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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No.
December 31, 1996 0-15443
THERAGENICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 58-1528626
(State of incorporation) (I.R.S. Employer Identification Number)
5325 Oakbrook Parkway
Norcross, Georgia 30093
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(770) 381-8338
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registerer
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, par value $.01 per share, together with the associated
Common Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K _____.
As of March 18, 1997 the aggregate market value of the common
stock of the registrant held by non-affiliates of the registrant,
as determined by reference to the closing price of the Common Stock
as reported on the Nasdaq National Market system, was $244,272,249.
As of March 18, 1997 the number of shares of common stock, $.01 par value,
outstanding was 11,843,503.
Documents incorporated by Reference: Proxy Statement for the resigtrant's
1997 Annual Meeting of Stockholders - to be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 1996, is
incorporated by reference in Part III herein.
Part I
Item 1. BUSINESS
General
Theragenics Corporation ("Theragenics" or the "Company") is a leader in the
production and marketing of implantable radiation devices used in the treatment
of prostate cancer. The Company produces and markets TheraSeed(R), an
FDA-licensed device based on Pd-103, a radioactive isotope. Management believes
the Company is the only producer of Pd-103 for use in medical devices. In the
treatment of prostate cancer, TheraSeeds(R) are implanted into the prostate in a
one-time, minimally invasive procedure. The radiation emitted by the seeds is
contained within the immediate prostate area, killing the tumor while sparing
surrounding organs. TheraSeed(R) has been shown in independent clinical studies
to offer success rates that are comparable to or better than other conventional
therapies, while being associated with a reduced incidence of side effects. In
addition, TheraSeed(R) offers significant quality of life and cost advantages.
Since 1987, TheraSeed(R) has been used by physicians in nearly 300 centers
across the United States in approximately 13,000 procedures for prostate cancer,
including approximately 4,000 procedures in 1996. Sales of TheraSeed(R)
increased 65% in 1995 and 58% in 1996 due to reliable production from the
Company's cyclotron-based manufacturing process and increased demand for
TheraSeed(R) as a result of significantly increased marketing efforts and the
release of favorable clinical data. TheraSeed(R) has also been used on a limited
basis to treat cancers of the pancreas, lung, head, neck, oral cavity, brain and
eye.
On February 24, 1997, the Company entered into a letter of intent with Indigo
Medical, Inc., a subsidiary of Johnson & Johnson, stating the intent to grant to
Indigo the exclusive worldwide right to market and sell TheraSeed(R) for the
treatment of prostate cancer. The letter of intent is subject to the completion
of definitive documentation and approval by the respective Boards of Directors
of the Company and Indigo. Management believes the proposed alliance with Indigo
would provide for sales growth and international expansion while allowing the
Company to focus its resources on maintaining its leadership in the production
of Pd-103 for prostate cancer treatment and other potential applications. By
leveraging the extensive worldwide marketing capability of Indigo and Johnson &
Johnson, the Company would eliminate the need to develop an extensive,
vertically integrated sales, marketing and education and training network.
Theragenics received an FDA license for TheraSeed(R) in 1986 and commenced
product sales in 1987. The Company has been profitable in every quarter
since 1991. In 1992, management increased its control over the
manufacture of TheraSeed(R) by integrating into the Company the production of
Pd-103. This significantly increased capacity for the production of TheraSeed(R)
while maintaining quality and regulatory compliance.
Industry Overview
Prostate Cancer
Prostate cancer is the most common form of cancer, and the second leading
cause of cancer deaths, in men. It is expected to account for approximately 43%
of all cancers to be diagnosed in men during 1997. Based on industry data, the
Company estimates that the cost of treating prostate cancer exceeded $3.0
billion in the United States in 1995. The American Cancer Society estimates new
cases of prostate cancer grew 30% in 1996 to 317,000 from 244,000 cases in 1995,
with deaths associated with the disease estimated to have grown to 41,400 in
1996 from 40,000 in 1995. Principal reasons for the significant increase in new
cases have been advances in diagnostic technology and increased media attention,
including publicity regarding several highly visible individuals who have made
public their battles with the disease. Estimates by the United States Bureau of
Census indicate that the number of men most prone to prostate cancer, those 40
to 80 years old, will grow to 55 million by 2006 from 45 million in 1996. The
Company estimates its market share in the treatment of localized, early-stage
prostate cancer to be approximately 2.5%.
The prostate is a walnut-sized gland surrounding the male urethra, located
below the bladder and adjacent to the rectum. The two most prevalent prostate
diseases are benign prostatic hyperplasia ("BPH") and prostate cancer. BPH is a
non-cancerous enlargement of the innermost part of the prostate. Prostate cancer
is a malignant tumor that begins most often in the periphery of the gland and,
like other forms of cancer, may spread beyond the prostate to other parts of the
body. If left untreated, prostate cancer can metastasize to the lung or bone,
resulting in death. The following table summarizes the various stages of
prostate cancer.
Classification Stage of Progression
A Clinically unsuspected
B Tumor confined to the prostate gland (localized)
C Tumor outside prostate capsule
D Metastasized into pelvic lymph nodes
D2 Metastasized into distant lymph nodes,
organs, soft tissues or bone
Source: American Urological Association Today
Prostate cancer can grow slowly or quickly and virulently, and its cause and
potential methods of prevention are currently unknown. The risk of developing
prostate cancer increases with age. By way of comparison, studies indicate that
one in five men in the United States can expect to develop the disease, whereas
one in eight women in the United States may expect to contract breast cancer.
With prompt treatment, the long-term outlook for men with localized,
early-stage prostate cancer is considered favorable.
Approximately 58% of new prostate cancer diagnoses are defined to be at the
localized stage of the disease. Prostate cancer is typically curable when
detected early, but the lack of early-stage symptoms makes diagnosis difficult.
Until 1988, the best method of routine examination had been the digital rectal
exam, which requires the existence of solid tumors for detection. In 1988, a
diagnostic test was developed that determines the amount of prostate specific
antigen ("PSA") present in the blood. PSA is found in a protein secreted by the
prostate, and elevated levels of PSA are associated with either prostatitis (a
noncancerous inflammatory condition) or a proliferation of cancer cells in the
prostate. The widespread acceptance of the PSA test greatly improved physicians'
ability to diagnose prostate cancer at an early stage and significantly
increased the number of new cases diagnosed annually. Industry studies have
shown that the PSA test can detect prostate cancer as many as five years earlier
than the digital rectal exam. The PSA test is currently part of the routine
medical check-up for prostate assessment. Transrectal ultrasound tests and
biopsies are typically performed on patients with elevated PSA readings to
confirm the existence of cancer.
Treatment Options
In addition to seeding, prostate cancer can be treated with radical
prostatectomy ("RP"), external beam radiation therapy ("EBRT"), hormone therapy,
chemotherapy and watchful waiting. Some of these therapies may be combined. The
treatments that have been most successful are those that remove or kill all of
the cancerous tissue while avoiding excessive damage to the surrounding healthy
tissue. When the cancerous tissue is not completely eliminated, the cancer
typically returns to the primary site, often with metastases to other areas. The
following is a summary of treatment options for prostate cancer other than
seeding.
Radical Prostatectomy is a major surgical procedure that involves the
complete removal of the prostate gland. This procedure has been used for 30
years and is considered to be the standard medical treatment for early-stage,
localized tumors. RP typically requires a three to seven day hospital stay and
a lengthy recovery period (generally four to six weeks). Side effects include
impotence and incontinence. The cost of RP ranges from $20,000 to $30,000 per
procedure, excluding treatment for side effects and postoperative complications.
Approximately 120,000 men underwent RP in 1995.
External Beam Radiation Therapy involves directing a beam of radiation at
the prostate gland to destroy tumorous tissue and has been a common technique
for treating many kinds of cancer since the 1950s. EBRT has typically been
reserved for early-stage prostate cancer in locally advanced cases where the
patient presents an inappropriate surgical risk. The therapy consists of a
series of daily treatments usually lasting from six to eight weeks. Rectal
complications resulting from damage to the rectal wall caused by the radiation
beam as it travels to the prostate are the most common side effects. Principal
side effects also include incontinence and impotence, but these side effects
generally occur with less frequency than they do following RP. EBRT is estimated
to cost between $12,000 to $15,000 per patient. Approximately 35,000 men
underwent EBRT in 1995.
Ancillary Therapies, primarily consisting of hormone therapy and
chemotherapy, are used to slow the growth of cancer and reduce tumor size, but
are generally not intended to be curative. Ancillary therapies are often used
during advanced stages of the disease to extend life and relieve symptoms. Side
effects of hormonal drug therapy include increased development of breasts,
impotence and decreased libido. In addition, many hormone pharmaceuticals
artificially lower PSA levels in patients, which can interfere with staging the
disease and monitoring its progress. Side effects of chemotherapy include
nausea, hair loss and fatigue. Drug therapy and chemotherapy require long-term,
repeated administration of medication on an outpatient basis.
Watchful Waiting is recommended by some physicians in certain circumstances
based on the severity and growth rate of the disease, as well as on the age and
life expectancy of the patient. The aim of watchful waiting is to monitor the
patient, treat some of the attendant symptoms and determine when more active
intervention is required. Watchful waiting requires periodic physician visits
and PSA monitoring.
In addition to the treatment options described above, other forms of
treatment are being developed and tested in clinical trials. Cryosurgery, which
freezes and destroys diseased tissue, has been used to treat prostate cancer,
but to the Company's knowledge has not demonstrated a long-term curative effect.
Photon radiosurgery, a developmental stage form of treatment that emits
low-energy x-rays from a probe and irradiates the tumor from the inside out, is
undergoing clinical studies for the treatment of metastatic brain tumors.
Clinical trials for prostate cancer are not anticipated to begin until late 1997
or early 1998.
The Theragenics Solution
Theragenics produces and markets TheraSeed(R), an FDA-licensed device
currently used principally in seeding for the treatment of prostate cancer. In
this application, TheraSeeds(R) are implanted throughout the prostate gland in a
minimally invasive surgical technique under ultrasound guidance. The radiation
emitted by the seeds is contained within the immediate prostate area, killing
the tumor while sparing surrounding organs. The seeds, whose capsules are
biocompatible, are not removed after delivering their radiation dose to the
prostate. TheraSeed(R) is best suited for solid localized tumors and is usually
classified as a treatment for early-stage disease.
