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.
[X] For the quarterly period ended June 30, 2002
[ ] Transition period pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from __________ to __________.
0-20727
(Commission File Number)
NOVOSTE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 59-2787476
------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3890 STEVE REYNOLDS BLVD.
NORCROSS, GA 30093
------------ -----
(Address of Principal Executive Offices) (Zip Code)
(770) 717-0904
(Registrant's telephone, including area code)
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.
(Item 1) Yes X No
--------------- ----------------
(Item 2) Yes X No
--------------- ----------------
As of July 31, 2002 there were 16,346,173 shares of the Registrant's Common
Stock outstanding.
NOVOSTE CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE NO
-------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (unaudited) 3
and December 31, 2001
Consolidated Statements of Operations (unaudited) for the three and six 4
months ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows (unaudited) for the six 5
months ended June 30, 2002 and 2001
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NOVOSTE CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2002 December 31, 2001
------------------ ------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 16,594,765 $ 5,878,286
Short-term investments 17,648,393 31,683,627
Accounts receivable, net of allowance of
$1,119,545 and $878,424 respectively 13,108,113 16,130,721
Inventory, net 3,976,539 3,746,433
Prepaid expenses and other current assets 1,242,751 1,023,137
-------------- ---------------
Total current assets 52,570,561 58,462,204
--------------- ---------------
Property and equipment, net 9,806,116 9,886,711
Radiation and transfer devices, net 10,363,064 13,534,356
Receivable from officers 314,497 144,025
Other assets 1,058,715 883,311
-------------- ---------------
Total assets $ 74,112,953 $ 82,910,607
============== ===============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 2,594,789 $ 4,026,866
Accrued expenses 7,924,814 10,917,277
Unearned revenue 2,258,189 2,786,476
Revolving Line of Credit - -
Capital lease obligations 138,514 249,212
-------------- ---------------
Total current liabilities 12,916,306 17,979,831
-------------- ---------------
Long-term liabilities
Capital lease obligations 182,852 203,135
-------------- ---------------
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;
16,351,953 and 16,265,081 shares issued, 163,520 162,651
Additional paid-in capital 187,478,589 187,357,044
Accumulated other comprehensive income (loss) 265,066 (408,139)
Accumulated deficit (126,532,530) (121,383,528)
-------------- ---------------
61,374,645 65,728,028
Less treasury stock, 5,780 shares of common stock at cost (23,840) (23,840)
Unearned compensation (337,010) (976,547)
-------------- ---------------
Total shareholders' equity 61,013,795 64,727,641
-------------- ---------------
Total liabilities and shareholders' equity $ 74,112,953 $ 82,910,607
============== ===============
See accompanying notes.
3
5
1489942v3
NOVOSTE CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- ---------------------------------------
2002 2001 2002 2001
----------------- ------------------ ------------------- ------------------
Net sales $ 16,824,300 $ 17,290,707 $ 39,756,652 $ 26,581,336
Cost of sales 6,214,300 5,725,840 12,892,421 9,470,344
Impairment charge 6,900,000 0 6,900,000 0
----------------- ------------------ ------------------- ------------------
Gross margin 3,710,000 11,564,867 19,964,231 17,110,992
----------------- ------------------ ------------------- ------------------
Operating expenses:
Research and development 3,464,246 3,724,430 6,123,172 7,320,567
Sales and marketing 6,544,863 9,149,095 14,762,959 16,435,330
General administrative 2,293,249 2,576,295 4,490,673 4,486,995
----------------- ------------------ ------------------- ------------------
Total operating expenses 12,302,358 15,449,820 25,376,804 28,242,892
----------------- ------------------ ------------------- ------------------
Loss from operations (8,592,358) (3,884,953) (5,412,573) (11,131,900)
Interest income, interest expense
and other, net 40,864 588,347 313,571 1,206,726
----------------- ------------------ ------------------- ------------------
Loss before income taxes (8,551,494) (3,296,606) (5,099,002) (9,925,174)
Income taxes 0 0 (50,000) 0
----------------- ------------------ ------------------- ------------------
Net loss $ (8,551,494) $ (3,296,606) $ (5,149,002) $ (9,925,174)
================= ================== =================== ==================
Net loss per share - basic and diluted $ (0.52) $ (0.20) $ (0.32) $ (0.62)
================= ================== =================== ==================
Weighted average shares outstanding
basic and diluted 16,311,496 16,131,974 16,295,926 16,104,834
See accompanying notes.
