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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2001.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934.
For the transition period __________ to __________ .
Commission File Number: 0-20727
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NOVOSTE CORPORATION
(Exact name of registrant as specified in its charter)
Florida 59-2787476
(State or other (I.R.S. Employer
jurisdiction
of incorporation or
organization) Identification No.)
3890 Steve Reynolds 30093
Blvd., Norcross, GA
(Address of principal (Zip Code)
executive offices)
Registrant's telephone, including area code: (770) 717-0904
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Rights to Purchase Preferred Shares
(Title of Class)
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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
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosures 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 1, 2002, there were 16,315,676 shares of Common Stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the Registrant was approximately $103,957,000 based upon the closing sales
price of the Common Stock on February 28, 2002 on the Nasdaq National Market.
Shares of Common Stock held by each officer, director, and holder of five
percent or more of the Common Stock outstanding as of March 1, 2002 have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for its Annual Meeting of
Stockholders, which the Registrant intends to file not later than 120 days
following December 31, 2001, are incorporated by reference to Part III of this
Form 10-K Report.
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NOVOSTE CORPORATION
FORM 10-K
INDEX
PART I.
Page
----
ITEM 1. BUSINESS......................................................... 3
ITEM 2. PROPERTIES....................................................... 21
ITEM 3. LEGAL PROCEEDINGS................................................ 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 21
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT............................. 22
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.......................................................... 23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA............................. 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 33
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......... 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................. 33
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 34
ITEM 11. EXECUTIVE COMPENSATION........................................... 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 34
PART IV.
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K...................................................... 35
2
PART I
ITEM 1. BUSINESS
In this Form 10-K, "Novoste," the "Company," "we," "us" and "our" refer to
Novoste Corporation. Novoste(R), Beta-Cath/TM/, Corona(R) and the Novoste(R)
logo are trademarks of the Company.
General
Novoste, a Florida Corporation, has developed the Beta-Cath/TM/ System, a
hand-held device to deliver beta, or low penetration, radiation to the site of
a treated blockage in a coronary artery to decrease the likelihood of
restenosis. Restenosis, the renarrowing of a previously treated artery, is the
major limitation of percutaneous coronary intervention or PTCA, a procedure
used by interventional cardiologists to open blocked coronary arteries.
Coronary stents, metal tubes or coils permanently deployed at a blockage in a
coronary artery, were developed to reduce the incidence of restenosis, however
restenosis still occurs in greater than 30% of the patients who receive stents.
In August 1998, we qualified to apply CE marking to the Beta-Cath/TM/ System, a
requirement to sell our device in most of Western Europe and commenced the
active marketing of our device in Western Europe in January, 1999. On
November 3, 2000, Novoste received U.S. marketing approval from the FDA for the
Beta-Cath/TM/ System (30-millimeter source train) for use in patients suffering
from "in-stent restenosis", a condition in which previously placed coronary
stents become clogged with new tissue growth. Novoste received additional
approvals from the FDA for The Beta-Cath(TM) System with a 40millimeter source
train during 2001 and the 60-millimeter source train and smaller, 3.5 French
catheter and source train in early 2002.
The Company has principal operations in the United States and sales and
disribution in Western Europe and Rest of World (Canada, Asia and South
America). The Company markets its products through a direct sales force in the
United States and a combination of direct sales representatives and independent
disributors in markets outside the United States. All revenues have been
generated from the marketing of the Beta-Cath(TM) System and during 2001, 93%
of net sales were generated in the United States. Information concerning
revenues and long lived assets by geographic area for the past three years may
be found in Item 14 under Notes To Consolidated Financial Statements, Note 11.
Segment Information.
Industry Overview
Coronary Artery Disease. Coronary artery disease is the leading cause of
death in the United States. More than 13 million people in the United States
currently suffer from coronary artery disease, which is generally characterized
by the progressive accumulation of plaque as a result of the deposit of
cholesterol and other fatty materials on the walls of the arteries. The
accumulation of plaque leads to a narrowing of the interior passage, or lumen,
of the arteries, thereby reducing blood flow to the heart muscle. When blood
flow to the heart muscle becomes insufficient, oxygen supply is restricted and
a heart attack and death may result. Depending on the severity of the disease
and other variables, patients will be treated either surgically with CABG or
less invasively with a PTCA procedure.
Coronary Artery Bypass Graft Surgery. Coronary artery bypass graft surgery,
or CABG, was introduced as a treatment for coronary artery disease in the
1950's. CABG is a highly invasive, open surgical procedure in which blood
vessel grafts are used to bypass the site of a blocked artery, thereby
restoring blood flow. CABG, still considered the most durable treatment for
coronary artery disease, is generally the primary treatment for severe coronary
artery disease involving multiple vessels. In addition, CABG is often a
treatment of last resort for patients who have undergone other less invasive
procedures like PTCA but require revascularization. However, CABG has
significant limitations, including medical complications such as stroke,
multiple organ dysfunction, inflammatory response, respiratory failure and
post-operative bleeding, each of which may result in death. In addition, CABG
is a very expensive procedure and requires a long recovery period. In the United
3
States, the average cost of undergoing CABG, including hospital stay, is
approximately $45,000; and the average recuperation period following discharge
from the hospital is at least four to six weeks. In 2001, approximately 400,000
CABG procedures were performed in the United States. Several new minimally
invasive surgical techniques have been commercialized which attempt to lessen
the cost and trauma of CABG procedures while maintaining efficacy.
PTCA. Since its introduction in the late 1970s, PTCA has emerged as the
principal less invasive alternative to CABG. PTCA is a procedure performed in a
cath lab by an interventional cardiologist. During PTCA, a guidewire is
inserted into a blood vessel through a puncture in the leg (or arm, in some
cases) and guided through the vasculature to a diseased site in the coronary
artery. A balloon-tipped catheter is then guided over the wire to the deposit
of plaque or lesion occluding the artery. Once the balloon is positioned across
the lesion inside the vessel, the balloon is inflated and deflated several
times. Frequently, successively larger balloons are inflated at the lesion
site, requiring the use of multiple balloon catheters. The inflation of the
balloon cracks or reshapes the plaque and the arterial wall, thereby expanding
the arterial lumen and increasing blood flow. However, the inflation of the
balloon typically results in injury to the arterial wall. In 2001, it is
estimated that about 400,000 PTCA procedures were performed in the United
States and approximately 600,000 procedures were performed outside the United
States. The average cost of each PTCA procedure in the United States is
approximately $20,000, or less than one-half of the average cost of CABG. The
length of stay and recuperation period are substantially less than those
required for CABG.
Though PTCA has grown rapidly as a highly effective, less invasive therapy
to treat coronary artery disease, the principal limitation of PTCA is the high
rate of restenosis, the renarrowing of a treated artery, which often requires
reintervention. Studies have indicated that, within six months after PTCA,
between 30% and 50% of PTCA patients experience restenosis.
Pathology of Restenosis. Restenosis is typically defined as the renarrowing
of a treated coronary artery within six months of a revascularization procedure
such as PTCA to less than 50% of its normal size. Restenosis is a vascular
response to the arterial trauma caused by PTCA. Due to multiple mechanisms
controlling vascular repair, restenosis may occur within a short period after a
revascularization procedure or may develop over the course of months or years.
Restenosis that occurs within a day of a revascularization procedure is
usually attributed to elastic recoil (acute loss of diameter) of the artery.
Restenosis also may result from hyperplasia, which is the excessive
proliferation of cells at the treatment site, or from vascular remodeling of
the arterial segment, which is a slow contraction of a vessel wall. Hyperplasia
is a physiological response to injury, similar to scarring, which occurs in
wound healing. Vascular remodeling is a contraction of the vessel caused by a
thickening of the outside wall of the artery. In response to an arterial injury
from revascularization, the body sets off a biochemical response to repair the
injured site and protect it from further harm. This response will include a
signal to adjacent cells of the arterial wall to multiply. Often this cell
proliferation goes unchecked, resulting in a much thicker and inelastic
arterial wall and in reduced blood flow. Hyperplasia and vascular remodeling
are the primary causes of restenosis.
Coronary Stenting. Coronary stents are expandable, implantable metal
devices permanently deployed at a lesion site. Stents maintain increased lumen
diameter by mechanically supporting the diseased site in a coronary artery. Of
all the non-surgical treatments seeking to improve upon PTCA, stents have been
the most successful in improving the outcome immediately following the
procedure and reducing the incidence of restenosis. In a typical stent
procedure, the artery is pre-dilated at the lesion site with a balloon
catheter, and the stent is delivered to the site of the lesion and deployed
with the use of a second balloon catheter which expands the stent and firmly
positions it in place. This positioning may be followed by a third expansion,
using a high-pressure balloon to fully deploy and secure the stent. Once
placed, stents exert radial force against the walls of the coronary artery to
enable the artery to remain open and functional.
4
Studies have concluded that the rate of restenosis in patients receiving
coronary stents following PTCA is approximately 30% lower than in patients
treated only by PTCA. Since their commercial introduction in the United States
in 1994, the use of stents has grown rapidly, and it is estimated that they
were utilized in over 75% of the approximately 1.5 million PTCA procedures
performed in 2001.
Despite their rapid adoption, stents have certain drawbacks. The use of
stents increases the cost of a PTCA procedure, especially when, as is often the
case, two or more stents are used. In addition, studies have shown that
restenosis still occurs in approximately 30% to 40% of the patients who receive
stents following PTCA. This is commonly referred to as "in-stent" restenosis.
Studies have shown that patients with "in-stent" restenosis often experience
recurrent restenosis and as a result are prone to multiple revascularization
procedures. Stents are also permanent implants which may result in unforeseen,
long-term adverse effects, and cannot be used in cases where the coronary
arteries are too tortuous or too narrow. Further, stents appear to be effective
in reducing the frequency of restenosis resulting from elastic recoil and
vascular remodeling, but they increase the degree of hyperplasia.
Studies conducted by Novoste and other companies using radiation to treat
in-stent restenosis led to FDA approval and the subsequent introduction of
vascular brachytherapy devices in 2000 and 2001. These devices have proven to
reduce in-stent restenosis but because of the complexity of using radiation in
the cath lab other companies have been researching coatings and treatments to
coronary stents that could also reduce restenosis and would possibly be more
acceptable to a medical community already experienced at using stents. Even
though early trial results of drug coated stents have been reported as
eliminating restenosis, the Company believes there will continue to be a market
for vascular brachytherapy in the foreseeable future. Only one of the drug
coated stents, Johnson & Johnson's, has continued development in its current
configuration as other companies are seeking to test multiple drug coating in
an effort to find the drug will reduce restenosis without creating additional
damage to the artery. Additionally, Novoste believes that the early clinical
data is not representative of the wide variety of patients that will be treated
by a wide variety of physicians in unmonitored settings. Those patients who do
restenos will still benefit from treatment with vascular brachytherapy. From an
economic standpoint it also may not be practical or possible for most hospitals
to use drug-coated stents on all their patients, since the price of new stents
is projected to be about three times the price of traditional bare metal stents.
The Novoste Solution
The Beta-Cath/TM/ System has been shown to reduce the incidence of
restenosis in patients who are being treated for blocked stents, or in-stent
restenosis. The administration of localized beta radiation reduces restenosis
rates by inhibiting hyperplasia and vascular remodeling. Radiation has been
used therapeutically in medicine for more than 50 years in the treatment of
proliferative cell disorders, such as cancer. Cancer therapy has primarily
involved the use of gamma radiation, which is highly penetrating and may be
hazardous unless handled and used with great care. By contrast, beta radiation
is far less penetrating and easier to use and shield than gamma radiation while
still delivering a sufficient dose to the treated coronary arteries. We view
beta radiation as well-suited for intracoronary use following PTCA, where the
objective is to treat the coronary artery with minimal exposure to adjacent
tissues.
The Beta-Cath/TM/ System is designed to fit well with techniques currently
used by interventional cardiologists in the cath lab. It is a hand-held device
that hydraulically delivers beta radiation sources through a closed-end
catheter to the area of the coronary artery injured by the immediately
preceding PTCA procedure. To facilitate easy placement of the catheter, it is
advanced over the same guidewire used in the PTCA procedure. After the
administration of the prescribed radiation dose to a lesion site, which takes
less than five minutes per lesion, the radiation sources are hydraulically
returned to the hand-held transfer device. We reuse the radiation isotopes for
eighteen months due to the long half-life of Strontium-90, the isotope used in
Novoste device.
5
Our Business Strategy
Our objective is to maintain our leadership position in the vascular
brachytherapy market and leverage our catheter technology expertise, our strong
distribution network and our ability to execute development, clinical trials
and market introduction of new technology. Elements of our strategy include:
. Maintaining our vascular brachytherapy market leadership position. We've
enhanced the already successful system with a small-diameter catheter
that was approved by the FDA in February 2002, and a 60mm radiation
source train that was approved in March 2002. We anticipate these
additional Beta-Cath(TM) System product offerings will enable
interventional cardiologists greater ability to treat in-stent restenosis.
. Increasing revenue and improving earnings per share in 2002 through
enhancements to the Beta-Cath(TM) System and the availability of
reimbursement. We are also working to further improve manufacturing
efficiencies and control costs.
. Filing for FDA approval of peripheral products in 2003. We hope to expand
our radiation technology into larger markets--like treating
femoral-popliteal (fem-pop) disease and arterial-venous (A-V) dialysis
grafts--where drug-coated stents are not likely to be a competitive
threat. We have already initiated our fem-pop trial, and are working
towards starting the A-V graft trial very soon.
. Diversify our revenue from new products by 2004. We have in progress a
number of development programs seeking to provide novel technologies and
products that will enable new treatment opportunities for the most
challenging diseases in cardiology and related markets. These programs
are targeted at markets with significant market potential.
. Funding operating and product development activities internally. Based on
our sales and profitability goals, we expect to generate substantial net
income that can fund our development and acquisition efforts.
Beta-Cath/TM/ System Design and Advantages
The primary components of the Beta-Cath/TM/ System are:
Radiation Source Train. The beta radiation administered by the
Beta-Cath/TM/ System emanates from a "train" of several miniature sealed
sources containing Strontium-90 (Strontium/Yttrium), a beta-emitting
radioisotope. We currently manufacture trains in 30mm, 40mm and 60mm lengths,
with the longer length intended for use on longer lesions. The use of beta,
rather than gamma, radiation is intended to make the Beta-Cath/TM/ System safer
and easier to use in the cath lab environment. In addition, due to the long
half-life (approximately 28 years) of Strontium-90, and because the source
train will not come into contact with a patient's blood or tissue, the
radiation sources are expected to be reused for up to eighteen months. Beta
radiation from the Strontium-90 source is easily shielded from health care
workers by the use of approximately one-half-inch-thick quartz in the transfer
device.
Transfer Device. The transfer device is a multiple-use, hand-held
instrument used to deliver, retrieve and then store the radiation sources when
not in use. The transfer device:
. transfers the radiation sources to and from the delivery catheter via a
proprietary hydraulic delivery system;
. contains a radiation source sensing system which is interlocked with a
gating system to prevent the radiation sources from exiting the transfer
device until the delivery catheter is locked in place and to prevent
removal of the delivery catheter prior to the return of the radiation
sources to the transfer device; and
. completely shields the beta radiation from health care workers when the
radiation source train is housed inside it.
6
Delivery Catheter. The delivery catheter is a single-use, multi-lumen
catheter that provides a pathway for the radiation sources to be rapidly
delivered and retrieved from the coronary arterial segment to be treated. The
delivery catheter is positioned by advancing it over the same guidewire used
during the immediately preceding PTCA procedure. The radiation sources are
delivered and retrieved through a dual-lumen closed hydraulic circuit, which
uses a fluid-filled standard syringe to create the hydraulic pressure. We
currently sell a version of the catheter in the United States that fits over
most of the length of the guidewire used in the PTCA procedure, commonly known
as an "over the wire" catheter, and our European subsidiaries sell a version
that fits over the guidewire for only a small portion of the catheter at its
far end, commonly known as a "rapid exchange" catheter.
The Beta-Cath/TM/ System is used in a cath lab by an interventional
cardiologist in conjunction with a radiation oncologist. The cardiologist
places the delivery catheter into the patient's vasculature until the catheter
reaches the targeted site. The radiation oncologist operates the transfer
device to deliver the radiation source train hydraulically to the end of the
catheter in a matter of seconds. The radiation sources remain at the targeted
site for less than five minutes to deliver a predetermined dose of radiation.
The radiation sources are then returned by the use of positive hydraulic
pressure applied through a different lumen of the delivery catheter. Upon
completion of each procedure, the train of radiation sources is stored safely
inside the transfer device. At the end of the day, the transfer device is
delivered to a designated radiation storage site within the hospital for
safekeeping. While the need for a cardiologist and a radiation oncologist is
expected to result in incremental physician fees, we believe the Beta-Cath/TM/
System will be cost-effective, principally by reducing the need for costly
revascularization procedures often required following treatment of in-stent
restenosis.
We believe the Beta-Cath/TM/ System has the following advantages:
. Site-specific Therapy. The Beta-Cath/TM/ System is designed to confine
radiation exposure to the targeted intervention area.
. Short Procedure Times. The Beta-Cath/TM/ System is designed to enhance
patient safety and comfort, as well as to promote productivity in the
cath lab, by delivering the recommended dosage in less than five minutes
of radiation exposure per lesion.
. Utilization of Existing PTCA Techniques. Although intracoronary
radiation is a new concept in coronary artery disease treatment, the
hand-held Beta-Cath/TM/ System is designed to be easily adopted and used
by the interventional cardiologist. The Beta-Cath/TM/ System is very
similar to other catheter-based tools used by the cardiologist.
. Multiple-Use System. The radiation source train can be reused for
numerous patients, due to the long half-life of the isotope and because
the source train does not come into contact with the patient's blood. As
a result, inventory planning is very straightforward, and last minute
treatment decisions can be made.
. Ease of Use and Accuracy of Dosing. The Beta-Cath/TM/ System is a hand-
held device that is easy to operate. Because of the long half-life of our
radiation source, prescribed treatment times will remain constant over
the approved shelf life of the isotope. Vascular brachytherapy systems
that utilize short half-life isotopes are likely to require complex
case-by-case dose calculations based on the current decay state of the
isotope. In addition, they require frequent inventory replacement due to
their short half-lives.
. Designed for Safety. The Beta-Cath/TM/ System utilizes localized beta
radiation, which results in total body radiation exposure significantly
less than that received during routine x-ray during PTCA or during
treatment with a gamma radiation device. Other safety mechanisms include:
a closed-source train lumen, special locking mechanisms to connect the
delivery catheter to the transfer device and sufficient shielding in the
transfer device to protect health care workers from beta radiation
exposure. In addition, the beta radiation sources are delivered and,
following the administration of the prescribed dose, retrieved
hydraulically in a matter of seconds, thereby minimizing exposure to
adjacent tissue.
7
PRODUCT DEVELOPMENT AND CLINICAL TRIALS
The Company is engaged in ongoing product development to introduce new
products as simple solutions to complex interventional therapies. In addition
we seek to enhance the effectiveness, ease of use, safety and reliability of
our Beta-Cath/TM/ System and to expand the applications for which its uses are
appropriate.
Research and development expenses, which include the cost of clinical
trials, for the years ended December 31, 2001, 2000, and 1999 were
approximately $12.8 million, $17.1 million and $22.9 million, respectively. The
Company has conducted numerous clinical trials to provide the basis for
approval by the FDA of several versions of the Beta-Cath/TM/ System.
Beta-Cath/TM/ System Trials
START 30 Trial.