Management believes TheraSeed(R) offers significant advantages over RP and
EBRT. Recent multi-year clinical studies indicate that seeding offers success
rates that are comparable to or better than those of RP or EBRT and reduced
complication rates. In addition, the TheraSeed(R) treatment is a one-time
outpatient procedure with a two to three day recovery period. By comparison, RP
is an inpatient procedure typically accompanied by a three to seven day hospital
stay and a four to six week recovery period, and EBRT involves six to eight
weeks of daily radiation treatments. Treatment with TheraSeed(R) costs $10,000
to $15,000 per procedure, which is substantially lower than the cost of RP and
comparable to the cost of EBRT. In addition, management believes TheraSeed(R)
offers significant competitive advantages over I-125, an alternative
radioisotope used in seeding, as a result of Pd-103's higher dose rate and
shorter half-life.
TheraSeed(R) is a radioactive "seed" approximately 4.5 millimeters long and
0.81 millimeters wide, or approximately the size of a grain of rice. Each seed
consists of a biocompatible titanium capsule containing the radioactive
substance Pd-103. The half-life of Pd-103, or the time required to reduce the
emitted radiation to one-half of its initial level, is 17 days, resulting in the
loss of almost all radioactivity in less than four months.
Treatment Protocol
Prostate cancer patients electing seed therapy first undergo a transrectal
ultrasound test or CT scan, which generates a two-dimensional image of the
prostate that is transformed into a three-dimensional image. With the assistance
of a computer program, a treatment plan is designed that calculates the number
and placement of the seeds required for the best possible distribution of
radiation to the prostate.
Once the implant model has been constructed, the procedure is scheduled and
the seeds are ordered. The number of seeds implanted ranges from 40 to 100, with
the number of seeds varying with the size of the prostate. The procedure is
usually performed under local anesthesia in an outpatient setting. An ultrasound
probe is first positioned in the rectum to guide needle placement and seed
location. Correct needle placement is facilitated by a template, or grid, that
covers the perineum (the area between the scrotum and rectum through which the
needles are inserted) and is attached to the ultrasound probe. Implant needles
loaded with seeds are assigned to the appropriate template holes as indicated in
the treatment plan. Each needle is guided through the template and then through
the perineum to its predetermined position within the prostate under direct
ultrasound visualization. The seeds are implanted as the needle is withdrawn
from the prostate. When all seeds have been inserted, the ultrasound image is
again reviewed to verify seed placement.
An experienced practitioner typically performs the procedure in approximately
60 to 90 minutes, with the patient often returning home at day's end. Recovery
time is typically two to three days. In contrast, RP generally requires up to
three hours to perform, with a three to seven-day hospital stay and a typical
recovery period of four to six weeks. EBRT requires daily outpatient radiation
treatments for a period of six to eight weeks. Seeding has been used as a
treatment for prostate cancer since the early 1970s, when I-125 seeds were
implanted in prostate tumors under open surgery. However, this "free hand"
technique fell into disfavor because the seeds were often haphazardly arranged
leading to inhomogeneous dosimetry, with suboptimal antitumor effect in
underdosed areas and significant damage to collateral tissues, particularly in
the urethra and rectum, in overdosed areas. Clinical results indicate that the
computer modeling and advanced imaging and other techniques used in seeding
today have virtually eliminated these drawbacks.
Clinical Results
Strong Efficacy Results. Clinical data indicates that seeding offers success
rates that are comparable to or better than those of RP or EBRT. In a study
described in Urology Times in September 1994, Drs. John Blasko and Haakon Ragde
of the Northwest Tumor Institute in Seattle, Washington, found, in a study of
298 men with early-stage prostate cancer, an actuarial local control rate of
96%, after treatment with either Pd-103 or I-125 seed implantation. A study
published in 1995 by Drs. Blasko and Ragde found 100% of the 111 patients
treated with TheraSeed(R) for localized early-stage prostate cancer showed no
localized prostate cancer after treatment follow-up ranging from 12-73 months,
with a median follow-up of 32 months. The actuarial disease-free rate at 54
months was 89%. Updating their previous study on patients treated with Pd-103
or I-125 for a paper prepared for the First International Consultation on
Prostate Cancer organized by the World Health Organization in June 1996,
Drs. Blasko and Ragde found a seven-year actuarial local disease-free rate
of 97% for 320 patients treated for localized early-stage prostate cancer. They
also presented therein an eight-year actuarial local disease-free rate of 87%
for 188 patients who were considered to represent higher risks of locally
advanced prostate cancer and were treated with a combination of Pd-103 or
I-125 seeding and a modified dose of EBRT. A study by Dr. Michael Dattoli of
University Community Hospital, Tampa, Florida and Dr. Kent Wallner of
Memorial Sloan-Kettering Cancer Center, New York, New York, published in
the International Journal of Radiation Oncology, Biology and Physics in
July 1996 found a three-year actuarial freedom from biochemical failure
(based on PSA scores) of 79% among 73 patients with clinically
localized, high risk prostate cancer who were treated with EBRT in combination
with Pd-103. This compares favorably to results reported for patients treated
with conventional dose EBRT alone. These locally advanced cases are significant
because RP guidelines would not classify them as suitable for surgical
treatment.
Reduced Incidence of Side Effects. Because TheraSeed(R) delivers a highly
concentrated and confined dose of radiation directly to the prostate, healthy
surrounding tissues and organs are spared excessive radiation exposure. This
results in significantly fewer and less severe side effects and complications
than are incurred with other conventional therapies. RP generally results in a
50-90% impotence rate and a 2-65% incontinence rate, and EBRT generally results
in impotence and incontinence rates of 40-60% and 10-25%, respectively. In
contrast, according to the 1995 study by the Northwest Tumor Institute described
above, it was reported that 85% of seed therapy patients under 70 years of age
who were potent before the procedure remained so. In addition, patients who had
not had a previous transurethral prostate resection ("TURP") suffered no
incontinence. Patients having a previous TURP have compromised urinary tracts
and can experience higher rates of incontinence. Patients receiving seeding can
expect some urinary urgency post-implantation as the Pd-103 delivers its
radiation dose.
Lower Treatment Cost. The total cost of seeding is approximately $10,000 to
$15,000 per procedure. This is approximately one-half the cost of RP, which
ranges from $20,000 to $30,000, excluding treatment for side effects and
post-operative complications, and is comparable to the cost of EBRT, which
ranges from $12,000 to $15,000 for a six-to-eight week course of treatment.
The following table compares the methods of treatment discussed above with a
minimum of five-year outcomes data:
- -------------------------------------- ----------------------------- ------------------------------ ------------------------------
External Beam
Radical Prostatectomy Radiation Therapy Seeding
- -------------------------------------- ----------------------------- ------------------------------ ------------------------------
Outpatient procedure One-time outpatient
Inpatient procedure with with daily treatments for procedure lasting
3-7 day hospital stay 6-8 weeks 60-90 minutes
Nature of Treatment
- -------------------------------------- ----------------------------- ------------------------------ ------------------------------
- -------------------------------------- ----------------------------- ------------------------------ ------------------------------
Targeted Cancer Stage A and B A, B and C A and B
- -------------------------------------- ----------------------------- ------------------------------ ------------------------------
- -------------------------------------- ----------------------------- ------------------------------ ------------------------------
Five Year Success Rate(a) 78-83% 50% 80-100%
- -------------------------------------- ----------------------------- ------------------------------ ------------------------------
- -------------------------------------- ----------------------------- ------------------------------ ------------------------------
Recovery Period Generally 4-6 weeks None after 6-8 weeks 2-3 days
- -------------------------------------- ----------------------------- ------------------------------ ------------------------------
- -------------------------------------- ----------------------------- ------------------------------ ------------------------------
Impotence Rate(b) 50-90% 40-60% 5-15%
- -------------------------------------- ----------------------------- ------------------------------ ------------------------------
- -------------------------------------- ----------------------------- ------------------------------ ------------------------------
Incontinence Rate(b) 2-65% 10-25% 0-2%
- -------------------------------------- ----------------------------- ------------------------------ ------------------------------
- -------------------------------------- ----------------------------- ------------------------------ ------------------------------
Cost Per Procedure $20,000-$30,000 $12,000-$15,000 $10,000-$15,000
- -------------------------------------- ----------------------------- ------------------------------ ------------------------------
(a) Calculated as the percent of patients disease-free after five years. Rates
may be actuarially computed.
(b) The percent of patients with normal continence and potency prior to
treatment not preserving such attributes. Excludes patients with previous
TURPs.
Management believes TheraSeed(R) represents the best available form of
seeding. Another radioactive isotope, Iodine-125 ("I-125"), is also commercially
available as a permanent implant. TheraSeed(R) is the first commercially
available alternative isotope to I-125 since I-125's introduction in the 1970s.
Management believes I-125 and Pd-103 are used with relatively equal frequency in
substantially all prostate cancer seeding procedures. Another technique known as
"temporary seeding," which involves the temporary placement of an Iridium-based
source in or near a tumor, is used in a very small percentage of cases.
Management believes Pd-103 has the following advantages over I-125: (i) Pd-103
delivers three times the dose rate of I-125, which can yield advantages in
treating aggressive cancers, (ii) Pd-103 has approximately one-third the
half-life of I-125, which shortens radiation induced side effects and exposure
to medical personnel in treatment follow-up; and (iii) unlike I-125, Pd-103 is
nontoxic and non-volatile as it decays. Management is not aware of any clinical
studies directly comparing the efficacy of Pd-103 and I-125.
Strategy
In an effort to enhance market penetration and maintain technological
leadership in the field of radiological treatment of diseases, the Company is
implementing the following strategies. In the event the Company enters into a
definitive agreement with Indigo, management anticipates that Indigo will assume
and expand upon certain of the strategic initiatives described below.
o Increase Physician Awareness of Seeding and TheraSeed(R).
Physician acceptance is critical to the increased use of seeding
as a form of treatment for prostate cancer. The primary
physician for the treatment of prostate cancer is the urologist.
