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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NO. 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) 271-0233
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Common stock, $.01 par value, New York Stock Exchange
Together with associated Common
Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
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 29, 1999 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 New York Stock
Exchange, was $152,239,682.
As of March 29, 1999 the number of shares of common stock, $.01 par value,
outstanding was 29,435,018.
Documents incorporated by reference: Proxy Statement for the registrant's 1999
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1998, 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 cancer. The Company produces and sells TheraSeed(R), which is a
U.S. Food and Drug Administration (FDA) licensed device, based on the
radioactive isotope palladium 103 (Pd-103). The Company received FDA clearance
to market TheraSeed(R) in 1986 and commenced commercial production and product
sales in 1987. Currently, TheraSeed(R) is used primarily in the treatment of
early stage prostate cancer. In the treatment, 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 cancerous tumor while sparing surrounding healthy cells and organs
from any significant dose of radiation. TheraSeed(R) has been shown in
independent clinical studies to offer success rates that are comparable to or
better than conventional therapies for the treatment of prostate cancer, while
being associated with a reduced incidence of adverse side effects. In addition,
TheraSeed(R) offers significant quality of life and cost advantages. Since 1987,
TheraSeed(R) has been used in over 650 centers across the United States. In
1998, the Company received regulatory approval for the marketing of TheraSeed(R)
throughout the member countries of the European Union by obtaining CE Marking.
Sales of TheraSeed(R) in Europe were not significant in 1998, and are not
expected to be significant in 1999. TheraSeed(R) has also been used on a limited
basis in the treatment of cancers of the pancreas, lung, head, neck, oral
cavity, brain and eye.
Prior to 1993, the Company relied exclusively on reactor produced Pd-103. In
order to increase control over the timeliness, availability and cost of Pd-103,
the Company converted from reactor produced Pd-103 to an alternative means of
producing Pd-103 using Company-owned cyclotrons. The first cyclotron became
operational in 1993 and as of December 31, 1998, seven cyclotrons were fully
operational. Currently, all Pd-103 utilized by the Company is produced by
Company-owned cyclotrons.
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 all methods of treating prostate
cancer exceeded $3.0 billion in the United States. The American Cancer Society
estimates there will be 179,300 new cases of prostate cancer and an estimated
37,000 deaths associated with the disease in 1999. Between 1989 and 1992,
prostate cancer incidence rates increased dramatically, probably due to the
increasing use of prostate-specific antigen (PSA) blood test screenings. The
rate declined 6.3 percent overall from 1991 to 1995. According to the National
Cancer Institute, the incidence rate for white men peaked in 1992 at
approximately 186 new cases per 100,000 men before declining 27% to 135 new
cases per 100,000 in 1994. Incidence in African American men peaked in 1993 at
approximately 265 cases per 100,000 before declining 12% to approximately 234
cases per 100,000 in 1994. The prostate cancer death rate for white men began
dropping in 1992 and for black men in 1994.
Prostate cancer incidence and mortality increase with age. More than eight out
of ten men diagnosed with prostate cancer are over the age of 65. Prostate
cancer accounts for about 13% of male cancer-related deaths. Men survive at
least five years in 89% of the diagnosed prostate cancer cases. According to the
American Cancer Society, approximately 58% of all prostate cancers are found
while they are still localized (confined to the prostate), and a 5-year relative
survival rate for men with localized prostate cancer is 100%. 31% of prostate
cancers have spread to tissues near the prostate when diagnosed, and the 5-year
survival rate for these men is 94%. The remaining 11% of those men diagnosed
have prostate cancer that has spread to distant parts of the body. About 31% are
expected to survive at least five years. These survival statistics, according to
the American Cancer Society, include all diagnosed prostate cancer cases,
regardless of the treatment. The Company estimates that in 1998, its U.S. market
share in the treatment of early stage localized prostate cancer was
approximately 8%.
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.
Staging is the process of determining how far the cancer has spread. The
treatment and recovery outlook depend on the stage of the cancer. The TNM system
is the staging process used most often. The TNM system for staging gives three
key pieces of information:
T refers to the size of the Tumor which is measured in centimeters (cm). One
cm is about one-half inch. N describes how far the cancer has spread to nearby
lymph Nodes. M shows whether the cancer has spread (Metastasized) to other
organs of the body. In addition, the TNM descriptions can be grouped together
with stages labeled 0 through IV (0-4). The higher the number, the more the
cancer has spread. The following table summarizes the various stages of prostate
cancer.
Stages Characteristics of prostate cancer
T1 or T2 Localized in the prostate
T3 or T4 Locally advanced
N+ or M+ Spread to pelvic lymph nodes (N+) or distant
organs (M+)
The Gleason system is typically used for "grading" or determining how fast
the tumor is growing. Some prostate cancers grow more quickly than others. A
Gleason grade, which ranges from 2 to 10, usually is used to indicate the
tumor's growth rate after it is taken during a biopsy. Higher Gleason grades
such as 8-10 means cancer cells are likely to grow more quickly. Most localized
cancers of the prostate are an intermediate grade, Gleason grades 4, 5, or 6.
Approximately 58% of new prostate cancer diagnoses are defined as being
localized (that is, confined to the prostate) and the 5-year relative survival
rate for men with localized prostate cancer is 100%. The lack of early-stage
symptoms makes diagnosis difficult. Until the mid 1980's, the best method of
routine examination had been the digital rectal exam, an uncomfortable
subjective determination. The diagnostic test currently used most often is the
PSA blood test, which 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 can be 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, probably as a result of an improvement in the
ability to diagnose prostate cancer through 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"), transurethral resection of the prostate ("TURP"), external
beam radiation therapy ("EBRT"), cryosurgery, 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 and transurethral resection of the prostate are the two
most common surgical procedures. Radical Prostatectomy 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-day average hospital stay and a
lengthy recovery period (generally three to five weeks). Possible side effects
include impotence and incontinence. The cost of RP ranges from $19,000 to
$25,000 per procedure, excluding treatment for side effects and postoperative
complications. Approximately 120,000 men underwent RP in 1995, and it is
estimated that 120,000 men will undergo RP in the year 2000.
Transurethral resection of the prostate (TURP) is used for men who are not
able to have a radical prostatectomy because of advanced age or serious illness
in addition to the prostate cancer. It is not done to cure the disease or to
remove all of the cancer, but rather as a relief of the symptoms from the
disease before other treatments begin. The procedure is actually used more often
to relieve symptoms of non-cancerous prostate enlargement. The procedure usually
requires a hospital stay of one to two days and the patient may return to work
in one to two weeks. Possible side effects include some bleeding into the urine
after surgery, possibility of infections and the risks associated with the type
of anesthesia used.
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. Patients are usually treated five
days per week in an outpatient center over a period of six to seven 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.
Other possible 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 $13,000 to $17,000 per patient. Approximately
35,000 men underwent EBRT in 1995, and it is estimated that approximately 65,000
EBRT procedures will be performed in the year 2000 for the treatment of
localized prostate cancer.
Cryosurgery involves placing a small metal tool into the tumor and killing
the cancer by freezing the entire prostate. Patients usually remain in the
hospital for one to two days. There will be some bruising and soreness of the
area where the probe was inserted. Side effects of cryosurgery may include
damage to nerves near the prostate that may cause impotence and incontinence,
damage to bladder and intestines, and a fistula (an abnormal opening) between
the rectum and bladder. This option is considered most appropriate for men with
serious medical conditions that make them unable to endure surgery or radiation
therapy.
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 for treatment of
all solid localized tumors and currently used principally in seeding for the
treatment of prostate cancer. In the prostate 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 of significant radiation exposure. The seeds, whose capsules
are biocompatible, remain in the prostate after delivering their radiation dose.
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 for early-stage prostate cancer 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 an average three day hospital stay and a three to five week
recovery period, and EBRT involves six to seven weeks of daily radiation
treatments. The Company estimates that treatment with TheraSeed(R) generally
costs $13,000 to $17,000 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 for early-stage prostate cancer treatment that are comparable to or better
than those of RP or EBRT. The vast majority of published studies on the use of
seeding in the treatment of early-stage prostate cancer have been very positive.
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.
Because of Dr. Blasko's extensive experience in the treatment of cancer and
brachytherapy, the company retained him as a medical and cancer advisor in 1998.
Seeding treatment in combination with EBRT has also recorded impressive results
in the treatment of higher risk prostate cancer patients. In their paper
published for the Seminars in Surgical Oncology 1997, Drs. Blasko, Ragde, Grimm,
et al. also presented 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
65-90% impotence rate and a 2-35% incontinence rate, and EBRT generally results
in impotence and incontinence rates of 40-60% and 8-18%, 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 urethra irritation and urinary urgency post-implantation as the
Pd-103 delivers its radiation dose.
Lower Treatment Cost. The total cost of seeding is approximately $15,000 per
procedure. This is approximately two-thirds the cost of RP, which ranges from
$19,000 to $25,000, excluding treatment for side effects and post-operative
complications. Seeding cost is comparable to the cost of EBRT, which ranges from
$13,000 to $17,000 for a six-to-seven week course of treatment.
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) was the first commercially
available alternative isotope to I-125 since I-125's introduction in the 1970s.
Management believes that I-125 and Pd-103 are used in approximately 60% and 40%,
respectively, of 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 the duration of some radiation
induced side effects by two-thirds and reduces radiation 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 signed a sales and marketing agreement with Indigo
Medical, Inc., a Johnson & Johnson company, in 1997. Management believes that
over time this agreement provides an opportunity for Theragenics and Indigo to
take the seeding treatment of prostate cancer to levels of penetration
previously unseen by leveraging the marketing, health care organization network,
training capacity and international capabilities of Johnson & Johnson.