4
NOVOSTE CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Months Ended
June 30,
2002 2001
----------------- -----------------
Cash flows from operating activities:
Net income (loss) $ (5,149,002) $ (9,925,174)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization 1,099,788 1,151,032
Issuance (cancellation) of stock for service or compensation 196,875 1,076,614
Amortization of deferred compensation 96,681 (241,069)
Amortization of radiation & transfer devices 6,029,897 1,440,662
Provision for doubtful accounts 241,121 304,013
Changes in assets and liabilities:
Accounts receivable 2,988,355 (9,351,855)
Inventory (260,106) (1,388,639)
Prepaid expenses (219,705) (316,039)
Accounts payable (1,303,762) (446,249)
Accrued expenses and taxes withheld (4,824,768) 2,541,543
Unearned revenue (553,330) 2,502,122
Impairment Charge 5,065,000 --
Other 397,213 (1,738,847)
----------------- -----------------
Net cash generated (used) by operations 3,604,317 (14,391,886)
----------------- -----------------
Cash flow from investing activities:
Maturity (purchase) of short-term investments 14,035,234 1,809,585
Purchase of property and equipment, net (999,822) (2,698,664)
Purchase of radiation and transfer devices (6,073,605) (4,765,405)
----------------- -----------------
Net cash (provided by and used by) investing activities 6,961,807 (5,654,484)
----------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 468,397 929,850
Repayment of capital lease obligations (130,981) (115,307)
----------------- -----------------
Net cash provided by financing activities 337,416 814,543
Effect of exchange rate changes on cash (187,060) 511,484
Net increase (decrease) in cash and cash equivalents 10,716,479 (18,720,343)
Cash and equivalents at beginning of period 5,878,286 26,512,398
----------------- -----------------
Cash and cash equivalents at end of period $ 16,594,765 $ 7,792,055
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
Information:
Cash paid for interest $ (20,718) $ (31,027)
Non-cash investing and financing activities:
Assets acquired under capital lease $ 0 $ 105,000
----------------------------------------------------------------------------------------------------------------
See accompanying notes.
5
NOVOSTE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with instructions to Article 10 of
Regulation S-X. Accordingly, such consolidated financial statements do not
include all of the information and disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included.
The operating results of the interim periods presented are not necessarily
indicative of the results to be achieved for the year ending December 31, 2002.
The accompanying consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 2001 included in the Company's 2001 Annual Report on Form 10-K
filed with the Securities and Exchange Commission ("SEC").
The consolidated financial statements include the accounts of Novoste
Corporation and its wholly-owned subsidiaries incorporated in August 1998 in the
Netherlands, in December 1998 in Belgium, in February 1999 in Germany, in
January 2000 in France and a dedicated sales corporation incorporated in the
state of Florida in 2002. Significant intercompany transactions and accounts
have been eliminated.
NOTE 2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents are comprised of certain highly liquid investments with
maturities of less than three months at the time of their acquisition. In
addition to cash equivalents, the Company has investments in commercial paper
and other securities that are classified as short-term. Management determines
the appropriate classification of debt securities at the time of purchase.
All securities are considered as available-for-sale and reported at fair value,
with the unrealized gains and losses reported in a separate component of
shareholders' equity, if significant. The amortized cost of debt securities in
this category if significant, is adjusted for amortization included in interest
income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in investment income. At June 30, 2002, fair value approximated net
book value for all short-term investments and all were considered
available-for-sale and have been accounted for as such.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 2002 and December 31, 2001 includes receivables
due from product sales and amounts due under lease arrangements relating to
radiation and transfer devices (see Note 5. Radiation and Transfer Devices). The
carrying amounts reported in the consolidated balance sheets for accounts
receivable approximate their fair value. The Company performs periodic credit
evaluations of its customers' 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 three-month periods ended June 30,
2002 and 2001 amounted to $158,265 and $200,000, respectively, and for the
six-month periods were $164,107 and $300,000.
6
NOTE 4. 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:
June 30, 2002 December 31, 2001
----------------- -------------------
Raw Materials $ 2,852,217 $ 1,971,347
Work in Process 419,677 811,406
Finished Goods 704,645 963,680
----------------- -------------------
Total $ 3,976,539 $ 3,746,433
================= ====================
NOTE 5. RADIATION AND TRANSFER DEVICES
The Company retains ownership of the radiation source trains (RSTs) and transfer
devices (TDs). Depreciation of the costs of these assets is taken over the
estimated useful life using the straight-line method and recorded in cost of
sales. Depreciation begins once the Beta-Cath(TM) System is placed into service.
The annual agreements with the Company's customers to license the use of
radiation and transfer devices are classified by the Company as operating
leases.
During 2001 the Company estimated the useful lives of these assets to be 18
months based upon the information available at that time. During January 2002,
the Company determined that, based upon new testing and experience, the
estimated useful lives of RSTs are twelve months and the TDs are three years.
