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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No.
December 31, 1997 0-15443
THERAGENICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 58-1528626
(State of incorporation) (I.R.S. Employer Identification Number)
5325 Oakbrook Parkway
Norcross, Georgia 30093
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(770) 381-8338
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registerer
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, par value $.01 per share, together with the associated
Common Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K.
As of March 16, 1998 the aggregate market value of the common stock of the
registrant held by non-affiliates of the registrant, as determined by reference
to the closing price of the Common Stock as reported on the Nasdaq National
Market system, was $1,003,681,314.
As of March 16, 1998 the number of shares of common stock, $.01 par value,
outstanding was 14,546,106.
Documents incorporated by reference: Proxy Statement for the registrant's 1998
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1997, is incorporated by
reference in Part III herein.
Part I
Item 1. BUSINESS
General
Theragenics Corporation ("Theragenics" or the "Company") is a leader in the
production and sales of implantable radiation devices ("seeds") used in the
treatment of prostate cancer. The Company produces and sells TheraSeed(R); a
FDA-licensed device based on Pd-103, a radioactive isotope. Management believes
the Company is currently the only company commercially producing Pd-103 for use
in medical devices. In the treatment of prostate cancer, TheraSeeds(R) are
implanted ("seeding") into the prostate in a one-time, minimally invasive
procedure. The radiation emitted by the seeds is contained within the immediate
prostate area, killing the tumor while sparing surrounding organs. TheraSeed(R)
has been shown in independent clinical studies to offer success rates that are
comparable to or better than other conventional therapies, while being
associated with a reduced incidence of side effects. In addition, TheraSeed(R)
offers significant quality of life and cost advantages. Since 1987, TheraSeed(R)
has been used by physicians in over 400 centers across the United States. Sales
of TheraSeed(R) increased 58% in 1996 and 99% in 1997 due to increased and
reliable production from the Company's cyclotron-based manufacturing process and
higher demand for TheraSeed(R) as a result of increased marketing efforts and
the release of favorable clinical data. TheraSeed(R) has also been used on a
limited basis to treat cancers of the pancreas, lung, head, neck, oral cavity,
brain and eye.
On May 30, 1997, the Company entered into a sales and marketing agreement with
Indigo Medical, Inc., a subsidiary of Johnson & Johnson, granting Indigo the
exclusive worldwide right to market and sell TheraSeed(R) for the treatment of
prostate cancer. Management believes the alliance with Indigo will provide for
sales growth and international expansion while allowing the Company to focus its
resources on maintaining its leadership in the production of Pd-103 for prostate
cancer treatment and other potential applications. By leveraging the extensive
worldwide marketing capability of Indigo and Johnson & Johnson, the Company has
eliminated the need to develop an extensive, vertically integrated sales,
marketing, education and training network for the sale of TheraSeed(R) for
prostate cancer treatment.
Theragenics received FDA clearance to market TheraSeed(R) in 1986 and
commenced product sales in 1987. The Company has been profitable in every
quarter since 1991. In 1992, management increased its control over the
manufacture of TheraSeed(R) while maintaining quality and regulatory compliance
by integrating into the Company the production of Pd-103.
Industry Overview
Prostate Cancer
Excluding skin cancer, prostate cancer is the most common form of cancer,
and the second leading cause of cancer deaths, in men. Based on industry data,
the Company estimates that in 1995 the cost of treating prostate cancer exceeded
$3.0 billion in the United States. In 1998, the American Cancer Society
estimates there will be 184,500 new cases of prostate cancer and an estimated
39,200 deaths associated with the disease. Between 1989 and 1992, prostate
cancer incidence rates increased dramatically, probably due to the increasing
use of prostate-specific antigen (PSA) blood test screenings. In 1993 and 1994,
prostate cancer incidence rates declined as the initial impact of improved
diagnosis caught up with already existing but undiagnosed cases of prostate
cancer. Overall from 1973 to 1994, incidence rates for white men increased from
63 to 135 per 100,000 and incidence rates for African-American men increased
from 106 to 234 per 100,000.
Prostate cancer incidence and mortality increase with age; 77% of men
diagnosed with prostate cancer each year are over 65 years old. While rare in
young men, incidence rates accelerate with age. Illustratively, incidence rates
are 1 in 100,000 for men under 40, 82 in 100,000 for men ages 50-54, 518 in
100,000 for men ages 60-64, and 1,326 in 100,000 for men ages 70-74. Estimates
by the United States Bureau of Census indicate the number of men most prone to
prostate cancer, those 40 to 80 years old, will grow to 55 million by 2006 from
45 million in 1996. The Company estimates that in 1997, its U.S. market share in
the treatment of early stage localized prostate cancer was approximately 5%.
The prostate is a walnut-sized gland surrounding the male urethra, located
below the bladder and adjacent to the rectum. The two most prevalent prostate
diseases are benign prostatic hyperplasia ("BPH") and prostate cancer. BPH is a
non-cancerous enlargement of the innermost part of the prostate. Prostate cancer
is a malignant tumor that begins most often in the periphery of the gland and,
like other forms of cancer, may spread beyond the prostate to other parts of the
body. If left untreated, prostate cancer can metastasize to the lung or bone,
resulting in death. The following table summarizes the various stages of
prostate cancer.
Classification Stage of Progression
- - -------------- --------------------
A Clinically unsuspected
B Tumor confined to the prostate gland (localized)
C Tumor outside prostate capsule
D Metastasized into pelvic lymph nodes
D2 Metastasized into distant lymph nodes,
organs, soft tissues or bone
Source: American Urological Association Today
Approximately 58% of new prostate cancer diagnoses are defined as being
localized. Prostate cancer is typically curable when detected early, but the
lack of early-stage symptoms makes diagnosis difficult. Until 1988, the best
method of routine examination had been the digital rectal exam, an uncomfortable
subjective determination. In 1988, a diagnostic test was developed that
determines the amount of prostate specific antigen ("PSA") present in the blood.
PSA is found in a protein secreted by the prostate, and elevated levels of PSA
are associated with either prostatitis (a noncancerous inflammatory condition)
or a proliferation of cancer cells in the prostate. As stated earlier, the
number of new prostate cancers diagnosed increased significantly from 1989 to
1993 as a result of physicians' use of the PSA test. Industry studies have shown
that the PSA test can detect prostate cancer as many as five years earlier than
the digital rectal exam. The PSA test is currently part of the routine medical
check-up for prostate assessment. Transrectal ultrasound tests and biopsies are
typically performed on patients with elevated PSA readings to confirm the
existence of cancer.
Treatment Options
In addition to seeding, prostate cancer can be treated with radical
prostatectomy ("RP"), external beam radiation therapy ("EBRT"), hormone therapy,
chemotherapy and watchful waiting. Some of these therapies may be combined in
special cases to address a specific cancer stage or patient need. For example,
TheraSeed(R) has been used in combination with EBRT to treat some locally
advanced cases of prostate cancer. The treatments that have been most successful
are those that remove or kill all of the cancerous tissue while avoiding
excessive damage to the surrounding healthy tissue. When the cancerous tissue is
not completely eliminated, the cancer typically returns to the primary site,
often with metastases to other areas. The following is a summary of treatment
options for prostate cancer other than seeding.
Radical Prostatectomy is a major surgical procedure that involves the complete
removal of the prostate gland. This procedure has been used for over 30 years
and is considered to be the standard medical treatment for early-stage,
localized tumors. RP typically requires a three to seven day hospital stay and a
lengthy recovery period (generally four to six weeks). Side effects include
impotence and incontinence. The cost of RP ranges from $20,000 to $30,000 per
procedure, excluding treatment for side effects and postoperative complications.
Approximately 120,000 men underwent RP in 1995.
External Beam Radiation Therapy involves directing a beam of radiation at
the prostate gland to destroy tumorous tissue and has been a common technique
for treating many kinds of cancer since the 1950s. EBRT has typically been
reserved for early-stage prostate cancer in locally advanced cases where the
patient is an inappropriate surgical risk. The therapy consists of a series of
daily treatments usually lasting from six to eight weeks. Rectal complications
resulting from damage to the rectal wall caused by the radiation beam as it
travels to the prostate are the most common side effects. Principal side effects
also include incontinence and impotence, but these side effects generally occur
with less frequency than they do following RP. EBRT is estimated to cost between
$12,000 to $15,000 per patient. Approximately 35,000 men underwent EBRT in 1995.
Ancillary Therapies, primarily consisting of hormone therapy and
chemotherapy, are used to slow the growth of cancer and reduce tumor size, but
are generally not intended to be curative. Ancillary therapies are often used
during advanced stages of the disease to extend life and relieve symptoms. Side
effects of hormonal drug therapy include increased development of breasts,
impotence and decreased libido. In addition, many hormone pharmaceuticals
artificially lower PSA levels in patients, which can interfere with staging the
disease and monitoring its progress. Side effects of chemotherapy include
nausea, hair loss and fatigue. Drug therapy and chemotherapy require long-term,
repeated administration of medication on an outpatient basis.
Watchful Waiting is recommended by some physicians in certain circumstances
based on the severity and growth rate of the disease, as well as on the age and
life expectancy of the patient. The aim of watchful waiting is to monitor the
patient, treat some of the attendant symptoms and determine when more active
intervention is required. Watchful waiting has gained popularity among those
patients refusing treatment due to side effects associated with radical
prostatectomy. Watchful waiting requires periodic physician visits and PSA
monitoring.
In addition to the treatment options described above, other forms of
treatment as well as prevention are being developed and tested in clinical
settings.
The Theragenics Solution
Theragenics produces TheraSeed(R), an FDA-cleared device currently used
principally in seeding for the treatment of prostate cancer. In this
application, TheraSeeds(R) are implanted throughout the prostate gland in a
minimally invasive surgical technique under ultrasound guidance. The radiation
emitted by the seeds is contained within the immediate prostate area, killing
the tumor while sparing surrounding organs. The seeds, whose capsules are
biocompatible, are not removed after delivering their radiation dose to the
prostate. TheraSeed(R) is best suited for solid localized tumors and is
typically classified as a treatment for early-stage disease.
Management believes TheraSeed(R) offers significant advantages over RP and
EBRT. Recent multi-year clinical studies indicate that seeding offers success
rates that are comparable to or better than those of RP or EBRT plus reduced
complication rates. In addition, the TheraSeed(R) treatment is a one-time
outpatient procedure with a typical two to three day recovery period. By
comparison, RP is an inpatient procedure typically accompanied by a three to
seven day hospital stay and a four to six week recovery period, and EBRT
involves six to eight weeks of daily radiation treatments. Treatment with
TheraSeed(R) generally costs $10,000 to $15,000 per procedure, which is
substantially lower than the cost of RP and comparable to the cost of EBRT.
TheraSeed(R) is a radioactive "seed" approximately 4.5 millimeters long and
0.8 millimeters wide, or roughly the size of a grain of rice. Each seed consists
of a biocompatible titanium outer capsule containing the radioactive substance
Pd-103. The half-life of Pd-103, or the time required to reduce the emitted
radiation to one-half of its initial level, is 17 days. The half-life
characteristics result in the loss of almost all radioactivity in less than four
months.
Treatment Protocol
Prostate cancer patients electing seed therapy first undergo a transrectal
ultrasound test or CT scan, which generates a two-dimensional image of the
prostate. With the assistance of a computer program, a three dimensional
treatment plan is designed that calculates the number and placement of the seeds
required for the best possible distribution of radiation to the prostate.
Once the implant model has been constructed, the procedure is scheduled and
the seeds are ordered. The number of seeds implanted normally ranges from 40 to
100, with the number of seeds varying with the size of the prostate. The
procedure is usually performed under local anesthesia in an outpatient setting.
An ultrasound probe is first positioned in the rectum to guide needle placement
and seed location. Correct needle placement is facilitated by a template, or
grid, that covers the perineum (the area between the scrotum and rectum through
which the needles are inserted). This template is attached to the ultrasound
probe. Implant needles loaded with seeds are assigned to the appropriate
template holes as indicated in the treatment plan. Each needle is guided through
the template and then through the perineum to its predetermined position within
the prostate under direct ultrasound visualization. The seeds are implanted as
the needle is withdrawn from the prostate. When all seeds have been inserted,
the ultrasound image is again reviewed to verify seed placement.
An experienced practitioner typically performs the procedure in approximately
60 to 90 minutes, with the patient often returning home at day's end. Seeding
has been used as a treatment for prostate cancer since the early 1980s, when
seeds containing the radioactive isotope Iodine-125 ("I-125") were implanted in
prostate tumors under open surgery. However, this technique fell into disfavor
because the seeds were often haphazardly arranged resulting in radiation not
reaching all of the targeted cancerous prostate. Compounding this was that often
an unintended radiation dose was delivered to healthy surrounding tissues,
particularly the urethra and rectum. Clinical results indicate that the computer
modeling, advanced imaging and other techniques used in seeding today have
significantly ameliorated these drawbacks.
Clinical Results
Strong Efficacy Results. Clinical data indicates that seeding offers success
rates that are comparable to or better than those of RP or EBRT. In a study
published in Urology Times in September 1994, Drs. John Blasko and Haakon Ragde
of the Northwest Tumor Institute in Seattle, Washington, in a study of 298 men
with early-stage prostate cancer, found an actuarial local control rate of 96%
after treatment with either PD-103 or I-125 seed implantation. A study published
in 1995 by Drs. Blasko and Ragde found 100% of the 111 patients treated with
TheraSeed(R) for localized early-stage prostate cancer showed no localized
prostate cancer after treatment follow-up ranging from 12-73 months, with a
median follow-up of 32 months. The actuarial disease-free rate at 54 months was
89%. Updating their previous study on patients treated with Pd-103 or I-125 for
a paper published for the Seminars in Surgical Oncology 1997, Drs. Blasko,
-----------------------------
Ragde, Grimm, et al. found a seven-year actuarial local (confined to the
prostate) and distal (outside the prostate) disease-free rate of 97% and 95%,
respectively for 320 patients treated for localized early-stage prostate cancer.