RP has a long history as the treatment of choice for early-stage,
localized prostate cancer and urologists are accustomed to
performing this procedure. Compelling long-term outcomes data is
therefore key to the development of physician interest in seeding as
an alternative form of prostate cancer treatment. To promote such
interest, the Company is publishing the results of recent clinical
studies illustrating TheraSeed(R)'s effectiveness in treating
prostate cancer and is supporting related research and publication
efforts by physicians using TheraSeed(R). Management recognizes
the importance of well-trained physicians and the need for quality
training in advancing the growth of this product and is exploring
opportunities toward this end. Management has historically lent
financial support to training centers and expects to continue
this practice. By increasing physician awareness of TheraSeed(R) and
its effectiveness in treating prostate cancer, the Company plans to
increase demand for TheraSeed(R) within the medical community.
o Maintain A Strong Commitment to Providing Cancer Information Services to
Patients. Management believes that patients are taking an active role in
choosing their medical treatment. In response to this, Theragenics
intends to maintain its efforts to increase patient awareness of
alternative treatments and the importance of second opinions through its
Cancer Information Center as well as other avenues of increasing
awareness.
o Maintain Technological Leadership. Management believes the Company is
the only producer of Pd-103-based radioactive seeds. The Company's
strategy is to be a technological leader in the cancer treatment
industry and believes its proprietary technology possesses performance
advantages over competitive seed technology. The Company will also
continue to focus on production technology to maintain leadership in
this area.
o Explore and Evaluate Opportunities for Strategic Alliances. The
Company is negotiating the terms of a strategic alliance with Indigo
Medical, Inc., a subsidiary of Johnson & Johnson, and has stated an
intent to grant to Indigo the exclusive worldwide right to market
and sell TheraSeed(R) for the treatment of prostate cancer.
Management believes this alliance will enable the Company to focus
its resources on maintaining its leadership in the production of
Pd-103 for prostate cancer treatment and other potential
applications without being required to develop an extensive,
vertically integrated sales, marketing, education and training
network. Synergies with large healthcare-related companies may be
identified and Theragenics may pursue strategic relationships with
such companies on its own or through its relationship with Indigo.
Such relationships could relate to marketing, product development,
supply, distribution, research or other aspects of the Company's
operations. Potential strategic allies include large
pharmaceutical or medical device companies, health maintenance
organizations, outpatient treatment centers and companies, hospitals,
research centers, universities, start-up companies or other entities.
Management believes the Company's long-term growth and strong
competitive position could be enhanced through such alliances or
affiliations and intends to actively seek suitable opportunities
for such relationships.
o Promote Seeding to Health Care Payors. A substantial portion of the
cost of prostate cancer treatment in the United States is currently
reimbursed by the Medicare program and other third party payors.
The amount of reimbursement for prostate cancer treatment is
likely to have a significant impact on the decisions of urologists,
oncologists and other health care providers regarding treatment
options. The Company has been actively engaged in efforts to ensure
that adequate and fair reimbursement for seeding is available for the
doctors performing the procedure. The Company has long-standing
relationships with patient advocacy groups that share with the
Company a desire to ensure unrestricted access to the TheraSeed(R)
treatment alternative. The Company plans to continue these
activities as they relate to the Company's business.
o Explore New Distribution Channels and Product Applications. Management
believes significant long-term international marketing opportunities
exist for TheraSeed(R). Although no meaningful overseas market currently
exists for the product, management believes a variety of factors,
including international introduction of the PSA test, may create an
international market for TheraSeed(R) in the future. In addition,
although the Company has focused primarily on prostate cancer to date,
management believes TheraSeed(R) could be used increasingly to treat
other forms of cancer, including cancers of the pancreas, lung, head,
neck, oral cavity, brain and eye. Management plans to support
programs to identify additional oncological and non-oncological uses
for TheraSeed(R) and Pd-103.
Production
The production of TheraSeed(R) is dependent upon the availability of Pd-103,
as well as Rhodium-103 ("Rh-103"), titanium, graphite and lead. With the
exception of Pd-103, all of these raw materials are relatively inexpensive and
readily available from third party suppliers.
Pd-103 is a radioactive isotope that can be produced by neutron bombardment
of Pd-102 in a nuclear reactor, or by proton bombardment of Rh-103 in a
cyclotron. Following the production of Pd-103 from Rh-103 in the cyclotron, the
Pd-103 is harvested from the cyclotron and moved through a number of proprietary
production processes until it reaches its final seed form used by doctors.
Until 1993, the Company used the neutron bombardment method of producing
Pd-103. Under this method, the Company was required to contract with third
parties for the enrichment services necessary to produce a useable feed material
for production of Pd-103 in a nuclear reactor. Additionally, the Company was
dependent upon a university and a United States government reactor for the
irradiation of this feed material to yield Pd-103. The government facility was
subject to increasing political uncertainty regarding its control and funding,
and neither the university nor the government facility operated on a commercial
timetable. These factors combined to limit the Company's ability to obtain
Pd-103 on a timely and consistent basis.
To increase its control over timely and consistent availability, quality and
cost of Pd-103, the Company turned to the proton bombardment method of producing
Pd-103. To accomplish this alternative method of production, the Company
contracted in 1992 for the purchase of a cyclotron for in-house production of
Pd-103. After the cyclotron was delivered and reliable production of Pd-103 was
proven, the Company discontinued its reliance on outside vendors for enrichment
and irradiation services.
The Company has three cyclotrons in production and is currently installing
a fourth, which is scheduled to become operational during the first quarter of
1997. The Company has ordered four additional cyclotrons for installation in
fiscal 1998. The Company's cyclotrons are designed, built, installed and tested
by a Belgian company specializing in the construction of such equipment. A
number of proprietary design modifications are incorporated in the cyclotrons.
These modifications are subject to confidentiality agreements with the cyclotron
manufacturer and the Company's own personnel.
Due to the highly sophisticated and technical nature of the equipment, the
Company has encountered delays and difficulties in the construction,
installation and testing of its cyclotrons. Management cannot be certain that
such problems will not occur in connection with the construction, installation
and testing of the cyclotrons to be installed in 1998.
Cyclotron operations constitute only one component of the TheraSeed(R)
manufacturing process. Because the production of TheraSeed(R) is highly
sensitive and labor intensive, management is focusing significant attention and
effort on automating and otherwise improving all aspects of the Company's
manufacturing process. Although the automation process is difficult and time
consuming, management believes it will improve efficiency, further reduce
radiation exposure to personnel and provide additional production capacity for
TheraSeed(R).
Marketing
The Company's marketing program is aimed at increasing awareness of
TheraSeed(R) within the medical community and the potential patient population,
as well as adding value to its customers' medical practices.
Strategic Alliance. The Company recently entered into a letter of intent
with Indigo Medical, Inc., a subsidiary of Johnson & Johnson, stating the
intent to grant to Indigo the exclusive worldwide right to market and sell
Theraseed(R) for the treatment of prostate cancer. Indigo would also assume
responsibility for the education and training of urologists, radiation
oncologists and other personnel involved in the use of TheraSeed(R). The
letter of intent also contemplates that Indigo will have a first right of
negotiation with respect to additional uses of TheraSeed(R) and other products
that may be developed by the Company.
Management believes the proposed alliance with Indigo would provide for sales
growth and international expansion while allowing the Company to focus its
resources on maintaining its leadership in the production of Pd-103 for prostate
cancer treatment and other potential applications. By leveraging the extensive
worldwide marketing capability of Indigo and Johnson & Johnson, the Company
would eliminate the need to develop an extensive, vertically integrated sales,
marketing and education and training network. No assurance can be given,
however, that the Company and Indigo will enter into a definitive agreement or
that it will have the anticipated effect on the Company's operations.
Education/Awareness. Bringing attention to prostate cancer and its treatment
alternatives is a primary focus of the Company's marketing program. As part of
its pull marketing strategy, the Company works to disseminate prostate cancer
information through general interest stories in the print and broadcast media.
To accomplish this strategy, the Company uses its own in-house network of media
contacts as well as public relation firms. Theragenics also has an advertising
program aimed at men over 50 that promotes options for the treatment of prostate
cancer and stresses the importance of alternative treatments and obtaining
second opinions. The Company also staffs its own Cancer Information Center to
answer questions about the TheraSeed(R) treatment and assist cancer patients in
locating physicians trained in seeding. Representatives of the Company regularly
attend trade shows and conventions where the Company is visible to large numbers
of urologists, radiation oncologists and patients.
Advocacy. The Company has supported the writing and publication of a book by
a TheraSeed(R) patient, aided patient support groups, sponsored speakers on
prostate cancer, and has been active with cancer information hotlines such as
the American Cancer Society. Theragenics has fought and continues to fight for
adequate reimbursement for seed implantation from Medicare and other third party
payors. Theragenics has also advocated treatment opportunities for military
veterans.
Scholarship. The Company actively supports the writing of scholarly articles
by doctors using TheraSeed(R) and the publication of these articles in medical
journals. The Company also supports and encourages doctors using TheraSeed(R) to
present papers to and speak at seminars and symposiums on prostate disease.
Customer Service. The Company performs a value-added service to the
physician customer by directing patients seeking additional information from
Theragenics' Cancer Information Center to one of the nearly 300 centers across
the United States performing the TheraSeed(R) treatment. Theragenics also
provides assistance to physicians newly trained in the TheraSeed(R) treatment by
providing the doctor or the medical center with consultative advice on
increasing the visibility of the practice and the new treatment being performed
there. Theragenics retains a company specializing in medical reimbursement to
assist its customers in obtaining adequate reimbursement from third party
payors.
Physician Training. Management recognizes the marketing benefits that can be
generated by a well-trained seeding physician population and the need for
quality training to achieve that end. Physicians are currently trained at three
seeding education centers across the United States.
TheraSphere (R)
Theragenics has also participated in the development of TheraSphere(R), a
microscopic radioactive glass sphere designed for the treatment of liver cancer.
