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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010
 
OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ________
 
COMMISSION FILE NO. 001-14339
 
THERAGENICS CORPORATION®
(Exact name of registrant as specified in its charter)
 
Delaware
 
58-1528626
(State of incorporation)
 
(I.R.S. Employer Identification Number)
     
5203 Bristol Industrial Way
   
Buford, Georgia
 
30518
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code:
(770) 271-0233
 
Securities registered pursuant to Section 12(b) of the Act:
 
       
Name of each exchange on
 
 
Title of each class
   
which registered
 
           
 
Common stock, $.01 par value,
   
New York Stock Exchange
 
 
Together with associated
       
 
Common Stock Purchase Rights
       
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x
 
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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 
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. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
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 New York Stock Exchange on June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, was $37,317,296.
 
As of February 22, 2011 the number of shares of Common Stock, $.01 par value, outstanding was 33,664,554.
 
Documents incorporated by reference: Proxy Statement for the registrant’s 2010 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2010 is incorporated by reference in Part III herein.
 


 
 

 
 
THERAGENICS CORPORATION® AND SUBSIDIARIES
 
TABLE OF CONTENTS
 
       
Page
   
PART I
   
Item 1.
 
Business
 
I-1
Item 1A.
 
Risk Factors
 
I-11
Item 1B.
 
Unresolved Staff Comments
 
I-20
Item 2.
 
Properties
 
I-20
Item 3.
 
Legal Proceedings
 
I-20
Item 4.
 
Reserved
 
I-20
         
   
PART II
   
Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
II-1
Item 6.
 
Selected Financial Data
 
II-2
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
II-3
Item 7A.
 
Quantitative and Qualitative Disclosures About Market Risk
 
II-20
Item 8.
 
Financial Statements and Supplementary Data
 
II-21
Item 9.
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
II-21
Item 9A.
 
Controls and Procedures
 
II-21
Item 9B.
 
Other Information
 
II-22
         
   
PART III
   
Item 10.
 
Directors, Executive Officers and Corporate Governance
 
III-1
Item 11.
 
Executive Compensation
 
III-1
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
III-1
Item 13.
 
Certain Relationships and Related Transactions, Director Independence
 
III-1
Item 14.
 
Principal Accounting Fees and Services
 
III-1
         
   
PART IV
   
Item 15.
 
Exhibits and Financial Statement Schedules
 
IV-1
         
   
Signatures
 
IV-5

 
 

 
 
Part I
 
Item 1. BUSINESS
 
Overview and Business Strategy
 
Theragenics Corporation®, a Delaware corporation formed in 1981, is a medical device company serving the surgical products and cancer treatment markets, operating in two business segments.  The terms “Company”, “we”, “us”, or “our” mean Theragenics Corporation and all entities included in our consolidated financial statements.
 
Our surgical products business manufactures, markets and sells disposable devices primarily utilized in certain surgical procedures.  Our brachytherapy seed business manufactures, markets and sells radioactive “seeds” primarily utilized in the treatment of early stage prostate cancer.  At the present time, both of our segments do business primarily in the United States.  Our surgical products business is the faster growing of our businesses and has been supported by the cash flows generated by our market leading brachytherapy seed business and our flagship TheraSeed® brand.  In our surgical products business we plan to grow and diversify revenues by adding product offerings and manufacturing capabilities, expanding the applications and markets in which we compete, and gaining scale to improve profitability.
 
Our surgical products business was built through the acquisitions of CP Medical Corp. in May 2005, Galt Medical Corporation in August 2006, and Needletech Products, Inc. in July 2008.  We currently manufacture almost 3,500 products in this business as part of three broad product platforms; wound closure, vascular access and specialty needles.  To date we have maintained the names and brands under which each of these companies previously manufactured, marketed and sold their products.  We serve a number of markets and applications, including, among other areas, interventional cardiology, interventional radiology, vascular surgery, orthopedics, plastic surgery, dental surgery, urology, veterinary medicine (sutures), pain management, endoscopy, and spinal surgery. With the exception of veterinary sutures, our surgical products hold relatively small market shares.  Our products include both finished goods and components.  Our products are sold primarily to original equipment manufacturers (“OEMs”) and to a network of distributors.  Our surgical products business has achieved 10% revenue growth in both 2010 and 2009 (growth in 2009 is pro forma, assuming we had acquired Needletech at the beginning of 2008).  We have accomplished this primarily by increasing sales to existing customers and, to a lesser extent, adding new customers.  Further, we achieved this revenue growth during a period of severe economic difficulties.  Our strategy for increasing sales and scale going forward includes: becoming more integral within the supply chain of our customers both for existing products and for our customers’ development programs (which may allow us to increase sales to existing and new customers from all product platforms); developing new products internally; acquiring products, licenses, and other intellectual property; acquiring businesses and; entering certain markets outside the United States.
 
We have operated our brachytherapy seed business since 1987, emerging from the development stage in 1990.  Historically our brachytherapy seed segment has generated strong cash flows, which have enabled us to diversify our business substantially.  Positive cash flows from our brachytherapy seed business continue despite an industry-wide decline in brachytherapy procedures in the United States which began about five years ago.  The overall brachytherapy industry in the United States is now experiencing difficulties primarily due to competition from other treatments.  Many of these competing treatments enjoy favorable Medicare reimbursement rates relative to brachytherapy reimbursement rates.  We believe this results in a non-level playing field for brachytherapy device manufacturers, providers, and patients.  One of the primary competitive treatments provided by our radiation oncologist customers is Intensity Modulated Radiation Therapy, or “IMRT”.  IMRT enjoys substantially higher reimbursement rates than brachytherapy yet, clinical studies do not indicate that IMRT delivers improved outcomes.   We believe the market positioning and heavy promotion of robotic surgery for prostate cancer treatment has also adversely affected the number of brachytherapy procedures performed.  Despite these industry-wide difficulties we have maintained positive cash flows in our brachytherapy business for a variety of reasons including, among other things, the relatively fixed nature of our brachytherapy seed manufacturing costs; our ability to anticipate changes in market conditions; our ability to respond to government controlled pricing policies surrounding reimbursement of our products and, more recently; increasing our overall market share.  After 19 consecutive quarters of year over year declines, product revenue in our brachytherapy seed segment (excluding license fees) increased in both third and fourth quarters of 2010 over the 2009 periods.  Indeed, our product sales increased 3% in the second half of 2010 over 2009.  This success in increasing year over year product revenue was primarily due to obtaining new supply agreements with new distributors in 2010, which increased our market share.  One of these new supply agreements was with Core Oncology.  See “Brachytherapy Seed Business” below for additional information on the supply agreement with Core.
 
At the present time we believe that we have additional opportunities to increase our market share through additional distribution agreements, diversification of our product and service offerings, and potential opportunities in markets outside of the United States.   We believe we have these opportunities to expand and broaden our distribution channels because of, among other things, the reliability of our supply, the quality of our products, the quality of our direct sales force, and our long-term commitment to the brachytherapy industry including patient education, direct to consumer advertising, and congressional lobbying for fair reimbursement.
 
 
I-1

 
 
Description of the Business
 
Financial Information about Operating Segments and Geographic Areas
 
We operate in two business segments; the surgical products segment and the brachytherapy seed segment. Information related to revenue from external customers, measure of profit and loss by segment, total assets by segment, and geographic areas, is contained in Note N to the consolidated financial statements included in Part IV of this report.
 
Surgical Products Business
 
Overview
Our surgical products segment manufactures and distributes wound closure, vascular access, and specialty needle products, all of which are considered medical devices.  Sales are primarily to OEMs and to a network of distributors.
 
Wound closure products include sutures and other surgical products with applications in veterinary, urology, cardiology, orthopedics, plastic surgery, and other fields.  We believe the wound closure market to be a $2.0 billion annual worldwide market, and a $1.2 billion annual market in the United States.  We believe sutures represent approximately $700 million of the worldwide wound closure market.  Our wound closure products are used to hold skin, internal organs, blood vessels and other tissue together after they have been severed by injury or surgery.  Wound closure products, such as sutures, are produced with various dimensions, configurations, and types of materials, depending on the application.  We produce and distribute over 850 wound closure line items, including sterile and non-sterile products.  Sutures represent the majority of wound closure products we sell.  During 2010, approximately 83% of our suture product sales were in veterinary applications and 17% in human applications. In 2009, approximately 81% of our suture product sales were in veterinary applications and 19% in human applications.
 
Vascular access products include a variety of introducer sheaths, guidewires and accessories used in interventional radiology, interventional cardiology and vascular surgery.  We believe the interventional radiology and interventional cardiology markets to be in excess of $12.0 billion.  The market for access devices is estimated to be over $1.0 billion.  Our introducers are used to create a conduit through which a physician can insert a device, such as a catheter, into a blood vessel.  Such a device is introduced into the vasculature by first using a needle to access the vein. A guidewire is then inserted through the needle, and the needle is removed. The introducer, consisting of a hollow sheath and a dilator, is then inserted over the guidewire to expand the opening. The guidewire and dilator are then removed, leaving only the hollow sheath through which the catheter or other device is inserted. Once the device is in place, the introducer sheath is removed. This is typically done by splitting the introducer in half when the “tear away” version of the product is utilized. Introducers and guidewires are produced with various dimensions, configurations and types of material, depending upon the application.  We produce and distribute approximately 2,000 products and components in this product line, some of which are procedure kits that, in addition to introducers and guidewires, may include needles, scalpels and other components.  These products are sold sterile to distributors and in sterile and bulk, non-sterile configurations to OEMs.
 
Specialty needle products include coaxial needles, biopsy needles, access trocars, brachytherapy needles, guidewire introducer needles, spinal needles, disposable Veress needles, and other needle-based products.  End markets served include the cardiology, orthopedic, pain management, endoscopy, spine, urology, and veterinary markets.  The United States is the largest market for specialty purpose needles, which we believe to be approximately $800 million, with our specialty needle products addressing approximately 10% of this market.  Our specialty needle products are used for a number of purposes including: retrieval of samples of tissue or bone (biopsies) that will be examined for disease; delivery of therapeutic materials such as drugs, radioactive sources, and bone cement and; providing access to a specific area of the body to allow passage for other instruments.  Our specialty needles are typically constructed of stainless steel wire and tubing with special cutting edges which are ground to specification.   We produce specialty needles in various forms depending upon the application, and we manufacture over 600 line items for sale primarily to OEMs in sterile private label, and bulk, non-sterile configurations.
 
Major product lines in our surgical products business include:
 
Sutures:
Sutures are classified as absorbable or non-absorbable; monofilament, multifilament or braided; and natural or synthetic. Absorbable or non-absorbable describes the suture’s effective life within tissue. Absorbable sutures lose the majority of their tensile strength within 60 days after use. Non-absorbable sutures are resistant to living tissue and do not break down. Monofilament, multifilament and braided describes the structure or configuration of the suture and is based on the number of strands used to manufacture the product. Natural or synthetic describes the origin of the suture. Natural suture materials include surgical gut, chromic gut, and silk. Synthetic suture materials include nylon, polyester, stainless steel, polypropylene, polyglycolic acid, polyglycolide-cocaprolactone, and polydioxanone.
 
 
I-2

 
 
Needles and Brachytherapy Accessories:
Needles used in general surgery, including a line of needles and related products used in brachytherapy surgical procedures.  Smooth and echogenic introducer needles are also available as sterile products.
 
Guidewires:
Guidewires function as a mechanical assist for the percutaneous introduction and exchange of various types of plastic catheters or introducer systems into the vasculature.  Once the catheter is in place, the guidewire is removed and serves no other function. Materials commonly used in the production of guidewires are stainless steel, Nitinol, precoated Teflon (polytetrafluoroethylene, or “PTFE”), tungsten alloys and platinum alloys.  Guidewires are sold to OEMs on a bulk, non-sterile basis as well as packaged sterile.  We have the technological and manufacturing capability to produce diagnostic and interventional guidewires and currently offer a sterile product line with approximately 40 line items.
 
Micro-Introducer Kits:
Micro-Introducers are commonly called coaxial dilators and are utilized when a small entry site (21-gauge needle) is desirable.  Micro-Introducers are introduced over a guidewire.  These introducers are typically packaged in a sterile kit that includes a Micro-Introducer set, a 21-gauge needle and a .018” diameter guidewire.  The standard product offerings consist of standard and stiffen variations.  Various iterations are accomplished by using three different needle types and four different mandrel type guidewires.  The current sterile product line consists of approximately 60 line items including the Fluent™ transitionless Micro-Introducer and non-vascular GaltStick® introducer.
 
Tearaway Introducer Sets and Kits:
This product consists of a Teflon sheath and a High Density Polyethylene (“HDPE”) dilator set that is introduced over a guidewire.  Once that introduction is made, the guidewire and the dilator are removed leaving the sheath in place as a vascular access.  Once the definitive device (catheter) is introduced through the sheath, the sheath is easily split and removed leaving the desired catheter in place.  These products are offered sterile as an introducer sheath/dilator set or as a complete introducer kit that includes a needle and a guidewire.  The sterile product line consists of approximately 150 line items with lengths from 5cm to 50cm.  Additionally, the components are sold on a bulk, non-sterile basis to OEMs.
 
Elite HV™ Introducer Kits:
This product consists of a sheath that incorporates a hemostasis valve and an HDPE dilator for arterial access.  It is introduced into the vasculature as a set over a guidewire.  The guidewire and dilator are removed leaving a “closed” vascular access system.  The product line consists of standard .035” compatible sheaths; as well as .018” Micro-access kits, which allows for a less invasive entry.  The product line consists of 45 line items and is sold sterile and bulk, non-sterile.
 
ReDial™ 4cm High Flow Introducer Sheath:
This product consists of a sheath that incorporates a hemostasis valve, HDPE dilator, larger bore tubing, side holes, and color coded clamps for use in de-clotting dialysis shunts. The larger bore tubing and side holes allow for high flow procedures. The ReDial™ is available with or without a radiopaque band, and consists of 24 line items. The product line is sold sterile and bulk, non-sterile.
 
Radial Artery Access Kits:
This product consists of a sheath that incorporates a hemostasis valve and an HDPE dilator for arterial access via the radial artery.  Radial artery access reduces trauma and recovery time.  The radial artery access kits are available in 24 line items to meet the preference of the physician, and include a needle and guidewire. These introducer sheaths are typically used during coronary angioplasty procedures.
 
Biopsy Needles:
These needles consist of a stainless steel stylet and cannula combination sharpened in such a way as to facilitate entry into the body to cut and retrieve a sample of tissue for examination or testing.  This family of needles contains three major types: Core Biopsy Needles used to obtain a soft tissue sample for histology in areas such as the breast or prostate; Aspiration Biopsy Needles used to obtain a sample of cells for cytology in areas such as the lung or liver and; Bone Biopsy Needles that core and retrieve a sample of marrow, generally from the pelvic area.  They are sold sterile private label and bulk non-sterile to OEMs.
 
Orthopedic Needles:
These needles are large diameter (up to 8-gauge) stainless steel stylet and cannula combinations attached to a large handle that provides the significant leverage needed to gain access to the vertebral body of the spine.  This family of devices provides a system for harvesting bone marrow, collecting biopsy samples and delivering bone cement or any other FDA-cleared materials. These devices are primarily sold bulk non-sterile or sterile with private labeling.
 
 
I-3

 

Pain Management Needles:
These needles are also referred to as “denervation needles”.  These devices are manufactured from 18 to 21-gauge stainless steel tubing that have a sharpened distal end and are insulated along the entire length of the needle except for the most distal end.  The distal tip of the device is placed into contact with the nerve responsible for patient pain and then energized, usually with radio frequency energy, causing the needle distal end to heat.  Heat applied to the target nerve reduces the pain signal to the brain providing patient relief.  These products are generally sold sterile with private labeling.
 
Access Needles:
Access needles are a broad term used to describe devices that are used for less invasive entry during Laparoscopic type procedures, vascular access for delivery of guidewires into the circulatory system and to create a channel by which any other instrument can pass.
 
Production - Surgical Products Business
 
We design, manufacture, assemble, package and distribute our surgical products in three primary production facilities, each of which manufactures different products.  Component raw materials primarily include natural and synthetic sutures, plastic and stainless steel tubing, wire, plastic resins and other components, which are generally readily available from third party suppliers. Suppliers are located in the United States, as well as in Latin America, Europe, and Asia. A significant portion of our products in the surgical products segment is produced for OEMs as private labeled products or in a bulk, non-sterile configuration.
 
Marketing and Major Customers - Surgical Products Business
 
Our surgical products are primarily sold to OEMs and through a network of distributors in the United States and Europe. A small direct sales force is maintained for direct sales to healthcare providers (human use and veterinary) and group purchasing organizations, as well as to service the needs of distributors.
 
Competition - Surgical Products Business
 
Our surgical products business operates primarily in the wound closure, interventional radiology, interventional cardiology, vascular surgery, and specialty needle markets.  These markets are dominated by a few large suppliers and a number of smaller suppliers, potentially limiting the growth opportunities available to smaller participants. The primary suppliers include AngioDynamics, Angiotech Pharmaceuticals, Covidien Ltd., Boston Scientific, Cook Medical, Inc., C.R. Bard, Inc., Greatbatch, Inc., Hart Enterprises, Cordis and Ethicon, Inc. (subsidiaries of Johnson and Johnson), Merit Medical, Needle Specialty Products, Terumo Medical and Tegra Medical. Many of our competitors have substantially greater financial, technical and marketing resources than we do. Our surgical products business competes in these markets by providing custom labeled products, high quality, timely and cost effective products, and a high level of customer service in niche markets underserved by the larger suppliers or where customers lack the expertise or resources to manufacture the products that they need. Our surgical products business also has extensive experience and knowledge of the markets as well as many established relationships with distributors and providers.  
 
The current environment of managed care is characterized by economically motivated buyers, consolidation among healthcare providers, increased competition and declining reimbursement rates.  In addition, healthcare providers may attempt to simplify the procurement process which may affect, among other things, the number of suppliers in the supply chain.  As a supplier to OEMs and distributors, we do not sell directly to the end user and may be affected by these and other changes in the structure of the business relationships between the healthcare provider and the OEM or distributor.  We believe our future competitive success will depend on our ability to integrate ourselves into the supply chain by providing outstanding value to our customers.  This may include, among other things, developing new products (including extensions of current products), offering competitive pricing, and providing value added services to our customers that will contribute to their efficiencies and profitability. Also critical to our continued competitive success is our ability to attract and retain skilled product development personnel, obtain patents or other protection for our products, obtain required regulatory and reimbursement approvals, successfully market and manufacture our products and maintain sufficient inventory to meet demand.
 
Patents and Licenses; Trade Secrets - Surgical Products Business
 
Our surgical products business holds several U.S. patents related to suture dispensing systems, suture and needle design, vascular introducer system design, and bone biopsy and vertebroplasty needles. Our policy is to file patent applications in the United States and foreign countries where rights are available and when we believe it is commercially advantageous to do so.  We consider the ownership of patents important, but not necessarily essential, to our surgical products business.  A strategy of confidentiality agreements and trade secret treatment is also utilized to protect non-patented proprietary information.
 
 
I-4

 
 
Brachytherapy Seed Business
 
Overview
 
We produce, market and sell TheraSeed® and I-Seed,  FDA-cleared devices for treatment of all solid localized tumors and currently used principally for the treatment of localized prostate cancer. These devices are commonly referred to as “seeds” and are utilized in a procedure referred to as “brachytherapy”.  Currently our TheraSeed® product comprises the substantial portion of our product sales in this business.  Our seed devices can be packaged in a number of different configurations. In December 2010, we obtained CE Marking for both our TheraSeed® and I-Seed products.  To date, substantially all of our seed product sales have been in the United States.  While we believe we may have opportunities for sales outside the U.S., we do not expect sales of our TheraSeed® and I-Seed products outside of the United States to be material in the near future.
 
