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 28, 2002
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.)
9 EXECUTIVE PARK DRIVE 01862
NORTH BILLERICA, MA (Zip code)
(Address of Principal Executive Offices)
(978) 670-8777
(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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
------------------
10,055,902 shares of Common Stock, $.01 par value, were outstanding as of
November 4, 2002
1
PHOTOELECTRON CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 28, 2002
TABLE OF CONTENTS
Page
----
PART I-- FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements ................................................. 3
Condensed Consolidated Balance Sheets at September 28, 2002 and December 29, 2001 ........... 3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 28, 2002 and September 29, 2001 ................................................... 4
Condensed Consolidated Statements of Cash Flow for the Nine Months Ended September 28,
2002 and September 29, 2001 ................................................................. 5
Notes to Unaudited Condensed Consolidated Financial Statements .............................. 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk .................................. 11
Item 4 Controls and Procedures ..................................................................... 12
PART II-- OTHER INFORMATION
Item 1 Legal Proceedings ........................................................................... 13
Item 2 Changes in Securities and Use of Proceeds ................................................... 13
Item 3 Defaults upon Senior Securities ............................................................. 13
Item 4 Submission of Matters to a Vote of Security Holders ......................................... 13
Item 5 Other Information ........................................................................... 13
Item 6 Exhibits and Reports on Form 8-K ............................................................ 13
2
PHOTOELECTRON CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 28, December 29,
------------- ------------
2002 2001
---- ----
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ................................................. $ 1,451,482 $ 4,007,547
Accounts receivable ....................................................... 186,120 277,674
Inventories ............................................................... 1,457,828 1,656,889
Prepaid expenses .......................................................... 118,633 198,289
Held to maturity investments .............................................. -- 1,594,166
------------ ------------
Total current assets ................................................. 3,214,063 7,734,565
============ ============
Property and Equipment:
Computer equipment ........................................................ 1,026,534 1,026,534
Lab and production equipment .............................................. 1,229,074 1,188,131
Clinical site equipment ................................................... 875,122 875,122
Sales demo equipment ...................................................... 148,450 148,450
Furniture and fixtures .................................................... 183,104 183,104
Leasehold improvements .................................................... 107,254 866,230
------------ ------------
Property and equipment .................................................... 3,569,538 4,287,571
Less--Accumulated depreciation and amortization ........................... 3,230,423 3,849,728
------------ ------------
Net property and equipment ................................................ 339,115 437,843
------------ ------------
Other Assets:
Deferred offering costs, net .............................................. 808,972 1,030,444
------------ ------------
Total assets ......................................................... $ 4,362,150 $ 9,202,852
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable .......................................................... $ 378,169 $ 298,182
Accrued expenses .......................................................... 462,818 659,360
Accrued payroll and benefits .............................................. 93,583 171,712
------------ ------------
Total current liabilities ............................................ 934,570 1,129,254
============ ============
Long Term Liabilities
Senior convertible debentures ............................................. 15,592,796 15,024,333
------------ ------------
Commitments and Contingencies (Note 4)
Shareholders' Deficit:
Preferred stock, $0.01 par value
Authorized--2,500,000
Issued and outstanding--none at September 28, 2002 and December 29,
2001, respectively ................................................ -- --
Common stock, $0.01 par value
Authorized--25,000,000 and 20,000,000 at September 28, 2002 and
December 29, 2001 respectively ....................................
Issued and outstanding--10,054,901 and 9,947,418 at September 28, 2002
and December 29, 2001, respectively ............................... 100,549 99,474
Capital in excess of par value common stock ............................... 48,757,583 48,374,531
Deferred compensation ..................................................... (28,630) (77,298)
Accumulated deficit ....................................................... (60,994,718) (55,347,442)
------------ ------------
Total shareholders' deficit .......................................... (12,165,216) (6,950,735)
------------ ------------
Total liabilities and shareholders' deficit .......................... $ 4,362,150 $ 9,202,852
============ ============
The accompanying notes are an integral part of these financial statements.