The Company holds a worldwide exclusive license from the University of Missouri
for the use of the technology required to produce TheraSphere(R). The Company
has granted to Nordion International, Inc. ("Nordion") an exclusive worldwide
sublicense to manufacture, distribute and sell TheraSphere(R) for any
application. TheraSphere(R) has been approved for distribution in Canada, but
has not been approved by the FDA for distribution in the United States. Under
the terms of the sublicense, Nordion has agreed to obtain the necessary
regulatory approvals for distribution of TheraSphere(R) in the United States and
other countries. The commercial development and regulatory approval of
TheraSphere(R) is still in its early stages, and management does not anticipate
significant revenues from TheraSphere(R) within the foreseeable future.
A TheraSphere(R) treatment dose contains approximately five million
yttrium-90 glass spheres that are each approximately half the diameter of a
human hair. The radiation dose is delivered to the tumor by introducing the
TheraSphere(R) by catheter into the hepatic artery, which carries arterial blood
to the liver. Because of greater blood flow to tumors compared to healthy liver
tissue, the microspheres concentrate in the capillaries feeding the tumor. The
concentration of microspheres in healthy tissue is much lower. Because of the
ability to place the radiation source in such close proximity to the tumor,
TheraSphere(R) can deliver a radiation dose to the tumor cells five times as
strong as that which can be delivered via external beam radiation.
Patents and Licenses; Trade Secrets
The Company's success is dependent upon protecting its proprietary
technology for the production of Pd-103. The Company relies in part on
combinations of patent, trademark and trade secrecy laws, along with contractual
provisions, to protect its intellectual property rights and its technology. The
effectiveness of these various types of protection can be limited, however, by
variations in laws and enforcement procedures from country to country. It is
possible that competitors may independently develop similar technology or
otherwise obtain access to the Company's intellectual property assets.
The Company holds United States patents directed to Pd-103 based on its
production using both cyclotrons and nuclear reactors. The Company also has
corresponding patents in Canada, South Africa, Japan and the 10 countries of the
European patent convention, and a PCT patent application on file for Japan,
Australia, New Zealand, Canada, and Europe (representing 16 European countries)
as well as a direct filing in Mexico. The Company may file additional patent
applications from time to time and considers the ownership of patents important,
but not necessarily essential, to its operations. The Company also uses a
strategy of confidentiality agreements and trade secret treatment to provide
primary protection to a number of proprietary design modifications in the
cyclotrons, as well as various production processes.
The Company also holds a worldwide exclusive license from the University of
Missouri for the use of technology required for producing TheraSphere(R).
Theragenics holds the rights to all improvements developed by the University of
Missouri on this technology. The Company, in turn, sublicenses exclusive
worldwide rights to this technology and all improvements to Nordion. Pursuant to
its license agreement with the University of Missouri, the Company is obligated
to pay the University the greater of a fixed annual amount or a percentage of
the gross sales amount derived from the sale of TheraSphere(R).
Theragenics holds patents for technology concerning methods for delivery of
TheraSphere(R) in several countries, including the United States, Canada,
Australia, Argentina, South Africa and the 10 countries of the European patent
convention, and has patent applications on file in other countries, including
Japan. The Company exclusively licenses this technology to Nordion for worldwide
use.
The Company relies to a significant degree on trade secrets, proprietary
know-how and technological advances that are either not patentable or which the
Company chooses not to patent. In particular, the Company has designed certain
modifications to its cyclotrons as well as various production processes that it
deems to be proprietary. The Company seeks to protect non-patented proprietary
information, in part, by confidentiality agreements with suppliers, employees
and consultants.
Competition
The Company competes in a market characterized by technological innovation,
extensive research efforts and significant competition. In general, TheraSeed(R)
competes with conventional methods of treating localized cancer such as RP and
EBRT. RP currently represents the standard medical treatment for early-stage,
localized prostate cancer. RP has a long history of favorable clinical results
and physicians have developed a high degree of familiarity and comfort with this
procedure. EBRT is also a well-established method of treatment and is widely
accepted for patients who do not represent a good surgical risk or whose
prostate cancer has advanced beyond the stage for which surgical treatment is
indicated. RP and EBRT are therefore well entrenched in the medical community
and in the universities and schools providing medical education. Management
believes that if general conversion from these established procedures to
TheraSeed(R) treatment does occur, such conversion will be the result of a
combination of equivalent or better efficacy, reduced incidence of side effects
and complications, lower cost, other quality of life issues and pressure by
health care providers and patients.
In addition, I-125 is commercially available as a permanent implant and
competes with TheraSeed(R). Management believes I-125 and Pd-103 are used with
relatively equal frequency in prostate cancer seeding procedures. I-125's dose
rate is approximately one-third that of Pd-103, however, and its half-life is
three times longer. Management believes Pd-103 enjoys a competitive advantage
over I-125 based on: (i) a higher dose rate, which can yield advantages in
treating aggressive cancers, (ii) a shorter half-life, which shortens radiation
induced side effects and exposure to medical personnel in treatment follow-up;
and (iii) Pd-103 is nontoxic and non-volatile as it decays. Management is aware
of no other similar radioactive products competing directly with TheraSeed(R).
Although a small Belgium start-up company has announced its intent to produce
Pd-103 for medical devices, to management's knowledge, Theragenics is the only
company in the world that commercially produces Pd-103 for medical devices.
Many companies, both public and private, are researching new and innovative
methods of treating cancer. In addition, many companies, including many large,
well-known pharmaceutical, medical device and chemical companies, are engaged in
radiological pharmaceutical and device research. Significant developments by any
of these companies could lessen or eliminate the demand for the Company's
products.
Government Regulation
The Company's present and intended future activities in the development,
manufacture and sale of cancer therapy products are subject to various laws,
regulations, regulatory approvals and guidelines. Within the United States, the
Company's therapeutic radiological devices must comply with the U.S. Federal
Food, Drug and Cosmetic Act, which is enforced by the FDA.
Before a new device can be marketed in the United States, the manufacturer
generally must obtain either (i) FDA clearance of a pre-market notification
under Section 510(k) of the Federal Food, Drug & Cosmetic Act or (ii) FDA
approval of a pre-market approval application (a "PMA"). Following submission of
the 510(k), the manufacturer may not market the new device until an order is
issued by the FDA finding the device to be "substantially equivalent" to a
legally marketed medical device (a "predicate device"). The 510(k) process can
be lengthy and expensive and the issuance of such clearance is often uncertain.
If a new device is not eligible for clearance under the 510(k) process, a PMA
application must be filed with and approved by the FDA before the product may be
marketed. The PMA process requires the performance of extensive clinical trials
to determine safety and efficacy, is significantly more complex, expensive and
time consuming than the 510(k) process and typically requires five to seven
years. In countries in which the Company's products are not currently approved,
the use or sale of the Company's commercial products will require approvals by
government agencies comparable to the FDA. The Company is also required to
adhere to applicable FDA regulations for Good Manufacturing Practices, including
extensive record keeping and reporting and periodic inspections of manufacturing
facilities. Similar requirements are imposed in other countries.
The Company obtained FDA 510(k) clearance in 1986 to market TheraSeed(R)
for, in general, the treatment of localized solid tumors. A new 510(k) clearance
is required for any modifications in the device or its labeling that could
significantly affect the safety or effectiveness of the original product. Under
the FDA's regulatory scheme, the decision whether to seek 510(k) clearance for a
modified device is left to the manufacturer in the first instance, and
management has thus far determined that no such clearance has been required. The
FDA has the right to review and revoke 510(k) clearance at any time. A PMA may
be required for future products or for future modifications to TheraSeed(R).
The Company's handling of radioactive materials is governed by the State of
Georgia in agreement with the NRC. The users of TheraSeed(R) are also required
to possess licenses issued either by the states in which they reside or the NRC
(depending upon which state is involved and which of two possible processes are
used by the Company to produce TheraSeed(R)). Use licenses also will be required
by some of the foreign jurisdictions in which the Company may attempt to market
its products. Although the regulatory standards applicable to products
containing radioactive materials produced as a by-product of nuclear fission
reactions are uniform nationally, uniform regulatory standards do not exist at
the present time with respect to TheraSeed(R) as produced by the Company's
current manufacturing process. To date, these standards have imposed no
impediment to marketing and management anticipates they will not pose an
impediment unless the regulatory environment changes or new rulings are adopted.
Furthermore, the Company's expansion plans require the Company to secure
additional permits and licenses from a number of environmental, health and
safety regulatory agencies. The Company believes, but cannot assure, that it
will be able to acquire the permits and licenses necessary for its planned
expansion of its manufacturing capacity in accordance with the Company's
timetable for its expansion. The Company to date has not experienced delays in
licensing any of its facilities or cyclotrons.
The Company is required under its radioactive materials license to maintain
radiation control and radiation safety personnel, procedures, equipment and
processes, and to monitor its facilities and its employees and contractors. The
Company is also required to provide financial assurance that end-of-life
radiological decommissioning of its cyclotrons and other radioactive areas of
its property that contain radioactive materials will be adequately funded by the
Company. The Company has so far been successful in explaining to the Georgia
Department of Natural Resources that it will not have to dispose of its
cyclotrons, but instead will be able to sell them for re-use if its ceases to
operate them. Thus, the Company is only required to estimate and provide
financial assurance for the end-of-life remediation and disposal costs
associated with ancillary structures, such as plumbing, laboratory equipment and
chemical processing facilities. The Company's decommissioning obligations will
increase as its production capacity is expanded. Moreover, if the Georgia
Department of Natural Resources were to require that the Company include the
cost of decommissioning its cyclotrons in its financial assurance demonstration,
the amount of money required to be set aside by the Company to cover
decommissioning costs could dramatically increase.
The Company disposes of low level radioactive waste to licensed commercial
radioactive waste treatment or disposal facilities for incineration or land
disposal. The amount of radioactive waste generated by the Company's operations
will increase following implementation of the Company's planned expansion of its
production capacity. There is a high degree of regulatory uncertainty associated
with commercial radioactive waste disposal facilities, and the cost of disposing
of radioactive waste has increased dramatically in recent years. To mitigate the
impact of a potential moratorium on radioactive waste disposal at the Company's
current disposal site, the Company sought and received a license from the
Georgia Department of Natural Resources for temporary on-site storage capacity.
The Company believes that it would be able to obtain additional licensure
necessary to enable it to continue production for a substantial period of time
in the event its current waste disposal contractor ceases to be able to receive
the Company's waste and an alternative disposal site is not readily available.