In 1998 the Company received regulatory approval for the marketing of
TheraSeed(R) throughout the member countries of the European Union by obtaining
CE Marking, and a limited number of TheraSeed(R) procedures were performed in
Italy and Germany. Management does not expect sales of TheraSeed(R) in Europe to
be significant in 1999.
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
and cost of Pd-103, the Company turned away from reactor-based neutron
bombardment of Pd-102 and to the cyclotron-based 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 currently has eight cyclotrons in production and is currently
installing a ninth, which is scheduled to become operational during the second
quarter of 1999. The Company has ordered five additional cyclotrons to be
installed in fiscal 1999, though the last of these five will not be operational
until early 2000. The Company's cyclotrons are designed, built, installed and
tested by a company specializing in the construction of such equipment.
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 1999 and 2000.
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. Certain portions of the Company's production processes
were automated during 1998. Although the automation process is difficult and
time consuming, and has been subject to significant delays, management believes
it can continue to 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.
Marketing
Strategic Alliance. In 1997, the Company entered into a sales and marketing
agreement with Indigo Medical, Inc., a Johnson & Johnson Company, 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 that upon full implementation of Indigo's marketing
efforts directed to patients and medical professionals, the alliance with Indigo
will provide the opportunity for long-term 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.
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. Timing for commercial development and regulatory approval of
TheraSphere(R) in the United States and elsewhere is uncertain, 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. In the treatment of liver cancer, a radiation dose is delivered to
the tumor by introducing 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 and concentrate 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 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 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 also 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.
Seasonality
The Company has not historically identified seasonality in the demand for
TheraSeed(R). The Company's rapid sales growth together with production capacity
constraints experienced prior to the fourth quarter of 1998 prevented any
meaningful ability to detect seasonality. The fourth quarter of 1998 was the
first quarter in which production capacity exceeded demand. Management believes
that a variety of factors may have combined to create these circumstances,
including the annual occurrence of three holidays and a major medical convention
in the fourth quarter, together with the fact that the transition of sales
responsibility to Indigo was substantially completed during the fourth quarter
of 1998. As a result of the combined effect of the foregoing factors, the impact
of seasonality on the Company's future sales is uncertain at this time.
Accordingly, no assurances can be given that seasonality will not be identified
in future periods.
Research and Development
Research and development (R&D) expenses were $448,000 in 1998 compared to
$55,000 in 1997. The increase in R&D was a result of development efforts to
improve the Company's proprietary production processes.
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, as well as competing permanent implant devices. 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. Management believes that if
general conversion from these treatment options (or other established or
conventional 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.
Iodine-125 (I-125) is commercially available as a permanent implant and
competes with TheraSeed(R). At least three companies are currently producing and
distributing I-125 seeds and a number of companies have announced their
intentions to do so. Management believes that I-125 and Pd-103 are used in
approximately 60% and 40%, respectively, of all prostate cancer seeding
procedures. The dose rate of I-125 is approximately one-third of Pd-103, and the
half-life of I-125 is approximately three times longer than Pd-103. Management
believes that 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 the duration of some radiation induced
side effects by two-thirds and reduces radiation exposure to medical personnel
in treatment follow-up; and (iii) unlike I-125, Pd-103 is non toxic and
non-volatile as it decays.
A small number of patients in the United States have recently been treated
with Pd-103 seeds produced and distributed by at least two other companies,
which compete directly with TheraSeed(R). These companies have announced their
intentions to produce Pd-103 seeds in commercial quantities in 1999. One of
these companies also produces I-125 seeds. A number of other companies have also
announced their intentions to produce Pd-103 seeds. Management believes that
Theragenics has competitive advantages over these companies including: (i) its
proprietary production processes that have been developed and patented; (ii) its
record of reliability and safety in its manufacturing operations; (iii) the time
and resources required for competitors' production capabilities to ramp up to
commercial production on a scale comparable to Theragenics'; and (iv) the
resources and world-wide marketing capabilities of its marketing partner,
Indigo, a Johnson and Johnson company.
One of the companies that has produced Pd-103 consists of certain former
employees of Theragenics. Theragenics initiated legal action against this
company in 1997 for misappropriation of trade secrets. The Company's lawsuit
against the former employees' company is on going, and management is currently
unable to predict the ultimate outcome of the litigation.
In addition to the competition from the procedures and companies noted
above, 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 that have significant resources available to them, are
engaged in radiological pharmaceutical and device research. These companies are
located in the United States, Europe and throughout the world. Significant
developments by any of these companies could have a material adverse effect on
the demand for Theragenics' products.
Government Regulation
The Company's present and future intended activities in the development,
manufacture and sale of cancer therapy products are subject to extensive laws,
regulations, regulatory approvals and guidelines. Within the United States, the
Company's therapeutic radiological device must comply with the U.S. Federal
Food, Drug and Cosmetic Act, which is enforced by the FDA. As a result of
receiving its CE Marking during 1998, the Company must also comply with the
regulations of the Competent Authorities of the European Union for TheraSeed(R)
sold in the member nations of the European Union.
The Company is also required to adhere to applicable FDA regulations for Good
Manufacturing Practices, including extensive record keeping 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
would be 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 Nuclear Regulatory Commission (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 the state 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 its timetable. To
date, the Company 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 adequate funding
will exist for end-of-life radiological decommissioning of its cyclotrons and
other radioactive areas of its property that contain radioactive materials. 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 in this regard. The Company provides training and monitoring
of its personnel to facilitate the proper handling of all materials.
Employees
As of December 31, 1998, the Company had 190 full time employees (including
full time temporary employees and executive personnel). Of this total, 156 were
engaged in the 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
agreement, and management considers employee relations to be good.
Item 2. Properties
The Company owns two manufacturing facilities located in Buford, Georgia. One,
completed and placed into service during 1998, houses cyclotrons, raw material
processing, assembly and shipping operations. The second facility, which is
adjacent to the first facility, houses cyclotrons. The Company also leases
warehouse space and office space in two buildings located in Norcross, Georgia.
Upon completion of the expansion projects currently underway, approximately
15 acres will be available for future development adjacent to the Company's
current Buford location. Management intends to use this land for long term
expansion of its manufacturing and support operations.
Item 3. Legal Proceedings
Subsequent to December 31, 1998, the Company and certain of its officers
and directors were named as defendants in twelve (12) separate securities
actions, alleging violations of the federal securities laws, including Sections
10(b), 20(a) and Rule 10b-5 of the Securities and Exchange Act of 1934, as
amended. As of this time, eleven of the actions are pending in the U.S.
District Court for the Northern District of Georgia; a twelfth action is
presently pending in the Central District of California and is expected to
be dismissed in the near future (1). The complaints, which are substantially
similar in nature, purport to represent a class of investors who purchased
or sold securities during the time period from January 29, 1998 to January 11,
1999. The complaints generally allege that the defendants made certain
misrepresentations and omissions in connection with the performance of the
Company during the class period. The complaints seek unspecified damages.
No answer or otherwise responsive papers are yet due from the defendants.
Management believes these charges are without merit and intends to vigorously
oppose the litigation, however, given the nature and early stage of the
proceedings, the ultimate outcome of the litigation cannot be determined at
this time. Accordingly, no provision for any liability that might result from
this litigation has been made. The Company and its officers and directors
maintain insurance for claims of this general nature.
(1) A complete list of the pending actions follows:
o MCV SALES INC. PROFIT SHARING PLAN & TRUST DTD 6/16/75, on behalf of
itself and all others similarly situated v. THERAGENICS
CORP., M. CHRISTINE JACOBS and BRUCE W. SMITH; Civil Action
No.1:99-CV 0141 TWT
o SIDNEY FELDON, on behalf of himself and all others similarly situated
v. THERAGENICS CORP., M. CHRISTINE JACOBS and BRUCE W.
SMITH; Civil Action No. 1 99-CV-0175 TWT
o DANIEL KURSMAN, on behalf of himself and all others similarly situated
v. THERAGENICS CORP., M. CHRISTINE JACOBS and BRUCE W. SMITH; Civil
Action No. 1 99-CV-0201 TWT
o BRUCE B. BERNSTEIN, on behalf of himself and all others similarly
situated v. THERAGENICS CORP., M. CHRISTINE JACOBS and
BRUCE W. SMITH; Civil Action No. 1 99-CV-0205 TWT
o GERALDINE BYERS, on behalf of herself and all others similarly
situated v. THERAGENICS CORP., M. CHRISTINE JACOBS and BRUCE W. SMITH;
Civil Action No. 1 99-CV-0253 TWT
o HOWARD B. MARKS, on behalf of himself and all others similarly situated
v. THERAGENICS CORP., M. CHRISTINE JACOBS and BRUCE W. SMITH; Civil
Action No. 1 99-CV-0271 TWT
o ALEXANDER T. KOWALSKI, on behalf of himself and all others similarly
situated v. THERAGENICS CORP., M. CHRISTINE JACOBS and
BRUCE W. SMITH; Civil Action No. 1 99-CV-0354 TWT
o SARA CHEESEMAN, on behalf of herself and all others similarly situated
v. THERAGENICS CORP., M. CHRISTINE JACOBS and BRUCE W. SMITH; Civil
Action No. 1 99-CV-0407
o JERRY L. JENSEN, on behalf of himself and all others similarly situated
v. THERAGENICS CORP., M. CHRISTINE JACOBS and BRUCE W. SMITH; Civil
Action No. 1 99-CV-0425
o JOSEPH S. BUTLER, on behalf of himself and all others similarly
situated v. THERAGENICS CORP., M. CHRISTINE JACOBS and BRUCE W. SMITH;
Civil Action No. 1 99-CV-0443
o ROBERT L. THOMAS, JR., on behalf of himself and all others similarly
situated v. THERAGENICS CORP., M. CHRISTINE JACOBS and
BRUCE W. SMITH; Civil Action No. 1 99-CV-0488; and
o In the United States District Court, Central District of California:
GABRIEL BERCZI, on behalf of himself and all others similarly situated
v. THERAGENICS CORP., BRUCE W. SMITH, CHARLES KLIMKOWSKI, CHRISTINE
JACOBS, PETER SAUNDERS, and ORWIN CARTER; Civil Action No. 99-00533
CBM (RZX)
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 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock, $.01 par value, ("Common Stock") is traded on the
New York Stock Exchange (NYSE) under the symbol "TGX". Trading on the NYSE
commenced on August 6, 1998. Prior to that date, the Company's Common Stock was
traded on the Nasdaq National Market. The high and low prices for the Company's
Common Stock as reported on the NYSE and, prior to August 6, 1998, on NASDAQ,
for each quarterly period in 1997 and 1998 are as follows:
High Low
1997
First Quarter........................$13.75 $7.87
Second Quarter....................... 12.69 7.52
Third Quarter.........................25.00 11.12
Fourth Quarter........................27.00 16.50
1998
First Quarter.........................35.37 17.81
Second Quarter........................34.62 22.25
Third Quarter.........................24.75 9.25
Fourth Quarter........................21.75 10.81
As of March 29, 1999, the closing price of the Company's Common Stock was
$6.75 per share. Also, as of that date, there were approximately 811 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.