Excluding skin cancer, prostate cancer is the most common form of cancer, and the second leading cause of cancer deaths, in men. The American Cancer Society estimated that there were 217,730 new cases of prostate cancer diagnosed and an estimated 32,050 deaths associated with the disease in the United States during 2010.   According to the American Cancer Society, more than 90% of all prostate cancers are found in the local and regional stages (local means it is still confined to the prostate; regional means it has spread from the prostate to nearby areas, but not to distant sites such as other organs).
 
In a prostate brachytherapy application, the seeds are implanted throughout the prostate gland in a minimally invasive surgical technique, assisted by transrectal ultrasound guidance. The radiation emitted by the seeds is contained within the immediate prostate area for the purpose of killing the tumor while attempting to spare surrounding organs of significant radiation exposure. The seeds remain permanently in the prostate after delivering their radiation dose. The number of seeds implanted normally ranges from 50 to 150.  The procedure is usually performed under local anesthesia in an outpatient setting. An experienced practitioner typically performs the procedure in approximately 45 minutes with the patient often returning home the same day.
 
These radioactive “seeds” are roughly the size of a grain of rice. Each seed consists of biocompatible titanium that encapsulates a radioactive isotope.  TheraSeed®, which we have produced since 1987 and is currently our primary seed product, utilizes the radioactive isotope palladium-103 (“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 six months.  Our I-Seed device, which we have produced since 2004, utilizes the radioactive isotope iodine-125 (“I-125”). The half-life of I-125 is approximately 60 days resulting in the loss of almost all radioactivity in approximately 20 months.
 
We believe brachytherapy offers significant advantages over other options for the treatment of early stage prostate cancer, including reduced incidence of side effects such as impotence and incontinence. Recent multi-year clinical studies indicate that brachytherapy offers success rates for early-stage prostate cancer that are comparable to or better than alternative treatment options and is associated with reduced complication rates. In addition, brachytherapy is a one-time outpatient procedure with a typical two to three day recovery period. By comparison, certain other treatment modalities typically require lengthy treatment periods, extended hospital stays and long recovery periods. In addition, the total cost of a brachytherapy treatment is typically lower than other treatment options for early stage prostate cancer.
 
We believe the number of brachytherapy procedures performed in the United States has declined in recent years. Some newer forms of treatment have increased their market share, especially those with Medicare reimbursement levels that are higher than reimbursement levels for brachytherapy.  These newer forms of alternative treatments include Intensity Modulated Radiation Therapy (“IMRT”) and robotic surgery.  In particular, we believe IMRT has gained in popularity as physicians have established IMRT centers in which the physician has a financial interest.  The physician then utilizes certain exceptions to the Stark Amendment to self-refer patients to the IMRT center.  Recently, a number of media stories and publications have been critical of this practice of self-referral, including a December 7, 2010 article in the Wall Street Journal and a recent article published in the International Journal of Radiation Oncology by physicians at the Yale University School of Medicine (Falit, Gross and Roberts, Int. J. Radiation Oncology Biol. Phys., Vol 76, No. 5).  Despite the favorable reimbursement and potential physician financial incentive enjoyed by IMRT relative to seeding, brachytherapy outcomes continue to be equal to or better than IMRT at a lower overall cost.  However, we believe that brachytherapy will continue to lose market share to IMRT (and other technologies that enjoy favorable reimbursement) as long as the current Medicare reimbursement policies provide favorable reimbursement levels for competing therapies.
 
Treatment Options - Brachytherapy Seed Business
 
In addition to brachytherapy, there are many treatment options for localized prostate cancer. Some therapies may be combined to address a specific cancer stage or patient need.  Treatment options for prostate cancer other than seeding include, among other treatments:
 
 
I-5

 

Radical Prostatectomy is the most common surgical procedure. Radical Prostatectomy (“RP”) involves the complete surgical removal of the prostate gland. RP typically requires a three-day average hospital stay and a lengthy recovery period (generally three to five weeks). Possible side effects include impotence and incontinence. Alternative forms of radical prostatectomy include laparoscopic radical prostatectomy (“LRP”) and robotic radical prostatectomy (“RRP”).  These forms of radical prostatectomy are intended to be less invasive than a traditional radical prostatectomy and are more complex to perform.
 
External Beam Radiation Therapy (“EBRT”) involves directing a beam of radiation at the prostate gland from outside the body to destroy tumorous tissue. Patients are usually treated five days per week in an outpatient center over a period of eight to nine weeks.  Side effects include impotence, incontinence and rectal complications.
 
Certain forms of external beam radiation include Intensity Modulated Radiation Therapy (“IMRT”), Image Guided Radiation Therapy (“IGRT”) stereotactic radiotherapy and proton therapy. These treatments generally utilize high-energy and computerized mapping. We believe these forms of external beam radiation, including IMRT and IGRT, are gaining market share in the treatment of early stage prostate cancer.  We are not aware of long-term data documenting outcomes for these treatments, but we believe they enjoy favorable reimbursement rates relative to brachytherapy.
 
Active Surveillance, while not a treatment, 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 active surveillance is to monitor the patient, treat some of the attendant symptoms and determine when more active intervention is required.
 
In addition to the treatment options described above, other forms of treatment and prevention, including drugs, vaccines, focal cryotherapy, high-intensity focused ultrasound (HIFU) and other forms of radiation are also in use in the United States and other areas of the world.  Additionally, newer treatment alternatives may be undergoing development and testing in clinical settings.
 
 Clinical Results - Brachytherapy Seed Business
 
Strong Efficacy Results. Clinical data indicates that seeding offers success rates for men of all ages with low-, intermediate-and high-risk early-stage prostate cancer that are comparable to or better than those of RP or EBRT. Such clinical studies include:
 
 
“103-Pd Brachytherapy versus radical Prostatectomy in Patients with Clinically Localized Prostate Cancer: a 12 Year Experience from a Single Group Practice”, (Sharkey, et al, Brachytherapy, Vol. 4, Issue 1, 2005).  Brachytherapy compared favorably to RP for low-, intermediate- and high-risk patients.
 
“Brachytherapy in Men Aged <= 54 Years with Clinically Localized Prostate Cancer”, (Merrick, et al, British Journal of Urology, Vol. 98, 2006).  Results of brachytherapy for men aged 54 years and younger 8 years after treatment.  96% of the 108 men showed biochemical progression free survival.
 
“Long Term Outcomes for Patients with Prostate Cancer Having Intermediate and High Risk Disease, Treated with External Beam Irradiation and Brachytherapy”, (Dattoli, et al, Journal of Oncology, December 2010).  Results of combination treatment (brachytherapy and external beam radiation) for intermediate and high risk patients were 81% successful at 17 years.
 
Production - Brachytherapy Seed Business
 
With the exception of rhodium-103 (“Rh-103”), all raw materials used in the production of the TheraSeed® and I-Seed devices are relatively inexpensive and readily available from third party suppliers. Rh-103 is relatively expensive but readily available on the open market.  Our brachytherapy seed production does not require significant amounts of Rh-103.  In addition, for reasons of quality assurance, sole source availability or cost effectiveness, certain components and raw materials are available only from sole suppliers.
 
We produce our Pd-103 by proton bombardment of Rh-103 in cyclotrons (accelerators). There are other methods of producing Pd-103. We currently have eight cyclotrons in operation.
 
We began production of the I-Seed product early in 2004. We do not produce the I-125 isotope.  This isotope is relatively inexpensive and is readily available from multiple suppliers.
 
Since 1997, our quality control system related to our medical device manufacturing has been certified as meeting all the requirements of the International Organization for Standards (ISO) Quality System Standard, and is currently certified to ISO 13485:2003.
 
 
I-6

 
 
Marketing and Major Customers - Brachytherapy Seed Business
 
We sell our brachytherapy seed products directly to healthcare providers and to third-party distributors.  During 2010, we added two new third-party distributors.  In January 2010 we announced a new distribution agreement with Core Oncology (“Core”), and in July 2010 we announced a new distribution agreement with Oncura, a unit of GE Healthcare.  We also sell our I-Seed I-125 device, and other brachytherapy related products, directly to healthcare providers.
 
Under our third party distribution agreements, we are the exclusive palladium-103 seed supplier for the treatment of prostate cancer for each distributor, and each distributor has the non-exclusive right to sell TheraSeed® in the U.S. and Canada.  Certain agreements also provide distributors with the right to distribute TheraSeed® for the treatment of solid localized tumors other than in the prostate, and with rights to distribute to certain locations outside of North America.  Such applications (non-prostate and outside of North America) have not been material and are not expected to become material in the near future. Our principal non-exclusive distribution agreement is with C.R. Bard (“Bard”).  Our agreement with Bard provides for automatic one year extensions of the term, unless either party gives notice of its intent not to renew at least twelve months prior to the end of the current term. The current term expires December 31, 2012 and will be automatically extended for one additional year unless either party gives notice of its intent not to extend by December 31, 2011. Sales to Bard by our brachytherapy segment represented 33% and 44% of brachytherapy seed segment revenue in 2010 and 2009, respectively.  (Our surgical products segment also sells to Bard.  Total consolidated sales to Bard, including sales in our brachytherapy seed segment and our surgical products segment, represented 11% and 16% of consolidated revenue in 2010 and 2009, respectively).
 
Core became an additional non-exclusive distributor of TheraSeed® in January 2010.  Sales to Core represented approximately 14% of brachytherapy segment revenue in 2010.  (Our surgical products segment also sells to Core.  Total consolidated sales to Core, including sales in our brachytherapy seed segment and our surgical products segment, represented 5% of consolidated product revenue in 2010).  In February 2011, we terminated our agreement with Core due to Core’s failure to pay its trade receivables in accordance with the contractual terms of the agreement. Core had been attempting to become current with amounts due to us.  However, litigation filed against Core by a third party in late January 2011 created what we view as an unacceptable level of uncertainty surrounding Core’s ability to satisfy their financial obligations to us for both current and ongoing sales.  In the past, healthcare providers have shown strong loyalty to TheraSeed® and we have been highly successful in retaining TheraSeed® customers following the termination of distribution agreements. Healthcare providers who previously purchased TheraSeed® through Core have the opportunity to continue an uninterrupted supply of our product for their patients, either directly from us or through our other distribution channels. To ensure that scheduled patient procedures proceeded as planned, our termination notice provided a transition period during which additional orders from Core have been accepted and honored, including orders from Core on a prepaid basis.  Should Core ultimately satisfy its obligations to us and demonstrate an ability to satisfy its obligations going forward, we would consider reentering into a distribution agreement with Core.
 
We also currently have non-exclusive distribution agreements for TheraSeed® in place with Oncura (a unit of GE Healthcare) and Brachysciences.  Sales under each of these agreements were less than 10% of our brachytherapy product sales in 2010.  We may pursue additional distribution agreements for both palladium-103 and iodine-125 products in an effort to increase market share.  We may also have opportunities to enter certain markets outside of the United States with an iodine-125 device.
 
We maintain an internal brachytherapy sales force that sells the TheraSeed® and I-Seed devices directly to hospitals, doctors, and clinics. Direct product sales comprised approximately 40% and 47% of brachytherapy segment revenue in 2010 and 2009, respectively.  We expect to continue direct to consumer advertising and other activities to support demand for brachytherapy, including direct to consumer print advertising, support for clinical studies aimed at showing the advantages of brachytherapy in the treatment of prostate cancer, technical field support to customers and health care providers that utilize our brachytherapy products, and other customer service and patient information activities.
 
Patents and Licenses; Trade Secrets - Brachytherapy Seed Business
 
We hold a number of United States patents pertaining to radiation delivery devices for therapeutic uses, as well as certain corresponding international patents.  Our policy is to file patent applications in the United States and foreign countries where rights are available and when we believe it is commercially advantageous to do so.  We consider the ownership of patents important, but not necessarily essential, to our brachytherapy seed business. We also use 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.
 
We also hold a worldwide exclusive license from the University of Missouri for the use of technology required for producing the TheraSphere® device; the underlying patents for this technology have since expired. We continue to hold the rights to all improvements developed by the University of Missouri on this technology.  In turn, we sublicense exclusive worldwide rights to this technology and all improvements, along with trademarks and other intellectual property owned by us, to Nordion, Inc. (“Nordion”).  Pursuant to our licensing agreement with the University of Missouri, we are obligated to pay the university a small fixed annual amount for these rights.
 
 
I-7

 
 
We have an exclusive license agreement under which we license the rights to certain intellectual property related to an expandable brachytherapy delivery system that we developed.  The term of the agreement is through the expiration of the last of the patents licensed under the agreement, which is currently July 2025.  The term may be altered if such patents are found to be invalid.  The agreement provides for a minimal non-refundable initial license fee and non-refundable continuing royalties based upon sales subject to certain minimums. The minimum annual royalty based upon the contract year of the agreement, which ends each May, is $450,000 for the twelve months ended May 31, 2011.
 
Competition - Brachytherapy Seed Business
 
Our brachytherapy business competes in a market characterized by technological innovation, extensive research efforts and significant competition. In general, the TheraSeed® and I-Seed devices compete with conventional methods of treating localized cancer, including, but not limited to, radical prostatectomy, which includes laparoscopic radical prostatectomy and robot-assisted radical prostatectomy, and external beam radiation therapy, which includes IMRT, as well as competing permanently and temporarily implanted devices. We believe that the industry-wide decline in prostate brachytherapy procedure volume continued in 2010.  Some newer forms of treatment have increased their market share, especially those with Medicare reimbursement levels that are higher than reimbursement levels for brachytherapy.  These alternative treatment forms include IMRT and robotic surgery. We believe that the industry-wide decline in brachytherapy procedures is likely to continue as long as other treatment options, especially IMRT, continue to enjoy favorable Medicare reimbursement rates.
 
 Several companies produce and distribute Pd-103 and I-125 seeds, which compete directly with our TheraSeed® and I-Seed devices. C.R. Bard, Inc., Best Medical, Core Oncology, Oncura (a unit of GE Healthcare) and others manufacture and/or sell brachytherapy seeds.  Other forms of brachytherapy seeds that utilize other isotopes, including both low dose radiation and high dose radiation, also compete directly with our devices.  We believe that we have competitive advantages over these companies including, but not limited to: (i) our proprietary production processes that have been developed and patented; (ii) our 23 year history of manufacturing radioactive medical devices with a record of reliability and safety in our manufacturing operations; (iii) vertical integration of production and related services; (iv) the time and resources required for competitors’ production capabilities to ramp up to commercial production on a scale comparable to ours; (v) maintenance of our cancer information center; (vi) our direct sales force; (vii) our direct to consumer advertising programs and (viii) the non-exclusive distribution agreements that we currently have in place.
 
In early 2010, we reduced the transfer price to our non-exclusive distributors in recognition of the competitive environment and new distributor strategies.  At any point in time, we and/or our non-exclusive distributors may continue to change their respective pricing policies for the TheraSeed® device, and we may change our pricing policies for the I-Seed device in order to take advantage of market opportunities or respond to competitive situations. Responding to market opportunities and competitive situations, including but not limited to competitor selling tactics, could have an adverse effect on the prices of the TheraSeed® or I-Seed device.  Responding to market opportunities and competitive situations may also have a favorable effect on market share and volumes, while failure to do so could adversely affect market share and volumes although per unit pricing could possibly be maintained.
 
In addition to the competition from the procedures and companies noted above, many companies, both public and private, are researching new and innovative methods of preventing and treating cancer. In addition, many companies, including many large, well-known pharmaceutical, medical device and chemical companies that have significant resources available to them, are engaged in radiological pharmaceutical and device research. These companies are located in the United States, Europe and throughout the world. Significant developments by any of these companies either in refining existing treatment protocols (such as enhancements in surgical techniques) or developing new treatment protocols could have a material adverse effect on the demand for our products.
 
Seasonality
 
Although we have not identified seasonal effects in relation to a specific quarter or quarters for either business segment, we believe that holidays, major medical conventions and vacations taken by physicians, patients and patients’ families, may have a seasonal impact on sales, particularly in the brachytherapy seed segment.
 
 
I-8

 
 
Research and Development
 
Research and development (“R&D”) expenses were $1.9 million, $2.2 million and $1.3 million in 2010, 2009 and 2008, respectively.  We began to increase our R&D investments in 2008, focusing on opportunities in our surgical products business.  Substantially all R&D expenses have been related to our surgical products segment in the 2008 to 2010 period.   Looking forward, we expect our R&D expenses to remain at levels comparable to 2010.   However, the rate of R&D spending going forward could change based on the opportunities identified.  The amounts invested will be dependent upon a number of factors, including our ability to obtain qualified personnel and the types of activities required for our product development.  We have recently been reassessing the projects in our R&D program, in an effort to focus on opportunities with a more immediate impact and to consolidate our R&D activities.  Any new product development activities will be focused on products that can be marketed once they have received 510(k) clearance by the U.S. Food and Drug Administration (“FDA”), rather than products that would require costly and lengthy clinical trials.  We expect that this investment will accelerate our entrance into new markets, expand our offerings to new and existing customers, and support growth in our surgical products business.  The FDA has recently announced that it is reviewing the 510(k) process, and many commentators expect the 510(k) rules to become more stringent.  Any such changes in the 510(k) rules may increase the cost and time to market of our product development activities.
 
Government Regulation
 
Our present and future intended activities in the development, manufacture and sale of wound closure, vascular access, specialty needle, and cancer therapy products, are subject to extensive laws, regulations, regulatory approvals and guidelines. Within the United States, our medical devices must comply with the U.S. Federal Food, Drug and Cosmetic Act, which are enforced by the FDA. We are also subject to regulation by other governmental agencies, including the Occupational Safety and Health Administration (OSHA), the Environmental Protection Agency (EPA), the Nuclear Regulatory Commission (NRC), and other federal and state agencies. We must also comply with the regulations of the Competent Authorities of the European Union for our products that have been CE Marked and are sold in the member nations of the European Union.
 
Medicare covers a substantial percentage of the patients treated for prostate cancer in the United States, and consequently, the costs for prostate cancer treatment are subject to Medicare’s prescribed rates of reimbursement.  The utilization of TheraSeed®, I-Seed and many of the products in our surgical products business may be influenced by Medicare’s reimbursement levels, and the policies of other third party payors, which can change periodically.  See Management’s Discussion and Analysis of Financial Condition and Results of Operations – Medicare Developments.
 
We are also required to adhere to applicable FDA regulations for Quality System Regulation (previously known as Good Manufacturing Practices), including extensive record keeping and periodic inspections of manufacturing facilities.
 
We have obtained FDA 510(k) clearances to the extent required for our medical devices in our surgical products and brachytherapy seed businesses.  New FDA clearances would be required for any modifications in such products or its labeling that could significantly affect the safety or effectiveness of the original product.  However, not all of our products require FDA 510(k) clearances.
 
Our manufacturing, distribution and security of radioactive materials are governed by the State of Georgia in agreement with the NRC. The users of the TheraSeed® device are also required to possess licenses issued either by the states in which they reside or the NRC depending upon the state involved and the production process used.
 
Our facilities and operations are subject to extensive environmental, nuclear, regulatory and occupational health and safety laws at the federal, state and local levels (which we refer to as “Environmental Laws and Regulation” in this section under the heading of “Government Regulation”). We are also subject to similar foreign laws and regulations under certain circumstances when our products are distributed outside of the United States.  These Environmental Laws and Regulations govern, among other things, air emissions; wastewater discharges; the generation, storage, handling, use and transportation of hazardous materials; the handling and disposal of hazardous wastes; the cleanup of contamination; and the health and safety of our employees. In our brachytherapy seed business, we are required to maintain radiation control and to properly dispose of radioactive waste.  We are required to maintain radiation safety personnel, procedures, equipment and processes, and to monitor our facilities and our employees and contractors. We are also required to provide financial assurance that adequate funding will exist for end-of-life radiological decommissioning of our cyclotrons and other areas of our property where radioactive materials are handled.  We transfer low-level radioactive waste to licensed commercial radioactive waste treatment or disposal facilities for incineration or land disposal. We provide training and monitoring of our personnel to facilitate the proper handling of all materials.  Under these Environmental Laws and Regulations, we are required to obtain certain permits from governmental authorities for some portions of our operations.
 