3
PHOTOELECTRON CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
September 28, September 29, September 28, September 29,
------------- ------------- ------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues ............................. $ 448,258 $ 157,585 $ 1,300,891 $ 760,365
Cost of Goods Sold ................... 285,133 90,825 727,294 479,728
------------ ------------ ------------ ------------
Gross Margin ......................... 163,125 66,760 573,597 280,637
------------ ------------ ------------ ------------
Operating Expenses
Research and development
Expenses ..................... 973,314 1,236,850 2,943,272 3,040,524
Sales, general and administrative
Expenses ..................... 711,031 1,132,777 2,343,551 3,562,633
------------ ------------ ------------ ------------
Total operating expenses ..... 1,684,345 2,369,627 5,286,823 6,603,157
------------ ------------ ------------ ------------
Operating loss ............... (1,521,220) (2,302,867) (4,713,226) (6,322,520)
Interest income ...................... 12,956 31,284 49,952 191,963
Interest expense ..................... (330,447) (241,082) (984,000) (761,274)
------------ ------------ ------------ ------------
Interest expense, net ................ (317,491) (209,798) (934,048) (569,311)
------------ ------------ ------------ ------------
Net loss ............................. $ (1,838,711) $ (2,512,665) $ (5,647,274) $ (6,891,831)
============ ============ ============ ============
Basic and diluted net loss per
share ............................ $ (0.18) $ (0.25) $ (0.56) $ (0.72)
============ ============ ============ ============
Weighted average basic and
diluted shares .................... 10,049,749 9,912,370 10,001,961 9,627,677
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
PHOTOELECTRON CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Nine Months Ended
-------------------------------
September 28, September 29,
------------- -------------
2002 2001
---- ----
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss ........................................................................... $ (5,647,274) $ (6,891,831)
Adjustments to reconcile net loss to net cash used in operating activities--
Depreciation and amortization .................................................... 246,926 367,208
Noncash amortization of offering expenses ........................................ 226,883 160,879
Noncash compensation expense ..................................................... 11,767 44,041
Noncash commission expense... .................................................... 9,174 --
Noncash consulting expense... .................................................... 7,878 9,106
Noncash interest expense on 10% convertible debt ................................. 752,300 761,274
Noncash interest expense on 6% convertible debt .................................. 231,700 --
Changes in current accounts--
Accounts receivable .............................................................. 91,554 105,997
Inventories ...................................................................... 199,061 (246,045)
Prepaid expenses ................................................................. 79,656 64,122
Accounts payable ................................................................. 79,987 347,830
Accrued expenses and accrued payroll and benefits ................................ (274,671) (183,714)
Net cash used in operating activities .......................................... (3,985,059) (5,461,133)
------------- -------------
Cash flows from investing activities:
Proceeds from held to maturity investments ........................................ 1,594,166 3,972,770
Purchases of equipment and leasehold improvements .................................. (148,197) (142,464)
------------- -------------
Net cash provided by investing activities ...................................... 1,445,969 3,830,306
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock ............................................. 9,221 3,881,109
Deferred offering expenses ......................................................... (26,196) (177,377)
------------- -------------
Net cash provided by (used in) financing activities ............................ (16,975) 3,703,732
------------- -------------
Increase (decrease) in cash and cash equivalents ..................................... (2,556,065) 2,072,905
------------- -------------
Cash and cash equivalents, beginning of period ....................................... 4,007,547 662,857
------------- -------------
Cash and cash equivalents, end of period ............................................. $ 1,451,482 $ 2,735,762
------------- -------------
Noncash financing activities:
Conversion of 10% convertible debentures to common stock .......................... $ 415,537 $ 1,568,241
============= =============
The accompanying notes are an integral part of these financial statements.
5
PHOTOELECTRON CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The interim unaudited condensed consolidated financial statements
contained herein have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations. 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 December
29, 2001 included in Photoelectron Corporation's (the "Company" or "PeC") Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
The Company has experienced significant operating losses in each year
since its inception, due primarily to substantial research and development
expenditures. As of September 28, 2002, the Company had an accumulated deficit
of approximately $61 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 Company's products 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 its
products and make the transition to a manufacturing and marketing company. The
Company believes that its existing cash and investments together with
anticipated revenues will be sufficient for at least the remainder of the year.
