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
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Act of 1934.
For the quarterly period ended March 31, 2002
Transition period pursuant to Section 13 or 15(d) of the Securities
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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 May 1, 2002 there were 16,315,676 shares of the Registrant's Common Stock
outstanding.
NOVOSTE CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
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Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2002 (unaudited)
and December 31, 2001 3
Consolidated Statements of Operations (unaudited) for the three
months ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows (unaudited) for the three
months ended March 31, 2002 and 2001 5
Notes to Unaudited Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 5. Other Information 17
Item 6. Reports on Form 8-K 17
SIGNATURES 17
2
NOVOSTE CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
------------- --------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 17,544,697 $ 5,878,286
Short-term investments 21,901,407 31,683,627
Accounts receivable, net of allowance of $870,445 and $878,424
respectively 17,030,521 16,130,721
Inventories 4,300,488 3,746,433
Prepaid expenses and other current assets 1,010,237 1,023,137
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Total current assets 61,787,350 58,462,204
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Property and equipment, net 9,741,165 9,886,711
Radiation and transfer devices, net 13,265,692 13,534.356
Receivable from officers 314,497 144,025
Other assets 829,929 883,311
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Total assets $ 85,938,633 $ 82,910,607
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 4,380,232 $ 4,026,866
Accrued expenses 6,501,707 10,917,277
Deferred revenue 1,834,612 2,786,476
Revolving Line of Credit 4,000,000 -
Capital lease obligations 205,427 249,212
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Total current liabilities 16,921,978 17,979,831
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Long-term liabilities
Capital lease obligations 182,852 203,135
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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;
16,321,456 and 16,265,081 shares issued, respectively 163,215 162,651
Additional paid-in-capital 187,912,722 187,357,044
Accumulated other comprehensive income (loss) (311,649) (408,139)
Accumulated deficit (117,981,036) (121,383,528)
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69,783,252 65,728,028
Less treasury stock, 5,780 shares of common stock at cost (23,840) (23,840)
Unearned compensation (925,609) (976,547)
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Total shareholders' equity 68,833,803 64,727,641
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Total liabilities and shareholders' equity $ 85,938,633 $ 82,910,607
============= =============
See accompanying notes.
3
NOVOSTE CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31,
2002 2001
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Net sales $ 22,932,352 $ 9,290,629
Cost of sales 6,678,121 3,744,504
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Gross margin 16,254,231 5,546,125
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Operating expenses:
Research and development 2,658,926 3,596,137
Sales and marketing 8,218,096 7,286,234
General and administrative 2,197,424 1,910,700
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Total operating expenses 13,074,446 12,793,071
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Income (loss) from operations 3,179,785 (7,246,946)
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Interest income 370,878 642,918
Interest expense (98,171) (24,539)
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Total other income 272,707 618,379
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Income (loss) from operations before income tax 3,452,492 (6,628,567)
Income tax 50,000 -
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Net income (loss) $ 3,402,492 $ (6,628,567)
============ ============
Net income (loss) per share - basic $ 0.21 $ (0.41)
============ ============
Weighted average shares outstanding - basic 16,280,182 16,076,974
------------ ------------
Net income (loss) per share - diluted $ 0.21 $ (0.41)
============ ============
Weighted average shares outstanding - diluted 16,543,648 16,076,974
============ ============
See accompanying notes.