 
I-9

 

We continue to make capital and operational expenditures relating to compliance with existing Environmental Laws and Regulations in the normal course of business.  We budget for these expenditures and believe that our compliance with the Environmental Laws and Regulations will not have a material effect on our business, results of operations, financial condition and/or liquidity, relative to the effect such expenditures have had in recent years.   However, Environmental Laws and Regulations tend to become more stringent over time, and we could incur additional material costs and expenses in the future relating to compliance with such future laws and regulations. In addition, if we violate or fail to comply with applicable Environmental Laws and Regulations, we could be fined or otherwise sanctioned by regulators. Such fines, sanctions or other related costs could have a material adverse effect on our business, results of operations and/or liquidity. We cannot completely eliminate the risk of violation of Environmental Laws and Regulation, and we may incur additional material liabilities as a result of any such violations.
 
For more information on the effect of environmental, nuclear, regulatory and occupational health and safety laws and regulations on our business, please read the information included elsewhere in this Form 10-K, including Risk Factors, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies, and other information contained herein.
 
Employees
 
As of December 31, 2010, we had approximately 500 full time employees.  None of our employees are represented by a union or a collective bargaining agreement, and we consider employee relations to be good.
 
Available Information
 
Our website address is http://www.theragenics.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed pursuant to Section 13(a) or 15(c) of the Securities and Exchange Act of 1934 are available free of charge through our website by clicking on the “Investor Relations” page and selecting “SEC Filings.” These reports will be available as soon as reasonably practicable after such material has been electronically filed with, or furnished to, the SEC. These reports are also available through the SEC’s website at http://www.sec.gov. The information on these websites and the information contained therein or connected thereto are not intended to be incorporated by reference into this Form 10-K. In addition we will provide paper copies of these filings (without exhibits) free of charge to our shareholders upon request.
 
 
I-10

 
 
Item 1A. Risk Factors
 
We operate in continually changing business environments and new risk factors may emerge from time to time. We cannot predict such new risk factors, nor can we assess the impact, if any, of such new risk factors on our business or to the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed in any forward looking statement. Additional risks and uncertainties not currently known to us or that we might currently deem to be immaterial also may adversely affect our business, financial condition and/or operating results.
 
We operate multiple businesses. When we refer to “surgical products” or the “surgical products business”, we are referring to the business that produces, markets and sells wound closure products, disposable medical devices used for vascular access, specialty needles, and other surgical related products. When we refer to “brachytherapy” or the “brachytherapy business”, we are referring to the business that produces, markets and sells TheraSeed®, our premier palladium-103 prostate cancer treatment device, I-Seed, our iodine-125 based prostate cancer treatment device, and related products and services.
 
Risks Related to our Business
 
There are risks associated with our acquisitions, potential acquisitions and joint ventures.
 
An important element of our strategy is to seek acquisition prospects and diversification opportunities (including companies, product lines and intellectual property) that we believe will complement or diversify our existing product offerings, augment our market coverage and customer base, enhance our technological capabilities or offer revenue and profit growth opportunities. We acquired CP Medical in May 2005, Galt in August 2006 and NeedleTech in July 2008. Further transactions of this nature could result in potentially dilutive issuance of equity securities, use of cash and/or the incurrence of debt and the assumption of contingent liabilities.
 
Acquisitions entail numerous costs, challenges and risks, including difficulties in the assimilation of acquired operations, technologies, personnel and products and the retention of existing customers and strategic partners, diversion of management’s attention from other business concerns, risks of entering markets in which we have limited or no prior experience and potential loss of key employees of acquired organizations. Other risks include the potential strain on the combined companies’ financial and managerial controls and reporting systems and procedures, greater than anticipated costs and expenses related to integration, and potential unknown liabilities associated with the acquired entities. No assurance can be given as to our ability to successfully integrate the businesses, products, technologies or personnel acquired in past acquisitions or those of other entities that may be acquired in the future or to successfully develop any products or technologies that might be contemplated by any future joint venture or similar arrangement. A failure to integrate potential acquisitions could result in our failure to achieve our revenue growth or other objectives associated with acquisitions, or recover costs associated with these acquisitions, which could affect our profitability or cause the market price of our common stock to fall.
 
We may not realize the benefits of acquisitions.
 
The process of integrating our acquisitions may be complex, time consuming and expensive and may disrupt our businesses, and could affect our financial condition, results of operations or future prospects. We will need to overcome significant challenges in order to realize benefits or synergies from the acquisitions. These challenges include the timely, efficient and successful execution of a number of post-acquisition events, including:
 
 
integrating the operations and technologies of the acquired companies;
 
retaining and assimilating the key personnel of each company;
 
retaining existing customers of each company and attracting additional customers;
 
retaining strategic partners of each company and attracting new strategic partners; and
 
creating uniform standards, controls, procedures, policies and information systems.
 
The execution of these post-acquisition events will involve considerable risks and may not be successful. These risks include:
 
 
the potential disruption of the combined companies’ ongoing businesses and distraction of management;
 
the potential strain on the combined companies’ financial and managerial controls and reporting systems and procedures; and
 
the potential unknown liabilities associated with the acquisition and the combined operations.
 
We may not succeed in addressing these risks or any other problems encountered in connection with the acquisitions. The inability to successfully integrate the operations, technology and personnel of acquired companies, or any significant delay in achieving integration, could have a material adverse effect on us.
 
 
I-11

 
 
The cost of acquisitions could harm our financial results.
 
If the benefits of acquisitions do not exceed the associated costs, including costs related to integrating the companies acquired and dilution to our stockholders resulting from the issuance of shares in connection with the acquisitions, our financial results, including earnings per share, could be materially harmed.
 
We are dependent on key personnel.
 
We are highly dependent upon our ability to attract and retain qualified management, scientific and technical personnel. Therefore, our future success is dependent on our key employees. If the services of our chief executive or other key employees cease to be available, the loss could adversely affect our business and financial results. We carry key employee insurance for M. Christine Jacobs, our Chief Executive Officer.
 
Our stock price has been and may continue to be subject to large fluctuations.
 
The trading price of our Common Stock has been and may continue to be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, announcements of technological innovations, new products or acquisitions by us or our competitors, developments with respect to patents or proprietary rights, changes in our customer base, general conditions in the medical device and surgical products industries, or other events or factors. In addition, the stock market can experience extreme price and volume fluctuations, which can particularly affect the market prices of technology companies and which can be unrelated to the operating performance of such companies. Average daily trading volume in our Common Stock is not significant and can cause significant price fluctuations. Specific factors applicable to broad market fluctuations or to us may materially adversely affect the market price of our Common Stock. We have experienced significant fluctuations in our stock price and share trading volume in the past and may continue to do so.
 
Our future operating results are difficult to predict and may vary significantly from quarter to quarter.
 
Comparisons of our quarterly operating results are an unreliable indication of our future performance because they are likely to vary significantly based on many factors, including:
 
 
the size and timing of orders from our customers;
 
the demand for and acceptance of our products;
 
the success of our competition;
 
our ability to command favorable pricing for our products;
 
the growth of the market for our devices;
 
the expansion and rate of success of our sales channels;
 
actions relating to ongoing FDA compliance;
 
the effect of intellectual property disputes;
 
the attraction and retention of key personnel;
 
an inability to control costs; and
 
general economic conditions as well as those specific to our customers and markets.
 
We face production risks.
 
We operate four primary production facilities, each of which manufactures unique products. Each facility also utilizes unique equipment that can be expensive and time consuming to replace.  If an event occurred that resulted in damage to one or more of our production facilities or certain equipment, we may be unable to produce the relevant products at previous levels or at all. In addition, for reasons of quality assurance, sole source availability or cost effectiveness, certain components and raw materials are available only from a sole supplier. Due to the FDA’s and other stringent regulations regarding the manufacture of our products, we may not be able to quickly establish replacement sources for certain component materials. Any interruption in manufacturing, or in the ability to obtain raw materials and component supplies, could have a material adverse effect on our business.
 
Manufacturing or quality control problems may arise in any of our businesses as we increase production or as additional manufacturing capacity is required in the future. These factors may have an adverse impact on our business, financial condition and results of operations.
 
Surgical product components are obtained from suppliers located in the United States, as well as in Latin America, Europe, and Asia. While we believe there is adequate access to alternative suppliers, any disruption in supply could have a material adverse effect on our business, financial condition and results of operations.
 
 
I-12

 
 
We are subject to a comprehensive system of federal, state and international laws and regulations, and we could be the subject of an enforcement action or face lawsuits and monetary or equitable judgments.
 
Our operations are affected by various state, federal and international healthcare, environmental, antitrust, anti-corruption and employment laws, including for example various FDA regulations, the federal Anti-Kickback Statute and the Foreign Corrupt Practices Act (“FCPA”). We are subject to periodic inspections to determine compliance with the FDA’s Quality System Regulation requirements, current medical device adverse event reporting regulations and foreign rules and regulations. Product approvals by the FDA and other foreign regulators can be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial approval. The failure to comply with regulatory standards or the discovery of previously unknown problems with a product or manufacturer could result in FDA Form-483 notices and/or Warning Letters, fines, delays or suspensions of regulatory clearances, detainment, seizures or recalls of products (with the attendant expenses), the banning of a particular device, an order to replace or refund the cost of any device previously manufactured or distributed, operating restrictions and civil or criminal prosecution, as well as decreased sales as a result of negative publicity and product liability claims, and could have a material adverse effect on our business, financial condition and results of operations.
 
In addition, the healthcare industry is under scrutiny from state governments and the federal government with respect to industry practices in the area of sales and marketing. If our marketing or sales activities fail to comply with the FDA’s regulations or guidelines, or other applicable laws, we may be subject to warnings from the FDA or enforcement actions from the FDA or other enforcement bodies. In the recent past, medical device manufacturers have been the subject of investigations from state and federal prosecutors related to their relationships with doctors, among other activities or practices.  If an enforcement action involving us were to occur, it could result in penalties, fines, exclusion of our products from reimbursement under federally-funded programs and/or prohibitions on our ability to sell our products, and could have a material adverse effect on our business and results of operations.
 
Our brachytherapy manufacturing operations involve the manufacturing and possession of radioactive materials, which are subject to stringent regulation. The users of our brachytherapy seed products are required to possess licenses issued by the states in which they reside or the NRC. User licenses are also required by some of the foreign jurisdictions in which we may seek to market our products. There can be no assurance that current licenses held by us for our manufacturing operations will remain in force or that additional licenses required for our operations will be issued. There also can be no assurance that our customers will receive or retain the radioactive materials licenses required to possess and use TheraSeed® or I-Seed or that delays in the granting of such licenses will not hinder our ability to market our products. Furthermore, regulation of our radioactive materials manufacturing processes involves the imposition of financial requirements related to public safety and decommissioning, and there are costs and regulatory uncertainties associated with the disposal of radioactive waste generated by our manufacturing operations. There can be no assurance that the imposition of such requirements and the costs and regulatory restrictions associated with disposal of waste will not, in the future, adversely affect our business, financial condition and results of operations.
 
We are required under our radioactive materials license to maintain radiation control and radiation safety personnel, procedures, equipment and processes, and to monitor our facilities and our employees and contractors. We are also required to provide financial assurance that adequate funding will exist for end-of-life radiological decommissioning of our cyclotrons and other areas of our properties that contain radioactive materials. We have provided this financial assurance through the issuance of letters of credit. We have so far been successful in explaining to the Georgia Department of Natural Resources that we will not have to dispose of our cyclotrons, but instead will be able to sell them for re-use or use for spare parts if we cease to operate them. Thus, we are 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. However, if the Georgia Department of Natural Resources was to require that we include the cost of decommissioning our cyclotrons in our financial assurance demonstration, the amount of funds required to be set aside by us to cover decommissioning costs could dramatically increase.
 
Failure to obtain and maintain regulatory approvals, licenses and permits could significantly delay our manufacturing and/or marketing efforts. Furthermore, changes in existing regulations, or interpretations of existing regulations or the adoption of new restrictive regulations could adversely affect us from obtaining, or affect the timing of, future regulatory approvals. Failure to comply with applicable regulatory requirements could result in, among other things, significant fines, suspension of approvals, seizures or recalls of products, operating restrictions and/or criminal prosecution and materially adversely affect our business, financial condition and results of operations.
 
We face risks related to our dependence on the medical device business, and specifically the brachytherapy and surgical products markets.
 
All of our revenues are generated from the medical device business, specifically the surgical products and brachytherapy seed markets.  Through April 2005, virtually all of our revenues were generated from the brachytherapy seed market. The growth of our surgical products business has reduced our dependence on the brachytherapy business. However, there is no assurance that we can continue to successfully diversify our business, and a lack of diversification or over reliance on any one of our businesses can be a risk.
 
 
I-13

 
 
We are dependent on new technological development.
 
We compete in markets characterized by technological innovation, extensive research efforts and significant competition. New developments in technology may have a material adverse effect on the development or sale of our products and may render such products noncompetitive or obsolete. Other companies, many of which have substantially greater capital resources, marketing experience, research and development staffs and facilities than us, are currently engaged in the development of products and innovative methods for treating cancer, and for competing with our wound closure, vascular access and specialty needle products. Significant developments by any of these companies or advances by medical researchers at universities, government research facilities or private research laboratories could reduce or eliminate the entire market for any or all of our products.
 
We face significant competition.
 
Our surgical products business competes with other suppliers of wound closure, vascular access and specialty needle products.  Many of our competitors have substantially greater financial, technical, sales, marketing and other resources, as well as greater name recognition and a larger customer base, than we do. In our brachytherapy seed business, competing treatments such as IMRT and robotic surgery have been gaining market share, which we believe is due primarily to favorable reimbursement rates set by Medicare.  Additionally, many companies located outside of the United States, in particular in Asia, produce and supply similar surgical products. These companies may have access to substantially lower costs of production. Accordingly, such competitors or future competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products than us. As a result, we may be at a disadvantage when competing with these larger companies. If we fail to compete effectively, our business, financial condition and results of operations may be adversely affected.
 
We face pricing pressures.
 
Our businesses are subject to intense pressure to lower pricing as our customers are leveraging current economic conditions to demand reduced pricing or more favorable payment discounts. Accordingly, we could find it difficult to offset discounts with in-house cost savings measures. Failure to offer satisfactory savings to our customers or to successfully reduce our costs may adversely affect our revenue and results of operations.
 
We are highly dependent on our marketing and advertising specialists and our direct sales organization in the brachytherapy business. Any failure to build and manage our direct sales organization could negatively affect our revenues.
 
We are highly dependent on our direct sales organization comprised of brachytherapy specialists who promote and support our brachytherapy products. There is intense competition for skilled sales and marketing employees, particularly for people who have experience in the radiation oncology market. Accordingly, we could find it difficult to hire or retain skilled individuals to sell our products. Failure to retain our direct sales force could adversely affect our growth and our ability to meet our revenue goals. There can be no assurance that our direct sales and marketing efforts will be successful. If we are not successful in our direct sales and marketing, our sales revenue and results of operations are likely to be materially adversely affected.
 
We depend partially on our relationships with distributors and other industry participants to market our surgical and brachytherapy products, and if these relationships are discontinued or if we are unable to develop new relationships, our revenues could decline.
 
A significant portion of our surgical products revenue is derived from our relationships with OEMs, dealers and distributors. There is no assurance that we will be able to maintain or develop these relationships with OEMs, agents and distributors and other industry participants or that these relationships will continue to be successful. If any of these relationships is terminated, not renewed or otherwise unsuccessful, and we do not retain the ultimate customers or develop additional relationships, our product sales could decline, and our ability to grow our product lines could be adversely affected.
 
We rely, and will continue to rely, upon collaborative relationships with agents and distributors and other industry participants to maintain market access to potential customers. Some of the entities, with which we have relationships to help market and distribute our products, also produce or distribute products that directly compete with our products. In particular, Bard is one of our competitors in the brachytherapy seed market, and also a competitor for certain of our surgical products segment applications.  Yet Bard is also a non-exclusive distributor of our TheraSeed® product and a customer of our surgical products business. Sales to Bard under the Bard Agreement represented 33% of our brachytherapy seed segment revenue in 2010. Our surgical products segment also sells to Bard.  Total sales to Bard, including sales in our brachytherapy seed segment and our surgical products segment, represented approximately 11% of consolidated revenue in 2010.
 
 
I-14

 
 
We also had a supply and reseller agreement in our brachytherapy seed business with Core Oncology (“Core”), under which Core became a non-exclusive distributor of our TheraSeed® device in 2010.  Sales to Core were approximately 14% of our brachytherapy segment revenue in 2010 (and 5% of our 2010 consolidated revenue).  Core is also a competitor of ours in the brachytherapy market.  The terms of our brachytherapy related distribution agreement with Bard is currently less than two years.  In February 2011, we terminated our distribution agreement with Core.  There is no assurance that any of our distribution agreements will be extended and if they are not extended, or they are otherwise terminated (such as the Core agreement), how much unit volume being sold through them will be able to be captured by our direct sales force or other distributors that we may utilize.
 
Doctors and hospitals may not adopt our products and technologies at levels sufficient to sustain our business or to achieve our desired growth rate.
 
To date, we have attained only limited penetration of the total potential market for most of our products. Our future growth and success depends upon creating broad awareness and acceptance of our products by doctors, hospitals and freestanding clinics, as well as patients. This will require substantial marketing and educational efforts, which will be costly and may not be successful. The target customers for our products may not adopt these technologies or may adopt them at a rate that is slower than desired. In addition, potential customers who decide to utilize any of our devices may later choose to purchase competitors’ products. Important factors that will affect our ability to attain broad market acceptance of our products include:
 
 
doctor and/or patient awareness and acceptance of our products;
 
the real or perceived effectiveness and safety of our products;
 
the relationship between the cost of our products and the real or perceived medical benefits of our products;
 
the relationship between the cost of our products and the financial benefits to our customers using our products, which will be greatly affected by the coverage of, and reimbursement for, our products by governmental and private third-party payors; and
 
market perception of our ability to continue to grow our business and develop enhanced products.
 
Failure of our products to gain broad market acceptance could cause our revenues to decline and our business to suffer.
 
Evolving regulation of corporate governance and public disclosure may result in additional expenses and continuing uncertainty.
 
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, new SEC regulations and NYSE rules are creating uncertainty for public companies, and are particularly burdensome for smaller public companies such as ours. We cannot predict or estimate the amount of the additional costs we may incur relating to regulatory developments or the timing of such costs. These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
 
We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we have invested resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business, financial position and results of operations may be adversely affected.
 
There are limitations on our ability to protect our intellectual property, and we are dependent on trade secrets.
 
Our success will depend, in part, on our ability to obtain, assert and defend patent rights, protect trade secrets and operate without infringing the proprietary rights of others. We hold rights to issued United States and foreign patents. There can be no assurance that rights under patents held by or licensed to us will provide us with competitive advantages or that others will not independently develop similar products or design around or infringe the patents or other proprietary rights owned by or licensed to us. In addition, there can be no assurance that any patent obtained or licensed by us will be held to be valid and enforceable if challenged by another party.
 
 
I-15

 
 
There can be no assurance that patents have not been issued or will not be issued in the future that conflict with our patent rights or prevent us from marketing our products. Such conflicts could result in a rejection of our or our licensors’ patent applications or the invalidation of patents, which could have a material adverse effect on our business, financial condition and results of operations. In the event of such conflicts, or in the event we believe that competitive products infringe patents to which we hold rights, we may pursue patent infringement litigation or interference proceedings against, or may be required to defend against litigation or proceedings involving, holders of such conflicting patents or competing products. There can be no assurance that we will be successful in any such litigation or proceeding, and the results and cost of such litigation or proceeding may materially adversely affect our business, financial condition and results of operations. In addition, if patents that contain dominating or conflicting claims have been or are subsequently issued to others and such claims are ultimately determined to be valid, we may be required to obtain licenses under patents or other proprietary rights of others. No assurance can be given that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to us, if at all. If we do not obtain such licenses, we could encounter delays or could find that the development, manufacture or sale of products requiring such licenses is foreclosed.
 
