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 September 30, 2001
Transition period pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934.
For the transition period from _____________ to ______________.
0-20727
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(Commission File Number)
Novoste Corporation
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(Exact Name of Registrant as Specified in Its Charter)
Florida 59-2787476
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3890 Steve Reynolds Blvd., Norcross, GA 30093
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone, including area code: (770) 717-0904
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
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(Item 2) Yes X No
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As of November 1, 2001 there were 16,231,569 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 September 30, 2001 (unaudited)
and December 31, 2000 3
Consolidated Statements of Operations (unaudited) for the three and nine
months ended September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended September 30, 2001 and 2000 5
Notes to Unaudited Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
NOVOSTE CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
September 30, 2001 December 31, 2000
------------------ -----------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 14,377,259 $ 26,512,398
Short-term investments 22,134,142 30,655,436
Accounts receivable, net of allowance 13,923,403 4,469,781
Inventories 2,682,649 1,251,687
Prepaid expenses and other current assets 1,099,769 482,383
------------- -------------
Total current assets 54,217,222 63,371,685
------------- -------------
Property and equipment, net 8,951,527 7,277,734
Radiation and transfer devices, net 12,100,439 5,480,948
Other assets 1,498,348 942,427
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Total assets $ 76,767,536 $ 77,072,794
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 2,976,790 $ 3,425,250
Accrued expenses 8,227,905 5,415,277
Unearned revenue 3,541,659 580,817
Capital lease obligations 62,011 208,805
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Total current liabilities 14,808,365 9,630,149
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Long-term liabilities
Capital lease obligations 475,152 400,526
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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;
16,223,649 and 16,094,635 shares issued, respectively 162,236 160,946
Additional paid-in-capital 187,104,201 184,511,610
Accumulated other comprehensive income (loss) (311,591) (93,690)
Accumulated deficit (124,113,621) (116,274,687)
------------- -------------
62,841,225 68,304,179
Less treasury stock, 5,780 shares of common stock at cost (23,840) (23,840)
Unearned compensation (1,333,366) (1,238,220)
------------- -------------
Total shareholders' equity 61,484,019 67,042,119
------------- -------------
Total liabilities and shareholders' equity $ 76,767,536 $ 77,072,794
============= =============
See accompanying notes.
3
NOVOSTE CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September 30, Nine months ended September 30,
-------------------------------------- ---------------------------------------
2001 2000 2001 2000
-------------------------------------- ---------------------------------------
Net Sales $ 20,916,639 $ 1,445,527 $47,497,974 $ 3,583,575
Cost of Sales 5,118,949 977,146 14,589,293 2,594,894
------------ ----------- ----------- ------------
Gross Margin 15,797,690 468,381 32,908,681 988,681
------------ ----------- ----------- ------------
Operating expenses
Research and Development 2,941,372 5,248,267 10,261,939 13,974,188
Sales and Marketing 8,990,636 3,171,584 25,425,965 8,528,790
General and Administrative 2,252,761 1,855,862 6,739,757 4,271,017
------------ ----------- ----------- ------------
Total operating expenses 14,184,769 10,275,713 42,427,661 26,773,995
------------ ----------- ----------- ------------
Income/(Loss) from operations 1,612,921 (9,807,332) (9,518,980) (25,785,314)
------------ ----------- ----------- ------------
Interest Income 492,933 1,108,202 1,742,068 2,769,783
Interest Expense 19,613 5,652 62,022 17,329
------------ ----------- ----------- ------------
473,320 1,102,550 1,680,046 2,752,457
------------ ----------- ----------- ------------
Net income/(loss) $ 2,086,241 $(8,704,782) $(7,838,934) $(23,032,857)
============ =========== =========== ============
Basic earnings per share $ 0.13 $ (0.54) $ (0.49) $ (1.50)
============ =========== =========== ============
Weighted average shares outstanding - basic 16,188,275 16,005,921 16,132,954 15,382,341
============ =========== =========== ============
Weighted average shares outstanding - diluted 16,418,391 16,005,921 16,132,954 15,382,341
============ =========== =========== ============
See accompanying notes.
4
NOVOSTE CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
2001 2000
---------------- -----------------
Cash flows from operating activities:
Net loss $ (7,383,934) $ (23,032,857)
Adjustments to reconcile net loss to net cash used by
Operating activities:
Depreciation and amortization 1,770,425 961,686
Issuance of stock for services or compensation 155,246 379,661
Amortization of deferred compensation 826,222 470,866
Amortization of radiation & transfer devices 3,077,099 -
Provision for doubtful accounts 587,920 150,000
Changes in assets and liabilities:
Accounts receivable (10,041,542) (1,387,301)
Inventory (1,430,962) 1,918,758
Prepaid expenses (617,386) (942,613)
Accounts payable (448,460) 1,729,740
Accrued expenses 2,812,628 (438,568)
Unearned revenue 2,960,842 300,482
Other (793,328) (379,808)
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Net cash used by operations (8,980,230) (20,269,774)
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Cash flow from investing activities:
Maturity of short-term investments 8,521,294 12,602,063
Purchase of property and equipment (3,339,284) (2,793,026)
Purchase of radiation and transfer devices (9,696,590) (3,487,086)
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Net cash (used) provided by investing activities (4,514,580) 6,321,951
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Cash flows from financing activities:
Proceeds from issuance of common stock 1,517,267 55,948,389
Repayment of capital lease obligations (177,103) --
------------- -------------
Net cash provided by financing activities 1,340,164 55,948,389
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Effect of exchange rates on cash and
cash equivalents 19,507 105,166
Net (decrease) increase in cash and cash equivalents (12,135,139) 42,105,732
Cash and equivalents at beginning of period 26,512,398 7,091,025
------------- -------------
Cash and cash equivalents at end of period $ 14,377,259 $ 49,196,757
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
Information:
Cash paid for interest on capital lease obligation $ (45,027) $ --
Non-cash investing and financing activities:
Assets acquired under capital lease $ 105,000 $ --
See accompanying notes.
