<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 July 1, 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
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(Exact Name of Registrant as Specified in its Charter)
MASSACHUSETTS 04-3035323
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 FORBES ROAD, LEXINGTON, MASSACHUSETTS 02421
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(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
____________________
7,850,754 shares of Common Stock, $.01 par value, were outstanding as of
August 8, 2000.
<PAGE>
PHOTOELECTRON CORPORATION
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QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JULY 1, 2000
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
<S> <C>
PART I - FINANCIAL INFORMATION
---------------------
Item 1 Consolidated Financial Statements 3
CONSOLIDATED BALANCE SHEETS AT
JULY 1, 2000 AND JANUARY 1, 2000 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE THREE AND SIX MONTHS ENDED
JULY 1, 2000 AND JULY 3, 1999 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE SIX MONTHS ENDED
JULY 1, 2000 AND JULY 3, 1999 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
PART II - OTHER INFORMATION
-----------------
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 12
</TABLE>
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<PAGE>
PHOTOELECTRON CORPORATION AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 1, JANUARY 1,
2000 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................................... $ 5,878,458 $ 134,104
Accounts receivable........................................................................... 169,344 87,500
Inventories................................................................................... 1,428,984 1,437,557
Prepaid expenses.............................................................................. 297,522 146,799
Investments Held to Maturity.................................................................. -- --
Other current assets.......................................................................... 16,573 32,272
------------ ------------
Total current assets...................................................................... 7,790,881 1,838,232
------------ ------------
PROPERTY AND EQUIPMENT
Computer equipment............................................................................ 960,600 960,324
Lab and production equipment.................................................................. 977,278 975,408
Clinical site equipment....................................................................... 1,023,572 978,898
Furniture and fixtures........................................................................ 177,883 177,883
Leasehold improvements........................................................................ 819,613 805,886
------------ ------------
PROPERTY, PLANT, EQUIPMENT AND LEASEHOLD IMPROVEMENT, Less 3,958,946 3,898,399
------------ ------------
ACCUMULATED DEPRECIATION AND AMORTIZATION........................................................ 3,146,299 2,872,636
------------ ------------
Net property and equipment.................................................................... 812,647 1,025,763
------------ ------------
LONG TERM ASSETS
Deferred offering costs....................................................................... 1,276,310 --
------------ ------------
Total assets.............................................................................. $ 9,879,838 $ 2,863,995
============ ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES
Accounts payable.............................................................................. $ 220,082 $ 256,982
Accrued expenses.............................................................................. 260,408 364,495
Accrued payroll and benefits.................................................................. 64,408 75,690
Accrued warranty expense...................................................................... 338,000 266,000
Deferred revenue.............................................................................. -- 87,500
Convertible subordinated notes................................................................ -- 761,770
Convertible note payable...................................................................... -- 804,311
------------ ------------
Total current liabilities................................................................. 882,898 2,616,748
------------ ------------
LONG TERM LIABILITIES
10% Senior convertible debentures............................................................. 10,524,494 --
------------ ------------
Total long term liabilities............................................................... $ 10,524,494 --
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value
Authorized - 2,500,000
Issued and outstanding - none at July 1, 2000 and January 1, 2000, respectively -- --
Common stock, $0.01 par value -
Authorized - 20,000,000
Issued and outstanding - 7,844,454 and 7,768,754 at July 1, 2000 and
January 1, 2000, respectively............................................................. 78,445 77,688
Capital in excess of par value - preferred stock.............................................. -- --
Capital in excess of par value - common stock................................................. 40,638,193 38,641,184
Deferred compensation......................................................................... (9,986) (9,986)
Subscription receivable.......................................................................