We rely to a significant degree on trade secrets, proprietary know-how and technological advances that are either not patentable or that we choose not to patent. We seek to protect non-patented proprietary information, in part, by confidentiality agreements with suppliers, employees and consultants. There can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others. The disclosure to third parties of proprietary non-patented information could have a material adverse effect on our business, financial condition and results of operations.
 
Domestic and foreign legislative or administrative reforms resulting in restrictive reimbursement practices of third-party payors and cost containment measures could decrease the demand for products purchased by our customers, the prices that our customers are willing to pay for those products and the number of procedures using our devices.
 
Our products are purchased principally by hospitals or physicians, which typically bill various third-party payors, such as governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care plans, for the healthcare services provided to their patients. The ability of our customers to obtain appropriate reimbursement for products and services from third-party payors is critical to the success of medical device companies because it affects which products customers purchase and the prices they are willing to pay. Reimbursement can significantly impact the acceptance of new technology. Implementation of healthcare reforms in the United States may limit, reduce or eliminate reimbursement for our products and adversely affect both our pricing flexibility and the demand for our products. Even when we develop a promising new product, we may find limited demand for the product unless reimbursement approval is obtained from private and governmental third-party payors.
 
Major third-party payors for hospital services in the United States and abroad continue to work to contain healthcare costs through, among other things, the introduction of cost containment incentives and closer scrutiny of healthcare expenditures by both private health insurers and employers. For example, in an effort to decrease costs, certain hospitals and other customers sometimes resterilize products otherwise intended for a single use or purchase reprocessed products from third-party reprocessors.
 
Further legislative or administrative reforms to the U.S. reimbursement systems in a manner that significantly reduces reimbursement for procedures using our medical devices or denies coverage for these procedures, or adverse decisions relating to our products by administrators of these systems in coverage or reimbursement issues, would have an adverse impact on the acceptance of our products and the prices that our customers are willing to pay for them. These outcomes, along with cost containment measures, could have a material adverse effect on our business and results of operations.
 
In addition, Medicare covers a substantial percentage of the patients treated for prostate cancer in the United States, and consequently, the costs for prostate cancer treatment are subject to Medicare’s prescribed rates of reimbursement. The utilization of TheraSeed®, I-Seed and many of the products in our surgical products business may be influenced by Medicare’s reimbursement levels, and the policies of other third party payors, which can change periodically. Unfavorable reimbursement levels and confusion regarding potential changes in Medicare have adversely affected sales of our brachytherapy products in the past and could do so in the future.
 
 
I-16

 
 
We believe that Medicare reimbursement policies have affected the brachytherapy market and will continue to affect the brachytherapy market.  Prior to 2010, Medicare continued to reimburse for brachytherapy seeds under the “charges adjusted to costs” methodology, which is based on the actual invoiced cost of the seeds and which we sometimes refer to as a “pass-through” methodology.   Consistent with proposals that CMS attempted unsuccessfully to implement in recent years, CMS published a final hospital OPPS on November 20, 2009.  Under this fixed OPPS, which went into effect on January 1, 2010, the per seed rate at which Medicare reimburses hospitals for the purchase of seeds is fixed annually.  We sometimes refer to this system as “fixed reimbursement”.  We continue to support efforts that urge Congress and CMS to replace this “fixed reimbursement” rule by obtaining a new extension of the “pass-through” reimbursement policies which existed prior to 2010.  Fixed reimbursement policies at CMS can be expected to lead to pricing pressure from hospitals and other healthcare providers and to have an adverse effect on our brachytherapy revenue.  The extent of the effect is impossible for us to predict, especially when fixed reimbursement policies are being introduced at a time that coincides with 1) an industry-wide decline in procedures being performed (and, as a result, a decline in demand for brachytherapy products)  which is attributable, at least in part, to favorable CMS reimbursement rates enjoyed by alternative, less proven, technologies and 2) uncertainties regarding the implementation and impact of healthcare reform generally.  These factors could have an adverse effect on brachytherapy revenue.
 
See “Medicare Developments” included in “Management’s Discussion and Analysis” below for additional information regarding CMS reimbursement policies for brachytherapy seeds.
 
Responding to market opportunities and competitive situations could have an adverse effect on average selling prices. Responding to market opportunities and competitive situations could also have a favorable effect or prevent an unfavorable effect on market share and volumes. Conversely, we or our non-exclusive distributors could individually and independently decide to maintain per unit pricing under certain competitive situations that could adversely affect current or potential market share and volumes.
 
There can be no assurance (i) that current or future limitations or requirements for reimbursement by Medicare or other third party payors for prostate cancer treatment will not materially adversely affect the market for our brachytherapy or other products, (ii) that health administration authorities outside of the United States will provide reimbursement at acceptable levels, if at all or (iii) that any such reimbursement will be continued at rates that will enable us to maintain prices at levels sufficient to realize an appropriate return. Any of these factors could have an adverse effect on brachytherapy revenue.
 
We may be unable to maintain sufficient liability insurance.
 
Our business is subject to product liability risks inherent in the testing, manufacturing and marketing of medical devices. We maintain product liability and general liability coverage.  These coverages are subject to annual renewal. There can be no assurance that liability claims will not exceed the scope of coverage or limits of such policies or that such insurance will continue to be available on commercially reasonable terms or at all. If we do not or cannot maintain sufficient liability insurance, our ability to market our products may be significantly impaired. In addition, product liability claims, as well as negative publicity arising out of such claims, could have a material adverse effect on our business, financial condition and results of operations.
 
If we do not comply with laws and regulations relating to our use of hazardous materials, we may incur substantial liabilities.
 
We use hazardous materials and chemicals in our manufacturing operations. We are required to comply with increasingly rigorous laws and regulations governing environmental protection and workplace safety, including requirements governing the handling, storage and disposal of hazardous substances and the discharge of materials into the environment generally. Although, we believe that we handle, store and dispose of these materials in a manner that complies with state and federal regulations, the risk of accidental contamination or injury exists. In the event of an accident, we could be held liable for decontamination costs, other clean-up costs and related damages or liabilities. To help minimize these risks, we employ a full-time Environmental Health and Safety Officer and, when appropriate, we utilize outside professional services organizations to help us evaluate environmental regulations and monitor our compliance with such regulations. In addition, we procure insurance specifically designed to mitigate environmental liability exposures.
 
Litigation may harm our business or otherwise distract our management.
 
Substantial, complex or extended litigation could cause us to incur large expenditures and distract our management, and could result in significant monetary or equitable judgments against us. For example, lawsuits by employees, patients, customers, licensors, licensees, suppliers, business partners, distributors, stockholders, or competitors could be very costly and could substantially disrupt our business. Disputes from time to time with such companies or individuals are not uncommon, and we cannot assure that we will always be able to resolve such disputes out of court or on terms favorable to us.
 
 
I-17

 
 
Defects in, or misuse of, our products, or any detrimental side effects that result from the use of our products, could result in serious injury or death and could require costly recalls or subject us to costly and time-consuming product liability claims. This could harm future sales and require us to pay substantial damages.
 
Our brachytherapy seed products deliver a highly concentrated and confined dose of radiation directly to the prostate from within the patient’s body. Surrounding tissues and organs are typically spared excessive radiation exposure. Our wound closure, vascular access and specialty needle products are also utilized directly on patients. It is an inherent risk of the industries in which we operate that we might be sued in a situation where one of our products results in, or is alleged to result in, a personal injury to a patient, health care provider, or other user. Although we believe that as of the current date we have adequate insurance to address anticipated potential liabilities associated with product liability, any unforeseen product liability exposure in excess of, or outside the scope of, such insurance coverage could adversely affect our operating results. Any such claim brought against us, with or without merit, could result in significant damage to our business.
 
The FDA’s medical device reporting regulations require us to report any incident in which our products may have caused or contributed to a death or serious injury, or in which our products malfunctioned in a way that would be likely to cause or contribute to a death or serious injury if the malfunction reoccurred. Any required filing could result in an investigation of our products and possibly subsequent regulatory action against us if it is found that one of our products caused the death or serious injury of a patient.
 
Because of the nature of our products, the tolerance for error in the design, manufacture or use of our products may be small or nonexistent. If a product designed or manufactured by us is defective, whether due to design or manufacturing defects, or improper assembly, use or servicing of the product or other reasons, the product may need to be recalled, possibly at our expense. Furthermore, the adverse effect of a product recall might not be limited to the cost of the recall. For example, a product recall could cause applicable regulatory authorities to investigate us as well as cause our customers to review and potentially terminate their relationships with us. Recalls, especially if accompanied by unfavorable publicity or termination of customer contracts, could cause us to suffer substantial costs, lost revenues and a loss of reputation, each of which could harm our business. Products as complex as our planning and dose calculation software systems may also contain undetected software errors or defects when they are first introduced or as new versions are released. Our products may not be free from errors or defects even after they have been tested, which could result in the rejection of our products by our customers and damage to our reputation, as well as lost revenue, diverted development resources and increased support costs. We may also be subject to claims for damages related to any errors in our products.
 
Although a number of the surgical products are Class II devices subject to certain special controls by the FDA, many of the products are Class I devices, meaning that the FDA considers these products to present minimal potential for harm to the user. Nonetheless, if there is an error in the design, manufacture or use of any of these products, there remains a risk of recall, rejection of our product by our customers, damage to our reputation, lost revenue, diverted development of resources and increased support costs. We may also be subject to claims for damages related to any error in such products.
 
We may require additional capital in the future, and we may be unable to obtain capital on favorable terms or at all.
 
Although we expect our existing capital resources and future operating cash flows to be sufficient for the foreseeable future, certain events, such as operating losses or unavailability of credit could significantly reduce our remaining cash, cash equivalents and investments in marketable securities. Furthermore, we may require additional capital for research and development, the purchase of other businesses, technologies or products. Our capital requirements will depend on numerous factors, including the time and cost involved in expanding production capacity, the cost involved in protecting our proprietary rights and the time and expense involved in completing product development programs.
 
If we are unable to develop new enhancements and new generations, we may be unable to retain our existing customers or attract new customers.
 
Rapid and significant technological change in products offered as well as enhancements to existing products and surgical techniques coupled with evolving industry standards and new product introductions characterize the market for our brachytherapy, wound closure, vascular access, and specialty needle products. Many of our brachytherapy and surgical products are technologically innovative and require significant planning, design, development and testing. These activities require significant capital commitments and investment. If we are unable to raise needed capital on favorable terms or at all, we may be unable to maintain our competitive advantage in the marketplace.
 
 
I-18

 
 
New product developments in the healthcare industry are inherently risky and unpredictable. These risks include:
 
 
failure to prove feasibility;
 
time required from proof of feasibility to routine production;
 
timing and cost of product development and regulatory approvals and clearances;
 
competitors’ response to new product developments;
 
development, launch, manufacturing, installation, warranty and maintenance cost overruns;
 
failure to obtain customer acceptance and payment;
 
customer demands for retrofits of both old and new products; and
 
excess inventory caused by phase-in of new products and phase-out of old products.
 
The high cost of technological innovation is coupled with rapid and significant change in the regulations governing the products that compete in both our surgical products and brachytherapy markets. We may also be affected by industry standards that could change on short notice, and by the introduction of new products and technologies that could render existing products and technologies uncompetitive. We cannot be sure that we will be able to successfully develop new products or enhancements to our existing brachytherapy products and innovative surgical products. Without new product introductions, our revenues will likely suffer. Even if customers accept new enhanced products, the costs associated with making these products available to customers, as well as our ability to obtain capital to finance such costs, could reduce or prevent us from increasing our operating margins.
 
Our cash balances and marketable securities are subject to risks, which may cause losses and affect the liquidity of these investments.
 
Our cash and cash equivalents represent cash deposits, money market funds, and commercial paper and are invested with a limited number of financial institutions. Investments in marketable securities are made in accordance with our investment policies, which generally allow investments in high-credit quality corporate and municipal obligations. All of these cash, cash equivalents and marketable securities investments are subject to general credit, liquidity, market, interest rate and counterparty risks.  These risks may be exacerbated by the disruptions and volatility in the economic climate, lack of liquidity in the credit and investment markets, economic difficulties encountered by many financial institutions and other economic uncertainties that have in the past and may in the future affect various sectors of the financial markets causing credit and liquidity issues. These market risks associated with our investment portfolio may have a negative adverse effect on our results of operations, liquidity and financial condition.
 
We face unknown and unpredictable risks related to the economic climate.
 
Financial markets and the economies in the United States and internationally have experienced extreme disruption in recent periods and volatility and conditions could recur. This can result in severely diminished liquidity and credit availability in the market, which could impair our ability to access capital or adversely affect our operations. An economic downturn may also, among other things:
 
create downward pressure on the pricing of our products;
 
affect the collection of accounts receivable;
 
increase the sales cycle for certain of our products;
 
slow the adoption of new products and technologies;
 
adversely affect our customers, causing them to reduce spending; or
 
adversely affect our suppliers, which could adversely affect our ability to produce our products.
 
Any of these conditions could have a material adverse effect on our business, financial position, liquidity and results of operations.
 
Changes in FDA requirements for obtaining 510(k) approval to market and sell medical device products in the U.S. may adversely affect our business, financial condition and results of operations.
 
The FDA has recently been considering legislative, regulatory and/or administrative changes to the FDA’s 510(k) program.  Various committees of the U.S. Congress have also indicated that they may consider investigating the FDA’s 510(k) process.  Under the current 510(k) rules, certain types of medical devices can obtain FDA approval without lengthy and expensive clinical trials.  Among our product offerings, those products that require FDA approval have received such approval under the 510(k) rules.  Our R&D programs and new product programs contemplate obtaining any required FDA approvals under the current 510(k) rules.  Any changes to the current 510(k) or related FDA rules that make such rules more stringent or require more clinical data, can significantly increase the time and costs associated with bringing new products to market.  This may have a material adverse effect on our business, financial condition and results of operations.
 
 
I-19

 
 
We face risks in connection with our current project to install a new ERP system.
 
We are currently replacing our multiple legacy business systems with a corporate-wide ERP system to handle various business, operating and financial processes.  ERP implementations are complex and time-consuming projects that can involve substantial expenditures for system hardware, software, and implementation activities. Such an integrated, wide-scale implementation is extremely complex and may require transformation of business and financial processes in order to reap the benefits of the ERP system.  Problems or delays in our ERP implementation could result in operational issues including delayed shipments or production, missed sales, inefficiencies in our business operations, billing and accounting errors and other operational issues. Our business and results of operations may be adversely affected if we experience operating problems and/or cost overruns during the ERP implementation process or if the ERP system and the associated process changes do not function as expected or do not give rise to the expected benefits. System delays or malfunctions could also disrupt our ability to timely and accurately process and report the results of our consolidated operations, financial position, and cash flows. This may have a material adverse effect on our business, financial condition and results of operations.
 
The adoption of healthcare reform in the United States may adversely affect our business, results of operations and/or financial condition.
 
In March 2010, significant reforms to the healthcare system were adopted as law in the United States. The law includes provisions that, among other things, reduce and/or limit Medicare reimbursement to certain providers, require all individuals to have health insurance (with limited exceptions) and impose new and/or increased taxes. Specifically, the law requires the medical device industry to subsidize healthcare reform in the form of a 2.3% excise tax on U.S. sales of most medical devices beginning in 2013. We are still evaluating the impact of this tax on our overall business. Further, many of the provisions contained in the healthcare reform law will be subject to future rule-making.  Various healthcare reform proposals have also emerged at the state level. The new federal law and the state proposals could reduce medical procedure volumes and impact the demand for our products or the prices at which we sell our products. In addition, the excise tax will increase our cost of doing business. Other provisions of the new law may also impact our costs of doing business in the areas of employee benefits and regulatory compliance, among other areas.  The impact of this law and these proposals could have a material adverse effect on our business, results of operations and/or financial condition.
 
More recently, there have been some lawsuits filed that challenge all or part of the healthcare reform law.  We cannot predict the ultimate outcome of any of the litigation or whether Congress may otherwise revisit some or all of the healthcare reform law during 2011.  Because of these uncertainties, we cannot predict whether any or all of the legislation will be overturned, repealed, or modified and what the impact on our business may be resulting from any such changes.
 
Item 1B. Unresolved Staff Comments.
 
None.
 
Item 2. Properties
 
Our executive offices are located in Buford, Georgia.  Our manufacturing and development operations are carried out at four principal plants.  We own our brachytherapy seed manufacturing facility, located in Buford, Georgia.  In our surgical products segment we own a manufacturing facility located in Massachusetts, and lease facilities located in Oregon and Texas.  All of our owned and leased spaces are well maintained and suitable for the operations conducted within.
 
Item 3. Legal Proceedings
 
During the first quarter of 2010, we initiated a lawsuit to enforce certain non-competition agreements with the former owner of CP Medical and to protect our trade secrets related to that business, among other claims.  Subsequently, we filed a claim in arbitration seeking compensation for the former owner’s breach of his non-competition agreements and misappropriation of trade secrets.  The defendant brought certain counterclaims against us.   The action was settled in October 2010.  Pursuant to the settlement, the litigation has been dismissed, the former owner of CP Medical paid $200,000 to Theragenics while denying all liability, and each party released the other party from any and all claims up to and including the date of settlement.   Other than releases provided by all parties, no other consideration is required from Theragenics.
 
From time to time, we are subject to certain legal proceedings and claims in the ordinary course of business. We currently are not aware of any such legal proceedings or claims that we believe will have, individually or in aggregate, a material adverse effect on our business, financial condition, or operating results.
 
Item 4.  Reserved.
 
 
I-20

 

PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our Common Stock, $.01 par value, (“Common Stock”) is traded on the New York Stock Exchange (NYSE) under the symbol “TGX”. The high and low prices for our Common Stock for each fiscal quarterly period in 2010 and 2009 are as follows:
 
   
High
   
Low
 
2010
           
First Quarter
  $ 1.84       1.25  
Second Quarter
    1.80       1.04  
Third Quarter
    1.40       1.10  
Fourth Quarter
    1.57       1.18  
                 
2009
               
First Quarter
  $ 1.39     $ 0.79  
Second Quarter
    1.48       0.86  
Third Quarter
    1.89       1.04  
Fourth Quarter
    1.59       1.23  
 
As of February 22, 2011, the closing price of our Common Stock was $1.80 per share. Also, as of that date, there were approximately 385 holders of record of our Common Stock. The number of record holders does not reflect the number of beneficial owners of our Common Stock for whom shares are held by depositary trust companies, brokerage firms and others.
 
We have a Stockholder Rights Plan (the “Rights Plan”), which contains provisions designed to protect our stockholders. Pursuant to the Rights Plan, each share of our Common Stock contains a share purchase right (a “Right”). The Rights expire in February 2017, and do not become exercisable unless certain events occur including the acquisition of, or commencement of a tender offer for, 20% or more of the outstanding Common Stock. 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 stockholders will entitle its holder to purchase additional shares of Common Stock at a substantial discount to then current market prices. The Rights Plan and the terms of the Rights, which are set forth in a Rights Agreement between us and Computershare Investor Services LLC, as Rights Agent, could add substantially to the cost of acquiring us and consequently could delay or prevent a change in control of us.
 
We have not previously declared or paid a cash dividend on our Common Stock. It is the present policy of our Board of Directors to retain all earnings to support operations and our strategy of continued diversification and expansion.
 
 
II-1

 
 
Item 6. Selected Financial Data 
 
The following selected financial data are derived from our consolidated financial statements. The selected financial data set forth below should be read in conjunction with our consolidated financial statements and related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.
 