They also presented therein an eight-year actuarial local and distal
disease-free rate of 91% and 83%, respectively for 231 patients who were
considered to represent higher risks of locally advanced prostate cancer and
were treated with a combination of Pd-103 or I-125 seeding and a modified dose
of EBRT. A study by Dr. Michael Dattoli of University Community Hospital, Tampa,
Florida and Dr. Kent Wallner of Memorial Sloan-Kettering Cancer Center, New
York, New York, published in the International Journal of Radiation Oncology,
Biology and Physics in July 1996 found a three-year actuarial freedom from
biochemical failure (based on PSA scores) of 79% among 73 patients with
clinically localized, high risk prostate cancer who were treated with EBRT in
combination with Pd-103. This compares favorably to results reported for
patients treated with conventional dose EBRT alone. These locally advanced cases
are significant because typical RP protocols would not classify them as suitable
for surgical treatment.
Reduced Incidence of Side Effects. Because TheraSeed(R) delivers a highly
concentrated and confined dose of radiation directly to the prostate, healthy
surrounding tissues and organs are spared excessive radiation exposure. This
results in significantly fewer and less severe side effects and complications
than are incurred with other conventional therapies. RP generally results in a
50-90% impotence rate and a 2-65% incontinence rate, and EBRT generally results
in impotence and incontinence rates of 40-60% and 10-25%, respectively. In
contrast, according to the 1995 study by the Northwest Tumor Institute described
above, it was reported that 85% of seed therapy patients under 70 years of age
who were potent before the procedure remained so. In addition, patients who had
not had a previous transurethral prostate resection ("TURP") suffered no
incontinence. Patients having a previous TURP have compromised urinary tracts
and can experience higher rates of incontinence. Patients receiving seeding can
expect some urinary urgency post-implantation as the Pd-103 delivers its
radiation dose.
Lower Treatment Cost. The total cost of seeding is approximately $10,000 to
$15,000 per procedure. This is approximately one-half the cost of RP, which
ranges from $20,000 to $30,000, excluding treatment for side effects and
post-operative complications. Seeding cost is comparable to the cost of EBRT,
which ranges from $12,000 to $15,000 for a six-to-eight week course of
treatment.
The following table compares the methods of treatment discussed above
with a minimum of five-year outcomes data:
-------------------------------------- ----------------------------- ------------------------------ ----------------------------
External Beam
Radical Prostatectomy Radiation Therapy Seeding
-------------------------------------- ----------------------------- ------------------------------ ----------------------------
Outpatient procedure One-time outpatient
Inpatient procedure with with daily treatments for procedure lasting
3-7 day hospital stay 6-8 weeks 60-90 minutes
Nature of Treatment
-------------------------------------- ----------------------------- ------------------------------ ----------------------------
-------------------------------------- ----------------------------- ------------------------------ ----------------------------
Targeted Cancer Stage A and B A, B and C A and B
-------------------------------------- ----------------------------- ------------------------------ ----------------------------
-------------------------------------- ----------------------------- ------------------------------ ----------------------------
Five Year Success Rate(a) 78-83% 50% 80-100%
-------------------------------------- ----------------------------- ------------------------------ ----------------------------
-------------------------------------- ----------------------------- ------------------------------ ----------------------------
Recovery Period Generally 4-6 weeks None after 6-8 weeks 2-3 days
-------------------------------------- ----------------------------- ------------------------------ ----------------------------
-------------------------------------- ----------------------------- ------------------------------ ----------------------------
Impotence Rate(b) 50-90% 40-60% 5-15%
-------------------------------------- ----------------------------- ------------------------------ ----------------------------
-------------------------------------- ----------------------------- ------------------------------ ----------------------------
Incontinence Rate(b) 2-65% 10-25% 0-2%
-------------------------------------- ----------------------------- ------------------------------ ----------------------------
-------------------------------------- ----------------------------- ------------------------------ ----------------------------
Cost Per Procedure $20,000-$30,000 $12,000-$15,000 $10,000-$15,000
-------------------------------------- ----------------------------- ------------------------------ ----------------------------
(a) Calculated as the percent of patients disease-free after five years. Rates
may be actuarially computed. (b) The percent of patients with normal continence
and potency prior to treatment not remaining continent or
potent following the procedure. Excludes patients with previous TURPs.
Management believes TheraSeed(R) represents the best available form of
seeding. Another radioactive isotope, Iodine-125 ("I-125"), is also commercially
available as a permanent implant. TheraSeed(R) is the first commercially
available alternative isotope to I-125 since I-125's introduction in the 1970s.
Management believes I-125 and Pd-103 are used with relatively equal frequency in
substantially all prostate cancer seeding procedures. Another technique known as
"temporary seeding," which involves the temporary placement of an Iridium-based
source in or near a tumor, is used in a very small percentage of cases.
Management believes Pd-103 has the following advantages over I-125: (i) Pd-103
delivers three times the initial dose rate of I-125, which can yield advantages
in treating aggressive cancers, (ii) Pd-103 has approximately one-third the
half-life of I-125, which shortens radiation induced side effects and exposure
to medical personnel in treatment follow-up; and (iii) unlike I-125, Pd-103 is
nontoxic and non-volatile as it decays. Management is not aware of any clinical
studies directly comparing the efficacy of Pd-103 versus I-125.
Strategy
In an effort to enhance market penetration and maintain technological
leadership, the Company has signed a sales and marketing agreement with Indigo
Medical, Inc., a Johnson & Johnson Company. Management believes that this
agreement will allow Theragenics and Indigo to take the seeding treatment of
prostate cancer to levels of penetration previously unseen by leveraging the
consumer marketing, health care organization network, training capacity and
international capabilities of Johnson & Johnson.
Production
The production of TheraSeed(R) is dependent upon the availability of Pd-103,
as well as Rhodium-103 ("Rh-103"), titanium, graphite and lead. With the
exception of Pd-103, all of these raw materials are relatively inexpensive and
readily available from third party suppliers.
Pd-103 is a radioactive isotope that can be produced by neutron bombardment
of Pd-102 in a nuclear reactor, or by proton bombardment of Rh-103 in a
cyclotron. Following the production of Pd-103 from Rh-103 in the cyclotron, the
Pd-103 is harvested from the cyclotron and moved through a number of proprietary
production processes until it reaches its final seed form.
To increase its control over timely, consistent and continuing availability,
quality and cost of Pd-103, the Company turned away from neutron bombardment of
Pd-102 and to the proton bombardment method of producing Pd-103. To accomplish
this alternative method of production, the Company contracted in 1992 for the
purchase of a cyclotron for in-house production of Pd-103. After the cyclotron
was delivered and reliable production of Pd-103 was proven, the Company
discontinued its reliance on outside vendors for irradiation services.
The Company has four cyclotrons in production and is currently installing a
fifth, which is scheduled to become operational during the second quarter of
1998. The Company has ordered nine additional cyclotrons, three to be installed
in fiscal 1998, and six in fiscal 1999. The Company's cyclotrons are designed,
built, installed and tested by a company specializing in the construction of
such equipment. A number of proprietary design modifications are incorporated in
the cyclotrons. These modifications are subject to confidentiality agreements
with the cyclotron manufacturer and the Company's own personnel.
Due to the highly sophisticated and technical nature of the equipment, the
Company has in the past encountered delays and difficulties in the construction,
installation and testing of its cyclotrons. Management cannot be certain that
such problems will not occur in connection with the construction, installation
and testing of the cyclotrons to be installed in 1998 and 1999.
Cyclotron operations constitute only one component of the TheraSeed(R)
manufacturing process. Because the production of TheraSeed(R) is highly
sensitive and labor intensive, management is focusing significant attention and
effort on automating and otherwise improving all aspects of the Company's
manufacturing process. Although the automation process is difficult and time
consuming, and has been subject to significant delays, management believes it
can improve efficiency, further reduce radiation exposure to personnel and
provide additional production capacity for TheraSeed(R).
During 1997, the Company received certification that its quality control
system meets all the requirements of the International Organization for
Standards' ISO 9001/EN46001 Quality System Standard. The Company is currently
working toward obtaining a CE mark. Receipt of a CE mark is a necessary step for
any future launch of Theraseed(R) in the European Community.
Marketing
Strategic Alliance. In 1997, the Company entered into a sales and marketing
agreement with Indigo Medical, Inc., a subsidiary of Johnson & Johnson, granting
to Indigo the exclusive worldwide right to market and sell Theraseed(R) for the
treatment of prostate cancer. Indigo has assumed responsibility for the
education and training of urologists, radiation oncologists and other personnel
involved in the use of TheraSeed(R) for the treatment of prostate cancer.
Management believes the alliance with Indigo will provide for sales growth and
international expansion while allowing the Company to focus its resources on
maintaining its leadership in the production of Pd-103 for prostate cancer
treatment and other potential applications. By leveraging the extensive
worldwide marketing capability of Indigo and Johnson & Johnson, the Company
eliminates the need to develop an extensive, vertically integrated sales,
marketing and education and training network for the marketing of Theraseed(R)
for prostate cancer.
Based on the current high level of demand in the prostate cancer market and
production capacity, management does not anticipate having the ability to
generate significant sales in other cancer areas in the coming year.
TheraSphere(R)
Theragenics has also participated in the development of TheraSphere(R), a
microscopic radioactive glass sphere designed for the treatment of liver cancer.
The Company holds a worldwide exclusive license from the University of Missouri
for the use of the technology required to produce TheraSphere(R). The Company
has granted to Nordion International, Inc. ("Nordion") an exclusive worldwide
sublicense to manufacture, distribute and sell TheraSphere(R) for any
application. TheraSphere(R) has been approved for distribution in Canada, but
has not been approved by the FDA for distribution in the United States. Under
the terms of the sublicense, Nordion has agreed to obtain the necessary
regulatory approvals for distribution of TheraSphere(R) in the United States and
other countries. The commercial development and regulatory approval of
TheraSphere(R) is still in its early stages, and management does not anticipate
significant revenues from TheraSphere(R) within the foreseeable future.
A TheraSphere(R) treatment dose contains approximately five million
yttrium-90 glass spheres that are each approximately half the diameter of a
human hair. The radiation dose is delivered to the tumor by introducing the
TheraSphere(R) by catheter into the hepatic artery, which carries arterial blood
to the liver. Because of greater blood flow to tumors compared to healthy liver
tissue, the microspheres concentrate in the capillaries feeding the tumor. The
concentration of microspheres in healthy tissue is much lower. Because of the
ability to place the radiation source in such close proximity to the tumor,
TheraSphere(R) can deliver a radiation dose to the tumor cells five times as
strong as that which can be delivered via external beam radiation.
Patents and Licenses; Trade Secrets
The Company holds United States patents directed to Pd-103 based on its
production using both cyclotrons and nuclear reactors. The Company also has
corresponding patents in Canada, South Africa, Japan and the 10 countries of the
European patent convention, and a PCT patent application on file for Japan,
Australia, New Zealand, Canada, and Europe (representing 16 European countries)
as well as a direct filing in Mexico. The Company may file additional patent
applications from time to time and considers the ownership of patents important,
but not necessarily essential, to its operations. The Company also uses a
strategy of confidentiality agreements and trade secret treatment to provide
primary protection to a number of proprietary design modifications in the
cyclotrons, as well as various production processes.
The Company also holds a worldwide exclusive license from the University of
Missouri for the use of technology required for producing TheraSphere(R).
Theragenics holds the rights to all improvements developed by the University of
Missouri on this technology. The Company, in turn, sublicenses exclusive
worldwide rights to this technology and all improvements to Nordion. Pursuant to
its license agreement with the University of Missouri, the Company is obligated
to pay the University the greater of a fixed annual amount or a percentage of
the gross sales amount derived from the sale of TheraSphere(R).
Theragenics holds patents for technology concerning methods for delivery of
TheraSphere(R) in several countries, including the United States, Canada,
Australia, Argentina, South Africa and the 10 countries of the European patent
convention, and has patent applications on file in other countries, including
Japan. The Company exclusively licenses this technology to Nordion for worldwide
use.
The Company relies to a significant degree on trade secrets, proprietary
know-how and technological advances that are either not patentable or which the
Company chooses not to patent. In particular, the Company has designed certain
modifications to its cyclotrons as well as various production processes that it
deems to be proprietary. The Company seeks to protect non-patented proprietary
information, in part, by confidentiality agreements with suppliers, employees
and consultants.
Competition
The Company competes in a market characterized by technological innovation,
extensive research efforts and significant competition. In general, TheraSeed(R)
competes with conventional methods of treating localized cancer such as RP and
EBRT. RP currently represents the standard medical treatment for early-stage,
localized prostate cancer. RP has a long history of favorable clinical results
and physicians have developed a high degree of familiarity and comfort with this
procedure. EBRT is also a well-established method of treatment and is widely
accepted for patients who do not represent a good surgical risk or whose
prostate cancer has advanced beyond the stage for which surgical treatment is
indicated. RP and EBRT are therefore well entrenched in the medical community
and in the universities and schools providing medical education. Management
believes that if general conversion from these established procedures to
TheraSeed(R) treatment does occur, such conversion will be the result of a
combination of equivalent or better efficacy, reduced incidence of side effects
and complications, lower cost, other quality of life issues and pressure by
health care providers and patients.
In addition, I-125 is commercially available as a permanent implant and
competes with TheraSeed(R). Management believes I-125 and Pd-103 are used with
relatively equal frequency in prostate cancer seeding procedures. I-125's dose
rate is approximately one-third that of Pd-103, however, and its half-life is
three times longer. Management believes Pd-103 enjoys a competitive advantage
over I-125 based on: (i) a higher dose rate, which can yield advantages in
treating aggressive cancers, (ii) a shorter half-life, which shortens radiation
induced side effects and exposure to medical personnel in treatment follow-up;
and (iii) Pd-103 is nontoxic and non-volatile as it decays. Management is aware
of no other similar radioactive products competing directly with TheraSeed(R). A
number of small companies have announced their intentions to produce I-125
and/or Pd-103 seeds for the treatment of prostate cancer. One such company, a
small start-up, consisting of certain former Theragenics' employees, has
indicated that they will have one cyclotron installed by the third quarter of
1998 for the purpose of producing Pd-103 for medical devices. Theragenics has
initiated legal action against the company for infringement of trade secrets and
the legal action is ongoing. To the best of Management's knowledge, Theragenics
is still the only company in the world currently producing quantities of Pd-103
for medical devices on a commercial basis.