Deficit accumulated during development stage.................................................. (42,234,206) (38,461,639)
------------ ------------
Total shareholders' equity................................................................ (1,527,554) 247,247
------------ ------------
Total liabilities and shareholders' equity................................................ $ 9,879,838 $ 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>
Three Months Ended Six Months Ended Period
------------ ------------ ------------ ------------ from Inception
July 1, July 3, July 1, July 3, to July 1, 2000)
2000 1999 2000 1999 (January 4, 1989
----------- ----------- ----------- ----------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues $ 530,000 $ -- $ 952,549 $ 272,134 $ 2,890,557
Cost of Goods Sold............................. 229,850 -- 339,817 124,420 1,246,257
----------- ----------- ----------- ----------- ------------
Gross Margin.................................. 300,150 -- 612,732 147,714 1,644,300
Operating Expenses
Research and Development expenses........ $ 707,858 $ 1,298,939 $ 1,472,826 $ 2,237,677 $ 29,208,694
Sales, general and administrative expenses 961,550 702,145 1,709,403 2,031,980 14,172,453
----------- ----------- ----------- ----------- ------------
Total operating expenses................. 1,669,408 2,001,084 3,182,229 4,269,657 43,381,147
----------- ----------- ----------- ----------- ------------
Operating loss........................... (1,369,258) (2,001,084) (2,569,497) (4,121,943) (41,736,847)
----------- ----------- ----------- ----------- ------------
Interest income.......................... 13,979 44,285 37,928 109,509 1,986,696
Interest expense......................... (921,968) (14,157) (1,240,998) (28,727) (2,484,055)
----------- ----------- ----------- ----------- ------------
Interest income (expense), net........... (907,989) 30,128 (1,203,070) 80,782 (497,359)
----------- ----------- ----------- ----------- ------------
Net loss................................. $(2,277,247) $(1,970,956) $(3,772,567) $(4,041,161) $(42,234,206)
=========== =========== =========== =========== ============
Basic and diluted net loss per share..... $(0.29) $(0.25) $(0.48) $(0.52)
=========== =========== =========== ===========
Weighted average basic and diluted shares 7,843,509 7,742,702 7,815,468 7,738,980
</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
Six Months Ended (January 4, 1989
July 1, 2000 July 3, 1999 to July 1, 2000)
------------- ------------- ----------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $(3,772,567) $(4,041,161) $(42,234,206)
Adjustments to reconcile net loss to net cash used in
Operating activities --
Depreciation and amortization............................................ 273,663 299,189 3,154,890
Noncash interest converted to subordinated notes......................... 82,828 -- 1,190,367
Noncash salary converted to common stock................................. -- -- 250,000
Noncash commission expense............................................... 4,576 -- 4,576
Noncash consulting expense............................................... 186,842 -- 186,842
Noncash research and development expense converted to subordinated notes. -- -- 9,000
Noncash compensation expense............................................. -- -- 1,192,579
Noncash interest expense bridge financing................................ 638,696 -- 672,486
Noncash interest expense on 10% senior convertible debentures............ 519,474 -- 519,474
Changes in current accounts --
Inventories.................................................................. 8,573 (318,814) (1,428,714)
Accounts receivable.......................................................... (81,844) 202,719 (169,344)
Prepaid expenses............................................................. (150,723) 75,309 10,678
Other current assets......................................................... 15,699 98,869 63,638
Accounts payable............................................................. (36,900) (48,961) 220,082
Accrued expenses............................................................. (43,369) (159,636) 461,868
Deferred revenue............................................................. (87,500) -- --
----------- ----------- ------------
Net cash used in operating activities.................................... (2,442,552) (3,892,486) (35,895,784)
----------- ----------- ------------
Cash flows from investing activities:
(Purchases) Maturation of held to maturity investments....................... -- 994,965 -
Purchases of equipment and leasehold improvements............................ (60,547) (250,998) (3,934,100)
Loan to officer.............................................................. -- -- (80,211)
Proceeds from sale of equipment and leasehold improvements................... -- -- 9,845
----------- ----------- ------------
Net cash (used in) provided by investing activities...................... (60,547) 743,967 (4,004,466)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock....................................... 121,976 257,067 18,685,512
Proceeds from issuance of preferred stock.................................... -- -- 13,385,370
Proceeds from issuance of subordinated convertible notes..................... -- -- 6,122,000
Proceeds from issuance of convertible notes payable.......................... 1,450,000 -- 1,450,000
Proceeds from issuance of 10% senior convertible debentures.................. 10,458,909 -- 10,458,909
Proceeds from issuance of warrants........................................... -- -- 236,453
Deferred offering expenses................................................... (684,523) -- (1,157,529)
Conversion of subordinated note payable...................................... (3,098,909) -- (3,098,909)
Payments under capital lease obligations..................................... -- -- (40,735)
Payments of subordinated notes............................................... -- 14 ,313 (262,363)
----------- ----------- ------------
Net cash provided by (used in) financing activities...................... 8,247,453 271,380 45,778,708
----------- ----------- ------------
Increase (decrease) in cash and cash equivalents................................ 5,744,354 (2,877,139) 5,878,458
----------- ----------- ------------
Cash and cash equivalents, beginning of period.................................. 134,104 3,686,457 --
----------- ----------- ------------
Cash and cash equivalents, end of period........................................ 5,878,458 809,318 5,878,458
=========== =========== ============
Noncash financing activities:
Non cash deferred offering expenses.......................................... $ 591,787 $ $ 591,787
=========== =========== ============
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>
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 $1,276,310 consist of deferred cash
offering costs in the amount of $684,523, 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 Form 10-K filing with the
Securities and Exchange Commission.