4
NOVOSTE CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31,
2002 2001
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Cash flows from operating activities:
Net income (loss) $ 3,402,492 $(6,628,567)
Adjustments to reconcile net income (loss) to net cash
Used by operating activities:
Depreciation and amortization 425,389 682,510
Issuance of stock for services or compensation 196,875 237,254
Amortization of deferred compensation 50,938 178,006
Amortization of radiation & transfer devices 1,582,186 435,167
Provision for doubtful accounts - 109,217
Changes in assets and liabilities:
Accounts receivable (944,839) (4,322,114)
Inventory (578,129) 319,562
Prepaid expenses 12,959 (93,106)
Accounts payable 380,024 156,646
Accrued expenses (4,413,553) (83,564)
Deferred revenue (947,786) 942,996
Other (33,865) (794,844)
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Net cash used by operations (867,308) (8,861,262)
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Cash flow from investing activities:
Maturity (purchase) of short-term investments 9,782,220 5,038,530
Purchase of property and equipment (283,282) (1,072,228)
Purchase of radiation and transfer devices (1,313,522) (3,500,409)
============ ===========
Net cash provided by investing activities 8,185,416 465,893
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Cash flows from financing activities:
Proceeds from issuance of common stock 359,369 373,409
Proceeds from revolving line of credit 4,000,000 -
Repayment of capital lease obligations (64,068) (53,823)
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Net cash provided by financing activities 4,295,301 319,586
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Effect of exchange rate changes on cash 53,002 313,947
Net increase (decrease) in cash and cash equivalents 11,666,411 (7,761,836)
Cash and equivalents at beginning of period 5,878,286 26,512,398
------------ -----------
Cash and cash equivalents at end of period $ 17,544,697 $18,750,562
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
Information:
Cash paid for interest on capital lease obligation $ 11,782 $ 23,306
Non-cash investing and financing activities:
Assets acquired under capital lease $ - 104,935
See accompanying notes.
5
NOVOSTE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 (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, 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 and in
January 2000 in France. 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
that are classified as short-term (mature in more than 90 days but less than one
year from the date of acquisition). Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date.
The Company has classified all investments as available for sale. Available for
sale securities are carried at fair value, with the unrealized gains and losses
reported in a separate component of shareholders' equity if significant.
Realized gains and losses are included in investment income and are determined
on a specific identification basis.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable at March 31, 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 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 three-month period ended March 31,
2002 and 2001 amounted to $0 and $98,000, respectively.
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:
March 31, 2002 December 31, 2001
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Raw Materials $ 2,466,950 $ 1,971,347
Work in Process 1,042,650 811,406
Finished Goods 790,888 963,680
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Total $ 4,300,488 $ 3,746,433
============= ===========
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 reclassified these
assets from inventory to a long-term asset named, radiation and transfer
devices. From the second quarter of 2000 through December 31, 2001, depreciation
of the costs of these assets was recognized over their estimated useful lives
(which was estimated at 18 months) using the straight-line method and began once
the Beta-Cath(TM) System was 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 have been classified by the Company as operating
leases.
During January 2002, the Company determined that, based upon new testing and
experience, the estimated useful lives of RSTs and TDs are twelve months and
three years, respectively. Accordingly, depreciation has been recognized over
the new estimated lives starting at the beginning of the first quarter 2002.
Depreciation begins when the Beta-Cath(TM) System is placed into service and
annual lease agreements to license the Beta-Cath(TM) System are accounted for as
operating leases. Depreciation of these assets is recorded in cost of sales. The
effect of this change in estimate for the first quarter of 2002 is an increase
in net income of $940,980 or $0.06 per common share on both a basic and diluted
basis. At March 31, 2002, equipment with a cost of approximately $15,975,000
before of accumulated depreciation of approximately $6,802,000 were under
operating leases. Approximately $4,092,000 of radiation and transfer devices
were available for lease at March 31, 2002. At March 31, 2002, lease payments
receivable under these operating leases approximated $954,000 and are recorded
in accounts receivable. Radiation and transfer devices are stated at cost and
are comprised of the following:
March 31, 2002 December 31, 2001
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Radiation and Transfer Devices $20,067,269 $18,753,747
Less: Accumulated Depreciation 6,801,577 5,219,391
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$13,265,692 $13,534,356
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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. During 2002,
the Company charged approximately $212,000 to compensation expense for such
contributions. There was no compensation expense for the three-month period
ended March 31, 2001. In addition, the Company advanced the officers a total of
$170,000 for related payroll taxes. This amount is reflected as a receivable
from officers on the balance sheet. In accordance with the plan agreement, if an
officer leaves the Company for any reason, retires or in any way terminates or
withdraws from the plan, then the life insurance company is obligated to repay
the Company for the tax advances prior to settlement of the account with the
officer. The advances are unsecured and are subject to the life insurance
company's ability to repay the Company in the future. At March 31, 2002 and
December 31, 2001, the receivable from officer's balance was $314,497 and
$144,025, respectively.