The Company's primary source of liquidity in 2002 is the $5,000,000 of proceeds
from the 6% Debenture issued in December 2001. The Company has reached
agreements in principle with Carl Zeiss and PYC Corporation to provide $500,000
each in a bridge financing, which the Company anticipates will provide
sufficient cash to continue operations through the first quarter of 2003. The
Company anticipates that the $500,000 to be provided by Carl Zeiss will be in
the form of advance purchase orders under the existing distribution agreement
between the Company and Carl Zeiss, and that the $500,000 to be provided by PYC
Corporation will be under a line of credit secured by certain of the Company's
assets. In order to continue operations, the Company will have to raise
additional capital in fiscal 2003 unless revenues are greater than anticipated.
The Company is currently reviewing potential financing options for the upcoming
year. There is no assurance that it will be able to find additional financing on
acceptable terms, if at all.
Significant Accounting Policies
The significant accounting policies followed by the Company in
preparing its financial statements are set forth in Note 1 to the financial
statements included in its Form 10-K for the year ended December 29, 2001. The
Company has made no changes to these policies during this quarter.
2. Net Loss Per Share
The computation of diluted earnings per share for September 28, 2002
and September 29, 2001 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
period. As of September 28, 2002 and September 29, 2001, there were 907,367 and
980,707 of such options outstanding, respectively, with exercise prices ranging
from $2.125-$9.00 per share and with expiration dates ranging from March 18,
2003 to July 31, 2012. As of September 28, 2002, there were securities
convertible into 4,953,596 shares of common stock, with conversion prices
ranging from $2.45-$4.74 per share and with expiration dates ranging from May 1,
2003 to September 27, 2007. As of September 29, 2001, there were securities
convertible into 3,459,055 shares of common stock, with conversion prices
ranging from $2.45-$4.74 per share and with expiration dates ranging from
January 27, 2002 to June 30, 2005.
6
3. Comprehensive Income (Loss)
Comprehensive income (loss) approximates the net loss for all periods
presented.
4. Commitments and Contingencies
On May 22, 2002, the Company entered into a lease agreement with the
American Power Conversion Corporation for approximately 23,700 square feet of
space at 9 Executive Park Drive in North Billerica, Massachusetts. In July 2002,
the Company relocated to the new facility which now serves as the principal
offices of the Company. The term of the lease agreement expires on August 31,
2007, but may be extended by the Company for an additional five-year term. The
Company has commitments under this lease agreement to make payments of
approximately $108,625 in 2002, $260,700 in each of 2003 through 2006, and
$152,075 in 2007.
5. Recent Accounting Pronouncements
On December 30, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No.144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," which addresses financial reporting for the impairment or
disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and the accounting
and reporting provisions of APB 30 related to the disposal of a segment of a
business. The adoption of this statement did not have a significant effect on
the Company's financial position or results of operations.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated With Exit or Disposal Activities." SFAS
No. 146 addresses financial accounting and reporting for costs associated with
exit or disposal activities and is effective for such activities that are
initiated after December 31, 2002, with earlier adoption encouraged. The
adoption of SFAS No. 146 is not expected to have any effect on the Company's
results of operations or financial position upon adoption.