In February 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, each share of the Company's Common Stock contains a share purchase right
(a "Right"). The Rights expire in February 2007, 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. 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 at a substantial discount to then current market prices. These effects
could adversely effect the market price of the Company's Common Stock. The
Rights Plan and the terms of the Rights, which are set forth in a Rights
Agreement between the Company and SunTrust Bank, Atlanta, as Rights Agent, could
add substantially to the cost of acquiring the Company, and consequently could
delay or prevent a change in control of the Company.
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 any 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 Board of Directors approved a two-for-one Common Stock
split, effected in the form of a 100% stock dividend, which was distributed on
April 15, 1998 to stockholders of record on March 31, 1998. All references to
shares outstanding and per share amounts contained herein have been restated to
reflect the stock split.
Item 6. Selected Financial Data
The selected financial data set forth below as of December 31, 1997 and 1998
and for each of the three years in the period ended December 31, 1998 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, 1994, 1995 and 1996
and for each of the two years in the period ended December 31, 1995 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,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Dollars and shares in thousands, except per share data)
Statement of Earnings Data:
Product sales - affiliate..................... $ -- $ -- $ -- $12,287 $37,775
Product sales................................. 4,723 7,782 12,257 12,170 83
Licensing fees................................ -- 85 100 100 100
------ ----- ----- ------ ------
4,723 7,867 12,357 24,557 37,958
Cost of product sales......................... 1,791 2,645 3,736 6,141 10,869
Selling, general and administrative.......... 1,844 2,396 3,198 4,819 6,000
Research and development..................... 15 18 7 55 448
------ ------ ----- ------ ------
3,650 5,059 6,941 11,015 17,317
Other income................................. 110 64 36 1,306 1,262
------ ------ ------ ------ ------
Net earnings before income taxes............. 1,183 2,872 5,452 14,848 21,903
Income tax expense........................... 453 1,100 2,067 5,350 7,880
------ ------ ------ ----- ------
Net earnings................................. $730 $1,772 $3,385 $9,498 $14,023
====== ====== ====== ====== ======
Earnings per common share
Basic...................................... $ 0.03 $ 0.08 $ 0.15 $ 0.35 $ 0.48
Diluted.................................. $ 0.03 $ 0.07 $ 0.14 $ 0.33 $ 0.46
Weighted average common shares
Basic.................................... 21,870 22,206 23,250 27,526 29,259
Diluted.................................. 23,176 23,696 24,582 28,617 30,315
December 31,
------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Cash and short-term investments.................. $2,317 $3,266 $2,986 $30,162 $19,542
Marketable securities............................ 50 - - 8,392 6,830
Property, plant and equipment, net............... 8,458 10,073 17,586 28,986 53,258
Total assets..................................... 14,169 16,878 23,689 71,200 88,273
Long-term debt, including current
installments..................................... 1,989 1,519 3,458 -- --
Shareholders' equity............................. 11,810 14,769 19,385 67,033 84,385
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Theragenics operates in one business segment; the development,
manufacture and sale of radiological devices used in the treatment of
cancer. In 1986, the Company received clearance from the U.S. Food and
Drug Administration (FDA) for commercial distribution of TheraSeed(R),
a rice-sized device, for use in any solid localized tumor. Currently,
Theraseed(R) is the Company's principal product and is used primarily
in the treatment of early-stage prostate cancer. Physicians, hospitals
and other healthcare providers, located primarily in the United States,
utilize the TheraSeed(R) product. In 1998 the Company received
regulatory approval for the marketing of TheraSeed(R) throughout the
member countries of the European Union by obtaining CE Marking. Sales
of TheraSeed(R) in Europe were not significant in 1998.
Under a Sales and Marketing agreement executed in May 1997 with
Indigo Medical, Inc. ("Indigo"), a Johnson & Johnson company, (the
"Indigo Agreement") Indigo obtained the exclusive worldwide right to
market and sell TheraSeed(R) for the treatment of prostate cancer.
Under the terms of the Indigo Agreement, Indigo has 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 of TheraSeed(R).
Palladium-103 (Pd-103) is the radioactive isotope that supplies the
therapeutic radiation of TheraSeed(R). Prior to 1993, the Company
relied exclusively on reactor produced Pd-103. In order to increase
control over the timeliness, availability and cost of Pd-103, the
Company converted from reactor produced Pd-103 to an alternative means
of producing Pd-103 using a cyclotron. The first cyclotron became
operational in 1993 and as of December 31, 1998, seven cyclotrons were
fully operational. Currently, all Pd-103 utilized by the Company is
produced by Company-owned cyclotrons.
The Company's first cyclotron was installed in 1993, one cyclotron
was added annually in 1995, 1996 and 1997, and three cyclotrons became
operational during 1998. Six additional cyclotrons are scheduled to
become operational in 1999 and one more in 2000. Because a cyclotron
does not become operational until approximately 18 months after it is
ordered, the accuracy of the Company's long-term projections related to
delivery of cyclotrons and market conditions, such as demand, can
significantly affect its results of operations. The delivery of
cyclotrons prior to a commensurate increase in demand could adversely
impact gross margins, while inadequate capacity could limit the
Company's ability to meet demand and achieve maximum sales growth.
Also, 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 1999 and 2000.
In addition to adding three cyclotrons in 1998, the Company completed
the construction of its new production facilities. Additional expansion
plans currently underway and expected to be completed during 1999
include the addition of seven cyclotrons and supporting facilities,
although one of the cyclotrons is not expected to be operational until
early 2000. As of December 31, 1998, approximately $16.0 million has
been incurred in connection with these expansion plans and completion
of the expansion is expected to cost an additional $17.0 million.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues were $38.0 million in 1998 compared to $24.6 million in
1997, an increase of $13.4 million or 54.5%. This increase was
attributable to the Company's ability to increase production and sales
volume of TheraSeed(R) with additional cyclotron and assembly capacity,
including the addition of three cyclotrons in 1998. Although 1998 was
another year of record revenue for Theragenics, sales for the fourth
quarter of 1998 declined as compared to the third quarter of 1998. This
was the first full quarter in which the transition of sales
responsibility for TheraSeed(R) to Indigo under the Indigo Agreement
was substantially complete, as well as the first quarter in which the
Company had more capacity than current demand. During 1998 Indigo
focused its marketing efforts on physician training and building
physician relationships, rather than efforts directed at patients. The
Company believes that the results of Indigo's 1998 marketing efforts
have confirmed Theragenics' experience that in addition to marketing
TheraSeed(R) to physicians and other health care professionals,
substantial attention and resources must be devoted to educating the
ultimate consumer regarding the benefits of seeding therapy. In
recognition of the potential value added by consumer marketing and in
an effort to build sales growth momentum, Indigo has advised the
Company that it has made adjustments to its sales and marketing
strategy to increase the focus on marketing efforts directed to
patients. Theragenics' management is working closely with Indigo in the
development of these marketing efforts.
Looking forward, the full impact of marketing efforts directed to
patients may not be realized for several months since a patient is
typically not treated until six weeks to three months or more after
being diagnosed with prostate cancer. Therefore, there are no
assurances that sales for the first quarter of 1999 will increase or
even remain flat versus the fourth quarter of 1998. Management believes
that Indigo's patient directed marketing focus could have a positive
impact on sales in the second half of 1999, though there are no
assurances that these efforts will not take longer to have an impact on
revenue, if any. Actual results may differ materially from those
anticipated based on certain risks and uncertainties, such as the
impact of Indigo's marketing efforts to consumers and medical
professionals. Management is confident in Indigo's commitment of both
talent and resources to its objective of making TheraSeed(R) the
treatment of choice for prostate cancer.
Licensing fees represent royalty payments with respect to the
Company's licensed TheraSphere(R) technology. Management does not
expect such licensing fees to become material in the foreseeable
future. See Note G to the financial statements.
Cost of product sales increased to 28.7% of product sales in 1998
from 25.1% of product sales revenue in 1997. This increase was
attributable to an increase in the manufacturing fixed cost base as
depreciation and other fixed expenses associated with additional
cyclotrons and new manufacturing facilities were incurred during 1998.
