UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(X) QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended April 3, 2005
or
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from __________ to __________
Commission
File No. 0-15443
THERAGENICS
CORPORATION®
(Exact
name of registrant as specified in its charter)
|
Delaware |
58-1528626 |
|
(State
or other jurisdiction of |
(I.R.S.
Employer |
|
incorporation
or organization) |
Identification
Number) |
| |
|
|
5203
Bristol Industrial Way |
|
|
Buford,
Georgia |
30518 |
|
(Address
of principal executive offices) |
(Zip
Code) |
Registrant's
telephone number, including area code: (770) 271-0233
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X
NO ___
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). YES X
NO ___
As of May
10, 2005
the number of shares of $0.01 par value common stock outstanding was
31,908,572.
THERAGENICS
CORPORATION®
| |
Page
No. |
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3 |
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3 |
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3 |
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5 |
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6 |
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7 |
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8 |
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ITEM
2. |
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14 |
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ITEM
3. |
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25 |
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ITEM
4. |
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25 |
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PART
II. |
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25 |
| |
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|
ITEM
1. |
|
25 |
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ITEM
5. |
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25 |
| |
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ITEM
6. |
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25 |
| |
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26 |
THERAGENICS
CORPORATION®
(Amounts
in thousands, except per share data)
ASSETS |
|
|
|
|
|
| |
|
April
3, |
|
December
31, |
|
| |
|
2005
(unaudited) |
|
2004 |
|
| |
|
|
|
|
|
|
CURRENT
ASSETS |
|
|
|
|
|
|
|
|
Cash
and short-term investments |
|
$ |
29,084 |
|
$ |
26,150 |
|
|
Marketable
securities |
|
|
32,868 |
|
|
36,111 |
|
|
Trade
accounts receivable, less allowance of $184 in 2005 and $177 in
2004 |
|
|
6,021 |
|
|
5,787 |
|
|
Inventories |
|
|
3,061 |
|
|
2,996 |
|
|
Deferred
income tax asset |
|
|
585 |
|
|
410 |
|
|
Prepaid
expenses and other current assets |
|
|
4,440 |
|
|
4,221 |
|
|
TOTAL
CURRENT ASSETS |
|
|
76,059 |
|
|
75,675 |
|
| |
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT |
|
|
|
|
|
|
|
|
Buildings
and improvements |
|
|
44,061 |
|
|
43,618 |
|
|
Machinery
and equipment |
|
|
64,081 |
|
|
61,560 |
|
|
Office
furniture and equipment |
|
|
810 |
|
|
810 |
|
| |
|
|
108,952 |
|
|
105,988 |
|
|
Less
accumulated depreciation and |
|
|
|
|
|
|
|
|
amortization |
|
|
(42,983 |
) |
|
(41,226 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
65,969 |
|
|
64,762 |
|
| |
|
|
|
|
|
|
|
|
Land |
|
|
822 |
|
|
822 |
|
|
Construction
in progress |
|
|
1,831 |
|
|
4,631 |
|
|
TOTAL
PROPERTY AND EQUIPMENT |
|
|
68,622 |
|
|
70,215 |
|
| |
|
|
|
|
|
|
|
|
OTHER
ASSETS |
|
|
3,123 |
|
|
2,788 |
|
| |
|
|
|
|
|
|
|
|
TOTAL
ASSETS |
|
$ |
147,804 |
|
$ |
148,678 |
|
| |
|
|
|
|
|
|
|
THERAGENICS
CORPORATION®
BALANCE
SHEETS - Continued
(Amounts
in thousands, except per share data)
LIABILITIES
& SHAREHOLDERS’ EQUITY
|
|
|
April
3, |
|
|
December
31, |
|
|
|
|
|
2005
(unaudited) |
|
|
2004 |
|
| |
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES |
|
|
|
|
|
|
|
|
Trade
accounts payable |
|
$ |
1,619 |
|
$ |
1,871 |
|
|
Accrued
salaries, wages and payroll taxes |
|
|
488 |
|
|
608 |
|
|
Other
current liabilities |
|
|
646 |
|
|
607 |
|
| |
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES |
|
|
2,753 |
|
|
3,086 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES |
|
|
|
|
|
|
|
|
Deferred
income taxes |
|
|
6,758 |
|
|
6,920 |
|
|
Asset
retirement obligation |
|
|
602 |
|
|
549 |
|
|
Other
liabilities |
|
|
73
|
|
|
63 |
|
| |
|
|
|
|
|
|
|
|
TOTAL
LONG-TERM LIABILITIES |
|
|
7,433 |
|
|
7,532 |
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY |
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value, 100,000 |
|
|
|
|
|
|
|
|
shares
authorized; issued and outstanding, |
|
|
|
|
|
|
|
|
30,023
in 2005 and 29,989 in 2004 |
|
|
300 |
|
|
300 |
|
|
Additional
paid-in capital |
|
|
62,097 |
|
|
61,987 |
|
|
Deferred
compensation |
|
|
(16 |
) |
|
(23 |
) |
|
Retained
earnings |
|
|
75,434 |
|
|
75,930 |
|
|
Accumulated
other comprehensive loss |
|
|
(197 |
) |
|
(134 |
) |
| |
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS' EQUITY |
|
|
137,618 |
|
|
138,060 |
|
| |
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND |
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY |
|
$ |
147,804 |
|
$ |
148,678 |
|
|
The
accompanying notes are an integral part of these statements.
|
THERAGENICS
CORPORATION®
(UNAUDITED)
(Amounts
in thousands, except per share data)
| |
|
Three
Months Ended |
|
| |
|
April
3, |
|
April
4, |
|
| |
|
2005 |
|
2004 |
|
|
REVENUE |
|
|
|
|
|
|
|
|
Product
sales |
|
$ |
9,462 |
|
$ |
7,882 |
|
|
Licensing
fees |
|
|
77 |
|
|
71 |
|
| |
|
|
|
|
|
|
|
| |
|
|
9,539 |
|
|
7,953 |
|
| |
|
|
|
|
|
|
|
|
COST
OF SALES |
|
|
4,794 |
|
|
3,398 |
|
| |
|
|
|
|
|
|
|
|
GROSS
PROFIT |
|
|
4,745 |
|
|
4,555 |
|
| |
|
|
|
|
|
|
|
|
OPERATING
EXPENSES |
|
|
|
|
|
|
|
|
Selling,
general & administrative |
|
|
4,501 |
|
|
4,072 |
|
|
Research
& development |
|
|
1,407 |
|
|
2,278 |
|
| |
|
|
5,908 |
|
|
6,350 |
|
| |
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS |
|
|
(1,163 |
) |
|
(1,795 |
) |
| |
|
|
|
|
|
|
|
|
OTHER
INCOME/(EXPENSE) |
|
|
|
|
|
|
|
|
Interest
income |
|
|
383 |
|
|
251 |
|
|
Interest
and financing costs |
|
|
(55 |
) |
|
(45 |
) |
|
Other |
|
|
2 |
|
|
(33 |
) |
| |
|
|
330 |
|
|
173
|
|
| |
|
|
|
|
|
|
|
|
Loss
before income tax |
|
|
(833 |
) |
|
(1,622 |
) |
|
|
|
|
|
|
|
|
|
|
Income
tax benefit |
|
|
(337 |
) |
|
(656 |
) |
| |
|
|
|
|
|
|
|
|
NET
LOSS |
|
$ |
(496 |
) |
$ |
(966 |
) |
| |
|
|
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE: |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.02 |
) |
$ |
(0.03 |
) |
|
Diluted
|
|
$ |
(0.02 |
) |
$ |
(0.03 |
) |
| |
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Basic |
|
|
30,014 |
|
|
29,957 |
|
|
Diluted |
|
|
30,014 |
|
|
29,957 |
|
| |
|
|
|
|
|
|
|
|
Comprehensive
loss: |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(496 |
) |
$ |
(966 |
) |
|
Other
comprehensive income/(loss):
Unrealized
gain/(loss) on securities available for sale, net of taxes |
|
|
(63 |
) |
|
3 |
|
|
Total
comprehensive loss |
|
$ |
(559 |
) |
$ |
(963 |
) |
| |
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements. |
THERAGENICS
CORPORATION®
(UNAUDITED)
(Amounts
in thousands)
| |
|
|
Three
Months Ended |
|
| |
|
|
April
3,
2005 |
|
|
April
4,
2004 |
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net
Loss |
|
$ |
(496 |
) |
$ |
(966 |
) |
|
Adjustments
to reconcile net loss to net cash |
|
|
|
|
|
|
|
|
provided
by/(used by) operating activities: |
|
|
|
|
|
|
|
|
Deferred
income taxes |
|
|
(337 |
) |
|
(16 |
) |
|
Depreciation
& amortization |
|
|
1,789 |
|
|
1,710 |
|
|
Provision
for allowances |
|
|
11 |
|
|
35 |
|
|
Stock
based compensation |
|
|
50 |