6. Other Events
Effective August 21, 2002, the Company entered into a Distribution
Agreement (the "Distribution Agreement") with Carl-Zeiss-Ziftung, dba Carl
Zeiss, a trust foundation organized and existing under the laws of Germany
("Carl Zeiss"). The Distribution Agreement appoints Carl Zeiss as exclusive
worldwide (other than Japan) distributor of the Company's Photon Radiosurgery
System ("PRS") and the Company's INTRABEAM(TM) intra-operative radiosurgery
system that combines the PRS with a counterbalanced surgical support stand and a
set of applicators. Also included are all improvements, redesigns, successor
models and other developments to such products and any device, component, part,
accessory or consumable in or intended for use with any such product. The
Distribution Agreement replaces the Development and Distribution Agreement with
Carl Zeiss Oberkochen that expired August 21, 2002. Carl Zeiss has committed to
certain minimum purchase requirements during the term of the Distribution
Agreement
Under an agreement with Cordis Corporation ("Cordis") dated as of
February 5, 2001 (the "2001 Agreement"), the Company agreed to develop for
Cordis a miniature x-ray source for intravascular radiation therapy (the "X-Ray
System") that would be subsequently distributed by Cordis. Effective September
6, 2002, the Company and Cordis amended the 2001 Agreement (a) to grant the
Company sole authority to determine the amount of resources it will devote from
time to time to its development efforts under the 2001 Agreement, and (b) if the
Company completes the product development efforts contemplated by the 2001
Agreement, to grant Cordis the option to proceed with the terms of the 2001
Agreement or, if Cordis elects not to proceed with the 2001 Agreement, to grant
the Company the exclusive right to manufacture and distribute the X-Ray System.
7
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 December 29, 2001, 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.
Photoelectron Corporation ("PeC" or the "Company") is a technology
company dedicated to developing, manufacturing and marketing miniature x-ray
systems for multiple market applications.
Established in 1989, the Company initially focused on research and
development for the miniaturization of an x-ray system for cancer treatment. The
Company has since expanded its development efforts and is now creating and
adapting miniature x-ray systems for a variety of applications in healthcare and
non-healthcare related markets. The Company has established an intellectual
property portfolio of twenty-three (23) U.S. patents and has twelve (12)
additional U.S. patents pending, all of which relate to the Company's core
technology and use.
The Company's business strategy is to identify opportunities in which
its patented core technology can be used to gain access to new markets by means
of strategic alliances with industry leaders. This strategy allows the Company
to foster the development of multiple applications of its technology, while
remaining focused on its core expertise of developing, manufacturing and
marketing miniature x-ray systems. By joining with one or more industry leaders
to develop an x-ray system to satisfy the needs of a specific market, the
Company gains market and application expertise without having to internalize
many of the costs and organizational overhead necessary to support the specific
application. Leveraging the market expertise of these strategic relationships
allows the Company to rapidly bring the technology to new markets. The Company
plans to identify additional market opportunities that can both be linked to the
core technology and present the opportunity to access the market through a
strategic partner with application expertise and the sales and marketing
organization necessary to drive market acceptance.
The Company is currently pursuing initiatives in the medical and
industrial markets with miniature x-ray systems designed for intra-operative
radiation therapy, radiosurgery, intravascular radiation therapy, brachytherapy,
and x-ray fluorescence analysis.
On August 12, 2002, the Company engaged Deloitte & Touche LLP to serve
as independent public accountants for the fiscal year ending December 28, 2002.
The decision to engage Deloitte & Touche LLP was approved by the Company's Audit
Committee of the Board of Directors under authority of the Company's Board of
Directors.
Effective August 21, 2002, the Company entered into a Distribution
Agreement (the "Distribution Agreement") with Carl-Zeiss-Ziftung, dba Carl
Zeiss, a trust foundation organized and existing under the laws of Germany
("Carl Zeiss"). The Distribution Agreement appoints Carl Zeiss as exclusive
worldwide (other than Japan) distributor of the Company's Photon Radiosurgery
System ("PRS") and the Company's INTRABEAM(TM) intra-operative radiosurgery
system that combines the PRS with a counterbalanced surgical support stand and a
set of applicators. Also included are all improvements, redesigns, successor
models and other developments to such products and any device, component, part,
accessory or consumable in or intended for use with any such product. The
Distribution Agreement replaces the Development and Distribution Agreement with
Carl Zeiss Oberkochen that expired August 21, 2002. Carl Zeiss has committed to
certain minimum purchase requirements during the term of the Distribution
Agreement.