Accordingly, depreciation has been recorded over the new estimated lives
starting at the beginning of the first quarter 2002. The Company still begins
depreciation when the Beta-Cath(TM) System is placed into service and accounts
for annual agreements to license the Beta-Cath(TM) System as leases. Income is
recognized ratably over the length of the lease. At June 30, 2002, deferred
revenue under these leases approximated $1.3 million. At June 30, 2002,
equipment with a cost of approximately $24.8 million less $5.1 million reserve
for impairment (See Note 11) before accumulated depreciation of approximately
$9.4 million, was subject to operating leases. Approximately $3.2 million of
radiation and transfer devices were available for lease at June 30, 2002.
Radiation and transfer devices are stated at cost and less impairment charge are
comprised of the following:
June 30, 2002 December 31, 2001
---------------------- -----------------------
Radiation and Transfer Devices $ 19,777,352 $ 18,753,747
Less: Accumulated Depreciation (9,414,288) (5,219,391)
---------------------- -----------------------
$ 10,363,064 $ 13,534,356
====================== =======================
NOTE 6. 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 and also
provides an advance for related payroll taxes. The payroll tax advance is
reflected as a receivable from officers on the balance sheet. During the three
months ended June 30, 2002, the Company made matching contributions of
approximately $7,000 but made no related advances for payroll taxes. There were
no similar compensation expenses or payroll advances for the three-month period
ended June 30, 2001. Payroll advances provided to officers of the Company are
reflected as receivables 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
7
future from the available funds. At June 30, 2002 and December 31, 2001, the
receivable from officers balance was $314,497 and $144,025, respectively.
NOTE 7. LINE OF CREDIT
In August 2001, the Company obtained a $10 million revolving line of credit.
During the six months ended June 30, the Company had borrowed as much $4
million; however, at June 30, 2002 and December 31, 2001, the Company had no
outstanding borrowings. The Company may borrow an amount not to exceed the
borrowing base as defined in the loan agreement, principally based on domestic
accounts receivables. Interest on outstanding balances 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%. The Company granted a first priority security
interest in substantially all assets of the Company to the lender. The Company
was not in violation of any of its loan covenants at June 30, 2002. By agreement
between the Company and the lender, dated July 30, 2002, the maturity date of
the original Loan Agreement between the parties was extended to August 31, 2002.
It is anticipated that a new revolving line of credit agreement, under similar
terms, will be completed and executed prior to the expiration of the extended
maturity date.
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 in
the aggregate.
NOTE 8. 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 accessing
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:
North America, Europe and the Rest of World (Canada, Asia and South America)
The Company's net sales, net income or loss from operations and long-lived
assets by geographic area at and for the six months ended June 30 for 2002 and
2001 are as follows:
Net sales
United States Europe Rest of World Consolidated
------------- ------ ------------- ------------
2002 $36,825,566 $2,618,630 $312,456 $39,756,652
2001 24,028,800 2,124,193 428,343 26,581,336
8
Net Income
(Loss)
United States Europe Rest of World Consolidated
------------- ------ ------------- ------------
2002 $(3,333,985) $(1,487,388) $(327,629) $(5,149,002)
2001 (7,009,801) (2,841,898) (73,475) (9,925,174)
Long-lived assets
United States Europe Rest of World Consolidated
------------- ------ ------------- ------------
2002 $18,013,188 $2,019,201 $136,791 $20,169,180
2001 16,453,494 798,188 105,096 17,356,778
At June 30, 2002 and December 31, 2001, the Company's net assets outside of the
United States, consisting principally of cash and cash equivalents, accounts
receivable, transfer devices and office equipment, were approximately $5.4
million and $4.8 million, respectively.
NOTE 9. EARNINGS (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 are not included
in the per share calculations where the effect of their inclusion would be
antidilutive.
The following table sets forth the computation of basic and diluted earnings
(loss) per share for the three and six month periods ended June 30, 2002 and
2001:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ------------------------------
2002 2001 2002 2001
---------------- -------------- --------------- --------------
Numerator:
Net income (loss) $(8,551,494) $(3,296,606) $(5,149,002) $(9,925,174)
Denominator:
Weighted-average shares outstanding 16,311,496 16,131,974 16,295,926 16,104,834
Net income (loss) per share:
Basic and diluted $(0.52) $(0.20) $(0.32) $(0.62)
9
NOTE 10. SHAREHOLDERS' EQUITY
For the three and six month periods ended June 30, 2002 changes in shareholders'
equity consisted of the following:
Three Months Six Months
---------------------- ----------------------
Shareholders' Equity at beginning of period $ 68,833,803 $ 64,727,641
Proceeds from exercise of 5,000 and 56,375 stock options
ranging from $1.00 to $6.65 per share 5,000 364,369
Proceeds from issuance of stock under employee stock purchase
plan, 25,497 shares on 6/28/02 at $4.08 per share 104,028 104,028
Deferred compensation relating to accelerated vesting of
certain stock options 196,873
Amortization of unearned compensation 45,743 96,681
Comprehensive loss:
Translation adjustment 576,715 673,205
Net income (loss) (8,551,494) (5,149,002)
---------------------- ----------------------
Total comprehensive loss (7,974,779) (4,475,797)
Shareholders' Equity at June 30, 2002 $ 61,013,795 $ 61,013,795
====================== ======================
NOTE 11. IMPAIRMENT CHARGES
In March 2002, Novoste began commercial distribution of a newer, smaller
Beta-Cath (TM) System equipped with a 3.5F diameter catheter. Original plans
were to introduce the product slowly; however, the smaller diameter system
allows physicians to provide better and more comprehensive treatment to their
patients, and demand for the new product exceeded expectations, with the
first-year goal of installed sites being achieved in less than four months.