(Amounts in thousands, except per share data)   Year ended December 31,  
    2010     2009     2008     2007     2006  
Statement of Operations Data:
                             
Product sales
  $ 80,683       77,151     $ 66,447     $ 61,286     $ 53,076  
License and fee income
    1,501       1,175       911       924       1,020  
Total revenue
    82,184       78,326       67,358       62,210       54,096  
                                         
Cost of sales
    49,155       44,953       36,264       31,994       27,752  
Gross profit
    33,029       33,373       31,094       30,216       26,344  
                                         
Selling, general and administrative
    24,013       22,020       20,500       19,131       19,951  
Amortization of purchased intangibles
    3,077       3,441       2,410       1,875       1,371  
Research and development
    1,942       2,160       1,300       1,365       805  
Impairment of goodwill and tradenames
                70,376              
Other operating items
    111       3       (147 )     500       168  
Total operating expenses
    29,143       27,624       94,439       22,871       22,295  
                                         
Earnings (loss) from operations
    3,886       5,749       (63,345 )     7,345       4,049  
                                         
Other income (expense), net
    (583 )     (837 )     277       1,502       1,104  
                                         
Earnings (loss) before income taxes
    3,303       4,912       (63,068 )     8,847       5,153  
                                         
Income tax expense (benefit)
    1,233       1,837       (4,528 )     3,212       (1,712 )
                                         
Net earnings (loss)
  $ 2,070       3,075     $ (58,540 )   $ 5,635     $ 6,865  
                                         
Net earnings (loss) per share
                                       
Basic and Diluted
  $ 0.06       0.09     $ (1.77 )   $ 0.17     $ 0.21  
 
   
December 31,
 
(In thousands)
 
2010
   
2009
   
2008
   
2007
   
2006
 
Balance Sheet Data:
                             
Cash and cash equivalents
  $ 29,674     $ 45,326     $ 39,088     $ 28,666     $ 18,258  
Marketable securities
    10,949             1,507       20,123       14,722  
Goodwill and other intangible assets, net
    12,319       15,464       18,720       50,539       52,586  
Total assets
    115,187       116,108       114,419       148,821       146,244  
Long-term borrowings
    23,667       27,000             7,500       7,500  
Total debt
    27,000       30,333       32,000       7,500       7,500  
Shareholders’ equity
  $ 80,279     $ 77,653     $ 74,110     $ 132,619     $ 126,141  
 
Comparability of the selected financial data above is affected by certain material changes in our business, including:
 
 
The acquisitions of Galt in August 2006 and NeedleTech in July 2008.  The results of operations of acquired companies are included in our consolidated results for periods subsequent to each respective acquisition date,
 
impairment charges related to the write off of goodwill and tradenames in 2008, and
 
refinancing of our credit facility in 2009.
 
The above list is not intended to identify all material changes in our business in the periods presented.  Rather, we believe the above information is useful in understanding the period to period comparability of the above selected financial data.  Please read the information included elsewhere in this Form 10-K, including Business, Risk Factors, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Financial Statements and Supplementary Data, as well as other information contained herein for a more complete discussion of our business, financial condition, and results of operations.
 
 
II-2

 

THERAGENICS CORPORATION
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview and Business Strategy
 
Theragenics Corporation®, a Delaware corporation formed in 1981, is a medical device company serving the surgical products and cancer treatment markets, operating in two business segments.  The terms “Company”, “we”, “us”, or “our” mean Theragenics Corporation and all entities included in our consolidated financial statements.
 
Our surgical products business manufactures, markets and sells disposable devices primarily utilized in certain surgical procedures.  Our brachytherapy seed business manufactures, markets and sells radioactive “seeds” primarily utilized in the treatment of early stage prostate cancer.  At the present time, both of our segments do business primarily in the United States.  Our surgical products business is the faster growing of our businesses and has been supported by the cash flows generated by our market leading brachytherapy seed business and our flagship TheraSeed® brand.  In our surgical products business we plan to grow and diversify revenues by adding product offerings and manufacturing capabilities, expanding the applications and markets in which we compete, and gaining scale to improve profitability.
 
Our surgical products business was built through the acquisitions of CP Medical Corp. in May 2005, Galt Medical Corporation in August 2006, and Needletech Products, Inc. in July 2008.  We currently manufacture almost 3,500 products in this business as part of three broad product platforms; wound closure, vascular access and specialty needles.  To date we have maintained the names and brands under which each of these companies previously manufactured, marketed and sold their products.  We serve a number of markets and applications, including, among other areas, interventional cardiology, interventional radiology, vascular surgery, orthopedics, plastic surgery, dental surgery, urology, veterinary medicine (sutures), pain management, endoscopy, and spinal surgery. With the exception of veterinary sutures, our surgical products hold relatively small market shares.  Our products include both finished goods and components.  Our products are sold primarily to original equipment manufacturers (“OEMs”) and to a network of distributors.  Our surgical products business has achieved 10% revenue growth in both 2010 and 2009 (growth in 2009 is pro forma, assuming we had acquired Needletech at the beginning of 2008).  We have accomplished this primarily by increasing sales to existing customers and, to a lesser extent, adding new customers.  Further, we achieved this revenue growth during a period of severe economic difficulties.  Our strategy for increasing sales and scale going forward includes: becoming more integral within the supply chain of our customers both for existing products and for our customers’ development programs (which may allow us to increase sales to existing and new customers from all product platforms); developing new products internally; acquiring products, licenses, and other intellectual property; acquiring businesses and; entering certain markets outside the United States.
 
We have operated our brachytherapy seed business since 1987, emerging from the development stage in 1990.  Historically our brachytherapy seed segment has generated strong cash flows, which have enabled us to diversify our business substantially.  Positive cash flows from our brachytherapy seed business continue despite an industry-wide decline in brachytherapy procedures in the United States which began about five years ago.  The overall brachytherapy industry in the United States is now experiencing difficulties primarily due to competition from other treatments.  Many of these competing treatments enjoy favorable Medicare reimbursement rates relative to brachytherapy reimbursement rates.  We believe this results in a non-level playing field for medical device manufacturers and patients.  One of the primary competitive treatments provided by our radiation oncologist customers is Intensity Modulated Radiation Therapy, or “IMRT”.  IMRT enjoys substantially higher reimbursement rates than brachytherapy, yet clinical studies do not indicate that IMRT delivers improved outcomes.   We believe the market positioning and heavy promotion of robotic surgery for prostate cancer treatment has also adversely affected the number of brachytherapy procedures performed.  Despite these industry-wide difficulties we have maintained positive cash flows in our brachytherapy business for a variety of reasons including, among other things, the relatively fixed nature of our brachytherapy seed manufacturing costs; our ability to anticipate changes in market conditions; our ability to respond to government controlled pricing policies surrounding reimbursement of our products and, more recently; increasing our overall market share.  After 19 consecutive quarters of year over year declines, product revenue in our brachytherapy seed segment (excluding license fees) increased in both third and fourth quarters of 2010 over the 2009 periods.  Indeed, our product sales increased 3% in the second half of 2010 over 2009.  This success in increasing year over year product revenue was primarily due to obtaining new supply agreements with new distributors in 2010, which increased our market share.  One of these new supply agreements was with Core Oncology.  See “Brachytherapy Seed Business” below for additional information on the supply agreement with Core.
 
At the present time we believe that we have additional opportunities to increase our market share through additional distribution agreements, diversification of our product and service offerings, and potential opportunities in markets outside of the United States.   We believe we have these opportunities to expand and broaden our distribution channels because of, among other things, the reliability of our supply, the quality of our products, the quality of our direct sales force, and our long-term commitment to the brachytherapy industry including patient education, direct to consumer advertising, and congressional lobbying for fair reimbursement.
 
 
II-3

 
 
Results of Operations
 
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
 
Revenue
Following is a summary of revenue by segment for each of the three years in the period ended December 31, 2010 (in thousands):
 
Revenue by segment
 
Year ended December 31,
 
   
2010
   
2009
   
2008
 
Surgical products
                 
    Product sales
  $ 58,991     $ 53,591     $ 38,745  
    License and fee income
    36       69       34  
        Total surgical products
    59,027       53,660       38,779  
                         
Brachytherapy seed
                       
Product sales
    22,287       23,860       27,910  
Licensing fees
    1,465       1,106       877  
Total brachytherapy seed
    23,752       24,966       28,787  
                         
Intersegment eliminations
    (595 )     (300 )     (208 )
                         
Consolidated
  $ 82,184     $ 78,326     $ 67,358  
 
Surgical Products Segment
 
Revenue in our surgical products business increased 10% in 2010 over 2009.  All three of our general product categories, including wound closure, vascular access, and specialty needles, recorded organic growth during 2010.   The majority of our 2010 revenue growth was driven by our vascular access and wound closure products.  Our organic revenue growth was primarily a result of increased sales to existing customers.  Open orders in our surgical products segment were $13.0 million at December 31, 2010 compared to $13.5 million at December 31, 2009.  Open orders represent orders from customers for future delivery that we believe to be firm.  Open orders are not guaranteed shipments, and they are subject to cancellation or delay.
 
Backlog in our surgical products business was $345,000 at December 31, 2010 and $931,000 at December 31, 2009.  Backlog represents orders included in open orders, but for which we have missed promised shipment dates.
 
During the first quarter of 2010, we experienced a spike in demand and changes in customer purchasing behavior.  These factors increased our backlog early in 2010. This increase in our backlog added to an already high level of open orders (including backlog) that we had entering into the year.  In an attempt to compensate for the additional lead time we were experiencing in shipping orders, some customers added to existing orders.  We incurred overtime, hired temporary labor, and added shifts, among other actions, to help relieve our backlog and address opportunities during the first quarter.  We have since reduced our backlog.  However, we continued to experience changes in customer purchasing behavior.  These circumstances may continue until customer behavior becomes more predictable and consistent.  A portion of the increase in product sales experienced in 2010 resulted from reducing our backlog.
 
A significant portion of the products in our surgical business continue to be sold to OEMs and a network of distributors.  Ordering patterns of these customers vary and are difficult to predict. Accordingly, surgical products revenue is subject to fluctuation, especially on a quarter-to-quarter basis.  In addition, revenue has been and will continue to be affected by our customers’ response to efforts by hospitals to reduce inventories and conserve cash due to the difficult economic climate and macroeconomic uncertainties.  All of these factors may cause the fluctuations in our results to be even more volatile from period to period.
 
Both our surgical products segment and our brachytherapy seed segment sell to Core Oncology (“Core”).  As discussed below under “Brachytherapy Seed Segment”, we terminated our distribution agreement with Core for brachytherapy seeds in February 2011.  Sales to Core were less than 1% of revenue in our surgical products segment in 2010.
 
 
II-4

 

Brachytherapy Seed Segment
 
We sell our brachytherapy seed products directly to healthcare providers and to third-party distributors.  During 2010, we added two new third-party distributors.  In January 2010 we announced a new distribution agreement with Core; and in July 2010 we announced a new distribution agreement with Oncura, a unit of GE Healthcare.  We also sell our I-Seed I-125 device, and other brachytherapy related products, directly to healthcare providers.  We believe that the industry-wide decline in prostate brachytherapy procedure volume in the United States experienced over the last few years continued during 2010.  Some newer forms of competing treatment have increased their market share, especially those with Medicare reimbursement levels that are higher than reimbursement levels for brachytherapy.  These newer forms of competing treatments include IMRT and robotic surgery.  In addition to treatment options that enjoy favorable reimbursement rates and that reduce demand for brachytherapy procedures, we believe brachytherapy seed volume and revenue are also affected by pricing strategies from other brachytherapy providers and uncertainties surrounding reimbursement.
 
Our brachytherapy product sales decreased 7% in 2010 from 2009.  Our strategy of increasing market share through new distribution agreements helped to offset the continued year over year industry-wide decline in procedures.  This reduced the decline in product sales we would have otherwise experienced in 2010.  Indeed, our product sales increased 3% in the second half of 2010 compared to the second half of 2009.
 
We have non-exclusive distribution agreements in place for the distribution of the TheraSeed® device.  Under our third party distribution agreements, we are the exclusive palladium-103 seed supplier for the treatment of prostate cancer for each distributor, and each distributor has the non-exclusive right to sell TheraSeed® in the U.S. and Canada.  Certain agreements also provide distributors with the right to distribute TheraSeed® for the treatment of solid localized tumors other than in the prostate, and with rights to distribute to certain locations outside of North America.  Such applications (non-prostate and outside of North America) have not been material and are not expected to become material in the near future. Our principal non-exclusive distribution agreement is with C.R. Bard (“Bard”).  Our agreement with Bard provides for automatic one year extensions of the term, unless either party gives notice of its intent not to renew at least twelve months prior to the end of the current term. The current term expires December 31, 2012 and will be automatically extended for one additional year unless either party gives notice of its intent not to extend by December 31, 2011. Sales to Bard by our brachytherapy segment represented 33% and 44% of brachytherapy seed segment revenue in 2010 and 2009, respectively.  (Our surgical products segment also sells to Bard.  Total consolidated sales to Bard, including sales in our brachytherapy seed segment and our surgical products segment, represented 11% and 16% of consolidated revenue in 2010 and 2009, respectively).
 
Core became an additional non-exclusive distributor of TheraSeed® in January 2010.  Sales to Core represented approximately 14% of brachytherapy segment revenue in 2010.  (Our surgical products segment also sells to Core.  Total consolidated sales to Core, including sales in our brachytherapy seed segment and our surgical products segment, represented 5% of consolidated product revenue in 2010).  In February 2011, we terminated our agreement with Core due to Core’s failure to pay its trade receivables in accordance with the contractual terms of the agreement. Core had been attempting to become current with amounts due to us.  However, litigation filed against Core by a third party in late January 2011 created what we view as an unacceptable level of uncertainty surrounding Core’s ability to satisfy their financial obligations to us for both current and ongoing sales.  In the past, healthcare providers have shown strong loyalty to TheraSeed® and we have been highly successful in retaining TheraSeed® customers following the termination of distribution agreements. Healthcare providers who previously purchased TheraSeed® through Core have the opportunity to continue an uninterrupted supply of our product for their patients, either directly from us or through our other distribution channels. To ensure that scheduled patient procedures proceeded as planned, our termination notice provided a transition period during which additional orders from Core have been accepted and honored, including orders from Core on a prepaid basis.  Should Core ultimately satisfy its obligations to us and demonstrate an ability to satisfy its obligations going forward, we would consider reentering into a distribution agreement with Core.  As of  February 25, 2011, we have not experienced a material decline in unit volumes compared to the volumes we would have expected had the Core agreement not been terminated by us.  However, it is difficult to predict how much unit volume we will ultimately be able to retain due to, among other things, uncertainties in the marketplace, a continuing decline in overall industry-wide procedures and competition.  Unless Core demonstrates an ability to pay, certain shipments made to Core in 2011 immediately prior to our notice of termination of the agreement and during the notice period may not meet the revenue recognition criteria of U.S. GAAP, which could affect our 2011 first quarter revenue.
 
We also currently have non-exclusive distribution agreements for TheraSeed® in place with Oncura (a unit of GE Healthcare) and Brachysciences.  Sales under each of these agreements were less than 10% of our brachytherapy product sales in 2010.  We may pursue additional distribution agreements for both palladium-103 and iodine-125 products in an effort to increase market share.  We may also have opportunities to enter certain markets outside of the United States with an iodine-125 device.
 
 
II-5

 
 
We believe that Medicare reimbursement policies, which have negatively affected the brachytherapy market in prior periods, will continue.  Prior to 2010, Medicare continued to reimburse for brachytherapy seeds under the “charges adjusted to costs” methodology, which is based on the actual invoiced cost of the seeds and which we sometimes refer to as a “pass-through” methodology.   Consistent with proposals that the Centers for Medicare & Medicaid Services (“CMS”) attempted unsuccessfully to implement in recent years, CMS published a final hospital outpatient prospective payment system (“OPPS”) on November 20, 2009.  Under this fixed OPPS, which went into effect on January 1, 2010, the per seed rate at which Medicare reimburses hospitals for the purchase of seeds is fixed annually.  We sometimes refer to this system as “fixed reimbursement”.  We expect to continue to support efforts to urge Congress and CMS to replace this “fixed reimbursement” rule by obtaining a new extension of the “pass-through” reimbursement policies which existed prior to 2010.  Fixed reimbursement policies at CMS can be expected to lead to pricing pressure from hospitals and other healthcare providers, and to have an adverse effect on our brachytherapy revenue.  The extent of the effect is impossible for us to predict, especially when fixed reimbursement policies are being introduced at a time that coincides with 1) an industry-wide decline in procedures being performed (and, as a result, a decline in demand for brachytherapy products) which is attributable, at least in part, due to favorable CMS reimbursement rates enjoyed by alternative, less proven, technologies for early stage prostate cancer treatment and 2) uncertainties regarding the implementation and impact of healthcare reform generally.  These factors could have an adverse effect on brachytherapy revenue.
 
License fees in our brachytherapy segment increased $359,000, or 32%, in 2010 over 2009.  License fees include fees from the licensing of our TheraSphere® product, a medical device used for the treatment of liver cancer.  Licensing fees also includes fees related to the licensing of certain intellectual property related to an expandable brachytherapy delivery system that we developed. This agreement, which was executed in May 2008, provides for a minimal non-refundable initial license fee and non-refundable continuing royalties based upon sales subject to certain minimums.
 
Operating income (loss) and costs and expenses
 
Following is a summary of operating income (loss) by segment for each of the three years in the period ended December 31, 2010 (in thousands):
 
   
Year ended December 31,
 
   
2010
   
2009
   
2008
 
Surgical products
                 
Operating income (loss)
  $ 215     $ 1,664     $ (66,595 )
Impairment of goodwill and tradenames
                67,798  
Surgical products excluding impairment
    215       1,664       1,203  
                         
Brachytherapy seed
                       
Operating income
    3,685       4,081       3,233  
Impairment of goodwill and tradenames
                2,578  
Change in estimated value of asset held for sale
                (142 )
Brachytherapy seed excluding impairment
    3,685       4,081       5,669  
                         
Intersegment eliminations
    (14 )     4       17  
                         
Operating income (loss)
                       
Consolidated
  $ 3,886     $ 5,749     $ (63,345 )
Excluding impairment
  $ 3,886     $ 5,749     $ 6,889  
 
Operating income excluding impairment is a non-GAAP financial measure.  In addition to calculations measuring operating income (loss) as calculated and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we sometimes utilize operating income excluding certain items, such as impairment, to make operational decisions, evaluate performance, prepare internal forecasts and allocate resources.  Operating income excluding impairment is a non-GAAP financial measure which, when compared with operating income (loss) calculated in accordance with GAAP, allows us to more accurately determine whether a given increase or decrease in operations for a given segment is a result of an event that is non-recurring in nature or is reflective of an ongoing performance issue. We believe presentation of this non-GAAP financial measure provides supplemental information that is helpful to an understanding of the operating results of our businesses and period-to-period comparisons of performance.  However, we recognize that the use of non-GAAP measures has limitations, including the fact that they may not be directly comparable with similar non-GAAP financial measures used by other companies. We compensate for these limitations by providing full disclosure of each non-GAAP financial measure and providing a reconciliation to the most directly comparable GAAP financial measure.  All non-GAAP financial measures are intended to supplement the applicable GAAP disclosures and should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
 
 
II-6

 
 
Surgical Products Segment
 
Operating income in our surgical products segment decreased to $215,000 in 2010 from $1.7 million in 2009.  Affecting profitability in the 2010 periods was a decline in our gross profit margins on product sales.  Our gross profit margins were approximately 36% in 2010 compared to 39% in 2009.  This decline was driven by several factors: spikes in demand early in 2010; continuing changes in customer behavior; pricing pressures; changes in product mix and distribution channels; and the move to our new specialty needle manufacturing facility.
 
We experienced a spike in demand during the first quarter of 2010, increasing our backlog and putting pressure on certain facilities that were already at or near capacity.  To address the spike in demand and backorders, we ran overtime, brought in temporary labor and implemented a third shift at one plant, among other things. These additional costs eroded our gross margins.  Amplifying the costs associated with these actions were changes in customer behavior.  Recurring changes in order quantities and requested delivery dates of orders reduced the ability of our operations to efficiently address production requirements.  Our former specialty needle manufacturing plant was running at near capacity, putting a strain on operations.  We have also seen an increase in our OEM sales relative to our dealer sales during 2010.  OEM sales generally carry a lower gross profit margin.  Additionally, we experienced pricing pressure from customers and from the need to respond to aggressive pricing behavior of competitors.
 