5
NOVOSTE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
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 (consisting of normal recurring accruals) 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, 2001.
The accompanying consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 2000 included in the Company's 2000 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 and in
January 2000 in France. Significant intercompany transactions and accounts have
been eliminated.
NOTE 2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company maintains cash equivalents and investments in several large
well-capitalized financial institutions. The Company's investment policy does
not allow investment in any debt securities rated less than "investment-grade"
by national racings services. Cash equivalents are comprised of certain highly
liquid investments with maturities of less than three months. In addition to
cash equivalents, the Company has investments in commercial paper and
certificates of deposit that are classified as short-term (mature in more than
90 days but less than one year).
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
These investments are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities ("SFAS 115"). The Company has classified all short
and long-term investments as available for sale. Available for sale securities
are carried at fair value, with the unrealized gains and losses reported in a
separate component of stockholder's equity if significant. Realized gains and
losses are included in investment income and are determined on a specific
identification basis.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable at September 30, 2001 and December 31, 2000 include
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 customer's financial condition and generally does not
require collateral. Management records estimates of expected credit losses and
returns of product sold. Bad debt expense for the nine month period ended
September 30, 2001 amounted to approximately $12,000. There was no bad debt
expense recorded for the nine month period ended September 30, 2000.
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:
September 30, 2001 December 31, 2000
------------------ ------------------
Raw Materials $1,576,722 $ 777,819
Work in Process 320,398 218,958
Finished Goods 785,529 254,910
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Total $2,682,649 $1,251,687
========== ==========
NOTE 5. RADIATION AND TRANSFER DEVICES
The Company retains ownership of the radiation source trains (RSTs) and transfer
devices (TDs). During 1999, the Company was the lessor of RSTs and TDs under
annual sales-type lease agreements expiring through December 2000.
During the second quarter of 2000, the Company determined that based upon
experience, testing and discussions with the FDA the estimated useful life of
RSTs and TDs would exceed one year. Accordingly, the Company has reclassified
these assets from inventory to a long-term asset named, radiation and transfer
devices. Depreciation of the costs of these assets, which is included in cost of
sales, will be over their estimated useful lives (currently estimated at 18
months) using the straight-line method and will begin once the Beta-Cath(TM)
System is placed into service. Concurrent with the change in estimated life, the
RST and TD annual agreements to license the use of the radiation and transfer
devices are classified by the Company as operating leases. At September 30,
2001, equipment with a cost of approximately $10,509,000 before accumulated
depreciation of approximately $3,077,000 was under operating leases.
Approximately $4,669,000 of radiation and transfer devices were available for
lease at September 30, 2001. At September 30, 2001, amounts receivable under
these operating leases approximated $1,705,000 and are recorded in accounts
receivable. Radiation and transfer devices are stated at cost and are comprised
of the following:
September 30, 2001 December 31, 2000
------------------ -----------------
Radiation and Transfer Devices $ 15,177,538 $ 5,612,763
Less: Accumulated Depreciation 3,077,099 131,815
------------ -----------
Total $ 12,100,439 $ 5,480,948
============ ===========
NOTE 6. LINE OF CREDIT
In August 2001, the Company entered into a $10 million accounts receivable
revolving line of credit with a financial institution that matures in one year.
At September 30, 2001, there were no outstanding borrowings. The Company may
borrow an amount not to exceed the borrowing base of 80% of eligible accounts
receivable as defined in the loan agreement. Interest is payable on the first of
each month calculated on the outstanding balance and accrues at a rate of the
bank's prime rate plus 1%. At such time that the Company sustains three
consecutive months of profitability, the rate decreases to the prime rate. The
Company granted a first priority security interest in substantially all assets
of the Company. The Company must meet certain financial covenants related to
maintaining a minimum tangible net worth and quick ratio. The Company was not in
violation of any of its loan covenants at September 30, 2001.
NOTE 7. 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
7
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 (Asia and South America)
The Company's net sales by geographic area are as follows:
United States Europe Rest of World Consolidated
------------- ---------- ------------- ------------
2001 $43,466,425 $3,527,056 $504,493 $47,497,974
2000 462,772 2,778,233 342,570 3,583,575
At September 30, 2001 and 2000, the Company's net assets outside of the United
States, consisting principally of cash and cash equivalents, accounts
receivable, inventory and office equipment, were approximately $6,529,000 and
$3,061,000, respectively.