7
NOTE 7. 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 March 31, 2002 and December 31, 2001, the Company had borrowed $4,000,000 and
$0, respectively. The Company may borrow an amount not to exceed the borrowing
base as defined in the loan agreement. Interest is payable on the first of each
month calculated on the outstanding balance and accrues at a rate of the bank's
prime rate plus 1%. At such time that the Company sustains three consecutive
months of profitability, the rate decreases to the prime rate. The company
granted a first priority security interest in substantially all assets of the
Company. The loan agreement contains certain financial and nonfinancial
covenants. The Company was not in violation of any of its loan covenants at
March 31, 2002.
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.
NOTE 8. BASIC AND DILUTED LOSS PER SHARE
The basic and diluted loss per share is computed based on the weighted average
number of common shares outstanding. Common equivalent shares are not included
in the per share calculations where the effect of their inclusion would be
antidilutive. Certain common stock equivalent shares are not included in the
computation of diluted income (loss) per share where the effect would be
antidilutive.
NOTE 9. 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 (loss) and long-lived assets by geographic
area at March 31 are as follows:
Net sales
United States Europe Rest of World Consolidated
------------- ---------- ------------- ------------
2002 $21,446,832 $1,284,746 $200,774 $22,932,352
2001 8,039,535 1,118,870 132,224 9,290,629
Net Income (Loss)
United States Europe Rest of World Consolidated
------------- ----------- ------------- ------------
2002 $ 3,721,606 $ (49,074) $(270,040) $ 3,402,492
2001 (4,944,020) (1,592,344) (92,203) (6,628,567)
Long-lived assets
United States Europe Rest of World Consolidated
------------- ---------- ------------- ------------
2002 $23,966,736 $184,547 - $24,151,283
2001 17,064,529 383,188 - 17,447,717
At March 31, 2002 and 2001, 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 $4,804,000 and
$4,965,000, respectively.
8
NOTE 10.
The following table sets forth the computation of basic and diluted earnings per
share:
March 31, 2002 December 31, 2001
-------------- -----------------
Numerator:
Net income (loss) $ 3,402,492 $(5,108,841)
Denominator:
Weighted-average shares outstanding 16,273,595 16,145,773
Unvested restricted stock outstanding 6,587 6,587
----------- -----------
Denominator for basic earnings per share 16,280,182 16,152,360
Dilutive effect of stock options and invested restricted stock 263,466 -
----------- -----------
Denominator for basic earnings per share 16,543,648 16,152,360
Net income (loss) per share
Basic $ 0.21 $ (0.32)
Diluted $ 0.21 $ (0.32)
NOTE 11. SHAREHOLDERS' EQUITY
For the three-month period ended March 31, 2002 changes in shareholders' equity
consisted of the following:
Shareholders' Equity at beginning of period $64,727,641
-----------
Proceeds from exercise of 56,375 stock options
ranging from $3.20 to $6.65 per share 359,369
Deferred compensation relating to accelerated
vesting of certain stock options 196,873
Amortization of unearned compensation 50,938
Comprehensive income (loss)
Translation adjustment 96,490
Net income 3,402,492
-----------
Total comprehensive income 3,498,982
-----------
Shareholders' Equity at March 31, 2002 $68,833,803
===========
NOTE 12. RESTRUCTURING CHARGES
Restructuring charges of $773,000 were recorded in 2001 primarily related to a
reduction in workforce of thirteen employees located in Europe and six employees
located in the United States in addition to termination of certain facility
leases in Europe. The Company paid $560,000 of the restructuring charges in the
fourth quarter of 2001 related to severance payments and lease payments for
closed facilities and recorded $213,000 in accrued expenses related to severance
agreements that were paid in the first quarter of 2002.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD LOOKING STATEMENTS
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, 2001. The Company
does not undertake any obligations to update or revised any forward-looking
statement, made by it or on its behalf, whether as a result of new information,
future events, or otherwise.