The Company also handles nonradioactive chemical substances in the normal course
of its manufacturing operations that are subject to a broad range of state and
federal environmental regulations, and which could cause harm to humans or to
the environment if improperly handled or released to the environment. Management
believes the Company is in compliance with all state and federal regulations.
The Company provides training and monitoring of its personnel with two full time
regulatory and safety officers to facilitate the proper handling of all
materials.
Employees
As of December 31, 1996, the Company had 59 full-time employees (including
executive personnel). Of this total, 37 were engaged in development and
production of the Company's products. The remainder were engaged in marketing
and general corporate activities. The Company's employees are not represented by
a union or a collective bargaining unit, and management considers employee
relations to be good.
Item 2. Properties
The Company owns a 15,245 square-foot, single-story building in Buford,
Georgia, leases a 10,752 square-foot, single-story building in Norcross,
Georgia, and leases a 2,692 square-foot suite of offices in a four-story office
building in Norcross, Georgia. The larger Norcross facility houses the Company's
assembly, shipping, marketing and administrative operations, the smaller
Norcross facility provides executive office space and the Buford facility houses
the Company's cyclotrons and its raw material processing operations. In 1996,
the Company purchased 30 acres of land adjacent to its Buford facility.
Management plans to use this land for long-term expansion of the Company's
production facilities as manufacturing expands to meet increasing sales demand
and eventually plans to relocate all functions currently housed in the leased
Norcross facilities to the facilities planned for construction on the 30 acres
of land adjacent to its current Buford facility.
Item 3. Legal Proceedings
There are currently no material legal proceedings pending or, to the
knowledge of management, threatened against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of its security holders during
the fourth quarter of calendar 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Stock is traded over the counter and reported on the
Nasdaq National Market ("Nasdaq"). The trading symbol for the Company's Common
Stock is "THRX." The high and low prices as reported on Nasdaq for the Company's
Common Stock for each quarterly period in 1995 and 1996 are as follows:
High Low
1995
First Quarter...................................... $3.75 $2.25
Second Quarter..................................... 6.50 3.13
Third Quarter...................................... 6.38 4.88
Fourth Quarter..................................... 12.50 4.88
1996
First Quarter...................................... 12.25 7.00
Second Quarter..................................... 18.63 8.63
Third Quarter...................................... 19.25 11.75
Fourth Quarter..................................... 25.63 16.00
As of March 18, 1997, the closing price of the Company's Common Stock was
$20-5/8 per share. Also, as of that date, there were approximately 743 holders
of record of the Company's Common Stock. The number of record holders does not
reflect the number of beneficial owners of the Company's Common Stock for whom
shares are held by depositary trust companies, brokerage firms and others.
On February 14, 1997, The Company's Board of Directors adopted a Stockholder
Rights Plan (the "Rights Plan"). The Rights Plan contains provisions to protect
the Company's stockholders in the event of an unsolicited offer to acquire the
Company, including offers that do not treat all stockholders equally, the
acquisition in the open market of shares constituting control without offering
fair value to all stockholders and other coercive, unfair or inadequate takeover
bids and practices that could impair the ability of the board of Directors to
represent stockholders' interests fully. Pursuant to the Rights Plan, the Board
of Directors declared and paid a dividend of one share purchase right (a
"Right") for each outstanding share of Common Stock held of record as of
February 28, 1997. The Rights, which will expire in February 2007, initially
will be represented by, and traded together with, the Common Stock. The Rights
are not currently execisable and do not become exercisable unless certain events
occur, including the acquisition of, or commencement of a tender offer for, 15%
or more of the outstanding Common Stock. Each Right represents the right to
purchase from the Company one share of Common Stock at a purchase price of
$120.00, subject to adjustment. In the event certain triggering events occur,
including the acquisition of 20% or more of the outstanding Common Stock each
Right that is not held by the 20% or more stockholder will entitle its holder to
purchase additional shares of Common Stock having a market value of twice the
purchase price. As a result, the Rights Plan could add substantially to the cost
of acquiring the Company, and consequently could delay or prevent a change in
control of the Company. These effects could adversely affect the market price of
the Common Stock. Prior to the time the Rights become exercisable, the Board of
Directors may redeem the Rights at a redemption price of $.01 per Right. The
description and terms of the Rights are set forth in a Rights Agreement dated as
of February 17, 1997 by and between the Company and SunTrust Bank, Atlanta, as
Rights Agent.
Dividend Policy
The Company has never declared or paid a cash dividend on its Common Stock.
It is the present policy of the Board of Directors to retain all earnings to
support operations and to finance expansion. Consequently, the Board of
Directors does not anticipate declaring or paying cash dividends on the Common
Stock in the foreseeable future. The Company's current credit facility limits
the amount of dividends payable on the Common Stock to a maximum of 25% of the
Company's annual net income after tax. Decisions on the payment and amount of
future dividends on the Common Stock will depend on the Company's results of
operations, capital requirements and financial condition and other relevant
factors as determined by the Board of Directors.
Item 6. Selected Financial Data
The selected financial data set forth below as of December 31, 1995 and 1996
and for each of the years in the three-year period ended December 31, 1996 have
been derived from the financial statements of the Company included elsewhere
herein, which have been audited by Grant Thornton LLP, independent certified
public accountants. The selected financial data as of December 31, 1992, 1993
and 1994 and for each of the years in the two-year period ended December 31,
1993 have been derived from the financial statements of the Company, which have
been audited by Grant Thornton LLP but are not included herein. The selected
financial data set forth below should be read in conjunction with the financial
statements of the Company and related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere herein.
Year Ended December 31,
-----------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars and shares in thousands, except per share data)
Statement of Earnings
Data:
Product sales $4,379 $4,091 $4,723 $7,782 $12,257
Licensing fees -- -- -- 85 100
----- ------ ------ ------ ------
4,379 4,091 4,723 7,867 12,357
Cost of product sales 1,227 1,678 1,791 2,645 3,736
Selling, general and
administrative 1,639 1,607 1,844 2,396 3,198
Research and
development 63 36 15 18 7
----- ------ ------ ------ ------
2,929 3,321 3,650 5,059 6,941
Other income (expense) 68 (86) 110 64 36
----- ------ ------ ------ ------
Net earnings before
income taxes,
extraordinary credit
and cumulative effect
of change in accounting
principle 1,518 684 1,183 2,872 5,452
Income tax expense 582 254 453 1,100 2,067
----- ------ ------ ------ ------
Net earnings before
extraordinary credit
and change in accounting
method 936 430 730 1,772 3,385
Extraordinary credit 556 -- -- -- --
Change in accounting
method -- 2,860 -- -- --
----- ------ ------ ------ ------
Net earnings $1,492 $3,290 $ 730 $1,772 $3,385
====== ====== ====== ====== ======
Earnings per common
share before
extraordinary credit
and change in
accounting method $ 0.08 $ 0.04 $ 0.06 $ 0.15 $ 0.28
Earnings per common
share $ 0.13 $ 0.28 $ 0.06 $ 0.15 $ 0.28
Weighted average
shares 11,431 11,709 11,583 11,759 12,259
Year Ended December 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Cash and short-term
investments $2,928 $3,083 $2,317 $3,266 $2,986
Property, plant and
equipment, net 3,404 5,647 8,458 10,073 17,586
Total assets 7,851 12,619 14,169 16,878 23,689
Long-term debt,
including current
installments -- 1,330 1,989 1,519 3,458
Shareholders' equity 7,445 11,034 11,810 14,769 19,385
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Theragenics was founded in 1981 and is engaged in the manufacture and sale of
TheraSeed(R), a rice-sized device used for the treatment of localized prostate
cancer in a one-time, minimally invasive procedure. In 1986, the Company
received FDA clearance for its principal product, TheraSeed(R), for use in any
solid localized tumor. Sales increased 65% in 1995 and 58% in 1996 due to
reliable production from the Company's cyclotrons and increased demand for
TheraSeed(R) as a result of significantly increased marketing efforts and the
release of favorable clinical data relating to the use of TheraSeed(R).
TheraSeed(R) has been used in an estimated 13,000 procedures for prostate cancer
since 1987, including approximately 4,000 procedures in 1996.
Production of Pd-103, the radioisotope supplying the therapeutic radiation of
TheraSeed(R), has always been a controlling factor in the Company's efforts to
generate sales. Until 1993, the Company used a manufacturing process that
required it to contract with third parties for enrichment services that were
necessary to produce a useable feed material for production of Pd-103 in a
nuclear reactor. Additionally, the Company was dependent on a university and a
United States government reactor for the irradiation of this feed material to
yield Pd-103. These factors combined to limit the availability of Pd-103 on a
timely and consistent basis.
To increase its control over the timely and consistent availability, quality
and cost of Pd-103, the Company converted to an alternative means of producing
Pd-103 using a cyclotron. In 1992, the Company contracted for the purchase of a
cyclotron for in-house production of Pd-103. After the cyclotron was delivered
and reliable production of Pd-103 was demonstrated, the Company discontinued its
reliance on outside vendors for enrichment and irradiation services.
In view of the scale of the investment necessary to add cyclotrons and the
Company's limited access to debt and equity capital, the Company undertook a
slow and measured roll-out of its TheraSeed(R) product. Management focused
primarily on the careful development of relationships with the physician
community and on ensuring that the Company's production capabilities could meet
demand for its product. The Company added additional cyclotrons in 1995 and
1996, and a fourth cyclotron is scheduled to become operational in early 1997.
Because a cyclotron does not become available for production until approximately
18 months after it is ordered, the accuracy of the Company's long-term plans can
significantly affect its results of operations. The delivery of cyclotrons prior
to a commensurate increase in demand could adversely impact margins, while
inadequate cyclotron capacity could limit the Company's ability to meet demand
and achieve maximum sales growth.
The Company has recently commenced a $20.0 million capital expansion project
that includes the purchase of four additional cyclotrons and the construction of
new production and administrative facilities. Although no assurances can be
given, management expects that one new cyclotron will become operational during
each quarter of fiscal 1998. Management intends to apply a substantial portion
of the net proceeds from an offering of two million shares of the Company's
Common Stock, planned for completion by the end of March 1997, toward the
purchase of the cyclotrons to be installed in fiscal 1998 and use the remainder
for working capital and other corporate purposes as appropriate. See "Liquidity
and Capital Resources."