Many companies, both public and private, are researching new and innovative
methods of preventing and treating cancer. In addition, many companies,
including many large, well-known pharmaceutical, medical device and chemical
companies, are engaged in radiological pharmaceutical and device research.
Significant developments by any of these companies could lessen or eliminate the
demand for the Company's products.
Government Regulation
The Company's present and intended future activities in the development,
manufacture and sale of cancer therapy products are subject to various laws,
regulations, regulatory approvals and guidelines. Within the United States, the
Company's therapeutic radiological devices must comply with the U.S. Federal
Food, Drug and Cosmetic Act, which is enforced by the FDA.
The Company is also required to adhere to applicable FDA regulations for
Good Manufacturing Practices, including extensive record keeping and reporting
and periodic inspections of manufacturing facilities.
The Company obtained FDA 510(k) clearance in 1986 to market TheraSeed(R)
for, in general, the treatment of localized solid tumors. A new 510(k) clearance
is required for any modifications in the device or its labeling that could
significantly affect the safety or effectiveness of the original product.
The Company's handling of radioactive materials is governed by the State of
Georgia in agreement with the NRC. The users of TheraSeed(R) are also required
to possess licenses issued either by the states in which they reside or the NRC
(depending upon which state is involved and the production process used). The
Company's expansion plans require the Company to secure additional permits and
licenses from a number of environmental, health and safety regulatory agencies.
The Company believes, but cannot assure, that it will be able to acquire the
permits and licenses necessary for its planned expansion of its manufacturing
capacity in accordance with the Company's timetable for its expansion. The
Company to date has not experienced delays in licensing any of its facilities or
cyclotrons.
The Company is required under its radioactive materials license to maintain
radiation control and radiation safety personnel, procedures, equipment and
processes, and to monitor its facilities and its employees and contractors. The
Company is also required to provide financial assurance that end-of-life
radiological decommissioning of its cyclotrons and other radioactive areas of
its property that contain radioactive materials will be adequately funded by the
Company. The Company's decommissioning obligations will increase as its
production capacity is expanded.
The Company disposes of low level radioactive waste to licensed commercial
radioactive waste treatment or disposal facilities for incineration or land
disposal. Management believes the Company is in compliance with all state and
federal regulations. The Company provides training and monitoring of its
personnel to facilitate the proper handling of all materials.
Employees
As of December 31, 1997, the Company had 111 full-time employees (including
full-time temporary employees and executive personnel). Of this total, 84 were
engaged in development and production of the Company's products. The remainder
were engaged in marketing and general corporate activities. The Company's
employees are not represented by a union or a collective bargaining unit, and
management considers employee relations to be good.
Item 2. Properties
The Company owns a 15,245 square-foot, single-story building in Buford,
Georgia, leases a 10,752 square-foot, single-story building in Norcross,
Georgia, and leases a 2,692 square-foot suite of offices in a four-story office
building in Norcross, Georgia. The larger Norcross facility houses the Company's
assembly, shipping, and administrative operations, the smaller Norcross facility
provides executive office space and the Buford facility houses the Company's
cyclotrons and its raw material processing operations. In 1996, the Company
purchased 30 acres of land adjacent to its Buford facility. Management is using
this land for long-term expansion of the Company's production facilities as
manufacturing expands to meet increasing sales demand. Currently under
construction on this land is a single story manufacturing facility of
approximately 80,000 square feet. Eventually all functions currently housed in
the leased Norcross facilities will be relocated to this new site adjacent to
its current Buford facility.
Item 3. Legal Proceedings
There are currently no material legal proceedings pending or, to the
knowledge of management, threatened against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of its security holders during
the fourth quarter of calendar 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Stock is traded on the Nasdaq National Market ("Nasdaq").
The trading symbol for the Company's Common Stock on Nasdaq is "THRX." The high
and low prices as reported on Nasdaq for the Company's Common Stock for each
quarterly period in 1996 and 1997 are as follows:
High Low
---- ---
1996
First Quarter............................................$12.25 $7.00
Second Quarter............................................18.63 8.63
Third Quarter.............................................19.25 11.75
Fourth Quarter............................................25.63 16.00
1997
First Quarter.............................................27.50 15.75
Second Quarter............................................25.38 15.05
Third Quarter.............................................50.00 22.25
Fourth Quarter............................................54.00. 33.00
As of March 16, 1998, the closing price of the Company's Common Stock was $69
per share. Also, as of that date, there were approximately 706 holders of record
of the Company's Common Stock. The number of record holders does not reflect the
number of beneficial owners of the Company's Common Stock for whom shares are
held by depositary trust companies, brokerage firms and others.
On February 14, 1997, the Company's Board of Directors adopted a Stockholder
Rights Plan (the "Rights Plan"). The Rights Plan contains provisions to protect
the Company's stockholders in the event of an unsolicited offer to acquire the
Company, including offers that do not treat all stockholders equally, the
acquisition in the open market of shares constituting control without offering
fair value to all stockholders and other coercive, unfair or inadequate takeover
bids and practices that could impair the ability of the Board of Directors to
represent stockholders' interests fully. Pursuant to the Rights Plan, the Board
of Directors declared and paid a dividend of one share purchase right (a
"Right") for each outstanding share of Common Stock held of record as of
February 28, 1997. The Rights, which will expire in February 2007, initially
will be represented by, and traded together with, the Common Stock. The Rights
are not currently exercisable and do not become exercisable unless certain
events occur, including the acquisition of, or commencement of a tender offer
for, 15% or more of the outstanding Common Stock. Each Right represents the
right to purchase from the Company one share of Common Stock at a purchase price
of $120.00, subject to adjustment. In the event certain triggering events occur,
including the acquisition of 20% or more of the outstanding Common Stock each
Right that is not held by the 20% or more stockholder will entitle its holder to
purchase additional shares of Common Stock having a market value of twice the
purchase price. As a result, the Rights Plan could add substantially to the cost
of acquiring the Company, and consequently could delay or prevent a change in
control of the Company. These effects could adversely affect the market price of
the Common Stock. Prior to the time the Rights become exercisable, the Board of
Directors may redeem the rights at a redemption price of $.01 per Right. The
description and terms of the Rights are set forth in a Rights Agreement dated as
of February 17, 1997 by and between the Company and SunTrust Bank, Atlanta, as
Rights Agent.
Dividend Policy
The Company has never declared or paid a cash dividend on its Common Stock. It
is the present policy of the Board of Directors to retain all earnings to
support operations and to finance expansion. Consequently, the Board of
Directors does not anticipate declaring or paying cash dividends on the Common
Stock in the foreseeable future. The Company's current credit facility restricts
the Company's ability to pay dividends if such dividend payment would cause a
default under any of the credit facility's financial covenants. Decisions on the
payment and amount of future dividends on the Common Stock will depend on the
Company's results of operations, capital requirements and financial condition
and other relevant factors as determined by the Board of Directors.
Stock Split
On March 16, 1998, the Company announced a two-for-one stock split to be
effected in the form of a 100% stock dividend payable on April 15, 1998 to
shareholders of record at the close of business on March 31, 1998.
Item 6. Selected Financial Data
The selected financial data set forth below as of December 31, 1996 and 1997
and for each of the years in the three-year period ended December 31, 1997 have
been derived from the financial statements of the Company included elsewhere
herein, which have been audited by Grant Thornton LLP, independent certified
public accountants. The selected financial data as of December 31, 1993, 1994
and 1995 and for each of the years in the two-year period ended December 31,
1994 have been derived from the financial statements of the Company, which have
been audited by Grant Thornton LLP but are not included herein. The selected
financial data set forth below should be read in conjunction with the financial
statements of the Company and related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere herein.
Year Ended December 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars and shares in thousands, except per share data)
Statement of Earnings Data:
Product sales..................................................... $4,091 $4,723 $7,782 $12,257 $12,170
Product sales - affiliate -- -- -- -- 12,287
Licensing fees.................................................... -- -- 85 100 100
------ ----- ------ ------- -------
4,091 4,723 7,867 12,357 24,557
Cost of product sales............................................. 1,678 1,791 2,645 3,736 6,141
Selling, general and administrative............................... 1,607 1,844 2,396 3,198 4,819
Research and development.......................................... 36 15 18 7 55
------ ----- ------ ------- ------
3,321 3,650 5,059 6,941 11,015
Other income (expense)............................................ (86) 110 64 36 1,306
------- ------ ------ ------- ------
Net earnings before income taxes, extraordinary credit
and cumulative effect of change in accounting
principle.........................................................
684 1,183 2,872 5,452 14,848
Income tax expense................................................ 254 453 1,100 2,067 5,350
------ ------ ------ ------ -------
Net earnings before extraordinary credit and change in accounting
method............................................................
430 730 1,772 3,385 9,498
Extraordinary credit.............................................. -- -- -- -- --
Change in accounting method....................................... 2,860 -- -- -- --
------ ------ ------ ------ -------
Net earnings...................................................... $3,290 $ 730 $1,772 $3,385 $9,498
====== ====== ====== ====== ======
Earnings per common share-basic
Income before accounting change................................. $ 0.04 $ 0.07 $ 0.16 $ 0.29 $ 0.69
Cumulative effect of a change in
accounting principle.......................................... $ 0.26 -- -- -- --
Net Income.................................................... $ 0.30 $ 0.07 $ 0.16 $ 0.29 $ 0.69
Weighted average shares-basic..................................... 10,800 10,935 11,103 11,625 13,763
Earnings per common share-assuming
dilution
Income before accounting change............................... $ 0.04 $ 0.06 $ 0.15 $ 0.28 $ 0.66
Cumulative effect of a change in
accounting principle.......................................... $ 0.24 -- -- -- --
Net Income.................................................... $ 0.28 $ 0.06 $ 0.15 $ 0.28 $ 0.66
Weighted average shares-diluted................................... 11,705 11,588 11,848 12,291 14,309
December 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Cash and short-term investments.................................. $3,083 $2,317 $3,266 $2,986 $30,162
Property, plant and equipment, net............................... 5,647 8,458 10,073 17,586 28,986
Total assets..................................................... 12,619 14,169 16,878 23,689 71,140
Long-term debt, including current installments...................
1,330 1,989 1,519 3,458 --
Shareholders' equity............................................. 11,034 11,810 14,769 19,385 67,033
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Theragenics was founded in 1981 and is engaged in the manufacture and sale
of TheraSeed(R), a rice-sized device used for the treatment of localized
prostate cancer in a one-time, minimally invasive procedure. In 1986, the
Company received FDA clearance for its principal product, TheraSeed(R), for use
in any solid localized tumor. Sales increased 58% in 1996 and 99% in 1997 due to
increased and reliable production from the Company's cyclotrons and increased
demand for TheraSeed(R) as a result of growing market acceptance of this
treatment alternative for prostate cancer.
Production of Pd-103, the radioisotope supplying the therapeutic radiation
of TheraSeed(R), has always been a controlling factor in the Company's efforts
to generate sales. To increase its control over the timely and consistent
availability, quality and cost of Pd-103, the Company converted from reactor
produced Pd-103 to an alternative means of producing Pd-103 using a cyclotron.
In 1992, the Company contracted for the purchase of a cyclotron for in-house
production of Pd-103. After the cyclotron was delivered and reliable production
of Pd-103 was demonstrated, the Company discontinued its reliance on outside
vendors for irradiation services.
In view of the scale of the investment necessary to add cyclotrons, the time
and effort required to develop the production process, and the Company's limited
access to debt and equity capital, the Company undertook a slow and measured
roll-out of its TheraSeed(R) product. Management focused primarily on the
careful development of relationships with the physician community and on
ensuring that the Company's production capabilities could meet demand for its
product. The Company added additional cyclotrons in 1995, 1996, and 1997 for a
total of four cyclotrons. Four additional cyclotrons are scheduled to become
operational in 1998 and six in 1999. Because a cyclotron does not become
available for production until approximately 18 months after it is ordered, the
accuracy of the Company's long-term plans can significantly affect its results
of operations. The delivery of cyclotrons prior to a commensurate increase in
demand could adversely impact margins, while inadequate cyclotron capacity could
limit the Company's ability to meet demand and achieve maximum sales growth.
The Company is well underway on a $28 million capital expansion project that
includes the purchase of four additional cyclotrons and the construction of a
new production facility. Although no assurances can be given, management expects
that one new cyclotron will become operational in April, 1998, or shortly
thereafter and the next three becoming operational at three month intervals.
Contracts were signed for six additional cyclotrons to be delivered in 1999.
Again, while no assurances can be given, Management expects one to be
operational at the end of the first quarter 1999, three additional by the end of
third quarter 1999, and two more by the end of the fourth quarter of 1999, or
shortly thereafter. Each of these cyclotrons, including the facility to house
each, are estimated to cost less than $5,000,000.
On May 30,1997, the Company entered into a sales and marketing agreement
with Indigo Medical, Inc., a subsidiary of Johnson & Johnson, granting the
exclusive worldwide right to market and sell Theraseed(R) for the treatment of
prostate cancer. Under the terms of the agreements, Indigo has assumed
responsibility for the education and training of urologists, radiation
oncologists and other personnel involved in the use of TheraSeed(R) as well as
all other sales and marketing activities. The Company continues to be
responsible for all manufacturing and distribution for TheraSeed(R).
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended
December 31, 1996
Product sales were $24.6 million in 1997 compared to $12.4 million in 1996,
an increase of $12.2 million, or 98.4%. Market acceptance of the Company's
TheraSeed(R) treatment alternative for prostate cancer grew during 1997.
Concurrently, the Company was able to reliably increase production from its
cyclotron-based manufacturing and thereby take advantage of increased demand.
Sales also reflect that the Company had four cyclotrons available during much of
1997 to meet sales demand as compared to only two cyclotrons throughout 1996.
Licensing fees represent royalty payments with respect to the Company's
licensed TheraSphere(R) technology. Management does not expect licensing fees to
become material in the foreseeable future. See Note F of Notes to Financial
Statements.