OVERVIEW
Novoste commenced operations as a medical device company in May 1992. Since
1994, we have devoted substantially all of our efforts to developing the
Beta-Cath(TM) System. The Company commenced the active marketing of the
Beta-Cath(TM) System in Europe in January 1999 for use in patients suffering
from "in-stent restenosis", a condition in which coronary stents become clogged
with new tissue growth. On November 3, 2000, Novoste received U.S. marketing
approval for the 30-millimeter Beta-Cath(TM) System from the FDA and
subsequently shipped its first commercial system on November 27, 2000. The
number of commercial sites in the U.S. increased rapidly throughout 2001, and in
the first quarter of 2002, the Company added over enty new sites.
Since our inception through June 30, 2001 we experienced significant losses in
each period due to product development and clinical trial costs and, beginning
in 2000, the costs of launching the Beta-Cath(TM) System in the U.S. At March
31, 2002 we
9
had an accumulated deficit of approximately $118.0 million. The Company
experienced its first net operating profit in the third quarter of 2001. We
expect to maintain an operating profit in 2002 as we continue to allocate
resources to leverage our existing manufacturing operations, both internally and
with outside vendors, expect our sales and marketing efforts in support of
United States market development to level off as a percent of net sales and
anticipate that our administrative activities to support our growth will remain
at a constant level. At the same time we will continue to conduct clinical
trials and research and development projects in order to expand the
opportunities for our technology.
The Company also faces intense competition in the field of vascular
brachytherapy with companies that have significantly greater capital resources
than Novoste including Johnson & Johnson and Guidant. Both Johnson & Johnson and
Guidant have introduced vascular brachytherapy products that compete with our
Beta-Cath(TM) System. A new technology called drug-coated stents pose additional
competitive threats in treating restenosis. We may not be able to sustain an
acceptable level of market demand for the Beta-Cath(TM) System if this
technology is successfully introduced. Failing to sustain our current level of
demand could significantly reduce revenues and affect our ability to remain
profitable.
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 2002 was $3,402,492, or $0.21
per share, as compared to a net loss of $6,628,567 or ($0.41) per share, for the
three months ended March 31, 2001. The increase in net income for the three
months ended March 31, 2002 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 $22,932,352 were recognized in the three months ended
---------
March 31, 2002 as compared to net revenue of $9,290,629 for the three months
ended March 31, 2001. Revenues recorded in the United States for the three-month
period ended March 31, 2002 were $21,446,832 as compared to $8,039,535 for the
same period ended March 31, 2001. The increase in revenues was primarily due to
the addition of over 300 sites in the U.S. market since March 31, 2001 and the
accompanying stocking orders for catheters in these new sites. Comparatively,
international revenue increased 18.7% to $1,485,520 compared to $1,251,094.
International sales increased from the prior year due to adding sites in other
parts of the world. Non U.S. revenue has not risen at the same rate seen in the
United States because of a lack of acceptance of vascular brachytherapy in
Europe and no insurance reimbursement approval. The U.S. market received
insurance reimbursement for the procedure in the second half of 2001 that
contributed to the acceptance and growth in revenue in this market.
Cost of Sales. Cost of sales of $6,678,121 were incurred in the three months
-------------
ended March 31, 2002 resulting in a gross margin of $16,254,231 or 71% as
compared to cost of sales of $3,744,504 and a gross margin of $5,546,124 or 60%
for the three months ended March 31, 2001. The increase in gross margin on both
an absolute and percentage basis is due to the higher sales and production
volumes and improved production yields during 2002 over the same period in 2001.
The Company expects gross margins to remain relatively stable during 2002 unless
volume dramatically increases or decreases. Cost of sales includes raw material,
labor and overhead to manufacture catheters as well as the amortized costs of
transfer devices and radiation source trains used in the Beta-Cath(TM) System.
Research and Development Expenses. Research and development expenses decreased
---------------------------------
26% to $2,658,926 for the three months ended March 31, 2002 from $3,596,137 for
the three months ended March 31, 2001. 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. The Company anticipates increasing research
and development expenses in 2002 as it pursues product improvements and line
extensions, some of which may require additional clinical trials.
Sales and Marketing Expenses. Sales and marketing expenses increased 13% to
----------------------------
$8,218,096 for the three months ended March 31,
2002 from $7,286,234 for the three months ended March 31, 2001. These expenses
increased primarily as the result of additional personnel, trade show,
consulting and promotional literature costs associated with marketing the
Company's product on a direct basis in the U.S. as we continued launch of the
new Beta-Cath(TM) System in the U.S. However, these higher costs were offset by
a decrease in the commission program for the U.S. sales force beginning in 2002.