On February 24, 1997, the Company entered into a letter of intent with
Indigo Medical, Inc., a subsidiary of Johnson & Johnson, stating the intent to
grant to Indigo the exclusive worldwide right to market and sell Theraseed(R)
for the treatment of prostate cancer. Under the terms of the proposed alliance,
the Company will receive a fixed price per seed sold by Indigo in the United
States and will participate in any unit price increases above a fixed gross
sales price. Indigo would also assume responsibility for the education and
training of urologists, radiation oncologists and other personnel involved in
the use of TheraSeed(R). The Company will continue to be responsible for all
manufacturing and distribution for TheraSeed(R). The terms of international
collaboration would be negotiated in the future.
Should a definitive agreement be reached, management expects that the
alliance would result in higher sales volume that would offset the reduced price
received by the Company for its product and would provide avenues for
international expansion. Based on the Company's ability to utilize Indigo's
sales, marketing and education and training network, management also anticipates
that an alliance with Indigo would significantly reduce the increases in
selling, general and administrative expense that would be necessary to generate
and respond to any future sales increases. In addition, management expects that
increased volume would require the Company to purchase additional cyclotrons and
plans to order additional cyclotrons at a rate commensurate with demand in the
event a definitive agreement with Indigo is reached. No assurance can be given,
however, that the Company and Indigo will successfully negotiate or execute a
definitive agreement or that it will have the anticipated effect on the
Company's results of operations.
Results of Operations
Year Ended December 31, 1996 Compared to Year Ended
December 31, 1995
Product sales were $12.3 million in 1996 compared to $7.8 million in 1995, an
increase of $4.5 million, or 57.7%. This increase was due to increased shipments
of TheraSeed(R) as a result of reliable production from the Company's
cyclotron-based manufacturing process and increased demand for TheraSeed(R) as a
result of significantly increased marketing efforts and the release of favorable
clinical data. During the periods presented, the Company engaged in significant
marketing efforts to educate both physicians and patients as to the availability
of this treatment option. Sales also reflect that the Company had two cyclotrons
available to meet sales demand throughout 1996 as compared to only one cyclotron
until April 1995.
Licensing fees represent royalty payments with respect to the Company's
licensed TheraSphere(R) technology. Management does not expect licensing fees to
become material in the foreseeable future. See Note F of Notes to Financial
Statements.
Cost of product sales was $3.7 million in 1996 compared to $2.6 million in
1995, an increase of $1.1 million, or 42.3%. This increase was due primarily to
incremental staffing and cyclotron related costs. Staffing increases were
necessary to respond to and anticipate sales growth. Cyclotron operating costs
and depreciation increased as the Company's second cyclotron ran for the entire
year and the third cyclotron was placed in service. The third cyclotron came
on-line behind schedule in the fourth quarter of 1996 and is experiencing
start-up difficulties. As cyclotrons come on-line, margins decline because each
machine represents excess capacity for a period while carrying its full
component of fixed costs, including depreciation. As a percentage of product
sales, cost of product sales decreased from 34.0% in 1995 to 30.5% in 1996. This
decrease resulted from economies of scale, offset in part by margin pressures
related to bringing the third cyclotron into production.
Selling, general and administrative expense was $3.2 million in 1996 compared
to $2.4 million in 1995, an increase of $803,000, or 33.5%. This increase
reflects higher expenditures in a number of areas to support increased sales.
Marketing expenditures increased, as did staffing costs in response to
increasing workloads and responsibilities brought on by growth. Some salaries
were increased to maintain competitiveness in the marketplace and thereby retain
and attract key employees. Additionally, as head count grew, space became
limited in the Company's two facilities. The Company rented and outfitted
off-site administrative space at additional expense. Also, an increase in
overall asset size resulted in higher insurance and property tax costs. Other
support expenses grew in direct response to sales and asset size. Despite these
increases, selling, general and administrative expense as a percentage of net
sales decreased from 30.8% in 1995 to 26.1% in 1996 due to economies of scale.
During the periods presented, the Company had no ongoing pure research
function. Development of processes incorporated in the Company's production
operations is incorporated in the manufacturing area and therefore is included
in the cost of goods sold category. Management may choose to develop a research
and development program if and when appropriate opportunities are identified and
resources are in place.
Other income (expense) during the periods presented consist principally of
interest income, interest expense and write off of unamortized loan costs as a
result of loan refinancing.
The Company's effective income tax rate in both 1996 and 1995 was
approximately 38%.
Year Ended December 31, 1995 Compared to Year Ended
December 31, 1994
Product sales were $7.8 million in 1995 compared to $4.7 million in 1994, an
increase of $3.1 million, or 64.8%. This increase was due to reliable production
from the Company's cyclotron-based manufacturing process and increased demand
for TheraSeed(R) as a result of significantly increased marketing efforts and
the release of favorable clinical data. During 1994, sales efforts remained
conservative while the Company addressed the lingering impact of the 1993
change-over from reactor-produced to cyclotron-produced Pd-103 and a lengthy
period of unexpected downtime on the Company's first cyclotron during the third
quarter of 1993. In 1993 and the first half of 1994, management delayed
increasing marketing efforts until reliable cyclotron production of Pd-103 was
demonstrated. Once demonstrated, the Company instituted a more aggressive
marketing program in mid-1994. Product sales for 1995 reflected the favorable
impact of this increased marketing effort.
Cost of product sales was $2.6 million in 1995 compared to $1.8 million in
1994, an increase of $855,000, or 47.8%. This increase resulted from the
increase in TheraSeed(R) sales. As a percentage of product sales, cost of
product sales decreased from 37.9% in 1994 to 34.0% in 1995, primarily as a
result of increased utilization of production capacity and economies of scale,
partially offset by increased depreciation.
Selling, general and administrative expense was $2.4 million in 1995
compared to $1.8 million in 1994, an increase of $552,000, or 29.9%. This
increase was due primarily to increased advertising and public relations expense
to support activities associated with increased sales. Headcount expenses also
increased in response to the additional workload created by the higher sales. As
a percentage of net sales, selling, general and administrative expense decreased
from 39.0% in 1994 to 30.8% in 1995 due to economies of scale.
Income Taxes. The Company's effective income tax rate in both 1995 and
1994 was approximately 38%.
Liquidity and Capital Resources
During 1994, 1995 and 1996, the Company's principal cash needs related to
capital spending to increase manufacturing capacity. To manufacture
TheraSeed(R), the Company purchases, installs and operates cyclotrons, which
involves significant capital investment. The Company has funded its operations
over this period principally from cash flows from operations and bank
borrowings.
The Company had cash and short-term investments of $2.3 million, $3.3 million
and $3.0 million at December 31, 1994, 1995 and 1996, respectively. Working
capital was $1.3 million at December 31, 1996, including $3.5 million
representing borrowings against the Company's credit facility. This compares to
$3.7 million at year end 1995, which included $511,000 representing the current
portion of long-term obligations. The Company's credit facility allows for the
conversion of, at the Company's option, the entire outstanding balance borrowed
against the credit facility to be converted to a five-year term loan on or
before June 30, 1997, provided the Company equals or exceeds certain financial
ratios. See Note E of Notes to Financial Statements. The Company currently
satisfies these conditions. If the Company were to meet these ratios on June 30,
1997, and choose to convert the December 31, 1996 balance of $3.5 million to a
five-year term loan, the pro forma restated working capital at December 31, 1996
would equal approximately $4.4 million.
Cash provided by operating activities was $1.6 million, $3.4 million and $5.7
million during 1994, 1995 and 1996, respectively. These amounts represent
primarily net income and adjustments for deferred income tax expense and
depreciation and amortization expense, offset in part by adjustments for
increases in accounts receivable related to sales growth.
Cash used in investing activities was $3.1 million, $2.4 million and $8.6
million in 1994, 1995 and 1996, respectively, consisting in each of these years
primarily of purchases of property and equipment. Spending in 1994 primarily
represented progress payments on a project to add a second cyclotron to the
Company's manufacturing facility. This project began in 1993 and was completed
in 1995. Spending in 1995 represents the beginning of a project to add
cyclotrons three and four to the facility, while spending in 1996 represents the
continuation of the project to add cyclotrons three and four to the facility,
the purchase of 30 acres of land for the Company's expansion project and
spending on an assembly automation project. The expansion project for the
addition of cyclotrons three and four that began in 1995 is estimated to cost
approximately $9.0 million and be completed in early 1997. As of January 23,
1997, approximately $8,500,000 has been spent on this expansion project.
On December 27, 1996, the Company entered into agreements for the purchase of
four additional cyclotrons. These four cyclotrons are part of a larger expansion
project that will also include new cyclotron, product assembly and
administrative facilities. Upon completion of the project, the Company plans to
consolidate its entire workforce at this one site. As of January 23, 1997, the
Company had already spent approximately $2.5 million on this project. Management
estimates the total cost of the project to be approximately $20.0 million.
Cash provided (used) by financing activities was $659,000, ($21,000) and
$2.6 million in 1994, 1995 and 1996, respectively. Cash flows from financing
activities relates principally to bank borrowings and repayments thereof and, in
1995 and 1996, proceeds from the exercise of stock options and warrants. In the
third quarter of 1994, Theragenics received funding on a $2.1 million loan
secured by the Company's cyclotron facility including a second cyclotron (the
"1994 Term Loan"). The 1994 Term Loan was to mature in 1998 and bore an interest
rate of 8.47% per annum. Of the $2.1 million loan, $1.4 million was used to pay
off an outstanding balance under an existing long-term financing while the
remainder was used to provide partial financing for the purchase of the second
cyclotron and the facility expansion to house it. As of December 8, 1996,
approximately $1.0 million remained outstanding on the 1994 Term Loan.