As additional cyclotrons come on line, margins generally decline
because each machine represents excess capacity for a period while
carrying its full component of fixed costs, including depreciation.
With cyclotrons 8 through 13 expected to be brought on line in 1999,
cost of product sales are expected to continue to increase as a percent
of revenue to the extent that additional cyclotrons create capacity
more rapidly than the growth in demand. During 1998 the Company also
increased the number of manufacturing employees and enhanced employee
compensation and benefits in an effort to continue to attract and
retain qualified employees. Fiscal 1998 also included moving, training,
testing and other start-up expenses associated with its new
manufacturing facilities, which were placed in
service in the third quarter, and testing and start-up expenses related
to three cyclotrons. Only one cyclotron was added in 1997.
The increase in cost of sales as a percentage of revenue over 1997 is
also attributable to the fact that during the first half of 1997, prior
to the execution of the Indigo Agreement, the Company sold and marketed
TheraSeed(R) with internal resources and accordingly, charged higher
unit prices than it has charged to Indigo. Fiscal 1998 reflects a full
year of these reduced unit prices, while the Indigo Agreement was in
effect for only the last half of 1997. Under the terms of the Indigo
Agreement, Indigo bears the selling and marketing expenses directly
associated with TheraSeed(R) for prostate cancer. Accordingly,
management does not expect Indigo's marketing efforts to have a
significant impact on the Company's SG&A expenses in 1999.
Selling, general and administrative (SG&A) expenses were $6.0 million
in 1998 compared to $4.8 million in 1997, reflecting an increase of
$1.2 million or 25.0%. However, SG&A expenses as a percentage of
revenue declined to 15.8% in 1998 from 19.6% in 1997. The increase in
SG&A expenses during 1998 was primarily attributable to increases in
professional fees and compensation and benefits. Legal and professional
fees increased primarily due to fees in connection with the Company's
on-going efforts to protect its trade secrets and other proprietary
information, including litigation against parties the Company believes
have violated or threaten to violate the Company's rights. Compensation
and benefits increased as the Company continued to add employees and
build infrastructure to support its increasing operations.
The increase in SG&A expenses in 1998 over 1997 were partially offset
by a reduction in selling expenses as a result of the Indigo Agreement.
Under the Indigo Agreement, Indigo bears the cost of the selling and
marketing efforts related to TheraSeed(R) for prostate cancer. The
decreases in these selling expenses contributed to the decrease in SG&A
expenses as a percentage of revenue in 1998 from 1997. Additionally,
SG&A expenses incurred to support increasing operations did not
increase at the same rate as the growth in revenue. Selling and
marketing related expenses are not expected to continue to decline
however, since the Indigo Agreement became effective during the third
quarter of 1997.
Research and development (R&D) expenses were $448,000 in 1998
compared to $55,000 in 1997. The increase in R&D was a result of
development efforts to improve the Company's proprietary production
processes. In connection with the Company's efforts to enhance its
production processes and its objective to expand the application of
Pd-103 and TheraSeed(R) to other oncological and non-oncological uses,
management plans to significantly increase efforts and investment in
research and development in 1999 with the possibility of expenditures
in this area more than tripling. R&D spending is dependent on
appropriate opportunities arising so no assurances can be made as to
spending amounts. As a result, R&D expenses may fluctuate significantly
from period to period.
Other income was approximately $1.3 million for both 1998 and 1997,
comprised primarily of interest income generated from the Company's
short-term investments and high quality municipal bond investments.
These investments were made utilizing the proceeds from the Company's
secondary stock offering in April 1997. These funds have and will
continue to be utilized for the Company's current and future expansion
programs. As funds continue to be used for expansion programs,
management expects other income to decline accordingly.
Income tax expense was $7.9 million in 1998 and $5.4 million in 1997.
The increase was due to the increase in pretax earnings in 1998 over
1997. The effective income tax rate was 36.0% for 1998 and 1997.
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 G 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
additional cyclotrons come on-line, margins generally 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
25.1% 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
50.0%. 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 25.9% in 1996 to 19.6% in 1997 due to economies of
scale.
The Company had no ongoing research function in 1996 and 1997. 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.
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 in 1997, 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. The decline in the
effective tax rate was due to tax-exempt interest earned in 1997.
Liquidity and Capital Resources
The Company's principal cash needs related to capital spending to
increase manufacturing capacity. The Company has funded its capital
expansion programs with cash generated from operations and the proceeds
of a secondary stock offering that was completed in April 1997.
The Company had cash and short-term investments of $19.5 million at
December 31, 1998, compared to $30.2 million at December 31, 1997. The
decrease in cash and short-term investments was a result of cash used
for capital expenditures, partially offset by cash generated from
operations. Working capital was $33.0 million at December 31, 1998,
compared to $39.0 million at December 31, 1997. The decrease in working
capital was primarily a result of the decline in cash and short-term
investments, partially offset by an increase in accounts receivable.
Cash provided by operations was $13.6 million and $14.2 million in
1998 and 1997, respectively. Cash generated from operations consists of
net earnings plus non-cash expenses such as depreciation, and the
effects of cash either absorbed or generated by changes in working
capital. Cash provided by operations declined in 1998 from 1997 as cash
generated from the increase in net earnings was offset primarily by an
increase in accounts receivable and decrease in accounts payable.
Cash used by investing activities was $24.7 million and $21.3 million
in 1998 and 1997, respectively. Capital expenditures were $26.2 million
and $12.9 million in 1998 and 1997, respectively, and are expected to
significantly increase in 1999. These expenditures relate primarily to
capital expansion projects including the addition of cyclotrons and new
manufacturing and support facilities. Capital expenditures during 1997
primarily represented Phase I of an expansion project to add four
cyclotrons and new manufacturing and support facilities. During 1998,
the Company completed the construction of the new manufacturing and
support facilities and three of the cyclotrons became operational,
bringing the total number of fully operational cyclotrons to seven. The
Phase I expansion was completed during the first quarter of 1999 with
the addition of cyclotron number eight. Additional expansion projects
currently underway include purchase agreements to add six additional
cyclotrons and supporting facilities during 1999, although one of these
cyclotrons will not be fully installed and operational until early
2000. Costs incurred through December 31, 1998 on these projects were
approximately $16.0 million. These projects are expected to cost
approximately $33.0 million and be completed in various stages during
1999. Upon completion of these projects, the Company expects to have
fourteen fully operational cyclotrons with supporting facilities.
Investing activities also included cash generated from net maturities
of marketable securities of $1.5 million in 1998, and the purchase of
marketable securities of $8.4 million in 1997. Marketable securities
consist primarily of high-credit quality municipal debt obligations
purchased in accordance with the Company's investment policies.
Cash provided by financing activities was $462,000 in 1998,
consisting of cash proceeds from the exercise of stock options and
warrants. During 1997, cash provided by financing activities was $34.2
million, consisting primarily of $32.0 million in net proceeds from a
secondary stock offering and $5.0 million from the sale of common stock
to Johnson and Johnson Development Company, an affiliate of Indigo.
Financing activities in 1997 also included the repayment of $3.5
million of long-term debt and $644,000 in proceeds from the exercise of
stock options and warrants.
Management believes that current cash and investment balances, cash
from future operations and its available credit facilities, will be
sufficient to meet its currently anticipated working capital and
capital expenditure requirements. In the event additional financing
becomes necessary, management may choose to raise those funds through
other means of financing as appropriate.
Foreign Currency and Geographic Information
As previously noted, the Company expects that its capital expansion
projects currently underway will cost approximately $33.0 million, of
which approximately $16.0 million has been incurred as of December 31,
1998. Of the $17.0 million in purchase commitments related to the
completion of these projects, approximately $9.7 million is denominated
in Belgian Francs, based on the year-end exchange rate. This exposes
the Company to foreign currency risk as it relates to movements in the
exchange rate between the U.S. dollar and the Belgian Franc. The
Company manages this risk by frequently reviewing the status of the
purchase commitments and entering into foreign exchange forward
contracts to hedge the foreign currency risks when believed it is
appropriate to do so. Such 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. At December 31, 1998, the Company
did not hold any foreign exchange forward contracts. Additionally,
management does not expect the introduction of the Euro to have any
effect on its purchase commitments denominated in Belgian Francs. The
terms of the purchase agreements allow for all payments to be made in
Belgian Francs.
All balance sheet accounts denominated in foreign currencies are
translated into U.S. dollars at the year-end rate of exchange. Such
balance sheet accounts, which were not significant at December 31,
1998, included a cash account maintained in Belgium and denominated in
Belgian Francs. Additionally, there were no statements of earnings
items or any foreign currency transaction gains or losses during any of
the three years in the period ended December 31, 1998.
Included in construction in progress at December 31, 1998 are
progress payments totaling approximately $9.4 million related to
equipment being constructed in Belgium. Upon completion of
construction, the equipment will be transported to the United States
and installed in the Company's U.S. manufacturing facilities.
Impact of the Year 2000 Issue
Introduction
Many 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 the
year 2000. Other problems may also be encountered, such as the
inability to recognize special codes that make use of the date field.
These and other problems may exist in primary software products and
embedded systems such as microcontrollers. This may cause many computer
systems to fail or create inaccurate results unless corrective measures
are taken. Additionally, a company may be affected by the computer
systems of their customers and vendors, even though that company's
internal computer systems may be Year 2000 (Y2K) compliant.