|
|
- |
|
|
Deferred
rent |
|
|
10 |
|
|
- |
|
|
Loss
on disposal of equipment |
|
|
- |
|
|
2 |
|
|
Changes
in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(241 |
) |
|
(982 |
) |
|
Inventories |
|
|
(69 |
) |
|
(739 |
) |
|
Prepaid
expenses and other current assets |
|
|
(219 |
) |
|
(322 |
) |
|
Other
assets |
|
|
- |
|
|
59 |
|
|
Trade
accounts payable |
|
|
(252 |
) |
|
(425 |
) |
|
Accrued
salaries, wages and payroll taxes |
|
|
(120 |
) |
|
(226 |
) |
|
Other
current liabilities |
|
|
39
|
|
|
239 |
|
|
Net
cash provided by/(used by) operating activities |
|
|
165
|
|
|
(1,631 |
) |
|
CASH
FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchases
and construction of property and equipment |
|
|
(130 |
) |
|
(482 |
) |
|
Cash
paid for acquisition |
|
|
(348 |
) |
|
(1,000 |
) |
|
Purchases
of marketable securities |
|
|
(4,266 |
) |
|
(9,559 |
) |
|
Maturities
of marketable securities |
|
|
7,446
|
|
|
4,485 |
|
|
Net
cash provided by/(used by) investing activities |
|
|
2,702
|
|
|
(6,556 |
) |
|
CASH
FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Exercise
of stock options and stock purchase plan |
|
|
67
|
|
|
51 |
|
|
Net
cash provided by financing activities |
|
|
67
|
|
|
51 |
|
|
NET
INCREASE/(DECREASE) IN CASH AND |
|
|
|
|
|
|
|
|
SHORT-TERM
INVESTMENTS |
|
|
|
|
|
(8,136
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH
AND SHORT-TERM INVESTMENTS |
|
|
|
|
|
|
|
|
AT
BEGINNING OF PERIOD |
|
|
26,150 |
|
|
45,104 |
|
| |
|
|
|
|
|
|
|
|
CASH
AND SHORT-TERM INVESTMENTS |
|
|
|
|
|
|
|
|
AT
END OF PERIOD |
|
$
|
29,084
|
|
$ |
36,968 |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements. |
|
|
|
|
|
|
|
THERAGENICS
CORPORATION®
FOR
THE THREE MONTHS ENDED APRIL 3, 2005
(UNAUDITED)
(Amounts
in thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
| |
|
Common
Stock |
|
Additional |
|
|
|
|
|
Other |
|
|
|
| |
|
Number
of |
|
Par
value |
|
Paid-in |
|
Deferred |
|
Retained |
|
Comprehensive |
|
|
|
| |
|
shares |
|
$0.01
|
|
Capital |
|
Compensation |
|
Earnings |
|
Loss |
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2004 |
|
|
29,989 |
|
$ |
300 |
|
$ |
61,987 |
|
$ |
(23 |
) |
$ |
75,930 |
|
$ |
(134 |
) |
$ |
138,060 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options |
|
|
26
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
42 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock purchase plan |
|
|
8 |
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
25 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
incentive plan (See Note E) |
|
|
|
|
|
|
|
|
43 |
|
|
7 |
|
|
|
|
|
|
|
|
50 |
|
|
Unrealized
loss on securities
available
for sale, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63 |
) |
|
(63 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(496 |
) |
|
|
|
|
(496 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
April 3, 2005 |
|
|
30,023 |
|
$ |
300 |
|
$ |
62,097 |
|
$ |
(16 |
) |
$ |
75,434 |
|
$ |
(197 |
) |
$ |
137,618 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
statements. |
|
|
|
|
|
|
|
|
|
|
THERAGENICS
CORPORATION®
NOTES TO FINANCIAL STATEMENTS
April
3, 2005
(Unaudited)
NOTE
A - BASIS OF PRESENTATION
The
interim financial statements included herein have been prepared by the Company
without audit. These statements reflect all adjustments that are, in the opinion
of management, necessary to present fairly the financial position, results of
operations, cash flows and changes in shareholders’ equity for the periods
presented. All such adjustments are of a normal recurring nature. Beginning with
the quarter ended July 4, 2004, the Company began reflecting the quarter-end
using the actual cut-off dates, rather than rounding the reporting dates to the
nearest calendar quarter-end. The Company’s first quarter of 2005 ended on April
3, 2005. The Company’s first quarter of 2004 ended on April 4, 2004. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. The Company believes
that the financial statements and disclosures are adequate to make the
information not misleading. It is suggested that these financial statements and
notes be read in conjunction with the audited financial statements and notes for
the year ended December 31, 2004, included in the Form 10-K filed by the
Company. The results of operations for the three months ended April 3, 2005 are
not necessarily indicative of the results to be expected for a full
year.
NOTE
B - DISTRIBUTION AGREEMENTS AND MAJOR CUSTOMERS
The
Company sells its TheraSeed® device
directly to health care providers and to third party distributors.
Theragenics™ also
manufactures and distributes I-Seed, an iodine-125 based medical device,
directly to health care providers. Currently, the Company has non-exclusive
distribution agreements in place with two companies for the distribution of the
TheraSeed® device,
C. R. Bard and Medi-Physics, Inc. (formerly d/b/a Nycomed Amersham and now part
of Oncura, a company formed by a merger of the brachytherapy business of
Amersham plc and Galil Medical Ltd., and referred to herein as “Oncura”). The
non-exclusive distribution agreements for the distribution of the
TheraSeed® device
give each distributor the right to distribute the TheraSeed® device
in the U.S., Canada and Puerto Rico for the treatment of prostate cancer and
other solid localized cancerous tumors. These non-exclusive agreements give the
distributors the option to distribute the TheraSeed®
device
internationally. During December 2004, the Company was notified by Oncura that
it would not be renewing its distribution agreements effective December 31,
2005. Oncura and the Company have agreed to advance the termination of
Oncura's distribution agreements. ( See Note D.) C.R. Bard has
exercised its option to extend its distribution agreement with the Company
through December 2006.
Sales to
the two non-exclusive distributors represented 76.5% and 81.2% of total product
revenue for the three months ended April 3, 2005 and April 4, 2004,
respectively, with each of the two non-exclusive distributors each exceeding 10%
of total revenues during those periods.
Accounts
receivable from the two non-exclusive distributors represented approximately
67.4% and 73.5% of gross
accounts receivable at April 3, 2005 and December 31, 2004, respectively.
Accounts receivable from C. R. Bard exceeded 10% of total gross receivables at
April 3, 2005 and December 31, 2004 while accounts receivable from Oncura
exceeded 10% of total gross receivables at December 31, 2004.
THERAGENICS
CORPORATION®
NOTES
TO FINANCIAL STATEMENTS
April
3, 2005
(Unaudited)
NOTE
C - CONSTRUCTION IN PROGRESS AND PURCHASE COMMITMENTS
The U.S.
Department of Energy (“DOE”) has granted Theragenics™ access
to unique DOE technology (plasma separation process or “PSP”) for use in
production of isotopes, including palladium-102. The Company has constructed a
facility in Oak Ridge, Tennessee to house the equipment, infrastructure and work
force necessary to support the production of isotopes, including palladium-102,
using this DOE technology. The building and the PSP became operational during
the latter half of 2002. Additional equipment in the amount of $1.7 million has
not yet been placed in service and is recorded as construction-in-progress on
the accompanying balance sheets. Due to delays by the DOE’s primary contractor
in Oak Ridge, the Company currently anticipates that this additional equipment
will become operational during 2005.
In June
2004 the Company entered into an asset purchase agreement with a contractor for
the design and manufacture of certain equipment. The capital asset purchase
agreement in the amount of $570,000 was completed during the first quarter of
2005.