Under an agreement with Cordis Corporation ("Cordis") dated as of
February 5, 2001 (the "2001 Agreement"), the Company agreed to develop for
Cordis a miniature x-ray source for intravascular radiation therapy (the "X-Ray
System") that would be subsequently distributed by Cordis. Effective September
6, 2002, the Company and Cordis amended the 2001 Agreement (a) to grant the
Company sole authority to determine the amount of resources it will devote from
time to time to its development efforts under the 2001 Agreement, and (b) if the
Company completes the product development efforts contemplated by the 2001
Agreement, to grant Cordis the option to proceed with the terms of the 2001
Agreement or, if Cordis elects not to proceed with the 2001 Agreement, to grant
the Company the exclusive right to manufacture and distribute the X-Ray System.
8
The Company has experienced significant operating losses in each year
since its inception, due primarily to substantial research and development
expenditures. As of September 28, 2002, the Company had an accumulated deficit
of approximately $61 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 Company's products 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 its
products and make the transition to a manufacturing and marketing company. The
Company anticipates that its sales and marketing efforts through its existing
sales and distribution channels will continue to increase sales of its products
in the current year.
Results of Operations
Three Months Ended September 28, 2002 and September 29, 2001
Revenue. The Company had revenues of $448,258 in the third quarter of
2002, as compared with $157,585 in the third quarter of 2001. The 2002 third
quarter revenue reflects the sale of an INTRABEAM system through the Company's
distributor, Carl Zeiss, to a leading neurological center in Poland combined
with the sale of an INTRABEAM system upgrade to the Middlesex Hospital, London.
In addition, during the quarter, the Company continued to achieve sales of
LASER-X(TM), the Company's x-ray source for industrial x-ray fluorescence, as
well as Dosimetry products for the characterization of small radiation sources.
The 2001 revenue reflects the sale of a core PRS to the University of
Heidleberg, Germany, combined with sales of the LASER-X industrial x-ray source.
Gross margin. Gross margins for the third quarter of 2002 totaled
$163,125 (36%) as compared to $66,760 (42%) for the third quarter of 2001. The
increase in gross margin dollars reflects the $290,673 in increased revenue for
the quarter. The decrease in gross margin percentage is due to product mix and
the discounting of the sale price of the INTRABEAM system upgrade to the
Middlesex Hospital, London.
Research and development expenses. The Company's research and
development expenses decreased by $263,536 from $1,236,850 in the third quarter
of 2001 to $973,314 in the third quarter of 2002. The decrease primarily
represents the completion of certain development projects coupled with lower
expenditures associated with the development of the miniature x-ray sources for
intravascular radiation therapy (X-SEED(TM)) and x-ray fluorescence systems
(LASER-X).
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased by $421,746 from $1,132,777 in the third
quarter of 2001 to $711,031 in the third quarter of 2002. The decrease is
primarily attributable to a reduction in direct marketing programs and
personnel as a result of the distribution arrangement in place with Carl Zeiss.
Interest income. Interest income decreased by $18,328 from $31,284 in
the third quarter of 2001 to $12,956 in the third quarter of 2002. The decrease
resulted from a decrease in amounts invested by the Company in conjunction with
lower market interest rates.
Interest expense. Interest expense increased by $89,365 from $241,082
in the third quarter of 2001 to $330,447 in the third quarter of 2002. The
change resulted from an increase in amounts borrowed, which is primarily
attributable to the sale by the Company of a $5,000,000 6% senior convertible
debenture to PYC Corporation in December 2001.
Nine Months Ended September 28, 2002 and September 29, 2001
Revenue. The Company had revenues of $1,300,891 in the first nine
months of 2002, as compared with $760,365 in the first nine months of 2001. The
2002 revenue reflects increased sales of the Company's INTRABEAM system for
intra-operative radiation therapy, LASER-X industrial x-ray source and Dosimetry
products.