In December 1995, the Company amended and restated its existing bank credit
facility. The amended and restated bank credit facility (the "Bank Credit
Facility") initially consisted of a $1.0 million receivables credit facility and
an additional $2.0 million revolving credit facility. The Bank Credit Facility
was subsequently increased to $5.0 million. On December 9, 1996, the Company
amended and restated the Bank Credit Facility. The amended and restated Bank
Credit Facility (the "Second Credit Facility") consisted of an $11.0 million
revolving credit facility. Partial proceeds from the Second Credit Facility were
used to pay off the $1.0 million balance on the 1994 Term Loan, while borrowings
under the Bank Credit Facility were rolled over to the Second Credit Facility.
Borrowings under the Second Credit Facility are secured by substantially all of
the Company's assets. The Second Credit Facility contains certain covenants
limiting the payment of dividends, the amount of annual capital expenditures and
the incurrence of additional debt and requires the maintenance of certain
minimum financial ratios. As of December 31, 1996, the Company was in compliance
with all of such covenants. Borrowings under the Second Credit Facility may be
made, at the Company's option, at an interest rate equal to the London Interbank
Offered Rate ("LIBOR") plus 2% or the lender's prime rate as defined. At
year-end, $3.5 million was outstanding against the Second Credit Facility. The
Second Credit Facility terminates on June 30, 1997. At that time, the entire
amount outstanding against the credit facility may, at the Company's option, be
converted to a five-year term loan provided certain financial ratios are
attained. No assurances can be made that the Company will attain these ratios or
if it does that it will choose to convert said balance to the term loan. See
Note E of Notes to Financial Statements.
The Company has filed a registration statement with the Securities and
Exchange Commission with respect to an underwritten public offering of 2,300,000
shares of Common Stock by the Company (including an option for 300,000 shares
that may be exercised by the underwriters to cover over-allotments, if any).
The Company intends to utilize a portion of the net proceeds for the purchase
of four additional cyclotrons during the next two fiscal years and to
construct facilities to house the cyclotrons, assembly facilities and
additional executive and administrative office space. The remaining proceeds
will be used for working capital and for general corporate purposes,
including but not limited to expenses or capital expenditures incurred
in the purchase of additional cyclotrons, marketing, research and
development and automation. Management believes that the net proceeds of
the secondary offering planned for completion by the end of March, 1997,
together with current cash balances, cash from future operations and the
Second Credit Facility, will be sufficient to meet its working capital and
capital expenditure requirements for at least the next 24 months.
This document contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, including statements
regarding the letter of intent with Indigo Medical, Inc., trends implied by
prostate cancer incidence and treatment data, future costs of sales, selling,
general and administrative expenses, the sufficiency of the Company's liquidity
and capital resources, and statements regarding matters other than historical
facts. These forward-looking statements are subject to certain risks,
uncertainties and other factors which could cause actual results to differ
materially from those anticipated, including risks associated with the
management of growth, government regulation of the therapeutic radiological
pharmaceutical and device business, dependence on health care professionals, and
competition from conventional and newly developed methods of treating localized
cancer.
Quarterly Results
The following table sets forth certain consolidated statements of operations
data for each of the Company's last eight quarters. This unaudited quarterly
information has been prepared on the same basis as the annual audited
information presented elsewhere in this Form 10K, reflects all adjustments
(consisting only of normal, recurring adjustments) necessary in management's
opinion for a fair presentation of the information for the periods covered and
should be read in conjunction with the financial statements and notes thereto.
The operating results for any quarter are not necessarily indicative of results
for any future period.
1995 1996
---- ----
First Second Third Fourth First Second Third Fourth
Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
--- --- --- --- --- --- --- ---
(Dollars and shares in thousands, except per share data)
Total revenues $1,834 $1,912 $1,926 $2,195 $2,798 $2,727 $3,144 $3,688
------ ------ ------ ------ ------ ------ ------ ------
Cost of product
sales 635 639 665 706 753 888 958 1,137
Selling,
general and
administrative 604 674 607 511 693 771 722 1,012
Research and
Development 7 7 3 1 1 1 1 4
Other income
(expense) 28 29 28 (21) 27 26 17 (34)
------ ------ ------ ------ ------ ------ ------ ------
Net earnings before
income taxes 616 621 679 956 1,378 1,093 1,480 1,501
Income tax expense 234 236 258 372 524 415 562 566
------ ------ ------ ------ ------ ------ ------ ------
Net earnings $ 382 $ 385 $ 421 $ 584 $ 854 $ 678 $ 918 $ 935
====== ====== ====== ====== ====== ====== ====== ======
Earnings per
common share $ 0.03 $ 0.03 $ 0.04 $ 0.05 $ 0.07 $ 0.06 $ 0.07 $ 0.08
Weighted average
shares 11,539 11,784 11,937 12,134 12,106 12,204 12,298 12,372
Inflation
Management does not believe that the relatively moderate levels of inflation
which have been experienced in the United States in recent years have had a
significant effect on the Company's net sales or profitability.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements and following pages.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
Not Applicable
PART III
Item 10. Directors and Executive Officers of Registrant*
Item 11. Executive Compensation*
Item 12. Security Ownership of Certain Beneficial Owners and
Management*
Item 13. Certain Relationships and Related Transactions*
- ------------------------------
*The information called for by Items 10, 11, 12 and 13 is omitted from this
Report and is incorporated by reference to the definitive Proxy Statement to
be filed by the Company not later than 120 days after December 31, 1996, the
close of its fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
a) The following documents are filed as part of this Report.
1. Financial Statements
See index to financial statements.
2. Financial Schedules
See the index to financial statements.
3. Exhibits
3.1 - Certificate of Incorporation (1)
3.2 - Certificate of Amendment to Certificate
of Incorporation (1)
3.3 - Certificate of Amendment to Certificate
of Incorporation (1)
3.4 - By-Laws (1)
4.1 - See Exhibits 3.1 - 3.4 for provisions in the
Company's Certificate of Incorporation and By-Laws
defining the rights of holders of the Company's Common
Stock.
4.2 - Form of Warrant issued to the
Representatives of the Underwriters of the
Company's Public Offering (1)
4.3 - Warrant Agreements dated May 1, 1989 between the
Company and James Devas (4)
4.4 - Warrant Agreement dated May 8, 1993 between
the Company and James Devas
10.1 - License Agreement with University of
Missouri, as amended (1)
10.2 - Agreement with Atomic Energy of Canada, Ltd. (1)
10.3 - Reassignment and Release Agreement among the Company,
John L. Russell, Jr., and Georgia Tech Research
Institute (1)
10.4 - 1986 Incentive and Non-Incentive Stock
Option Plan (1)
10.5 - Letter of Agreement between the Company and
Yale-New Haven Hospital (2)
10.6 - Lease between the Company and T. Rowe Price
Realty Income Fund II dated July 14, 1988 (2)
10.7 - Form of Purchase Agreement between the
Company and ten institutional investors (3)
10.8 - Form of Custody Agreement between the
Company and IBJ Schroder Bank & Trust
Company (3)
10.9 - 1990 Incentive and Non-Incentive Stock
Option Plan (5)*
10.10 - Employment Agreement of John V. Herndon
dated June 4, 1990 (5)
10.11 - Employment Agreement of Bruce W. Smith (5)
10.12 - Purchase Agreement between Theragenics
Corporation and Production Equipment
Manufacturer (6)
10.13 - Term Loan and Security Agreement between
Theragenics Corporation and Heller
Financial, Inc. (7)
10.14 - Purchase Agreement between Theragenics
Corporation and Production Equipment
Manufacturer (8)
10.15 - Amendment to Purchase Agreement between
Theragenics Corporation and Production
Equipment Manufacturer (9)
10.16 - Employment Agreement of John V. Herndon
dated August 1, 1993 (9)*
10.17 - Employment Agreement of M. Christine Jacobs
dated as of August 1, 1996.
10.18 - Lease between the Company and T. Rowe Price
Realty Income Fund II dated January 1, 1994
(9)
10.19 - Term Loan and Security Agreement between
Theragenics Corporation and Bank South, N.A (10)
10.20 - Agreement with Nordion International Inc.
(11)
10.21 - Purchase Agreements between Theragenics
Corporation and Production Equipment
Manufacturer (12)
10.22 - Line of Credit Facility and Revolving
Credit Facility between Theragenics Corporation
and Bank South, N.A. (13)
10.23(a) Purchase Agreement dated December 27, 1996 between
Theragenics Corporation and Ion Beam Applications
s.a. (14)
10.23(b) Purchase Agreement dated December 27, 1996
between Theragenics Corporation and Ion Beam
Applications s.a. (14)
10.23(c) Purchase Agreement dated December 27, 1996
between Theragenics Corporation and Ion Beam
Applications s.a. (14)
10.23(d) Purchase Agreement dated December 27, 1996 between
Theragenics Corporation and Ion Beam Applications
s.a. (14)
10.24 - Second Amended and Restated Loan and Security Agreement
by and between Theragenics Corporation and NationsBank,
N.A. (South), Dated as of December 9, 1996 (14)
10.25 - Rights Agreement dated as of February 17, 1997
between the Company and SunTrust Bank, Atlanta (15)
10.26 - Theragenics Corporation 1995 Stock Option Plan (16)
24.1 - Consent of Independent Public Accountants
for Incorporation by Reference of Audit
Statement into Registration Statement
* Management contract or compensatory plan or arrangement idendified
pursuant to Item 14(a)(3) of Form 10-K
(1) Incorporated by reference to the exhibits filed with the
Company's registration statement on Form S-1, File No.
33-7097, and post-effective amendments thereto.
(2) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1988.
(3) Incorporated by reference to the exhibits to the report on Form 10-Q for
the period ended June 30, 1989.
(4) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1989.
(5) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1990.
(6) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1991.
(7) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1992.
(8) Incorporated by reference to the exhibits to the report on Form 10-Q for
the period ended June 30, 1993.
(9) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1993.
(10) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1994.
(11) Incorporated by reference to the exhibits to the report on Form 8-K dated
March 23, 1995.
(12) Incorporated by reference to the exhibits to the report on Form 8-K dated
June 29, 1995.
(13) Incorporated by reference to the exhibits to the report on Form 10-K for
the period ended December 31, 1995.
(14) Incorporated by reference to the exhibits to the report on Form 8-K dated
January 13, 1997.
(15) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form 8-A filed February 27, 1997.