Cost of product sales was $6.1 million in 1997 compared to $3.7 million in
1996, an increase of $2.4 million, or 64.9%. This increase was due primarily to
incremental staffing and cyclotron related costs. Staffing increases were
necessary to respond to and anticipate sales growth. Cyclotron operating costs
and depreciation increased as all four of the Company's cyclotrons were in
service by February, 1997. As cyclotrons come on-line, margins decline because
each machine represents excess capacity for a period while carrying its full
component of fixed costs, including depreciation. As a percentage of product
sales, cost of product sales decreased from 30.5% in 1996 to 25.0% in 1997. This
decrease resulted from economies of scale.
Selling, general and administrative expense was $4.8 million in 1997
compared to $3.2 million in 1996, an increase of $1.6 million, or 50.6%. Primary
contributors to this increase were legal and professional fees and compensation
and related expense. Legal and professional expense fees increased as the
Company completed the Theragenics/Indigo Sales and Marketing Agreement and
initiated legal action against a small company founded by former employees.
Compensation and related expenses rose as the number of employees increased and
salaries were increased reflecting the larger scope of the Company's operations
and the need to attract and retain qualified employees. There were also higher
expenditures in a number of areas representing support for higher sales levels.
Despite these increases, selling, general and administrative expense as a
percentage of net sales decreased from 26.1% in 1996 to 19.7% in 1997 due to
economies of scale.
During the periods presented, the Company had no ongoing pure research
function. As in the past, much of the development component of research and
development of product and processes is incorporated in the manufacturing area
and therefore is included in the cost of goods sold category. Management may
choose to develop a more traditional research and development program if and
when appropriate opportunities are identified and resources are in place.
Other income (expense) during the periods presented consist principally of
interest income, interest expense and the write-off of unamortized loan costs as
a result of loan refinancing. Interest income jumped dramatically, reflecting
interest on funds received as a result of the secondary stock offering completed
in April, 1997. Since these funds will largely be used to fund the Company's
expansion program in 1998 and 1999, management expects other income to return to
levels consistent with historical amounts.
The Company's effective income tax rate was approximately 38% in 1996 and
approximately 36% in 1997.
Liquidity and Capital Resources
During 1995, 1996 and 1997, the Company's principal cash needs related to
capital spending to increase manufacturing capacity. To manufacture
TheraSeed(R), the Company purchases, installs and operates cyclotrons, which
involves significant capital investment. The Company has funded its capacity
expansions in 1995 and 1996, principally from cash flows from operations and
bank borrowings, and in 1997 from cash flows from operations and the proceeds
from the secondary offering of common stock completed in April, 1997.
The Company had cash and short-term investments of $30.2 million at December
31, 1997, compared to $3.0 million at December 31, 1996. Working capital was
$39.0 million at December 31, 1997, This compares to $1.3 million at year end
1996, which included $3.5 million representing the current portion of long-term
obligations.
Cash provided by operating activities was, $5.7 million and $14.2 million
during 1996 and 1997, respectively. These amounts primarily represent net income
supplemented in 1997 by an increase in income tax payable and trade accounts
payable, and in all years by the tax sheltering effects of depreciation and
deferred tax expense. Offsetting these items were increases in accounts
receivable.
Cash used in investing activities was $8.6 million and $21.2 million in 1996
and 1997, respectively, consisting in each of these years primarily of purchases
of property and equipment. Spending in 1996 represents the continuation of a
project to add cyclotrons three and four to the facility, the purchase of 30
acres of land for the Company's expansion project and spending on an assembly
automation project. Spending in 1997 primarily represents the beginning of a
project to add four cyclotrons and a new manufacturing facility having an
estimated total cost of approximately $28 million. As of December 31, 1997,
approximately $11 million had been spent on this expansion project and less than
$2 million on other capital projects. Theragenics invested in marketable
securities and held $8.4 million of those securities at December 31, 1997 as
disclosed in Note B-3 in the Notes to Financial Statements attached hereto.
On January 23, 1998, the Company entered into six agreements, each for the
purchase of one additional cyclotron. Each cyclotron, including the facility to
house it, is expected to cost less than $5 million. The Company has made
payments to date on these six cyclotrons totaling approximately $5.5 million as
of March 16, 1998.
Cash provided (used) by financing activities was $(21,000), $2.6 million and
$34.2 million in 1995, 1996 and 1997, respectively. Cash flows from financing
activities relates principally to bank borrowings and repayments thereof,
proceeds from the exercise of stock options and warrants, and in 1997, proceeds
from the secondary placement of common stock, and common stock sold to Indigo
Medical as part of a sales and marketing agreement.
Management intends to continue its efforts toward increasing its Pd-103
production capacity. As such, over the next two fiscal years, the Company
intends to construct facilities, purchase cyclotrons, purchase other production
equipment, invest in research and development, invest in automation, and provide
for working capital and general corporate needs.
Management believes that current cash balances, cash from future operations
and its credit facility, will be sufficient to meet its working capital and
capital expenditure requirements for at least the next 12 months. In the event
additional financing becomes necessary, management may choose to raise those
funds through other methods of financing as appropriate.
YEAR 2000 ISSUE: Some computer systems used today were designed and developed
using two digits, rather than four, to specify the year. Consequently, such
systems may recognize a date of "00" as the year 1900 instead of year 2000. This
may cause many computer systems to fail or create inaccurate results unless
corrective measures are taken. We are currently implementing, or we have plans
to implement, upgrades to computer systems to properly recognize dates after
December 31, 1999. The financial impact associated with upgrades to systems to
address the year 2000 issue is not expected to have a material effect on the
Company's financial position or results of operations in any given year.
This document contains certain forward-looking statements within the meaning
of the private securities litigation reform act of 1995 including, without
limitation, statements regarding possible benefits associated with the alliance
with Indigo Medical Inc., future costs of sales, S, G & A expenses, research and
development, costs and timetable for capacity expansion and the sufficiency of
the Company's liquidity and capital resources. From time to time, the Company
may make other forward-looking statements relating to such matters as well as
anticipated financial performance, business prospects, technological
developments, research and development activities and similar matters. These
forward-looking statements are subject to certain risks, uncertainties and other
factors which could cause actual results to differ materially from those
anticipated, including risks associated with the management of growth,
government regulation of the therapeutic radiological, pharmaceutical and device
business, dependence on health care professionals, competition from conventional
and newly developed methods of treating localized cancer, and dependence on a
third party cyclotron manufacturer.
Quarterly Results
The following table sets forth certain consolidated statements of operations
data for each of the Company's last eight quarters. This unaudited quarterly
information has been prepared on the same basis as the annual audited
information presented elsewhere in this Form 10K, reflects all adjustments
(consisting only of normal, recurring adjustments) necessary in management's
opinion for a fair presentation of the information for the periods covered and
should be read in conjunction with the financial statements and notes thereto.
The operating results for any quarter are not necessarily indicative of results
for any future period. Quarterly data presented may not reconcile to totals or
full year results due to rounding.
1996 1997
---- ----
First Second Third Fourth First Second Third Fourth
Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
--- --- --- --- --- --- --- ---
(Dollars and shares in thousands, except per share data)
Total revenues $2,798 $2,727 $3,144 $3,688 $4,107 $6,172 $7,018 $7,260
------ ------ ------ ------ ------ ------ ------ ------
Cost of product sales
753 888 958 1,137 1,145 1,559 1,580 1,856
Selling,
general and 693 771 722 1,012 1,185 1,391 1,180 1,063
administrative
Research and Development
1 1 1 4 4 30 11 10
Other income
(expense) 27 26 17 (34) 16 328 499 462
------ ----- ------ ------ ----- ------ ----- ------
Net earnings before income 1,378 1,093 1,480 1,501 1,789 3,520 4,746 4,793
taxes
Income tax
expense 524 415 562 566 680 1,338 1,803 1,529
------ ----- ----- ------ ----- ------ ----- ------
Net earnings $ 854 $ 678 $ 918 $ 935 $1,109 $2,182 $2,943 $3,264
====== ====== ====== ====== ====== ====== ====== ======
Earnings per common
share:
Basic $0.07 $0.06 $0.08 $0.08 $0.09 $0.15 $0.20 $0.22
Diluted $0.07 $0.06 $0.08 $0.08 $0.09 $0.15 $0.20 $0.22
Weighted average shares
outstanding
Basic: 11,505 11,588 11,658 11,748 11,836 14,229 14,449 14,537
Diluted 12,290 12,204 12,298 12,372 12,381 14,730 15,030 15,094
Inflation
Management does not believe that the relatively moderate levels of inflation
which have been experienced in the United States in recent years have had a
significant effect on the Company's net sales or profitability.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements (Page 34) and following pages.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
Not Applicable
PART III
Item 10. Directors and Officers of Registrant*
Item 11. Executive Compensation*
Item 12. Security Ownership of Certain Beneficial Owners and Management*
Item 13. Certain Relationships and Related Transactions*
- - ------------------------------
*Theinformation called for by Items 10, 11, 12 and 13 is omitted from this
Report and is incorporated by reference to the definitive Proxy Statement
to be filed by the Company not later than 120 days after December 31,
1997, the close of its fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a) The following documents are filed as part of this Report.
1. Financial Statements
See index to financial statements on page 34
2. Financial Schedules
See the index to financial schedules on page 34
3. Exhibits
3.1 - Certificate of Incorporation (1)
3.2 - Certificate of Amendment to Certificate
of Incorporation (1)
3.3 - Certificate of Amendment to Certificate
of Incorporation (1)
3.4 - By-Laws (1)
4.1 - See Exhibits 3.1 - 3.4 for provisions in the Company's
Certificate of Incorporation and By-Laws defining the
rights of holders of the Company's Common Stock.
4.2 - Form of Warrant issued to the
Representatives of the Underwriters of the
Company's Public Offering (1)
4.3 - Warrant Agreements dated May 1, 1989 between the
Company and James Devas (4)
4.4 - Warrant Agreement dated May 8, 1993 between
the Company and James Devas (9)
10.1 - License Agreement with University of
Missouri, as amended (1)
10.2 - Agreement with Atomic Energy of Canada, Ltd. (1)
10.3 - Reassignment and Release Agreement among the Company,
John L. Russell, Jr., and Georgia Tech Research
Institute (1)
10.4 - 1986 Incentive and Non-Incentive Stock
Option Plan (1)
10.5 - Letter of Agreement between the Company and Yale-New
Haven Hospital (2)
10.6 - Lease between the Company and T. Rowe Price
Realty Income Fund II dated July 14, 1988 (2)
10.7 - Form of Purchase Agreement between the
Company and ten institutional investors (3)
10.8 - Form of Custody Agreement between the
Company and IBJ Schroder Bank & Trust
Company (3)
10.9 - 1990 Incentive and Non-Incentive Stock
Option Plan (5)*
10.10 - Employment Agreement of Bruce W. Smith (5)*
10.11 - Purchase Agreement between Theragenics
Corporation and Production Equipment
Manufacturer (6)
10.12 - Term Loan and Security Agreement between
Theragenics Corporation and Heller
Financial, Inc. (7)
10.13 - Purchase Agreement between Theragenics
Corporation and Production Equipment
Manufacturer (8)
10.14 - Amendment to Purchase Agreement between
Theragenics Corporation and Production
Equipment Manufacturer (9)
10.15 - Employment Agreement of John V. Herndon
dated August 1, 1993 (9)*
10.16 - Employment Agreement of M. Christine Jacobs* (14)
10.17 - Lease between the Company and T. Rowe Price
Realty Income Fund II dated January 1, 1994
(9)
10.18 - Agreement with Nordion International Inc.
(11)
10.19 - Purchase Agreements between Theragenics
Corporation and Production Equipment
Manufacturer (12)
10.20(a) Purchase Agreement dated December 27, 1996 between
Theragenics Corporation and Ion Beam Applications s.a.
(15)
10.20(b) Purchase Agreement dated December 27, 1996
between Theragenics Corporation and Ion Beam
Applications s.a. (15)
10.20(c) Purchase Agreement dated December 27, 1996 between
Theragenics Corporation and Ion Beam Applications s.a.
(15)
10.20(d) Purchase Agreement dated December 27, 1996 between
Theragenics Corporation and Ion Beam Applications s.a.
(15)
10.21 - Second Amended and Restated Loan and Security Agreement
by and between Theragenics Corporation and NationsBank,
N.A. (South), Dated as of December 9,
1996 (15)
10.22 - First modification of Second Amended and Restated Loan
and Security Agreement between Theragenics Corporation
and NationsBank, N.A., Dated September 30, 1997.
10.23 - Second Modification of Second Amended and Restated
Loan and security Agreement between Theragenics
Corporation and NationsBank, N.A., Dated November 26,
1997.
10.24 - Rights Agreement dated as of February 17, 1997 between
the Company and SunTrust Bank, Atlanta (16)
10.25 - Theragenics Corporation 1995 Stock Option Plan (17)*
10.26 - 1997 Stock Incentive Plan (18)*
10.27 - Marketing and Sales Agreement by and between the
Company and Indigo Medical, Inc. dated May 30, 1997 (19)
24.1 - Consent of Independent Public Accountants
for Incorporation by Reference of Audit
Report into Registration Statements
27.1 - Financial Data Schedule for the years ended December 31,
1997 and 1996 (for SEC use only)
27.2 - Financial Data Schedule for the interim periods in the
year ended December 31, 1997
27.3 - Financial Data Schedule for the interim periods in the
year ended December 31, 1996
* Management contract or compensatory plan or arrangement identified
pursuant to Item 14(a)(3) of Form 10-K
(1) Incorporated by reference to the exhibits filed with the Company's
registration statement on Form S-1, File No. 33-7097, and post-effective
amendments thereto.
(2) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1988.
(3) Incorporated by reference to the exhibits to the report on Form 10-Q for
the period ended June 30, 1989.
(4) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1989.
(5) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1990.
(6) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1991.
(7) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1992.
(8) Incorporated by reference to the exhibits to the report on Form 10-Q for
the period ended June 30, 1993.
(9) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1993.
(10) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1994.