The first trial to be completed was the "Stent And Radiation Therapy Trial"
or START Trial. The START 30 Trial was a randomized, triple-masked,
placebo-controlled, multicenter human clinical trial with the primary endpoint
of target vessel revascularization ("TVR"), the incidence of an additional
revascularization procedure in the vessel originally treated within eight
months. The START 30 Trial sought to determine the safety and effectiveness of
the 30mm version of the Beta-Cath/TM/ System (30mm System) in treating
"in-stent" restenosis. Enrollment in this trial of a total of 476 patients at
51 sites was completed in April 1999. In March 2000, we announced the results
of the START Trial showing statistically significant results for patients with
"in stent" restenosis treated with the 30mm System when compared to patients
treated with placebo. In those patients treated with the 30mm system, the rate
of restenosis decreased by 66% at the stented portion of the treated artery and
by 36% at a longer section of the artery, beyond that treated with radiation or
revascularization methods. The START 30 Trial was the basis for the FDA
approval of the 30mm system in November, 2000.
START 40 Trial.
In addition, in June 1999 we initiated the START 40 Trial. This multicenter
clinical trial enrolled 207 patients who received vascular brachytherapy using
a 40mm active radiation source train. The START 40 Trial had an identical
protocol design to the START 30 Trial and, therefore, we used the START 30
Trial's control group in analyzing the clinical data from the START 40 Trial.
The purpose of this trial was to gain regulatory approval for the longer 40mm
radiation source train. Enrollment of patients was completed in October 1999.
The longer 40mm radiation source train was found to be helpful in addressing
clinical concerns over the possibility of "geographic miss" during a vascular
brachytherapy procedure. Geographic miss is the failure to delivery radiation
to the intended target balloon-injury area either due to poor alignment of the
radiation source train with the balloon-induced injury, or using too short a
radiation source train compared to the balloon injury.
In November, 2000, results from the analysis of the eight month follow-up
angiograms were released. The data, as also seen in START 30, demonstrated
significant reduction in restenosis in patients treated with beta radiation. In
those patients treated with the 40-millimeter source train with the
Beta-Cath/TM/ System, compared to those treated with a placebo, a 63% decrease
in the rate of restenosis was observed in the stented portion of the treated
artery and a 44% decrease was observed in the longer section of the artery,
beyond the area treated with radiation or revascularization methods. The 40mm
System received FDA approval in June, 2001.
Beta-Cath/TM/ System Trial
Designed in 1996 and begun in July 1997, the Beta-Cath/TM/ System Trial was
the first randomized, multicenter, placebo-controlled study of vascular
brachytherapy. The Trial was also the first pivotal study to evaluate
intracoronary radiation in the primary prevention of coronary restenosis
subsequent to either PTCA ("percutaneous transluminal coronary angioplasty" or
"balloon angioplasty") or first time stent placement.
8
The Beta-Cath/TM/ System Trial was originally designed to enroll 1,100
patients into one of two branches, either the PTCA branch or the Provisional
Stent branch. According to the clinical trial protocol, patients enrolled in
the Trial were initially treated with balloon angioplasty. If the cardiologist
achieved a satisfactory result, the patient would remain in the PTCA branch and
then be treated with the Beta-Cath/TM/ System. If balloon angioplasty was
sub-optimal, the patient would be entered into the Provisional Stent branch.
Prior to stent placement, the patient would be treated with the Beta-Cath/TM/
System, after which a stent would be implanted. All patients were randomized to
either an inactive (placebo) or active 30-mm Strontium-90 (beta radiation)
source train. Patients returned for follow-up examinations eight months after
the vascular brachytherapy procedure.
In March 1999, the Trial's Data Safety and Monitoring Board proposed
creating a new stent branch comprised of only those patients receiving a longer
duration of anti-platelet therapy (APT), a change first implemented by Novoste
in November 1998 to address late stent thrombosis concerns. Patient recruitment
continued until September 1999, at which time 1,455 patients had been enrolled
into the Trial at 59 investigational sites in North America and Europe.
On March 18, 2001, the Company announced the results of the Beta-Cath/TM/
System Trial. While the primary clinical endpoint of the overall Trial did not
demonstrate a significant benefit of beta radiation when the two branches of
the Trial (balloon and stent) were combined, beta radiation was shown to
significantly reduce the risk of angiographic restenosis in the lesion for
patients undergoing either balloon angioplasty or stent implantation, when
compared to the placebo group. In the PTCA branch, restenosis in the lesion
segment was significantly reduced by 38% in the group receiving radiation
versus placebo. In addition, the effect of beta radiation on all clinical
outcomes in the PTCA branch demonstrated a strong positive trend.
The Trial was first analyzed by comparing the clinical outcomes of the total
radiation cohort (those receiving either PTCA or a stent with extended APT) to
the overall placebo group. Then the data was analyzed by reviewing the PTCA and
the stent branches individually.
In this combined group of PTCA and stent patients, those who received beta
radiation exhibited modest improvements in their clinical endpoints, although
not statistically significant. Upon analysis of the two Trial branches, it was
clear that patients in the PTCA branch clinically benefited more from radiation
than did those in the Stent branch, thereby leading to a less pronounced effect
when the two branches were combined. In the PTCA branch, restenosis in the
legion segment was significantly reduced by 38% in the group receiving
radiation versus placebo. In addition, the effect of beta radiation on all
clinical outcomes in the PTCA branch demonstrated a strong positive trend.
In the Stent branch, angiographic restenosis in the lesion was also reduced
significantly (by 36%) as in the PTCA branch; however, radiation did not
improve restenosis in the much longer analysis segment. This was likely due to
"geographic miss", the mismatch of the radiation source train relative to the
placement of the stent, which was implanted after the radiation catheter was
removed. In reviewing the clinical endpoints of the Stent branch, the data did
not show a beneficial effect of radiation on improving outcomes. The incidence
of late thrombosis, however, was the same (1.3%) in both the radiation and the
placebo groups, indicating that the extended antiplatelet therapy resolved the
problems of thrombosis observed in the original stent branch.
Based upon the clinical outcome of the total radiation cohort the Company
determined that the results of the Beta-Cath/TM/ System Trial would be
insufficient to support an application for pre-market approval in the U.S. to
use our device following balloon angioplasty or previously untreated (de novo)
lesions.
Additional Beta-Cath/TM/ System Approvals
During 2001 Novoste applied to the FDA for approval to market two additional
Beta-Cath/TM/ System products. The Beta-Cath/TM/ 3.5 French (F) System,
Novoste's next generation smaller diameter catheter system, received marketing
approval from the FDA on in February, 2002. The Beta-Cath/TM/ 3.5 French (F)
System, offered with both a 30mm and 40mm radiation source train, is a smaller
diameter vascular brachytherapy catheter
9
approved for the treatment of in-stent restenosis. Due to its lower profile,
the 3.5F System should be able to treat areas unable to be addressed with the
current 5F System.
Marketing approval for the 60mm Beta-Cath/TM/ System was received was
received from the FDA in March 2002. The 60mm device is designed to treat long,
diffuse in-stent restenosis. Approval of the 60-mm device was based on the
results of a 139 patient subset (RENO Long) of the 1,098 patient RENO (REgistry
NOvoste) European registry trial. An analysis was performed on the RENO Long
group and compared to a placebo control group selected from the Washington
Radiation for In-Stent Restenosis Trials (WRIST / LONG WRIST (n=94)). Thee data
demonstrated a 75% reduction in Target Vessel Revascularization (TVR) rate
(14.9% vs. 60.6%) and a 72% reduction in Major Adverse Cardiac Event (MACE)
rate (17.9% vs. 64.9%) for the subset of patients receiving Sr-90 beta
radiation compared to this placebo control group. The average lesion length for
the RENO Long patient subset was 35.3 mm (site reported) compared to the
average lesion length of 28.0 mm in the WRIST / LONG WRIST placebo control
group.
New Products and Applications
Future development efforts will focus on modifying the Beta-Cath/TM/ System
for use in peripheral applications, such as arterial-venous shunts and the
femoral arteries. There can be no assurance that we will be successful in
developing these or other products.
Mobile Trial
Novoste developed the CORONA(TM) System to deliver Beta vascular
brachytherapy to treat patients with peripheral artery disease (restricted
blood flow in the upper legs). The Company believes that there is currently no
effective treatment of diffuse peripheral artery disease which can become
debilitating, by limiting their ability to walk without pain, for patients who
suffer from the disease. Symptomatic peripheral artery disease affects over
1.25 million patients annually in the U.S. The CORONA(TM) System differs from
the Beta-Cath(TM) System by the addition of a balloon-based delivery system
which allows for the treatment of large 5-8mm vessels with relatively short (3
to 5 minute) treatment times.
In December 2001 Novoste began its More patency with Beta In the Lower
Extremity (MOBILE) trial. The MOBILE trial will include 410 patients from 30
sites in North American and Europe. Patients will be randomized to receive
either standard percutansous catheter-based revascularization therapy followed
by vascular brachytherapy or standard therapy alone. Enrollment is expected to
be complete in the second half of 2002 and approval, if received, could be in
2004.
Bravo Trial
In March 2002 Novoste announced that it had submitted an investigational
device exemption (IDE) application to the FDA for its CORONA(TM) System to
treat arterial-venous dialysis graft stenosis. More than 220,000 people in the
U.S. currently undergo long-term dialysis for end stage renal disease and a
majority of these patients rely on arterial-venous dialysis grafts for vascular
access. Unfortunately, these grafts are associated with a very low patency rate
of 40-60% at one year and many of these grafts require interventional therapy
to maintain patency. There is evidence that the stenosis is due to intimal
hyperplasia formation at the graft site as a result of turbulent blood flow,
increased pressure and cyclical stretching of the vein wall, and therefore may
be an ideal target for vascular brachytherapy.
The BRAVO (Beta Radiation for treatment of Arterial-Venous graft Outflow)
trial IDE, submitted to the FDA for review, will be a prospective, randomized,
multi-center, placebo-controlled trial investigating the safety and efficacy of
the CORONA(TM) System to treat venous outflow stenosis in arterial-venous
dialysis grafts.
The BRAVO trial protocol will include 230 patients who will be randomized
between conventional treatment and conventional treatment plus radiation and
follow-up will be six months. The trial is expected to be performed in 20 sites
in North America. We anticipate completion of the enrollment of the 230
patients in the second half of 2002. Provided the trial is successful we intend
to file, in 2003, an application to obtain pre-market approval from the FDA to
sell the Corona/TM/ System in the United States for the treatment of venous
outflow stenosis in arterial-venous dialysis grafts. Approval from the FDA, if
any, would likely not be obtained for at least one year from filing.
10
Clinical trials are administered by our clinical and regulatory staff of
fourteen people. We also use consultants to monitor the clinical sites and to
assist in training and have engaged independent contract research organization
and consultants to compile data from the trials and to perform statistical and
reimbursement analyses. Novoste may take on the responsibilities of future
clinical trials as it seeks to develop additional products or obtains rights to
products developed by other companies. There can be no assurances that Novoste
will have the manpower or resources to successfully complete these trials.
Sales and Marketing
We have recruited a qualified and experienced field sales, sales management
and marketing organization and are selling our products directly in the United
States through that organization. At year end, this organization totaled 72
employees.
The Company directs its sales and marketing efforts at prominent domestic
and international cardiac catheterization laboratories that perform the
majority of the interventional cardiology procedures. The Company believes that
prominent cardiac cath labs are generally more likely to keep abreast of and
utilize new technologies such as the Beta-Cath/TM/ System for diagnosing and
treating restenosis. The Company's sales and marketing strategy includes
developing and maintaining a close working relationship with its customers in
order to assess and satisfy their needs for products and services. The Company
meets with clinicians both in the United States and Europe periodically to
share ideas regarding the marketplace, existing products, products under
development and existing or proposed research projects.
As part of our strategy to increase the awareness of and acceptance of
vascular brachytherapy and the Beta-Cath/TM/ System in cardiac cath labs, the
Company also works to develop peer reviewed journal articles authored by
leading experts in interventional cardiology, sponsors publication of papers
based on research covering the performance and benefits of the Beta-Cath/TM/
System and conducts informational seminars.
Our direct sales activities target all of the medical specialists involved
in vascular brachytherapy: cardiologists, radiation therapists and medical
physicists, which results in a lengthy sales effort. To reach each of these
groups, we are using a multidisciplinary sales force consisting of experienced
medical device salespeople, clinical specialists with nursing experience in
cardiology, and medical physicists experienced in obtaining licenses for new
radioactive medical products. The Company expects future products currently in
development will be distributed by the existing sales force, supplemented by
additional expertise for the particular application or by additional personnel
required to properly support the market.
Manufacturing, Sources of Supply
Our manufacturing operations are required to comply with the FDA's quality
systems regulations, which included an inspection of our manufacturing
facilities prior to pre-market approval. In addition, certain international
markets have quality assurance and manufacturing requirements that may be more
or less rigorous than those in the United States. Specifically, we are subject
to the compliance requirements of ISO 9001 certification and CE mark directives
in order to produce products for sale in Europe. We received ISO 9001/EN 46001
certification from our European notified body in April 1998. We are subject to
periodic inspections by regulatory authorities to ensure such compliance. See
"Government Regulation." We conduct quality audits of suppliers and we are
establishing a vendor certification program. All suppliers of components must
also be in compliance with Novoste's and the FDA's quality systems regulations.
Beta Radiation Source Train Suppliers
We have obtained all of our requirements for our beta radioactive sources to
date pursuant to an agreement with a single supplier, Bebig Isotopentechnik und
Umweltdiagnostik GmbH, a German corporation.
11
On June 20, 2001, the Company entered into a new manufacturing and supply
agreement (Agreement) with Bebig Isotopen-und Medizintechnik GmbH (Bebig), a
German corporation, to manufacture and supply the Company with radioactive
sealed Strontium-90 seed trains. The Agreement supercedes all prior agreements
with Bebig and neither the Company nor Bebig have any rights or obligations
under any of the previous agreements. During each calendar year under the
four-year contract, the Company guarantees to pay to Bebig minimum annual
payments through 2004 aggregating $5,750,000, including decontamination cost.
All product purchases are credited against the annual guaranteed payment. Any
product payments in excess of the annual guaranteed payment can be credited
against the guaranteed payment of the next year. In the event that the Company
does not purchase product to exceed the annual guaranteed payment, the
deficiency will be due and payable to Bebig within thirty days after the end of
each one-year contract period. At December 31, 2001, the Company exceeded the
annual guaranteed payment.
Bebig is required to comply with various regulatory requirements with
respect to the supply of radiation sources. Bebig has agreed to manufacture
radioactive sources at an agreed-upon base price. In light of the technical
expertise and capital investment required to manufacture the radioactive
sources and the limited number of manufacturers of Strontium 90, it would be
difficult to find an alternate source of supply without significant lead time.
Our business, results of operations and financial condition could be materially
adversely affected by Bebig's failure to provide us with beta isotopes on a
timely basis during the term of the agreement or by our inability to obtain an
alternative source of supply on a timely basis and on terms satisfactory to us
following any termination of the agreement. In addition, portions of the
process used to manufacture the materials may be proprietary to Bebig.
On October 14, 1999 the Company signed a development and manufacturing
supply agreement with AEA Technologies QSA GmbH for a second source of
radioactive supply and for the development of a smaller diameter radiation
source. The agreement provides for the construction of a production line which
is expected to be finished in two phases. The first phase was completed in
February 2001 and the second phase is expected to be completed in mid 2002. The
cost of this production line is estimated at $4,000,000 and is paid as
construction progresses. Payments made toward the production line are being
capitalized as property and equipment. Depreciation of the production line will
begin when the equipment is placed into service, expected to be mid 2002. In
addition, the agreement provides for joint ownership of all intellectual
property arising from the development work and that AEA may manufacture
vascular brachytherapy sources only for us. The development of the smaller
diameter source may not be successfully completed, the new production line may
not be completed on time or on budget, and the smaller diameter source may not
be manufacturable in commercial quantities.
Supply of Other Components by Third Parties
We currently rely on third party manufacturers for the supply of the hand-
held transfer device and other components of our Beta-Cath/TM/ System. The
supply of these components requires a long lead time. In addition, we could not
establish quickly additional or replacement suppliers or internal manufacturing
capabilities for these components. An existing vendor's failure to supply
components in a timely manner or our inability to obtain these components on a
timely basis from another supplier could have a material adverse effect on our
ability to manufacture the Beta-Cath/TM/ System and, therefore, on our ability
to market the Beta-Cath/TM/ System.
Patents and Proprietary Technology
Our policy is to protect our proprietary position by, among other methods,
filing United States and foreign patent applications. On November 4, 1997 we
were issued United States Patent No. 5,683,345, on May 4, 1999 we received
United States Patent No. 5,899,882 (which is jointly owned by us and Emory
University) and on January 11, 2000 we received United States Patent No.
6,013,020, all related to the Beta-Cath/TM /System. We also have several
additional United States applications pending covering aspects of our
Beta-Cath/TM/ System. The United States Patent and Trademark Office has
indicated that certain claims pending in another United States application are
allowable. With respect to the above identified United States Patents and our
other pending United States patent applications, we have filed, or will file in
due course, counterpart applications in the European Patent Office and certain
other countries.
12
Like other firms that engage in the development of medical devices, we must
address issues and risks relating to patents and trade secrets. United States
Patent No. 5,683,345 may not offer any protection to us because competitors may
be able to design functionally equivalent devices that do not infringe this
patent. It may also be reexamined, invalidated or circumvented. In addition,
claims under our other pending applications may not be allowed, or if allowed,
may not offer any protection or may be reexamined, invalidated or circumvented.
In addition, competitors may have or may obtain patents that will prevent,
limit or interfere with our ability to make, use or sell our products in either
the United States or international markets.
We received a letter from NeoCardia, L.L.C., dated July 7, 1995, in which
NeoCardia notified us that it was the exclusive licensee of United States
Patent No. 5,199,939, or the Dake patent, and requested that we confirm that
our products did not infringe the claims of the Dake patent. On August 22, 1995
our patent counsel responded on our behalf that we did not infringe the Dake
patent.
The United States Patent and Trademark Office later reexamined the Dake
patent. In the reexamination proceeding some of the patent claims were amended
and new claims were added. We have concluded, based upon advice of patent
counsel, that our Beta-Cath/TM/ System does not infringe any claim of the Dake
patent as reexamined.
In May 1997 Guidant acquired NeoCardia together with the rights under the
Dake patent. Guidant is attempting to develop and commercialize products that
may compete with the Beta-Cath/TM/ System and has significantly greater capital
resources than the Company. Guidant may sue for patent infringement in an
attempt to obtain damages from us and/or injunctive relief restraining us from
commercializing the Beta-Cath/TM/ System in the United States. While the
Company does not believe such an action would have merit, if Guidant were
successful in any such litigation, we might be required to obtain a license
from Guidant under the Dake patent to market the Beta-Cath/TM/ System in the
United States, if such license were available, or be prohibited from selling
the Beta-Cath/TM/ System in the United States. Any of these actions could have
a material adverse effect on our business, financial condition and results of
operations, or could result in cessation of our business.
We have two versions of our delivery catheter: a "rapid exchange" catheter
and an "over the wire" catheter. As a result of certain United States patents
held by other device manufacturers covering "rapid exchange" catheters, we
currently intend to sell the "over the wire" version of our delivery catheter
in the United States. If further investigation reveals that we may sell a
"rapid exchange" version in the United States without infringing the valid
patent rights of others, we might decide to do so in the future. However, we
cannot assure that we will be able to sell a "rapid exchange" version in the
United States without a license of third party patent rights or that such a
license would be available to us on favorable terms or at all.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Companies in the
medical device industry have employed intellectual property litigation to gain
a competitive advantage. There can be no assurance that we will not become
subject to patent-infringement claims or litigation or interference proceedings
declared by the United States Patent and Trademark Office to determine the
priority of inventions. The defense and prosecution of intellectual property
suits, or interference proceedings and related legal and administrative
proceedings are both costly and time-consuming. Litigation may be necessary to
enforce our patents, to protect our trade secrets or know-how or to determine
the enforceability, scope and validity of the proprietary rights of others. Any
litigation or interference proceedings will result in substantial expense to us
and significant diversion of effort by our technical and management personnel.