NOTE 8. EARNINGS PER SHARE
The computation, presentation and disclosure requirements for earnings per share
are presented in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share." Basic earnings per common share is
computed by dividing net income by the weighted average number of common shares
outstanding during each period. Diluted earnings per common share assumes
exercise of outstanding stock options and vesting of restricted stock when the
effects of such assumptions are dilutive.
The following table sets forth the computation of basic and diluted earnings per
share for the three-month period ended September 30, 2001:
Weighted average number of common shares
outstanding-Basic 16,188,275
Dilutive effect of:
Restricted stock 18,908
Stock options 211,208
----------
Weighted average number of common and common
equivalent shares outstanding-Diluted 16,418,391
==========
Common equivalent shares are antidilutive for the nine-month period ended
September 30, 2001 and for 2000.
NOTE 9. SHAREHOLDERS' EQUITY
For the three and nine month period ended September 30, 2001 changes in
shareholders' equity consisted of the following:
Shareholders' Equity at beginning of period $ 57,639,304 $ 67,042,119
------------ ------------
Exercise of 21,562 and 92,238
stock options ranging from $3.20 to $27.00
per share 210,079 1,095,445
Proceeds from issuance of stock under employee
stock purchase plan, 18,873 shares on 4/2/01 at
$14.93 pre share and 17,903 shares on 7/2/01 at
$14.93 per share 267,258 548,996
Other equity transactions 18,000 18,000
Amortization of unearned compensation 238,002 479,071
Comprehensive loss:
Translation adjustment 1,025,135 (217,901)
Net income/(loss) 2,086,241 (7,838,934)
------------ ------------
Total comprehensive income (loss) 3,111,376 (8,056,835)
------------ ------------
Shareholders' Equity at September 30, 2001 $ 61,484,019 $ 61,484,019
============ ============
During April 2001, the Company granted 101,000 stock options to certain officers
of the Company. Based quoted market value per share at the grant date, the value
of the shares has been recorded as unearned compensation in the amount of
$839,000. Such unearned compensation is being amortized to compensation expense
over the vesting period of the awards.
NOTE 10. SUBSEQUENT EVENT
Subsequent to September 30, 2001 the Company announced a restructuring of its
operations outside the United States. The restructuring is intended to reduce
operating expenses in the future by consolidating certain functions and offices
in Europe. The Company expects restructuring charges of approximately $1 million
to be incurred in the fourth quarter 2001.
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 the 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 section "Certain Factors That May Impact Future
Operations." 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, 2000. The
Company does not undertake any obligations to update or revise any forward-
looking statement, made by it or on its behalf, whether as a result of new
information, future events, or otherwise.
8
OVERVIEW
Novoste commenced operations as a medical device company in May 1992. Since
1994, we have devoted substantially all of our efforts to developing the Beta-
Cath(TM) System. The Company commenced the active marketing of the Beta-Cath(TM)
System in Europe in January 1999. 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. On September 18, 2001
Novoste received US marketing approval for the 40-millimeter Beta-Cath(TM)
System from the FDA. While the Beta-Cath(TM) System has been approved by the FDA
for use in patients suffering from in-stent restenosis, future clinical trials
may not demonstrate the safety and effectiveness of other or different
applications or utilizations of the product.
Since our inception through June 30, 2001 we experienced significant losses in
each period. For the quarter ended September 30, 2001, the Company experienced
its first net operating profit. At September 30, 2001, we had an accumulated
deficit of approximately $124.1 million. We expect to maintain an operating
profit in the fourth quarter of 2001 as we continue to allocate resources to
leverage our existing manufacturing operations, both internally and with outside
vendors, expect our sales and marketing efforts in support of United States
market development to level off or even decline as a percent of net sales and
anticipate that our administrative activities to support our growth will remain
at a constant level. At the same time we will continue to conduct clinical
trials and research and development projects in order to expand the
opportunities for our technology.
The Company also faces intense competition in the field of vascular
brachytherapy with companies that have significantly greater capital resources
than Novoste including Johnson & Johnson and Guidant. New technologies under
development by companies that have significantly greater resources than Novoste,
including coated stents being developed by Johnson & Johnson, Guidant, Cook and
Boston Scientific, pose additional competitive threats in treating restenosis.
We may not successfully sustain an acceptable level of market demand for Beta-
Cath(TM) System or any other product we develop. We may be unable to sustain
significant revenues from sales of our Beta-Cath(TM) System and we may not be
------
able to sustain profitability.
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RESULTS OF OPERATIONS
Net income for the three months ended September 30, 2001 was $2,086,241 or $.13
per share, as compared to net loss of $8,704,782 or ($.54) per share, for the
three months ended September 30, 2000. Net loss for the nine months ended
September 30, 2001 was $7,838,934, or ($.49) per share, as compared to
$23,032,857 or ($1.50) per share, for the nine months ended September 30, 2000.
The increase/decrease in net income/(loss) for the three and nine months ended
September 30, 2001 compared to the year earlier period was primarily due to an
increase in revenue from sales in the U.S. market from its commercial launch of
the Beta-Cath(TM) System.