2. NET LOSS PER SHARE - During the first six months of 2000 and 1999, basic and
diluted net loss per share were calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
July 1, 2000 July 3, 1999 July 1, 2000 July 3, 1999
------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Basic:
Net loss $(2,277,247) $(1,970,956) $(3,772,567) $(4,041,161)
Weighted average shares 7,843,509 7,742,702 7,815,468 7,738,980
Basic net loss per share $ (0.29) $ (0.25) $ (0.48) $ (0.52)
</TABLE>
The computation of diluted earnings per share for July 1, 2000 and July 3,
1999 excludes the effect of assuming the exercise of stock option outstanding
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 July 1,
2000 there were 982,417 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 July 1, 2000, there were securities
convertible into 4,169,727 shares of common stock, with conversion prices
ranging from $2.45 - $4.74 per share with expiration dates ranging from
September 29, 2000 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
-6-
<PAGE>
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 were recorded as interest expense on the 10% Senior Convertible
Debenture. 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
$2,312,756 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, 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. 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. On June 30, 2000 the company increased the principal of the 10%
Senior Convertible Debenture in the amount of $65,585 of accrued interest.
Additionally, the Company recorded the fair value of these debentures in the
amount of $22,545 as interest expense. 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.
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".
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<PAGE>
5. SUBSEQUENT EVENT - On July 20, 2000, the Company announced the appointment of
Timothy W. Baker as Chief Financial Officer of the Company replacing Gerald
J. Bojas who elected to retire.
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
using photon radiosurgery 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. To date, the
Company has not received any significant revenue from the sale of the PRS400
System.
The Company has experienced significant operating losses in each year since its
inception, due primarily to substantial research and development expenditures.
As of July 1, 2000, the Company had an accumulated deficit of approximately
$42.2 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 sales and marketing efforts with Carl Zeiss will
begin to generate sales of the PRS, ACCUBEAM and INTRABEAM systems in the
upcoming year. The Company anticipates that its research and development, sales
and general and administrative expenses will increase minimally during 2000.
-8-
<PAGE>
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 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). 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
-9-
<PAGE>
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 securities sold in the offering have not been registered under the
Securities Act 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 agreed to use its best efforts to file with the Securities and
Exchange Commission, within sixty days following June 30, 2000, the final
closing date of the offering, a registration statement on Form S-3 (or such
other form as applicable) 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 1, 2000 AND JULY 3, 1999
Revenue. The Company had revenue of $530,000 in the second three months of
2000, as compared with $0 in the second three months of 1999. This can be
attributed to the company shipping a total of four miniature x-ray systems in
the quarter, placing two domestically and two systems in Europe.
Research and development expenses. The Company's research and development
expenses decreased by $591,081 from $1,298,939 in the second three months of
1999 to $707,858 in the second three 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
1999.