The Company expects sales and marketing expenses in 2002 to remain relatively
consistent with 2001 expense.
General and Administrative Expenses. General and administrative expenses
-----------------------------------
increased 15% to $2,197,424 for the three months ended March 31, 2002 from
$1,910,700 for the three months March 31, 2001. The increase for this three
month period was primarily the result of additional management personnel at
higher salaries and the increase in infrastructure (accounting, information
systems, human resources and benefits) to support the commercial launch of the
Beta Cath System. The Company expects that at the current level of sales,
general and administrative expenses will remain constant in 2002.
10
Total Other Income. Total other income decreased 56% to $272,707 for the three
------------------
months ended March 31, 2002 from $618,379 for the three months ended March 31,
2001. The decrease in interest income for the quarter was primarily due to the
decrease in average cash equivalent and short-term investment balances that were
used for operations combined with falling interest rates. In addition, interest
expense increased as the Company leased additional computer equipment under
capital lease obligations.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2002 and 2001, the Company used cash to
fund operations of $0.9 million and $8.9 million, respectively. The decrease in
cash used by operating activities of $8.0 million for 2002 over 2001 was
primarily attributable to (i) $10.0 million improvement from net loss to net
income, (ii) $3.4 million collection of accounts receivable, (iii) $0.1 million
increase in earnings from other assets, (iv) $0.2 million provided by accounts
payable, (v) $0.8 million increase in other assets, (vi) $0.1 million provided
by prepaid expenses and (vii) $0.5 million increase in earnings related to
non-cash items, offset by (i) $0.9 million used to fund the purchase of
increased levels of inventory, (ii) $4.3 million used for payment of accrued
expenses and taxes withheld, and (iii) $1.9 million decrease in unearned revenue
related to revenue recognized on radiation and transfer devices.
Net cash provided by investing activities for the three months ended March 31,
2002 and 2001 was $8.2 million and $0.5 million, respectively. The $7.7 million
increase in cash provided in 2002 compared to 2001 was due to $4.7 million in
short-term investments that matured, $0.8 million decrease in funds used to
purchase of property and equipment, and $2.2 million decrease in funds used to
buy radiation and transfer devices.
The Company's financing activities include equity offerings, borrowings under a
revolving credit facility and borrowings and repayments of capital leases.
Financing activities for the three months ended March 31, 2002 and 2001 provided
net cash of $4.3 million and $0.3 million, respectively. The change of $4.0
million resulted primarily from borrowing under the accounts receivable
revolving line of credit.
In August 2001, the Company entered into a $10 million accounts receivable
revolving line of credit with a financial institution (lender) that matures in
one year. At March 31, 2002, the Company had borrowed $4,000,000 to be used in
operations. The Company may borrow an amount not to exceed the borrowing base as
defined in the loan agreement. Interest is payable on the first of each month
calculated on the outstanding balance and accrues at a rate of the bank's prime
rate plus 1%. At such time that the Company sustains three consecutive months of
profitability, the rate decreases to the prime rate. The Company granted a first
priority security interest in substantially all assets of the Company.
Additionally, the loan agreement contains certain financial and non-financial
covenants. The Company was not in violation of any of its loan covenants at
March 31, 2002.
In addition, the Company also has Letters of Credit available under the line of
credit. The lender will issue or have issued letters of credit for the Company's
account not exceeding (i) the lesser of the committed revolving line of the
borrowing base minus (ii) the outstanding principal balance of the Advances and
minus (iii) the Cash Management Sublimit as defined below; however, the face
amount of outstanding Letters of Credit (including drawn but unreimbursed
letters of credit) may not exceed $500,000. Each letter of credit will have an
expiry date of no later than 180 days after the revolving maturity date, but the
Company's reimbursement obligation will be secured by cash on terms acceptable
to the lender at any time after the revolving maturity date if the term of this
Agreement is not extended by the Lender. The Company agrees to execute any
further documentation in connection with the letters of credit as the lender may
reasonably request.