Net Sales. Net sales of $20,916,638 and $47,497,974 were recognized in the
----------
three and nine months ended September 30, 2001 as compared to net sales of
$1,445,527 and $3,583,575 for the three and nine months ended September 30,
2000. Net sales increased due to the FDA approval of the Beta-Cath(TM) System in
the U.S. and the initial, first three full quarters of sales in the U.S. Net
sales in the United States for the three and nine months ended September 30,
2001 were $19,437,626 and $43,466,425. The Company added over 70 sites in the
U.S. for the three months ended September 30, 2001 for a total of over 290 new
sites for the year. All sales in the 2000 three and nine month periods were due
to sales made in Europe. Comparatively, internationally the Company recognized
net sales of $1,500,261 and $4,031,549 in the three and nine months ended
September 30, 2001. Sales remained relatively flat in Europe due to lack of
acceptance of vascular brachytherapy in Europe and lack of approval for
insurance reimbursement for vascular brachytherapy. However, international sales
increased from the prior year due to adding sites in other parts of the world.
Cost of Sales. Cost of sales for the three months ended September 30, 2001 were
-------------
$5,118,949 resulting in a gross margin of 75.5%, compared to cost of sales of
$977,146 and gross margin of 32.4% for the same period of 2000. Cost of sales
were $14,589,293 for the nine months ended September 30, 2001 resulting in a
gross margin of 69.3% as compared to cost of sales of $2,594,894 and a gross
margin of 27.6% for the nine months ended September 30, 2000. Cost of sales
includes raw material, labor and overhead to manufacture catheters as well as
the amortized costs of transfer devices and radiation source trains used in the
Beta-Cath(TM) System. Cost of sales is expected to continue to grow at a slower
pace than sales as the manufacturing facility continues to utilize capacity of
the current plant and therefore increase gross margin.
9
Research and Development Expenses. Research and Development expenses decreased
----------------------------------
44% to $2,941,372 for the three months ended September 30, 2001 from $5,248,267
for the three months ended September 30, 2000. For the nine months ended
September 30, 2001 research and development expenses decreased 27% to
$10,261,939 from $13,974,188 for the same period a year earlier. These
decreases were primarily the result of decreased clinical trial activity related
to the completion of pivotal trials and the elimination of costs associated with
enrollments such as the costs of supplying product to clinical sites. However,
the Company expects research and development expenses to increase from third
quarter 2001 in anticipation of new clinical trial activity.
Sales and Marketing Expenses. Sales and marketing expenses increased 183% to
-----------------------------
$8,990,636 for the three months ended June 30, 2001 from $3,171,584 for the
three months ended September 30, 2000. For the nine months ended September 30,
2001 sales and marketing expenses were $25,425,965 as compared to $8,528,790 for
the nine months ended September 30, 2000, an increase of 198%. These increases
were primarily the result of additional sales and customer support personnel,
training, trade show, consulting and promotional literature costs associated
with marketing the Company's product on a direct basis in the U.S. as the
Company launched the new Beta-Cath(TM) System in the U.S. Significant resources
were expended in launching the Beta-Cath(TM) System in the U.S. The Company
expects that future sales and marketing expenses may grow at a slower pace than
net sales, or may even decline.
General and Administrative Expenses. General and administrative expenses for
------------------------------------
the three and nine months ended September 30, 2001 were $2,252,761 and
$6,739,757 as compared to the three and nine months ended September 30, 2000 of
$1,855,862 and $4,271,017, an increase of 21% and 58%, respectively. The
increase for the three and nine-month period was primarily the result of
additional management personnel at higher salaries and information systems costs
in support of building the infrastructure of the Company. The Company expects
general and administrative expenses to remain constant in the future.
-
Interest Income. Net interest income decreased 57% to $473,320 for the three
----------------
months ended September 30, 2001 from $1,102,550 for the three months ended
September 30, 2000. Net interest income decreased 39% to $1,680,046 for the
nine months ended September 30, 2001 from $2,752,457 for the nine months ended
September 30, 2000. The decrease in interest income for the three and nine
months was primarily due to the decrease in average cash equivalent and short-
term investment balances used in operations combined with falling interest
rates.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2001 and 2000, the Company used cash
to fund operations of $9.0 million and $20.2 million, respectively. The
decrease in cash used by operating activities of $11.2 million for 2001 over
2000 was primarily attributable to (i) $15.2 million decrease in net loss, (ii)
$4.5 million increase in earnings related to non-cash items, (iii) $.3 million
increase in prepaid expenses, (iv) $3.3 million provided by accrued expenses,
and (v) $2.7 million increase in unearned revenue related to revenue recognized
on radiation and transfer devices offset by (i) $8.7 million funding
of accounts receivable due to the growth in sales of the Beta-Cath(TM) System
related to the initial market launch in the US, (ii) $3.3 million used to fund
the purchase of increased levels of inventory, (iii) $2.2 million used for
payment of accounts payable, and (iv) $.5 million increase in other assets.