An adverse determination in litigation or interference proceedings to which we
may become a party could subject us to significant liabilities to third
parties, require us to seek licenses from third parties, require us to redesign
our products or processes to avoid infringement or prevent us from selling our
products in certain markets, if at all. Although patent and intellectual
property disputes regarding medical devices have often been settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and could include significant ongoing royalties. Furthermore,
there can be no assurance that the necessary licenses would be available to us
on satisfactory terms, if at all, or that we could redesign our products or
13
processes to avoid infringement. Any adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling our products, which would have a material
adverse effect on our business, financial condition and results of operations.
Patent applications in the United States and patent applications in foreign
countries are maintained in secrecy for a period after the earliest claimed
priority date. Publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries and the filing of related
patent applications. Patents issued and patent applications filed relating to
medical devices are numerous. Accordingly, there can be no assurance that
current and potential competitors, many of which have substantial resources and
have made substantial investments in competing technologies, or other third
parties have not or will not file applications for, or have not or will not
receive, patents and will not obtain additional proprietary rights relating to
products made, used or sold or processes used or proposed to be used by us.
We have developed certain of our patent and proprietary rights relating to
the Beta-Cath/TM/ System in conjunction with Emory University Hospital, a
leader in the research of intravascular radiation therapy. To obtain the
exclusive rights to commercialize the Beta-Cath/TM/ System for the treatment of
restenosis, we entered into a license agreement with Emory. Under this
agreement, Emory assigned to us all of Emory's rights to one United States
patent application and exclusively licensed to us its rights under another
United States application and related technology. Emory made no representation
or warranty with respect to its ownership of the assigned patent application,
and made only limited representations as to its ownership of the licensed
patent application and related technology. Under the agreement Emory will be
entitled to royalty payments based upon net sales of the Beta-Cath/TM/ System.
The term of the agreement runs through the later of (i) the date the last
patent covered by the agreement expires or (ii) January 2016 (unless earlier
terminated as provided in the agreement). Any inventions developed jointly by
our personnel and Emory during the term of the license agreement are owned
jointly by Emory and us. If Emory terminated the agreement as a result of our
failure to pay such royalties or any other breach of our obligations under such
agreement, our rights to use jointly owned patents (including the United States
Patent No. 5,899,882) would become non-exclusive and we would have no rights to
use future patents owned exclusively by Emory. In addition, if we breach our
obligations under the license agreement, we could be required by Emory to
cooperate in licensing the pending jointly-owned United States patent
application and our foreign counterparts to third parties so that they would be
able to commercialize and sell the Beta-Cath/TM/ System.
All of the physicians on staff at Emory who were involved in the development
of the Beta-Cath/TM/ System, including Spencer B. King III, M.D., have assigned
their rights in the technology, if any, to Emory and/or us. In addition, we
have entered into a license agreement with Dr. King. Under the terms of this
agreement, Dr. King is entitled to receive a royalty on the net sales of the
Beta-Cath/TM/ System (excluding consideration paid for the radioactive
isotope), subject to a maximum of $5,000,000.
We employ a full time manager of intellectual property to prepare invention
records and to coordinate the prosecution of new intellectual property. We
typically obtain confidentiality and invention assignment agreements in
connection with employment, consulting and advisory relationships. These
agreements generally provide that all confidential information developed or
made known to the individual by us during the course of the individual's
relationship with us, is to be kept confidential and not disclosed to third
parties, except in specific circumstances. There can be no assurance, however,
that these agreements will provide meaningful protection or adequate remedies
for us in the event of unauthorized use, transfer or disclosure of such
information or inventions.
Furthermore, our competitors may independently develop substantially
equivalent proprietary information and techniques, or otherwise gain access to
our proprietary technology, and we may not be able to meaningfully protect our
rights in unpatented proprietary technology.
14
COMPETITION; RAPID TECHNOLOGICAL CHANGE
Competition in the medical device industry, and specifically the markets for
cardiovascular devices, is intense and characterized by extensive research and
development efforts and rapidly advancing technology. New developments in
technology could render vascular brachytherapy generally or the Beta-Cath/TM/
System in particular noncompetitive or obsolete.
Vascular brachytherapy may compete with other treatment methods designed to
improve outcomes from coronary artery procedures that are well established in
the medical community, such as coronary stents. Stents are the predominant
treatment currently utilized to reduce the incidence of coronary restenosis
following PTCA and were used in approximately 75% of all PTCA procedures
performed worldwide in 2001. Manufacturers of stents include Johnson & Johnson
(J&J), Medtronic, Inc., Guidant Corporation and Boston Scientific Corporation.
Stent manufacturers often sell many products used in the cardiac
catheterization labs, commonly referred to as cath labs, and as discussed
below, certain of these companies are marketing vascular brachytherapy devices.
Both J&J and Guidant compete directly with Novoste for market acceptance of
vascular brachytherapy and both have substantially greater capital resources
and greater resources and experience at introducing new products than does
Novoste. J&J's product, the CHECKMATE/TM/ System, is a gamma radiation vascular
brachytherapy device. Although, the CHECKMATE/TM/ System received approval at
the same time as Novoste's Beta-Cath/TM/ System, the Company believes it
competes effectively against J&J because of the ease of use of beta radiation
over gamma. In November 2001, Guidant received FDA approval of the GALILEO/TM/
Intravascular Radiotherapy System. The GALILEO/TM/ System is also a beta
radiation system as is the Beta-Cath/TM/ System. In the current environment of
managed care, economically motivated buyers, consolidation among health care
providers, increased competition from J&J and Guidant, Novoste may be required
to compete on the basis of price. We may not be able to compete effectively
against Guidant or Johnson and Johnson in the future.
Many of these same companies and others are researching coatings and
treatments to coronary stents that could reduce restenosis and would possibly
be more acceptable to a medical community already experienced at using stents.
Recently, results from early human clinical trials were reported as eliminating
restenosis. More extensive U.S. clinical trials will need to be completed in
order to receive approval to market domestically and, if successful, could have
a negative impact on the ultimate acceptability of vascular brachytherapy, our
revenue and the Company's stock price. If the trials are successfully completed
in the time frame contemplated by at least one competitor, Johnson & Johnson,
drug coated stents could receive FDA approval by as early as 2003.
Many of our competitors and potential competitors have substantially greater
capital resources than we do and also have greater resources and expertise in
the area of research and development, obtaining regulatory approvals,
manufacturing and marketing. Our competitors and potential competitors may
succeed in developing, marketing and distributing technologies and products
that are more effective than those we will develop and market or that would
render our technology and products obsolete or noncompetitive. Additionally,
many of the competitors have the capability to bundle a wide variety of
products in sales to cath labs. We may be unable to compete effectively against
such competitors and other potential competitors in terms of manufacturing,
marketing, distribution, sales and servicing.
Any product we develop that gains regulatory clearance or approval will have
to compete for market acceptance and market share. An important factor in such
competition may be the timing of market introduction of competitive products.
Accordingly, we expect the relative speed with which we can develop products,
gain regulatory approval and reimbursement acceptance and supply commercial
quantities of the product to the market to be an important competitive factor.
In addition, we believe that the primary competitive factors for products
addressing restenosis include safety, efficacy, and ease of use, reliability,
and suitability for use in cath labs, service and price. We also believe that
physician relationships, especially relationships with leaders in the
interventional cardiology and radiation oncology communities, are important
competitive factors.
Government Regulation
United States
Our Beta-Cath/TM/ System is regulated in the United States as a medical
device. The manufacture and sale of medical devices intended for commercial
distribution are subject to extensive governmental regulations in the
15
United States. Medical devices are regulated in the United States by the FDA
under the Federal Food, Drug and Cosmetic Act (the "FDC Act") and generally
require pre-market clearance or pre-market approval prior to commercial
distribution. In addition, certain material changes or modifications to medical
devices also are subject to FDA review and clearance or approval. The FDA
regulates the clinical testing, manufacture, packaging, labeling, storage,
distribution and promotion of medical devices. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant pre-market clearance or
pre-market approval for devices, withdrawal of marketing approvals, a
recommendation by the FDA that we not be permitted to enter into government
contracts, and criminal prosecution. The FDA also has the authority to request
repair, replacement or refund of the cost of any device manufactured or
distributed.
In the United States, medical devices are classified into one of three
classes (Class I, II or III) on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under FDA
regulations Class I devices are subject to general controls (for example,
labeling, pre-market notification and adherence to good manufacturing practices
or quality systems regulations) and Class II devices are subject to general and
special controls (for example, performance standards, postmarket surveillance,
patient registries, and FDA guidelines). Class III is the most stringent
regulatory category for medical devices. Generally, Class III devices are those
that must receive pre-market approval by the FDA after evaluation of their
safety and effectiveness (for example, life-sustaining, life-supporting or
implantable devices, or new devices that have not been found substantially
equivalent to other Class II legally marketed devices). The Beta-Cath/TM/
System is a Class III device, which required the FDA's pre-market approval
prior to its commercialization, which occurred November 2000.
A pre-market approval application must be supported by valid scientific
evidence, which typically includes extensive data, including preclinical and
human clinical trial data to demonstrate safety and effectiveness of the
device. If human clinical trials of a device are required and the device trial
presents a "significant risk," the sponsor of the trial, usually the
manufacturer or the distributor of the device, is required to file an
investigational device exemption application with the FDA and obtain FDA
approval prior to commencing human clinical trials. The investigational device
exemption application must be supported by data, typically including the
results of animal and laboratory testing. If the investigational device
exemption application is approved by the FDA and one or more appropriate
Institutional Review Boards, or "IRBs," human clinical trials may begin at a
specific number of investigational sites with a specific number of patients, as
approved by the FDA.
The pre-market approval application must also contain the results of all
relevant bench tests, laboratory and animal studies, a complete description of
the device and its components, and a detailed description of the methods,
facilities and controls used to manufacture the device. In addition, the
submission should include the proposed labeling, advertising literature and
training methods (if required).
If the FDA's evaluation of the pre-market approval application is favorable,
the FDA will either issue an approval letter or an "approvable letter,"
containing a number of conditions, which must be satisfied in order to secure
the final approval of the pre-market approval application. When and if those
conditions have been fulfilled to the satisfaction of the FDA, the agency will
issue a letter approving a pre-market approval application authorizing
commercial marketing of the device for certain indications. If the FDA's
evaluation of the pre-market approval application or manufacturing facilities
is not favorable, the FDA will deny approval of the pre-market approval
application or issue a "not approvable letter." The FDA may also determine that
additional clinical trials are necessary, in which case approval of the
pre-market approval application could be delayed for several years while
additional clinical trails are conducted and submitted in an amendment to the
pre-market approval application.
The process of obtaining a pre-market approval and other required regulatory
approvals can be expensive, uncertain and lengthy, and we may be unsuccessful
in obtaining approvals to market future products. The
16
Company anticipates submitting applications for pre-market approval for the use
of radiation in treating femoral-popliteal (fem-pop) disease and
arterial-venous (A-V) dialysis grafts after the completion of their respective
clinical trials. The FDA may not act favorably or quickly on any of our
submissions to the FDA. We may encounter significant difficulties and costs in
our efforts to obtain additional FDA approvals that could delay or preclude us
from selling new products in the United States. Furthermore, the FDA may
request additional data or require that we conduct further clinical studies,
causing us to incur substantial cost and delay. In addition, the FDA may impose
strict labeling requirements, onerous operator training requirements or other
requirements as a condition of our pre-market approval, any of which could
limit our ability to market new products. Labeling and marketing activities are
subject to scrutiny by the FDA and, in certain circumstances, by the Federal
Trade Commission. FDA enforcement policy strictly prohibits the marketing of
FDA cleared or approved medical devices for unapproved uses, further, if a
company wishes to modify a product after FDA approval of a pre-market approval,
including any changes that could affect safety or effectiveness, additional
approvals will be required by the FDA. Such changes include, but are not
limited to: new indications for use, the use of a different facility to
manufacture, changes to process or package the device, changes in vendors to
supply components, changes in manufacturing methods, changes in design
specifications and certain labeling changes.
Any products we manufacture or distribute pursuant to FDA approvals are
subject to pervasive and continuing regulation by the FDA, including
record-keeping requirements and reporting of adverse experiences with the use
of the device. Device manufacturers are required to register their
establishments and list their devices with the FDA and certain state agencies,
and are subject to periodic inspections by the FDA and those state agencies.
The Food, Drug and Cosmetic Act requires device manufacturers to comply with
good manufacturing practices regulations. A new set of regulations, called the
quality systems regulations, went into effect June 1, 1997. The regulations
require that medical device manufacturers comply with various quality control
requirements pertaining to design controls, purchasing contracts, organization
and personnel; device and manufacturing process design; buildings,
environmental control, cleaning and sanitation; equipment and calibration of
equipment; medical device components; manufacturing specifications and
processes; reprocessing of devices; labeling and packaging; in-process and
finished device inspection and acceptance; device failure investigations; and
recordkeeping requirements including compliance files. The FDA enforces these
requirements through periodic inspections of medical device manufacturing
facilities. In addition, a set of regulations known as the medical device
reporting regulations obligates manufacturers to inform the FDA whenever
information reasonably suggests that one of its devices may have caused or
contributed to a death or serious injury, or when one of its devices
malfunctions and, if the malfunction were to recur, the device would be likely
to cause or contribute to a death or serious injury.
Labeling and promotional activities are also subject to scrutiny by the FDA.
Among other things, labeling violates law if it is false or misleading in any
respect or it fails to contain adequate directions for use. Moreover, any
labeling claims that exceed the representations approved by the FDA will
violate the Food, Drug and Cosmetic Act.
Our product advertising is also subject to regulation by the Federal Trade
Commission under the Federal Trade Commission Act, which prohibits unfair
methods of competition and unfair or deceptive acts or practices in or
affecting commerce, including the dissemination of any false advertisement
pertaining to medical devices. Under the Federal Trade Commission's
"substantiation doctrine," an advertiser is required to have a "reasonable
basis" for all product claims at the time claims are first used in advertising
or other promotions.
Our business involves the import, export, manufacture, distribution, use and
storage of Strontium-90 (Strontium/Yttrium), the beta-emitting radioisotope
utilized in the Beta-Cath/TM/ System's radiation source train. Accordingly,
manufacture, distribution, use and disposal of the radioactive material used in
the Beta-Cath/TM/ System in the United States will be subject to federal, state
and/or local rules relating to radioactive material. The State of Georgia
Department of Natural Resources (DNR) issued a sealed source and device
registration certificate for the Company's Beta-Cath/TM/ System on August 4,
2000, allowing it to be listed on the Nuclear Regulatory Commission's Sealed
Source and Device Registry. The DNR authorized Novoste to commercially
distribute its radiation sources to licensed recipients in the United States
with the issuance of a license allowing
17
the manufacturing and distribution of the Beta-Cath/TM/ System. In addition, we
must comply with NRC, Georgia and United States Department of Transportation
regulations on the labeling and packaging requirements for shipment of
radiation sources to hospitals or other users of the Beta-Cath/TM/ System.
Hospitals in the United States are required to have radiation licenses to
hold, handle and use radiation. Many of the hospitals and/or physicians in the
United States are required to amend their radiation licenses to include
Strontium-90 prior to receiving and using our Beta-Cath/TM/ System. Depending
on the state that the hospital is located in, its license amendment will be
processed at the DNR in agreement states, or by the NRC. Obtaining any of the
foregoing radiation-related approvals and licenses can be complicated and time
consuming and may take longer in the NRC States (sixteen states).
We are also subject to numerous federal, state and local laws relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire-hazard control and disposal of hazardous or potentially
hazardous substances. We may be required to incur significant costs to comply
with such laws and regulations now or in the future and such laws or
regulations could have a material adverse effect upon our ability to do
business.
Changes in existing requirements or adoption of new requirements or policies
could adversely affect our ability to comply with regulatory requirements. Our
failure to comply with regulatory requirements could have a material adverse
effect on our business, financial condition or results of operations. We may be
required to incur significant costs to comply with laws and regulations in the
future and these laws and regulations could have a material adverse effect upon
our business, financial condition or results of operations.
International
We qualified to apply CE marking to the Beta-Cath/TM/ System in August 1998,
which allows us to sell the device in the 18 countries of the European Economic
Area, or EEA, and Switzerland. Although the medical devices directive is
intended to ensure free movement within the EEA of medical devices that bear
the CE marking, many countries in the EEA have imposed additional requirements,
such as labeling in the national language and notification of placing the
device on the market. In addition, regulatory authorities in European countries
can demand evidence on which conformity assessments for CE-marked devices are
based and in certain circumstances can prohibit the marketing of products that
bear the CE marking. Many European countries maintain systems to control the
purchase and reimbursement of medical equipment under national health care
programs, and the CE marking does not affect these systems.
In order for us to market the Beta-Cath/TM/ System in Japan and certain
other foreign jurisdictions, we must obtain and retain required regulatory
approvals and clearances and otherwise comply with extensive regulations
regarding safety and manufacturing processes and quality. These regulations,
including the requirements for approvals or clearance to market and the time
required for regulatory review, vary from country to country, and in some
instances within a country. We may not be able to obtain regulatory approvals
in such countries or may be required to incur significant costs in obtaining or
maintaining our foreign regulatory approvals. Delays in receipt of approvals to
market our products, failure to receive these approvals or future loss of
previously received approvals could have an adverse effect on our results of
operations.
The time required to obtain approval for sale in foreign countries may be
longer or shorter than that required for FDA approval, and the requirements may
differ. The European Union has promulgated rules requiring that medical devices
placed on the market after June 14, 1998 bear CE marking, a legal symbol
attesting to compliance with the appropriate directive which, in our case, is
the medical devices directive. The Company's products have not received
regulatory approval in Japan nor have they been approved for government
reimbursement in Japan.
In addition, there are generally foreign regulatory barriers other than
pre-market approval (including separate regulations concerning the
distribution, use, handling and storage of radiation sources), and the export of
18
devices must be in compliance with FDA regulations. The distribution and use of
the Beta-Cath/TM/ System outside the United States is subject to radiation
regulatory requirements that vary from country to country and sometimes vary
within a given country. Generally, each country has a national regulatory
agency responsible for regulating the safe practice and use of radiation in its
jurisdiction. In addition, each hospital desiring to use the Beta-Cath/TM/
System is generally required to amend its radiation license to hold, handle and
use the Strontium 90 sources in our device. Generally, these licenses are
specific to the amount and type of radioactivity utilized. In addition,
generally the use of a radiation source by a physician, either for a diagnostic
or therapeutic application, also requires a license, which again is specific to
the isotope and the clinical application.
The adoption of the Beta-Cath(TM) System in the European market was not as
rapid as the U.S. market adoption. In order to improve profitability and
continue to focus on the markets with the greatest opportunity to generate
revenue growth, the Company elected to restructure European operations in the
fourth quarter of 2001. As a result, Novoste reduced its workforce by thirteen
employees in Europe and consolidated its operations into one office located in
Germany.
Health Care Cost Containment and Third Party Reimbursement
Our products typically are purchased by clinics and hospitals, which bill
various third-party payors, such as governmental programs and private insurance
plans, for the healthcare services provided to their patients. Third-party
payors carefully review and increasingly challenge the prices charged for
medical products and services. Reimbursement rates from private companies vary
depending on the procedure performed, the third-party payor, the insurance
plan, and other factors. Medicare reimburses hospitals a prospectively
determined fixed amount for the costs associated with an in-patient
hospitalization based on the patient's discharge diagnosis, and reimburses
physicians a prospectively determined fixed amount based on the procedure
performed, regardless of the actual costs incurred by the hospital or physician
in furnishing the care and unrelated to the specific devices used in that
procedure. Medical and other third-party payors are increasingly scrutinizing
whether to cover new products and the level of reimbursement for covered
products. After the Company develops a promising new product, the Company may
find limited demand for it unless the Company obtains reimbursement approval
from private and governmental third-party payors.
In international markets, reimbursement by private third party medical
insurance providers, including government insurers and providers, varies
significantly country by country. In certain countries, the Company's ability to
achieve significant market penetration may depend upon the availability of third
party governmental reimbursement.