The Company may use up to $500,000 for the Lender's Cash Management Sublimit,
which may include merchant service, direct deposit of payroll, business credit
card, and check cashing services identified in various cash management services
agreements related to such services (the "Cash Management Services"). All
amounts the Lender pays for any Cash Management Services will be treated as
advances under the committed revolving line. The Company did not have any credit
lines outstanding at March 31, 2002.
At March 31, 2002 the Company had commitments to purchase $4.4 million in
inventory components of the Beta-Cath(TM) System over the next year.
In addition, on October 14, 1999 the Company signed a development and
manufacturing supply agreement with AEA Technologies QSA GmbH for a second
source of radioisotope supply and for the development of a smaller diameter
source. This agreement provides for the construction of a production line over
the period October 1, 1999 to mid 2002. The cost of this production line is
estimated at $4.0 million and is being paid by the Company as construction
progresses. Through March 31, 2002, the Company has paid $3.9 million towards
this commitment.
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On June 20, 2001, the Company entered into a manufacturing and supply agreement
(Agreement) with Bebig Isotopen-und Medizintechnik GmbH (Bebig), a German
corporation, to manufacture and supply the Company with radioactive sealed
Strontium-90 seed trains. The Agreement supercedes all prior agreements with
Bebig and neither the Company nor Bebig have any rights or obligations under any
of the previous agreements. During each calendar year under the four-year
contract, the Company guarantees to pay to Bebig minimum annual payments. All
product purchases are credited against the annual guaranteed payment. Any
product payments in excess of the annual guaranteed payment can be credited
against the guaranteed payment of the next year. In the event that the Company
does not purchase product to exceed the annual guaranteed payment, the
deficiency will be due and payable to Bebig within thirty days after the end of
each one-year contract period. At December 31, 2001, the Company exceeded the
annual guaranteed payment.
Significant proportions of key components and processes relating to the
Company's products are purchased from single sources due to technology,
availability, price, quality, and other considerations. Key components and
processes currently obtained from single sources include isotopes, protective
tubing for catheters, proprietary connectors, and certain plastics used in the
design and manufacture of the transfer device. In the event a supply of a key
single-sourced material or component was delayed or curtailed, the Company's
ability to produce the related product in a timely manner could be adversely
affected. The Company attempts to mitigate these risks by working closely with
key suppliers regarding the Company's product needs and the maintenance of
strategic inventory levels.
The Company has entered into a license agreement with a physician pursuant to
which he is entitled to receive a royalty on the net sales of the Beta-Cath(TM)
System (excluding consideration paid for the radioactive isotope), subject to a
maximum payment of $5,000,000. Royalty fees to the physician aggregated $208,670
and $83,902 for the three months ended March 31, 2002 and 2001, 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
$447,133 and $205,836 for the three months ended March 31, 2002 and 2001,
respectively, and have been expensed in Cost of Sales.
The Company's principal source of liquidity at March 31, 2002 consisted of cash,
cash equivalents and short-term investments of $39.4 million.
The Company had significant operating losses through the second quarter of 2001
and has been profitable for the remaining two quarters of 2001 and during the
first quarter of 2002. The Company believes that existing cash and cash expected
to be generated from a operations will be sufficient to meet its working
capital, financing and capital expenditure requirements through at least 2002.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including, among others: market demand for its products; the
resources required to maintain a direct sales force in the United States and in
the larger markets of Europe, the resources required to introduce enhancements
to and expansion of the Beta Cath (TM) System product line; the resources the
Company devotes to the development, manufacture and marketing of its products;
resources expended to license or acquire new technologies; and the progress of
the Company's clinical research and product development programs. Novoste may in
the future seek to raise additional funds through bank facilities, debt or
equity offering or other sources of capital. Additional financing, if, required,
may not be available on satisfactory terms, or at all.
CERTAIN FACTORS THAT MAY IMPACT FUTURE OPERATONS
Dependence on the successful commercialization of the Beta-Cath(TM) System.
We began to commercialize the Beta-Cath(TM) System in the United States in
November 2000. Substantially all of our revenue in the first quarter 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. Our failure to continue commercialization of the
Beta-Cath(TM) System would have a material adverse effect on our business,
financial condition and results of operations.