State of Readiness
The Company began to assess the status of its Y2K readiness during
1997 and developed a plan intended to make its information technology
assets, including embedded microcontrollers ("IT assets"), year 2000
ready. The plan covers the following phases: (i) inventory of IT
assets, (ii) assessment of repair requirements (iii) repair and
testing, and (iv) creation of contingency plans in the event of Y2K
related failures. The inventory and assessment phases have been
completed for all critical IT assets. Repairs and testing of critical
IT assets is currently in process and is scheduled to be completed in
the second quarter of 1999.
The Company's Y2K compliance also depends upon the compliance of
others. The Company has contacted its critical suppliers and
significant customer to evaluate their Y2K programs and state of
readiness, and to evaluate whether a Y2K related disruption at these
entities would have a material adverse effect on the Company's
operations as the year 2000 approaches. At the current date, the
Company has received responses from approximately 73% of the entities
contacted, none of which have indicated that a year 2000 related
business interruption is anticipated. However, while the Company
believes it is taking reasonable action in this regard, Theragenics is
not in a position to guarantee the performance of others or predict
whether any assurances and representations received from others will
ultimately prove to be accurate. Additionally, the Y2K compliance of
the Company's critical suppliers and significant customer also depends
upon the Y2K compliance of their critical suppliers and customers. The
Company also relies on governmental agencies, utility companies,
telecommunication service providers, financial institutions and other
service providers outside of the Company's control. There is no
assurance that any of these entities will not experience a year 2000
related failure and business interruption. Such failures could have a
material adverse effect on the Company's financial position and results
of operations.
Costs to Address the Year 2000 Issue
The Company has incurred costs of approximately $60,000 in addressing
the Y2K issue, consisting primarily of replacing IT assets that were
not Y2K compliant. Remaining costs of Y2K remediation are not expected
to be material.
Risks of the Company's Year 2000 Issues
The Company has not currently identified any critical IT assets under
its control that present a material risk of not being Y2K compliant in
a timely manner, or for which an acceptable alternative cannot be
implemented. As testing continues however, it is possible that IT
assets could be identified that present a material risk of a Y2K
interruption, and that such an interruption could have a material
adverse effect on the Company's financial position and results of
operations.
The Company does not possess the ability to control its critical
suppliers, significant customer or the health care providers that
utilize its product. Y2K related disruptions at these entities could
result in delays in the supply of goods and services and capital
equipment from the Company's vendors, delays in receiving payments from
the Company's significant customer, and delays in the ordering of
product and scheduling of TheraSeed(R) procedures by the health care
providers, among other things. Such potential delays could be of a
short-term nature or could be more significant and longer-term. The
failure of any of these entities to properly address their year 2000
issues could have a materially adverse effect on the Company's
financial position and results of operations. Additionally, the failure
of the Company's primary equipment vendor to deliver cyclotrons in
accordance with the terms of the purchase contracts could have a
materially adverse effect on the Company's ability to increase its
production capacity.
Contingency Plans
Contingency plans for critical IT assets are currently being
developed. These contingency plans are in the early stages of
development and will be modified as the risks of potential Y2K
interruptions continue to be assessed.
Forward Looking Statements
This document contains certain forward-looking information within the
meaning of the Private Securities Litigation Reform Act of 1995
including, without limitation, statements regarding possible benefits
associated with the Indigo Agreement, the timing of the possible impact
of Indigo's sales and marketing efforts, future costs of sales, R&D
expenses, SG&A expenses, expansion plans, possible electronic data
processing problems related to the year 2000 and the sufficiency of the
Company's liquidity and capital resources. From time to time, the
Company may also 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, year 2000
issues, research and development activities, effectiveness and
execution of Indigo's marketing and sales programs, government
regulation of the therapeutic radiological pharmaceutical and device
business, dependence on health care professionals, and competition from
other brachytherapy products and conventional and newly developed
methods of treating localized cancer.
Quarterly Results
The following table sets forth certain statement 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 10-K, 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.
1997 1998
---- ----
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 $4,107 $6,172 $7,018 $7,260 $8,281 $8,714 $11,129 $9,834
------ ------ ------ ------ ------ ------ ------- ------
Cost of product sales 1,145 1,559 1,580 1,856 2,188 2,414 3,184 3,083
Selling,
general and
administrative 1,185 1,391 1,180 1,063 1,337 1,307 1,644 1,711
Research and Development 4 30 11 10 41 49 262 96
Other income 16 328 499 462 443 297 260 261
------ ------ ------ ------ ------ ------ ------- ------
Net earnings before income
taxes 1,789 3,520 4,746 4,793 5,158 5,241 6,299 5,205
Income tax expense 680 1,338 1,803 1,529 1,857 1,908 2,267 1,848
----- ------ ------ ------ ------ ------ ------- ------
Net earnings $1,109 $2,182 $2,943 $3,264 $3,301 $3,333 $4,032 $3,357
====== ====== ====== ====== ====== ====== ====== ======
Earnings per common
share:
Basic $0.05 $0.08 $0.10 $0.11 $0.11 $0.11 $0.14 $0.11
Diluted $0.04 $0.07 $0.10 $0.11 $0.11 $0.11 $0.13 $0.11
Weighted average shares
outstanding:
Basic: 23,672 28,459 28,898 29,074 29,088 29,191 29,364 29,396
Diluted 24,763 29,459 30,060 30,188 30,353 30,479 30,160 30,166
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 7A. Quantitative and Qualitative Disclosures About Market Risk
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations; Foreign Currency and Geographic Information".
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements (Page 45) 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*
- ------------------------------
*The information 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,
1998, 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 45
2. Financial Schedules
See the index to financial schedules on page 45
3. Exhibits
3.1 - Certificate of Incorporation as amended through July
29, 1998 (16)
3.2 - By-Laws (1)
4.1 - See Exhibits 3.1 - 3.2 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 - Warrant Agreement dated May 8, 1993 between the
Company and James Devas (6)
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 - 1990 Incentive and Non-Incentive Stock
Option Plan (3)*
10.7 - Purchase Agreement between Theragenics
Corporation and Production Equipment
Manufacturer (4)
10.8 - Purchase Agreement between Theragenics
Corporation and Production Equipment
Manufacturer (5)
10.9 - Amendment to Purchase Agreement between
Theragenics Corporation and Production
Equipment Manufacturer (6)
10.10 - Employment Agreement of M. Christine Jacobs* (9)
10.11 - Agreement with Nordion International Inc.(7)
10.12 - Purchase Agreements between Theragenics
Corporation and Production Equipment
Manufacturer (8)
10.13(a) Purchase Agreement dated December 27, 1996 between
Theragenics Corporation and Ion Beam Applications s.a.
(10)
10.13(b) Purchase Agreement dated December 27, 1996 between
Theragenics Corporation and Ion Beam Applications s.a.
(10)
10.13(c) Purchase Agreement dated December 27, 1996 between
Theragenics Corporation and Ion Beam Applications s.a.
(10)
10.13(d) Purchase Agreement dated December 27, 1996 between
Theragenics Corporation and Ion Beam Applications s.a.
(10)
10.14 - Second Amended and Restated Loan and Security Agreement
by and between Theragenics Corporation and NationsBank,
N.A. (South), Dated as of December 9, 1996 (10)
10.15 - First modification of Second Amended and Restated Loan
and SecuritY Agreement between Theragenics Corporation
and NationsBank, N.A., Dated September 30, 1997. (15)
10.16 - Second Modification of Second Amended and Restated Loan
and security Agreement between Theragenics Corporation
and NationsBank, N.A., Dated November 26, 1997. (15)
10.17 - Rights Agreement dated as of February 17, 1997 between
the Company and SunTrust Bank, Atlanta (11)
10.18 - Theragenics Corporation 1995 Stock Option Plan
(12)*
10.19 - 1997 Stock Incentive Plan (13)*
10.20 - Marketing and Sales Agreement by and between the Company
and Indigo Medical, Inc. dated May 30, 1997 (14)
10.21 - Theragenics Corporation Employee Stock Purchase Plan
(17)
10.22 - Employment agreement of Bruce W. Smith*
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,
1998 and 1997 (for SEC use only)
* 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-K for
the period ended December 31, 1990.
(4) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1991.
(5) Incorporated by reference to the exhibits to the report on Form 10-Q for
the quarterly period ended June 30, 1993.
(6) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1993.
(7) Incorporated by reference to the exhibits to the report on Form 8-K dated
March 23, 1995.
(8) Incorporated by reference to the exhibits to the report on Form 8-K dated
June 29, 1995.
(9) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1996.
(10) Incorporated by reference to the exhibits to the report on
Form 8-K dated January 13, 1997.
(11) Incorporated by reference to the exhibits to the Company's registration
statement on Form 8-A filed February 27, 1997.
(12) Incorporated by reference to the exhibits to the
Common Stock Registration Statement on form S-8, file #333- 15313.
(13) Incorporated by reference to appendix B to the Company's proxy
statement for its 1997 Annual Meeting of Stockholders filed on schedule
14A.
(14) Incorporated by reference to the exhibits to the report on Form 10-Q for
the quarterly period ended September 30, 1997.
(15) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1997.
(16) Incorporated by reference to the exhibits to the report on Form 10-Q for
the quarterly period ended June 30, 1998
(17) Incorporated by reference to the Common Stock Registration Statement on
form S-8, file #333-64801.