NOTE
D - CONTINGENCIES
In
January 1999, the Company and certain of its officers and directors were named
as defendants in certain securities actions alleging violations of the federal
securities laws, including Sections 10(b), 20(a) and Rule 10b-5 of the
Securities and Exchange Act of 1934, as amended. These actions were consolidated
into a single action in the U.S. District Court for the Northern District of
Georgia. The complaint, as amended, purported to represent a class of investors
who purchased or sold securities during the time period from January 29, 1998 to
January 11, 1999. The amended complaint generally alleged that the defendants
made certain misrepresentations and omissions in connection with the performance
of the Company during the class period and sought unspecified damages. In 2004,
the consolidated federal securities class action was settled for an amount
within the limits of the Company’s directors and officers’ liability insurance.
The Company was not required to make any financial contribution toward the
settlement and the federal securities case was officially over as of November 1,
2004.
On May
14, 1999 a stockholder of the Company filed a derivative complaint in the
Delaware Court of Chancery purportedly on behalf of the Company, alleging that
certain directors breached their fiduciary duties by engaging in the conduct
that was alleged in the consolidated federal class action complaint. The
derivative action was stayed by the agreement of the parties. Its status is
currently being reevaluated in light of the settlement of the securities class
action lawsuit.
The
Company and one of its distributors, Oncura, had been arbitrating claims arising
in connection with the Company’s non-exclusive distribution agreement with
Oncura. As of April 9, 2005, the arbitration was settled by mutual consent of
the parties. As part of the settlement, the Company and Oncura have agreed to
advance the termination of the distribution agreements with Oncura, and to issue
a joint announcement on June 9, 2005 with further information about the
termination and when the termination date will be.
THERAGENICS
CORPORATION®
NOTES
TO FINANCIAL STATEMENTS
April
3, 2005
(Unaudited)
From time
to time the Company may be a party to claims that arise in the ordinary course
of business, none of which, in the view of Management, is expected to have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
NOTE
E - ACCOUNTING FOR STOCK-BASED COMPENSATION
The
Company provides stock-based compensation under equity incentive plans approved
by stockholders. The plans collectively provide for the granting of stock
options, restricted stock and other equity incentives. As of April 3, 2005 there
were 2,546,133 options and 141,000 restricted stock rights (representing from
75,900 to 234,000 shares depending on performance as described below)
outstanding and 150,929 shares of Common Stock remaining available for issuance
under the Company’s equity incentive plans (based on assumed vesting of
outstanding rights at target performance level).
Stock
option grants to date have been granted with an exercise price at least equal to
100% of market value on the date granted. Stock options granted to date provide
for the expiration of options ten years from the date of grant and become
exercisable over a three to five-year vesting period.
In 2003
and 2004, each non-officer director received 1,000 shares of restricted stock
per year, with one year vesting, as one component of director compensation. The
Company issued 7,000 shares of restricted stock to the non-officer directors in
November, 2003 which vested in November, 2004. The total compensation cost
associated with these restricted shares, $30,740, was recognized over the
vesting period with $7,685 included in selling, general and administrative
expense in the accompanying statements of operations for the three months ended
April 4, 2004. The Company issued an additional 7,000 restricted shares to the
non-officer directors in November, 2004 which will vest in November, 2005. The
total compensation cost related to these restricted shares, $27,370, is being
recognized over the vesting period with $6,843 included in selling, general and
administrative expense in the accompanying statements of operations for the
three months ended April 3, 2005.
On August
10, 2004, the Board of Directors granted an aggregate of 48,000 restricted stock
rights to the Company’s executive management. Each right represents one share of
common stock to be issued upon vesting, provided that the executive remains in
the Company’s employ until the vesting date of December 31, 2005. The Company
recognized $33,000 of stock-based compensation related to these restricted stock
rights during the three months ended April 3, 2005. In February 2005 and June
2004, the Company also granted performance restricted stock rights to executive
management as long-term incentives. Under the long-term incentives, the
number of shares issuable upon vesting of each performance restricted stock
right will depend on the Company’s stock price appreciation plus dividends paid
(total shareholder return, or “TSR”) relative to an industry peer group based on
a fixed schedule. Each performance restricted stock right represents the right
to a minimum of 0.30 of a share of common stock provided that the executive
remains in the Company’s employ as of the vesting date, and a maximum of two
shares of common stock depending on the Company’s TSR. For the February 2005
grants, TSR will be measured for the period from January 1, 2005 through
December 31, 2007, and rights will vest under the program as of December 31,
2007. For the June 2004 grants, TSR will be measured for the period from January
1, 2004 through December 31, 2006, and rights will vest under the program as of
December 31, 2006. The performance restricted rights will vest at the target
THERAGENICS
CORPORATION®
NOTES
TO FINANCIAL STATEMENTS
April
3, 2005
(Unaudited)
achievement
level upon a change of control. The number of shares that could be earned in
respect of the performance restricted stock rights ranges from 13,950 shares to
93,000 shares based on TSR performance for both the February 2005 and June 2004
grants. The Company recognized $5,000 of stock-based compensation related to
each of the 13,950 share minimum ($10,000 of total stock-based compensation) for
the February 2005 and June 2004 grants, respectively, during the three months
ended April 3, 2005. Management will monitor the TSR of the Company, compared to
the industry peer group, during the vesting period for the February 2005 and
June 2004 grants and recognize additional, or adjust previously recorded
compensation expense, as appropriate. As of April 3, 2005, no additional
stock-based compensation expense was recorded based on TSR during the three
months ended April 3, 2005.
In
December 2002, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure (“SFAS
148”). SFAS 148 amends Statement No. 123, Accounting
for Stock-Based Compensation (“SFAS
123”), to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, SFAS 148 amends the disclosure requirement of SFAS 123 to require
more prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the effect of
the method used on reported results. The Company accounts for stock-based
compensation for employees under Accounting Principles Board ("APB") Opinion
No. 25, Accounting
for Stock Issued to Employees, and
elected the disclosure-only alternative under SFAS 123. No stock-based
compensation cost related to options issued to employees is included in net
earnings, as all such options granted have an exercise price equal to the market
value of the stock on the date of grant. Stock-based compensation costs of
approximately $7,000 and $8,000 are included in the results of operations for
the three months ended April 3, 2005 and April 4, 2004, respectively, related to
the restricted stock issued to directors. Stock-based compensation costs of
$43,000 are included in the results for the three months ended April 3, 2005
related to the restricted stock rights granted to executive management. In
accordance with SFAS 148, the following table presents the effect on net
earnings and net earnings per share had compensation cost for the Company's
stock plans been determined consistent with SFAS 123 (in thousands, except per
share data):
| |
|
|
Three
Months Ended |
|
| |
|
|
April
3,
2005 |
|
|
April
4,
2004 |
|
| |
|
|
|
|
|
|
|
Net
loss, as reported |
|
$ |
(496 |
) |
$ |
(966 |
) |
|
Less:
total stock-based compensation
expense
determined under fair
value
method for all stock options,
net
of related income tax benefit |
|
|
(27 |
) |
|
(97 |
) |
Pro
forma net loss |
|
$ |
(523 |
) |
$ |
(1,063 |
) |
| |
|
|
|
|
|
|
|
|
Basic
net loss per common share: |
|
|
|
As
reported |
|
$ |
(0.02 |
) |
$ |
(0.03 |
) |
Pro
forma |
|
$ |
(0.02 |
) |
$ |
(0.04 |
) |
|
Diluted
net loss per common share: |
|
|
|
As
reported |
|
$ |
(0.02 |
) |
$ |
(0.03 |
) |
Pro
forma |
|
$ |
(0.02 |
) |
$ |
(0.04 |
) |
THERAGENICS
CORPORATION®
NOTES
TO FINANCIAL STATEMENTS
April
3, 2005
(Unaudited)
Fair
value was calculated on the grant dates using the Black-Scholes options-pricing
model with the following assumptions for options issued during the three months
ended April 3, 2005 and the three months ended April 4, 2004.
| |
|
|
Three
Months Ended |
|
| |
|
|
April
3,
2005 |
|
|
April
4,
2004 |
|
Expected
dividend yield |
|
|
0.0 |
% |
|
0.0 |
% |
Expected
stock price volatility |
|
|
45.8 |
% |
|
60.3 |
% |
Risk-free
interest rate |
|
|
3.0 |
% |
|
2.9 |
% |
Expected
life of option (years) |
|
|
3.1 |
|
|
4.0 |
|
NOTE
F - NEW ACCOUNTING PRONOUNCEMENTS
In
November 2004, the FASB issued Statement of Financial Accounting Standards No.