While the older, larger 5.0F diameter Beth Cath systems are still serviceable,
during Q2 of 2002, Novoste decided to concentrate marketing and development
efforts on the 3.5 F diameter Beta-Cath (TM) System and phase out the older 5.0F
systems. Accordingly, the Company evaluated the ongoing value of these older
systems that are equipped to use with 30mm and 40mm radiation source trains.
Based on this evaluation, the Company determined that the radiation devices,
which are long-lived assets, with a carrying amount of $8.6 million, were no
longer recoverable and wrote them down to their estimated fair value of $3.5
million and accrued $1.8 million for related expenses, resulting in an
impairment charge of $6.9 million for the second quarter. Fair value was based
on expected future net cash flows to be generated by the radiation devices
during their remaining service lives, discounted at the risk-free rate of
interest. Because of uncertain market conditions and the rate of exchange of the
older systems for the newer systems, it is reasonably possible that our estimate
of discounted cash flows may change in the near term resulting in the need to
adjust our determination of fair value.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD LOOKING INFORMATION
The statements contained in this Form 10-Q 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 expectations, beliefs, intentions or strategies regarding
the future. The Company intends 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 the Company's 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 the actual results
of the Company to differ materially from any future results expressed or implied
by such forward-looking statements. Some of these risks are discussed below in
the sections "Liquidity and Capital Resources" and "Certain Factors That May
Impact Future Operations and Liquidity." Additional risk factors are discussed
in other reports filed by the Company from time to time on Forms 10-K, 10-Q and
8-K, including the Company's annual report on Form 10-K for the year ended
December 31, 2001. The Company does not undertake any obligations to update or
revise any forward-looking statements, made by it or on its behalf, whether as a
result of new information, future events, or otherwise.
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.
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 and 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
11
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.
The Company sales its catheters with no right of return except in cases of
product malfunction or shipping errors. A reserve has been recorded against
revenue for known returns and an estimate of unknown returns. In connection with
the introduction of the 3.5F catheter system in the second quarter of 2002 the
Company has exchanged some 5F catheters for 3.5F catheters for its customers.
The exchange of these catheters is likely to continue in the future until the
3.5F system has been fully launched to all customer sites. For the three-month
period ended June 30, 2002 the Company has recorded a reserve for approximately
$1,000,000 to recognize that some 5F catheters purchased prior to June 30, 2002
may be exchanged in the future for 3.5F catheters. Although these 5F catheters
can be resold, the Company believes it is prudent to postpone the recognition of
this revenue until the exchanges have been completed or the likelihood of
exchange has subsided. The Company has recorded this amount based upon its
estimates of 5F catheters at customers sites and the anticipated demand by its
customers for exchanges. The amount of future exchanges could differ from the
amount recorded at June 30, 2002.
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 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.
During the second quarter of 2002, Novoste decided to concentrate marketing and
development efforts on the 3.5 F diameter Beta-Cath (TM) System and phase out
the older 5.0F systems. Accordingly, the Company evaluated the recoverability of
the carrying value for 5F devices and other assets to determine if an impairment
charge was necessary. The Company performed this evaluation in accordance with
the provisions of Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS 144").
Based on this evaluation, the Company determined that an impairment charge was
warranted (See Note 11).
Stock Based Compensation
Novoste applies the provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("FAS 123"). As permitted by
FAS 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 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
12
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. The amount
recorded in the allowances is based primarily on management's evaluation of the
financial condition of the customers. 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.
OVERVIEW
Novoste commenced operations as a medical device company in May 1992. Beginning
in 1994, the Company devoted substantially all of its 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 as an adjunctive
procedure in patients with ischemic heart disease. On November 3, 2000, Novoste
received U.S. marketing approval for the 30-millimeter Beta-Cath(TM) System from
the FDA for use in patients suffering from "in-stent restenosis", a condition in
which coronary stents become clogged with new tissue growth and shipped its
first commercial system on November 27, 2000. The number of commercial sites in
the U.S. increased rapidly throughout 2001, and in the first six months of 2002,
the Company added 36 new sites, bringing the total to 390 at June 30.
