior convertible debenture private placement which
was completed on June 30, 2000.
Nine Months Ended September 30, 2000 and October 2, 1999
Revenue. The Company had revenues of $1,120,509 in the first nine months of
2000, as compared with $534,634 in the first nine months of 1999. This increase
in revenue is primarily attributable to increased market penetration and sale of
the Company's products.
Research and development expenses. The Company's research and development
expenses decreased by $722,176 from $3,006,462 in the first nine months of 1999
to $2,284,286 in the first nine months of 2000. The decrease primarily
represents the Company's shift towards focusing on manufacturing and marketing
efforts for the PRS400, ACCUBEAM and INTRABEAM systems. Additionally, the other
factor contributing to the reduction is the reorganization of the Company in
early 1999.
Selling, general and administrative expenses. The Company's selling,
general and administrative expenses decreased by $148,298 from $2,756,885 in the
first nine months of 1999 to $2,608,587 in the first nine months of
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2000. The reduction primarily reflects the reorganization of the Company in
early 1999 and is partially offset by the increase in marketing expenses
incurred in the third three months of 2000 to promote the Company's existing
product range in the market.
Interest income. Interest income increased by $4,975 from $126,067 in the
first nine months of 1999 to $131,042 in the first nine months of 2000. This
increase resulted from investing the funds received from the Company's 10%
senior convertible debenture private placement which was completed on June 30,
2000.
Interest expense. Interest expense increased by $1,529,608 from $42,984 in
the first nine months of 1999 to $1,572,592 in the first nine months of 2000.
The interest expense incurred in the first nine months of 2000 is non-cash
interest expense related to the Company's convertible debt.
Liquidity and Capital Resources
The Company has expended substantial funds to research and develop the PRS,
ACCUBEAM and INTRABEAM systems and other potential products, conduct clinical
trials, pursue regulatory approvals, establish commercial scale manufacturing in
its own facilities or in the facilities of others, and market the PRS, ACCUBEAM
and INTRABEAM systems. The Company anticipates it will continue to expend
substantial funds in the future on such activities as such funds become
available.
Consolidated working capital was $7,161,372 at September 30, 2000, compared
with $(778,516) at January 1, 2000. Included in working capital are cash and
cash equivalents of $2,021,935 at September 30, 2000, compared with $134,104 at
January 1, 2000 and investments held to maturity of $4,019,249 at September 30,
2000, compared with $0 at January 1, 2000. During the first nine months of 2000,
the Company used $3,840,617 of cash for operating activities.
The Company used $218,176 of cash in the first nine months of 2000 for
fixed assets and leasehold improvements associated with its facility.
The Company received $1,863,251 of cash in the first nine months of 2000
from the exercise of stock options and a warrant to purchase common stock. The
Company also received $1,450,000 of cash in the first nine months of 2000 in the
form of bridge financing from PYC Corporation. The Company received $6,652,622
of net proceeds, after repayment of short-term debt and offering expenses, from
the 10% senior convertible debenture private placement which was completed on
June 30, 2000.
The Company maintains medical product liability insurance with respect to
its clinical trials which the Company believes contain reasonable deductibles
and other ordinary and customary provisions. The Company believes that these
policies cover such risks in such amounts as are reasonable and prudent under
the circumstances, and the Company does not anticipate that claims under these
policies, if any, will have a material adverse impact on the Company's liquidity
or capital resources. Prior to commercial sale of its products, the Company
obtained product liability insurance covering the commercial use of its
products.
The Company's future capital requirements will depend on a variety of
factors, including the time and costs involved in obtaining FDA and other
regulatory approvals, the results of the Company's ongoing clinical trials, the
market acceptance of the PRS, ACCUBEAM and INTRABEAM systems and any other
Company products, the expense and results of the Company's continued scientific
research and development programs, the time and costs expended in filing,
prosecuting and enforcing patent claims, and the development of competing
technologies.
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PART II: OTHER INFORMATION
ITEM 5: OTHER INFORMATION.
Subsequent Event
On October 19, 2000, the Company elected Dr. Leonard Laster to the Board of
Directors of the Company to fill a vacancy created by the September 30, 2000
resignation of George N. Hatsopoulos from the Board. Dr. Laster was also elected
to the Audit Committee of the Board.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
No. Description
--- -----------
27 Financial Data Schedule.
(b) Reports on Form 8-K
Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
PHOTOELECTRON CORPORATION
By: /s/ Euan S. Thomson
-------------------
Euan S. Thomson
President and Chief Executive Officer
By: /s/ Timothy W. Baker
--------------------
Timothy W. Baker
Chief Financial Officer and Treasurer
Dated: November 6, 2000
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