151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4 (“SFAS
151”). SFAS 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials and requires that such
items be recognized as current-period charges regardless of whether they meet
the “so abnormal” criterion outlined in ARB No. 43. In addition, SFAS 151
requires that allocation of fixed production overhead to the cost of conversion
be based on normal capacity of the production facilities. SFAS 151 is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
While the Company is still evaluating the impact of this statement, it does not
currently believe it will have a material impact on its financial statements.
In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
123 (revised 2004), Share-based
Payments (“SFAS
123R”), which replaces the prior SFAS No. 123, Accounting
for Stock-based Compensation, and
supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees. SFAS
123R requires compensation costs related to share-based payment transactions to
be recognized in the financial statements based on the grant date fair value of
the award. Compensation cost will be recognized over the period during which an
employee is required to provide services in exchange for the award, usually the
vesting period. SFAS 123R will also require companies to measure the cost of
employee services received in exchange for Employee Stock Purchase Plan (“ESPP”)
awards. SFAS 123R was scheduled to become effective for interim or annual
periods beginning after June 15, 2005, which would have been the Company’s third
fiscal quarter of 2005. On April 14, 2005 the Securities and Exchange Commission
adopted a new rule amending the effective date of SFAS 123R for public
companies, allowing registrant’s to implement SFAS 123R at the beginning of the
next fiscal year, instead of the next interim period, that begins after June 15,
2005. This new rule delays the required effective date of SFAS 123R for the
Company until January 1, 2006. The Company has not yet implemented and is in the
process of determining the impact SFAS 123R will have on its financial
statements.
In
December 2004, the FASB issued Statement of Financial Account Standards No. 153,
Exchanges
of Nonmonetary Assets, an amendment of APB Opinion No. 29 (“SFAS
153”). SFAS 153 is effective for nonmonetary exchanges occurring in fiscal
periods beginning after June 15, 2005, with earlier application permitted. The
Company is currently evaluating SFAS 153, but does not believe it will have a
material impact on its financial statements.
THERAGENICS
CORPORATION®
NOTES
TO FINANCIAL STATEMENTS
April
3, 2005
(Unaudited)
In
December 2004, the FASB issued FASB Staff Position No. FAS 109-1,
Application
of FASB Statement No. 109, "Accounting for Income Taxes," to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004
("FAS 109-1"). The American Jobs Creation Act of 2004 introduced a special
9% tax deduction on qualified production activities. FAS 109-1 clarifies
that this tax deduction should be accounted for as a special tax deduction in
accordance with Statement 109. Pursuant to the American Jobs Creation Act of
2004, the Company does not anticipate the ability to claim this tax benefit
during 2005.
In
December 2004, the FASB issued FASB Staff Position No. FAS 109-2,
Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004
("FAS 109-2"). The American Jobs Creation Act of 2004 introduced a limited
time 85% dividends received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer (repatriation provision), provided certain criteria
are met. The Company does not expect the adoption of these new tax provisions to
have a material impact on its financial statements.
NOTE
G - REVENUE RECOGNITION
Product
sales represent orders for the TheraSeed® and
I-Seed devices and radiochemical products. The implantable radiation devices
produced according to patient and procedure requirements are sold to third-party
distributors, as well as to direct customers. Radiochemical products, typically
used in medical nuclear imaging procedures, are sold to direct customers. All
revenues from product sales are recognized upon shipment and are generally not
returnable. Licensing fees are recognized in the periods to which they relate.
NOTE
H - RECLASSIFICATIONS
Certain
amounts included in the 2004 financial statements have been reclassified to
conform to the 2005 presentation.
NOTE
I - SUBSEQUENT EVENT
On April
26, 2005, the Company entered into an agreement to acquire CP Medical
Corporation (“CP Medical”), a manufacturer and supplier of innovative sutures,
cardiac pacing cables, brachytherapy needles/spacers, and other related medical
products sold in the professional surgical and veterinary fields. On May 6,
2005, the Company completed the acquisition by paying sellers $19,032,353 in
cash and issuing 1,885,370 shares of common stock valued at approximately
$6,250,000 as calculated over a 20-day period from March 28, 2005 through April
22, 2005. The Company funded the cash portion of the purchase price from cash on
hand. At the closing, 904,977 shares of the Company’s common stock issued to the
sellers were placed in escrow for the purpose of compensating the Company in the
event the sellers must indemnify the Company pursuant to the terms of the Stock
Purchase Agreement. The Company has agreed to make
additional payments to the sellers in the event that some portion of the gain
from the sale is taxable at ordinary income (instead of capital gain) tax rates.
The stock portion of the purchase price is subject to adjustment based on the
difference between the working capital of CP Medical on the closing and CP
Medical’s working capital as of December 31, 2004. The Company estimates the
final purchase price to be approximately $25,400,000.
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Theragenics
Corporation® is the
manufacturer of TheraSeed®, a
rice-sized, FDA-cleared device used to treat solid localized tumors, primarily
prostate
cancer, with a one-time, minimally invasive procedure. Theragenics™ is the
world’s largest producer of palladium-103, the radioactive isotope that supplies
the therapeutic radiation for its TheraSeed® device.
Physicians, hospitals and other healthcare providers, primarily located in the
United States, utilize the TheraSeed® device.
The TheraSeed® device
has also been approved for marketing throughout the member countries of the
European Union by obtaining its CE Mark. Sales of the TheraSeed® device
in Europe have not been significant. The majority of sales are channeled through
two third-party distributors. The Company also sells its TheraSeed® devices
directly to physicians.
On April
26, 2005, the
Company entered into an agreement to acquire CP Medical Corporation (“CP
Medical”), a manufacturer and supplier of innovative sutures, cardiac pacing
cables, brachytherapy needles/spacers, and other related medical products sold
in the professional surgical and veterinary fields. Historically, CP Medical has
generated the majority of its revenue in the wound closure market, an estimated
$2.0 billion annual market worldwide and an estimated $1.2 billion annual market
in the United States. During 2004, approximately 70% of CP Medical’s revenue was
generated in the veterinary wound closure market, an estimated $50 million
annual market in the United States, and approximately 15% of revenue was
generated in the brachytherapy market. On May 6, 2005, the Company completed the
acquisition by paying sellers $19,032,353 in cash and issuing 1,885,370 shares
of common stock valued at approximately $6,250,000 as calculated over a 20-day
period from March 28, 2005 through April 22, 2005. The Company funded the cash
portion of the purchase price from cash on hand. At the
closing, 904,977 shares of the Company’s common stock issued to the sellers were
placed in escrow for the purpose of compensating the Company in the event the
sellers must indemnify the Company pursuant to the terms of the Stock Purchase
Agreement. The Company has agreed to make additional payments to the sellers in
the event that some portion of the gain from the sale is taxable at ordinary
income (instead of capital gain) tax rates. The stock portion of the purchase
price is subject to adjustment based on the difference between the working
capital of CP Medical on the closing and CP Medical’s working capital as of
December 31, 2004. The Company estimates the final purchase price to be
approximately $25,400,000. The
transaction establishes a new growth platform for the Company within the field
of medical devices and also serves to diversify the Company’s product offerings
within its core brachytherapy business. The former owners of CP Medical hold
approximately 6% of the outstanding common stock of the Company.
Early in
2003 the Company diversified its product line with the purchase of the U.S.
iodine-125 prostate brachytherapy business of BEBIG Isotopen-und Medizintechnik
GmbH ("BEBIG"). The purchase gives Theragenics™ exclusive U.S. manufacturing and
distribution rights to an FDA-cleared iodine-125-based medical device (I-Seed)
for the treatment of prostate cancer. The Company sells the I-Seed device
directly to physicians, hospitals and other healthcare providers. The
non-exclusive distributors of the TheraSeed®
device have no
distribution rights for the I-Seed device. The
Company believes that the ability to provide both TheraSeed® and
I-Seed devices enhances the Company’s ability to market to direct customers who
seek a single source for both palladium-103 and iodine-125 brachytherapy seeds.
The U.S.