We were able to reduce the backlog experienced early in 2010 and reduce or eliminate some of the additional costs we were incurring to address the circumstances that existed during that time.  We also implemented certain measures to better control costs and margins on an ongoing basis. However, we continue to experience changes in customer behavior, ordering and pricing pressures which in turn, cause variability in our gross margins from period to period.  We believe these factors are at least in part being driven by the continued macroeconomic uncertainties prevalent in the U.S. economy.  We expect continued pressure on our gross margins due to these and other factors at least until customer behavior becomes more predictable and consistent.
 
Also affecting our 2010 gross margins was the move to our new specialty needle facility in July 2010.  We experienced inefficiencies, such as planned downtime, to facilitate the move.  Our new facility, which is 43% larger than our previous operating facilities, also has higher operating costs associated with it.
 
Another factor reducing income in the 2010 periods was legal fees of $629,000 associated with our initiation of legal action against the former owner of CP Medical.  This legal action was intended to enforce certain non-compete agreements and to protect the trade secrets and other assets of that business, which we acquired in 2005.  We had no such legal fees in 2009.  The action was settled in October 2010, and no further significant legal fees are expected to be incurred in this matter.
 
Moving related expenses of $570,000 were incurred in 2010 in connection with the move to our new, larger specialty needle manufacturing facility.  These expenses are included in selling, general and administrative expenses and in loss on disposal of assets in our 2010 statement of earnings.  We completed the move to the new facility in the third quarter of 2010, and no further significant moving related expenses are expected to be incurred.
 
Bad debt expense also increased in 2010, primarily a result of amounts due from Core for which we believe collection is doubtful of approximately $380,000.  Both our surgical products segment and our brachytherapy seed segment sell to Core.  The circumstances surrounding our relationship with Core are discussed above under “Revenue, Brachytherapy Seed Segment”.
 
Selling, general and administrative expenses, other than the aforementioned legal, moving and bad debt expenses, were 24% of revenue in 2010 compared to 25% in 2009.
 
Research and development (“R&D”) expenses decreased $380,000, or 18%, in 2010 from 2009.  Our R&D program is intended to focus on product extensions, next generation products, and new products that are complementary to our current product lines and that support our customers’ product lines.  Our R&D program is directed toward 510(k) products and not on products that require lengthy and expensive clinical trials.  We have recently been reassessing the projects in our R&D program in an effort to focus on opportunities with a more immediate impact and to consolidate our R&D efforts.  We believe that opportunities to support programs for our customers may be more attractive for us than developing new products.  Looking forward, our results are expected to be affected by the timing of these investments.
 
During 2010, we have continued development of a corporate-wide Enterprise Resource Planning (“ERP”) system. As our ERP system was under development, we capitalized certain internal costs associated with its development.  These costs, which consisted primarily of employee payroll and related expenses, totaled $331,000 and $247,000 in 2010 and 2009, respectively, in our surgical products segment.  Upon completion of the ERP system development at each location, these development costs will no longer be capitalized but will be charged as operating expenses.  We expect to complete the system development at the remaining two locations in the next year.
 
 
II-7

 
 
Looking forward, we expect a number of items to continue to affect the profitability in our surgical products business including, among other things:
 
ordering patterns of our larger OEM and distributor customers,
 
costs incurred to address significant changes in demand,
 
continued investments in infrastructure and R&D as we make investments to support anticipated future growth and to develop products to address growth opportunities,
 
changes in product mix and sales channels, with sales through OEM channels generally carrying a relatively lower gross profit margin and sales through distributor channels generally carrying a somewhat higher gross profit margin,
 
continued pricing pressure from customers,
 
higher maintenance and operating costs associated with our new and larger specialty needle manufacturing facility,
 
the implementation of our new, corporate-wide ERP system, and
 
the increasing scale of our surgical products business.
 
Brachytherapy Seed Segment
 
Operating income in our brachytherapy business decreased to $3.7 million in 2010 from $4.1 million in 2009.  Manufacturing related expenses in our brachytherapy business tend to be relatively fixed in nature.  Accordingly, even modest changes in revenue can have a significant impact on operating income.  The decline in product sales had a negative effect on operating income in 2010.  Operating income in our brachytherapy seed business is expected to continue to be highly dependent on sales levels due to this high fixed cost component.   Increases in our license and fee income contribute to profitability as there are minimal costs associated with those licensing agreements.  The increase in license and fee income in 2010 partially offset the declines in product sales.  We were able to decrease some operating expenses during 2010 including personnel related costs, advertising and professional fees. Looking forward, we may not be able to continue to reduce our operating costs.  Our brachytherapy business also absorbed fewer corporate overhead costs since we allocate corporate costs based upon the relative revenue of our business segments.  Corporate overhead costs allocated to our brachytherapy business declined $320,000 in 2010 from 2009.
 
Partially offsetting reductions in operating expenses noted in the preceding paragraph was $1.6 million of bad debt expense related to amounts due from Core for which we believe collection is doubtful. We terminated our distribution agreement with Core in February 2011 as discussed above under Revenue, Brachytherapy Seed Segment. We used our judgment in determining the amount due from Core for which collection is doubtful. In making this determination, our estimates and judgment included all facts and circumstances which existed at December 31, 2010 and developments occuring through February 25, 2010 (the date we filed this Annual Report on Form 10-K). We continue to pursue collection of all amounts due to us from Core. If Core demonstrates an ability to pay any or all of the amounts previously considered doubtful, this would represent a change in our estimate. Any resulting change in estimate would in turn reduce our operating expenses in the period in which Core demonstrates an ability to pay any or all of the amounts due to us. In addition, we sold product to Core in January 2011, prior to our termination of our agreement with Core. Unless Core demonstrates an ability to pay, we will have additional charges related to Core receivables in the first quarter of 2011.
 
Non-operating income/expense
 
A summary of our interest expense is as follows:
   
Year Ended December 31,
 
   
2010
   
2009
 
2008
 
                 
  Interest paid or accrued, including loan fees
  $ 982     $ 822     $ 841  
  Fair value adjustment
    107       80        
  Interest capitalized
    (113 )     (37 )      
                         
Total interest expense
  $ 976     $ 865     $ 841  
 
Interest expense paid or accrued, including loan fees, is related to our effective interest rates and the level of our outstanding borrowings under our credit facility.  Fair value adjustments are related to our interest rate swaps.  Such fair value adjustments are unrealized losses and reflect the period to period changes in the estimated fair value of our swaps.  Interest capitalized primarily relates to the construction of our new specialty needle manufacturing facility.  Interest capitalized is expected to decline in 2011 as construction on that facility was completed in 2010.  Our weighted average effective rate was 3.0% at December 31, 2010.
 
 
II-8

 
 
We manage our interest rate risk using interest rate swaps associated with outstanding borrowings under our credit agreement, as our interest rates are floating rates based on LIBOR.  We do not hold or issue interest rate swaps for trading purposes, and we hold no other derivative financial instruments other than interest rate swaps. We enter into interest rate swaps that are designed to hedge the interest rate risk but are not designated as “hedging instruments”, as defined under guidance issued by the Financial Accounting Standards Board (“FASB”).  Changes in the fair value of these instruments are recognized as interest expense.  Such changes in fair value are based on, among other things, discounted cash flows based upon current market expectations about future amounts, yield curves, and mid-market pricing.  Accordingly, the fair value of our interest rate swaps is subject to fluctuation and may have a significant effect on our results of operations in future periods.  Additionally, the counterparty to our interest rate swaps is the lender under our Credit Agreement.  Accordingly, we are exposed to counterparty credit risk from this financial institution. We entered into interest rate swaps based on the relationship with this financial institution as our lender and on its credit rating and the rating of its parent company. We continue to monitor our counterparty credit risk.
 
Other income in 2010 includes $200,000 received in the settlement of the lawsuit with the former owner of CP Medical.  Interest income was not material in 2010 or 2009.
 
Income tax expense
 
Our effective income tax rate, which includes federal and state income taxes, was approximately 37% in 2010 and 2009.  In 2010, our tax rate was reduced by approximately $227,000 of state investment tax credits and R&D tax credits.  A significant portion of these credits in 2010 related to the construction of our new needle manufacturing facility, and we expect our tax credits to be substantially lower in 2011 and beyond.  Looking forward, these and other circumstances may continue to cause fluctuations in our effective income tax rate for financial reporting purposes.  Future tax rates can be affected by, among other things, tax expense for items unrelated to actual taxable income (such as the write-off of deferred tax assets associated with share-based compensation), changes in tax regulations, changes in statutory tax rates, changes in the tax jurisdictions in which we must file income tax returns, and many other items that affect the taxability and deductibility of our revenue and expenses and for which we cannot currently predict.
 
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
Revenue
 
Surgical Products Segment
 
Revenue in our surgical products business increased 38% in 2009 over 2008, primarily as a result of our NeedleTech acquisition.  On a pro forma basis, as if the NeedleTech acquisition had occurred on January 1, 2008, revenue in our surgical products segment would have increased 10% in 2009 over 2008.  All three of our general product categories, including wound closure, introducers and guidewires, and specialty needles, recorded organic growth during 2009.   Our wound closure products performed particularly well, as we believe we provided exceptional value in that application.  A significant portion of the revenues in our surgical business is generated by sales to OEMs and a network of distributors.  Ordering patterns of these customers vary and are difficult to predict.  Accordingly, surgical products revenue is subject to fluctuation, especially on a quarter-to-quarter basis.  In addition, the volatility and disruptions in the U.S. and global economies and credit markets, and other uncertainties due to the economic slowdown have had an effect on our surgical product revenue.  As general economic conditions worsened in the fourth quarter of 2008, scheduled shipping dates for our open orders during the fourth quarter were farther out than we historically experienced.  We did not experience a similar delay in requested shipping dates at the end of 2009.
 
Brachytherapy Seed Segment
 
Brachytherapy product sales decreased 15% in 2009 from 2008.  We believe that the industry-wide decline in prostate brachytherapy procedure volume experienced in 2008 continued in 2009.  Some newer forms of competing treatments have increased their market share, especially those with Medicare reimbursement levels that are higher than reimbursement levels for brachytherapy.  These newer forms of competing treatments include IMRT and robotic surgery.  Our revenues also continued to be affected by the performance of our main distributor.  Sales to this distributor declined 22% from 2008 to 2009. We also maintain our own internal brachytherapy sales force that sells TheraSeed® and I-Seed directly to hospitals and physicians. Our direct sales declined 11% in from 2008 to 2009.  Revenue from direct sales was 49% of total brachytherapy segment product revenue in 2009 compared to 47% in 2008.  In addition to competition from treatment options that enjoy favorable reimbursement rates, we believe brachytherapy seed revenue is affected by disruptive pricing from other brachytherapy providers and uncertainties surrounding reimbursement as discussed below.  The average selling price of the TheraSeed® device sold directly to hospitals and physicians during 2009 was comparable to the 2008 period.
 
 
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License fees increased from $877,000 in 2008 to $1.1 million in 2009, and include fees from the licensing of our TheraSphere® product, a medical device used for the treatment of liver cancer.  Licensing fees also includes fees related to the licensing of certain intellectual property related to an expandable brachytherapy delivery system that we developed. This agreement, which was executed in May 2008, provides for a minimal non-refundable initial license fee and non-refundable continuing royalties based upon sales subject to certain minimums.
 
Operating income (loss) and costs and expenses
 
Surgical Products Segment
 
Operating income excluding special items in our surgical products segment was $1.7 million in 2009 compared to $1.2 million in 2008.  Operating income in our surgical products segment included the results of NeedleTech subsequent to our acquisition on July 28, 2008.  Accordingly, NeedleTech was included in our consolidated results for all of 2009 but only for five months in 2008.
 
Our gross profit margin on products sales was 39% in 2009 compared with 41% in 2008.  A number of factors affected the comparability between the 2009 and 2008 periods.  In 2008, our gross profit and operating income was reduced by $885,000 of non-cash charges related to the acquisition of NeedleTech.  These non-cash charges were related primarily to the fair value adjustments to NeedleTech inventory at acquisition and did not recur in 2009.  Excluding these non-cash acquisition related charges, our gross profit margin on product sales was 43% in 2008.  Items affecting our gross profit margins in 2009 included, among other things, our product and sales channel mix changed subsequent to the NeedleTech acquisition, with a larger proportion of sales being made to OEM customers which generally carry lower gross profit margins relative to our other channels;  continued investments in infrastructure to address expected future growth; and pricing pressures from our customers in 2009, which we believe were at least in part caused by the general macroeconomic uncertainties.
 
Selling, general and administrative (“SG&A”) expenses in our surgical products segment was 25% of revenue in 2009 compared with 28% in 2008. The decline in SG&A as a percentage of revenue is due to the increasing scale of our surgical products segment, partially offset by the change in method of allocating our corporate costs.  We now allocate corporate costs based on the relative revenue of each of our two business segments.  Because our surgical products segment comprised more of our consolidated revenue in the 2009 periods, primarily due to the inclusion of NeedleTech in our consolidated results, corporate costs allocated to our surgical products segment increased by $1.2 million in 2009 from 2008.
 
Amortization of purchased intangibles increased by $1.0 million in 2009 from 2008.  This is primarily due to the inclusion of amortization related to NeedleTech purchased intangibles for a full year in 2009.  We also recorded amortization expense related to our tradenames intangible assets totaling $324,000 in 2009.  We did not record any tradename amortization in 2008.  Amortization of our tradenames intangible assets resulted from our reassessment of their useful lives during our impairment testing at December 31, 2008.
 
Operating income in our surgical products business in 2009 was also affected by increased investments in our research and development (“R&D”) program.  R&D expenses increased $927,000 in 2009 from 2008.  Our R&D program was launched in the second half of 2008.
 
During 2009 we began developing a new, corporate wide Enterprise Resource Planning (“ERP”) information technology system.  As our ERP system was under development during 2009, we capitalized certain internal costs associated with its development, totaling $247,000 in our surgical products segment.  These internal costs consisted primarily of employee payroll and related expenses.  Upon completion of the ERP system development at each location, these development costs will no longer be capitalized but will be charged as operating expenses.
 
Sale of asset held for sale in 2008
 
We completed the sale of our Oak Ridge facility in July 2008. This facility was previously classified as a long-term asset held for sale on our consolidated balance sheet. As part of this transaction, the facility was sold and the underlying land sublease was terminated. The significant portion of the present value of the future payments due under that sublease was previously classified as a long-term contract termination liability in our consolidated balance sheet. The $142,000 gain realized from the completion of the sale in July 2008, including the termination of the sublease, was recognized as an adjustment to the carrying value of the asset held for sale in 2008.
 
 
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Impairment of goodwill and tradenames in 2008
 
Goodwill and intangible assets with indefinite lives are not amortized to expense and must be reviewed for impairment annually or more frequently if events or changes in circumstances indicate that such assets might be impaired. The first step of the impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill and intangible assets with indefinite lives. If fair value exceeds book value, goodwill is considered not impaired, and the second step of the impairment test is not required. If book value exceeds fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. For this step the implied fair value of the goodwill is compared with the book value of the goodwill. If the book value amount of the goodwill exceeds the implied fair value of the goodwill, an impairment loss would be recognized in an amount equal to that excess. Any loss recognized cannot exceed the carrying amount of goodwill. After an impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis. Subsequent reversal of a previously recognized impairment loss is prohibited once the measurement of that loss is completed.
 
When we have goodwill or other intangible assets not subject to amortization recorded in our consolidated balance sheet, we perform impairment testing at the reporting unit level.  A reporting unit is the same as, or one level below, an operating segment.  Our annual impairment testing is typically performed during the fourth quarter of each year, which coincides with the timing of our annual budgeting and forecasting process.  We also make judgments about goodwill and other intangible assets not subject to amortization whenever events or changes in circumstances indicate that impairment in the value of such asset recorded on our consolidated balance sheet may exist. The timing of an impairment test may result in charges to our consolidated statements of operations in future reporting periods that could not have been reasonably foreseen in prior periods.
 
In order to estimate the fair value of goodwill and other intangible assets not subject to amortization, we typically prepare discounted cash flow analyses (“income approach”) and comparable company market multiples analyses (“market approach”) to determine the fair value of our reporting units.
 
For the income approach, we project future cash flows for each reporting unit. This approach requires significant judgments including the projected net cash flows, the weighted average cost of capital (“WACC”) used to discount the cash flows and terminal value assumptions. We derive the assumptions related to cash flows primarily from our internal budgets and forecasts.  These budgets and forecasts include information related to our current and future products, revenues, capacity, operating costs, and other information.  All such information is derived in the context of our long-term operational strategies.  The WACC and terminal value assumptions are based on the capital structure, cost of capital, inherent business risk profiles, and industry outlooks for each of our reporting units, and for our Company on a consolidated basis.
 
For the market approach, we identify reasonably similar public companies for each of our reporting units, analyze the financial and operating performance of these similar companies relative to our financial and operating performance, calculate market multiples primarily based on the ratio of Business Enterprise Value (“BEV”) to revenue and BEV to earnings before interest, taxes, depreciation and amortization (“EBITDA”), adjust such multiples for differences between the similar companies and our reporting units, and apply the resulting multiples to the fundamentals of our reporting units to arrive at an indication of fair value.
 
To assess the reasonableness of our valuations under each method, we reconcile the aggregate fair values of our reporting units to our market capitalization.
 
In conjunction with our goodwill and intangible asset impairment assessment performed in the fourth quarter of 2008,  we determined that all of our goodwill was impaired and that a portion of our tradenames intangible asset was impaired.  These impairment charges were recorded in the fourth quarter of 2008.  A summary of impairment charges by segment follows (amounts in thousands):
 
   
Goodwill
   
Tradenames
   
Total
 
Surgical products segment
  $ 65,283     $ 2,515     $ 67,798  
Brachytherapy seed segment
    2,578             2,578  
   Total impairment charges in 2008
  $ 67,861     $ 2,515     $ 70,376  
 
 
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Our market capitalization declined significantly in the fourth quarter of 2008, along with the significant declines in the overall market value of all of the major stock markets in the United States and around the world.  We considered our market capitalization when we developed the appropriate discount rates and comparable company market multiples for purposes of estimating the fair value of our reporting units.  The significant decline in our market capitalization resulted in discount rates that were considerably higher, and comparable company market multiples that were considerably lower, than the discount rates and comparable company market multiples we previously considered appropriate.  The most significant assumption leading to our impairment charges in the fourth quarter of 2008 was the various discount rates for our reporting units, all of which exceeded 20% at that point in time.  We attempted to identify the underlying reasons for this circumstance.  We considered many factors, including: the conditions of the companies in our sectors; unusual short selling or other unusual activity in the trading of our common stock; and whether the overall general economic outlook and stock market declines could be considered as “temporary.”  We were unable to identify any of these factors as directly affecting the decline in our market capitalization.  The long-term expectations for our reporting units did not materially change during the period.  We concluded that the significant increase in our discount rates and decrease in our comparable company market multiples was a result of the increased risk associated with the distressed equity and credit markets generally, especially as these factors relate to a small company such as ours.  In addition, we believe the increasing prevalence of shareholders and investors trading securities outside of traditional stock exchanges contributes to share price volatility, especially over the short term.  Finally, the scarcity of capital, especially for smaller companies such as ours, affects the risks associated with investments in its common stock and its share price.
 
In connection with our goodwill and tradenames impairment testing in the fourth quarter of 2008, we also assessed the estimated useful lives of our tradenames.  At December 31, 2008, we determined that current facts and circumstances no longer supported an indefinite life for our tradenames intangible asset.  In considering all of the facts and circumstances at that time, including the increased risk associated with our businesses as perceived by investors, the distressed general equity and credit markets, especially as these factors relate to smaller companies such as ours, and the significant economic uncertainties caused by the worsening overall economic conditions, we concluded that an indefinite life for our tradenames intangible assets was no longer supportable.  We also considered changes to our terminal value assumptions in our estimate of fair value for each reporting unit, which affected assumptions beyond year 10 in our cash flow forecasts.  Accordingly, we estimated that the remaining useful life of the recorded amount of our tradenames was 10 years, and we began to amortize tradenames over 10 years beginning in 2009. Prior to December 31, 2008, we estimated that our tradenames intangible assets had indeterminate lives and, accordingly, were not subject to amortization.
 