We believe that reimbursement in the future will be subject to increased
restrictions such as those described above, both in the United States and in
foreign markets. We believe that the overall escalating cost of medical
products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce the
cost of products and services, including products we offer. In the United
States or foreign markets third-party reimbursement and coverage may not be
available or adequate, current reimbursement amounts may be decreased in the
future and future legislation, regulation, or reimbursement policies of
third-party payors could have a material adverse affect on the demand for our
products or our ability to sell our products on a profitable basis,
particularly if our system is more expensive than competing products or
procedures. If third-party payor coverage or reimbursement is unavailable or
inadequate, our business, financial condition, and results of operations could
be materially adversely affected.
Product Liability and Insurance
Our business entails the risk of product liability claims. Although we have
not experienced any product liability claims to date, such claims could be
asserted and we may not have sufficient resources to satisfy any liability
resulting from such claims. We maintain product liability insurance with
coverage of an annual aggregate maximum of $11 million. Product liability
claims could exceed such insurance coverage limits, such insurance may not
continue to be available on commercially reasonable terms or at all, and a
product liability claim could have a material adverse affect on our business,
financial condition or results of operations.
19
Employees and Consultants
As of December 31, 2001 we directly employed 293 full-time individuals. Most
of our employees have prior experience with medical device or pharmaceutical
companies. We believe that we maintain good relations with our employees. None
of our employees is represented by a union or covered by a collective
bargaining agreement. Our success will depend in large part upon our ability to
attract and retain qualified employees. We face competition in this regard from
other companies, research and academic institutions and other organizations.
We maintain continuing relationships with a number of independent
consultants that have contributed to the development of our products and work
on specific development projects. These relationships are integral to our
continued success and the generation of new products from the research and
development departments.
Additional Risk Factors
Dependence on the Successful Commercialization of The Beta-Cath/TM/ System
We began to commercialize the Beta-Cath/TM/ System in the United States in
November 2000. Substantially all of our revenue in 2001 was from sales in the
United States. We anticipate that for the foreseeable future we will be solely
dependent on the successful commercialization of the Beta-Cath/TM/ System. Our
failure to continue commercialization of the Beta-Cath/TM/ System would have a
material adverse effect on our business, financial condition and results of
operations.
The Beta-Cath/TM/ System generated substantial revenue for Novoste in 2001,
however, in the future we may be unable to demonstrate that the Beta-Cath/TM/
System is an attractive and cost-effective alternative or complement to other
procedures, including coronary stents, competing vascular brachytherapy
devices, or drug coated stents. Because the Beta-Cath/TM/ System is our sole
near-term product focus, we could be required to cease operations if new
technology rendered vascular brachytherapy uncompetitive.
Dependence on Key Personnel
Our business and future operating results depend in significant part upon
the continued contributions of our key technical personnel and senior
management, many of whom would be difficult to replace. Our business and future
operating results also depend in significant part upon our ability to attract
and retain qualified management, manufacturing, technical, marketing, sales and
support personnel for our operations. Competition for such personnel is
intense, and we may not succeed in attracting or retaining such personnel. The
loss of key employees, the failure of any key employee to perform adequately or
our inability to attract and retain skilled employees, as needed, could
materially adversely affect our business, financial condition and results of
operations.
The Company's co-founder and Chairman of the Board of Directors is currently
serving as CEO in a part-time capacity. While a search is currently underway
for a permanent CEO, there can be no assurances that the Company will be able
to attract and hire someone to fill the position.
Issuance of Preferred Stock May Adversely Affect Rights of Common Shareholders
or Discourage a Takeover
Under our amended and restated articles of incorporation, our board of
directors has the authority to issue up to 5,000,000 shares of preferred stock
and to determine the price, rights, preferences and privileges of those shares
without any further vote or action by our shareholders. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any shares of preferred stock that may be issued
in the future.
In October 1996 our board of directors authorized 1,000,000 shares of Series
A Participating Preferred Stock in connection with its adoption of a
shareholder rights plan, under which we issued rights to purchase Series A
Participating Preferred Stock to holders of the common stock. Upon certain
triggering events, such rights become exercisable to purchase common stock (or,
in the discretion of our board of directors, Series A
20
Participating Preferred Stock) at a price substantially discounted from the
then current market price of the common stock. Our shareholder rights plan
could generally discourage a merger or tender offer involving our securities
that is not approved by our board of directors by increasing the cost of
effecting any such transaction and, accordingly, could have an adverse impact
on shareholders who might want to vote in favor of such merger or participate
in such tender offer.
While we have no present intention to authorize any additional series of
preferred stock, such issuance, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could also
have the effect of making it more difficult for a third party to acquire a
majority of our outstanding voting stock. The preferred stock may have other
rights, including economic rights senior to the common stock, and, as a result,
the issuance thereof could have a material adverse effect on the market value
of the common stock.
Other Provisions Discouraging a Takeover
The amended and restated articles of incorporation provide for a classified
board of directors, the existence of which could discourage attempts to acquire
us. Furthermore, we are subject to the anti-takeover provisions of the Florida
Business Corporation Act, the application of which would also have the effect
of delaying or preventing a merger, takeover or other change of control of the
Company and therefore could discourage attempts to acquire the Company.
Price Volatility and Fluctuations in Operating Results
The market price of our common stock could decline below the public offering
price. Specific factors relating to our business or broad market fluctuations
may materially adversely affect the market price of our common stock. The
trading price of our common stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, announcements
of technological innovations, new products or clinical data announced by us or
our competitors, governmental regulatory action, developments with respect to
patents or proprietary rights, general conditions in the medical device or
cardiovascular device industries, changes in earnings estimates by securities
analysts, or other events or factors, many of which are beyond our control. In
addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
medical device companies and which have often been unrelated to the operating
performance of such companies. Our revenue or operating results in future
quarters may be below the expectations of securities analysts and investors. In
such an event, the price of our common stock would likely decline, perhaps
substantially. During the twelve month period ended December 31, 2001, the
closing price of our common stock ranged from a high of $38.8750 per share to a
low of $5.73 per share and ended that period at $8.74 per share.
In addition, our results of operations may fluctuate significantly from
quarter to quarter and will depend upon numerous factors, including product
development efforts, actions relating to regulatory and reimbursement matters,
progress and costs related to clinical trials, the extent to which our products
gain market acceptance, and competition. These factors may cause the price of
our stock to fluctuate, perhaps substantially.
ITEM 2. PROPERTIES
The Company's facilities are located in Norcross, Georgia and consist of two
separate locations totaling approximately 70,000 square feet of leased office
and manufacturing space, including a 1,700 square foot class 100,000 clean
room. The Company plans to eliminate its Brussels, Belgium office in early 2002
and to move its European office to Krefeld, Germany. The Krefeld, Germany
office is leasing approximately 3,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
21
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and directors are as follows:
Name Age Position
---- --- --------
Thomas D. Weldon..... 46 Chairman and Chief Executive Officer
Donald J. Webber..... 39 Chief Operating Officer
Edwin B. Cordell, Jr. 43 Chief Financial Officer
Richard diMonda...... 51 Vice President, Clinical Research
David C. Field....... 44 Vice President, New Technology
Daniel G. Hall....... 56 Vice President, General Counsel and Secretary
Adam G. Lowe......... 39 Vice President, Quality Assurance and Regulatory Affairs
Susan D. Smith....... 52 Vice President, Human Resources
Robert P. Walsh...... 38 Vice President, Marketing and Investor Relations
Robert N. Wood, Jr... 47 Vice President, Global Sales
Thomas D. Weldon. Mr. Weldon, co-founded the Company and has served as a
Director since our capitalization in May 1992. In June 1998, Mr. Weldon became
Chairman of the Company. From May 1992 through March 1999, Mr. Weldon has
served as Chief Executive Officer of the Company. In April 1999, he co-founded
The Innovation Factory, a medical device venture, where he currently serves as
Chairman. In December, 2001, Mr. Weldon resumed the duties of Chief Executive
Officer on a part-time basis. Mr. Weldon co-founded and was President, Chief
Executive Officer and a Director of Novoste Puerto Rico, Inc., a manufacturer
of disposable cardiovascular medical devices, from 1987 to May 1992, prior to
its sale. Previous responsibilities included management positions at Arthur
Young & Company and Key Pharmaceuticals. Mr. Weldon received a B.S. in
Industrial Engineering form Purdue University and an M.B.A. in Operations and
Systems Management from Indiana University.
Donald J. Webber. Mr. Webber joined the Company in March 1998 as Director of
Manufacturing and served as our Vice President, Manufacturing since January
2000. In January 2002 he was promoted to the position of Chief Operating
Officer. From July 1996 through March 1998, Mr. Webber worked for Abiomed,
Inc., a manufacturer of cardiac products, as Director of Operations. From
January 1995 to July 1996, Mr. Webber was employed by Cabot Medical
Corporation, a medical device manufacturer, as Plant Manager and from 1988 to
1995 he was employed by Cordis Corporation, a manufacturer of cardiovascular
products. Mr. Webber received an MBA from Nova Southeastern University and a
B.S. degree in Industrial Engineering from the State University of New York,
Binghamton.
Edwin B. Cordell, Jr. Mr. Cordell joined the company in May 2000 as Vice
President of Finance and Chief Financial Officer. From November 1994 through
April 2000, Mr. Cordell was Vice President of Finance and Chief Financial
Officer of CryoLife Inc. (NYSE: CRY), a producer of implantable living human
tissues and adhesives for surgical use. From August 1987 to November 1994, Mr.
Cordell served as Controller and Chief Financial Officer of Video Display
Corporation, a publicly held consumer electronics manufacturing and
distribution company. Mr. Cordell, a CPA, received his B.S. in Accounting from
the University of Tennessee.
Richard diMonda. Mr. diMonda joined the Company in September of 1997 as a
consultant in January 1998 as Senior Director of Strategic Marketing and has
served as our Vice President of Marketing since April of 2000. From March 1987
through August 1997, Mr. diMonda worked for Dornier Medical Systems, Inc., as
Director of Corporate Development. From April 1976 to March 1987, Mr. diMonda
was employed by American Hospital Association as Director, Division of Clinical
Services and Technology. Mr. diMonda received an MBA from Keller Graduate
School of Management, a M.S. degree in Biomedical Engineering from Drexel
University, and a Bachelor of Electrical Engineering from Villanova University.
David C. Field. Mr. Field joined the Company in April 2001 as Vice
President, Peripheral Business. Prior to joining Novoste, Mr. Field served as
Director of Business Development for the Peripheral Technologies Division of
Bard. From 1995 to 1998 he was the Director of Marketing for the same division
of Bard. Earlier in his career
22
David was Territory Manager for Medi-Tech Inc. a division of Boston Scientific.
He holds a B.S. in Business Management form the University of Maryland and an
A.D. in Engineering from the State University of New York in Canton.
Daniel G. Hall. Mr. Hall joined the Company in June 2000 as Vice President
and General Counsel. He served as vice president, secretary and general counsel
of Cordis Corporation beginning in 1981 until the company was acquired by
Johnson & Johnson in 1995. From 1995 to 1999, Mr. Hall managed his own private
law practice. From June 1999, he practiced with Feldman, Gale & Weber, P.A. in
Miami, Florida, serving as managing attorney from December 1999 to June 2000.
Adam G. Lowe. Mr. Lowe joined the Company in June 1999 as our Vice
President, Quality Assurance. Effective May 2000, Mr. Lowe also took on the
additional responsibility of Vice President, Regulatory Affairs. From July 1993
to June 1999 Mr. Lowe worked for various divisions of C.R. Bard, Inc., a
diversified medical device manufacturer, having served most recently as the
Vice President, Quality at Bard Access Systems, Mr. Lowe received a B.S. in
Materials Science and Engineering from North Carolina State University and
became an ASQ Certified Quality Engineer in 1992.
Susan D. Smith. Ms. Smith joined Novoste Corporation in March 1996 and was
instrumental in forming the Human Resources Department at the "start-up"
company. She was promoted to Director of Human Resources in July 1998 and to
Vice President in December 2001. She has over 25 years experience in
Administration and Human Resource Management. She attended the University of
Georgia. Prior to joining Novoste, she served as Human Resources Administrator
for Solos Endoscopy and as Office Manager for First Baptist Church Duluth.
Robert P. Walsh. Mr. Walsh joined Novoste Corporation in July 1998 as
Director of Marketing. In December 2000 he was promoted to Senior Director of
Marketing. From 1996 to 1998, he served as Vice President, Global Marketing for
the Angio-Seal(TM) business unit of Sherwood-David & Geck, where he held
various marketing positions since his initial employment in 1990. From 1988 to
1990, Mr. Walsh was a cardiovascular clinical sales specialist with SciMed Life
Systems, Inc. Earlier in his career, he served as nurse manager of a cardiac
catherization laboratory. Mr. Walsh holds a B.A. and M.B.A. from Maryville
University in St. Louis, MO.
Robert N. Wood, Jr. Bob Wood joined the company in June 2000 from Perclose,
a manufacturer of arterial closure devices that was acquired by Abbott
Laboratories in 1999. He served as the Eastern regional sales manager of
Perclose from 1997-2000. From 1987-1997, Mr. Wood was employed by Cordis
Corporation (a Johnson & Johnson Company), where he held various senior sales
management positions, most recently that of national sales manager for Cordis'
Endovascular Systems division. He began his career in the medical device
business as a sales representative for Medrad, Inc. in 1983.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
(Nasdaq symbol: NOVT) since May 1996. The number of record holders of the
Company's Common Stock at March 1, 2002 was 16,315,676 excluding beneficial
owners of shares registered in nominee or street name. The Company has not paid
any dividends since its inception, other than the distribution of the
Shareholder Rights described in Item 1: Issuance Of Preferred Stock May
Adversely Affect Rights of Common Shareholders or Discourage a Takeover, and
does not intend to pay any dividends in the foreseeable future. Pursuant to the
terms of our revolving line of credit we are restricted from paying dividends
on our Common Stock.
23
The range of high and low closing sale prices for the Common Stock is as
follows:
Quarter Ended High Low
------------- -------- --------
Year Ended December 31, 2000
March 31, 2000............. $48.7500 $17.0000
June 30, 2000.............. $61.0000 $36.2500
September 30, 2000......... $60.8125 $39.1875
December 30, 2000.......... $43.4375 $22.5000
Year Ended December 31, 2001
March 31, 2001............. $17.8125 $15.5000
June 30, 2001.............. $25.8000 $24.9500
September 30, 2001......... $ 6.2000 $ 5.9000
December 30, 2001.......... $ 8.7400 $ 8.2100
On February 28, 2002 the last reported sale price for the Common Stock was
$6.70.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data are derived from the consolidated
financial statements of Novoste Corporation. The data should be read in
conjunction with the consolidated financial statements, related notes, and
other financial information included herein.
For the Year Ended December 31,
-----------------------------------------------
2001 2000 1999 1998 1997
------- -------- -------- -------- --------
(in thousands, except per share amounts)
Consolidated Statement of Operations Data:
Net sales and revenues.................... $69,908 $ 6,530 $ 1,823 $ 19 $ 29
Costs and expenses:
Cost of sales............................ 19,164 4,258 1,642 117 --
Research and development................. 12,756 17,119 22,889 21,089 12,873
Sales and Marketing...................... 34,654 15,651 6,606 3,074 1,022
General and administrative............... 9,324 6,321 3,775 2,528 1,736
Restructuring and other expense.......... 1,214 -- -- -- --
------- -------- -------- -------- --------
Loss from operations...................... (7,204) (36,819) (33,089) (26,789) (15,602)
Interest income (expenses), net........... 2,095 3,746 2,169 2,127 1,389
------- -------- -------- -------- --------
Net loss.................................. $(5,109) $(33,073) $(30,920) $(24,662) $(14,213)
======= ======== ======== ======== ========
Basic and diluted net loss per share (1).. $ (0.32) $ (2.13) $ (2.30) $ (2.34) $ (1.64)
======= ======== ======== ======== ========
Weighted average shares outstanding (1)... 16,152 15,517 13,433 10,536 8,665
Consolidated Balance Sheet Data:
Working capital................ $ 40,482 $ 53,742 $ 38,821 $ 21,797 $ 46,064
Total assets................... 82,911 77,073 49,367 29,482 49,796
Long-term liabilities.......... 203 401 -- -- --
Accumulated deficit............ (121,384) (116,275) (83,201) (52,281) (27,619)
Total shareholder's equity..... 64,728 67,042 43,065 24,517 47,369
- --------
(1) See note 1 to the consolidated financial statements for an explanation of
the method used to compute net loss per share.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
The statements contained in this Form 10-K that are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding the expectations, beliefs, intentions or strategies
regarding the future. We intend that all forward-looking statements be subject
to the safe-harbor provisions of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements reflect our views as of the date they
are made with respect to future events and financial performance, but are
subject to many uncertainties and risks which could cause our actual results to
differ materially from any future results expressed or implied by such
forward-looking statements. Examples of such uncertainties and risks are
discussed under "Item 1--Business" and in this Item 7. Additional risk factors
include those that may be set forth in reports filed by the Company from time
to time on Forms 10-K, 10-Q and 8-K. We do not undertake any obligation to
update any forward-looking statements.
Overview
Novoste commenced operations as a medical device company in May 1992. Since
1994, we have devoted substantially all of our efforts to developing the
Beta-Cath/TM/ System. The Company commenced the active marketing of the
Beta-Cath/TM/ System in Europe in January 1999 for use in patients suffering
from "in-stent restenosis", a condition in which coronary stents become clogged
with new tissue growth. On November 3, 2000, Novoste received U.S. marketing
approval for the 30-millimeter Beta-Cath/TM/ System from the FDA and
subsequently shipped its first commercial system on November 27, 2000. The
number of commercial sites in the U.S. increased rapidly throughout 2001.
Since our inception through June 30, 2001 we experienced significant losses
in each period due to product development and clinical trial costs and,
beginning in 2000, the costs of launching the Beta-Cath/TM/ System in the U.S.
At December 31, 2001 we had an accumulated deficit of approximately $121.4
million. The Company experienced its first net operating profit in the third
quarter of 2001. We expect to maintain an operating profit in 2002 as we
continue to allocate resources to leverage our existing manufacturing
operations, both internally and with outside vendors, expect our sales and
marketing efforts in support of United States market development to level off
as a percent of net sales and anticipate that our administrative activities to
support our growth will remain at a constant level. At the same time we will
continue to conduct clinical trials and research and development projects in
order to expand the opportunities for our technology.
The Company also faces intense competition in the field of vascular
brachytherapy with companies that have significantly greater capital resources
than Novoste including Johnson & Johnson and Guidant. Both Johnson & Johnson
and Guidant have introduced vascular brachytherapy products that compete with
our Beta-Cath/TM/ System. A new technology called drug-coated stents pose
additional competitive threats in treating restenosis. We may not be able to
sustain an acceptable level of market demand for the Beta-Cath/TM/ System if
this technology is successfully introduced. Failing to sustain our current
level of demand could significantly reduce revenues and affect our ability to
remain profitable.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of our financial statements
requires that we adopt and follow certain accounting policies. Certain amounts
presented in the financial statements have been determined based upon estimates
and assumptions. Although we believe that our estimates and assumptions are
reasonable, actual results will differ and could be material.
25
We have included below a discussion of the critical accounting policies that
we believe are affected by our more significant judgments and estimates used in
the preparation of our financial statements, how we apply such policies, and
how results differing from our estimates and assumptions would affect the
amounts presented in our financial statements. Other accounting policies also
have a significant effect on our financial statements, and some of these
policies also require the use of estimates and assumptions. Note 1 to the
Consolidated Financial Statements discusses all our significant accounting
policies.
Revenue Recognition
Revenue from the sale of products is recorded when an arrangement exists,
delivery has occurred or services have been rendered, the seller's price is
fixed and determinable and collectability is reasonably assured. The Company
earns revenue from sales of catheters and from license and lease agreements to
use the radiation source trains and transfer devices included in the
Beta-Cath(TM) System.