Department of Energy (“DOE”) has granted Theragenics™ access to unique DOE
technology, known as plasma separation process or PSP, for use in production of
isotopes, including palladium-102 (the “PSP Operation”). The Company has
constructed a facility in Oak Ridge, Tennessee to house the equipment,
infrastructure and work force necessary to support the production of isotopes,
including palladium-102, using this DOE technology. The building and the PSP
became operational during the latter half of 2002. The Company also has access
to and has made investments in other unique DOE resources. Additional equipment
in the amount of $1.7 million, which is physically located within DOE facilities
in Oak Ridge, has not yet been placed in service and is recorded as
construction-in-progress on the accompanying balance sheets. Due to delays by
the DOE’s primary contractor in Oak Ridge, the Company currently anticipates
that this additional equipment will become operational during 2005. As a result
of the sensitive nature of the PSP equipment and other unique DOE resources and
facilities, the specialized technology involved and the restrictions on access
to unique DOE-operated facilities, the Company has contracted with the DOE’s
primary contractor for its Oak Ridge facilities to handle certain technical and
operational services that are critical to the operation, including designing and
fabricating new parts and modifications to the equipment and DOE facilities,
operating and providing ongoing access to DOE facilities, and providing access
to other DOE resources. The success of the PSP Operation is, in part, dependent
on the continued cooperation of the DOE and its primary contractor, which could
be adversely affected by future changes in governmental program priorities and
funding. If there are problems with the operation or modification of the
DOE-operated facilities, problems with access to other DOE resources, or if
unforeseen challenges arise, the PSP Operation may not be successful or the
costs or availability associated with the PSP Operation could be adversely
affected. Additionally, as a result of the sensitive nature of the PSP equipment
and the specialized technology involved, the DOE is able to terminate the
Company’s access in the event of national emergency or in the interest of
national defense, or require the Company to perform programmatic work involving
use of the technology for the DOE in connection with carrying out its
governmental mission. The Company would be entitled to compensation in the event
of termination in connection with national emergency or defense or for
programmatic use of the technology for the DOE. Use of the PSP by Theragenics™
is also subject to classification and export control restrictions imposed by the
DOE and the U.S. government.
In
connection with the Company’s ongoing program targeted at diversifying its
future revenue stream, the Company continues to explore new applications for PSP
technology. Among other things, the PSP technology enables the Company to
conduct feasibility runs designed to validate isotope usage in various diverse
industries and potential markets. The Company is actively looking at other
opportunities for utilization of the PSP, including, but not limited to, being
active in the Federal budget process, and working to ensure that the PSP's
capabilities are known to Federal agencies such as the Departments of Defense
and Energy.
In the
first quarter of 2004 the Company’s Oak Ridge operations began to enrich
palladium-102, which can be activated in a nuclear reactor to produce
palladium-103. The enriched palladium-102, along with access to specialized
reactor and related capabilities, could potentially supply the palladium-103
radioisotope to support TheraSeed®
production, if necessary. The Company completed PSP production of palladium-102
at the Oak Ridge facility during October 2004, and completed chemical recovery
and processing in December 2004. The Company sold the excess palladium metal
remaining after the production and recovery of palladium-102 for approximately
$453,000, which reduced the carrying value of inventory by this amount. As a
result of the cessation of production of palladium-102 at the Oak Ridge
facility, in 2005 the Company has ceased capitalization of the palladium-102
production costs.
In 2003
the Company commenced a clinical trial using a palladium-103 device, called the
TheraSource®
Intravascular Brachytherapy System, designed to prevent restenosis or
renarrowing of arteries following treatment of
peripheral vascular disease by percutaneous transluminal angioplasty. Use of the
TheraSource® device
was found to be clinically safe and technologically feasible. The Company is
currently exploring potential external opportunities for the
TheraSource® device
and the Company anticipates internal costs and efforts to be minimal going
forward.
During
the second quarter of 2004, the Company filed an Investigational Device
Exemption (“IDE”) with the FDA to begin a human clinical trial for the
TheraSight®
Ocular
Brachytherapy System, a device intended to treat exudative (wet) age-related
macular degeneration (“AMD”), a disease that leads to loss of eyesight and in
some cases complete blindness. The IDE was approved by the FDA on July 29, 2004,
and enrollment commenced in the fourth quarter of 2004 to test the safety and
feasibility of the TheraSight® device.
The Company has patents pending on the TheraSight® device
and plans to run the trial at six separate clinical sites and expects to treat
approximately 30 patients. The Company has treated seven patients to date in the
TheraSight® trial.
The Company continues to be mindful of the potential competition in this market,
including but not limited to, existing treatments and other on-going clinical
trials in this area. Research and development expenditures are likely to
continue as our diversification initiatives are pursued.
The
Company has also identified potential opportunities, utilizing its cyclotrons,
for production of radiochemical products, which are typically used in medical
nuclear imaging procedures. During 2004, the Company began regular shipments to
customers of two radiochemicals, produced on the Company’s cyclotrons. The
revenue recognized during the three months ended April 3, 2005 and April 4, 2004
was not material. The Company has received a Drug Master File for these products
from the FDA, which will potentially allow access to a wider range of customers.
The Company also continues to assess the markets for other radiochemicals it is
able to produce using the existing cyclotrons. These developments could, if
pursued, increase research and development expenses. Radiochemical
product sales are not expected to have a material impact on revenue during
2005.
The
Company is also searching for, reviewing and evaluating internal and external
opportunities for diversification in the form of new products (for example, a
device for the treatment of breast cancer), joint ventures, partnerships, and/or
acquisitions of technologies, products and companies.
Results
of Operations
Revenues
for the three months ended April 3, 2005 were $9.5 million, compared to $8.0
million for the three months ended April 4, 2004, an increase of $1.5 million,
or 19.9%. The
increase in revenue during 2005 was primarily due to a 15.0% increase in unit
sales of the TheraSeed® device
during the three months ended April 3, 2005 compared to the corresponding period
of 2004 and $183,000 of revenue recognized in the three months ended April 3,
2005 for certain ancillary services to one distributor. The average selling
price of the TheraSeed® device
was consistent during the first three months of 2005 as compared to the first
three months of 2004. During the three months ended April 3, 2005, the
Company sold approximately 21.5% of total unit sales of the Company’s
palladium-103 (TheraSeed®) device
and iodine-125 (I-Seed) device directly
to customers compared to 15.8% of total unit sales (TheraSeed® and
I-Seed) directly
to customers during the three months ended April 4, 2004. Total revenue from
sales to direct customers (TheraSeed® and
I-Seed) was 23.0% of total product revenue during the three months ended April
3, 2005 compared to 18.8% of total product revenue during the three months ended
April 4, 2004. Revenue from distributors, including the $183,000 of revenue
generated from ancillary services, increased approximately 13.1% during the
three months ended April 3, 2005 compared to the three months ended April 4,
2004.
Currently,
the Company has non-exclusive distribution agreements in place with two
companies for the distribution of the TheraSeedâ device,
C. R. Bard and Medi-Physics, Inc. (formerly d/b/a Nycomed Amersham and now part
of Oncura, a company formed by a merger of the brachytherapy business of
Amersham plc and Galil Medical Ltd. and referred to herein as “Oncura”). C.R.
Bard has exercised its option to extend its distribution agreement with the
Company through December 2006. During December 2004, the Company was notified by
Oncura that it would not be renewing its distribution agreements effective
December 31, 2005. Sales to Oncura during the three months ended April 3, 2005
declined by 25.4% compared to the corresponding period of 2004.
The
Company and Oncura had been arbitrating claims arising in connection with the
Company’s non-exclusive distribution agreement with Oncura. As of April 9, 2005,
the arbitration was settled by mutual consent of the parties. As part of the
settlement, the Company and Oncura have agreed to advance the termination of the
distribution agreements with Oncura, and to issue a joint announcement on June
9, 2005 with further information about the termination and when the termination
date will be.
In
addition to the impact of disappointing performance by one of the two
distributors of the TheraSeed® device,
Management believes that the brachytherapy industry continues to be affected by
competition from alternative therapies, changes in medicare reimbursement,
declining prices for iodine-125 and palladium-103 seeds, competitors’ selling
tactics and the effects of consolidation in the industry. At any point in time,
Theragenics™ and/or its non-exclusive distributors may change their respective
pricing policies for the TheraSeed® or
I-Seed (in the case of Theragenics™) device in order to take advantage of market
opportunities or respond to competitive situations. Responding to market
opportunities and competitive situations could have an adverse effect on the
prices of the TheraSeed® or
I-Seed device and could have a favorable effect or prevent an unfavorable effect
on market share and volumes. Conversely, the Company and its non-exclusive
distributors could individually and independently decide to maintain per unit
pricing under certain competitive situations that could adversely affect current
or potential market share and volumes.
Licensing
fees revenue represents licensing payments for the Company’s
TheraSphere®
technology. Such licensing fees are not expected to become material in the
foreseeable future.