(11) Incorporated by reference to the exhibits to the report on Form 8-K dated
March 23, 1995.
(12) Incorporated by reference to the exhibits to the report on Form 8-K dated
June 29, 1995.
(13) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1995.
(14) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1996.
(15) Incorporated by reference to the exhibits to the report on Form 8-K dated
January 13, 1997.
(16) Incorporated by reference to the exhibits to the Company's registration
statement on Form 8-1 filed February 27, 1997.
(17) Incorporated by reference to the exhibits to the Common Stock Registration
Statement on for S-8, file #333- 15313.
(18) Incorporated by reference to appendix B to the Company's proxy statement
for its 1997 Annual Meeting of Stockholders filed on schedule 14A.
(19) Incorporated by reference to the exhibits to the report on Form 10Q for the
period ended September 30, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter
of the most recent fiscal year.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
THERAGENICS CORPORATION
(Registrant)
By:/s/ M. Christine Jacobs
M. Christine Jacobs
Chief Executive Officer
Dated: March 27, 1998
Norcross, Georgia
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ M. Christine Jacobs Chief Executive Officer 3/27/98
M. Christine Jacobs (Principal Executive Officer);
Director
/s/ Bruce W. Smith Chief Financial Officer, 3/27/98
Bruce W. Smith Treasurer (Principal
Financial Officer) and
Secretary
/s/ Charles Klimkowski Director, Chairman 3/27/98
Charles Klimkowski
/s/ John V. Herndon Director 3/27/98
John V. Herndon
/s/ Orwin L. Carter Director 3/27/98
Orwin L. Carter
/s/ Peter A.A. Saunders Director 3/27/98
Peter A.A. Saunders
/s/ Otis W. Brawley Director 3/27/98
Otis W. Brawley
THERAGENICS CORPORATION
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ................35
(For the periods ended December 31, 1995, 1996 and 1997)
FINANCIAL STATEMENTS
Balance Sheets - December 31, 1996 and 1997 .............36
Statements of Earnings for the Three Years Ended
December 31, 1997 .......................................37
Statement of Shareholders' Equity for
the Three Years Ended December 31, 1997 .................38
Statements of Cash Flows for the Three Years Ended
December 31, 1997 .......................................40
NOTES TO FINANCIAL STATEMENTS ...........................42
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Theragenics Corporation
We have audited the balance sheets of Theragenics Corporation (a
Delaware corporation) as of December 31, 1996 and 1997, and the related
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Theragenics
Corporation as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Atlanta, Georgia
January 15, 1998
THERAGENICS CORPORATION
BALANCE SHEETS
December 31,
1996 1997
--------------------- ----------------------
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 2,986,123 30,161,614
Marketable securities -- 8,391,807
Trade accounts receivable, less
allowance of $0 in 1996 and $65,446 in 1997 2,258,936 2,925,390
Inventories 229,298 433,873
Prepaid expenses and other current assets 133,625 160,620
-------------------- -------------------
Total current assets 5,607,982 42,073,304
PROPERTY, PLANT AND EQUIPMENT - AT COST
Building and improvements 3,333,728 3,333,728
Leasehold improvements 138,978 138,978
Machinery and equipment 11,522,064 14,698,623
Office furniture and equipment 65,057 66,464
-------------------- --------------------
15,059,827 18,237,793
Less accumulated depreciation (3,237,684) (4,695,669)
------------------- --------------------
11,822,143 13,542,124
Land 525,372 525,754
Construction in progress 5,238,056 14,917,788
------------------- --------------------
17,585,571 28,985,666
OTHER ASSETS
Deferred income tax asset 360,000 --
Patent costs 80,685 71,836
Other 55,183 9,503
------------------- --------------------
495,868 81,339
------------------- --------------------
Total Assets 23,689,421 $ 71,140,309
=================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt 3,458,436 --
Trade accounts payable 330,375 1,435,154
Accrued salaries, wages and payroll taxes 459,421 689,610
Income taxes payable -- 845,364
Other current liabilities 56,677 137,097
------------------- ---------------------
Total current liabilities 4,304,909 3,107,225
DEFERRED INCOME TAXES -- 1,000,000
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY
Common stock authorized 50,000,000 shares of $.01 par
value; issued and outstanding, 11,814,278 in 1996 and
14,537,841 in 1997 118,143 145,378
Additional paid-in capital 17,616,560 55,740,366
Retained earnings 1,649,809 11,147,340
------------------- ---------------------
------------------- ---------------------
19,384,512 67,033,084
------------------- ---------------------
=================== =====================
Total Liabilities and Shareholders' Equity $ 23,689,421 $ 71,140,309
=================== =====================
The accompanying notes are an integral part of these statements.
THERAGENICS CORPORATION
STATEMENTS OF EARNINGS
Year ended December 31,
1995 1996 1997
-------------------- ---------------------- ---------------------
REVENUE
Product sales $ 7,781,962 $ 12,257,165 $ 12,169,724
Product sales - affiliate -- -- 12,287,650
Licensing fees 85,431 100,000 100,000
-------------------- ---------------------- ---------------------
-------------------- ---------------------- ---------------------
7,867,393 12,357,165 24,557,374
-------------------- ---------------------- ---------------------
COSTS AND EXPENSES
Cost of product sales 2,645,730 3,735,669 6,141,330
Selling, general
and 2,395,846 3,198,663 4,818,650
administrative
Research and development 17,954 6,952 55,390
-------------------- ---------------------- ---------------------
-------------------- ---------------------- ---------------------
5,059,530 6,941,284 11,015,370
-------------------- ---------------------- ---------------------
OTHER INCOME (EXPENSE)
Interest income 143,424 126,953 1,361,890
Interest expense (51,967) (84,517) (21,095)
Other (26,995) (6,311) (35,268)
--------------------- --------------------- --------------------
-------------------- ---------------------- ---------------------
64,462 36,125 1,305,527
-------------------- ---------------------- ---------------------
Net earnings before income taxes 2,872,325 5,452,006 14,847,531
Income tax expense 1,100,000 2,067,500 5,350,000
-------------------- ---------------------- ---------------------
Net earnings $ 1,772,325 $ 3,384,506 $ 9,497,531
==================== ====================== =====================
Net earnings per common share
Basic $ .16 $ .29 $ .69
==================== ====================== =====================
Diluted $ .15 $ .28 $ .66
==================== ====================== =====================
Theragenics Corporation
STATEMENTS OF SHAREHOLDERS' EQUITY
For the three years ended December 31, 1997
Retained
Common stock Additional earnings
Number of Par value paid-in (accumulated
shares $.01 capital deficit) Total
Balance, December 31, 1994 10,961,887 $ 109,618 $ 15,207,453 $ (3,507,022) $ 11,810,049
Exercise of stock options, net of 17,102
common shares redeemed 432,898 4,330 469,717 - 474,047
Income tax benefit from stock options exercised - - 713,000 - 713,000
Net earnings for the year - - - 1,772,325 1,772,325
------------- ---------- -------------- -------------- -------------
Balance, December 31, 1995 11,394,785 113,948 16,390,170 (1,734,697) 14,769,421
Exercise of stock options, net of 11,723
common shares redeemed 379,493 3,795 398,163 - 401,958
Exercise of warrants 40,000 400 299,600 - 300,000
Income tax benefit from stock options exercised - - 528,627 - 528,627
Net earnings for the year - - - 3,384,506 3,384,506
------------ ---------- -------------- -------------- -------------
Balance, December 31, 1996 11,814,278 118,143 17,616,560 1,649,809 19,384,512
Theragenics Corporation
STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For the three years ended December 31, 1996
Retained
Common stock Additional earnings
Number of Par value paid-in (accumulated
shares $.01 capital deficit) Total
------------------------ ----------- ------------- ------------
Issuance of common stock in secondary public
offering, net of offering costs of $2,482,701 2,300,000 23,000 31,994,299 - 32,017,299
Issuance of common stock to Johnson & Johnson
Development Corporation 254,453 2,544 4,997,456 - 5,000,000
Exercise of stock options, net of 1,000 common
shares redeemed 149,110 1,491 492,615 - 494,106
Exercise of warrants 20,000 200 149,800 - 150,000
Income tax benefit from stock options exercised - - 489,636 - 489,636
Net earnings for the year - - - 9,497,531 9,497,531
---------- --------- ---------- ---------- ----------
Balance, December 31, 1997 14,537,841 $ 145,378 $55,740,366 $ 11,147,340 $67,033,084
========== ========= ========== =========== ==========
The accompanying notes are an integral part of these statements.
Theragenics Corporation
STATEMENTS OF CASH FLOWS
Year ended December 31,
1995 1996 1997
-------------- ------------- -------------
Cash flows from operating activities:
Net earnings $ 1,772,325 $ 3,384,506 $ 9,497,531
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Deferred income taxes 1,082,000 1,972,000 1,850,000
Depreciation and amortization 828,072 1,114,919 1,466,834
Provision for doubtful accounts receivable - - 65,446
Loss on disposal of property and equipment 1,677 - -
Change in assets and liabilities:
Accounts receivable (603,221) (923,291) (731,900)
Inventories 25,206 (62,343) (204,575)
Prepaid expenses and other current assets 24,280 (66,104) (26,995)
Other assets - - 45,680
Trade accounts payable 121,982 (17,816) 1,104,779
Accrued salaries, wages and payroll taxes 115,006 234,283 230,189
Other current liabilities (17,214) 47,369 80,056
Income taxes payable - - 845,364
--------- ----------- -----------
Net cash provided by operating activities 3,350,113 5,683,523 14,222,409
--------- ----------- -----------
Cash flows from investing activities:
Purchase and construction of property and equipment (2,426,961) (8,555,876) (12,858,080)
Purchase of marketable securities - - (8,391,807)
Maturities of marketable securities 50,000 - -
Patent costs (3,632) - -
--------- ----------- -----------
Net cash used by investing activities (2,380,593) (8,555,876) (21,249,887)
--------- ----------- -----------
Theragenics Corporation
STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
1995 1996 1997
-------------- ---------------- ---------------
Cash flows from financing activities:
Proceeds from long-term debt - 2,450,225 -
Repayment of long-term debt (469,622) (511,286) (3,458,436)
Proceeds from issuance of common stock, net - - 37,017,299
Proceeds from exercise of stock options and
warrants 474,047 701,958 644,106
Debt issue costs (25,070) (48,759) -
-------------- ---------------- ---------------
Net cash (used) provided by
financing activities (20,645) 2,592,138 34,202,969
-------------- ---------------- ---------------
Net increase (decrease) in cash and
short-term investments 948,875 (280,215) 27,175,491
Cash and short-term investments
at beginning of year 2,317,463 3,266,338 2,986,123
-------------- ---------------- ---------------
Cash and short-term investments
at end of year $ 3,266,338 $ 2,986,123 $ 30,161,614
============== ================ ===============
Supplemental Schedule of Non Cash Financing Activities
During 1995, 1996 and 1997, the Company realized an income tax benefit from
the exercise and early disposition of certain stock options of approximately
$713,000, $529,000 and $490,000, respectively.
Supplementary Cash Flow Disclosure
Interest paid, net of amounts capitalized $ 54,000 $ 82,000 $ 29,000
Income taxes paid $ 15,000 $ 99,000 $ 2,655,000
The accompanying notes are an integral part of these statements.
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Theragenics Corporation (the "Company") was organized in November 1981 to
develop, manufacture, and market radiological pharmaceuticals and devices
used in the treatment of cancer. The Company manufactures and markets
primarily one product, TheraSeed(R), which is used primarily in the treatment
of prostate cancer. Use of the Company's product is regulated by the U.S.
Food and Drug Administration (FDA). Under a marketing and sales agreement
executed with Indigo Medical, Inc. (Indigo) in May 1997, (see Note F) all
TheraSeed(R) products used in the treatment of prostate cancer are sold to
Indigo. The TheraSeed(R) product is utilized by hospitals, physicians and
other health service providers in the United States. The Company therefore is
directly affected by changes in technology, as it may apply to cancer
treatment, and by FDA regulations and the well being of the health care
industry.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
1.Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles ("GAAP"), management is required to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2.Cash and Short-Term Investments
For purposes of reporting cash flows, cash and short-term investments include
cash on hand, cash in banks and variable rate demand notes with original
maturities of less than 90 days.
3.Marketable Securities
Marketable securities are classified as available for sale and are reported
at fair value. Fair value is based upon quoted market prices. At December 31,
1997, marketable securities consisted of municipal and hospital authority
obligations. Marketable securities of $6,891,807 mature within one year and
marketable securities of $1,500,000 mature in 2004 with a put option
exercisable in 1998. At December 31, 1997, the fair value of marketable
securities approximated amortized cost. No marketable securities were held at
December 31, 1996.
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4.Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the specific identification method which approximates the first-in,
first-out (FIFO) method. Inventories consist primarily of work in process.
5.Property, Equipment, Depreciation and Amortization
Property and equipment are recorded at historical cost. Depreciation is
provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated services lives on a straight-line basis.
Depreciation and amortization expense related to property and equipment
charged to operations was approximately $810,000, $1,044,000 and $1,458,000
for 1995, 1996 and 1997, respectively. Estimated services lives are as
follows:
Building and improvements 30 years
Machinery, leasehold improvements,
furniture and equipment 5-10 years
A significant portion of the Company's depreciable assets are utilized in the
production of its product. Management periodically evaluates the
realizability of its depreciable assets in light of its current industry
environment. Management believes that no impairment of depreciable assets
exists at December 31, 1997. It is possible, however, that management's
estimates concerning the realizability of the Company's depreciable assets
could change in the near term due to changes in the technological and
regulatory environment.
The primary machinery and equipment utilized in the Company's manufacturing
process has been acquired from one vendor. Currently, the Company has
contracts for additional manufacturing equipment with this vendor. Management
believes that the vendor has the ability to continue to deliver the equipment
in accordance with the terms of the contracts. Any inability of the vendor to
meet its obligations for delivery of the equipment could have an adverse
affect on the Company's ability to increase its production capacity.
6.Patent Costs
The Company capitalizes the costs of patent applications for its products.