Novoste uses distributors in countries where the distributors experience and
knowledge of local radiation and medical device regulatory issues is considered
beneficial by the Company's management. Under the distributor arrangements,
there are no purchase commitments and no provisions for cancellation of
purchases. Novoste or the distributor may cancel the distributor agreements at
any time.
Revenue from sales of catheters directly to hospitals is recognized upon
shipment once the hospital has leased a Beta-Cath(TM) System and completed all
licensing and other requirements to use the system. The Company recognizes
revenue from sales of catheters to distributors at the time of shipment.
The Company retains ownership of the radiation source trains and transfer
devices and enters into either a lease or license agreement with its customers.
Revenue recognition begins once an agreement has been executed, the system has
been shipped, and all licensing and other requirements to use the system have
been completed. The revenue is recognized ratably over the term of the
agreement. The terms of the operating lease signed with customers located in
the United States requires, as dictated by FDA regulatory approval, replacement
and servicing of the radiation source train and transfer device at six-month
intervals. No other post-sale obligations exist.
Radiation and Transfer Devices and Amortization of Costs
The Company retains ownership of the radiation source trains (RSTs) and
transfer devices (TDs) that are manufactured by third party vendors. The costs
to acquire, test and assemble these assets are recorded as incurred. The
Company has determined that based upon experience, testing and discussions with
the FDA the estimated useful life of RSTs and TDs exceeds one year and is
potentially as long as four years. Accordingly, the Company classifies these
assets as long-term assets. Depreciation of the costs of these assets is
included in cost of sales and is recognized over their estimated useful lives,
currently 18 months, using the straight-line method. Depreciation begins once
the Beta-Cath/TM/ System is placed into service. Valuation allowances are
recorded for TDs and RSTs that are not available for use by a customer.
The Company has invested significant resources to acquire RSTs and TDs that
make up the Beta-Cath/TM/ System and offers multiple treatment length catheters
(each of which requires a different TD and RST). The acquisition of these
various length systems are based upon demand forecasts made based upon
available information from Sales and Marketing. If actual demand were less
favorable or of a different mixture of treatment lengths than those projected
by management, additional valuation allowances might be required which would
negatively impact operating profits.
Stock Based Compensation
Novoste applies the provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). As
permitted by SFAS 123, the Company accounts for stock options grants in
accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25") and related interpretations. Accordingly,
no compensation expense is recognized for
26
stock option grants to employees for which the terms are fixed. The Company
grants stock options generally for a fixed number of shares to employees,
directors, consultants and independent contractors with an exercise price equal
to the fair market value of the shares at the date of grant. Compensation
expense is recognized for increases in the estimated fair value of common stock
for any stock options with variable terms.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task Force
(EITF) Issue No. 96-18, Accounting for Equity Instruments that Are Issued to
Other than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.
Any compensation expense related to grants that do not vest immediately is
amortized over the vesting period of the stock options using the straight-line
method as that methodology most closely approximates the way in which the
option holder earns those options.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for the estimated losses
resulting from the inability of our customers to make required payments. Most
of our customers are hospitals located in the U.S., however, some are
distributors of our products in foreign countries or hospitals located in
Europe. If the financial condition of our customers deteriorates, additional
allowances may be required. Allowances are also maintained for future sales
returns and allowances based on an analysis of recent trends of product returns.
Inventories
Novoste values its inventories at the lower of cost or market on a first-in,
first-out (FIFO) basis. Provisions are recorded for excess or obsolete
inventory equal to the cost of the inventory. Shelf-life expiration or
replacement products in the marketplace may cause product obsolescence. If
actual product demand and market conditions were less favorable than those
projected by management, additional provisions might be required which would
negatively impact operating profits. Novoste evaluates the adequacy of these
provisions quarterly.
Results of Operations
Comparison of Years Ended December 31, 2001 and 2000
The net loss for the year ended December 31, 2001 was $5,109,000, or $.32
per share, as compared to $33,073,000, or $2.13 loss per share, for the year
earlier. The decrease in net loss for the twelve months ended December 31, 2001
was primarily due to an increase in revenue from sales in the U.S. market from
its commercial launch of the Beta-Cath/TM/ System.
Net Sales and Revenues. Net sales and revenues were $69,908,000 for the
year ended December 31, 2001 as compared to $6,530,000 for the year ended
December 31, 2000. The increase was due to the FDA approval of the
Beta-Cath/TM/ System in November 2000 and the initial, first full year of sales
in the U.S. Revenues recorded in the United States for the year ended December
31, 2001 were $64,696,793 as compared to $1,816,250 for the year ended December
31, 2000. The increase in revenues was primarily due to the addition of over
300 sites in the U.S. market and the accompanying stocking orders for catheters
in these new sites. Typically a new site in the U.S. will order 5 to 10
catheters. Comparatively, international revenue increased 10.6% to $5,211,503
compared to $4,713,331. International sales increased from the prior year due
to adding sites in other parts of the world. Non U.S. revenue has not risen at
the same rate seen in the United States because of a lack of acceptance of
vascular brachytherapy in Europe and no insurance reimbursement approval. The
U.S. market received insurance reimbursement for the procedure in the second
half of 2001 that contributed to the acceptance and growth in revenue in this
market.
Cost of Sales. Cost of sales for the year ended December 31, 2001 were
$19,164,000 resulting in a gross margin of $50,744,000 or 73% as compared to
cost of sales of $4,258,000 and a gross margin of $2,272,000 or 35% of net
sales for the year ended December 31, 2000. The increase in gross margin on
both an absolute and percentage basis is due to the higher sales and production
volumes and improved production yields during 2001.
27
The Company expects gross margins to remain relatively stable during 2002 when
volume dramatically increases or decreases. Cost of sales includes raw
material, labor and overhead to manufacture catheters as well as the amortized
costs of transfer devices and radiation source trains used in the Beta-Cath/TM/
System.
Research and Development Expenses. Research and development expenses
decreased 25% to $12,756,000 for the twelve months ended December 31, 2001 from
$17,119,000 for the twelve months ended December 31, 2000. These decreases were
primarily the result of decreased clinical trial activity related to the
completion of patient enrollment in the pivotal trials, the largest expense of
which was the costs of supplying product to clinical sites. Research and
development expenses were favorably impacted by the approval of the
Beta-Cath/TM/ System in November 2000. The Company anticipates increasing
research and development expenses in 2002 as it pursues product improvements
and line extensions, some of which may require additional clinical trials.
Sales and Marketing Expenses. Sales and marketing expenses increased 121%
to $34,653,000 for the year ended December 31, 2001 as compared to $15,651,000
for the previous year. These increases were primarily the result of higher
personnel, trade show, consulting and promotional literature costs associated
with marketing the Company's product on a direct basis in the U.S. and Europe
and significant expenses in recruiting, training and retaining a United States
sales force for the launch of the Beta-Cath/TM/ System in the United States.
The Company expects sales and marketing expenses in 2002 to remain relatively
consistent with 2001 expense.
General and Administrative Expenses. General and administrative expenses
increased 48% to $9,324,000 for the year ended December 31, 2001 from
$6,321,000 for the year ended December 31, 2000. The increase for this twelve
month period was primarily the result of additional management personnel at
higher salaries and the increase in infrastructure (accounting, information
systems, human resources and benefits) to support the commercial launch of the
Beta Cath System. The Company expects that at the current level of sales,
general and administrative expenses will remain constant in 2002.
Restructuring and Other Expenses. Restructuring charges of $773,000 were
recorded in 2001 primarily related to a reduction in workforce of thirteen
employees located in Europe and six employees located in the United States in
addition to termination of certain facility leases in Europe. The Company paid
$560,000 of the restructuring charges in 2001 related to severance payments and
lease payments for closed facilities and has $213,000 remaining in accrued
expenses at December 31, 2001 related primrily to severance agreements and
facility lease and termination payments. The Company expects to save
approximately $4,000,000 annually from this restructuring.
During 2001, the Company contributed $440,000 for an 8% ownership interest
in an equity method investment. This amount was subsequently expensed as a
result of the impairment of that investment.
Interest Income. Net interest income decreased 44% to $2,095,000 for the
twelve months ended December 31, 2001 from $3,745,000 for the same period a
year earlier. The decrease in interest income year-to-date was primarily due to
the decrease in average cash equivalent and short-term investment balances that
were used for operations combined with falling interest rates.
Comparison of Years Ended December 31, 2000 and 1999
The net loss for the year ended December 31, 2000 was $33,073,000, or $2.13
loss per share, as compared to $30,920,000, or $2.30 loss per share, for the
year earlier. The increase in net loss for the twelve months ended December 31,
2000 was due to increased sales and marketing expenses related to our United
States and European operations compared to the prior year. This was partially
offset by lower clinical trial expenses during the twelve months ended December
31, 2000. The decrease in the loss per share was due to more shares outstanding
in 2000 than in 1999.
28
Net Sales and Revenues. Net sales and revenues were $6,530,000 for the year
ended December 31, 2000 as compared to $1,823,000 for the year ended December
31, 1999. On November 3, 2000, the FDA granted marketing approval for the
Company's Beta-Cath/TM/ System in the United States market, and Novoste began
immediately marketing the product through its direct sales force. The increase
in net sales was primarily due to the increase in number of active sites,
including 21 sites that were opened in the United States market, and the
increase in utilization rates within these sites as compared to the year
earlier period. Within Europe, Germany represented 74% of total company
revenues in the twelve months ended December 31, 2000. Internationally, with
the exception of the Australian and New Zealand distributors, sales are
denominated in Euros. The Euro declined 11% as compared to the year earlier
period. The Company's distributor for the markets of Australia, New Zealand and
China accounted for 20% of net sales in 2000 compared to 14% in 1999.
The Company earns revenue from sales of catheters and from sales of license
and lease agreements to use the radiation source trains and transfer devices
included in the Beta-Cath/TM/ System. The Company retains ownership of the
radiation source trains and transfer devices and enters into either a one-year
lease or license agreement with its customers. Payments under these
arrangements are either due in full at the inception of the agreement or over
the term of the agreement as catheters are purchased. Revenue recognition
begins once an agreement has been executed, the system has been shipped, and
all licensing and other requirements to use the system have been completed. The
Company is dependent upon market acceptance of the Beta-Cath/TM/ System in the
United States.
During 1999 and through the second quarter of 2000, all payments under
license agreements were payable at the inception of the agreement. These
agreements were accounted for as sales-type leases and, accordingly, revenue
and the related costs of sales were recognized upon shipment. Beginning in the
third quarter of 2000, after the Company determined the estimated useful life
of the system exceeded one year, license and lease agreements were determined
to be operating leases and, accordingly, revenue has been recorded over the one
year term of the related agreements and costs are recorded over an eighteen
month estimated useful life. During 2000 and 1999, approximately $365,000 and
$713,000, respectively was earned related to the lease of radiation of transfer
devices and is included in net sales.
Cost of Sales. Cost of sales consist primarily of direct labor, allocated
manufacturing overhead, third-party contractor costs, royalties and the
acquisition cost of raw materials and accessories. Our gross margin in 2000 was
$2,272,000, or 35% of net sales, compared to a gross margin of $181,000, or 10%
of net sales in 1999. The increase in gross margin on both an absolute and
percentage basis is due to the higher sales and production volumes and improved
production yields as the Company transitions out of the start-up phase.
Research and Development Expenses. Research and development expenses
decreased 25% to $17,119,000 for the twelve months ended December 31, 2000 from
$22,889,000 for the twelve months ended December 31, 1999. These decreases were
primarily the result of decreased clinical trial expense related to the
completion of patient enrollment in the pivotal trials, the largest expense of
which was the costs of supplying product to clinical sites. Research and
development expenses were favorably impacted by the recent approval of the
Beta-Cath/TM/ System.
Sales and Marketing Expenses. Sales and marketing expenses increased 137%
to $15,651,000 for the year ended December 31, 2000 as compared to $6,606,000
for the previous year. These increases were primarily the result of higher
personnel, trade show, consulting and promotional literature costs associated
with marketing the Company's product on a direct basis in Europe and
significant expenses in recruiting, training and retaining a United States
sales force for the launch of the Beta-Cath/TM/ System in the United States.
General and Administrative Expenses. General and administrative expenses
increased 67% to $6,321,000 for the year ended December 31, 2000 from
$3,775,000 for the year ended December 31, 1999. The increase for this twelve
month period was primarily the result of additional management personnel and
higher salaries and the increase in infrastructure (accounting, information
systems, human resources and benefits) to support a commercial company.
29
Interest Income. Net interest income increased 72% to $3,745,000 for the
twelve months ended December 31, 2000 from $2,169,000 for the same period a
year earlier. The increase in interest income for the quarter and the
year-to-date was primarily due to the increase in average cash equivalent and
short-term investment balances arising from the private placement equity
offering in March and April 2000, as well as an increase in cash on hand due to
a large number of stock option exercises at the end of June, 2000.
Liquidity and Capital Resources
During the years ended December 31, 2001, 2000 and 1999, the Company used
cash to fund operations of $3.4 million, $30.3 million and $30.9 million,
respectively. The decrease in cash used by operating activities of $26.9
million for 2001 over 2000 was primarily attributable to (i) $8.5 million
funding of accounts receivable due to the growth in sales of the Beta-Cath(TM)
System related to the initial market launch in the U.S., (ii) $3.7 million used
to fund the purchase of increased levels of inventory, (iii) $.3 million
decrease in prepaid expenses, (iv) $1.8 million used for payment of accounts
payable, and (v) $.1 million decrease in other assets, offset by (i) $28.0
million decrease in net loss, (ii) $6.4 million increase in earnings related to
non-cash items, (iii) $4.4 million provided by accrued expenses and taxes
withheld, and (iv) $1.6 million increase in unearned revenue related to revenue
recognized on radiation and transfer devices.
The decrease in cash used by operating activities of $.6 million for 2000
over 1999 was primarily due to (i) $2.2 million increase in net loss, (ii) $2.9
million funding of accounts receivable due to the growth in sales of the
Beta-Cath(TM) System related to the initial market launch in the Europe, (iii)
$.2 million decrease in prepaid expenses, (iv) $1.0 million used to pay accrued
expenses and taxes withheld, and (v) $.1 million decrease in other assets,
offset by (i) $.8 million increase in earnings related to non-cash items, (ii)
$3.2 million provided by the decrease in inventory levels, (iii) $2.4 million
increase in accounts payable and (iv) $.6 million increase in unearned revenue
related to revenue recognized on radiation and transfer devices.
Net cash used by investing activities for the years ended December 31, 2001,
2000 and 1999 was $19.1 million, $6.5 million and $12.7 million, respectively.
The $11.7 million decrease in cash used in 2001 compared to 2000 was due to
$4.7 million used to purchase short-term investments, $7.5 million used to buy
additional radiation and transfer devices related to the increase in demand for
our Beta-Cath(TM) System, and $.4 million decrease in funds used to purchase
property and equipment.
The $6.2 million increase in cash used in 2000 compared to 1999 was due to
$14.3 million in short-term investments that matured, offset by $2.5 million
used to purchase property and equipment and $5.6 million used to buy additional
radiation and transfer devices related to the increase in demand for our
Beta-Cath(TM) System.
The Company's financing activities include equity offerings and borrowings
and repayments of capital leases. Financing activities for the years ended
December 31, 2001, 2000 and 1999 provided net cash of $1.7 million, $56.1
million and $48.3 million, respectively.
In 2001, the Company received $1.9 million from the exercise of stock
options and repaid $.2 million for capital leases of computer equipment.
On April 7, 2000 the Company completed a private placement offering, in
which we sold 1,463,500 shares of our common stock at $35.00 per share. The
placement raised net proceeds of approximately $49 million, of which $5 million
was received during the second quarter. After the offering, the Company had
15.85 million shares of common stock outstanding. The Company also received
approximately $7.2 million during the year from the exercise of stock options.
Also during 2000, the Company repaid $.1 million for capital leases of computer
equipment.
30
On March 19, 1999 the Company completed a follow-on public offering of
2,400,000 newly issued shares of its common stock at a public offering price of
$20 per share. On March 24, 1999 the Company issued an additional 160,000
shares of common stock pursuant to the exercise of the underwriters'
over-allotment option. Net proceeds to the Company after the exercise of the
underwriters' over-allotment option and all related expenses totaled $47.4
million. During 1999, the Company also received $.9 million from the exercise
of stock options.
At December 31, 2001 the Company had commitments to purchase $7.4 million in
inventory components of the Beta-Cath(TM) System over the next year.
In addition, on October 14, 1999 the Company signed a development and
manufacturing supply agreement with AEA Technologies QSA GmbH for a second
source of radioisotope supply and for the development of a smaller diameter
source. This agreement provides for the construction of a production line over
the period October 1, 1999 to mid 2002. The cost of this production line is
estimated at $4.0 million and is being paid by the Company as construction
progresses. Through December 31, 2001, the Company has paid $3.9 million
towards this commitment.
On June 20, 2001, the Company entered into a manufacturing and supply
agreement (Agreement) with Bebig Isotepen-und Medizintechnik GmbH (Bebig), a
German corporation, to manufacture and supply the Company with radioactive
sealed Strontium-90 seed trains. The Agreement supercedes all prior agreements
with Bebig and neither the Company nor Bebig have any rights or obligations
under any of the previous agreements. During each calendar year under the
four-year contract, the Company guarantees to pay to Bebig minimum annual
payments aggregating $5.5 million. All product purchases are credited against
the annual guaranteed payment. Any product payments in excess of the annual
guaranteed payment can be credited against the guaranteed payment of the next
year. In the event that the Company does not purchase product to exceed the
annual guaranteed payment, the deficiency will be due and payable to Bebig
within thirty days after the end of each one-year contract period. At December
31, 2001, the Company exceeded the annual guaranteed payment.
Significant proportions of key components and processes relating to the
Company's products are purchased from single sources due to technology,
availability, price, quality, and other considerations. Key components and
processes currently obtained from single sources include isotopes, protective
tubing for catheters, proprietary connectors, and certain plastics used in the
design and manufacture of the transfer device. In the event a supply of a key
single-sourced material or component was delayed or curtailed, the Company's
ability to produce the related product in a timely manner could be adversely
affected. The Company attempts to mitigate these risks by working closely with
key suppliers regarding the Company's product needs and the maintenance of
strategic inventory levels.
The Company has entered into a license agreement with a physician pursuant
to which he is entitled to receive a royalty on the net sales of the
Beta-Cath/TM/ System (excluding consideration paid for the radioactive
isotope), subject to a maximum payment of $5,000,000. Royalty fees to the
physician aggregated $632,600, $63,200 and $11,250 in 2001, 2000 and 1999,
respectively, and have been expensed in Cost of Sales.
On January 30, 1996, the Company entered into a license agreement whereby
Emory University assigned its claim to certain technology to the Company for
royalties based on net sales (as defined in the agreement) of products derived
from such technology, subject to certain minimum royalties. The royalty
agreement term is consistent with the life of the related patent and applies to
assignments of the patent technology to a third party. Royalty fees to Emory
University aggregated $1,443,967, $146,050 and $36,330 in 2001, 2000 and 1999,
respectively, and have been expensed in Cost of Sales.
31
The Company's principal source of liquidity at December 31, 2001 consisted
of cash, cash equivalents and short-term investments of $31.7 million. In
August 2001, the Company entered into a $10 million revolving line of credit
with a financial institution (lender) that matures in August 2002. At December
31, 2001, there were no outstanding borrowings under this agreement. The
Company may borrow an amount not to exceed the borrowing base as defined in the
loan agreement. Interest is payable on the first of each month calculated on
the outstanding balance and accrues at a rate of the bank's prime rate plus 1%.
At such time that the Company sustains three consecutive months of
profitability, the rate decreases to the prime rate. The Company granted a
first priority security interest in substantially all assets of the Company.
Additionally, the loan agreement contains certain financial and non-financial
covenants.