Net cash used by investing activities for the nine months ended September 30,
2001 was $4.5 million and net cash provided by investing activities for the nine
months ended September 30, 2000 was $6.3 million. The $10.8 million increase in
cash used in 2001 compared to 2000 was due $4.1 million in short-term
investments that matured, $.5 million increase in the purchase of property and
equipment, and $6.2 million used to buy radiation and transfer devices related
to the increase in demand for our Beta-Cath(TM) System.
Our financing activities include equity offerings and borrowings and repayments
of capital leases. Financing activities for the nine months ended September 30,
2001 and 2000 provided net cash of $1.3 million and $55.9 million, respectively.
The change of $54.6 million resulted primarily from receiving net proceeds of
$49.0 million in April 2000 for a private placement offering plus $6.9 million
from the exercise of stock options during the nine months ended September 30,
2000 and $1.7 million from the exercise of stock options during the same period
in 2001. In addition, the company repaid $.2 million for capital leases of
computer equipment.
On April 7, 2000 we completed a private placement offering, in which we sold
1,463,500 shares of our common stock at $35.00 per share. The placement raised
net proceeds of approximately $49 million, of which $5 million was received
during the second quarter. After the offering, we had 15.85 million shares of
common stock outstanding. The Company also received approximately $1.6 million
for the quarter and $6.9 million for the nine months ended September 30, 2000
from the exercise of stock options. In 2001, the Company received $.8 million
from the exercise of stock options for the quarter and $1.7 million for the nine
months ended September 30, 3001.
10
At September 30, 2001, the Company had commitments to purchase $7.1 million in
inventory components of the Beta-Cath(TM) System over the next year. In
addition, on October 14, 1999 the Company signed a development and manufacturing
supply agreement with AEA Technologies QSA GmbH for a second source of
radioisotope supply and for the development of a smaller diameter source. This
agreement provides for the construction of a production line over the period
October 1, 1999 to January 2002. The cost of this production line is estimated
at $4.0 million and is being paid by the Company as construction progresses.
Through September 30, 2001, the Company has paid $3.1 million towards this
commitment.
Significant proportions of key components and processes relating to the
Company's products are purchased from single sources due to technology,
availability, price, quality, and other considerations. Key components and
processes currently obtained from single sources include isotopes, protective
tubing for catheters, proprietary connectors, and certain plastics used in the
design and manufacture of the transfer device. In the event a supply of a key
single-sourced material or component was delayed or curtailed, the Company's
ability to produce the related product in a timely manner could be adversely
affected. The Company attempts to mitigate these risks by working closely with
key suppliers regarding the Company's product needs and the maintenance of
strategic inventory levels.
The Company has entered into a license agreement with a physician pursuant to
which he is entitled to receive a royalty on the net sales of the Beta-Cath(TM)
System (excluding consideration paid for the radioactive isotope), subject to a
maximum payment of $5,000,000. Royalty fees to the physician aggregated $429,257
and $29,472 for the nine months ended September 30, 2001 and 2000, respectively,
and have been expensed in Cost of Sales.
On January 30, 1996, the Company entered into a license agreement whereby Emory
University assigned its claim to certain technology to the Company for royalties
based on net sales (as defined in the agreement) of products derived from such
technology, subject to certain minimum royalties. The royalty agreement term is
consistent with the life of the related patent and applies to assignments of the
patent technology to a third party. Royalty fees to Emory University aggregated
$998,278 and $69,190 for the nine months ended September 30, 2001 and 2000,
respectively, and have been expensed in Cost of Sales.
The Company's principal source of liquidity at September 30, 2001 consisted of
cash, cash equivalents and short-term investments of $36.5 million.
In August 2001, the Company entered into a $10 million accounts receivable
revolving line of credit with a financial institution that matures in one year.
At September 30, 2001, there were no outstanding borrowings. The Company may
borrow an amount not to exceed the borrowing base of 80% of eligible accounts
receivable as defined in the loan agreement. Interest is payable on the first of
each month calculated on the outstanding balance and accrues at a rate of the
bank's prime rate plus 1%. At such time that the Company sustains three
consecutive months of profitability, the rate decreases to the prime rate. The
company granted a first priority security interest in substantially all assets
of the Company. The Company must meet certain financial covenants related to
maintaining a minimum tangible net worth and quick ratio. The Company was not in
violation of any of its loan covenants at September 30, 2001.
The Company had significant operating losses through the second quarter of 2001
and had its first profitable quarter in the third quarter 2001. We believe that
our existing capital resources will be sufficient to fund the Company until it
reaches a positive operating cash flow. The Company expects that given its
current rate of revenue growth, it will continue to have sufficient cash flow to
support growth of the business in the US and the Company also feels it will have
sufficient cash reserves until it is able to sustain a positive cash flow in
early 2002. The Company's future liquidity and capital requirements will
depend upon numerous factors, including, among others: market acceptance and
demand for its products; the resources required to maintain a direct sales force
in the United States and in the larger markets of Europe, develop distributors
internationally, and to continue to expand manufacturing capacity; the resources
the Company devotes to the development, manufacture and marketing of its
products; the receipt of and the time required to obtain additional regulatory
clearances and approvals; the resources required to gain such approvals; 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 offerings or other sources of capital. Additional
financing, if required, may not be available on satisfactory terms, or at all.