We also review long-lived assets, including our intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We group these assets at the lowest level that we could reasonably estimate the identifiable cash flows. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of long-lived assets to the future undiscounted net cash flows expected to be generated by these assets. If the carrying amounts exceed the future undiscounted cash flows, then the impairment recognized is the amount by which the carrying amount of the assets exceeds their fair value. As a result of the impairment indicators related to goodwill and tradenames, we tested our long-lived assets for impairment at December 31, 2008, and determined that there was no impairment.
 
Non-operating income/expense
 
Interest income decreased from $1.1 million in 2008 to $25,000 in 2009 due to significantly lower yields on our investment portfolio.  During 2008 we had significant investments in auction rate securities.  These investments provided relatively higher returns than we experienced in 2009, but they also turned out to be illiquid and riskier than expected.  We liquidated our auction rate securities in late 2008 and early 2009 at full value and without incurring any losses to principal.  However, due to the uncertainties and risks inherent in the current investment and credit markets, our investment portfolio in 2009 was much more conservatively invested than it was in 2008.
 
Interest expense was $865,000 in 2009 compared to $841,000 in 2008.  We maintained higher weighted average outstanding balances under our credit facility during 2009.  This was offset by a lower effective interest rate.  Our weighted average effective interest rate was 3.1% at December 31, 2009.  In addition, fair value adjustments related to our interest rate swaps are included in interest expense in 2009.  Such fair value adjustments are unrealized losses and totaled $80,000 in 2009.
 
Income tax expense
 
Our effective income tax rate was 37% in 2009.   Our effective income tax rate for 2008 was a benefit of 7%. These rates include federal and state income taxes.  Our effective income tax rate in 2008 was significantly affected by our non-cash impairment charges of goodwill and tradenames. The majority of these impairment charges were not deductible for income tax purposes and, accordingly, the associated tax benefit was not significant.
 
 
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Critical Accounting Policies and Estimates
 
The preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The SEC defines “critical accounting policies” as those that require application of our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The following is not intended to be a comprehensive list of our accounting policies. Our significant accounting policies are more fully described in the notes to our consolidated financial statements. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for our judgment in their application. The accounting policies described below are those which we believe are most critical to aid in fully understanding and evaluating our reported financial results, and are areas in which our judgment in selecting an available alternative might produce a materially different result. 
 
Marketable securities. We review our investments in marketable securities for impairment based on both quantitative and qualitative criteria that include the extent to which cost exceeds market value, the duration of any market decline, our intent and ability to hold to maturity or expected recovery, and the creditworthiness of the issuer. We perform research and analysis, and monitor market conditions to identify potential impairments.
 
Due to the severe volatility and disruptions related to the U.S. and global investment and credit markets, we are exposed to the risk of changes in fair value of our marketable securities in future periods, which may cause us to take impairment charges that we do not currently anticipate. While we will continue to research, analyze and monitor our investments, we cannot predict what the effect of current investment and credit market circumstances might have on our portfolio going forward. You can find more information related to the valuation of our marketable securities in Note E in the accompanying consolidated financial statements, Liquidity and Capital Resources in Management’s Discussion and Analysis, and Item 7A, Quantitative and Qualitative Disclosures About Market Risk, all of which are included in this report.
 
Property and equipment. Property and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of such assets. Our estimates can result in differences from the actual useful lives of certain assets. The significant portion of property and equipment includes cyclotrons, which are utilized in our brachytherapy business, and manufacturing buildings. As of December 31, 2010, we owned and operated eight cyclotrons, the first of which entered service in 1998. The estimated service life of our cyclotron equipment is 15 years.   The estimated service life of our buildings is 30 years.
 
We will continue to periodically examine estimates used for depreciation for reasonableness. If we determine that the useful life of property or equipment should be shortened or lengthened, depreciation expense would be adjusted accordingly for the remaining useful lives of the identified assets.
 
We assess the impairment of our depreciable assets (including property, equipment, and intangible assets subject to amortization) whenever events or circumstances indicate that such assets might be impaired. In the event the expected undiscounted future cash flow attributable to the asset is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. The estimation of fair value, whether in conjunction with an asset to be held and used or with an asset held for sale, also involves judgment. It is possible that our estimates of fair value may change and impact our financial condition and results of operations. As a result of the impairment indicators related to goodwill in the fourth quarter of 2008, we performed an assessment of our long-lived assets and determined that there was no impairment. See Impairment of goodwill and tradenames in 2008 above under Results of Operations.
 
Goodwill and other intangible assets.  Goodwill and intangible assets with indefinite lives are not amortized to expense and must be reviewed for impairment annually or more frequently if events or changes in circumstances indicate that such assets might be impaired. The first step of the impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill and intangible assets with indefinite lives. If fair value exceeds book value, goodwill is considered not impaired, and the second step of the impairment test is not required. If book value exceeds fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. For this step the implied fair value of the goodwill is compared with the book value of the goodwill. If the carrying amount of the goodwill exceeds the implied fair value of the goodwill, an impairment loss would be recognized in an amount equal to that excess. Any loss recognized cannot exceed the carrying amount of goodwill. After an impairment loss is recognized, the adjusted carrying amount of goodwill is its new accounting basis. Subsequent reversal of a previously recognized impairment loss is prohibited once the measurement of that loss is completed.
 
 
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When we have goodwill or other intangible assets not subject to amortization recorded in our consolidated balance sheet, we perform impairment testing at the reporting unit level.  A reporting unit is the same as, or one level below, an operating segment.  Our annual impairment testing is typically performed during the fourth quarter of each year, which coincides with the timing of our annual budgeting and forecasting process. We also make judgments about goodwill and other intangible assets not subject to amortization whenever events or changes in circumstances indicate that impairment in the value of such asset recorded on our consolidated balance sheet may exist. The timing of an impairment test may result in charges to our consolidated statements of operations in future reporting periods that could not have been reasonably foreseen in prior periods.
 
In order to estimate the fair value of goodwill and other intangible assets not subject to amortization, we typically prepare discounted cash flow analyses (“income approach”) and comparable company market multiples analyses (“market approach”) to determine the fair value of our reporting units.
 
For the income approach, we project future cash flows for each reporting unit. This approach requires significant judgments including the projected net cash flows, the weighted average cost of capital (“WACC”) used to discount the cash flows and terminal value assumptions. We derive the assumptions related to cash flows primarily from our internal budgets and forecasts.  These budgets and forecasts include information related to our current and future products, revenues, capacity, operating costs, and other information.  All such information is derived in the context of our long-term operational strategies.  The WACC and terminal value assumptions are based on the capital structure, cost of capital, inherent business risk profiles, and industry outlooks for each of our reporting units, and for our Company on a consolidated basis.
 
For the market approach, we identify reasonably similar public companies for each of our reporting units, analyze the financial and operating performance of these similar companies relative to our financial and operating performance, calculate market multiples primarily based on the ratio of Business Enterprise Value (“BEV”) to revenue and BEV to earnings before interest, taxes, depreciation and amortization (“EBITDA”), adjust such multiples for differences between the similar companies and our reporting units, and apply the resulting multiples to the fundamentals of our reporting units to arrive at an indication of fair value.
 
To assess the reasonableness of our valuations under each method, we reconcile the aggregate fair values of our reporting units to our market capitalization.
 
In conjunction with our goodwill and intangible asset impairment assessment performed in the fourth quarter of 2008,  we determined that all of our goodwill was impaired and that a portion of our tradenames intangible asset was impaired.  See Impairment of goodwill and tradenames in 2008 above under Results of Operations.
 
Other intangible assets determined to have finite lives are amortized over their useful lives using a method that is expected to reflect the pattern of its economic benefit. When a pattern of economic benefit cannot be determined, or if the straight-line method results in greater amortization, then the straight-line method is used. To date, all finite lived intangible assets have been amortized using the straight-line method. We also review finite lived intangible assets for impairment to ensure they are appropriately valued if conditions exist that indicate the carrying value may not be recoverable.
 
Allowance for doubtful accounts and returns. We make estimates and use our judgments in connection with establishing an allowance for the possibility that portions of our accounts receivable balances may become uncollectible or subject to return. Accounts receivable are reduced by this allowance. Specifically, we analyze accounts receivable in relation to customer creditworthiness, current economic trends, changes in our customer payment history, and changes in sales returns history in establishing this allowance. It is possible that these or other underlying factors could change and impact our financial position and results of operations.
 
At December 31, 2010, we had an allowance for doubtful accounts in the amount of $2.0 million related to one customer, Core Oncology. We used our judgment in determining the amount due from Core for which collection is doubtful. In making this determination, our estimates and judgment included all facts and circumstances which existed at December 31, 2010, and developments occurring through February 25, 2010 (the date we filed this Annual Report on Form 10-K). We continue to pursue collection of all amounts due to us from Core. If Core demonstrates an ability to pay any or all of the amounts previously considered doubtful, this would represent a change in our estimate. Any resulting change in estimate would in turn reduce our operating expenses in the period in which Core demonstrates an ability to pay any or all of the amounts due to us.
 
Allowance for obsolete inventory. We review inventory periodically and record an estimated allowance for inventory that has become obsolete, that has a cost basis in excess of its expected net realizable value, or that is in excess of expected requirements.  Specifically, we analyze inventory in relation to sales history, inventory turnover and days supply on hand, competing products, current economic trends, changes in our customers’ ordering histories, and historical write-offs. Our estimate is subjective and dependent on our estimates of future demand for a particular product.  If our estimate of future demand exceeds actual demand, we may have to increase the allowance for obsolete inventory for that product and record a charge to cost of product sales.
 
 
 
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Asset Retirement Obligations. We estimate the future cost of asset retirement obligations, discount that cost to its present value, and record a corresponding asset and liability in our consolidated balance sheet. The values ultimately derived are based on many significant estimates, including future decommissioning costs, inflation, cost of capital, and market risk premiums. The nature of these estimates requires us to make judgments based on historical experience and future expectations. Revisions to the estimates may be required based on such things as changes to cost estimates or the timing of future cash outlays. Any such changes that result in upward or downward revisions in the estimated obligation will result in an adjustment to the related capitalized asset and corresponding liability on a prospective basis.  Our asset retirement obligations consist primarily of decommissioning obligations related to our brachytherapy seed manufacturing equipment and facilities.
 
Share-based compensation. We account for share-based compensation in accordance with the fair value recognition provisions of guidance issued by FASB.  Under this method, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. In order to determine the fair value of stock options on the date of grant, we utilize the Black-Scholes model. Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. The risk-free interest rate and dividend yield are based on factual data derived from public sources. The expected stock-price volatility and option life assumptions require significant judgment, which makes them critical accounting estimates. Our expected volatility is based upon weightings of the historical volatility of our stock. With respect to the weighted-average option life assumption, we consider the exercise behavior of past grants and model the pattern of aggregate exercises.
 
The grant date fair value of Restricted Stock Units and Performance Restricted Stock Units (collectively, the “Stock Units”) are based on the fair value of the underlying common stock and is recognized over the requisite service period. For Stock Units containing performance conditions, the grant date fair value is adjusted each period for the number of shares ultimately expected to be issued. For Stock Units subject to discretionary performance conditions, the grant date has not been established and accordingly, the fair value of the award is updated each period for changes in the fair value of the underlying common stock. To the extent that the underlying fair value of our common stock varies significantly, and/or the number of shares issuable is determined, we may record additional compensation expense or adjust previously recognized compensation expense.
 
Accounting for income taxes. Our judgments, assumptions and estimates relative to the provision for income taxes take into account current tax laws and our interpretation of current tax laws. We must make assumptions, judgments and estimates to determine our tax provision and our deferred income tax assets and liabilities, including the valuation allowance to be recorded against a deferred tax asset. Actual operating results and the underlying amount and category of income in future years could differ materially from our current assumptions, judgments and estimates of recoverable net deferred taxes.
 
We periodically evaluate the recoverability of our deferred tax assets and recognize the tax benefit only as reassessment demonstrates that they are realizable. We evaluate the realizability of the deferred tax assets and assess the need for the valuation allowance each reporting period.  At such time, if it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance is adjusted. In the future if, based on the facts and circumstances surrounding our ability to generate adequate future taxable income, it becomes more likely than not that some or all of the deferred tax asset will not be realized, the valuation allowance may be required to be increased.
 
We review all of our tax positions. The tax benefits of uncertain tax positions are recognized only if it is more likely than not that we will be able to sustain a position taken on an income tax return. We have concluded that there were no significant uncertain tax positions as of December 31, 2010 and 2009. Our policy is to recognize accrued interest expense and penalties associated with uncertain tax positions as a component of income tax expense.
 
Contingencies.  From time to time we may be subject to various legal proceedings and claims, including, for example, disputes, disputes on agreements, employment disputes and other commercial disputes, the outcomes of which are not within our complete control and may not be known for extended periods of time. In some cases, the claimants seek damages, as well as other relief, which, if granted, could require significant expenditures. We record a liability in our consolidated financial statements for damages and/or costs related to claims, settlements and judgments where we have assessed that a loss is probable and an amount can be reasonably estimated. If the estimate of a probable loss is a range and no amount within the range is more likely, we accrue the minimum amount of the range. Legal costs associated with these matters are expensed as incurred.
 
 
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Commitments and Other Contractual Obligations
 
Contractual Obligations
 
We lease equipment and production, warehouse, office and other space under non-cancelable leases that expire at various dates through May 2013. We also have $27.0 million of borrowings outstanding under our credit facility. Our contractual obligations as of December 31, 2010 are as follows (amounts in thousands):
 
   
Total
   
Less than
1 year
   
1-3 years
   
3-5 years
   
More than
5 years
 
Obligation
                             
Operating lease obligations (1)
                             
Rental space and equipment
  $ 1,028     $ 448     $ 580     $     $  
                                         
 Borrowings under credit agreement (2)
    27,000       3,333       23,667              
 Interest payable on borrowings (3)
    1,337       772       565              
Total borrowings
    28,337       4,105       24,232              
                                         
Other obligations
    793       140       653              
                                         
Total
  $ 30,158     $ 4,693     $ 25,465     $     $  
 
(1)
Represents minimum rental payments for operating leases, one of which is subject to adjustment based on the Consumer Price Index.
(2)
Includes $5.0 million term loan payable at $3.3 million annually through June 2012, and $22.0 million outstanding under $30.0 million revolving credit facility, which matures October 2012.
(3)
Interest on outstanding borrowings under credit facility at December 31, 2010 is based on effective interest rates at December 31, 2010.
 
Letter of Credit
 
We have a letter of credit outstanding under the credit facility as of December 31, 2010 totaling $946,000. This letter of credit is related to asset retirement liabilities of long-lived assets.
 
Liquidity and Capital Resources
 
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant factors affecting the management of liquidity are: cash flows generated from operating activities, capital expenditures, operational investments to support growth (such as research and development programs), and acquisitions of businesses and technologies.
 
We have cash, cash equivalents and marketable securities of $40.6 million at December 31, 2010.  Marketable securities consisted primarily of high-credit quality corporate and municipal obligations in accordance with our investment policies. At December 31, 2009, we had $45.3 million of cash and cash equivalents. We held no marketable securities at December 31, 2009.  See Cash, Cash Equivalents and Marketable Securities below for more information.
 
Working capital was $57.1 and $59.6 million at December 31, 2010 and 2009, respectively.
 
Cash provided by operations was $7.9 million in 2010 compared to $11.6 million in 2009.  Cash provided by operations consists of net earnings, plus non-cash expenses such as depreciation, amortization, deferred income taxes, and changes in balance sheet items such as accounts receivable, inventories, prepaid expenses and payables. The decline in 2010 was primarily a result of the decline in net income; an increase in accounts receivable (net of allowances) in our brachytherapy segment resulting from increased revenue in the fourth quarter; and an increase in inventories to support growth in our surgical products segment. The timing of payments for other current liabilities had a positive effect on 2010 cash flows compared to 2009.  Finally, cash from operations in 2009 also benefited from a $1.5 million tax refund received during the year as a result of the use of an income tax loss generated in 2008.  During 2010, we had no significant remaining tax loss carryforwards and paid income taxes at our normal rates.
 
 
II-16

 
 
Capital expenditures totaled $9.1 million in 2010 and $5.0 million in 2009. The 2010 expenditures were primarily for the construction of our new specialty needle manufacturing facility and, to a lesser extent, the development of our new ERP system.  Construction of our new facility was completed in July 2010.   In the first quarter of 2010, we implemented our new ERP systems at two of our four primary locations with no significant interruptions in our day to day operations. We expect to complete the ERP implementation at our remaining locations over the next year. Looking forward, we expect our rate of 2011 capital expenditures to be less than 2010 as construction of our new needle manufacturing plant has been completed.
 
Cash used by financing activities was $3.3 million in 2010 compared to $1.9 million in 2009.  Cash used for financing activities primarily consisted of principal repayments of our outstanding borrowings, in accordance with the terms of our credit facility.  The terms of our credit facility require principal payments of $3.3 million annually through May 2012.
 
R&D expenses were $1.9 million in 2010 and $2.2 million in 2009. We expect to continue to use cash in 2011 to support growth in the surgical products segment, especially for R&D.  Looking forward, we expect R&D expense levels in 2011 to be similar to 2010.  However, R&D activities can be complex, and expense levels are also dependent upon the discovery of opportunities of which we are not currently aware.  Accordingly, R&D expenses are subject to significant variability form period to period.
 
We may also continue to use cash for increased marketing and support activities in our brachytherapy seed business, and in the pursuit of additional diversification efforts such as product development, the purchase of technologies, products or companies, and other strategic initiatives. We believe that current cash, cash equivalents, and investment balances and cash from future operations will be sufficient to meet our current short-term anticipated working capital and capital expenditure requirements. However, continued disruption and instability in the U.S. and global financial markets and worldwide economies may hinder our ability to take advantage of opportunities for long-term growth in our businesses. In the event additional financing becomes necessary, we may choose to raise those funds through other means of financing as appropriate.
 
Credit Agreement
 
We have a Credit Agreement with a financial institution which provides for up to $30 million of borrowings under a revolving credit facility (the “Revolver”) and a $10 million term loan (the “Term Loan”).  The Revolver matures on October 31, 2012 with interest payable at the London Interbank Offered Rate (“LIBOR”) plus 2.25%.  Maximum borrowings under the Revolver can be increased to $40 million with the prior approval of the lender under an accordion feature.  As of December 31, 2010, borrowings of $22.0 million and $5.0 million were outstanding under the Revolver and Term Loan, respectively, and letters of credit totaling $946,000, representing decommission funding required by the Georgia Department of Natural Resources, were outstanding under the Credit Agreement. The Term Loan is payable in thirty-six equal monthly installments of $278,000 plus interest at LIBOR plus 1.75%, through July 2012.  The Credit Agreement is unsecured but provides for a lien to be established on substantially all of our assets upon certain events of default.  The Credit Agreement contains representations and warranties, as well as affirmative, reporting and negative covenants customary for financings of this type.  Among other things, the Credit Agreement restricts the incurrence of certain additional debt and requires the maintenance of certain financial ratios, including a minimum fixed charge coverage ratio, a maximum liabilities to tangible net worth ratio, and the maintenance of minimum liquid assets of $10 million, as all such ratios and terms are defined in the Credit Agreement.
 
We amended our Credit Agreement effective as of June 30, 2010 (the “Amendment”) to, among other things, temporarily reduce the quarterly minimum fixed charge coverage ratio to accommodate the unusually high rate of capital expenditures over the previous twelve months, principally related to our new specialty needle manufacturing facility.  The amendment also provides for the exclusion of certain moving related expenses to be incurred during 2010 from the fixed charge coverage ratio and eliminates the $10 million limitation on annual capital expenditures.  The minimum fixed charge coverage ratio will gradually increase on a quarterly basis until it equals the pre-amendment ratio level for the quarterly measurement period ending March 31, 2011 and for subsequent measurement periods.  We were in compliance with all covenants, as amended, as of December 31, 2010.
 