In addition, the Company also has Letters of Credit available under the line
of credit. The lender will issue or have issued letters of credit for the
Company's account not exceeding (i) the lesser of the committed revolving line
of the borrowing base minus (ii) the outstanding principal balance of the
Advances and minus (iii) the Cash Management Sublimit as defined below;
however, the face amount of outstanding Letters of Credit (including drawn but
unreimbursed letters of credit) may not exceed $500,000. Each letter of credit
will have an expiry date of no later than 180 days after the revolving maturity
date, but the Company's reimbursement obligation will be secured by cash on
terms acceptable to the lender at any time after the revolving maturity date if
the term of this Agreement is not extended by the Lender. The Company agrees to
execute any further documentation in connection with the letters of credit as
the lender may reasonably request.
The Company may use up to $500,000 for the Lender's Cash Management
Sublimit, which may include merchant service, direct deposit of payroll,
business credit card, and check cashing services identified in various cash
management services agreements related to such services (the "Cash Management
Services"). All amounts the Lender pays for any Cash Management Services will
be treated as advances under the committed revolving line. The Company did not
have any credit lines or borrowings outstanding at December 31, 2001.
The Company had significant operating losses through the second quarter of
2001 and has been profitable for the remaining two quarters of 2001. The
Company believes that existing cash and cash expected to be generated from a
operations will be sufficient to meet its working capital, financing and
capital expenditure requirements through at least 2002. The Company's future
liquidity and capital requirements will depend upon numerous factors,
including, among others: market demand for its products; the resources required
to maintain a direct sales force in the United States and in the larger markets
of Europe, the resources required to introduce enhancements to and expansion of
the Beta Cath(TM) System product line; the resources the Company devotes to the
development, manufacture and marketing of its products; resources expended to
license or acquire new technologies; and the progress of the Company's clinical
research and product development programs. Novoste may in the future seek to
raise additional funds through bank facilities, debt or equity offering or
other sources of capital. Additional financing, if, required, many not be
available on satisfactory terms, or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting and
Reporting for Derivative Instruments. SFAS 133 establishes accounting and
reporting standards for derivative and hedging activities. SFAS 133, as amended
by SFAS 137 and SFAS 138, was adopted by the Company on January 1, 2001. The
adoption of these statements did not have a material impact on the Company's
financial statements.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets. SFAS 143 is
effective for fiscal years beginning after June 15, 2002. The Company is
currently assessing the impact of SFAS 143 on its financial statements.
32
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. Under the new rules, goodwill
and indefinite lived intangible assets are no longer amortized but are renewed
annually for impairment, or move frequently if impairment indictors arise. The
adoption of this standard did not have a material impact on the Company's
financial statements.
In July 2001, the FASB issued SFAS No. 144, Impairment or Disposal of
Long-Lived Assets, which is effective for fiscal years beginning after December
15, 2001. The provisions of this statement provide a single accounting model
for impairment of long-lived assets. The Company does not expect that the
adoption of SFAS 144 will have a material impact on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's cash equivalents and short-term investments are subject to
market risk, primarily interest-rate and credit risk. The Company's investments
are managed by outside professional managers within investment guidelines set
by the Company. Such guidelines include security type, credit quality and
maturity and are intended to limit market risk by restricting the Company's
investments to high credit quality securities with relatively short-term
maturities.
At December 31, 2001, the Company had $1.7 million in cash equivalents with
a weighted average interest rate of 1.8% and $31.7 million in available for
sale investments with a weighted average interest rate of 4.07% At December 31,
2000, the Company had $21.7 million in cash equivalents with a weighted average
interest rate of 6.32% and $30.7 million in available for sale investments with
a weighted average interest rate of 6.67%. All investments mature, by policy,
in one year or less.
Foreign Currency Risk
International revenues from the Company's foreign direct sales and
distributor sales comprised 7% of total revenues for the year ended December
31, 2001 and 72% for the year ended December 31, 2000. With the exception of
the Australian, Chinese and New Zealand distributor, which sales are
denominated in U.S. dollars, sales are denominated in Euros. The Company
experienced an immaterial amount of transaction gains and losses for the year
ended December 31, 2001. The Company is also exposed to foreign exchange rate
fluctuations as the financial results of its Dutch, Belgian, German and French
subsidiaries are translated into U.S. dollars in consolidation. As exchange
rates vary, these results when translated, may vary from expectations and
adversely impact overall expected profitability. The net effect of foreign
exchange rate fluctuations on the Company during the year ended December 31,
2001 was not material.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, with the report of the independent
auditors, listed in Item 14, are included in this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
Not applicable.
33
PART III
Incorporated by reference.
This information required by Part III of this Form 10-K is omitted from this
Report in that the Registrant will file a definitive proxy statement pursuant
to Regulation 14(a) for its 2001 Annual Meeting of Stockholders (the "Proxy
Statement") not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included therein is incorporated herein by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information on directors required by Items 401 and 405 of Regulation S-K
is incorporated herein by reference to the Company's definitive Proxy Statement
("Proxy Statement"), which will be filed with the Securities and Exchange
Commission ("SEC") within 120 days after December 31, 2001.
Information concerning the Company's executive officers required by Item
401(b) of Regulation S-K appears in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is incorporated
herein by reference to the Company's Proxy Statement, which will be filed with
the SEC within 120 days after December 31, 2001, except that the Report of the
Compensation Committee and the Stock Performance Graph contained in the Proxy
Statement are specifically excluded from incorporation by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K is incorporated
herein by reference to the Company's Proxy Statement, which will be filed with
the SEC within 120 days after December 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K is incorporated
herein by reference to the Company's Proxy Statement, which will be filed with
the SEC within 120 days after December 31, 2001.
34
PART VI
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Index to Financial Statements.
The following consolidated financial statements of Novoste Corporation are
included herein:
Page
Number
- - ------
Report of Independent Auditors............................................................. [F-1]
Consolidated Balance Sheets as of December 31, 2001 and 2000............................... [F-2]
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999. [F-3]
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000
and 1999................................................................................. [F-4]
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999. [F-5]
Notes to Consolidated Financial Statements................................................. [F-6]
2. Financial Statement Schedules.
Information required by consolidated financial statement schedules for which
provision is made in the applicable accounting regulation of the Securities and
Exchange Commission is included in the Notes to Consolidated Financial
Statements; thereby eliminating the needs for these schedules.
3. Exhibits.
The exhibits listed in the accompanying Index to Exhibits immediately
following the financial statement schedules are filed with this report.
(b) Reports on Form 8-K.
The following reports were filed on Form 8-K by the Registrant during the
fiscal quarter ended December 31, 2001.
(1). The Company filed a Form 8-K on December 28, 2001 stating that it
had issued a press release announcing that William A. Hawkins had resigned
as the Registrant's President and CEO.
(2). The Company filed a Form 8-K on January 28, 2002 stating that it had
initiated a voluntarily recalled 50 Beta-Cath(TM) System transfer devices.
Exhibits--The response to this portion of Item 14 is submitted as a separate
section of this report commencing on page 57 of this report.
35
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Novoste Corporation
We have audited the accompanying consolidated balance sheets of Novoste
Corporation (the "Company") as of December 31, 2001 and 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. 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 auditing standards generally
accepted in the United States. 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 that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company at December 31, 2001 and 2000, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
Atlanta, Georgia
January 28, 2002
[F-1]
36
NOVOSTE CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2001 2000
------------- -------------
ASSETS
Currents assets:
Cash and cash equivalents................................................. $ 5,878,286 $ 26,512,398
Short-term investments.................................................... 31,683,627 30,655,436
Accounts receivable, net of allowance of $878,424 and 311,310 respectively
(Note 1)................................................................ 16,130,721 4,469,781
Inventories............................................................... 3,746,433 1,251,687
Prepaid expenses and other current assets................................. 1,023,137 482,383
------------- -------------
Total current assets....................................................... 58,462,204 63,371,685
------------- -------------
Property and equipment, net................................................ 9,886,711 7,277,734
Radiation and transfer devices, net........................................ 13,534,356 5,480,948
Receivable from officers................................................... 144,025 --
Other assets............................................................... 883,311 942,427
------------- -------------
$ 82,910,607 $ 77,072,794
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 4,026,866 $ 3,425,250
Accrued expenses.......................................................... 10,917,277 5,415,277
Deferred revenue.......................................................... 2,786,476 580,817
Capital lease obligations................................................. 249,212 208,805
------------- -------------
Total current liabilities.................................................. 17,979,831 9,630,149
------------- -------------
Long-term liabilities:
Capital lease obligations................................................. 203,135 400,526
------------- -------------
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares
issued and outstanding.................................................. -- --
Common stock, $.01 par value, 25,000,000 shares authorized; 16,265,081
and 16,094,635 shares issued, respectively.............................. 162,651 160,946
Additional paid-in capital................................................ 187,357,044 184,511,610
Accumulated other comprehensive income (loss)............................. (408,139) (93,690)
Accumulated deficit....................................................... (121,383,528) (116,274,687)
------------- -------------
65,728,028 68,304,179
Less treasury stock, 5,780 shares of common stock at cost.................. (23,840) (23,840)
Unearned compensation...................................................... (976,547) (1,238,220)
------------- -------------
Total shareholders' equity................................................. 64,727,641 67,042,119
------------- -------------
$ 82,910,607 $ 77,072,794
============= =============
See accompanying notes
[F-2]
37
NOVOSTE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------------------
2001 2000 1999
----------- ------------ ------------
Net sales............................................. $69,908,296 $ 6,529,581 $ 1,823,394
Cost of sales......................................... 19,164,436 4,257,602 1,642,395
----------- ------------ ------------
Gross margin.......................................... 50,743,860 2,271,979 180,999
----------- ------------ ------------
Operating expenses:
Research and development............................. 12,756,257 17,118,976 22,889,182
Sales and marketing.................................. 34,653,392 15,650,756 6,606,337
General and administrative........................... 9,324,347 6,321,186 3,775,154
Restructuring and other expense...................... 1,213,705 -- --
----------- ------------ ------------
Total operating expenses.............................. 57,947,701 39,090,918 33,270,673
----------- ------------ ------------
Loss from operations.................................. (7,203,841) (36,818,939) (33,089,674)
----------- ------------ ------------
Interest income....................................... 2,164,295 3,784,378 2,209,983
Interest expense...................................... (75,783) (22,535) (13,526)
Other income (expense)................................ 6,488 (16,377) (26,995)
----------- ------------ ------------
Total other income.................................... 2,095,000 3,745,466 2,169,462
----------- ------------ ------------
Net loss.............................................. $(5,108,841) $(33,073,473) $(30,920,212)
=========== ============ ============
Net loss per share--basic and diluted................. $ (0.32) $ (2.13) $ (2.30)
Weighted average shares outstanding--basic and diluted 16,152,360 15,517,272 13,433,226
See accompanying notes.
[F-3]
38
NOVOSTE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Stock Additional Other
------------------- Paid-In Comprehensive Accumulated Treasury Unearned
Shares Amount Capital Income(Loss) Deficit Stock Compensation Total
---------- -------- ------------ ------------- ------------ -------- ------------ ------------
Balance at December 31,
1998.................... 10,704,817 $107,048 $ 77,022,814 $ -- $(52,281,002) $(23,840) $ (307,927) $ 24,517,093
Issuance of stock in
secondary offering at
$20 per share, net of
issuance costs of
$3,776,228.............. 2,560,000 25,600 47,398,172 -- -- -- -- 47,423,772
Issuance of restricted
stock for compensation
to officers, 10,000
shares at $23.56,
25,000 shares at
$20.75.................. 35,000 350 754,025 -- -- -- (754,375) --
Deferred compensation
relating to issuance of
certain stock options... -- -- 1,792,500 -- -- -- (1,792,500) --
Deferred consulting
charges on stock
option grants........... -- -- 234,597 -- -- -- -- 234,597
Amortization of unearned
compensation and
deferred consulting..... -- -- 112,500 -- -- -- 762,420 874,920
Exercise of stock options
at $0.25 to $17.25 per
share................... 901,815 9,018 867,934 -- -- -- -- 876,952
Comprehensive income
(loss):
Translation adjustment. -- -- -- 57,722 -- -- -- 57,722
Net loss............... -- -- -- -- (30,920,212) -- -- (30,920,212)
---------- -------- ------------ ------- ------------ -------- ----------- ------------
Total comprehensive
loss.................. -- -- -- -- -- -- -- (30,862,490)
Balance at December 31,
1999.................... 14,201,632 $142,016 $128,182,542 $57,722 $(83,201,214) $(23,840) $(2,092,382) $ 43,064,844
---------- -------- ------------ ------- ------------ -------- ----------- ------------
See accompanying notes.
[F-4]
39
NOVOSTE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Stock Additional Other Income
-------------------- Paid-In Comprehensive Accumulated Treasury Unearned
Shares Amount Capital Income (Loss) Deficit Stock Compensation Total
---------- -------- ------------ ------------- ------------- -------- ------------ ------------
Issuance of stock in
private placement,
1,463,500 shares at
$35 per share, net of
issuance costs of
$2,525,275............ 1,463,500 14,635 48,682,590 -- -- -- -- 48,697,225
Issuance of restricted
stock for
compensation to
officer and
employees, 1,500
shares at $41 per
share, 1,950 shares at
$22.50 per
share................. 3,450 35 105,340 -- -- -- (105,375) --
Cancellation of
unvested equity
awards issued to
officer............... (7,500) (75) (249,300) -- -- -- 249,375 --
Other equity
transactions.......... -- -- 114,880 -- -- -- -- 114,880
Amortization of
unearned
compensation.......... -- -- -- -- -- -- 710,162 710,162
Deferred consulting
charges on stock
option grants......... -- -- 328,876 -- -- -- -- 328,876
Exercise of stock
options at $1.00 to
$29.63 per share...... 426,544 4,265 7,141,874 -- -- -- -- 7,146,139
Issuance of stock under
Employee Stock
Purchase Plan 3,219
shares at $36.125
and 3,790 shares at
$23.375............... 7,009 70 204,808 -- -- -- -- 204,878
Comprehensive loss:
Translation
adjustment.......... -- -- -- (151,412) -- -- -- (151,412)
Net loss............. -- -- -- -- (33,073,473) -- -- (33,073,473)
---------- -------- ------------ --------- ------------- -------- ----------- ------------
Total comprehensive
loss.................. -- -- -- -- -- -- -- (33,224,885)
---------- -------- ------------ --------- ------------- -------- ----------- ------------
Balance at
December 31,
2000.................. 16,094,635 $160,946 $184,511,610 $ (93,690) $(116,274,687) $(23,840) $(1,238,220) $ 67,042,119
See accompanying notes.
[F-5]
40
NOVOSTE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Common Stock Additional Other Income Stock
------------------- Paid-In Comprehensive Accumulated Treasury Unearned
Shares Amount Capital Income (Loss) Deficit Stock Compensation Total
---------- -------- ------------ ------------- ------------- -------- ------------ -----------
Exercise of stock
options at $3.20
to $27.00.......... 117,188 1,172 1,258,302 -- -- -- -- 1,259,474
Deferred
compensation
relating to
issuance of stock
options to
officers........... -- -- 839,361 -- -- -- (594,547) 244,814
Issuance of stock
under Employee
Stock Purchase
Plan, 36,776
shares at $14.93
and 12,482 shares
at $7.15........... 49,258 493 637,731 -- -- -- -- 638,224
Issuance of
restricted stock to
an officer (3,000
shares) and
consultant (1,000
shares) at $23.02
per share.......... 4,000 40 92,040 -- -- -- (92,080) --
Amortization of
unearned...........
compensation........ 948,300 948,300
Other equity
transactions....... -- -- 18,000 -- -- -- -- 18,000
Comprehensive
loss:
Translation
adjustment....... -- -- -- (314,449) -- -- -- (314,449)
Net loss.......... -- -- -- -- (5,108,841) -- -- (5,108,841)
---------- -------- ------------ --------- ------------- -------- --------- -----------
Total
Comprehensive
loss............. -- -- -- -- -- -- -- (5,423,290)
Balance at
December 31,
2001............... 16,265,081 $162,651 $187,357,044 $(408,139) $(121,383,528) $(23,840) $(976,547) $64,727,641
========== ======== ============ ========= ============= ======== ========= ===========
See accompanying notes.
[F-6]
41
NOVOSTE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................................... $ (5,108,841) $(33,073,473) $(30,920,212)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization of property and equipment....... 2,413,135 1,458,994 930,582
Amortization of radiation and transfer devices................ 5,087,576 131,815 --
Issuance of stock for services or compensation................ 244,814 328,876 234,597
Amortization of deferred compensation......................... 948,300 710,162 874,920
Provision for doubtful accounts............................... 590,814 305,633 --
Change in assets and liabilities:
Accounts receivable......................................... (12,410,361) (3,871,403) (980,399)
Inventory................................................... (2,585,997) 1,144,159 (2,003,430)
Prepaid expenses and other current assets...................... (541,035) (265,502) (48,600)
Accounts payable............................................ 644,186 2,422,905 74,576
Accrued expenses and taxes withheld......................... 5,535,613 250,908 1,291,060
Deferred revenue............................................ 2,216,210 577,881 --
Other....................................................... (465,609) (404,572) (306,804)
------------ ------------ ------------
Net cash used by operations.................................... (3,431,195) (30,283,617) (30,853,710)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities (purchase) of short-term investments, net........... (1,028,191) 3,677,230 (10,637,216)
Purchase of property and equipment............................. (4,920,879) (4,564,549) (2,102,338)
Purchase of radiation and transfer devices..................... (13,140,984) (5,612,763) --
------------ ------------ ------------
Net cash used by investing activities.......................... (19,090,054) (6,500,082) (12,739,554)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock......................... 1,915,698 56,163,122 48,300,724
Payments on capital lease obligations.......................... (261,918) (52,248) --
------------ ------------ ------------
Net cash provided by financing activities...................... 1,653,780 56,110,874 48,300,724
------------ ------------ ------------
Effect of exchange rate changes on cash........................ 233,357 94,198 31,048
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents........... (20,634,112) 19,421,373 4,738,508
Cash and cash equivalents at beginning of period............... 26,512,398 7,091,025 2,352,517
------------ ------------ ------------
Cash and cash equivalents at end of period..................... $ 5,878,286 $ 26,512,398 $ 7,091,025
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest on capital lease obligations........... $ 74,091 $ 17,004 $ --
Noncash investing and financing activities:...................
Assets acquired under capital leases.......................... 105,000 661,000 --
See accompanying notes.
[F-7]
42
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Novoste Corporation (the "Company") was incorporated on January 8, 1987 and
remained dormant until May 22, 1992 (date of inception) at which time it was
capitalized. The Company is a medical device company that is engaged in
commercializing the Beta-Cath/TM/ System, an intraluminal beta radiation
catheter delivery system designed to reduce restenosis subsequent to
percutaneous transluminal coronary angioplasty. In the course of its
development activities the Company has sustained operating losses through
December 31, 2001.
During years prior to 1998 the Company was in the development stage. In 1998
the Company received CE mark approval to sell the Beta-Cath/TM/ System in
Europe and recorded its first sale of commercial product in December 1998. In
November 2000, the Company received Food and Drug Administration (FDA) approval
to sell the Beta-Cath/TM/ System in the United States. To achieve profitable
operations, the Company must successfully achieve market acceptance. The
Company plans to finance the Company with revenues from product sales. The
Company's ability to continue its operations is dependent upon successful
market acceptance and achieving profitable operations.
The consolidated financial statements include the accounts of Novoste
Corporation and its wholly-owned subsidiaries incorporated in The Netherlands,
Belgium, Germany and France. Significant intercompany accounts and transactions
have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The Company earns revenue from sales of catheters and from license and lease
agreements to use the radiation source trains and transfer devices included in
the Beta-Cath(TM) System. Novoste uses distributors in countries where the
distributors experience and knowledge of local radiation and medical device
regulatory issues is considered beneficial by the Company's management. Under
the distributor arrangements, there are no purchase commitments and no
provisions for cancellation of purchases. Novoste or the distributor may cancel
the distributor agreements at any time.