Amortization is computed on a straight line basis over the estimated economic
lives of the patents, commencing at the date of grant of the related patent.
Patent costs are net of accumulated amortization of $47,295 and $56,144 at
December 31, 1996 and 1997, respectively. Amortization related to patent
costs charged to operations was approximately $8,000, $10,000 and $9,000 for
1995, 1996 and 1997, respectively.
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
7.Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates applied to taxable income. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. A valuation allowance is
provided for deferred tax assets when it is more likely than not that the
asset will not be realized.
8.Research and Development Costs
The costs of research and development and consumable supplies and materials
to be used for the development of the Company's intended products are
expensed when incurred.
9.Advertising
The Company expenses the cost of advertising as incurred. Advertising expense
for the years ended December 31, 1995, 1996 and 1997 was approximately
$139,000, $229,000 and $230,000, respectively.
10. Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128 (SFAS
128), Earnings Per Share, in the fourth quarter of 1997. Basic net earnings
per common share is based upon the weighted average number of common shares
outstanding during the period. Diluted net earnings per common share is based
upon the weighted average number of common shares outstanding plus dilutive
potential common shares, including options and warrants outstanding during
the period. All comparative earnings per share data for prior periods
presented has been restated.
11. Stock Based Compensation
The Company's stock option plans are accounted for under the intrinsic value
method in which compensation expense is recognized for the amount, if any,
that the fair value of the underlying common stock exceeds the exercise price
at the date of grant.
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
12. Fair Value of Financial Instruments
The Company's financial instruments include cash, cash equivalents,
marketable securities and long-term debt. The carrying value of cash and cash
equivalents approximates fair value due to the relatively short period to
maturity of the instruments. Marketable securities are classified as
available for sale and are reported at fair value. The carrying value of the
Company's long-term obligations approximates fair value based upon borrowing
rates currently available to the Company for borrowings with comparable
maturities.
13. Hedging Activities
The Company enters into foreign exchange forward contracts to hedge the price
risks associated with equipment purchase commitments denominated in foreign
currencies. The forward contracts typically mature concurrently with payments
required under the equipment purchase contracts. The Company does not hold
foreign exchange forward contracts for trading or speculative purposes. Gains
and losses are deferred and accounted for as part of the underlying
transactions. At December 31, 1997, foreign exchange forward contracts were
not significant.
NOTE C - CONSTRUCTION IN PROGRESS
Construction in progress consists primarily of payments made for construction of
manufacturing equipment and facilities expansion. Total cost of this project is
expected to be approximately $54,000,000 and is expected to be completed in
various stages through 1999. Total outstanding commitments of this project at
December 31, 1997 are approximately $40,000,000. Construction of equipment and
facilities totaling approximately $4,900,000 and $3,000,000 were completed and
placed in service during 1996 and 1997, respectively.
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE D - INCOME TAXES
The provision for income taxes is summarized as follows:
1995 1996 1997
-------------- ------------- ------------
Current tax expense $ 18,000 $ 95,500 $ 3,500,000
Deferred tax expense 1,082,000 1,972,000 1,850,000
-------------- ------------- ------------
$ 1,100,000 $ 2,067,500 $ 5,350,000
============== ============= ============
The Company's temporary differences result in a deferred income tax asset at
December 31, 1996 and a deferred income tax liability at December 31, 1997,
summarized as follows:
December 31,
----------------------------------
1996 1997
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 870,000 $ -
Tax credit carryforwards 174,000 -
Nondeductible accruals and allowances 50,000 60,000
Other 14,000 -
------------ ------------
Gross deferred tax asset 1,108,000 60,000
Deferred tax liabilities:
Depreciation 748,000 (1,060,000)
----------- ------------
Net deferred tax asset (liability) $ 360,000 $ (1,000,000)
=========== ============
The provision for income taxes differs from the amount of income tax
determined by applying the applicable federal rates due to the following:
Year ending December 31,
------------------------
1995 1996 1997
-------- ----------- ---------
Tax at applicable federal rates $ 977,000 $ 1,854,000 $ 5,097,000
State tax, net 115,000 208,000 254,000
Tax exempt interest - - (40,000)
Other 8,000 5,500 39,000
--------- ----------- ---------
$ 1,100,000 $ 2,067,500 $ 5,350,000
========= =========== =========
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE E - NOTES PAYABLE
The Company has entered into an amended and restated loan and security
agreement ("the loan agreement") with a bank. The loan agreement provides for
a revolving credit facility of up to $15,000,000. Interest on outstanding
borrowings is payable monthly at the prime rate or at a LIBOR based rate.
The LIBOR based rate ranges from LIBOR plus 1.5% to LIBOR plus 2%, and is
determined by the Company's debt service coverage ratio, as defined in the
loan agreement. At December 31, 1996, $3,458,436 was outstanding under the
revolving credit facility with an effective interest rate of 8.25%. No
amounts were outstanding under the revolving credit agreement at December 31,
1997.
Outstanding borrowings under the loan agreement are collateralized by
substantially all of the Company's assets. Provisions of the loan agreement
limit the incurrence of additional debt and require the maintenance of
certain minimum financial ratios, among other things. As of December 31,
1997, the Company was in compliance with the provisions of the loan
agreement.
NOTE F - COMMITMENTS AND CONTINGENCIES
Marketing and Sales Agreement
In May 1997, the Company executed an agreement with Indigo Medical, Inc.
(Indigo), a subsidiary of Johnson & Johnson Development Corporation (Johnson
& Johnson), granting Indigo the exclusive worldwide right to market and sell
TheraSeed(R) for the treatment of prostate cancer for a period of seven years
with a provision for successive three year renewals. In accordance with this
agreement, all TheraSeed(R) products used for the treatment of prostate
cancer are sold to Indigo. Concurrently with the execution of the agreement,
Johnson & Johnson purchased 254,453 shares of the Company's common stock.
Licensing Agreement
The Company holds a worldwide exclusive license from the University of
Missouri for the use of technology, patented by the University, used in the
Company's "Therasphere" product. The licensing agreement provides for the
payment of royalties based on the level of sales and on lump sum payments
received pursuant to a licensing agreement with Nordion International, Inc.
(see below).
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE F - COMMITMENTS AND CONTINGENCIES - Continued
Licensing Agreement - Continued
The Company has granted certain of its geographical rights under the
licensing agreement with the University of Missouri to Nordion International,
Inc., a Canadian company which is a producer, marketer and supplier of
radioisotope products and related equipment. Under the Nordion agreement, the
Company will receive a licensing fee for each geographic area in which
Nordian receives new drug approval. The Company will also be entitled to a
percentage of future revenues earned by Nordion as royalties under the
agreement. Royalties from this agreement for each of the three years in the
period ended December 31, 1997 were not significant.
In 1995, 1996 and 1997, the Company received approximately $85,000, $100,000
and $100,000, respectively, from Nordion for the right to use certain patents
and to manufacture, distribute, and sell "Therasphere" for all applications
worldwide.
Letter of Credit
The Company has a letter of credit outstanding for approximately $315,000
relating to regulatory requirements.
Lease Commitment
The Company leases space and office equipment under noncancelable leases
which expire at various dates through April 2000. Approximate minimum lease
payments under the leases are as follows: 1998, $162,000; 1999, $25,000;
2000, $1,200.
Rent expense was approximately $61,500, $76,000 and $179,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE G - STOCK OPTIONS AND WARRANTS
Stock Options
The Company's board of directors has approved four stock option plans which
in aggregate cover up to 2,700,000 shares of common stock. The plans provide
for the expiration of options ten years from the date of grant and requires
the exercise price of the options granted to be at least equal to 100% of
market value on the date granted. Stock option transaction for each of the
three years in the period ended December 31, 1997 are summarized below:
1995 1996 1997
--------------------- --------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ------ -------- ------- --------- ------
Outstanding, beginning of year 1,226,716 $2.09 997,716 $ 3.11 826,500 $ 7.22
Granted 221,000 5.38 220,000 15.92 269,000 35.80
Exercised (450,000) 1.29 (391,216) 2.21 (150,110) 3.59
Forfeited - - - - (52,000) 5.38
--------- ------ -------- ------- --------- -----
Outstanding, end of year 997,716 $3.11 826,500 $ 7.22 893,390 $16.54
========= ====== ======== ======= ========= =====
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Excise Outstanding at Contractual Exercise Exercisable at Exercise
Price December 31, 1997 Life (Years) Price December 31, 1997 Price
----------- ----------------- ------------ ------------ ----------------- --------
$1.00-3.50 138,175 3.0 $ 2.03 138,175 $ 2.03
$5.38-6.38 278,215 7.6 5.59 113,881 5.78
$15.25-16.88 208,000 9.0 15.94 64,000 15.86
$23.50 24,000 9.5 23.50 - -
$37.00 245,000 10.0 37.00 - -
------- ----- ----- ----------- ------
893,390 7.9 $16.54 316,056 $ 6.18
======= ===== ===== =========== ======
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE G - STOCK OPTIONS AND WARRANTS - Continued
The Company follows the practice of recording amounts received upon the
exercise of certain options by crediting common stock and additional paid-in
capital. No charges are reflected in the statements of operations as a result
of the grant or exercise of options. The Company realizes an income tax
benefit from the exercise or early disposition of certain stock options. This
benefit results in a reduction to income taxes payable and an increase in
additional paid-in capital.
The Company uses the intrinsic value method in accounting for its stock
option plans. In applying this method, no compensation cost has been
recognized. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under those
plans, the Company's net earnings and earnings per share would have resulted
in the pro forma amounts indicated below:
1995 1996 1997
----------- ----------- -----------
Net earnings As reported $ 1,772,325 $ 3,384,506 $ 9,497,531
Pro forma 1,750,736 3,015,123 8,628,538
Basic net earnings per
common share As reported $ .16 $ .29 $ .69
Pro forma .16 .26 $ .63
Diluted net earnings per
common share As reported $ .15 $ .28 $ .66
Pro forma .15 .24 $ .61
For purposes of the pro forma amounts above, the fair value of each option
grant was estimated on the date of grant using the Black-Scholes
options-pricing model with the following weighted-average assumptions used
for grants in 1995, 1996 and 1997, respectively; expected volatility of 70%,
70% and 68%, risk-free interest rates of 5.86%, 6.33% and 5.87%; and expected
lives of 5.5 years, 7 years and 3.7 years.
Warrants
40,000 warrants were exercised during 1996 and 20,000 warrants were exercised
during 1997, resulting in proceeds to the Company of $300,000 and $150,000,
respectively. At December 31, 1997, there are outstanding warrants covering
40,000 shares of common stock. The warrants are exercisable at a price of
$7.50 per share and expire in May 1999.
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE H - EARNINGS PER SHARE
Earnings per common share was computed as follows:
Year ended December 31, 1997
----------------------------
Earnings Shares Per share
(Numerator) (Denominator) Amount
------------ -------------- -----------
Net earnings $ 9,497,531
============
Basic net earnings per common share
Earnings available to common shareholders $ 9,497,531 13,762,844 $ .69
===========
Effect of dilutive securities
Options and warrants 545,876
Diluted net earnings per common share $ 9,497,531 14,308,720 $ .66
============ ============== ===========
Year ended December 31, 1997
------------------------------
Earnings Shares Per share
(Numerator) (Denominator) Amount
-------------- -------------- -----------
Net earnings $ 3,384,506
============
Basic net earnings per common share
Earnings available to common shareholders $ 3,384,506 11,624,778 $ .29
=====
Effect of dilutive securities
Options and warrants 666,462
Diluted net earnings per common share $ 3,384,506 12,291,240 $ .28
============ ========== =====
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE H - EARNINGS PER SHARE - Continued
Year ended December 31, 1995
Earnings Shares Per share
(Numerator) (Denominator) Amount
Net earnings $ 1,772,325
============
Basic net earnings per common share
Earnings available to common shareholders $ 1,772,325 11,102,869 $ .16
=======
Effect of dilutive securities
Options and warrants 745,181
Diluted net earnings per common share $ 1,772,325 11,848,050 $ .15
============ =========== =======
NOTE I - MAJOR CUSTOMERS
In 1997, sales to Indigo Medical, Inc. (Indigo) represented 50% of total
sales. Additionally, approximately 86% of accounts receivable were from
Indigo at December 31, 1997. Indigo is a subsidiary of a stockholder of the
Company.
During 1995 and 1996, there were no customers which individually comprised
ten percent or more of sales.
NOTE J - EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution 401(k) Plan covering all
employees with at least six months of service and at least 21 years of age.
The Plan permits participants to defer a portion of their compensation
through payroll deductions. The Company may, at its discretion, contribute to
the Plan on behalf of participating employees. Company discretionary
contributions were approximately $40,000, $14,000 and $35,000 for 1995, 1996
and 1997, respectively.
Page 53
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1997
NOTE K - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summarizes certain quarterly results of operations (in thousands, except per share amounts):
Quarters ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Year ended December 31, 1997:
Net revenue $ 4,107 $6,172 $ 7,018 $ 7,260
Gross profit 2,962 4,613 5,437 5,404
Net earnings 1,109 2,182 2,943 3,264
Basic net earnings per common share $ .09 $ .15 $ .20 $ .22
Diluted net earnings per
common share $ .09 $ .15 $ .20 $ .22
Year ended December 31, 1996:
Net revenue $ 2,798 $2,727 $ 3,144 $ 3,688
Gross profit 2,045 1,840 2,186 2,550
Net earnings 854 678 918 935
Basic net earnings per common share $ .07 $ .06 $ .08 $ .08
Diluted net earnings per
common share $ .07 $ .06 $ .08 $ .08
NOTE L - NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued the following
Statements of Financial Accounting Standards (SFAS):
SFAS 130, Reporting Comprehensive Income, which is effective for fiscal years
beginning after December 15, 1997. SFAS 130 requires companies to include
details about comprehensive income that arise during a reporting period.
Comprehensive income includes revenue, expenses, gains and losses that bypass
the income statement and are reported directly in a separate component of
equity.
SFAS 131, Disclosure about Segments of An Enterprise and Related Information,
which is effective for fiscal years beginning after December 15, 1997. SFAS
131 requires companies to report information about an entity's different
types of business activities and the different economic environments in which
it operates, referred to as operating segments.