Cost of
sales was $4.8 million during the three months ended April 3, 2005, resulting in
a gross profit margin of 49.7%, compared with cost of sales of $3.4 million and
a gross profit margin of 57.3% during the three months ended April 4, 2004. The
decreased gross margin during 2005 was due primarily to a decrease in the amount
of material produced and used to support research and development efforts during
the three months ended April 3, 2005 compared to the corresponding period of
2004 as well as $513,000 of production costs capitalized during the three months
ended April 4, 2004 associated with the first production of palladium-102
material using the PSP technology at the Company’s Oak Ridge, Tennessee
facility. As a result of the cessation of production of palladium-102 during the
fourth quarter of 2004, no production costs were capitalized during the first
quarter of 2005 and none are expected to be capitalized during 2005. The gross
margin in 2005 was favorably impacted by $183,000 of revenue from ancillary
services to a certain distributor during the three months ended April 3, 2005
and by the
considerable fixed cost component of Theragenics’™ operations in combination
with increased revenue during the three months ended April 3, 2005 compared to
the corresponding period of 2004.
Selling,
general and administrative (“SG&A”) expense was $4.5 million during the
three months ended April 3, 2005, compared to $4.1 million during the three
months ended April 4, 2004, an increase of $429,000, or 10.5%. The increase in
2005 was primarily due to an increase in marketing and advertising costs of
$453,000. Other increases in the areas of executive compensation and legal fees
were offset by decreases in employee recruitment costs and other professional
fees. SG&A expenses for the second quarter of 2005 will reflect severance
costs associated with the departure of two executive officers.
Research
and development (“R&D”) expense decreased to $1.4 million, or approximately
14.7% of revenue, during the three months ended April 3, 2005, from $2.3
million, or approximately 28.6% of revenue, during the three months ended April
4, 2004. The decrease in R&D expense during 2005 was primarily attributable
to a decrease in the amount of palladium-103 material produced and used in
research and development efforts during the three months ended April 3, 2005
compared to the corresponding period of 2004 as well as a reduction of other
R&D costs due to the completion of the TheraP trial during 2004 and delays
in enrolling patients in the TheraSight trial (see “Overview” above).
Management
plans to continue efforts in R&D as its initiatives to diversify move
forward, and expects R&D expenditures to be significant. Such expenditures
in R&D may negatively affect results of operations. However, R&D
spending is dependent on the scheduling of R&D activities in progress as
well as the pursuit of other appropriate opportunities as they arise.
Accordingly, R&D expenses may fluctuate significantly from period to period.
Other
income, comprising interest income and non-operating expenses, was $330,000
during the three months ended April 3, 2005 compared to $173,000 during the
three months ended April 4, 2004. The increase during 2005 is primarily the
result of better returns on the Company’s investments as a result of higher
interest rates in the first three months of 2005 compared to the first three
months of 2004. The Company’s investments consist primarily of short-term cash
investments and high-credit quality corporate and municipal obligations, in
accordance with the Company’s investment policies. Funds available for
investment have and will continue to be utilized for the Company’s current and
future expansion programs, R&D activities, and strategic opportunities for
growth and diversification. As funds continue to be used for these programs and
activities, and as interest rates continue to change, management expects other
income to fluctuate accordingly.
The
Company’s effective income tax rate was a benefit of 40.5% during the three
months ended April 3, 2005 compared to a benefit of 40.4% during the three
months ended April 4, 2004. The Company’s income tax rate in each period
differed from statutory rates primarily due to the recognition of tax credits
generated by the Company’s investments in its expansion projects, research
activities and tax-exempt interest income.
Critical
Accounting Policies
The
financial statements of Theragenics Corporationâ are
prepared in conformity with accounting principles generally accepted in the
United States of America. Management is required to make certain estimates,
judgments and assumptions that we believe are reasonable based upon the
information available. These estimates and assumptions affect the reported
amounts of assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the periods presented. The
significant accounting policies which we believe are the most critical to aid in
fully understanding and evaluating our reported financial results include the
following:
Property,
plant and equipment. Property,
plant and equipment are recorded at cost and depreciated on a straight-line
basis over the estimated useful lives of such assets. The Company’s estimates
can result in differences from the actual useful lives of certain assets. The
Company currently owns and operates 14 cyclotrons, the first of which entered
service in 1993. Each of the Company’s cyclotrons is depreciated using an
estimated 10-year life. Management’s estimate of the useful life of these
cyclotrons is based on the Company’s experience to date with these cyclotrons.
Based on experience gained relative to the operation, refurbishment, and
maintenance of the cyclotrons, Management believes there is a substantive basis
for the current depreciable lives of the cyclotrons. Although the older
cyclotrons require increased maintenance, all the cyclotrons remain in service,
including fully depreciated cyclotrons, because the material produced by each
machine is required for ongoing operations and the Company’s current research
and development initiatives.
The PSP
equipment was placed in service during the second half of 2002 and is
depreciated using an estimated fifteen-year life. The PSP equipment utilizes
specialized, unique technology.
Management
will continue to periodically examine estimates used for depreciation for
reasonableness. If the Company should determine that the useful life of
property, plant or equipment should be shortened or lengthened, depreciation
expense would be adjusted accordingly for the remaining useful life/(lives) of
the identified asset/(s).
A
significant portion of the Company’s depreciable assets is utilized in the
production of its product. Management assesses the impairment of its depreciable
assets whenever events or circumstances indicate that such assets might be
impaired. In the event the expected undiscounted future cash flow attributable
to the asset is less than the carrying value of the asset, an impairment loss
equal to the excess of the asset’s carrying value over its fair value is
recorded. Management believes that no impairment of depreciable assets exists as
of April 3, 2005. It is possible, however, that Management’s estimates
concerning the realizability of the Company’s depreciable assets could change in
the future.
Goodwill. Early in
2003 the Company entered into an agreement to purchase the brachytherapy
business of BEBIG Isotopen-und Medizintechnik GmbH, a subsidiary company of
Eckert & Ziegler AG. A total of approximately $6.3 million was paid in
connection with the acquisition and the payments were allocated between the fair
value of the assets in the amount of $3.7 million and $2.6 million to goodwill.
The equipment became operational during the first quarter of 2004. The Company
has determined that the production line will be amortized over a fifteen-year
life.
The
Company accounts for goodwill and other intangible assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets (“SFAS
142”). Under SFAS 142, goodwill and intangible assets with indefinite lives are
not amortized to expense and must be reviewed for impairment annually or more
frequently if events or changes in circumstances indicate that such assets might
be impaired. The first step of the impairment test, used to identify potential
impairment, compares the fair value of a reporting unit with its carrying
amount, including goodwill and intangible assets with indefinite lives. The
Company operates as one reporting unit and therefore compares its book value to
market value (market capitalization plus a control premium). If fair value
exceeds book value, goodwill is considered not impaired, and the second step of
the impairment test is unnecessary. If book value exceeds market value, the
second step of the impairment test is preformed to measure the amount of
impairment loss, if any. For this step the implied fair value of the goodwill is
compared with the book value of the goodwill. If the carrying amount of the
goodwill exceeds the implied fair value of the goodwill, an impairment loss
would be recognized in an amount equal to that excess. Any loss recognized
cannot exceed the carrying amount of goodwill. After an impairment loss is
recognized, the adjusted carrying amount of goodwill is its new accounting
basis. Subsequent reversal of a previously recognized impairment loss is
prohibited once the measurement of that loss is completed. The Company completed
its annual goodwill impairment assessment as of November 28, 2004 and determined
that goodwill was not impaired and no impairment charge was
recorded.
Intangible
assets with definite lives are being amortized and this amortization is included
in the accompanying statements of operations.
Allowance
for doubtful accounts.
Management judgments and estimates are made and used in connection with
establishing an allowance for the possibility that portions of our accounts
receivable balances may become uncollectable. Accounts receivable are reduced by
this allowance. Specifically, Management analyzes accounts receivable in
relation to current economic trends and changes in our customer payment history
in establishing this allowance. The accounts receivable balance, net of the
provision for trade accounts receivables allowance of $184,000, was
approximately $6.0 million as of April 3, 2005.
Stock-based
compensation. The
Company has granted performance restricted stock rights. The number of shares
issuable upon vesting of the performance restricted stock rights will vary based
on total shareholder return or TSR over the vesting period as compared to an
industry peer group, as further described in Note E of the Notes to Financial
Statements. Each quarter the Company estimates TSR and records compensation
expense based on TSR experienced to date. To the extent that TSR varies
significantly from period to period, the Company may record additional
compensation expense or adjust previously recorded compensation expense to
reflect the current estimate of TSR over the vesting period.