(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 31, 1999
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 3/31/99
- ----------------------- (Principal Executive Officer);
M. Christine Jacobs Director, Chairman
/s/ Bruce W. Smith Chief Financial Officer, 3/31/99
- ----------------------- Treasurer (Principal
Bruce W. Smith Financial and Accounting
Officer) and Secretary
/s/ Otis W. Brawley Director 3/31/99
- ----------------------
Otis W. Brawley
/s/ Orwin L. Carter Director 3/31/99
- ----------------------
Orwin L. Carter
/s/ Patrick L. Flinn Director 3/31/99
- ----------------------
Patrick L. Flinn
/s/ John V. Herndon Director 3/31/99
- ----------------------
John V. Herndon
/s/ Charles R. Klimkowski Director 3/31/99
- -------------------------
Charles R. Klimkowski
/s/ Peter A.A. Saunders Director 3/31/99
- -----------------------
Peter A.A. Saunders
THERAGENICS CORPORATION
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ................... 46
(For the periods ended December 31, 1996, 1997 and 1998)
FINANCIAL STATEMENTS
Balance Sheets - December 31, 1997 and 1998 ................ 47
Statements of Earnings for each of the three years in
the period ended December 31, 1998 ..................... 49
Statements of Shareholders' Equity for each of the three
in the period ended December 31, 1998.................... 50
Statements of Cash Flows for each of the three
in the period ended December 31, 1998.................... 52
NOTES TO FINANCIAL STATEMENTS .............................. 54
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, 1997 and 1998, and the related
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. 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, 1997 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
- ----------------------
GRANT THRONTON LLP
Atlanta, Georgia
January 11, 1999
Theragenics Corporation
BALANCE SHEETS
December 31,
ASSETS
1997 1998
--------------- --------------
CURRENT ASSETS
Cash and short-term investments $ 30,161,614 $ 19,541,662
Marketable securities 8,391,807 6,830,266
Trade accounts receivable, less allowance of
$65,446 in 1997 and $53,773 in 1998 2,807,381 7,000,446
Inventories 433,873 780,825
Deferred income tax asset 60,000 210,000
Prepaid expenses and other current assets 278,629 579,132
------------- -------------
Total current assets 42,133,304 34,942,331
PROPERTY, PLANT AND EQUIPMENT - AT COST
Buildings and improvements 3,333,728 17,425,990
Leasehold improvements 138,978 154,234
Machinery and equipment 14,698,623 25,570,513
Office furniture and equipment 66,464 333,816
------------- -------------
18,237,793 43,484,553
Less accumulated depreciation 4,695,669 7,031,902
------------- -------------
13,542,124 36,452,651
Land and improvements 525,754 848,359
Construction in progress 14,917,788 15,957,453
------------- -------------
28,985,666 53,258,463
OTHER ASSETS 81,339 71,782
------------- -------------
$ 71,200,309 $ 88,272,576
============= =============
The accompanying notes are an integral part of these statements.
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1998
--------------- --------------
CURRENT LIABILITIES
Accounts payable
Trade $ 1,435,154 $ 627,679
Construction - 359,339
Accrued salaries, wages and payroll taxes 689,610 498,863
Income taxes payable 845,364 165,182
Other current liabilities 137,097 316,161
------------- -------------
Total current liabilities 3,107,225 1,967,224
DEFERRED INCOME TAXES 1,060,000 1,920,000
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common stock - authorized 100,000,000 shares
of $.01 par value; issued and outstanding,
29,075,682 in 1997 and 29,405,571 in 1998 290,756 294,056
Additional paid-in capital 55,594,988 58,921,414
Retained earnings 11,147,340 25,169,882
------------- -------------
67,033,084 84,385,352
$ 71,200,309 $ 88,272,576
============= =============
Theragenics Corporation
STATEMENTS OF EARNINGS
Year ended December 31,
1996 1997 1998
------------ ------------ --------------
Revenue
Product sales - affiliate $ - $ 12,287,650 $ 37,775,222
Product sales 12,257,165 12,169,724 83,030
Licensing fees 100,000 100,000 100,000
------------ ------------ --------------
12,357,165 24,557,374 37,958,252
------------ ------------ --------------
Costs and expenses
Cost of product sales 3,735,669 6,141,330 10,869,520
Selling, general and administrative 3,198,663 4,818,650 6,000,533
Research and development 6,952 55,390 447,680
------------ ------------ --------------
6,941,284 11,015,370 17,317,733
------------ ------------ --------------
Other income (expense)
Interest income 126,953 1,361,890 1,318,171
Interest and financing costs (84,517) (21,095) (56,480)
Other (6,311) (35,268) 332
------------ ------------ --------------
36,125 1,305,527 1,262,023
------------ ------------ --------------
Net earnings before income taxes 5,452,006 14,847,531 21,902,542
Income tax expense 2,067,500 5,350,000 7,880,000
------------ ------------ --------------
Net earnings $ 3,384,506 $ 9,497,531 $ 14,022,542
============ ============ ==============
Net earnings per common share
Basic $ .15 $ .35 $ .48
============ ============ ==============
Diluted $ .14 $ .33 $ .46
============ ============ ==============
The accompanying notes are an integral part of these statements.
Theragenics Corporation
STATEMENTS OF SHAREHOLDERS' EQUITY
For the three years ended December 31, 1998
Retained
Common stock Additional earnings
------------
Number of Par value paid-in (accumulated
shares $.01 capital deficit) Total
------------ ------------- ------------- --------------- -----------
Balance, December 31, 1995 11,394,785 $ 113,948 $ 16,390,170 $ (1,734,697) $ 14,769,421
Two for one stock split 11,394,785 113,948 (113,948) - -
Exercise of stock options and warrants,
net of 23,446 common shares redeemed 838,986 8,390 693,568 - 701,958
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 23,628,556 236,286 17,498,417 1,649,809 19,384,512
Issuance of common stock in secondary public
offering, net of offering costs of $2,482,701 4,600,000 46,000 31,971,299 - 32,017,299
Issuance of common stock to Johnson & Johnson
Development Corporation 508,906 5,088 4,994,912 - 5,000,000
Theragenics Corporation
STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
For the three years ended December 31, 1998
Retained
Common stock Additional earnings
------------
Number of Par value paid-in (accumulated
shares $.01 capital deficit) Total
------------ ------------- ------------- --------------- -----------
Exercise of stock options and warrants,
net of 2,000 common shares redeemed 338,220 3,382 640,724 - 644,106
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 29,075,682 290,756 55,594,988 11,147,340 67,033,084
Exercise of stock options and warrants,
net of 791 common shares redeemed 329,889 3,300 458,571 - 461,871
Stock-based compensation - - 163,734 - 163,734
Income tax benefit from stock options exercised - - 2,704,121 - 2,704,121
Net earnings for the year - - - 14,022,542 14,022,542
------------- -------------- -------------- ---------------- ------------
Balance, December 31, 1998 29,405,571 $ 294,056 $ 58,921,414 $ 25,169,882 84,385,352
============= ============== ============== ================ ============
The accompanying notes are an integral part of these statements.
Theragenics Corporation
STATEMENTS OF CASH FLOWS
Year ended December 31,
1996 1997 1998
--------------- --------------- -------------
Cash flows from operating activities:
Net earnings $ 3,384,506 $ 9,497,531 $ 14,022,542
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Deferred income taxes 1,972,000 1,850,000 710,000
Depreciation and amortization 1,114,919 1,466,834 2,366,197
Stock-based compensation - - 163,734
Provision for doubtful accounts receivable - 65,446 -
Change in assets and liabilities:
Accounts receivable (923,291) (731,900) (4,193,065)
Inventories (62,343) (204,575) (346,952)
Prepaid expenses and other current assets (66,104) (26,995) (300,503)
Other assets - 45,680 707
Trade accounts payable (17,816) 1,104,779 (807,475)
Accrued salaries, wages and payroll taxes 234,283 230,189 (190,747)
Other current liabilities 47,369 80,056 179,064
Income taxes payable - 845,364 2,023,939
------------ ------------- ---------------
Net cash provided by operating activities 5,683,523 14,222,409 13,627,441
------------ ------------- ---------------
Cash flows from investing activities:
Purchase and construction of property and equipment (8,555,876) (12,858,080) (26,249,691)
Purchase of marketable securities - (8,391,807) (2,609,573)
Maturities of marketable securities - - 4,150,000
------------ ------------- ---------------
Net cash used by investing activities (8,555,876) (21,249,887) (24,709,264)
------------ ------------- ---------------
Theragenics Corporation
STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
1996 1997 1998
--------------- --------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt 2,450,225 - -
Repayment of long-term debt (511,286) (3,458,436) -
Proceeds from issuance of common stock, net - 37,017,299 -
Proceeds from exercise of stock options and
warrants 701,958 644,106 461,871
Debt issue costs (48,759) - -
------------- ------------- ---------------
Net cash provided by
financing activities 2,592,138 34,202,969 461,871
------------- ------------- ---------------
Net increase (decrease) in cash and
short-term investments (280,215) 27,175,491 (10,619,952)
Cash and short-term investments
at beginning of year 3,266,338 2,986,123 30,161,614
------------- ------------- ---------------
Cash and short-term investments
at end of year $ 2,986,123 $ 30,161,614 $ 19,541,662
============= ============= ===============
Supplementary Cash Flow Disclosure
- ----------------------------------
Interest paid, net of amounts capitalized $ 82,000 $ 29,000 $ 56,000
Income taxes paid $ 99,000 $ 2,655,000 $ 5,650,000
Supplemental Schedule of Non Cash Financing Activities
During 1996, 1997 and 1998, the Company realized an income tax benefit from
the exercise of certain stock options of approximately $529,000, $490,000 and
$2,704,000, respectively.
The accompanying notes are an integral part of these statements.
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1998
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Theragenics Corporation (the "Company") was organized to develop, manufacture
and market radiological pharmaceuticals and devices used in the treatment of
cancer. Currently, the Company manufactures and sells one product,
TheraSeed(R), which is an implantable radiation device used primarily in the
treatment of prostate cancer. TheraSeed(R) is a U.S. Food and Drug
Administration (FDA) licensed device based on Pd-103, a radioactive isotope.