Gross margin. Gross margins for the nine months ended September 28,
2002 totaled $573,597 (44%) as compared to $280,637 (37%) for the nine months
ended September 29, 2001. The increase in gross margin dollars reflects the
$540,526 in increased revenue for the nine month period. The increase in gross
margin percentage is due to product mix and favorable system pricing as compared
to the same period in 2001.
Research and development expenses. The Company's research and
development expenses decreased by $97,252 from $3,040,524 in the first nine
months of 2001 to $2,943,272 in the first nine months of 2002. The decrease
primarily represents the completion of certain development projects coupled with
lower expenditures associated with the continued development of the miniature
x-ray sources for intravascular radiation therapy (X-SEED) and x-ray
fluorescence systems (LASER-X).
Selling, general and administrative expenses. The Company's selling,
general and administrative expenses decreased by $1,219,082 from $3,562,633 in
the first nine months of 2001 to $2,343,551 in the first nine months of 2002.
The decrease is primarily attributable to a reduction in direct marketing
programs and personnel as a result of the distribution arrangement in place
with Carl Zeiss.
Interest income. Interest income decreased by $142,011 from $191,963 in
the first nine months of 2001 to $49,952 in the first nine months of 2002. The
decrease resulted from a decrease in amounts invested by the Company in
conjunction with lower market interest rates.
9
Interest expense. Interest expense increased by $222,726 from $761,274
in the first nine months of 2001 to $984,000 in the first nine months of 2002.
The change resulted from an increase in amounts borrowed, which is primarily
attributable to the sale by the Company of a $5,000,000 6% senior convertible
debenture to PYC Corporation in December 2001.
Liquidity and Capital Resources
The Company has expended substantial funds to research and develop the
PRS, INTRABEAM, LASER-X, X-SEED 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,
INTRABEAM, LASER-X, X-SEED and other products. The Company anticipates it will
continue to expend substantial funds in the future on such activities as such
funds become available.
Since its inception, the Company has financed its operations through
the issuance of convertible debt and equity in a series of private placements
totaling approximately $36.6 million and its initial public offering with net
proceeds of approximately $16.8 million.
Consolidated working capital was $2,279,493 at September 28, 2002,
compared with $6,605,311 at December 29, 2001. Included in working capital are
cash and cash equivalents of $1,451,482 at September 28, 2002, compared with
$4,007,547 at December 29, 2001. During the first nine months of 2002, the
Company used $3,985,059 of cash for operating activities as compared to
$5,461,133 for the first nine months of 2001.
The Company used $148,197 of cash in the first nine months of 2002 for
lab and production equipment, and leasehold improvements. The Company does not
expect to expend significant funds for capital equipment for the remainder of
the fiscal year.
The Company received an aggregate of $0 and $9,221 of cash from the
exercise of stock options to purchase common stock for the three and nine months
ended September 28, 2002, respectively.
In June 2000, the Company issued in a private placement $10,458,909 of
10% senior convertible debentures. The Company used the net proceeds of the
private placement for general and administrative expenses, refinancing of
$2,312,755 of short-term debt bridge financing provided by PYC Corporation and
$786,153 due under an 8% Subordinated Convertible Demand Note to Peter M.
Nomikos, and for general corporate purposes, including, without limitation, to
support the accelerated testing and marketing of the Company's new products.
The holders of the 10% senior convertible 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 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. In the three and nine months ended September 28, 2002,
holders of $138,957 and $415,537 worth of debentures, respectively, exercised
their option to convert such amounts of debentures into shares of the Company's
common stock.
On February 5, 2001, Johnson & Johnson Development Corporation
purchased 904,762 shares of the Company's common stock for an aggregate purchase
price of $3.8 million.
On December 17, 2001, the Company raised $5,000,000 in a private
placement of a 6% senior convertible debenture (the "6% Debenture") to PYC
Corporation, whose advisor, Peter M. Nomikos, is the Company's Chairman of the
Board of Directors and Chief Executive Officer. The entire financial interest
in PYC Corporation is held by adult members of Mr. Nomikos's family.