Subsequent to September 30, 2001 the Company announced a restructuring of its
operations outside the United States. The restructuring is intended to reduce
operating expenses in the future by consolidating certain functions and offices
in Europe. The Company expects restructuring charges of approximately $1 million
to be incurred in the fourth quarter 2001.
The Company is evaluating both internally and externally developed strategic
opportunities. These opportunities could result in additional clinical trials or
development activities that would require a significant investment by the
Company. Although Novoste has sufficient cash resources to fund its current
commercial business, the development or acquisition of new technologies could
require the Company to raise additional funds through bank facilities, debt or
equity offerings or other sources of financing. Additional funding, if required,
may not be available on satisfactory terms, or at all.
CERTAIN FACTORS THAT MAY IMPACT FUTURE OPERATIONS
WE DEPEND ON THE SUCCESSFUL DEVELOPMENT AND COMMERCIALIZATION OF THE
BETA-CATH(TM) SYSTEM.
We began to commercialize the Beta-Cath(TM) System in the United States in
November 2000 and our distribution system in Europe and certain Asian countries
are still being developed. Substantially all of our revenue in the first nine
months of 2001 has been from sales in the United States. We anticipate that for
the foreseeable future we will be solely dependent on the continued successful
development and commercialization of the Beta-Cath(TM) System. Our failure to
continue commercialization of the Beta-Cath(TM) System would have a material
adverse effect on our business, financial condition and results of operations.
11
The Beta-Cath(TM) System received FDA approval for the 30-millimeter system on
November 3, 2000 and on June 15, 2001, the Company received FDA approval
for the 40-millimeter system; however, we may be unable to:
- broaden the Beta-Cath(TM) system marketability by obtaining approval for
additional applications of our product; or
- 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 other competitive
technologies, including coated stents, if and when approved for
commercialization.
Commercialization of the Beta-Cath (TM) System in Europe is subject to certain
additional risks. Physicians in Europe are generally less receptive to and
slower to adopt new medical devices and technologies than physicians in the
United States due to various factors, including the influence of national health
care policies and reimbursement strategies of health care payers. We may never
achieve significant revenue from sales in Europe or ever achieve or sustain
profitability in our European operations. Our sales in selected European
countries and several other countries aggregated approximately $1.8 million in
1999, approximately $4.2 million in 2000 and approximately $2.1 million for the
first nine months of 2001.
WE HAVE LIMITED OPERATING HISTORY; WE HAVE A HISTORY OF LOSSES AND MAY NOT BE
ABLE TO SUSTAIN THE PROFITABILITY WE ACHIEVED IN THE THIRD QUARTER OF 2001.
We have a limited history of operations. Since our inception in May 1992, we
have been primarily engaged in developing and testing our Beta-Cath(TM) System.
We have generated only limited revenue and do not have significant experience in
manufacturing, marketing or selling our products in quantities necessary for
sustaining profitability.
At September 30, 2001, we had accumulated a deficit of approximately $124.1
million since our inception in 1992. The commercialization of the Beta-Cath(TM)
System and other new products, if any, will require substantial additional
development, clinical, regulatory, manufacturing, sales and marketing and other
expenditures. We had our first quarter of profitability in the third quarter of
2001. Nevertheless, We may never:
- sustain commercial success in the sale of the Beta-Cath(TM) System or
achieve success in the sale of any other product in any countries in
which we have received the necessary governmental approvals to market
these products; or
- sustain profitability.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL REGULATORY APPROVALS TO EXPAND BETA-CATH
(TM) SYSTEM PRODUCT OFFERINGS OR TO BE ABLE TO MARKET THE BETA-CASH(TM) SYSTEM
TO TREAT A BROADER RANGE OF INDICATIONS FOR THE UNITED STATES.
United States Market Approvals
------------------------------
On November 3, 2000, we received marketing approval from the FDA for the 30mm
Beta-Cath(TM) System. On September 18, 2001, we received marketing approval from
the FDA for the 40mm Beta-Cath (TM) System. These approvals limit our ability
to promote the Beta-Cath(TM) System for use with patients who are being treated
for "in-stent" restenosis in a single coronary artery with a 30-millimeter
radiation source train or a 40-millimeter radiation source train. In order to
market the Beth-Cath(TM) System with radiation source trains longer than 40-
millimeters, we will likely be required to demonstrate to the FDA that a longer
source train is safe and effective. In order to market the Beta-Cath(TM) System
for a broader range of patients, we may seek to expand the indications for which
the Beta-Cath(TM) System can be marketed, for example, to patients undergoing
balloon angioplasty of previously untreated (de novo) lesions.
In order to market the Beta-Cath(TM) System for use with (1) further product
design enhancements, such as a 60-millimeter radiation source train or
modifications to the catheter or (2) a broader range of indications, including
stand alone balloon angioplasty or previously untreated (de novo) lesions, we
will likely be required to demonstrate to the FDA through additional clinical
trials that the Beta-Cath(TM) System is safe and effective with such product
design enhancement(s) or in treating a broader range of indications and the FDA
must approve a pre-market approval application or application supplement
covering the product design enhancement(s) or the broader range of indications
for the device. In August 2001, we filed an application with the FDA for a
pre-market approval supplement to use a 3.5 French catheter, or a smaller
diameter, in the treatment of in-stent restenosis. The failure to obtain
regulatory approval of this supplement in a timely manner could adversely affect
Novoste's business.