Selling, general and administrative expenses. The Company's selling,
general and administrative expenses increased by $259,405 from $702,145 in the
second three months of 1999 to $961,550 in the second three months of 2000. The
increase is primarily attributable to a one-time non-cash consulting expense of
$186,842 to a consultant of the Company, for warrants to purchase 100,000 shares
of the
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Company's common stock for services related to future capital financing. The
warrants issued are exercisable at any time for five years from May 1, 2000 at
an exercise price of $3.50 per share.
Interest income. Interest income decreased by $30,306 from $44,285 in the
second three months of 1999 to $13,979 in the second three months of 2000,
resulting from lower invested funds.
Interest expense. Interest expense increased by $907,811 from $14,157 in
the second three months of 1999 to $921,968 in the second three months of 2000.
The majority of this increase is $815,833 of non-cash interest expense incurred
as part of the $2.25 million PYC Corporation bridge loan and debenture offering.
SIX MONTHS ENDED JULY 1, 2000 AND JULY 3, 1999
Revenue. The Company had revenues of $952,549 in the first six months of
2000, as compared with $272,134 in the first six months of 1999. The 2000
revenue is primarily the result of the Company shipping a total of five
miniature x-ray systems in the first six months, placing three domestically and
two systems in Europe.
Research and development expenses. The Company's research and development
expenses decreased by $764,851 from $2,237,677 in the first six months of 1999
to $1,472,826 in the first six 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 1999.
Selling, general and administrative expenses. The Company's selling,
general and administrative expenses decreased by $322,577 from $2,031,980 in the
first six months of 1999 to $1,709,403 in the first six months of 2000. The
principal reduction in expense is attributable to the one time recognition of
severance expense relating to a former officer of the Company.
Interest income. Interest income decreased by $71,581 from $109,509 in the
first six months of 1999 to $37,928 in the first six months of 2000, resulting
from lower invested funds.
Interest expense. Interest expense increased by $1,212,271 from $28,727 in
the first six months of 1999 to $1,240,998 in the first six months of 2000. The
majority of this increase is $1,092,584 of non-cash interest expense incurred as
part of the $2.25 million PYC Corporation bridge loan and debenture offering.
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 $6,907,983 at July 1, 2000, compared with
$(778,516) at January 1, 2000. Included in working capital are cash and cash
equivalents of $5,878,458 at July 1, 2000, compared
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with $134,104 at January 1, 2000. During the first six months of 2000, the
Company used $2,442,552 of cash for operating activities.
The Company used $60,457 of cash in the first six months of 2000 for fixed
assets and leasehold improvements associated with its facility.
The Company received $121,976 of cash in the first six months of 2000 from the
exercise of stock options to purchase Common Stock. The Company also received
$1,450,000 of cash in the first six months of 2000 in the form of bridge
financing from PYC Corporation. The Company received $6,675,477 of proceeds
after repayment of short-term debt and offering expenses from the 10% Senior
Convertible Debenture 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.
PART II: OTHER INFORMATION
ITEM 5: OTHER INFORMATION
SUBSEQUENT EVENT
On July 20, 2000, the Company announced the appointment of Timothy W. Baker as
Chief Financial Officer of the Company replacing Gerald J. Bojas who elected to
retire.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
<TABLE>
<CAPTION>
NO. DESCRIPTION
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<S> <C>
10.1 Warrant Agreement dated May 1, 2000 by and between the Company and KSH Strategic Investment
Fund I, LP and exhibits thereto.
10.2 Warrant Certificate to purchase 11,000 shares of the Company's common stock issued to KSH
Strategic Investment Fund I, LP.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
10.3 Warrant Agreement dated June 30, 2000 by and between the Company and KSH Investment Group,
Inc. and exhibits thereto.
10.4 Warrant Certificate to purchase 184,000 shares of the Company's common stock issued to KSH
Investment Group, Inc.
27 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K
On June 20, 2000, the Company filed a Current Report on Form 8-K to announce
that the Company's independent public accountants removed the going concern
reference in the opinion previously issued to the Company in connection with the
Company's audited financial statements for the fiscal year ended January 1,
2000.
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: August 14, 2000
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