The Company is using the net proceeds of the private placement for
general and administrative expenses and for general corporate purposes,
including, without limitation, to fund intra-operative radiation therapy for
breast cancer clinical trials, for the sales and marketing of PRS400(TM) system
cancer treatment products, for the development of an X-SEED intravascular
radiation therapy device, for brachytherapy product development, for the general
support of clinical trials, and for further development of industrial
applications and distribution alliances.
PYC Corporation is entitled to receive interest payments at the rate of
6% per annum on the outstanding principal amount of the 6% Debenture. At the
option of the Company, interest may be paid when due by adding the amount
payable to the outstanding principal amount of the 6% Debenture. The principal
amount of the 6% Debenture, together with all accrued but unpaid interest, is
due and payable on May 1, 2005. The holder of the 6% Debenture has the option,
at any time prior to May 1, 2005, to convert the 6% Debenture, in whole or in
part, into shares of the Company's common stock at a price of $3.25 per share.
If any shares of common stock or securities convertible into shares of common
stock are issued at an effective price
10
lower than $3.25 per share (as adjusted and subject to certain exclusions), then
the conversion price of the 6% Debenture will be automatically adjusted to that
lower price.
The Company may redeem any portion of the 6% Debenture at any time,
provided that the average closing bid price per share of the Company's common
stock as reported on the American Stock Exchange for the twenty (20) consecutive
trading days prior to the date of the redemption notice is at least 175% of the
conversion price. The redemption price will be 105% of the outstanding principal
amount of the 6% Debenture being redeemed, along with accrued but unpaid
interest. In addition, so long as 50% of the outstanding principal amount of the
6% Debenture originally issued is outstanding and subject to certain exceptions,
the Company may not incur more than $10,000,000 in indebtedness after December
17, 2001.
Prior to entering into the transaction with PYC Corporation, the
Company attempted over a period of several months to raise funds from other
sources. After considering other financing alternatives, including a proposal
from another stockholder of the Company, the Board of Directors determined that
the terms and conditions of the financing proposal from PYC Corporation were
more favorable to the Company than the terms and conditions available from the
other stockholder or from non-related parties.
The securities sold in the private placement have not been registered
under the Securities Act of 1933 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 of 1933 and Rule 506
of Regulation D thereunder. The Company has agreed to use its best efforts to
file with the Securities and Exchange Commission by December 31, 2002 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 6% Debenture.
The Company maintains medical product liability insurance policies
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 new and expanding
existing United States Food and Drug Administration and other regulatory
approvals, the results of the Company's ongoing clinical trials, the market
acceptance of the PRS, INTRABEAM, LASER-X, X-SEED 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.
The Company believes that its existing cash and investments together
with anticipated revenues will be sufficient for at least the remainder of the
year. The Company's primary source of liquidity in 2002 is the $5,000,000 of
proceeds from the 6% Debenture issued in December 2001. The Company has reached
agreements in principle with Carl Zeiss and PYC Corporation to provide $500,000
each in a bridge financing, which the Company anticipates will provide
sufficient cash to continue operations through the first quarter of 2003. The
Company anticipates that the $500,000 to be provided by Carl Zeiss will be in
the form of advance purchase orders under the existing distribution agreement
between the Company and Carl Zeiss, and that the $500,000 to be provided by PYC
Corporation will be under a line of credit secured by certain of the Company's
assets. In order to continue operations, the Company will have to raise
additional capital in fiscal 2003 unless revenues are greater than anticipated.
The Company is currently reviewing potential financing options for the upcoming
year. There is no assurance that it will be able to find additional financing on
acceptable terms, if at all.
The Company has commitments under an operating lease agreement for
office space to make payments of approximately $108,625 in 2002, $260,700 in
each of 2003 through 2006, and $152,075 in 2007. The Company's senior
convertible debentures, in the outstanding principal amount of $15,592,796 as of
September 28, 2002, are due and payable on May 1, 2005.