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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 the Beta-Cath (TM) System. We may
encounter significant difficulties and costs in our efforts to obtain additional
FDA approvals that could delay or preclude us from selling new products in the
United States. Furthermore, the FDA may request additional data or require that
we conduct further clinical studies, causing us to incur substantial cost and
delay. In addition, the FDA may impose strict labeling requirements, onerous
operator training requirements or other requirements as a condition of our pre-
market approval, any of which could limit our ability to market 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 trails 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.
Foreign Pre-Market Approvals
-----------------------------
Sales of the Beta-Cath(TM) System outside the United States are subject to
regulatory requirements that vary widely from country to country but generally
include pre-marketing governmental approval. The time required to obtain
approval for sale in foreign countries may be longer or shorter than required
for FDA approval, and the requirements for the conduct of clinical trials,
marketing authorization, pricing and reimbursement differ from those in the
United States. Moreover, the export of medical devices from the United States
must be in compliance with FDA regulations. In August 1998 we qualified to apply
CE marking to the Beta-Cath(TM) System, a requirement necessary to sell our
device in most of Western Europe. In August of 2001 we qualified to apply CE
marking to the Beta-Cath(TM) 3.5F System. We are subject to continuing audit
and reporting requirements related to this marking. We may be delayed or
precluded from marketing the Beta-Cath(TM) System in other foreign countries.
Foreign pre-market and other regulatory approvals of the Beta-Cath(TM) System,
if granted, may include significant limitations on the indicated uses for which
the device may be marketed.
Approvals to Use, Handle and Transfer Radioactive Materials
-----------------------------------------------------------
Our business involves the import, export, manufacture, distribution, use and
storage of Strontium-90 (Strontium/Yttrium), the beta-emitting radioisotope
utilized in the Beta-Cath(TM) System 's radiation source train. Accordingly,
manufacture, distribution, use and disposal of the radioactive material used in
the Beta-Cath(TM) System in the United States will be subject to federal, state
and/or local rules relating to radioactive material. On August 4, 2000, the
State of Georgia Department of Natural Resources (DNR) issued a sealed source
and device registration certificate for the Company's Beta-Cath(TM) System,
allowing it to be listed on the Nuclear Regulatory Commission's Sealed Source
and Device Registry. The Company, in addition, must comply with NRC, Georgia and
United States Department of Transportation regulations on the labeling and
packaging requirements for shipment of radiation sources to hospitals or other
users of the Beta-Cath(TM) System. Further, hospitals and/or physicians in the
United States may be required to amend their radiation licenses to hold, handle
and use Strontium-90 prior to receiving and using our Beta-Cath(TM) System.
COATED STENTS 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.
Vascular brachytherapy may compete with other treatment methods designed to
improve outcomes from coronary artery procedures that are well established in
the medical community, such as coronary stents. Stents are the predominant
treatment currently utilized to reduce the incidence of coronary restenosis
following PTCA and were used in approximately 75% of all PTCA procedures
performed worldwide in 2000. 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 the
companies are developing vascular brachytherapy devices.
13
Also on November 3, 2000, the FDA approved Johnson & Johnson's CHECKMATE (TM)
System, a gamma radiation vascular brachytherapy device and on November 5, 2001
Guidant received FDA pre-marketing approval of its beta radiation device.
Johnson & Johnson, and if it receives FDA approval, Guidant, compete directly
with Novoste for market acceptance of vascular brachytherapy and has
substantially greater capital resources and greater resources and experience at
introducing new products that does Novoste. We 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 restonsis and possibly be more acceptable
to a medical community already experienced at using stents. Results from recent
double blinded non-US clinical trials were reported as eliminating restenosis.
Additional Clinical trials will need to be completed in order to confirm these
results. If those trials are successful and completed in the time frames
contemplated by the companies developing coated stents, coated stents, if
approved for sale, could have a material adverse affect on Novoste's business as
early as 2003 and could render vascular brachytherapy generall or the Beta-Cath
(TM) System in particular noncompetitive. At least one competitor, Johnson &
Johnson could receive FDA approval as early as late 2002 or early 2003.
Many of our competitors and potential competitors have substantially greater
capital resources that we do and also have greater resources and expertise in
the area of research and development, obtaining regulatory approvals,
manufacturing and marketing. Our competitors and potential competitors may
succeed in developing, marketing and distributing technologies and products that
are more effective than those we will develop and market or that would render
our technology and products obsolete or noncompetitive. Additionally, many of
the competitors have the capability to bundle a wide variety of products in
sales to cath labs. We may be unable to compete effectively against such
marketing, distribution, sales and servicing.