Management does not expect the adoption of these new standards to have a
material impact on the Company's results of operations or financial
condition.
THERAGENICS CORPORATION
INDEX TO EXHIBITS
Page No.
10.23 - First modification of Second Amended and 55
Restated Loan and Security Agreement between
Theragenics Corporation and NationsBank,
N.A., Dated September 30, 1997.
10.24 - Second Modification of Second Amended and 58
Restated Loan and security Agreement between
Theragenics Corporation and NationsBank,
N.A., Dated November 26, 1997.
24.1 Consent of Independent Public Accountants 68
for Incorporation by Reference of Audit
Statement into Registration Statement
FIRST MODIFICATION OF SECOND AMENDED AND RESTATED LOAN
AND SECURITY AGREEMENT
THIS MODIFICATION is made as of this 30th day of September, 1997, by
and between THERAGENICS CORPORATION, a Delaware corporation ("Borrower"), and
NATIONSBANK, N.A. ("Lender").
R E C I T A L S
---------------
WHEREAS, Lender and Borrower are parties to that certain Second Amended
and Restated Loan Agreement, dated as of December 9, 1996 (the "Loan
Agreement"), pursuant to which Lender has agreed to make one or more loans from
time to time to the Borrower in accordance with the terms and conditions
thereof; and
WHEREAS, Lender and Borrower desire to modify the Loan Agreement in
certain respects in accordance with the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises, the covenants and
agreements contained herein, and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, Borrower and Lender do
hereby agree that all capitalized terms used herein shall have the meanings
ascribed thereto in the Loan Agreement as amended hereby (except as otherwise
expressly defined or limited herein) and do hereby further agree as follows:
1. Amendment of Loan Agreement. Subject to the fulfillment of the conditions
precedent to the effectiveness of this Modification which are set forth below,
Section 1.1 of the Loan Agreement is hereby amended by deleting the definition
of the term "Revolving Credit Facility Expiration Date" in its entirety and by
substituting in lieu thereof the following new definition of such term:
"Revolving Credit Facility Expiration Date - December 31, 1997."
1. No Other Amendments. Except for the amendment expressly set forth and
referred to in Section 1 above, the Loan Agreement shall remain unchanged and in
full force and effect and is hereby in all respects ratified and confirmed.
Nothing in this Modification is intended, or shall be construed, to constitute a
novation or an accord and satisfaction of any of the Obligations or to modify,
affect or impair the perfection or continuity of Lender's security interests in,
security titles to or other Liens on any Collateral for the Obligations.
1. Representations and Warranties. To induce Lender to enter into this
Modification, the Borrower does hereby warrant, represent and covenant to Lender
that each representation or warranty of the Borrower set forth in the Loan
Agreement is hereby restated and reaffirmed as true and correct on and as of the
date hereof as if such representation or warranty were made on and as of the
date hereof (except to the extent that any such representation or warranty
expressly relates to a prior specific date or period), and no Default or Event
of Default has occurred and is continuing as of this date under the Loan
Agreement as amended by this Modification; and (b) the Borrower has the power
and is duly authorized to enter into, deliver and perform this Modification, and
this Modification is the legal, valid and binding obligation of the Borrower
enforceable against the Borrower in accordance with its terms.
1. Reference to and Effect on the Credit Documents. Upon the effectiveness of
this Modification, on and after the date hereof, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof" or words of like import
referring to the Loan Agreement, and each reference in the other Loan Documents
to "the Loan Agreement," "thereunder," "thereof" or words of like import
referring to the Loan Agreement, shall mean and be a reference to the Loan
Agreement as amended hereby.
1. Reimbursement of Costs and Expenses. The Borrower hereby agrees to reimburse
Lender on demand for all costs (including reasonable attorneys' fees) incurred
by Lender in negotiating, documenting and consummating this Modification, the
other documents referred to herein, and the transactions contemplated hereby and
thereby.
1. Conditions Precedent to Effectiveness of this Modification. The effectiveness
of this Modification and the amendment provided in Section 1 above are subject
to the truth and accuracy in all material respects of the representations and
warranties of the Borrower contained in Section 3 above and the Lender's receipt
of one or more duly executed counterparts of this Modification.
1. Counterparts. This Modification may be executed in multiple counterparts,
each of which shall be deemed to be an original and all of which when taken
together shall constitute one and the same instrument.
1. Governing Law. This Modification shall be governed by, and construed in
accordance with, the internal laws of the State of Georgia applicable to
contracts made and performed in such state.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have caused this Modification to
be duly executed and delivered as of the day and year specified at the beginning
hereof.
BORROWER:
THERAGENICS CORPORATION
By:
Name: /s/ Bruce W. Smith
-------------------
Bruce W. Smith
Title: Secretary, Treasurer &
Chief Financial Officer
LENDER:
NATIONSBANK, N.A.
By:
Name: /s/ Michael S. Paulson
----------------------
Michael S. Paulson
Title: Vice President
SECOND MODIFICATION OF SECOND AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
THIS MODIFICATION is made as of this 26th day of November, 1997, by and
between THERAGENICS CORPORATION, a Delaware corporation ("Borrower"), and
--------
NATIONSBANK, N.A. ("Lender").
------
R E C I T A L S
---------------
WHEREAS, Lender and Borrower are parties to that certain Second Amended
and Restated Loan and Security Agreement, dated as of December 9, 1996, as
amended by that certain First Modification of Second Amended and Restated Loan
and Security Agreement, dated as of September 30, 1997 (the "Loan Agreement"),
pursuant to which Lender has agreed to make one or more loans from time to time
to the Borrower in accordance with the terms and conditions thereof; and
WHEREAS, Lender and Borrower desire to modify the Loan Agreement in
certain respects in accordance with the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises, the covenants and
agreements contained herein, and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, Borrower and Lender do
hereby agree that all capitalized terms used herein shall have the meanings
ascribed thereto in the Loan Agreement as amended hereby (except as otherwise
expressly defined or limited herein) and do hereby further agree as follows:
1. Amendments of Loan Agreement. Subject to the fulfillment of the
----------------------------
conditions precedent to the effectiveness of this Modification which are set
forth below, the Loan Agreement shall be amended as follows:
(a) Section 1.1 of the Loan Agreement is hereby amended by adding to Section
1.1, the following new definitions:
Additional Facility - the uncommitted credit facility described
in Section 2.5 hereof.
Additional Facility Advances - advances, if any, made by
Lender under the Additional Facility.
Annual Maintenance Capital Expenditures - for any calendar
year, the number of Cyclotrons of Borrower in service as of
December 31 of the previous year, multiplied by $40,000.
Applicable Interest Rate Margin - the interest rate margin
determined pursuant to Section 2.4(D) hereof.
Current Assets - as of any date, the amount of the current
assets of a Person shown on a balance sheet of such Person at such
date in accordance with GAAP.
Current Liabilities - as of any date, the amount of the
current liabilities of a Person shown on a balance sheet of such
Person at such date in accordance with GAAP.
Current Ratio - the ratio of Borrower's Current Assets to
Borrower's Current Liabilities.
Indebtedness for Money Borrowed/EBITDA Ratio - as of the last
day of any fiscal quarter of Borrower, (a) Borrower's Indebtedness
for Money Borrowed on such day divided by (b) Borrower's EBITDA for
Borrower's most recently completed four (4) quarters.
Quarterly Maintenance Capital Expenditures - for each calendar
quarter during a year for which Annual Maintenance Capital
Expenditures has been calculated, such Annual Maintenance Capital
Expenditures divided by four (4).
(a) Section 1.1 of the Loan Agreement is hereby further amended by deleting from
Section 1.1, the terms "Debt Service Coverage Ratio," "Interest Period,"
"Loans," "Maturity Date," "Revolving Credit Facility Expiration Date," and
"Revolving Credit Maximum Availability," and
by substituting in lieu thereof,
the following new definitions of such terms:
Debt Service Coverage Ratio - for the four (4) calendar
quarters ending on the applicable calculation date, (a)(i) Borrower's
EBITDA for such period, minus (ii) taxes paid during such period, minus
(iii) any dividends or other distributions to shareholders made during
such period, minus (iv) the sum of Quarterly Maintenance Capital
Expenditures for each quarter ending during such period divided by (b)
total principal and interest paid on Indebtedness for Money Borrowed
during such period.
Interest Period - (a) in the case of the determination of any
Adjusted LIBOR, a one, two, three, four, five or six month period as
selected by Borrower, but (b) in the event any Interest Period would
end on a day which is not a Business Day, such Interest Period shall be
deemed to end on the immediately succeeding Business Day unless such
extension would cause such Interest Period to end on the next calendar
month in which case such Interest Period shall be deemed to end on the
immediately preceding Business Day, (c) any Interest Period which
begins on a day for which there is no numerically corresponding day in
the calendar month in which such Interest Period ends shall expire on
the immediately preceding Business Day, and (d) Borrower shall not be
entitled to select any Interest Period which extends beyond the
Revolving Credit Facility Expiration Date.
Loans - all loans and advances made by Lender pursuant to this
Agreement, including, without limitation, the Revolving Credit Loans.
Maturity Date - The Revolving Credit Facility Expiration Date,
or such earlier date as the Obligations shall become due (whether by
acceleration or otherwise).
Revolving Credit Facility Expiration Date - November 26, 2000.
Revolving Credit Maximum Availability - $15,000,000 (as such
amount may be adjusted from time to time pursuant to this Agreement).
(a) Section 1.1 of the Loan Agreement is hereby further amended by deleting from
Section 1.1, the terms, "Term-Out Requirements," "Treasury Rate," and "Treasury
Rate Advance."
(a) The Loan Agreement is hereby further amended by deleting Section 2.1(B) in
its entirety and by substituting in lieu thereof, the following new Section
2.1(B), the effect of which is to delete provisions relating to a term-out
option:
(B) On the Revolving Credit Facility Expiration Date, the
entire unpaid balance of the Revolving Credit Loans shall be due and
payable. For a period of thirty (30) days prior to November 26,1998,
Borrower may request a twelve-month extension of the Revolving Credit
Facility Expiration Date, which extension may be approved or not by
Lender in its sole and absolute discretion.
(a) The Loan Agreement is hereby further amended by deleting Section 2.2(A) in
its entirety and by substituting in lieu thereof, the following new Section
2.2(A), the effect of which is to delete reference to Treasury Rate Advances:
(A) A request for a Revolving Credit Loan shall be made, or
shall be deemed to be made, in the following manner: (i) Borrower shall
give Lender written notice (or telephonic notice promptly confirmed in
writing) substantially in the form of Exhibit C attached hereto, signed
by an authorized officer of Borrower, provided that in the case of
Prime Rate Advances, such notice shall be given to Lender not later
than 10:00 a.m. (Atlanta, Georgia time) on the Business Day of the date
of a proposed Prime Rate Advance and in the case of LIBOR Advances,
such notice shall be given to Lender at least two (2) Business Days
prior to the date of a proposed LIBOR Advance, and further provided
that any notice given to Lender under this Section shall be given to
Lender prior to 10:00 a.m. (Atlanta, Georgia time) in order for such
Business Day to count towards the minimum number of Business Days
required; (ii) the becoming due of any other Obligation, to the extent
not paid by Borrower, on the due date thereof, after giving effect to
any applicable grace periods, shall be deemed, at Lender's discretion,
irrevocably to be a request for a Revolving Credit Loan on the due date
in the amount then so due and (iii) pursuant to the terms of Borrower's
autoborrow account or similar account with Lender.
(a) The Loan Agreement is hereby further amended by deleting Sections 2.4(B) and
2.4(C) in their entireties, and by substituting in lieu thereof, the following
new Sections 2.4(B) and 2.4(C), the effect of which is to revise the applicable
margin for Advances on an Adjusted LIBOR basis and to delete reference to the
term-out option:
(B) Interest Rate. The unpaid principal balance of the
Revolving Credit Loans shall bear interest at a rate per annum equal to
the Prime Rate; provided, however, that Borrower may, by a written
notice (or by telephonic notice promptly confirmed in writing)
delivered to Lender not later than 10:00 am (Atlanta, Georgia time) on
the second Business Day prior to any Interest Period designated by
Borrower in such notice, direct that interest accrue on the unpaid
principal balance of the Revolving Credit Loans (or any portion thereof
which is in an amount of not less than $250,000 or any greater integral
multiple thereof) outstanding from time to time during such Interest
Period at a rate per annum equal to the sum of the Adjusted LIBOR for
such Interest Period plus the Applicable Interest Rate Margin in effect
from time to time and as more fully set forth in Section 2.4(D) below;
and provided, further, that (i) upon the occurrence and during the
continuation of any Event of Default, Lender may, upon notice to
Borrower, suspend Borrower's right to use the aforesaid Adjusted LIBOR
option, and (ii) Borrower may not have more than four (4) Adjusted
LIBOR-based interest rates in effect hereunder at any one time. Each
such designation by Borrower of an interest rate for the Revolving
Credit Loans based on the Adjusted LIBOR and of an Interest Period
applicable thereto shall be irrevocable and shall remain in effect
throughout such Interest Period. Upon determining any interest rate
based on the Adjusted LIBOR for an Interest Period requested by
Borrower, Lender shall notify the Borrower by telephone (which may be
confirmed in writing by Lender) of such determination, and such
determination shall, in the absence of manifest error, be final,
conclusive and binding for all purposes.
(C) Reserved.