Under a Sales and Marketing Agreement executed in May 1997 with Indigo
Medical, Inc. (Indigo), a Johnson & Johnson Company, all TheraSeed(R)
products used in the treatment of prostate cancer are sold to Indigo.
Physicians, hospitals and other healthcare providers, located primarily in
the United States, utilize the TheraSeed(R) product. In 1998 the Company
received regulatory approval for the marketing of TheraSeed(R) throughout
the member countries of the European Union by obtaining CE Marking. Sales
of TheraSeed(R) in Europe were not significant in 1998.
The Company competes in a market characterized by rapid technological
innovation, significant research efforts and continual scientific
discoveries. This market is also subject to significant regulatory oversight
at the federal, state and local levels. The regulatory bodies include, among
others, the FDA, the Nuclear Regulatory Commission (NRC),various states'
agencies such as the Departments of Natural and Human Resources, and the
Occupational and Health Safety Administration, as well as the European
counterparts of these U.S. governmental units. The Company is therefore
directly affected by changes in technology and products, as they may apply to
cancer treatment, governmental regulations related to its industry and the
well being of the healthcare 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.
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
2. Revenue Recognition
-------------------
Revenue from product sales is recognized upon shipment. Licensing fees are
recognized in the period to which they relate.
3. 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 and commercial
paper with original maturities of less than 90 days.
4. Marketable Securities
----------------------
Marketable securities consist primarily of high-credit quality municipality
obligations in accordance with the Company's investment policy. Marketable
securities are classified as available for sale and are reported at fair
value, based upon quoted market prices at the balance sheet date. The
amortized cost of marketable securities approximated their fair value at both
December 31, 1997 and 1998. The estimated fair value of marketable securities
by contractual maturity at December 31, 1998 is as follows:
Due in one year or less $ 3,044,937
Due after one year through five years 2,285,329
Due after five years through six years 1,500,000
5. Inventories
------------
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Inventories consist primarily of
spare parts, components and work in process.
6. 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 $1,044,000, $1,458,000 and $2,336,000
for 1996, 1997 and 1998, respectively. Estimated services lives are as
follows:
Buildings and improvements 30 years
Machinery and equipment, furniture 3-10 years
Leasehold improvements 1-5 years
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Property, Equipment, Depreciation and Amortization - Continued
--------------------------------------------------------------
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, 1998. 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 located in Belgium. 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.
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
------------------------------
Research and development costs are expensed when incurred.
9. Advertising
-----------
The Company expenses the cost of advertising as incurred. Advertising expense
was not significant for each of the three years in the period ended December
31, 1998.
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
10. Earnings Per Share and Common Stock
-----------------------------------
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.
On March 16, 1998, the board of directors approved a two-for-one common stock
split, effected in the form of a 100% stock dividend, which was distributed
on April 15, 1998 to shareholders of record on March 31, 1998. The stock
split has been recognized by reclassifying the par value of the additional
shares resulting from the stock split from additional paid in capital to
common stock. All references to shares outstanding and per share amounts have
been restated to reflect the stock split.
On June 12, 1998, the shareholders approved an increase in the number of
authorized common shares from 50,000,000 to 100,000,000.
11. Stock Based Compensation
------------------------
Stock options issued to employees 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. Stock options and other equity instruments issued in
exchange for goods or services with non-employees are accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more readily measurable.
12. Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments include cash, cash equivalents and
marketable securities. 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.
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
13. Foreign Currency
----------------
All balance sheet accounts denominated in foreign currencies are translated
into U.S. dollars at the year-end rate of exchange. Such balance sheet
accounts, which were not significant at December 31, 1998, included a cash
account maintained in Belgium and denominated in Belgian Francs.
Additionally, there were no statements of earnings items or any foreign
currency transaction gains or losses during any of the three years in the
period ended December 31, 1998.
The Company periodically 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, 1998, the Company did not
hold any foreign exchange forward contracts.
14. Reclassifications
-----------------
Certain amounts in the 1997 balance sheet have been reclassified to
conform to the 1998 presentation. Such reclassifications were
not significant.
NOTE C - CONSTRUCTION IN PROGRESS AND PURCHASE COMMITMENTS
Construction in progress consists primarily of payments made for construction
of manufacturing equipment and facilities expansion. Total cost of these
projects is expected to be approximately $33.0 million, consisting primarily
of equipment and related costs, and the projects are expected to be completed
in various stages through 1999. Total outstanding purchase commitments
related to these projects were approximately $17.0 million at December
31, 1998, $9.7 million of which was denominated in Belgium Francs,
based on the year end exchange rate. Construction of equipment and
facilities totaling approximately $3.0 million and $23.9
million were completed and placed in service during 1997 and 1998,
respectively.
Included in construction in progress at December 31, 1998 are
progress payments totaling approximately $9.4 million related to equipment
being constructed in Belgium. Upon completion of construction, the equipment
will be transported to the United States and installed in the Company's U.S.
manufacturing facilities.
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE D - INCOME TAXES
The income tax provision consisted of the following:
1996 1997 1998
------------- ------------ -------------
Current:
Federal $ 95,500 $ 3,300,000 $ 6,570,000
State - 200,000 600,000
------------ ----------- ------------
95,500 3,500,000 7,170,000
------------ ----------- ------------
Deferred:
Federal 1,862,000 1,750,000 655,000
State 110,000 100,000 55,000
------------ ----------- ------------
1,972,000 1,850,000 710,000
------------ ----------- ------------
$ 2,067,500 $ 5,350,000 $ 7,880,000
============ ========= ============
The Company's temporary differences result in a deferred income tax liability
at December 31, 1997 and 1998, summarized as follows:
December 31,
----------------------------------
1997 1998
Nondeductible accruals and allowances $ 60,000 $ 210,000
Other - 70,000
------------- -------------
Gross deferred tax assets 60,000 280,000
------------- -------------
Deferred tax liabilities:
Depreciation (1,060,000) (1,990,000)
------------- -------------
Net deferred tax liability $ (1,000,000) $ (1,710,000)
============= =============
The net deferred tax liability is classified in the accompanying balance
sheets as follows:
Current deferred tax asset $ (60,000) $ (210,000)
Long-term deferred tax liability 1,060,000 1,920,000
------------- -------------
Net deferred tax liability $ 1,000,000 $ 1,710,000
============= =============
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE D - INCOME TAXES - Continued
A reconciliation of the statutory federal income tax rate and the effective
tax rate follows:
1996 1997 1998
------------ ------------- -----------
Tax at applicable federal rates 34.0% 35.0% 35.0%
Effect of surtax exemption - (0.7) -
State tax, net of federal income tax 3.8 1.7 1.9
Tax exempt interest - (0.3) (1.1)
Other 0.1 0.3 0.2
--- --- ---
37.9% 36.0% 36.0%
==== ==== ====
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, which
expires in November 2000, 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. No amounts were outstanding under the revolving credit
agreement at December 31, 1997 or 1998.
The Company has a letter of credit outstanding under the loan agreement for
approximately $315,000 relating to regulatory requirements. The letter of
credit is subject to terms identical to those of borrowings under the loan
agreement.
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,
1998, the Company was in compliance with the provisions of the loan
agreement.
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE F - MARKETING AND SALES AGREEMENT AND MAJOR CUSTOMER
In May 1997, the Company executed a Sales and Marketing Agreement (the
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 the Agreement, all
TheraSeed(R) products used for the treatment of prostate cancer are sold to
Indigo. The terms of the Agreement require Indigo to purchase minimum
quantities of TheraSeed(R) on an annual basis. The minimum quantities have
been exceeded in 1997 and 1998.
As a result of the Indigo Agreement, substantially all sales in 1998 and
approximately 50% of sales in 1997 were to Indigo. Additionally,
approximately 86% and 99% of accounts receivable were from Indigo at December
31, 1997 and 1998, respectively. In 1996, there were no customers that
comprised ten percent or more of sales.
Concurrent with the execution of the Agreement, Johnson & Johnson purchased
508,906 shares of the Company's common stock for $5,000,000 in cash.
NOTE G - COMMITMENTS AND CONTINGENCIES
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).
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 Nordian as royalties under the
agreement. Royalties from this agreement were not significant for each of the
three years in the period ended December 31, 1998.
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE G - COMMITMENTS AND CONTINGENCIES - Continued
Lease Commitments
-----------------
The Company leases space and office equipment under noncancelable leases
which expire at various dates through August 2004. Approximate minimum lease
payments under the leases are as follows: 1999, $288,000; 2000, $156,000;
2001, $160,000; 2002, $169,000; 2003, $178,000.
Rent expense was approximately $76,000, $179,000 and $190,000 for the years
ended December 31, 1996 , 1997 and 1998, respectively.
Litigation
----------
Subsequent to December 31, 1998, the Company and certain of its officers and
directors were named as defendants in twelve separate securities actions,
alleging violations of the federal securities laws, including Sections 10(b),
20(a) and Rule 10b-5 of the Securities and Exchange Act of 1934, as amended.
As of this time, eleven of the actions are pending in the U.S. District Court
for the Northern District of Georgia; a twelfth action is presently pending
in the Central District of California and is expected to be dismissed in the
near future. The complaints, which are substantially similar in nature,
purport to represent a class of investors who purchased or sold securities
during the time period from January 29, 1998 to January 11, 1999. The
complaints generally allege that the defendants made certain
misrepresentations and omissions in connection with the performance of the
Company during the class period. The complaints seek unspecified damages. No
answer or otherwise responsive papers are yet due from the defendants.