Revenue from sales of catheters directly to hospitals is recognized upon
shipment once the hospital has leased a Beta-Cath(TM) System and completed all
licensing and other requirements to use the system. The Company recognizes
revenue from sales of catheters to distributors at the time of shipment.
The Company retains ownership of the radiation source trains and transfer
devices and enters into either a lease or license agreement with its customers.
Revenue recognition begins once an agreement has been executed, the system has
been shipped, and all licensing and other requirements to use the system have
been completed. The terms of the operating lease signed with customers located
in the United States requires, as dictated by FDA regulatory approval,
replacement and servicing of the radiation source train and transfer device at
six-month intervals. No other post-sale obligations exist.
During 1999 and through the second quarter of 2000, all payments under
license agreements were payable at the inception of the agreement. These
agreements were accounted for as sales-type leases and, accordingly,
43
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
revenue and the related costs of sales were recognized upon shipment. Beginning
in the third quarter of 2000, after the Company determined the estimated useful
life of the system exceeded one year, license and lease agreements were
determined to be operating leases and, accordingly, revenue has been recorded
over the term of the related agreements and costs are recorded over an eighteen
month estimated useful life.
Beginning in the fourth quarter of 2000 and during 2001, payments under
license and lease arrangements are either due in full at the inception of the
agreement or over the term of the agreement as catheters are purchased. Revenue
for these arrangements has been recorded using the lower of revenue earned
based on accrual catheters purchased or on a straight-line basis over the term
of the related agreements. Costs are recorded over an eighteen month estimated
useful life of the radiation source train and transfer device.
During 2001, 2000 and 1999, approximately $6,814,000, $365,000 and $713,000,
respectively, of net sales related to the lease of radiation transfer devices.
Accounts Receivable
Accounts receivable at December 31, 2001 and 2000 includes receivables due
from product sales and amounts due under lease arrangements to hospitals
relating to radiation and transfer devices (see Radiation and Transfer
Devices). The carrying amounts reported in the consolidated balance sheets for
accounts receivable approximate their fair value.
The Company's distributor for the markets of Australia, New Zealand and
China accounted for 20% of sales in 2000. There were no significant
concentrations of credit risk in 2001. The Company performs periodic credit
evaluations of its customer's financial condition and generally does not
require collateral. Management records estimates of expected credit losses and
returns of product sold. Bad debt expense for the years ended December 31,
2001, 2000 and 1999 amounted to $590,000, $311,000 and $0, respectively. For
December 31, 2001, 2000 and 1999, uncollectible accounts written off totaled
$22,886, $0 and $0, respectively.
Receivable from Officers
In October 2001, the Company adopted a split-dollar life insurance plan for
all officers. The Company matches officer contributions to the plan. During
2001, the Company charged $180,000 to compensation expense for such
contributions. In addition, the Company advanced the officers a total of
$144,000 for related payroll taxes. This amount is reflected as a receivable
from officers on the balance sheet. In accordance with the plan agreement, if
an officer leaves the Company for any reason, retires or in any way terminates
or withdraws from the plan, then the life insurance company is obligated to
repay the Company for the tax advances prior to settlement of the account with
the officer. The advances are unsecured and are subject to the life insurance
company's ability to repay the Company in the future.
Advertising Costs
All advertising costs are expensed as incurred. Approximately $1,350,000,
$1,155,000 and $539,000 was charged to advertising expense for the years ended
December 31, 2001, 2000 and 1999, respectively.
Basic and Diluted Loss Per Share
The basic and diluted loss per share is computed based on the weighted
average number of common shares outstanding. Common equivalent shares of
3,506,144, 2,483,157 and 2,108,561 are not included in the per share
calculations for 2001, 2000 and 1999, respectively where the effect of their
inclusion would be antidilutive.
44
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash Equivalents and Short-term Investments
The Company maintains cash equivalents and investments in several large
well-capitalized financial institutions. The Company's investment policy does
not allow investment in any debt securities rated less than "investment-grade"
by national rating services. Cash equivalents are comprised of certain highly
liquid investments with maturities of less than three months when purchased. In
addition to cash equivalents, the Company has investments in commercial paper
and certificates of deposit that are classified as short-term (mature in more
than 90 days but less than one year). These investments are accounted for in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115").
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. The Company has classified all investments as available for sale.
Available for sale securities are carried at fair value, with the unrealized
gains and losses reported in a separate component of shareholders' equity if
significant. Realized gains and losses are included in investment income and
are determined on a specific identification basis (Note 6).
Concentrations of Finance Risk
The Company's cash equivalents and short-term investments are subject to
market risk, primarily interest-rate and credit risk. The Company's investments
are managed by outside professional managers within investment guidelines set
by the Company. Such guidelines include security type, credit quality and
maturity and are intended to limit market risk by restricting the Company's
investments to high credit quality securities with relatively short-term
maturities.
Foreign Currency Risk
International revenues from the Company's foreign direct sales and
distributor sales comprised 7%, 74% and 100% of total revenues for the years
ended December 31, 2001, 2000 and 1999, respectively. All foreign sales are
denominated in Euros. The Company experienced an immaterial amount of
transaction gains and losses in 2001 and 2000 when converting from local
currencies into the respective functional currencies. The Company is also
exposed to foreign exchange rate fluctuations as the financial results of its
Dutch, Belgian, German and French subsidiaries are translated from Euros into
U.S. dollars for reporting purposes during consolidation. As exchange rates
vary from period to period, these results, when translated into U.S. dollars
(the reporting currency), may vary from expectations and adversely impact
overall expected profitability. The net effect of foreign exchange rate
fluctuations during 2001, 2000, and 1999 are reflected in accumulated other
comprehensive income on the consolidated statement of shareholders' equity.
Inventories
Inventories are stated at the lower of cost or market on a first-in,
first-out (FIFO) basis and are comprised of the following:
December 31, December 31,
2001 2000
------------ ------------
Raw Materials.. $1,971,347 $ 777,819
Work in Process 811,406 218,958
Finished Goods. 963,680 254,910
---------- ----------
Total.......... $3,746,433 $1,251,687
========== ==========
45
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment, including amounts under capital leases (Note 7), are
stated at cost. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets ranging from three to seven years.
Leasehold improvements are amortized over the remaining term of the underlying
lease using the straight-line method. Repairs and maintenance are expensed as
incurred.
Property and equipment is comprised of the following:
December 31, December 31,
2001 2000
------------ ------------
Furniture and Fixtures......................... $ 1,358,180 $ 1,217,807
Office Equipment............................... 4,759,623 3,632,468
Laboratory Equipment........................... 732,818 570,719
Leasehold Improvements......................... 2,131,813 1,585,553
Production Equipment........................... 7,119,161 4,097,877
----------- -----------
16,101,595 11,104,424
Less: Accumulated Depreciation and Amortization (6,214,884) (3,826,690)
----------- -----------
$ 9,886,711 $ 7,277,734
=========== ===========
Radiation and Transfer Devices
The Company retains ownership of the radiation source trains (RSTs) and
transfer devices (TDs). During 1999, the Company was the lessor of RSTs and TDs
under annual sales-type lease agreements expiring through December 2000. During
the second quarter of 2000, the Company determined that based upon experience,
testing and discussions with the FDA the estimated useful life of RSTs and TDs
would exceed one year. Accordingly, at that time the Company reclassified these
assets from inventory to a long-term asset named radiation and transfer
devices. Depreciation of the costs of these assets is included in cost of sales
and is recognized over their estimated useful lives (currently estimated at 18
months) using the straight-line method. Depreciation begins once the
Beta-Cath/TM/ System is placed into service. Concurrent with the change in
estimated life, the RST and TD annual agreements to license the use of the
radiation and transfer devices are classified by the Company as operating
leases.
At December 31, 2001, equipment of approximately $8,310,000, net of
accumulated depreciation of approximately $5,219,000 was leased under operating
leases. Approximately $5,224,000 of radiation and transfer devices were
available for lease at December 31, 2001. At December 31, 2001, lease payments
receivable under these operating leases approximated $1,032,000 and are
recorded in accounts receivable.
Radiation and transfer devices are stated at cost and are comprised of the
following:
December 31, December 31,
2001 2000
------------ ------------
Radiation and Transfer Devices $18,753,747 $5,612,763
Less: Accumulated Depreciation 5,219,391 131,815
----------- ----------
$13,534,356 $5,480,948
=========== ==========
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of ("SFAS 121"), long-lived assets are
46
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reviewed for impairment whenever events indicate that their carrying amount may
not be recoverable. In such reviews, estimated undiscounted future cash flows
associated with these assets are compared with their carrying value to
determine if a write-down to fair value (normally measured by discounting
estimated future cash flows) is required.
Research and Development and Patent Costs
All research and development costs are charged to operations as incurred.
Legal fees and other direct costs incurred in obtaining and protecting patents
are expensed as incurred.
Shipping Costs
All shipping costs incurred by the Company are classified as Cost of Sales.
Stock Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123") sets
forth accounting and reporting standards for stock-based employee compensation
plans (Note 9). As permitted by SFAS 123, the Company accounts for stock
options grants in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related
interpretations. Under APB 25 no compensation expense is recognized for stock
option grants to employees for which the terms are fixed. The Company grants
stock options generally for a fixed number of shares to employees, directors,
consultants and independent contractors with an exercise price equal to the
fair market value of the shares at the date of grant. Compensation expense is
recognized for increases in the estimated fair value of common stock for any
stock options with variable terms.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task Force
(EITF) Issue No. 96-18, Accounting for Equity Instruments that Are Issued to
Other than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.
Any compensation expense related to grants that do not vest immediately is
amortized over the vesting period of the stock options using the straight-line
method as that methodology most closely approximates the way in which the
option holder earns those options.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting and
Reporting for Derivative Instruments. SFAS 133 establishes accounting and
reporting standards for derivative and hedging activities. SFAS 133, as amended
by SFAS 137 and SFAS 138, was adopted by the Company on January 1, 2001. The
adoption of these statements did not have a material impact on the Company's
financial statements.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets. SFAS 143 is
effective for fiscal years beginning after June 15, 2002. The Company is
currently assessing the impact of SFAS 143 on its financial statements.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. Under the new rules, goodwill
and indefinite lived intangible assets are no longer amortized but are renewed
annually for impairment, or move frequently if impairment indicators arise. The
adoption of this standard did not have a material impact on the Company's
financial statements.
In July 2001, the FASB issued SFAS No. 144, Impairment or Disposal of
Long-Lived Assets, which is effective for fiscal years beginning after December
15, 2001. The provisions of this statement provide a single accounting model
for impairment of long-lived assets. The Company does not expect that the
adoption of SFAS 144 will have a material impact on its financial statements.
47
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications
Certain amounts have been reclassified in prior year statements to conform
to current year presentation.
2. CONSULTING AGREEMENTS
The Company has agreements with certain physicians, various consultants and
others with terms ranging from one to five years. Substantially all of these
agreements provide for stock or stock option grants on the agreement dates.
Shares issued under these agreements are generally valued at fair value on the
date of grant and include certain registration rights. Stock option grants
under these agreements are measured in accordance with EITF 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in Conjunction With Selling, Goods or Services. During 2001, 2000, and 1999
approximately, $20,000, $399,000 and $374,000, respectively, was charged to
operations as amortization of deferred compensation under these agreements in
accordance with their vesting terms.
3. COMMITMENTS AND CONCENTRATIONS OF SUPPLIERS
The Company is committed under operating leases for its facility and various
office equipment. Rent expense was approximately $956,000, $707,000 and
$607,000 for 2001, 2000, and 1999, respectively. The total future minimum
rental payments are as follows:
2002......................... $ 712,800
2003......................... 556,100
2004......................... 24,750
----------
$1,293,650
==========
The Company has entered into a license agreement with a physician pursuant
to which he is entitled to receive a royalty on the net sales of the
Beta-Cath(TM)System (excluding consideration paid for the radioactive isotope),
subject to a maximum payment of $5,000,000. Royalty fees to the physician
aggregated $632,300, $63,200 and $11,250 in 2001, 2000 and 1999 and have been
expensed in cost of sales.
On January 30, 1996, the Company entered into a license agreement whereby
Emory University assigned its claim to certain technology to the Company for
royalties based on net sales (as defined in the agreement) of products derived
from such technology, subject to certain minimum royalties. The royalty
agreement term is consistent with the life of the related patent and applies to
assignments of the patent technology to a third party. Royalty fees to Emory
University aggregated $1,441,800, $146,050 and $36,330 in 2001, 2000 and 1999
and have been expensed in cost of sales.
During 2000, and 1999, the Company obtained all of its requirements of
radiation source materials (totaling $1,487,000 and $1,270,000, respectively)
pursuant to an agreement, as amended (the "Supply Agreement"), with a single
German supplier, Bebig Isotopentechnik und Umweltdiagnostik GmbH. In 2001, the
Company purchased radiation source materials from two suppliers, Bebig
Isotopentechnik und Umweltdiagnostik GmbH and AEA Technologies QSA, GmbH,
totalling $2,438,000 and $1,115,000 respectively. At December 31, 2001, the
Company had commitments to purchase approximately $7,185,000 of various
inventory components for the Beta-Cath/TM/ System.
On October 14, 1999, the Company signed a development and manufacturing
supply agreement with AEA Technologies QSA GmbH for a second source of
radioisotope supply and for the development of a smaller
48
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
diameter source. This agreement provides for the construction of a production
line beginning October 1999 with expected completion in mid-2002. The cost of
this production line is estimated at $4,000,000 and will be paid by the Company
as construction progresses. At December 31, 2001, the Company had a commitment
remaining under this contract of approximately $110,000.
Significant proportions of key components and processes relating to the
Company's products are purchased from single sources due to technology,
availability, price, quality, and other considerations. Key components and
processes currently obtained from single sources include isotopes, protective
tubing for catheters, proprietary connectors, and certain plastics used in the
design and manufacture of the transfer device. In the event a supply of a key
single-sourced material or component was delayed or curtailed, the Company's
ability to produce the related product in a timely manner could be adversely
affected. The Company attempts to mitigate these risks by working closely with
key suppliers regarding the Company's product needs and the maintenance of
strategic inventory levels.
The Company maintains termination agreements with certain executives
providing for severance pay and other related benefits upon separation from the
Company under a change of control.
The Company is subject to legal claims and assertions in the ordinary course
of business. At December 31, 2001, the Company is not aware of any such
assertions that are material to the Company's financial statements.
4. LINE OF CREDIT
In August 2001, the Company entered into a $10 million revolving line of
credit with a financial institution (lender) that matures in August 2002. At
December 31, 2001, there were no outstanding borrowings under this agreement.
The Company may borrow an amount not to exceed the borrowing base as defined in
the loan agreement. Interest is payable on the first of each month calculated
on the outstanding balance and accrues at a rate of the bank's prime rate plus
1%. At such time that the Company sustains three consecutive months of
profitability, the rate decreases to the prime rate. The Company granted the
lender first priority security interest in substantially all assets of the
Company. Additionally, the loan agreement contains certain financial and
non-financial covenants.
The Company also has letters of credit available under the revolving line of
credit. The lender will issue or have issued letters of credit for the
Company's account subject to certain limitations; however they may not exceed
$500,000.
49
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the corresponding amounts used for income tax purposes.
Significant components of the Company's deferred income tax assets for federal
and state income taxes are as follows:
December 31, 2001 December 31, 2000
----------------- -----------------
Deferred Income Tax Assets:
Net operating loss carryforwards................. $ 48,334,941 $ 48,342,183
R&D tax credit carryforwards..................... 1,481,225 1,881,913
Provision for doubtful accounts.................. 57,000 118,298
Deferred revenue................................. -- 220,710
Other............................................ -- 237,991
Accruals/reserves................................ 1,436,791 --
Property and Equipment........................... 935,714 --
Deferred compensation............................ 360,352 --
------------ ------------
52,606,023 50,801,095
Valuation allowance for Deferred Income Tax assets (52,606,023) (50,801,095)
------------ ------------
Net Deferred Income Tax Assets.................... $ -- $ --
============ ============
At December 31, 2001 and 2000, a valuation allowance has been recognized to
reduce the net deferred tax assets to zero due to uncertainties with respect to
the Company's ability to generate taxable income in the future sufficient to
realize the benefit of deferred income tax assets. No income taxes were paid
during 2001, 2000, or 1999. The Company has approximately $103.3 million of net
operating losses for U.S. federal income tax purposes available to offset
future taxable income. Such losses expire in 2007 through 2021 and may be
subject to annual limitations on usage due to changes in ownership. Net
operating loss carry forwards aggregating approximately $13.4 million
representing cumulative exercises of non-qualified stock options will result in
a credit to contributed capital when recognized. In addition the company has
approximately $10.5 million of foreign net operating losses related to its
European subsidiaries. The activity in the valuation allowance includes the tax
effect of these non-qualified stock options. Additionally, the Company has
approximately $1.5 million in research and development tax credits that expire
in 2008 through 2021 unless utilized earlier.
A reconciliation of the provision for income taxes to the federal statutory
rate is presented below for the years ended December 31:
2001 2000 1999
----------- ------------ ------------
Tax benefit at statutory................... (1,737,006) (11,244,981) $(10,512,872)
State tax, net of federal benefit.......... (203,679) (1,322,939) (1,236,809)
R&D tax credit............................. (441,262) (501,561) (361,897)
Other...................................... 577,019 61,027 37,777
Valuation allowance for deferred income tax 1,804,928 13,008,454 12,073,801
----------- ------------ ------------
$ -- $ -- $ --
=========== ============ ============
6. INVESTMENTS
At December 31, 2001 and 2000, short-term investments consist of debt
securities classified as available-for-sale and have maturities greater than 90
days from the date of acquisition. All available-for-sale securities mature
within one year. The Company has invested primarily in commercial paper and
U.S. corporate notes, all of which have a minimum investment rating of A, in
addition to government agency notes and certificates of
50
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
deposit. The Company had insignificant realized gains or losses from the sale
of investments for the years ended December 31, 2001, 2000 and 1999. At
December 31, 2001 and 2000, cost of the short-term investments approximated
fair value.
7. CAPITAL LEASE OBLIGATIONS
The Company leases computers and equipment under capital leases with initial
or remaining terms in excess of one year or more. During the year ended
December 31, 2001, lease payments under capital leases were $296,255.
Amortization of assets recorded under capital leases is included in
depreciation expense.
Future minimum lease payments under capital leases are as follows:
2002.............................. $303,399
2003.............................. 192,407
2004.............................. 5,333
--------
$501,139
Less amounts representing interest 48,792
--------
$452,347
========
8. RESTRUCTURING CHARGES AND OTHER EXPENSE
Restructuring charges of $773,000 were recorded in 2001 primarily related to
a reduction in workforce of thirteen employees located in Europe and six
employees located in the Unites States in addition to termination of certain
facility leases in Europe. The Company paid $560,000 of the restructuring
charges in 2001 related to severance payments and lease payments for closed
facilities and recorded $213,000 in accrued expenses related to severance
agreements.
During 2001, the Company contributed $440,000 for an 8% ownership interest
in an equity method investment. This amount was subsequently expensed as a
result of the impairment of that investment.
9. SHAREHOLDERS' EQUITY
Shareholder Rights Plan
On October 25, 1996, the Company's Board of Directors declared a dividend of
one Right for each share of Common Stock held of record at the close of
business on November 25, 1996. The Rights are generally not exercisable until
10 days after an announcement by the Company that a person has acquired at
least 15% of the Company's Common Stock. Each Right, should it become
exercisable, will entitle the owner to buy 1 1/100th of a share of new Series A
participating preferred stock at an exercise price of $85. The Rights, which do
not have any voting rights, may be redeemed by the Company at a price of $.01
per Right at any time prior to a person's or group's acquisition of 15% or more
of the Company's Common Stock.