(a) The Loan Agreement is hereby further amended by deleting Section 2.4(D) in
its entirety and by substituting in lieu thereof, the following new Section
2.4(D), the effect of which is to delete reference to Treasury Rate Advances and
to replace the pricing grid in its entirety:
(D) Applicable Interest Rate Margin. The Applicable Interest
Rate Margin for LIBOR Advances shall be the interest rate margin
determined by Lender based upon Borrower's Indebtedness for Money
Borrowed/EBITDA Ratio for the four (4) quarter period ending on the
last day of the most recent fiscal quarter for which financial
statements have been provided to Lender, effective as of the second
Business Day after the financial statements referred to in Sections
7.1(I)(i) and 7.1(I)(ii) hereof, and an accompanying certificate of the
chief financial officer of Borrower in the form of Exhibit B attached
hereto, are delivered by Borrower to Lender for the fiscal quarter most
recently ended, expressed as a per annum rate of interest as follows:
------------------------------------------- =========================
If Borrower's Indebtedness for Money Then, the Applicable
Borrowed/EBITDA Ratio is: Interest Rate Margin shall
be:
------------------------------------------- =========================
Less than 1.0 to 1.0 1.500%
=========================================== =========================
Greater than or equal to 1.0 to 1.0 but 1.625%
Less than 1.5 to 1.0
=========================================== =========================
Greater than or equal to 1.5 to 1.0 but 1.750%
Less than 2.0 to 1.0
=========================================== =========================
Greater than or equal to 2.0 to 1.0 but 1.875%
Less than 2.5 to 1.0
=========================================== =========================
Greater than or equal to 2.5 to 1.0 2.000%
=========================================== =========================
In the event that Borrower fails to timely provide the financial
statements and certificate referred to above in accordance with the
terms of Sections 7.1(I)(i) and 7.1(I)(ii) hereof, and without
prejudice to any additional rights under Section 9.3 hereof or
otherwise, no downward adjustment of the Applicable Interest Rate
Margin in effect for the preceding quarter shall occur until the actual
delivery of such financial statements and certificate.
(a) The Loan Agreement is hereby further amended by deleting Section 2.4(E) and
by substituting in lieu thereof, the following new Section 2.4(E), the effect of
which is to delete reference to Treasury Rate Advances and to Section 2.4(C):
(E) Conversions and Continuations.
(i) Borrower may on any Business Day, subject to the
giving of a proper Notice of Conversion/Continuation as hereinafter
described, elect (A) to continue all or any part of a LIBOR Advance by
selecting a new Interest Period therefor, to commence on the last day
of the immediately preceding Interest Period, or (B) subject to the
availability of interest rates as provided in Sections 2.4(B) and
2.4(D) hereof, to convert all or any part of a Loan of one type into a
Loan of another type; provided, however, that Lender shall not be
obligated to convert any outstanding Loan into or continue any
outstanding Loan as a LIBOR Advance when any Default or Event of
Default has occurred and is continuing. Any conversion of a LIBOR
Advance into a Prime Rate Advance shall be made on the last day of the
Interest Period for such LIBOR Advance.
(ii) Whenever Borrower desires to convert or continue
Loans under Section 2.4(E)(i), Borrower shall give Lender written
notice (or telephonic notice promptly confirmed in writing)
substantially in the form of Exhibit D, signed by an authorized officer
of Borrower, on the requested conversion date by 10:00 a.m. in the case
of a conversion into a Prime Rate Advance, and by 10:00 a.m. at least
two (2) Business Days before the requested conversion or continuation
date in the case of a conversion into or continuation of a LIBOR
Advance. Each such Notice of Conversion/Continuation shall be
irrevocable and shall specify the aggregate principal amount of the
Loans to be converted or continued, the date of such conversion or
continuation (which shall be a Business Day) and whether the Loans are
being converted into or continued as a LIBOR Advance (and, if so, the
duration of the Interest Period to be applicable thereto) or a Prime
Rate Advance. If upon the expiration of any Interest Period in respect
of any LIBOR Advance, Borrower shall have failed to deliver the Notice
of Conversion/Continuation, Borrower shall be deemed to have elected to
convert such LIBOR Advance to a Prime Rate Advance.
(a) Section 2.4(H) of the Loan Agreement is hereby amended by
deleting the reference to Treasury Rate Advances in the first sentence thereof.
(a) The Loan Agreement is hereby further amended by adding the
following new Section 2.5 immediately following the existing Section 2.4:
Additional Facility.
--------------------
(A) Subject to the terms and conditions of this Agreement, the
Borrower may request on or prior to November 1, 2000, the Additional
Facility on any Business Day; provided, however, that the Borrower may
not request the Additional Facility or an Additional Facility Advance
after the occurrence or during the existence of an Event of Default.
The aggregate amount of the Additional Facility and the outstanding
Additional Facility Advances thereunder shall not exceed $25,000,000.
The maturity date for the Additional Facility Advances shall be not
later than November 1, 2000. The Lender is not committed to provide the
Additional Facility or to make any Additional Facility Advances, and
the decision of the Lender to provide the Additional Facility or to
make Additional Facility Advances to the Borrower shall be at the
Lender's sole and absolute discretion, and shall be subject to
customary due diligence, appropriate internal credit approval and
formal documentation.
(B) In connection with any request for the Additional
Facility, the Borrower shall (i) deliver to the Lender a notice of
Additional Facility and such other loan documents as Lender may be
reasonably request to further document and evidence the Additional
Facility; and (ii) provide revised projections to the Lender which
shall be in form and substance reasonably satisfactory to the Lender
and shall demonstrate the Borrower's ability to timely repay such
Additional Facility and any Additional Facility Advances thereunder and
to comply with the covenants contained in this Agreement or such other
covenants as shall be reasonably established by Lender based upon
Borrower's then-current credit situation.
(k) The Loan Agreement is hereby further amended by deleting Section
4.2(B) and by substituting in lieu thereof, the following new Section
4.2(B), the effect of which is to amend provisions relating to payment of
the unused commitment fee:
(B) Borrower shall pay to Lender an unused commitment fee on the
aggregate unused amount of the Revolving Credit Maximum Availability
(which will accrue from the date hereof) at a rate of .35% per annum;
provided, however, that such unused commitment fee shall not be due for
any month during which the average used amount of the Revolving Credit
Maximum Availability for such month is greater than thirty-five percent
(35%) of the Revolving Credit Maximum Availability. Such unused
commitment fee shall be computed on the basis of a hypothetical year of
360 days for the actual number of days elapsed, shall be payable
monthly in arrears on the last day of each month, commencing on
December 31, 1997 and on the Revolving Credit Facility Expiration Date,
shall be fully earned when due, and shall be non-refundable when paid.
For purposes hereof, the aggregate stated amount for all Letters of
Credit then outstanding shall be deemed a use of the Revolving Credit
Maximum Availability.
(l) The Loan Agreement is hereby further amended by deleting Sections
7.2(K), 7.2(L), 7.2(M), 7.2(N), 7.2(O) and 7.2(P) in their entireties and by
substituting in lieu thereof the following new Sections 7.2(K), 7.2(L), 7.(M),
7.2(N), 7.2(O) and 7.2(P), the effect of which is to (i) amend the negative
covenants entitled "Limitation on Indebtedness," "Minimum Tangible Net Worth,"
--------------------------- -----------------------------
"Debt Service Coverage Ratio," and Funded Debt Ratio," (ii) delete the negative
--------------------------- -----------------
covenants entitled "Leverage Ratio," "Capital Expenditures" and "Cyclotron
--------------- ---------------------
Purchases," and (iii) renumber the negative covenants entitled "Dividends,
----------
Distributions, Etc." and "Negative Negative Pledge":
- - ------------------- ------------------------
(K) Limitation on Indebtedness. Create, incur, assume or
----------------------------
suffer to exist any Indebtedness, except: (i) Indebtedness evidenced by
or arising under this Agreement, the Letter of Credit Agreement or any
of the other Loan Documents; (ii) unsecured current liabilities (other
than those for Money Borrowed) incurred in the ordinary course of
business for current purposes, including, without limitation, trade
payables incurred in the ordinary course of business, and which are not
represented by a promissory note or other evidence of indebtedness and
are not more than thirty (30) days past due; (iii) Indebtedness
described on Schedule 7.2(K) hereto, (iv) Purchase Money Indebtedness
not otherwise inconsistent with the terms of this Agreement, (v)
renewals or extensions of any of the Indebtedness described in items
(i) through (iv) above (but so long as any indebtedness described in
items (ii), (iii) or (iv) above is not increased after the date
hereof), and (vi) additional unsecured Indebtedness (other than
Indebtedness permitted under any of clauses (i) through (v) above) of
up to $250,000 in the aggregate at any time outstanding.
(L) Minimum Tangible Net Worth. Borrower's Tangible Net Worth
--------------------------
shall not be less than $58,000,000.00 on December 31, 1997, and
Borrower shall maintain a Tangible Net Worth as of the last day of each
fiscal quarter of Borrower ending after December 31, 1997, which is not
less than the sum of the minimum Tangible Net Worth of Borrower
required hereunder for the last day of the fiscal quarter immediately
preceding the fiscal quarter ending on the applicable calculation date
plus seventy-five (75%) of Borrower's Net Income after taxes for the
quarter ending on the applicable calculation date (rounded up to the
nearest $100,000, but such sum shall not be reduced if Borrower suffers
a net loss in any fiscal quarter).
(M) Current Ratio. Borrower's Current Ratio shall not be less
--------------
than 1.5 to 1.0 as of the end of any fiscal quarter or fiscal year
ending on
or after December 31, 1997.
(N) Debt Service Coverage Ratio. As of December 31, 1997, and
----------------------------
as of the end of each fiscal quarter thereafter, Borrower's Debt
Service Coverage Ratio shall not be less than 1.5 to 1.0.
(O) Indebtedness for Money Borrowed/EBITDA Ratio. As of
------------------------------------------------
December 31, 1997, and as of the end of each fiscal quarter thereafter,
Borrower shall not permit Borrower's Indebtedness for Money
Borrowed/EBITDA Ratio to exceed 3.0 to 1.0.
(P) Negative, Negative Pledge. Borrower shall not, directly or
-------------------------
indirectly, enter into any agreement (other than the Loan Documents and
documents relating to Permitted Liens) with any Person that prohibits
or restricts or limits the ability of Borrower to create, incur,
pledge, or suffer to exist any Lien upon any assets of Borrower.
(Q) Dividends, Distributions, Etc. Borrower shall not declare
-------------------------------
or pay any dividend on its capital stock (other than stock dividends)
or make any payment to purchase, redeem, retire or acquire any of its
capital stock or any option, warrant or other right to acquire such
capital stock if such declaration or payment would cause a Default or
Event of Default under any of the financial covenants set forth in this
Section 7.2.
(m) Section 10.4(B) of the Loan Agreement is hereby amended by deleting the
reference to "Treasury Rate Advance" from the third sentence thereof, and by
substituting in lieu thereof, a reference to "Prime Rate Advance."
(n) The Loan Agreement is hereby further amended by deleting the existing
Exhibit B and Exhibit D entitled "Chief Financial Officer's Certificate" and
- - --------- ---------
"Form of Notice of Conversion/Continuation," respectively, in their entireties,
and by substituting in lieu thereof, the Exhibit B and Exhibit D attached
--------- ---------
hereto.
1. No Other Amendments. Except for the amendments expressly set forth and
--------------------
referred to in Section 1 above, the Loan Agreement shall remain unchanged and in
full force and effect and is hereby in all respects ratified and confirmed.
Nothing in this Modification is intended, or shall be construed, to constitute a
novation or an accord and satisfaction of any of the Obligations or to modify,
affect or impair the perfection or continuity of Lender's security interests in,
security titles to or other Liens on any Collateral for the Obligations.
1. Representations and Warranties. To induce Lender to enter into this
--------------------------------
Modification, the Borrower does hereby warrant, represent and covenant to Lender
that (a) each representation or warranty of the Borrower set forth in the Loan
Agreement is hereby restated and reaffirmed as true and correct on and as of the
date hereof as if such representation or warranty were made on and as of the
date hereof (except to the extent that any such representation or warranty
expressly relates to a prior specific date or period), and no Default or Event
of Default has occurred and is continuing as of this date under the Loan
Agreement as amended by this Modification; and (b) the Borrower has the power
and is duly authorized to enter into, deliver and perform this Modification, and
this Modification is the legal, valid and binding obligation of the Borrower
enforceable against the Borrower in accordance with its terms.
1. Reference to and Effect on the Credit Documents. Upon the effectiveness of
------------------------------------------------
this Modification, on and after the date hereof, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof" or words of like import
referring to the Loan Agreement, and each reference in the other Loan Documents
to "the Loan Agreement," "thereunder," "thereof" or words of like import
referring to the Loan Agreement, shall mean and be a reference to the Loan
Agreement as amended hereby.
1. Reimbursement of Costs and Expenses. The Borrower hereby agrees to reimburse
-----------------------------------
Lender on demand for all costs (including reasonable attorneys' fees) incurred
by Lender in negotiating, documenting and consummating this Modification, the
other documents referred to herein, and the transactions contemplated hereby and
thereby.
1. Conditions Precedent to Effectiveness of this Modification. The effectiveness
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of this Modification and the amendments provided in Section 1 above are subject
to (i) the truth and accuracy in all material respects of the representations
and warranties of the Borrower contained in Section 3 above, and (ii) the
Lender's receipt of one or more duly executed counterparts of this Modification,
a duly executed replacement note in an original principal amount of $15,000,000
and copies of Borrower's board of directors resolutions approving this
Modification and the new promissory note, certified by the Borrower's corporate
secretary.
1. Counterparts. This Modification may be executed in multiple counterparts,
------------
each of which shall be deemed to be an original and all of which when taken
together shall constitute one and the same instrument.
1. Governing Law. This Modification shall be governed by, and construed in
--------------
accordance with, the internal laws of the State of Georgia applicable to
contracts made and performed in such state.
IN WITNESS WHEREOF, the parties hereto have caused this
Modification to be duly executed and delivered as of the day and year
specified at the beginning hereof.
BORROWER:
THERAGENICS CORPORATION
By: /s/ Bruce W. Smith
Name: Bruce W. Smith
Title: Secretary, Treasurer &
Chief Financial Officer
LENDER:
NATIONSBANK, N.A.
By: /s/ Michael S. Paulson
Name: Michael S. Paulson
Title: Vice President
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Theragenics Corporation
We hereby consent to the incorporation by reference of our report dated January
15, 1998, appearing in your Annual Report on Form 10-K for the year ended
December 31, 1997, in the Company's Registration Statements on Form S-8, file
numbers 333-15313, 333-40737, and 333-40653.
Atlanta, Georgia
March 30, 1998