Management believes these charges are without merit and intends to vigorously
oppose the litigation, however, given the nature and early stage of the
proceedings, the ultimate outcome of the litigation cannot be determined at
this time. Accordingly, no provision for any liability that might result from
this litigation has been made. The Company and its officers and directors
maintain insurance for claims of this general nature.
NOTE H - STOCK OPTIONS AND WARRANTS
Stock Options
-------------
The Company's board of directors has approved four stock option plans which
in aggregate cover up to 5,400,000 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 options generally become exercisable
over a three to five year vesting period. Stock option transactions for each
of the three years in the period ended December 31, 1998 are summarized
below:
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE H - STOCK OPTIONS AND WARRANTS - Continued Stock Options - Continued
1996 1997 1998
--------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- ------- ----------- --------- ----------- ---------
Outstanding, beginning of year 2,016,432 $1.54 1,674,000 $ 3.57 1,887,780 $ 7.95
Granted 440,000 7.96 538,000 17.90 157,333 20.07
Exercised (782,432) 1.11 (300,220) 1.80 (310,680) 1.30
Forfeited - - (24,000) 5.38 - -
--------- ------ ---------- ------- ---------- -------
Outstanding, end of year 1,674,000 $3.57 1,887,780 $ 7.95 1,734,433 $10.24
========= ====== ========== ======= ========== =======
The following table summarizes information about stock options outstanding at
December 31, 1998:
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, 1998 Life (Years) Price December 31, 1998 Price
----------- ----------------- ------------ ------------ ----------------- ----------
$.50 - $3.19 623,100 6.3 $ 2.66 536,060 $2.66
$7.63 - $11.75 464,000 7.8 8.36 280,000 7.97
$16.56 - 26.63 647,333 9.1 18.88 98,000 18.50
---------- --- ----- -------- -----
1,734,433 7.7 $10.24 914,060 $ 5.98
========= === ===== ======= ======
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 to or by employees. The Company realizes
an income tax benefit from the exercise of certain stock options and the
exercise and early disposition of the shares acquired via certain other stock
options. This benefit results in a reduction to income taxes payable and an
increase to additional paid-in capital.
The Company uses the intrinsic value method in accounting for stock options
issued to employees. 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:
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE H - STOCK OPTIONS AND WARRANTS - Continued
Stock Options - Continued
-------------------------
1996 1997 1998
------------- ------------- ----------
Net earnings As reported $ 3,384,506 $ 9,497,531 $ 14,022,542
Pro forma 3,015,123 8,628,538 11,941,866
Basic net earnings per
common share As reported $ .15 $ .35 $ .48
Pro forma .13 .31 .41
Diluted net earnings per
common share As reported $ .14 $ .33 $ .46
Pro forma .12 .31 .40
The weighted average fair value of the options granted during 1996, 1997 and
1998 was $6.36, $9.38 and $14.76, respectively. The fair values were
estimated using the Black Sholes options-pricing model with the following
weighted average assumptions:
1996 1997 1998
------------- ------------- ----------
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 70.0% 68.0% 65.0%
Risk-free interest rate 6.3% 5.9% 5.0%
Expected life of option (years) 7.0 3.7 5.0
Stock Options Issued to Non-Employees
-------------------------------------
During 1998, the Company issued 100,000 stock options to an individual for
medical and cancer consulting services. The Company is recording consulting
expenses based on the estimated fair value of the options at the grant date
over the consulting term of five years. Consulting expenses related to this
agreement were approximately $164,000 during 1998.
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE H - STOCK OPTIONS AND WARRANTS - Continued
Warrants
80,000 warrants were exercised during 1996, 40,000 warrants were exercised
during 1997 and 20,000 warrants were exercised during 1998, resulting in
proceeds to the Company of $300,000, $150,000 and $75,000, respectively. At
December 31, 1998, there are outstanding warrants covering 60,000 shares of
common stock. The warrants are exercisable at a price of $3.75 per share and
expire in May 1999.
NOTE I - EARNINGS PER SHARE
Earnings per common share was computed as follows:
Year ended December 31,
1996 1997 1998
Numerator for basic and diluted earnings
per share - income available common
shareholders $ 3,384,506 $ 9,497,531 $ 14,022,542
============= ============= =============
Denominator for basic earnings per share -
weighted average shares 23,249,556 27,525,688 29,259,398
Effect of dilutive stock options and warrants 1,332,924 1,091,752 1,055,222
------------- ------------- -------------
Denominator for diluted earnings per share -
adjusted weighted average shares 24,582,480 28,617,440 30,314,620
============= ============= =============
Basic earnings per share $ .15 $ .35 $ .48
============= ============= =============
Diluted earnings per share $ .14 $ .33 $ .46
============= ============= =============
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE J - EMPLOYEE BENEFIT PLAN
401(k) Savings Plan
The Company has a 401(k) savings plan providing retirement benefits to all
employees with at least six months of service and at lease 21 years of age.
Commencing in the fourth quarter of 1998, the Company makes matching
contributions of 20%-60% of each participant's contribution, up to 6% of
salary. The percentage of matching contributions are based on quarterly net
earnings and are made in the form of Company common stock. Matching
contributions are charged to operating expenses and totaled approximately
$7,500 in 1998. Additionally, the Company may make discretionary
contributions to the Plan that are allocated to each participants' account.
Discretionary contributions were approximately $14,000, $35,000 and $30,000
for 1996, 1997 and 1998, respectively.
Employee Stock Purchase Plan
In June 1998, the Company's stockholders approved the Theragenics Corporation
Employee Stock Purchase Plan (the "ESPP"). The ESPP allows eligible employees
the right to purchase common stock on a quarterly basis at the lower of 85%
of the market price at the beginning or end of each quarterly offering
period. As of December 31, 1998, there were 200,000 shares of common stock
reserved for the ESPP and no shares had been issued under the plan.
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, 1998:
Net revenue $ 8,281 $ 8,714 $ 11,129 $ 9,834
Gross profit 6,093 6,299 7,945 6,752
Net earnings 3,301 3,333 4,032 3,357
Net earnings per common share
Basic $ .11 $ .11 $ .14 $ .11
Diluted $ .11 $ .11 $ .13 $ .11
Theragenics Corporation
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1998
NOTE K - QUARTERLY FINANCIAL DATA (UNAUDITED) - Continued
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
Net earnings per common share
Basic $ .05 $ .08 $ .10 $ .11
Diluted $ .04 $ .07 $ .10 $ .11
NOTE L - NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued the Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, in June 1998. SFAS 133 will be effective
for the Company's fiscal year beginning January 1, 2000. SFAS 133 requires
that all derivatives be carried in the balance sheet at their fair value.
Changes in fair value of derivatives will be either recorded in earnings
currently or in other comprehensive income, depending upon the intended use
of the derivative. Management does not currently expect the adoption of SFAS
133 to have a material impact on the Company's results of operations or
financial condition.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 provides
guidance on accounting for the costs of computer software developed or
obtained for internal use. Also, in June 1998, the AICPA issued SOP 98-5,
"Reporting on the Costs of Start-Up Activities." SOP 98-5 requires costs of
start-up activities and organizational costs, as defined, to be expensed as
incurred. These statements are effective for the Company's fiscal year
beginning January 1, 1999. Management does not expect either of these SOP's
to have a material impact on the Company's results of operations or financial
condition.
Report of Independent Certified Public Accountants on Schedule
--------------------------------------------------------------
Board of Directors
Theragenics Corporation
In connection with our audit of the financial statements of Theragenics
Corporation referred to in our report dated January 11, 1999, which is
included in the annual report to security holders and incorporated by
reference in Part II of this form, we have also audited Schedule II for each
of the three years in the period ended December 31, 1998. In our opinion ,
the schedule presents fairly, in all material respects, the information
required to be set forth therein.
/s/ GRANT THORNTON LLP
----------------------
GRANT THORNTON LLP
Atlanta, Georgia
January 11, 1999
Theragenics Corporation
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For each of the three years in the period ended December 31, 1998
Column A Column B Column C Column D Column E
- --------------------------------------- ------------ ---------------------------- ----------- --------
Additions
----------------------------
(1) (2)
Balance at Charged to Charged to Balance at
beginning of costs and other accounts Deductions - end of
Description period expense describe describe (a) period
------------------------------------- ------------- ------------ -------------- ------------ ----------
Year ended December 31, 1998
Allowance for doubtful
accounts receivable $ 65,446 $ - $ - $ 11,673 $ 53,773
Allowance for doubtful inventory $ 77,024 $ 267,584 $ - $ - $ 344,608
Year ended December 31, 1997
Allowance for doubtful
accounts receivable $ - $ 65,446 $ - $ - $ 65,446
Allowance for doubtful inventory $ 77,024 $ - $ - $ - $ 77,024
Year ended December 31, 1996
Allowance for doubtful
accounts receivable $ - $ - $ - $ - $ -
Allowance for doubtful inventory $ 77,024 $ - $ - $ - $ 77,024
(a) - write-offs of uncollectible accounts receivable.
THERAGENICS CORPORATION
INDEX TO EXHIBITS
Page No.
10.22 - Employment Agreement between Theragenics 72
Corporation and Bruce W. Smith
24.1 - Consent of Independent Public Accountants 71
for Incorporation by Reference of Audit
Report into Registration Statements
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Theragenics Corporation
We hereby consent to the incorporation by reference of our reports dated January
11, 1999, appearing in your Annual Report on Form 10-K for the year ended
December 31, 1998, in the Company's Registration Statements on Form S-8, file
numbers 333-15313, 333-40737, 333-40653, and 333-64801.
/s/ GRANT THORNTON LLP
- ----------------------
GRANT THRONTON LLP
Atlanta, Georgia
March 26, 1999