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. The Company
recognized its first net operating profit in the third quarter of 2001. This
quarterly profit resulted from positive acceptance of the Beta-Cath (TM) System
launched earlier in the year, as revenue covered the extensive support
infrastructure developed to support the customer base using the new product. The
quarter also saw reduced expenses for research and development as clinical
trials associated with the Beta Cath System decreased.
Profitability continued during the fourth quarter of 2001 and the first quarter
of 2002 as growth in sites and product demand exceeded expectations. Gross
margins were the highest of the year as catheter revenue increased significantly
to cover the costs of placing the Beta-Cath (TM) System in service at customer
sites. Also during the quarter, the Company initiated an effort to reduce costs
in Europe to bring expenditures more in line with business volume.
The Company is reporting an operating loss in the second quarter 2002 driven be
lower revenues and the expense of transitioning from the 5F Beta-Cath (TM)
System to the 3.5F system. In addition, a reserve against revenue and an
impairment charge against 5F assets was recorded during the second quarter. At
June 30, 2002 we had an accumulated deficit of approximately $126.6 million.
13
RESULTS OF OPERATIONS
Net loss for the three months ended June 30, 2002 was $8,349,488 or $(0.51) per
share, as compared to a net loss of $3,296,606 or $(0.20) per share for the
three months ended June 30, 2001. Net loss for the six months ended June 30,
2002 was $4,946,997, or $(0.30) per share as compared to a net loss of
$9,925,174, or $(0.62) per share for the six months ended June 30, 2001. The
increase in net loss for the three months ended June 30, 2002 compared to the
year earlier periods was primarily due to lower revenue and the expense of
transitioning from the 5F Beta-Cath (TM) System to the 3.5F System and the
impairment charge against the 5F assets. The lower loss in the six months ended
June 30, 2002 was due to the issues impacting second quarter net loss, offset by
higher revenues and lower costs compared to the year earlier periods due to an
increase in revenue for sales in the US market from the commercial launch of the
Beta-Cath (TM) System.
Net Sales. Net sales were $16,824,300 and $39,756,652 in the three and six
months ended June 30, 2002, respectively, as compared to net sales of
$17,290,707 and $26,581,336 for the three and six months ended June 30, 2001,
respectively. Net sales recorded in the United States for the three and six
month periods ended June 30, 2002 were $15,378,734 and $36,825,566 respectively,
as compared to $16,039,613 and $24,028,800, respectively, for the same periods
ended June 30, 2001. Comparatively, international net sales increased 16% to
$1,445,566 for the three-month period and 15% to $2,931,086 for the six-month
period in 2002, compared to $1,251,094 for the 3- month period and $2,552,536
for the six-month period in 2001. International sales increased from the prior
year due to adding sites in other parts of the world.
Net sales declined for the quarter ended June 30, 2002 due to lower catheter
revenue and lease revenue. Catheter revenue was negatively impacted by the
reserve for future catheter exchanges, and lease revenue has declined because
the higher lease revenue from the larger number of new sites opened in the first
half of 2001 has not been replaced by lease revenue from the renewal of those
sites. Although the sites continue to use the Beta-Cath (TM) System, competitive
pressure has not allowed the Company to charge continued leasing fees. Excluding
the reserve for future catheter exchanges recorded in the quarter, catheter
revenue, as did unit volume, would have increased over the second quarter of
2001 based upon the larger number of sites now using the Beta-Cath (TM) System
at June 30, 2002 than at June 30, 2001.
Revenues increased for the six month period ended June 30, 2002 over the same
period a year ago due entirely to the approximately doubling of the number of
domestic sites utilizing the Beta-Cath (TM) System at June 30, 2002 as compared
to June 30, 2001. During the second quarter Novoste began commercial deployment
of a new Beta-Cath (TM) System with smaller, 3.5F diameter catheters. This new
system is expected to expand the market opportunity by allowing access to
smaller arteries in the patient. In many, but not all, applications, the 3.5 F
System can replace the older 5.0 F Beta-Cath (TM) System, thus, we expect to
experience reduced revenue from the older units as market penetration of the new
system proceeds. (See the discussion of the impairment charge in Note 12.)
Cost of Sales. Cost of sales of $6,214,300 and $12,892,421 were incurred in the
three and six months ended June 30, 2002, respectively. In addition, an
impairment charge of $7.0 million in the three months ended June 30, 2002 (See
Note 12), negatively impacted gross margins for the three and six month periods.
Reflecting cost of sales and impairment charges, gross margins for the three and
six month periods ending June 30, 2002 were $3,610,000, or 21% and $19,864,231,
or 50%, respectively. Excluding the impairment charge, gross margins were
$10,610,000, or 63%, for the three months and $26,864,231 or, 68%, for the six
months. Cost of sales for the three and six months ended June 30, 2001 were
$5,725,840 and $9,470,344, respectively, and gross margins were 67%, or,
$11,564,867, and $17,110,992 or, 64%, for the same periods respectively in 2001.