Liquidity
and Capital Resources
The
Company had cash, short-term investments and marketable securities of $62.0
million at April 3, 2005, compared to $62.3 million at December 31, 2004. Cash
and short-term investments were $29.1 million at April 3, 2005 compared to $26.2
million at December 31, 2004. Marketable securities were $32.9 million at April
3, 2005 compared to $36.1 million at December 31, 2004. Marketable securities
consist primarily of short-term cash investments and high-credit quality
corporate and municipal obligations, in accordance with the Company’s investment
policies. The aggregate decrease in cash, short-term investments and marketable
securities was a result of capital expenditures and costs associated with the
acquisition of CP Medical. Working capital was $73.3 million at April 3, 2005,
compared to $72.6 million at December 31, 2004. The Company also has a Credit
Agreement with a financial institution that provides for revolving borrowings of
up to $40.0 million, including a $5.0 million sub-limit for letters of credit,
through a credit facility which expires on October 29, 2006. No borrowings were
outstanding under the Credit Agreement as of April 3, 2005. Letters of credit
totaling $933,000 were outstanding under the Credit Agreement as of April 3,
2005. These letters of credit represent decommission funding required by the
Georgia Department of Natural Resources and a utility deposit to the City of Oak
Ridge, Tennessee in connection with the PSP facility. Pursuant to the terms and
conditions specified in the Stock Purchase Agreement between the Company and CP
Medical, a letter of credit in the amount of $250,000 was issued on April 26,
2005 representing liquidated damages payable to CP Medical in the event the
Stock Purchase Agreement is terminated by the Company. The letter of credit was
terminated following the closing of the acquisition on May 6, 2005.
Cash
provided by operations was $165,000 during the three months ended April 3, 2005
compared to cash used by operations of $1.6 million during the three months
ended April 4, 2004. Cash used by or generated from operations consists of net
earnings/(loss) plus non-cash expenses such as depreciation, amortization, and
changes in balance sheet items such as accounts receivable, inventories, prepaid
expenses and payables. Accounts receivable increased approximately $241,000
during the first three months of 2005 as a result of increased revenue during
the first quarter of 2005 compared to the fourth quarter of 2004 and the timing
of
payments
received from the Company’s distributors. Prepaid expenses and other current
assets increased $219,000 during the first three months of 2005 primarily as a
result of the timing of prepayments under the Company’s advertising and group
health insurance programs in the first quarter of 2005 compared to the fourth
quarter of 2004. Trade accounts payable decreased $252,000 during the first
three months of 2005 due primarily to the final payment made under a $570,000
purchase agreement of the Company with a
contractor for the design and manufacture of certain equipment.
Capital
expenditures totaled $130,000 and $482,000 during the first three months of 2005
and 2004, respectively. In addition, the Company made payments for acquisition
costs of $348,000 during the first quarter of 2005 as part of the acquisition of
CP Medical and made the final payment of $1.0 million during the first three
months of 2004 as part of the Company’s purchase of the U.S. iodine-125 prostate
brachytherapy business of BEBIG (see “Overview” above).
The Company procured an automated production line as part of the agreement that
became operational during the first quarter of 2004.
On May 6,
2005, the Company completed the purchase of CP Medical (see “Overview” above)
by paying $19,032,353 in cash and issuing 1,885,370 shares of common stock
valued at approximately $6,250,000 as calculated over a 20-day period from March
28, 2005 through April 22, 2005. The Company funded the cash portion of the
purchase price from cash on hand. At the
closing, 904,977 shares of the Company’s common stock issued to the sellers were
placed in escrow for the purpose of compensating the Company in the event the
sellers must indemnify the Company pursuant to the terms of the Stock Purchase
Agreement. The Company has agreed to make additional payments to the sellers in
the event that some portion of the gain from the sale is taxable at ordinary
income (instead of capital gain) tax rates. The stock portion of the purchase
price is subject to adjustment based on the difference between the working
capital of CP Medical on the closing and CP Medical’s working capital as of
December 31, 2004. The Company estimates the final purchase price to be
approximately $25,400,000.
In
addition, the Company expects that R&D spending will continue at the current
level during the remainder of 2005 (see “Results
of Operations” above).
Cash could also be used in 2005 for increased marketing and
TheraSeed®
support
activities and in the pursuit of additional diversification efforts such as the
purchase of technologies, products or companies.
In
addition to capital expenditures, cash used for investing activities during the
three months ended April 3, 2005 included $4.3 million used to purchase
marketable securities, offset by maturities of other investments amounting to
$7.4 million. Marketable securities, consisting primarily of short-term cash
investments and high-credit quality corporate and municipal obligations, are
purchased in accordance with the Company’s investment policies. The Company
expects to continue to invest cash as available.
Cash
provided by financing activities was $67,000 and $51,000 in the first three
months of 2005 and 2004, respectively, consisting of cash proceeds from the
exercise of stock options and the Company’s Employee Stock Purchase
Plan.
The
Company believes that current cash and investment balances and cash from future
operations and credit facilities will be sufficient to meet its current
anticipated working capital and capital expenditure requirements. In the event
additional financing becomes necessary, management may choose to raise those
funds through other means of financing as appropriate.
Government
Regulation
The
Company is required under its radioactive materials license to maintain
radiation control and radiation safety personnel, procedures, equipment and
processes, and to monitor its facilities and its employees and contractors. The
Company is also required to provide financial assurance that adequate funding
will exist for end-of-life radiological decommissioning of its cyclotrons and
other radioactive areas of its property that contain radioactive materials. The
Company has provided this financial assurance through the issuance of letters of
credit. The Company is also subject to federal, state and local regulations
relating to the discharge of materials into the environment generally. During
2003, the Company became aware of the need for an Industrial Process Water
Permit from the city of Buford, Georgia. The Company has taken all the required
steps to obtain this permit and expects to obtain this permit, but has also
requested a determination of non-applicability. The Company has been authorized
by the City to discharge industrial process water to the municipal sewage system
while the City considers its final decision.
Medicare
Developments
On
December 8, 2003, the President signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (“MMA”) into law that provides for
improved reimbursement and coding policies in 2004 and beyond for brachytherapy
seeds/sources under Medicare’s hospital outpatient prospective payment system
(“OPPS”).
The
brachytherapy provisions in the MMA, which went into effect on January 1, 2004,
require Medicare to unbundle the cost of the brachytherapy seeds/sources from
the costs of the brachytherapy procedure, catheters and needles under the OPPS.
More specifically, the MMA requires Medicare to reimburse hospitals for each
brachytherapy seed/source furnished between January 1, 2004 to December 31, 2006
based on the hospital’s costs for each patient (calculated from the hospital’s
charges adjusted by the hospital’s specific cost-to-charge ratio). This means
that hospital reimbursement is no longer limited to or dictated by the bundled
reimbursement amounts assigned to the brachytherapy codes that the Centers for
Medicare and Medicaid Services (“CMS”) used in 2003.
With
respect to coding, the MMA requires the Medicare program to create and use
coding that classifies brachytherapy seeds/sources separately from all the other
services and items reimbursed under the OPPS. These separate codes for
brachytherapy seeds/sources must be used in a manner that reflects the type of
radioactive isotope (for example, palladium-103), the radioactive intensity and
the number of brachytherapy seeds/sources used to treat each patient.
Depending
on the number of seeds needed to treat each prostate cancer patient, the total
reimbursement (for the combination of the unbundled procedure codes and seeds)
for the payment methodology in place until at least December 31, 2006 may be
higher than the 2003 bundled payment amounts. The MMA also directs the U.S.
Government Accountability Office (“GAO”, formerly the General Accounting Office)
to conduct a study examining future payment policies for brachytherapy seeds.
The GAO study is still pending.
The
Company believes its efforts in assisting policymakers in formulating and
revising Medicare policies to recognize the unique aspects of classification and
reimbursement that apply to brachytherapy devices such as TheraSeedâ were
pivotal to the enactment of the improved 2003 Medicare legislation for
brachytherapy seeds/sources. The Company plans to continue working to assist
policymakers regarding these important issues in the future.