(16) Footnote incorporated by reference to the exhibits to the Registration
Statement on Form S-8, File #333-15313.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated January 13, 1997,
reporting the signing of four agreements each for the purchase of
one cyclotron and the signing of an agreement for a Line of Credit
Facility and Revolving Credit Facility between Theragenics
Corporation and NationsBank, N.A. (South).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THERAGENICS CORPORATION
(Registrant)
By:/s/ M. Christine Jacobs
M. Christine Jacobs
Chief Executive Officer
Dated: March 18, 1997
Norcross, Georgia
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ M. Christine Jacobs Chief Executive Officer 3/18/97
M. Christine Jacobs (Principal Executive Officer);
Director
/s/ Bruce W. Smith Chief Financial Officer, 3/18/97
Bruce W. Smith Treasurer (Principal
Financial Officer) and
Secretary
/s/ Charles Klimkowski Director, Chairman 3/18/97
Charles Klimkowski
/s/ John V. Herndon Director 3/18/97
John V. Herndon
/s/ Orwin L. Carter Director 3/18/97
Orwin L. Carter
/s/ Peter A.A. Saunders Director 3/18/97
Peter A.A. Saunders
/s/ Otis W. Brawley Director 3/18/97
Otis W. Brawley
THERAGENICS CORPORATION
TABLE OF CONTENTS
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ................37
(For the periods ended December 31, 1994, 1995 and 1996)
FINANCIAL STATEMENTS
Balance Sheets - December 31, 1995 and 1996 .............38
Statements of Earnings for the Three Years Ended
December 31, 1996 .......................................39
Statement of Shareholders' Equity for
the Three Years Ended December 31, 1996 .................40
Statements of Cash Flows for the Three Years Ended
December 31, 1996 .......................................42
NOTES TO FINANCIAL STATEMENTS ...........................44
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Theragenics Corporation
We have audited the balance sheets of Theragenics Corporation (a Delaware
corporation) as of December 31, 1995 and 1996, and the related statements of
earnings, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Theragenics Corporation as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Atlanta, Georgia
January 16, 1997
THERAGENICS CORPORATION
BALANCE SHEETS
December 31,
1995 1996
-------- --------
ASSETS
CURRENT ASSETS
Cash and short-term investments........ $3,266,338 $2,986,123
Trade accounts receivable.............. 1,335,645 2,258,936
Inventories............................ 166,955 229,298
Prepaid expenses and other current
assets................................. 67,521 133,625
---------- ----------
Total current assets........... 4,836,459 5,607,982
PROPERTY, PLANT AND EQUIPMENT -- AT COST
Building and improvements.............. 1,690,045 3,333,728
Leasehold improvements................. 138,978 138,978
Machinery and equipment................ 8,203,256 11,522,064
Office furniture and equipment......... 44,721 65,057
---------- ----------
10,077,000 15,059,827
Less accumulated depreciation.......... 2,194,164 3,237,684
---------- ----------
7,882,836 11,822,143
Land................................... 49,485 525,372
Construction in progress............... 2,140,894 5,238,056
---------- ----------
10,073,215 17,585,571
OTHER ASSETS
Deferred income tax asset.............. 1,810,000 360,000
Patent costs........................... 90,704 80,685
Other.................................. 67,804 55,183
---------- ----------
1,968,508 495,868
---------- ----------
$16,878,182 $23,689,421
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt...... 511,362 3,458,436
Trade accounts payable................. 348,191 330,375
Accrued salaries, wages and payroll
taxes 225,138 459,421
Other current liabilities 15,935 56,677
---------- ----------
Total current liabilities................ 1,100,626 4,304,909
LONG-TERM DEBT........................... 1,008,135 --
COMMITMENTS AND CONTINGENCIES............ -- --
SHAREHOLDERS' EQUITY
Common stock -- authorized 50,000,000
shares of $.01 par value; issued and
outstanding, 11,394,785 in 1995 and
11,814,278 in 1996 113,948............. 113,948 118,143
Additional paid-in capital............. 16,390,170 17,616,560
Retained earnings (accumulated deficit) (1,734,697) 1,649,809
---------- ----------
14,769,421 19,384,512
---------- ----------
$16,878,182 $23,689,421
========== ==========
The accompanying notes are an integral part of these statements.
THERAGENICS CORPORATION
STATEMENTS OF EARNINGS
Year ended December 31,
1994 1995 1996
---------- ---------- ----------
Revenue
Product sales........... $4,723,107 $7,781,962 $12,257,165
Licensing fees.......... -- 85,431 100,000
---------- ---------- ----------
4,723,107 7,867,393 12,357,165
---------- ---------- ----------
Costs and expenses
Cost of product sales... 1,790,450 2,645,730 3,735,669
Selling, general and
administrative ....... 1,844,239 2,395,846 3,198,663
Research and development 15,268 17,954 6,952
---------- ---------- ----------
3,649,957 5,059,530 6,941,284
---------- ---------- ----------
Other income (expense)
Interest income......... 135,888 143,424 126,953
Interest expense........ -- (51,967) (84,517)
Other................... (25,673) (26,995) (6,311)
---------- ---------- ----------
110,215 64,462 36,125
---------- ---------- ----------
Net earnings before
income taxes............. 1,183,365 2,872,325 5,452,006
Income tax expense....... 453,000 1,100,000 2,067,500
---------- ---------- ----------
Net earnings............. $ 730,365 $1,772,325 $3,384,506
========== ========== ==========
Earnings per common share $ .06 $ .15 $ .28
---------- ---------- ----------
Weighted average shares... 11,582,793 11,759,178 12,259,214
The accompanying notes are an integral part of these statements.
- ---------------------------------------------------------------------------------------------------------------------
STATEMENT OF SHAREHOLDERS' EQUITY
For the three years ended December 31, 1996
Common Stock
Retained
Par Additional Earnings
Number of Value Paid-in (accumulated
Shares $.01 Capital deficit) Total
---------- --------- ----------- ------------ ------------
Balance, December 31, 1993......... $10,912,937 $ 109,129 $15,161,942 $(4,237,387) $11,033,684
Exercise of stock options........ 49,900 499 49,401 -- 49,900
Common stock redeemed............ (950) (10) (3,890) -- (3,900)
Net earnings for the year........ -- -- -- 730,365 730,365
---------- ----------- ------------ ----------- -----------
Balance, December 31, 1994......... 10,961,887 109,618 15,207,453 (3,507,022) 11,810,049
Exercise of stock options.......... 450,000 4,500 576,370 -- 580,870
Common stock redeemed............ (17,102) (170) (106,653) -- (106,823)
Income tax benefit from stock
options exercised................ -- -- 713,000 -- 713,000
Net earnings for the year........ -- -- -- 1,772,325 1,772,325
---------- ----------- ----------- ----------- -----------
Balance, December 31, 1995......... 11,394,785 113,948 16,390,170 (1,734,697) 14,769,421
Exercise of stock options.......... 391,216 3,912 648,242 -- 652,154
Exercise of warrants............. 40,000 400 299,600 -- 300,000
Common stock redeemed............ (11,723) (117) (250,079) -- (250,196)
Income tax benefit from stock
options exercised................ -- -- 528,627 -- 528,627
Net earnings for the year........ -- -- -- 3,384,506 3,384,506
---------- ----------- ------------ ----------- -----------
Balance, December 31, 1996......... 11,814,278 $ 118,143 $17,616,560 $ 1,649,809 $19,384,512
========== =========== ============ =========== ===========
The accompanying notes are an integral part of this statement.
THERAGENICS CORPORATION
STATEMENTS OF CASH FLOWS
Year ended December 31,
1994 1995 1996
--------- ---------- ----------
Cash flows from operating activities:
Net earnings....................... $730,365 $1,772,325 $3,384,506
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Deferred income tax expense...... 433,000 1,082,000 1,972,000
Depreciation and amortization 571,615 828,072 1,114,919
Loss on disposal of property
and equipment.................... 1,571 1,677 --
Change in assets and liabilities:
Accounts receivable ............. (197,133) (603,221) (923,291)
Inventories...................... (32,834) 25,206 (62,343)
Prepaid expenses and other current
assets........................... 22,448 24,280 (66,104)
Other assets..................... (200) -- --
Trade accounts payable........... 78,402 121,982 (17,816)
Accrued salaries, wages and
payroll taxes.................... 21,400 115,006 234,283
Other current liabilities........ 14,942 (17,214) 47,369
--------- ---------- -----------
Net cash provided by operating
activities..................... 1,643,576 3,350,113 5,683,523
--------- ---------- ----------
Cash flows from investing activities:
Purchase and construction of
property and equipment.............. (3,376,967) (2,426,961) (8,555,876)
Maturities of marketable
securities.......................... 309,765 50,000 --
Patent costs........................ (587) (3,632) --
---------- ---------- ----------
Net cash used by investing
activities...................... (3,067,789) (2,380,593) (8,555,876)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt........ 2,100,000 -- 2,450,225
Repayment of long-term debt......... (1,441,320) (469,622) (511,286)
Proceeds from exercise of stock
options and warrants ............... 49,900 580,870 952,154
Payment for redemption of common
stock............................... (3,900) (106,823) (250,196)
Debt issue costs.................... (46,025) (25,070) (48,759)
---------- ---------- ----------
Net cash (used) provided by
financing activities............ 658,655 (20,645) 2,592,138
---------- ---------- ----------
Net increase (decrease) in cash and
short-term investments................ (765,558) 948,875 (280,215)
Cash and short-term investments at
beginning of year.................... 3,083,021 2,317,463 3,266,338
---------- ---------- ----------
Cash and short-term investments at
end of year.......................... $2,317,463 $3,266,338 $2,986,123
========== ========== ==========
Supplemental Schedule of Non Cash Financing Activities
During 1995 and 1996, the Company realized an income tax benefit from the
exercise and early disposition of certain stock options, resulting in an
increase in the deferred tax asset and additional paid in capital of $713,000
and $528,627, respectively.
Supplementary Cash Flow Disclosure
Interest paid, net of
amounts capitalized... $ -- $ 53,843 $ 82,324
Income taxes paid..... 21,500 14,858 98,755
The accompanying notes are an integral part of these statements.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1996
NOTE A -- ORGANIZATION AND DESC