The decrease in the gross margin for the second quarter of 2002 is due to the
higher costs of maintaining more transfer devices and radiation source trains in
the larger number of sites in 2002. The six-month gross margins on both an
absolute and percentage basis increased due to the higher revenue volume. 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 and
the service costs on those transfer devices used in the Beta-Cath(TM) System.
Factors impacting cost of sales and gross margins in future quarters will
include the utilization of catheters at the sites using the Beta-Cath (TM)
System and the costs to service the existing devices as well as the new 3.5F
devices currently being launched.
14
Research and Development Expenses. Research and development expenses decreased
7% to $3,464,246 and 16% to $6,123,172 for the three and six months ended June
30, 2002, respectively, from $3,724,430 and $7,320,567 for the three and six
months ended June 30, 2001, respectively. These decreases were primarily the
result of decreased clinical trial activity related to the completion of pivotal
trials for the Beta-Cath (TM) System used in coronary applications in 2001. The
Company has however begun two new clinical trials to test the safety and
effectiveness of radiation in peripheral applications. The two trials, MOBILE
(More Beta radiation In the Lower Extremities) and BRAVO (Beta Radiation for
treatment of Arterial-Venous graft Outflow), have begun and the Company is
currently enrolling clinical trial sites and patients. The Company anticipates
increasing research and development expenses in the remainder of 2002 as it
anticipates increased enrollment in the two new trials and pursues product
improvements and line extensions, some of which may require additional clinical
trials.
Sales and Marketing Expenses. Sales and marketing expenses decreased 28% to
$6,544,863 for the three months and 10% to $14,762,959 for six months ended June
30, 2002, respectively, from $9,149,095 and $16,435,329 for the three and six
months ended June 30, 2001, respectively. These expenses declined because of
lower product launch costs incurred in 2002 than in 2001. Extra costs such as
commissions, travel, literature, trade shows, and samples were incurred last
year to facilitate introduction of the Beta-Cath (TM) System in the US market
and the start-up procedures and training of new sites in 2001. The Company
expects these costs to remain relatively consistent as a percent of revenue for
the balance of 2002.
General and Administrative Expenses. General and administrative expenses
decreased 11% to $2,293,249 for the three months ended June 30, 2002 and
increased 0.1% to $4,490,673 for the six months ended June 30, 2002, from
$2,576,296 and $4,486,996 for the three and six months ended June 30, 2001,
respectively. The decrease for the quarter is mainly due to decreased costs
associated with European operations and the consolidations of offices in Europe.
Total Other Income and Expenses. Total other income decreased 85% to $40,864 for
the three months ended June 30, 2002 and 74% to $313,571 for the six months
ended June 30, 2002, from $272,707 and $1,206,726 for the three and six months
ended June 30, 2001, respectively. The decrease is mainly due to the dramatic
decline in interest rates for short-term investments. Interest income is down
75% from the same quarter last year and down 41% year to date. In addition the
company incurred some interest costs associated with temporary borrowing from
the line of credit.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2002, the Company generated cash from
operations of $3.6 million and for the six months ended June 30, 2001 used $14.4
million of cash in operations. The $18.0 million change from cash used by
operations to cash generated by operating activities was the result of an
improvement in operating results of approximately $4.8 million and a reserve
expense of $6.9 million for the asset impairment. The improvement in operating
cash results was primarily attributable to decreasing accounts receivable in the
second quarter of 2002 because of decreasing revenue as opposed to the increase
in accounts receivable in the second quarter of 2001 due to the product launch
in the US. Other changes in inventory, accounts payable, accrued expenses and
unearned revenue offset one another and between the periods reflect the increase
in working capital needed in 2001 to fund the Beta-Cath (TM) System launch
offset by the decrease in working capital in the six months ended June 30, 2002
as the number of sites, and revenue growth slowed.
Net cash provided by and used in investing activities for the six months ended
June 30, 2002 and 2001 was $7.0 million and $5.7 million, respectively. The
decline in capital equipment purchases over the prior year is due to a slower
rate of opening new sites in 2002. The construction of the plant for 3.5F
radiation source trains is complete. The increased purchase of radiation devices
in 2002 reflects the larger number of sites that use the Beta-Cath (TM) System.
The purchase of radiation devices will continue, although at a slower rate, as
the Company continues to convert its accounts to the 3.5F System.
15
The Company's financing activities include equity offerings, borrowings under a
revolving credit facility and borrowings and repayments of capital leases.
Proceeds from the issuance of stock were received from the exercise of stock
options and the acquisition of stock by the Employee Stock Purchase Plan.