The Beta-Cath(TM) System received FDA approval for the 30-millimeter system on
November 3, 2000; however, we may be unable to:
- manufacture the Beta-Cath(TM) System in commercial quantities at
acceptable costs;
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The Beta-Cath(TM) System generated substantial revenue for Novoste in the
first quarter 2002, however, in the future we may be unable to demonstrate that
the Beta-Cath(TM) System is an attractive and cost-effective alternative or
complement to other procedures, including coronary stents, competing vascular
brachytherapy devices, or drug coated stents. Because the Beta-Cath(TM) System
is our sole near-term product focus, we could be required to cease operations if
new technology rendered vascular brachytherapy uncompetitive.
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PROVISIONS DISCOURAGING A TAKEOVER
The amended and restated articles of incorporation provide for a classified
board of directors, the existence of which could discourage attempts to acquire
us. Furthermore, we are subject to the anti-takeover provisions of the Florida
Business Corporation Act, the application of which would also have the effect of
delaying or preventing a merger, takeover or other change of control of the
Company and therefore could discourage attempts to acquire the Company.
PRICE VOLATILITY AND FLUCTUATIONS IN OPERATING RESULTS
The market price of our common stock could decline below the public offering
price. Specific factors relating to our business or broad market fluctuations
may materially adversely affect the market price of our common stock. The
trading price of our common stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, announcements of
technological innovations, new products or clinical data announced by us or our
competitors, governmental regulatory action, developments with respect to
patents or proprietary rights, general conditions in the medical device or
cardiovascular device industries, changes in earnings estimates by securities
analysts, or other events or factors, many of which are beyond our control. In
addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many medical
device companies and which have often been unrelated to the operating
performance of such companies. Our revenue or operating results in future
quarters may be below the expectations of securities analysts and investors. In
such an event, the price of our common stock would likely decline, perhaps
substantially. During the three month period ended March 30, 2002, the closing
price of our common stock ranged from a high of $11.94 per share to a low of
$6.54 per share and ended that period at $8.25 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
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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 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.
COATED STENTS COULD RENDER VASCULAR BRACHTHERAPY GENERALLY OR THE BET-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 may compete with other treatment methods designed to
improve outcomes from coronary artery procedures that are well established in
the medical community, such as coronary stents. Stents are the predominant
treatment currently utilized to reduce the incidence of coronary restenosis
following PTCA and were used in approximately 75% of all PTCA procedures
performed worldwide in 2001. Manufacturers of stents include Johnson & Johnson,
Medtronic, Inc., Guidant Corporation and Boston Scientific Corporation. Stent
manufacturers often sell many products used in the cardiac catheterization labs,
commonly referred to as cath labs, and as discussed below, certain of these
companies are developing vascular brachytherapy devices.
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 approval of its beta radiation device. Johnson & Johnson
will 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 than does Novoste. We may
not be able to compete effectively against Johnson & Johnson.
Many of these same companies and others are researching coatings and treatments
to coronary stents that could reduce restenosis and would possibly be more
acceptable to a medical community already experienced at using stents. Recently,
results from early non-randomized 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
approval for sale, could have a material adverse affect on Novoste's business.
At least one competitor, Johnson & Johnson, could receive FDA approval as early
as 2003.
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Many of our competitors and potential competitors have substantially greater
capital resources than we do and also have greater resources and expertise in
the area of research and development, obtaining regulatory approvals,
manufacturing and marketing. Our competitors and potential competitors may
succeed in developing, marketing and distributing technologies and products that
are more effective than those we will develop and market or that would render
our technology and products obsolete or noncompetitive. Additionally, many of
the competitors have the capability to bundle a wide variety of products in
sales to cath labs. We may be unable to compete effectively against such
competitors and other potential competitors in terms of manufacturing,
marketing, distribution, sales and servicing.
Any product we develop that gains regulatory clearance or approval will have to
compete for market acceptance and market share. An important factor in such
competition may be the timing of market introduction of competitive products.
Accordingly, we expect the relative speed with which we can develop products,
gain regulatory approval and reimbursement acceptance and supply commercial
quantities of the product to the market to be an important competitive factor.