DEPENDENCE ON KEY PERSONNEL
Our business and future operating results depend in significant part upon the
continued contributions of our key technical personnel and senior management,
many of whom would be difficult to replace. Our business and future operating
results also depend in significant part upon our ability to attract and retain
qualified management, manufacturing, technical, marketing, sales and support
personnel for our operations. Competition for such personnel is intense and we
may not succeed in attracting or retaining such personnel. The loss of key
employees, the failure of any key employee to perform adequately or our
inability to attract and retain skilled employees, as needed, could materially
adversely affect our business, financial condition and results of operations.
PRICE VOLATILITY AND FLUCTUATIONS IN OPERATING RESULTS
The market price of our common stock could decline below the public offering
price. Specific factors relating to our business or broad market fluctuations
may materially adversely affect the market price of our common stock. The
trading price of our common stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, announcements of
technological innovations, new products or clinical data announced by us or our
competitors, governmental regulatory action, developments with respect to
patents or proprietary rights, general conditions in the medical device or
cardiovascular device industries, changes in earnings estimates by securities
analysts, or other events or factors, many of which are beyond our control. In
addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many medical
device companies and which have often been unrelated to the operating
performance of such companies. Our revenue or operating results in future
quarters may be below the expectations of securities analysts and investors. In
such an event, the price of our common stock would likely decline, perhaps
substantially. During the nine month period ended September 30, 2001, the
closing price of our common stock ranged from a high of $39.50 per share to a
low of $5.47 per share and ended that period at $5.93 per share.
PATENTS AND PROPRIETARY TECHNOLOGY
Our policy is to protect our proprietary position by, among other methods,
filing United States and foreign patent applications. On November 4, 1997 we
were issued United States Patent No. 5,683,345, on May 4, 1999 we received
United States Patent No. 5,899,882 (which is jointly owned by us and Emory
University) and on January 11, 2000 we received United States Patent No.
6,013,020, all related to the Beta Cath(TM) System. We also have several
additional United States applications pending covering aspects of our Beta-
Cath(TM) System. The United States Patent and Trademark Office has indicated
that certain claims pending in another United States application are allowable.
With respect to the above identified United States Patents and our other pending
United States patent applications, we have filed, or will file in due course,
counterpart applications in the European Patent Office and certain other
countries.
14
Like other firms that engage in the development of medical devices, we must
address issues and risks relating to patents and trade secrets. United States
Patent No. 5,683,345 may not offer any protection to us because competitors may
be able to design functionally equivalent devices that do not infringe this
patent. It may also be reexamined, invalidated or circumvented. In addition,
claims under our other pending applications may not be allowed, or if allowed,
may not offer any protection or may be reexamined, invalidated or circumvented.
In addition, competitors may have or may obtain patents that will prevent, limit
or interfere with our ability to make, use or sell our products in either the
United States or international markets.
We have two versions of our delivery catheter: a "rapid exchange" catheter and
an "over the wire" catheter. As a result of certain United States patents held
by other device manufacturers covering "rapid exchange" catheters, we currently
intend to sell the "over the wire" version of our delivery catheter in the
United States. If further investigation reveals that we may sell a "rapid
exchange" version in the United States without infringing the valid patent
rights of others, we might decide to do so in the future. However, we cannot
assure that we will be able to sell a "rapid exchange" version in the United
States without a license of third party patent rights or that such a license
would be available to us on favorable terms or at all.
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 September 30, 2001, the Company had $14.3 million in cash equivalents with a
weighted average interest rate of 3.30% and $22.1 million in available for sale
investments with a weighted average interest rate of 3.40%. At September 30,
2000 the Company had $49.2 million in cash equivalents with a weighted average
interest rate of 6.47% and $21.7 million in available for sale investments with
a weighted average interest rate of 6.72%. All investments mature, by policy,
in one year or less.
PART II. OTHER INFORMATION
15
Item 5. Other Information
The registrant's Chief Executive Officer is the only executive officer who
has an employment agreement with the registrant. In September 2001, the
registrant entered into change of control agreements with nine of the other
executive officers. Each agreement provides that, following a Change in Control
of the registrant, if the executive officer is terminated by registrant without
Cause or leaves for Good Reason, then he or she will be entitled to a lump sum
cash payment of two times his or her average annual compensation and any
non-competition arrangement between the executive officer and registrant will
terminate effective on the date of the Change in Control. The form of agreement
is attached hereto as Exhibit 10.31 and incorporated herein by reference
thereto.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.30 Loan and Security Agreement dated August 1, 2001 between
Silicon Valley Bank and Novoste Corporation.
10.31 Negative Pledge Agreement dated August 1, 2001 between
Silicon Valley Bank and Novoste Corporation.
10.32 Form of change of control agreement executed between Novoste
Corporation and executive officers.
(b) Report on Form 8-K
The Company filed a Form 8-K on October 3, 2001 stating that a letter,
dated September 25, 2001 had been mailed from the Registrant to the
shareholders of the registrant. The purpose of the letter was to update
the shareholders on second quarter, 2001 financial results and to
address issues raised by the release of coated stent clinical trial
results, a competitive technology.
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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
November 13, 2001 /s/ Edwin B. Cordell, Jr.
------------------ ------------------------------------------
Date Edwin B. Cordell, Jr.
Vice President - Finance,
Chief Financial Officer
(Principal Financial & Accounting Officer)
17