Financing activities for the six months ended June 30, 2002 and 2001 provided
net cash of $0.3 million and $54.3 million, respectively. During the quarter,
the company repaid borrowings under the revolving line of credit of $4.0
million.
In August 2001, the Company entered into a $10 million accounts receivable
revolving line of credit with a financial institution (lender) that matures in
August 2002. At June 30, 2002, the Company had no outstanding borrowings. The
Company may borrow an amount ("advances") not to exceed the borrowing base as
defined in the loan agreement, which was $8.2 million at June 30, 2002. Interest
is payable on the first of each month calculated on the outstanding balance and
accrues at a rate of the lender's prime rate plus 1% (5.75% at June 30, 2002).
At such time that the Company achieves three consecutive months of
profitability, the rate decreases to the prime rate. The Company granted a first
priority security interest in substantially all of its assets to secure the line
of credit. Additionally, the loan agreement contains certain financial and
non-financial covenants. The Company was not in violation of any of its loan
covenants at June 30, 2002.By agreement between the Company and the financial
institution, dated July 30, 2002, the maturity date of the original Loan
Agreement between the parties was extended to August 31, 2002. It is anticipated
that a new revolving line of credit agreement with the existing lender, under
similar terms, will be completed and executed prior to the expiration of the
extended maturity date.
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 or the
borrowing base minus (ii) the outstanding principal balance of the Advances and
minus (iii) the Cash Management Sublimit as defined below; however, the
aggregate face amount of all 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 did not have any letters of
credit outstanding at June 30, 2002.
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. All amounts the Lender pays for any such
cash management services will be treated as advances under the committed
revolving line. The company expects to renew the credit facility when it expires
in August with the current lender.
At June 30, 2002 the Company had commitments to purchase $4.9 million in
inventory components of the Beta-Cath(TM) System over the next six months.
On June 20, 2001, the Company entered into a manufacturing and supply agreement
(Agreement) with Bebig Isotopen-und Medizintechnik GmbH, a German corporation
(Bebig), to manufacture and supply the Company with radioactive sealed
Strontium-90 seed trains. During each calendar year under the four-year
contract, the Company guarantees to pay to Bebig minimum annual payments
totaling $7.5 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 year during the four-year contract period. For 2001, the
Company exceeded the annual guaranteed payments and expects to do so in 2002.
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 with a cost estimated at $4.0
million and was paid by the Company as construction was completed. Through June
30, 2002, the Company has paid $4.0 million towards this commitment. The plant
is expected to become operational during the third quarter 2002.
16
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 aggregate payment of $5,000,000. Royalty fees to the physician
aggregated $169,534 and $154,042 for the three months ended June 30, 2002 and
2001, respectively, and have been expensed in Cost of Sales. As of June 30,
2002, aggregate payments of $1,085,254 have been made under the license
agreement.
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. After the first commercial
sale of royalty bearing products by Novoste, minimum royalties shall be due to
Emory University in the following amounts: year 2 after the first commercial
sale - $10,000.00; year 3 - $15,000.00; year 4 - $25,00.00; and years 5-10
$50,000.00 per year. 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 $347,985 and $367,664
for the three months ended June 30, 2002 and 2001, respectively, and have been
expensed in Cost of Sales.
The Company's principal source of liquidity at June 30, 2002 consisted of cash,
cash equivalents and short-term investments of $34.2 million.
The Company had significant operating losses through the second quarter of 2001,
but was profitable for the remaining two quarters of 2001 and in the first
quarter of 2002. Although the second quarter shows a net loss, cash was
generated by operations and the Company believes that existing cash and cash
expected to be generated from operations will be sufficient to meet its working
capital, financing and capital expenditure requirements for the foreseeable
future. The Company's future liquidity and capital requirements will depend upon
numerous factors, including the risks discussed at "Certain Factors That May
Impact Future Operations And Liquidity" below and the following, 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, may not be available on
satisfactory terms, or at all.
We expect during the remainder of 2002 to continue to allocate resources to
leverage our existing manufacturing operations, both internally and with outside
vendors. We 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. These factors should generate positive operating cash flow. 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, which could
require the use of existing cash reserves.
17
CERTAIN FACTORS THAT MAY IMPACT FUTURE OPERATONS AND LIQUIDITY
We Are Dependent On The Successful Commercialization Of One Product, 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 the first six months of 2002
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; however; in the future we may be unable to manufacture
the Beta-Cath (TM ) System in commercial quantities at acceptable costs or 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
non-competitive. 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.
Coated Stents Or Other New Technology Could Render Vascular Brachytherapy
Generally Or The Beta-Cath (TM) System In Particular Noncompetitive Or Obsolete.
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 competes 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
Percutaneous Transluminal Coronary Angioplasty, " PTCA" and were used in
approximately 75% of all PTCA procedures performed worldwide in 2001.