Due to
the fact that the Medicare rules governing coding of brachytherapy seeds/sources
have undergone significant change during the past few years, the Company
believes that Medicare reimbursement may continue to create confusion for
hospitals and doctors going forward. In that regard, Management continues to
closely monitor any effects of the reimbursement structure on the brachytherapy
market as it continues to evaluate pricing, marketing and distribution
strategies. The Company continues to engage a consulting firm specializing in
reimbursement practices to help communicate brachytherapy reimbursement
guidelines to customers.
Forward
Looking and Cautionary Statements
This
document contains certain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 including, without limitation,
statements regarding sales, marketing and distribution efforts, the Company’s
direct sales organization, including, but not limited to, its growth and
effectiveness, third-party reimbursement, CMS policy, sales mix, effectiveness
and continuation of non-exclusive distribution agreements, pricing for the
TheraSeed® and
I-Seed devices, future cost of sales, R&D efforts and expenses, inventory
investment, SG&A expenses, other income, timing and ultimate outcome of the
Company’s activities in peripheral vascular and macular degeneration programs
and other diversification efforts, potential new products and opportunities, the
PSP-related operations, the development of new markets and technologies, the
capabilities of the PSP to produce enriched isotopes, opportunities for isotopes
produced by Theragenics™, including, but not limited to, stable isotopes and
radiochemical products, the identification and development of new markets and
applications for isotopes, Theragenics’™ plans and strategies for
diversification, and the sufficiency of the Company’s liquidity and capital
resources. From time to time, the Company may also make other forward-looking
statements relating to such matters as well as statements relating to
anticipated financial performance, business prospects, technological
developments, other research and development activities and similar matters.
These forward-looking statements are subject to certain risks, uncertainties and
other factors which could cause actual results to differ materially from those
anticipated, including risks associated with research and development
activities, including animal studies and clinical trials related to new
products, risks associated with new product development cycles, effectiveness
and execution of marketing and sales programs of Theragenics™ and its
non-exclusive distributors, risks associated with customer distribution
concentration and consolidation among non-exclusive distributors and potential
changes in distributor relationships, potential costs and delays in capacity
expansion and start-up, potential costs and delays in PSP-related operations,
effect of palladium-103 demand on cyclotron and PSP capacity and investment in
inventory, the iodine-125 product line, actual or potential changes in product
pricing, competitive conditions and selling tactics of the Company’s
competitors, continued acceptance of TheraSeed® or the
I-Seed devices by the market, management of growth, acceptance and efficacy of
palladium-103 for other applications, adverse changes in governmental program
priorities and budgetary funding by the relevant governmental authorities,
continuing access to unique DOE technology, the DOE’s ability to require the
Company to use DOE technology for governmental purposes or terminate the
Company’s use in the event of a national emergency or for national defense,
government regulation of the therapeutic radiological pharmaceutical and device
business, potential changes in third-party reimbursement, risks associated with
market development activities, potential inability of the PSP to produce
isotopes suited for a particular application, potential inability to produce
selected isotopes at costs competitive to other options or potential inability
to produce selected isotopes at costs to make applications economically
feasible, risks associated with governmental regulations and related export
controls and security requirements for PSP technology and products. All forward
looking statements and cautionary statements included in this document are made
as of the date hereby based on information available to the Company as of the
date hereof, and the Company assumes no obligation to update any forward looking
statement or cautionary statement.
An
important element of our strategy is to seek acquisition prospects and
diversification opportunities that we believe will complement or diversify our
existing product offerings, augment our market coverage and customer base,
enhance our technological capabilities or offer revenue and profit growth
opportunities. We acquired CP Medical in May 2005. Further transactions of this
nature could result in potentially dilutive issuance of equity securities, use
of cash and/or the incurring of debt and the assumption of contingent
liabilities.
Acquisitions
entail numerous costs, challenges and risks, including difficulties in the
assimilation of acquired operations, technologies, personnel and products and
the retention of existing customers and strategic partners, diversion of
management’s attention from other business concerns, risks of entering markets
in which we have limited or no prior experience and potential loss of key
employees of acquired organizations. Other risks include the potential strain on
the combined companies’ financial and managerial controls and reporting systems
and procedures, greater than anticipated costs and expenses related to
integration, and potential unknown liabilities associated with the acquired
entities. No assurance can be given as to our ability to successfully integrate
the businesses, products, technologies or personnel acquired in past
acquisitions or those of other entities that may be acquired in the future or to
successfully develop any products or technologies that might be contemplated by
any future joint venture or similar arrangement. A failure to integrate CP
Medical or to integrate future potential acquisitions could result in our
failure to achieve our revenue growth or other objectives associated with
acquisitions, or recover costs associated with these acquisitions, which could
affect our profitability or cause the market price of our common stock to fall.
The
integration of CP Medical may be complex, time consuming and expensive and may
disrupt our businesses. The combined company will need to overcome significant
challenges in order to realize benefits or synergies from the acquisition. These
challenges include the timely, efficient and successful execution of a number of
post-acquisition events, including:
| |
· |
integrating
the operations and technologies of the two
companies; |
| |
· |
retaining
and assimilating the key personnel of each
company; |
| |
· |
retaining
existing customers of both companies and attracting additional
customers; |
| |
· |
retaining
strategic partners of each company and attracting new strategic
partners; and |
| |
· |
creating
uniform standards, controls, procedures, policies and information
systems. |
The
execution of these post-acquisition events will involve considerable risks and
may not be successful. These risks include:
| |
· |
the
potential disruption of the combined companies ongoing businesses and
distraction of management; |
| |
· |
the
potential strain on the combined companies financial and managerial
controls and reporting systems and
procedures; |
| |
· |
potential
unknown liabilities associated with the acquisition and the combined
operations. |
The
Company may not succeed in addressing these risks or any other problems
encountered in connection with the acquisition. The inability to successfully
integrate the operations, technology and personnel of the two companies, or any
significant delay in achieving integration, could have a material adverse effect
on the Company.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
The
Company's market risk exposure related to market risk sensitive financial
instruments is not material. Letters of credit totaling approximately $933,000
were outstanding under the terms of the Credit Agreement as of April 3, 2005. No
borrowings were outstanding under the Credit Agreement as of April 3, 2005.
Pursuant to the terms and conditions specified in the Stock Purchase Agreement
between the Company and CP Medical, a letter of credit in the amount of $250,000
was issued on April 26, 2005 representing liquidated damages payable to CP
Medical in the event the Stock Purchase Agreement is terminated by the Company.
The letter of credit was terminated following the closing of the acquisition on
May 6, 2005.
The
Company’s President and Chief Executive Officer and its Chief Financial Officer
are responsible for establishing and maintaining disclosure controls and
procedures as defined in the rules promulgated under the Securities Exchange Act
of 1934, as amended. Based upon the evaluation of the Company’s disclosure
controls and procedures as of April 3, 2005, the Company’s Chief Executive
Officer and President and its Acting Chief Financial Officer have concluded that
the Company’s disclosure controls and procedures were effective as of April 3,
2005. No changes in the Company’s internal controls over financial reporting
were identified as having occurred in the fiscal quarter ending April 3, 2005
that have materially affected, or are reasonably likely to materially affect,
the Company’s internal controls over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
See Note
D to the Company’s financial statements included in Part I, Item 1 of this
report, which is hereby incorporated by reference.
Item
5. Other Information
On May 8,
2005, the Company announced the resignation of James MacLennan as the Company’s
Chief Financial Officer and Tracy Caswell as the Company’s General Counsel and
Secretary. The Company has agreed to provide Mr. MacLennan and Ms. Caswell
severance payments and benefits substantially similar to amounts payable under
their respective employment agreements in connection with a termination without
cause. The documentation for these arrangements is in the process of completion,
and will be reported under Item 1.01 of Form 8-K within the prescribed period
upon entering into definitive documentation.
| |
Exhibit
No. |
Title |
| |
|
|
| |
31.1 |
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and Section 302 of
the Sarbanes-Oxley Act of 2002. |
| |
31.2 |
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and Section 302 of
the Sarbanes-Oxley Act of 2002. |
| |
32.1 |
Certification
of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title
18, United States Code, as adopted to Section 906 of the Sarbanes-Oxley
Act of 2002. |
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32.2 |
Certification
of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title
18, United States Code, as adopted to Section 906 of the Sarbanes-Oxley
Act of 2002. |
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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|
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REGISTRANT:
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/s/ M. Christine
Jacobs |
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M.
Christine Jacobs
Chief
Executive Officer |
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/s/ Bruce W. Smith |
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Bruce W. Smith
Acting
Chief Financial Officer |
Dated:
May 13, 2005
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