In the event the Rights become exercisable as a result of the acquisition of
at least 15% of the Company's Common Stock, each Right will entitle the owner,
other than the acquiring person, to buy at the Rights' then current exercise
price a number of shares of Common Stock with a market value equal to twice the
exercise price. In addition, unless the acquiring person owns more than 50% of
the outstanding shares of Common Stock, the Board of Directors may elect to
exchange all outstanding Rights (other than those owned by such acquiring
person or affiliates thereof) at an exchange ratio of one share of Common Stock
per Right. The Rights expire on November 25, 2006 unless they are earlier
exercised, redeemed, or exchanged. As a result of the adoption of the
Shareholders' Rights Plan, 1,000,000 shares of authorized preferred stock have
been reserved and designated as Series A Participating Preferred Stock.
51
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option Plans and Stock Grant
The Company's Board of Directors adopted in May 1992, the Novoste
Corporation Stock Option Plan (the "Plan") under which options designated as
either incentive or non-qualified stock options may be issued to employees,
officers, directors, consultants and independent contractors of the Company or
any parent, subsidiary or affiliate of the Company. Options granted under the
Plan are at prices not less than the fair market value on the date of grant and
may be exercised for a period of ten years from the date of grant. Options
granted under the Plan have vesting periods ranging from immediately to four
years. The Plan includes a provision for options to accelerate and become
immediately and fully exercisable upon a 50% or more change in control as
defined in the Amended and Restated Stock Option Plan. In 2001, this plan was
terminated and replaced with the 2001 Stock Plan. In August 1996 the Stock
Option and Compensation Committee of the Board of Directors of the Company
adopted a Non-Employee Director Stock Option Plan (the "Director Plan"). In
2001, this plan was terminated and replaced with the 2001 Stock Plan.
During April 2001, the 2001 Stock Plan (the "2001 Plan") was adopted by the
Company's Board of Directors and on June 14, 2001, the 2001 Plan was approved
by the Company's Shareholders. Any employee, officer, consultant, independent
contractor or director is eligible to participate in the 2001 Plan. The Novoste
2001 Stock Plan permits the granting of both incentive and non-qualified stock
options, stock appreciation rights, restricted stock, performance awards and
common stock. Options granted under the 2001 Plan are at prices not less than
the fair market value on the date of grant and may be exercised for a period of
ten years from the date of grant. Options granted under the 2001 Plan have
vesting periods ranging from immediately to four years. The 2001 Plan includes
a provision for options to accelerate and become immediately and fully
exercisable upon a 50% or more change in controls as defined in the Amended and
Restated Stock Options Plan.
Activity under the above-described three plans is summarized as follows:
Weighted
Number of Average
Shares Price Per Share Price
--------- --------------- --------
Outstanding at December 31 1998. 2,309,238 $ .250-29.625 $11.60
- -------------------------------------------
Options granted................. 715,800 11.000-28.375 19.42
Options exercised............... (901,815) .250-17.250 0.98
Options forfeited............... (53,516) 3.200-28.250 16.48
- -------------------------------------------
Outstanding at December 31, 1999 2,069,707 1.000-29.625 18.30
- -------------------------------------------
Options granted................. 978,444 20.750-49.250 28.83
Options exercised............... (426,544) 1.000-29.630 16.75
Options forfeited (169,166) 9.750-28.250 19.50
- -------------------------------------------
Outstanding at December 31, 2000 2,452,441 1.000-49.250 22.69
- -------------------------------------------
Options granted................. 1,425,300 6.65-34.750 9.52
Options exercised............... (117,188) 3.20-27.000 10.75
Options forfeited............... (260,045) 6.65-49.250 25.11
- -------------------------------------------
Outstanding at December 31, 2001 3,500,558 $ 1.000-49.250 $17.53
- -------------------------------------------
Exercisable at December 31, 2001 1,434,761 $ 1.000-49.250 $18.44
- -------------------------------------------
52
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 31, 2001 the Company has 3,755,491 shares of common stock
reserved for issuances under these employee and director stock option
agreements and 43,733 shares of common stock reserved for issue under the
Employee Stock Purchase Plan (Note 10).
The following table summarizes information concerning currently outstanding
and exercisable options:
Options Outstanding Options Exercisable
-------------------------------------- --------------------
Weighted
Average Weighted Average Weighted
Remaining Exercise Price Of Average
Range Of Number Of Contractual Options Number Exercise
Exercise Prices Shares Life (Years) Outstanding Exercisable Price
--------------- --------- ------------ ----------------- ----------- --------
$ 1.00-$ 5.00 45,650 1.47 $ 2.96 45,650 $ 2.96
5.01- 7.00 991,250 9.72 6.65 247,625 6.65
7.01- 10.50 61,900 9.96 8.24 20,000 7.63
10.51- 13.38 344,134 7.06 11.72 219,949 11.79
13.39- 21.94 555,200 7.51 17.12 212,925 18.31
21.95- 22.50 441,275 8.78 22.50 120,205 22.50
22.51- 24.69 508,700 6.58 23.96 367,625 24.00
24.70- 49.25 552,449 7.63 33.45 200,782 32.38
--------- ---------
3,500,558 8.10 17.53 1,434,761 18.44
========= =========
During the period October 1998 to February 1999, options to purchase 200,000
shares were granted at prices per share ranging from $11.75 to $28.00 per
share. These grants were subject to shareholder approval in May 1999. When
approval was obtained, the market price per share exceeded the exercise price,
and the Company incurred compensation of $1,792,500, which will be expensed
over the four-year vesting period of these options: $415,000, $431,000 and
$532,000 was expensed in 2001, 2000 and 1999, respectively). Approximately
37,500 of these options awarded to a former officer of the Company were
forfeited during 2000.
In May 1996, the Company amended an option to purchase 100,000 shares of
Common Stock at $3.20 per share of which options for 75,000 shares had not yet
become exercisable. As amended, options to purchase such 75,000 shares became
exercisable at the annual rate of 25,000 shares beginning May 20, 1997, subject
to acceleration upon the achievement of three specified milestones at the rate
of 25,000 shares per milestone. The Company recorded total non-cash
compensation expense of $810,000 ratably over the three-year period ending May
19, 1999. Approximately $101,250 was expensed in 1999 relating to these options.
In April 2001, options to purchase 101,000 shares were granted at $14.71 per
share. These grants were subject to shareholder approval in June 2001. When
approval was obtained, the market price per share exceeded the exercise price,
and the Company incurred compensation of $839,000, which will be expensed over
the vesting period of these options. The vesting period allowed for one-quarter
vesting of the options on the date of grant and the remainder to be vested
one-quarter over the next three grant date anniversaries. Approximately
$344,800 was expensed in 2001 relating to these options.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee and director stock options under the fair value method of SFAS 123.
The fair value for options was estimated at the date of grant using the
Black-Scholes option-pricing model. The following weighted-average assumptions
were used for 2001, 2000 and 1999: risk-free interest rates of 4.22%, 5.66% and
5.20%, respectively; no dividend yields; volatility factor of the expected
market price of the Company's common stock of 1.29, 1.29 and 0.577, in 2001,
2000 and 1999, respectively; and a weighted-average expected life of the option
of five years for 2001 and 2000 and six years for 1999.
53
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Option valuation models used under SFAS 123 were developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
Year Ended December 31,
-------------------------------------
2001 2000 1999
----------- ----------- -----------
Pro forma net loss........................................ $17,658,365 $41,014,516 $37,131,898
Pro forma net loss per share.............................. (1.09) (2.64) (2.76)
Weighted average fair value of options granted............ 10.07 15.98 11.30
Weighted average fair value of non-vested restricted stock 23.02 18.86 17.30
During 2001, 2000, and 1999, the Company has granted a total of 56,450
shares of restricted Common Stock from the Plan to consultants and certain
officers of the Company. Of these restricted shares, 7,500 were cancelled
during 2000. In October 2001, the Company accelerated the vesting of 39,000
shares of restricted stock previously issued to an officer. The Company
recognized approximately $190,000 in expense associated with the accelerated
vesting. As of December 31, 2001, 43,363 of these restricted shares have
vested. The remaining 5,586 shares will vest over the three or four year
vesting period from the date of grant provided that the consultant continues to
provide services and the officer is still employed by the Company. Holders of
these shares have voting rights once the shares vest. Based on the quoted
market value per share at the grant dates, the Company incurred compensation of
$434,000, $279,000 and $231,000 in 2001, 2000, and 1999, respectively. The
value of the remaining shares awarded totaled $138,000 at December 31, 2001 and
has been recorded as unearned compensation in the statement of shareholders'
equity. Such unearned compensation is being amortized to compensation expense
over the vesting periods of the awards.
10. EMPLOYEE BENEFIT PLANS
The Company has adopted a Defined Contribution 401(k) Plan in which all
employees who are at least 21 years of age are eligible to participate.
Contributions of up to 15% of compensation to the 401(k) Plan may be made by
employees through salary withholdings. Company matching contributions are
discretionary. In 2001, 2000, and 1999 the Company matched 33 1/3% of the first
6% of employee contributions, aggregating $239,000, $124,000 and $90,000,
respectively.
Effective July 1, 2000, the Company adopted an Employee Stock Purchase Plan
("Plan"), which makes available up to 100,000 shares of Common Stock of the
Company to be sold to eligible employees under the Plan. The purchase price of
each share of Common Stock sold pursuant to this Plan shall be the lesser of
85% of the Fair Market Value of such share on the first day of the purchase
period or 85% of the Fair Market Value of such share on the last day of the
purchase period. As of December 31, 2001, 56,267 shares have been purchased
under the Plan.
11. SEGMENT INFORMATION
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131") requires the reporting of segment information based on
the information provided to the company's chief operating decision maker for
purposes of making decisions about allocating resources and assessing
performance. The Company's business activities are represented by a single
industry segment, the manufacture and distribution of medical devices. For
management purposes, the Company is segmented into three geographic areas:
United States, Europe and Rest of World (Canada, Asia and South America).
54
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's net sales, loss from operations and long-lived assets by
geographic area are as follows:
United States Europe Rest of World Consolidated
Net Sales ------------- ---------- ------------- ------------
2001..... $64,696,793 $4,576,114 $635,389 $69,908,296
2000..... 1,816,250 $4,224,776 488,555 6,529,581
1999..... 18,000 1,510,394 295,000 1,823,394
Income
(Loss)
from United States Europe Rest of World Consolidated
operations ------------- ----------- ------------- ------------
2001...... $ 2,953,210 $(7,524,276) $(537,775) $ (5,108,841)
2000...... (27,683,138) $(5,235,572) (154,763) (33,073,473)
1999...... (26,489,952) (4,393,224) (37,036) (30,920,212)
Long-lived United States Europe Rest of World Consolidated
assets ------------- ---------- ------------- ------------
2001...... $23,400,897 $1,047,506 -- $24,448,403
2000...... 12,512,353 $1,188,756 -- 13,701,109
1999...... 3,669,007 575,176 -- 4,244,183
The Company's distributor for the markets of Australia, New Zealand and
China accounted for 20% of net sales in 2000 and 14% in 1999. In 2001, net
sales for the Company's distributors outside the U.S. market were less than one
percent of net sales. At December 31, 2001 and 2000, the Company's net assets
outside of the United States, consisting principally of cash and cash
equivalents, accounts receivable, inventory and office equipment, were
approximately $6,192,000 and $6,101,000, respectively.
12. SUBSEQUENT EVENT
In January 2002, the company incurred a compensation charge in the amount of
$330,000 in connection with a severance payout upon the resignation of an
officer of the Company. The related compensation was awarded through a
combination of cash and the accelerated vesting of options.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
First Quarter Second Quarter Third Quarter Fourth
Ended Ended Ended Quarter Ended
Fiscal 2001 March 31 June 30 September 30 December 31
----------- -------------- --------------- -------------- --------------
Net sales and revenue........ $ 9,290,629 $ 17,290,707 $ 20,916,638 $ 22,410,322
Cost of sales................ 3,744,504 5,725,840 5,118,949 4,575,143
Gross Margin................. 5,546,125 11,564,867 15,797,689 17,835,179
Income (loss) from operations (7,246,946) (3,884,953) 1,612,921 2,315,137
Net income (loss)............ (6,628,567) (3,296,606) 2,086,241 2,730,091
Net income (loss) per share.. (0.41) (0.20) 0.13 0.17
First Quarter Second Quarter Third Quarter Fourth
Ended Ended Ended Quarter Ended
Fiscal 2000 March 31 June 30 September 30 December 31
----------- -------------- --------------- -------------- --------------
Net sales and revenue........ 846,046 1,197,647 1,301,771 3,184,117
Cost of sales................ 753,380 770,013 833,390 1,900,819
Gross Margin................. 92,666 427,634 468,381 1,283,298
Loss from operations......... (7,799,879) (8,178,103) (9,807,332) (11,033,625)
Net loss..................... (7,198,942) (7,129,133) (8,704,782) (10,040,616)
Net loss per share........... (0.50) (0.45) (0.54) (0.63)
The Company recorded a restructuring charge and other expense in the amount
of $1.2 million during the fourth quarter ended December 31, 2001.
55
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, on March 29, 2002.
NOVOSTE CORPORATION
/s/ THOMAS D. WELDON
By: _______________________________
Thomas D. Weldon
Chairman and Chief Executive
Officer
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 indicated on March 29, 2002.
/s/ THOMAS D. WELDON
- ----------------------------- Chairman and Chief Executive
Thomas D. Weldon Officer (Principal Executive Officer)
/s/ EDWIN B. CORDELL, JR.
- ----------------------------- Chief Financial Officer (Principal
Edwin B. Cordell, Jr. Financial and Accounting Officer)
/s/ WILLIAM A. HAWKINS
- -----------------------------
William A. Hawkins Director
/s/ DONALD C. HARRISON
- -----------------------------
Donald C. Harrison, M.D. Director
/s/ J. STEPHEN HOLMES
- -----------------------------
J. Stephen Holmes Director
/s/ CHARLES E. LARSEN
- -----------------------------
Charles E. Larsen Director
/s/ STEPHEN I. SHAPIRO
- -----------------------------
Stephen I. Shapiro Director
/s/ NORMAN R. WELDON
- -----------------------------
Norman R. Weldon, PhD. Director
/s/ WILLIAM E. WHITMER
- -----------------------------
William E. Whitmer Director
56
INDEX TO EXHIBITS
Exhibit
Numbers Description
- ------- -----------
3.1 Articles of Incorporation of Registrant, as amended. (1)
3.2 Form of Amended and Restated Articles of Incorporation of Registrant filed on May 28, 1996. (1)
3.2(a) Copy of First Amendment to Amended and Restated Articles of Incorporation of Novoste
Corporation filed with the Department of State of the State of Florida on November 1, 1996. (2)
3.3(a) Copy of Amended and Restated By-Laws of Registrant adopted December 20, 1996. (3)
4.1 Form of Specimen Common Stock Certificate of Registrant. (1)
4.2 Registration Rights Agreement, dated July 28, 1995, by and among Registrant, Norman R.
Weldon, Thomas D. Weldon, Charles E. Larsen, the Hillman Investors (as defined therein), Noro-
Moseley Partners-III, L.P. and Advanced Technology Ventures IV, L.P. (1)
4.17(a) Amended and Restated Rights Agreement, dated as of July 29, 1999, between Novoste
Corporation and American Stock Transfer & Trust Company, which includes as Exhibit B thereto
the Form of Right Certificate. (2)
4.17(b) Amended and Restated Summary of Rights to Purchase Preferred Shares of Novoste
Corporation. (2)
4.20 Registration Rights Agreement dated as of March 28, 2000 by and among Novoste Corporation
and the investors listed on the signature pages thereto. (12)
*10.1 Copy of Stock Option Plan of Registrant, as amended. (3)
H10.2 License Agreement, dated January 30, 1996, between Emory University and Registrant. (1)
H10.4 License Agreement, dated January 31, 1996, between Spencer B. King III, M.D. and
Registrant. (1)
H10.5 Restenosis Therapy Project Development and Supply Agreement, dated November 28, 1994, with
Registrant, relating to the supply of radioactive beta isotopes. (1)
H10.6 Option to Purchase Assets Agreement dated August 22, 1995, with Registrant relating to the
purchase of assets of Registrant's supplier of radioactive beta isotopes. (1)
H10.10 Frame Agreement with Bebig Isotopentechnik und Umweltdiagnostik GmbH regarding purchases
and investment grant. (3)
*10.12 Copy of Non-Employee Director Stock Option Plan. (3)
H10.13 Memorandum of Understanding between Registrant and Bebig Isotopentechnik und
Umweltdiagnostik GmbH regarding purchases and investment grant dated April 23, 1997. (4)
10.14 Employment Agreement with William A. Hawkins III. (5)
10.16 Restricted Stock Award Agreement with William A. Hawkins III. (5)
10.17 Non-Incentive Stock Option Agreement with William A. Hawkins III. (5)
H10.18 Amendment to Framework Agreement and Security Agreement with Bebig GmbH. (5)
10.19 Lease, dated October 23, 1998, between Weeks Realty, L.P. and Registrant. (6)
H10.20 Manufacturing and Supply Agreement dated April 21, 1998 between Registrant and SeaMED
Corporation. (7)
#10.20a Manufacturing and Supply Agreement dated September 1, 1999 between Registrant and SeaMED,
a Plexus Company. (11)
*10.22 Restricted Stock Award dated July 1, 1999 between Novoste Corporation and William A.
Hawkins. (9)
57
Exhibit
Numbers Description
- ------- -----------
H10.25 Development and Manufacturing Agreement between AEA Technology -QSA GmbH and Novoste
Corporation. (10)
H10.27 Amendment to the Framework Agreement and Security Agreement (NOV 34) between Registrant
and Bebig Isotopentechnik und Umweltdiagnostik GmbH. (11)
10.29 Amendment to the Framework and Security Agreement (NOV 34) between Registrant and Bebig
Isotopentechnik und Umweltdiagnostik GmbH. (14)
10.30 Loan and Security Agreement dated August 1, 2001 between Silicon Valley Bank and Novoste
Corporation. (13)
10.31 Negative Pledge Agreement dated August 1, 2001 between Silicon Valley Bank and Novoste
Corporation. (13)
10.32 Form of change of control agreement executed between Novoste Corporation and Executive
officers. (13)
*10.33 Executive Deferred Income Plan.
23.1 Consent of Ernst & Young LLP, Independent Auditors
- --------
H Portions have been omitted and filed separately with the Securities and
Exchange Commission pursuant to an order granting confidential treatment.
(1) Filed as same numbered Exhibit to the Registrant's Registration Statement
on Form S-1 (File No. 333-4988).
(2) Filed as same numbered Exhibit to the Registrant's Report on Form 8-A/A
filed on August 3, 1999.
(3) Filed as Exhibit A to the Registrant's Proxy Statement for its 2001 Annual
Meeting of Stockholders filed on April 30, 2001.
(4) Filed as same numbered Exhibit to the Registrant's Registration Statement
on Form S-3 (File No. 333-38573).
(5) Filed as same numbered Exhibit to the Registrant's Report on Form 10-Q
filed on August 11, 1998.
(6) Filed as same numbered Exhibit to the Registrant's Report on Form 10-Q
filed on November 9, 1998.
(7) Filed as same numbered Exhibit to the Registrant's Report on Form 8-K
filed on January 27,1999.
(8) Filed as same numbered Exhibit to the Registrant's Registration Statement
on Form S-3 (File No. 333-72073).
(9) Filed as same numbered Exhibit to the Registrant's Report on Form 10-Q
filed on August 11, 1999.
(10) Filed as same numbered Exhibit to the Registrant's Report on Form 10-Q
filed on November 5, 1999.
(11) Filed as same numbered Exhibit to the Registrant's Report on Form 10-Q
filed May 15, 2000.
(12) Filed as same numbered Exhibit to the Registrant's Report on Form 8-K
filed April 6, 2000
(13) Filed as same numbered Exhibit to the Registrant's Report on Form 10-Q
filed November 14, 2001.
(14) Filed as same numbered Exhibit to the Registrant's Report on Form 10-Q
filed August 14, 2001.
* Constitutes a compensatory plan, contract or arrangement.
58