Manufacturers of stents include Johnson & Johnson, 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 have developed
vascular brachytherapy devices in the vascular brachytherapy market.
Johnson & Johnson and
Guidant compete directly with Novoste for market acceptance of vascular
brachytherapy and each has substantially greater capital resources and greater
resources and experience at introducing new products than does Novoste. The
Company may not be able to compete effectively against Johnson & Johnson or
Guidant.
Many of these same companies and others are researching coatings and treatments
to coronary stents that could reduce restenosis and possibly be more acceptable
to a medical community already experienced at using stents. Recently, results
from early trials were reported as eliminating restenosis. If additional trials
are successful and completed in the time frames contemplated by the companies
developing coated stents, coated stents, if approved for sales, could have a
material adverse effect on Novoste's business. At least one competitor, Johnson
& Johnson, could receive FDA approval as early as 2003.
Our Patents And Proprietary Technology May Not Adequately Protect Our
Proprietary Products.
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 other 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.
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 adequate protection to us because competitors
18
may be able to design functionally equivalent devices that do not infringe them.
They could also be reexamined, invalidated or circumvented. Furthermore, 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 May Be Unable To Compete Effectively Against Larger, Better Capitalized
Companies.
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 or to effectively reduce the price of competing VBT products.
We have recently experienced significant pricing pressure from the largest VBT
competitor, Guidant. We may be unable to compete effectively against such
competitors and other potential competitors in terms of manufacturing,
marketing, distribution, sales and servicing.
Compliance With Applicable Government Regulations Will Be Expensive And
Difficult.
Our Beta-Cath(TM) System is regulated in the United States as a medical device.
As such, we are subject to extensive regulation by the FDA, by other federal,
state and local authorities and by foreign governments. 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.
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 additional approvals to market new versions of the Beta-Cath(TM)
System or new indications for the Beta-Cath System. The FDA may not act
favorably or quickly on any of our submissions to the agency. 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
market approval, any of which could limit our ability to market our systems.
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. Failure to
receive or delays in receipt of FDA approvals, including the need for additional
clinical trials or data as a prerequisite to approval, or any FDA conditions
that limit our ability to market our systems, could have a material adverse
effect on our business, financial condition and results of operations.
The Hospitals With Which We Do Business May Be Delayed In Obtaining Or May Be
Unable To Obtain The Licenses To Hold, Handle And Use Radiation That Are
Required For Our Products.
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. Hospitals in the
19
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 have
been required to amend their radiation licenses to include Strontium-90 prior to
receiving and using our Beta-Cath(TM) System. Depending on the state in which
the hospital is located, its license amendment will be processed at and its use
of the isotope will be regulated at The State of Georgia Department of Natural
Resources ("DNR"), in agreement states, or by The United States Nuclear
Regulatory Commission ("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). A significant majority of the approved
license amendments have been in Non-NRC states. If a significant number of
hospitals are delayed in obtaining approvals for the use of stroutium-90, or is
those approvals are not obtained or are withdrawn as a result of regulatory
actions or sanctions, our business, financial condition and results of operation
could be materially adversely affected.
We May Be Unable To Obtain Foreign Approval To Market Our Products.
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 a material adverse effect on our business,
financial condition, and results of operations.
Item 3. 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 June 30, 2002, the Company had $16.6 million in cash equivalents with a
weighted average interest rate of 1.05% and $17.6 million in available-for-sale
investments with a weighted average interest rate of 3.07%.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Securityholders
20
(a) The Company held its annual meeting of stockholders on June 12, 2002 and
solicited votes by proxy in connection with such meeting.
(b) The following matters were approved by the shareholders:
(i) The approval of management's nominees to the Board of Directors with
the nominees receiving the following votes:
FOR AGAINST WITHHELD
Norman R. Weldon 13,906,561 79,670 --
Thomas D. Weldon 13,906,561 79,670 --
Charles E. Larsen 13,906,561 79,670 --
(ii) The shareholders approved on amendment to the Company's 2001 Stock
Plan to increase the number of Shares of Common Stock reserved under the Plan to
a total with 9,102,776 votes in favor, 4,765,010 against and 118,445 abstained.
(iii) The ratification of the appointment of Ernst & Young LLP as
independent auditors of the Company for the year ending December 31, 2002. The
proposal received 13,904,273 votes in favor, 75,548 against and 6,410 abstained.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a)
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
99.1 Certification of Periodic Financial Reports
(b) Reports on Form 8-K.
No reports on Form 8-K were filed or required to be filed during the
quarter ended June 30, 2002.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NOVOSTE CORPORATION
August 14, 2002 /s/ Edwin B. Cordell, Jr.
--------------------------- ------------------------------------------
Date Edwin B. Cordell, Jr.
Vice President - Finance,
Chief Financial Officer
(Principal Financial & Accounting Officer)
22
1489942