In addition, we believe that the primary competitive factors for products
addressing restenosis include safety, efficacy, and ease of use, reliability,
and suitability for use in cath labs, service and price. We also believe that
physician relationships, especially relationships with leaders in the
interventional cardiology and radiation oncology communities, are important
competitive factors.
GOVERNMENT REGULATION
United States
-------------
Our Beta-Cath(TM) System is regulated in the United States as a medical device.
As such, we are subject to extensive regulation by the FDA, by other federal,
state and local authorities and by foreign governments. The FDA regulates the
clinical testing, manufacture, packaging, labeling, storage, distribution and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant pre-market clearance or pre- market approval for devices,
withdrawal of marketing approvals, a recommendation by the FDA that we not be
permitted to enter into government contracts, and criminal prosecution. The FDA
also has the authority to request repair, replacement or refund of the cost of
any device manufactured or distributed.
The process of obtaining a pre-market approval and other required regulatory
approvals can be expensive, uncertain and lengthy, and we may be unsuccessful in
obtaining approvals to market the Beta-Cath(TM) System for use with (1) further
product design enhancements, such as varying lengths of the radiation source
train or modifications to the catheter or (2) with a broader range of
indications. The FDA may not act favorably or quickly on any of our submissions
to the FDA. We may encounter significant difficulties and costs in our efforts
to obtain additional FDA approvals that could delay or preclude us from selling
new products in the United States. Furthermore, the FDA may request additional
data or require that we conduct further clinical studies, causing us to incur
substantial cost and delay. In addition, the FDA may impose strict labeling
requirements, onerous operator training requirements or other requirements as a
condition of our pre- market approval, any of which could limit our ability to
market 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
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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.
Our business involves the import, export, manufacture, distribution, use and
storage of Strontium-90 (Strontium/Yttrium), the beta-emitting radioisotope
utilized in the Beta-Cath(TM) System `s radiation source train. Accordingly,
manufacture, distribution, use and disposal of the radioactive material used in
the Beta-Cath(TM) System in the United States will be subject to federal, state
and/or local rules relating to radioactive material. The State of Georgia
Department of Natural Resources (DNR) issued a sealed source and device
registration certificate for the Company's Beta-Cath(TM) System on August 4,
2000, allowing it to be listed on the Nuclear Regulatory Commission's Sealed
Source and Device Registry. The DNR authorized Novoste to commercially
distribute its radiation sources to licensed recipients in the United States
with the issuance of a license allowing the manufacturing and distribution of
the Beta-Cath(TM) System. In addition, we must comply with NRC, Georgia and
United States Department of Transportation regulations on the labeling and
packaging requirements for shipment of radiation sources to hospitals or other
users of the Beta-Cath(TM) System.
Hospitals in the United States are required to have radiation licenses to hold,
handle and use radiation. Many of the hospitals and/or physicians in the United
States will be required to amend their radiation licenses to include
Strontium-90 prior to receiving and using our Beta-Cath(TM) System. Depending on
the state that the hospital is located in, its license amendment will be
processed at the DNR in agreement states, or by the NRC. Obtaining any of the
foregoing radiation-related approvals and licenses can be complicated and time
consuming and may take longer in the NRC States (sixteen states). A significant
majority of the approved license amendments have been in Non-NRC states. If a
significant number of hospitals are delayed in obtaining any of the foregoing
approvals or any of those approvals are not obtained, our business, financial
condition and results of operations could be materially adversely affected.
INTERNATIONAL
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 March 31, 2001, the Company had $18.8 million in cash equivalents with a
weighted average interest rate of 5.29% and $25.6 million in available for sale
investments with a weighted average interest rate of 5.63%. At March 31, 2000
the Company had $5.6 million in cash equivalents with a weighted average
interest rate of 5.63% and $6.1 million in available for sale investments with a
weighted average interest rate of 6.05%. All investments mature, by policy, in
one year or less.
PART II. OTHER INFORMATION
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
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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
May 15, 2002 /s/ Edwin B. Cordell, Jr.
------------ ------------------------------------------
Date Edwin B. Cordell, Jr.
Vice President - Finance,
Chief Financial Officer
(Principal Financial & Accounting Officer)
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