Critical Accounting Policies
In the Company's Form 10-K for the fiscal year ended December 29, 2001,
the Company's most critical accounting policies and estimates upon which its
financial status depends were identified as those relating to revenue
recognition, warranty reserve and inventory valuation. The Company considered
the disclosure requirements of Financial Release ("FR") 60 ("FR-60") regarding
critical accounting policies and FR-61 regarding liquidity and capital
resources, certain trading activities and related party/certain other
disclosures, and concluded that nothing materially changed during the three and
nine months ended September 28, 2002 that would warrant further disclosure under
these releases.
Item 3: Quantitative and Qualitative Disclosures about Market Risk.
There have been no material changes in the market risk associated with
the Company's financial instruments. The Company is exposed to market risk from
changes in interest rates, which may adversely affect the Company's financial
position, results of operations and cash flows. In seeking to minimize the risks
from interest rate fluctuations, the Company manages exposure through its
regular operating and financial activities. The Company does not use financial
instruments for trading or other speculative purposes and is not a party to any
leveraged financial instruments.
11
Item 4: Controls and Procedures
The Company's chief executive officer and chief financial officer,
after evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)
and 15-d-14(c)) as of a date, October 17, 2002 (the "Evaluation Date"), within
90 days before the filing date of this quarterly report, have concluded that as
of the Evaluation Date, the Company's disclosure controls and procedures were
adequate and designed to ensure that material information relating to the
Company (including its consolidated subsidiary) is made known to them by others
within the Company. There were no significant changes in the Company's internal
controls or, to the Company's knowledge, in other factors that could
significantly affect the Company's disclosure controls and procedures subsequent
to the Evaluation Date.
12
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
Not Applicable
Item 2: Changes in Securities and Use of Proceeds
On July 9, 2002, the Company filed an amendment to its Articles of
Organization with the Massachusetts Secretary of the Commonwealth, which
amendment increased the number of authorized shares of the Company's common
stock from 20,000,000 to 25,000,000.
Item 3: Defaults upon Senior Securities
Not Applicable
Item 4: Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K.
(A) Exhibits
No. Description
--- -----------
10.1* Distribution Agreement dated as of August 21, 2002 by
and between the registrant and Carl- Zeiss-Ziftung, dba
Carl Zeiss (portions of this exhibit have been omitted
pursuant to a request for confidential treatment and
have been filed separately with the Commission)
10.2* Amendment No. 1 to Agreement, dated as of September 6,
2002, by and between the registrant and Cordis
Corporation
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
* Filed as an exhibit to the Company's Current Report on Form 8-K
filed with the SEC on October 2, 2002 and incorporated herein by
reference.
(B) Reports on Form 8-K
On July 2, 2002, the Company filed a Current Report on Form 8-K
announcing the dismissal of Arthur Andersen LLP as the Company's independent
public accountants. On August 13, 2002, the Company filed a Current Report on
Form 8-K announcing the Company's engagement of Deloitte & Touche LLP to serve
as independent public accountants for the fiscal year ending December 28, 2002.
The decision to engage Deloitte & Touche LLP was approved by the Company's Audit
Committee of the Board of Directors under authority of the Company's Board of
Directors.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHOTOELECTRON CORPORATION
By: /s/ Timothy W. Baker
--------------------
Timothy W. Baker
President and Chief Financial
Officer
Dated: November 12, 2002
CERTIFICATIONS
I, Peter M. Nomikos, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Photoelectron
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Peter M. Nomikos
--------------------
Chief Executive Officer
14
I, Timothy W. Baker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Photoelectron
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Timothy W. Baker
--------------------
President and Chief Financial Officer
15
EXHIBIT INDEX
Exhibit Description
No.
- ---
10.1* Distribution Agreement dated as of August 21, 2002 by and between
the registrant and Carl-Zeiss-Ziftung, dba Carl Zeiss (portions of
this exhibit have been omitted pursuant to a request for
confidential treatment and have been filed separately with the
Commission)
10.2* Amendment No. 1 to Agreement, dated as of September 6, 2002, by and
between the registrant and Cordis Corporation
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Filed as an exhibit to the Company's Current Report on Form 8-K filed with
the SEC on October 2, 2002 and incorporated herein by reference.
16