In the event that we do not maintain the required minimum fixed charge coverage ratio or comply with other covenants under the Credit Agreement, and an event of default occurs under the Credit Agreement that is not cured, waived or otherwise addressed, the financial institution could in certain circumstances accelerate the maturity of all borrowings outstanding under the Credit Agreement and claim a lien on substantially all of our assets.  As of December 31, 2010, we had outstanding borrowings under our Credit Agreement of $27.0 million, cash and cash equivalents of $29.7 million, and marketable securities of $10.9 million.
 
We also have certain interest rate swap agreements to manage our variable interest rate exposure.  We entered into a floating to fixed rate swap with respect to the entire principal amount of the Term Loan, at a fixed interest rate of 3.27%, and a separate floating to fixed rate swap with respect to $6.0 million of the principal amount outstanding under the Revolver, at a fixed interest rate of 4.26%.  Both interest rate swaps expire on June 1, 2012.  Our weighted average effective interest rate at December 31, 2010 was 3.0%.
 
 
II-17

 
 
Cash, Cash Equivalents and Marketable Securities
 
Our cash and cash equivalents include bank deposits, money market funds, U.S. Treasury securities, and commercial paper held at a limited number of financial institutions. We review our investments in marketable securities and cash equivalents for impairment based on both quantitative and qualitative criteria that include the extent to which cost exceeds market value, the duration of any market decline, our intent and ability to hold to maturity or expected recovery, and the creditworthiness of the issuer. We perform research and analysis, and monitor market conditions to identify potential impairments.  Looking forward, we may invest our funds in higher yielding investments if those investments meet the conservative criteria established by our investment policies and the macroeconomic outlook becomes clearer.  Funds available for investment have and will continue to be utilized for our current and future expansion programs, for strategic opportunities for growth and diversification, and for installment payments on the Term Loan. As funds continue to be used for these purposes, and as interest rates continue to change, we expect interest income to fluctuate accordingly.  Due to the disruptions, volatility and uncertainties related to the U.S. and global investment and credit markets we are exposed to the risk of further changes in fair value of our cash equivalents and marketable securities in future periods, which may cause us to take impairment charges that are not currently anticipated. While we will continue to research, analyze and monitor our investments, we cannot predict what the effect of current investment and credit market circumstances might have on our portfolio going forward.
 
Medicare Developments
 
Prior to 2010, Medicare continued to reimburse for brachytherapy seeds under the “charges adjusted to costs” methodology, which is based on the actual invoiced cost of the seeds and which we sometimes refer to as a “pass-through” methodology.   Consistent with proposals that CMS attempted unsuccessfully to implement in recent years, CMS published a final hospital OPPS on November 20, 2009.  Under this fixed OPPS, which went into effect on January 1, 2010, the per seed rate at which Medicare reimburses hospitals for the purchase of seeds is fixed annually.  We sometimes refer to this system as “fixed reimbursement”.  We continue to support efforts that urge Congress and CMS to replace this “fixed reimbursement” rule by obtaining a new extension of the “pass-through” reimbursement policies which existed prior to 2010.  Fixed reimbursement policies at CMS can be expected to lead to pricing pressure from hospitals and other healthcare providers, and to have an adverse effect on our brachytherapy revenue.  The extent of the effect is impossible for us to predict, especially when fixed reimbursement policies are being introduced at a time that coincides with 1) an industry-wide decline in procedures being performed (and, as a result, a decline in demand for brachytherapy products) which is attributable, at least in part, to favorable CMS reimbursement rates enjoyed by alternative, less proven, technologies and 2) uncertainties regarding the implementation and impact of healthcare reform generally.  These factors could have an adverse effect on brachytherapy revenue.
 
 
Forward Looking and Cautionary Statements
 
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding sales, marketing and distribution efforts, ordering patterns of customers, future costs to address significant changes in demand, short term volatility of our results, our expectation regarding changes in product mix and sales channels, with sales through OEM channels generally carrying a relatively lower gross profit margin and sales through distributor channels generally carrying a somewhat higher gross profit margin, our ability to control operating expenses, effects of healthcare reform, third-party reimbursement, CMS policy, sales mix, effectiveness and continuation of non-exclusive distribution agreements, pricing for the TheraSeed® and I-Seed devices, anticipated growth in the surgical products business segment,  the increasing scale of our surgical products business, the move to a new and larger specialty needle manufacturing facility, which is expected to have higher maintenance and operating costs, future cost of sales and gross margins, R&D efforts and expenses (including our centralized, corporate-wide R&D initiative), investment in additional personnel, infrastructure and capital assets, implementation of a new Enterprise Resource Planning system, future SG&A expenses, potential new products and opportunities, future results in general, plans and strategies for continuing diversification, valuation of marketable securities and cash equivalents we may hold, and the sufficiency of our liquidity and capital resources.
 
 
II-18

 
 
Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the following factors. You should not consider this list to be a complete statement of all potential risks and uncertainties:
 
 
Changes in the U.S. healthcare industry and regulatory environment;
 
competition;
 
new product development cycles;
 
development and growth of new applications within our markets;
 
changes in FDA regulatory approval processes;
 
effectiveness and execution of marketing and sales programs, including those of our distributors;
 
changes in third-party reimbursement, including CMS and private payors;
 
potential changes in product pricing;
 
changes in costs and availability of materials and other operating costs;
 
continued acceptance of our products in the marketplace;
 
changes in demand for products;
 
our ability to meet customer demands and/or the need to incur additional costs and inefficiencies to meet such demand;
 
a reduction in the number of procedures utilizing our devices caused by cost containment pressures, alternative therapies, or  by other reasons;
 
our ability to successfully identify, consummate and integrate strategic acquisitions;
 
our ability to capitalize on opportunities for growth;
 
increased costs or product delays required to comply with existing and changing regulations applicable to our businesses, operations  and products;
 
effectiveness of implementation of our new ERP system;
 
ability to realize our estimate of fair value upon sale or liquidation of cash, cash equivalents and marketable securities that we may hold;
 
retention of key employees;
 
damage to one or more of our facilities;
 
volatility in U.S. and global financial markets;
 
substantial defaults in payments or a material reduction in purchases by, or loss of, a large customer;
 
changes in circumstances that could impair our intangible assets;
 
new or revised tax legislation or challenges to our tax positions;
 
changes in accounting principles generally accepted in the United States of America;
 
general economic conditions, including changes in the financial markets that may affect the availability and cost of credit to us, our customers or our suppliers; and
 
the other factors set forth or incorporated by reference under “Risk Factors”.
 
  These and other risks and uncertainties are described herein and in other information contained in our publicly available SEC filings and press releases.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements were first made. Except to the extent required by federal securities laws, we undertake no obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.
 
 
II-19

 
 
Quarterly Results
 
The following table sets forth certain statement of operations data for each of the last eight quarters. This unaudited quarterly information has been prepared on the same basis as the annual audited information presented elsewhere in this Form 10-K, reflects all adjustments (consisting only of normal, recurring adjustments) which are, in our opinion, necessary for a fair presentation of the information for the periods covered and should be read in conjunction with the consolidated financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period. Quarterly data presented may not reconcile to totals for full year results due to rounding.
 
   
2010
   
2009
 
   
First
Qtr
   
Second
Qtr
   
Third
Qtr
   
Fourth
Qtr
   
First
Qtr
   
Second
Qtr
   
Third
Qtr
   
Fourth
Qtr
 
   
(Amounts in thousands, except per share data)
 
                                                 
Total revenue
  $ 20,318     $ 20,777     $ 20,412     $ 20,677     $ 20,077     $ 20,219     $ 19,344     $ 18,686  
Cost of sales
    12,471       11,953       11,919       12,812       11,370       11,082       10,783       11,718  
Gross profit
    7,847       8,824       8,493       7,865       8,707       9,137       8,561       6,968  
Selling, general and administrative
    5,904       6,118       5,889       6,102       6,029       5,509       5,607       4,875  
Amortization of purchased intangibles
    846       805       728       698       871       871       853       846  
Research and development
    440       414       529       559       603       588       521       448  
Loss on sale of assets
          39       72                   2       1        
Other income (expense)
    (287 )     (161 )     (230 )     95       (120 )     (149 )     (354 )     (214 )
Earnings before income taxes
    370       1,287       1,045       601       1,084       2,018       1,225       585  
Income tax expense
    226       505       274       228       477       747       426       187  
Net earnings
  $ 144     $ 782     $ 771     $ 373     $ 607     $ 1,271     $ 799     $ 398  
                                                                 
Earnings per share:
                                                               
Basic
  $ 0.00     $ 0.02     $ 0.02     $ 0.01     $ 0.02     $ 0.04     $ 0.02     $ 0.01  
Diluted
  $ 0.00     $ 0.02     $ 0.02     $ 0.01     $ 0.02     $ 0.04     $ 0.02     $ 0.01  
Weighted average shares outstanding:
                                                               
Basic
    33,213       33,266       33,276       33,280       33,104       33,145       33,161       33,176  
Diluted
    33,362       33,374       33,407       33,508       33,133       33,198       33,244       33,304  
 
Inflation
 
We do 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 our results of operations.
 
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
 
We have exposure to market risk as a result of changing interest rates on a portion of our borrowings under our Credit Agreement.  We have outstanding borrowings of $5 million under our Credit Agreement in the form of a Term Loan that is payable in equal monthly installments of approximately $278,000 plus interest through July 2012.  Interest is payable at LIBOR plus 1.75%.  We have entered into a floating to fixed rate swap agreement that expires in July 2012 with respect to the outstanding amount of the Term Loan at a fixed interest rate of 3.27%.  We also have outstanding borrowings of $22 million under the Revolver component of our Credit Agreement.  The Revolver matures in October 2012. Interest on outstanding borrowings under the Revolver is payable at LIBOR plus 2.25%. We entered into a separate floating to fixed rate swap that expires in July 2012 with respect to $6 million of the principal amount outstanding under the Revolver at a fixed interest rate of 4.26%.   Accordingly, we are exposed to changes in interest rates on outstanding borrowings in excess of $6 million under our Revolver.  A hypothetical 1% change in the interest rate applicable to the borrowings in excess of $6 million would result in an increase or decrease in interest expense of $160,000 per year before income taxes, assuming the same level of borrowings.
 
 
II-20

 
 
We review our investments in marketable securities and cash equivalents for impairment based on both quantitative and qualitative criteria that include the extent to which cost exceeds market value, the duration of any market decline, our intent and ability to hold to maturity or expected recovery, and the creditworthiness of the issuer. We perform research and analysis, and monitor market conditions to identify potential impairments. Due to the uncertainties related to the U.S. and global investment and credit markets we are exposed to the risk of further changes in fair value of our cash equivalents and marketable securities in future periods, which may cause us to take impairment charges that are not currently anticipated. While we will continue to research, analyze and monitor our investments, we cannot predict what the effect of current investment and credit market circumstances might have on our portfolio going forward.
 
Item 8. Financial Statements and Supplementary Data
 
See index to Financial Statements (Page F-1) and following pages.
 
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
 
None
 
Item 9A. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2010, the end of the period covered by this annual report.
 
Management’s Report on Internal Control over Financial Reporting
 
We are responsible for preparing our annual consolidated financial statements and for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
 
 
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
 
 
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
 
 
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
 
All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 
 
We assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making our assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on that assessment, we believe that, as of December 31, 2010, our internal control over financial reporting is effective based on those criteria.
 
 
II-21

 
 
Changes in Internal Control over Financial Reporting
 
During 2010, we have continued development of a corporate-wide Enterprise Resource Planning (“ERP”) system.  Our new ERP system is expected to standardize and automate business processes, to improve operational and financial performance, and to enhance internal controls.  We implemented our new ERP system at two of our four primary locations during the first quarter of 2010. The implementation of our new ERP system at these two locations has resulted in changes to our business processes and internal controls over financial reporting.  Our new ERP system has not yet been implemented at our other locations.
 
No changes in our internal control over financial reporting were identified as having occurred during the quarter ended December 31, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Further changes in our internal control over financial reporting are expected as we complete the implementation of our new ERP system at our remaining locations.
 
 Item 9B. Other Information
 
None.
 
 
II-22

 
 
PART III
 
Item 10. Directors, Executive Officers and Corporate Governance*
 
We have adopted a Code of Ethics for the Chief Executive Officer and Senior Financial Officers and a Code of Conduct for all employees, including Directors. These codes are available on our website at http://www.theragenics.com. These codes are also available without charge upon request directed to Investor Relations, Theragenics Corporation, 5203 Bristol Industrial Way, Buford, Georgia 30518. We intend to disclose amendments or waivers of these codes with respect to the Chief Executive Officer, Senior Financial Officers or Directors required to be disclosed by posting such information on our website.
 
Our Chief Executive Officer is required to certify to the New York Stock Exchange each year that she was not aware of any violation by us of the Exchange’s corporate governance listing standards. Our Chief Executive Officer made her annual certification to that effect to the New York Stock Exchange on June 1, 2010. This report includes the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a-14 and Section 302 of the Sarbanes-Oxley Act of 2002.
 
Item 11. Executive Compensation*
 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*
 
Item 13. Certain Relationships and Related Transactions, Director Independence*
 
Item 14. Principal Accounting Fees and Services*
 
*           Except as set forth above, the information called for by Items 10, 11, 12, 13 and 14 is omitted from this Report and is incorporated by reference to the definitive Proxy Statement to be filed by us not later than 120 days after December 31, 2010, the close of our fiscal year.
 
 
III-1

 
 
PART IV
 
Item 15. Exhibits and Financial Statement Schedules
 
(a)         The following documents are filed as part of this Report.
 
 
1.
Financial Statements.
 
See index to financial statements on page F-1.
 
 
2.
Financial Schedules.
 
See financial statement schedule on page S-2.
 
 
IV-1

 
 
Exhibits
 
3.1
Certificate of Incorporation as amended through July 29, 1998 (incorporated by reference to Exhibit 3.1 of the Company’s report on Form 10-Q for the quarterly period ended June 30, 1998)
 
3.2
Amended and Restated By-Laws (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed August 17, 2007)
 
4.1
See Exhibits 3.1 - 3.2 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
See Exhibit 10.20
 
10.1
License Agreement with University of Missouri, as amended (incorporated by reference to Exhibit 10.3 of the Company’s registration statement on Form S-1, File No. 33-7097, and post-effective amendments thereto)
 
10.2
Reassignment and Release Agreement among the Company, John L. Russell, Jr., and Georgia Tech Research Institute (incorporated by reference to Exhibit 10.8 of the Company’s registration statement on Form S-1, File No. 33-7097, and post-effective amendments thereto)
 
10.3
Agreement with Nordion International Inc. (incorporated by reference to the Company’s report on Form 8-K dated March 23, 1995)
 
10.4
Amended and Restated Credit Agreement dated May 27, 2009 among the Company, C.P. Medical Corporation, Galt Medical Corp., NeedleTech Products, Inc. and Wachovia Bank, National Association, together with related Term Loan Note and Amended, Restated and Consolidated Line of Credit Note (incorporated by reference to Exhibit 10.1 of the Company’s report on Form 10-Q for the quarterly period ended July 5, 2009)
 
10.5
First Amendment dated August 4, 2010 and effective as of June 30, 2010 to the Amended and Restated Credit Agreement dated May 27, 2009 among the Company, C.P. Medical Corporation, Galt Medical Corp., NeedleTech Products, Inc. and Wells Fargo Bank, National Association, successor in interest by merger to Wachovia Bank, National Association (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed August 6, 2010)
 
10.6
Theragenics Corporation 1995 Stock Option Plan* (incorporated by reference to Exhibit 10.1 of the Company’s common stock registration statement on Form S-8, file no. 333-15313)
 
10.7
1997 Stock Incentive Plan* (incorporated by reference to Appendix B of the Company’s Proxy Statement for its 1997 Annual Meeting of Stockholders filed on Schedule 14A)
 
10.8
Theragenics Corporation 2000 Stock Incentive Plan* (incorporated by reference to Exhibit 10.16 of the Company’s report on Form 10-K for the year ended December 31, 1999)
 
10.9
Employment Agreement dated April 13, 2000 of M. Christine Jacobs* (incorporated by reference to Exhibit 10.1 of the Company’s report on Form 10-Q for the quarterly period ended March 31, 2000)
 
10.9A
First Amendment dated July 8, 2003 to Executive Employment Agreement for M. Christine Jacobs* (incorporated by reference to Exhibit 10.1 of the Company’s report on Form 10-Q for the quarterly period ended June 30, 2003)
 
10.9B
Amendment to Employment Agreement dated August 8, 2006, between Theragenics Corporation and M. Christine Jacobs* (incorporated by reference to Exhibit 10.3 of the Company’s report on Form 10-Q for the quarterly period ended July 2, 2006)
 
10.9C
Amendment to Employment Agreement dated December 31, 2008, between Theragenics Corporation and M. Christine Jacobs* (incorporated by reference to Exhibit 10.11C of our report on Form 10-K for the year ended December 31, 2008)
 
10.10
Employment Agreement dated January 1, 1999 of Bruce W. Smith* (incorporated by reference to Exhibit 10.22 of the Company’s report on Form 10-K for the year ended December 31, 1998)
 
10.10A
Amendment to Executive Employment Agreement dated June 29, 1999 for Bruce W. Smith* (incorporated by reference to Exhibit 10.18 of the Company’s report on Form 10-K for year ended December 31, 2002)
 
10.10B
Second Amendment dated June 15, 2001 to Executive Employment Agreement for Bruce W. Smith* (incorporated by reference to Exhibit 10.19 of the Company’s report on Form 10-K for year ended December 31, 2002)
 
 
IV-2

 
 
10.10C
Third Amendment dated September 3, 2002 to Executive Employment Agreement for Bruce W. Smith* (incorporated by reference to Exhibit 10.20 of the Company’s report on Form 10-K for year ended December 31, 2002)
 
10.10D
Fourth Amendment dated May 28, 2003 to Executive Employment Agreement for Bruce W. Smith* (incorporated by reference to Exhibit 10.2 of the Company’s report on Form 10-Q for the quarterly period ended June 30, 2003)
 
10.10E
Fifth Amendment to Executive Employment Agreement for Bruce W. Smith* (incorporated by reference to Exhibit 10.15E of the Company’s report on Form 10-K for the year ended December 31, 2005)
 
10.10F
Amendment to Employment Agreement dated December 31, 2008, between Theragenics Corporation and Bruce W. Smith* (incorporated by reference to Exhibit 10.11C of our report on Form 10-K for the year ended December 31, 2008)
 
10.11
Forms of Option Award for grants prior to 2007* (incorporated by reference to Exhibit 10.22 of the Company’s report on Form 10-K for the year ended December 31, 2004)
 
10.12
Advisor to the Chief Executive Officer Agreement dated February 3, 2011 with John Herndon*
 
10.13
Form of Directors and Officers Indemnification Agreement* (incorporated by reference to Exhibit 10.28 of the Company’s report on Form 10-K for the year ended December 31, 2003)
 
10.14
Form of Restricted Stock Agreement for directors as of May 2005* (incorporated by reference to Exhibit 10.1 of the Company’s report on Form 10-Q for the quarterly period ended July 3, 2005)
 
10.15
Employment Agreement between the Company and Francis J. Tarallo dated August 10, 2005* (incorporated by reference to Exhibit 10.5 of the Company’s report on Form 10-Q for the quarterly period ended July 3, 2005)
 
10.15A
Amendment to Employment Agreement dated December 31, 2008, between Theragenics Corporation and Francis J. Tarallo*
 
10.16
Theragenics Corporation Incentive Stock Option Award for 2007 grants* (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated February 20, 2007)
 
10.17
Restricted Stock Award Pursuant to the Theragenics Corporation 2006 Stock Incentive Plan for 2007 grants* (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated February 20, 2007)
 
10.18
Theragenics Corporation Amended and Restated 2007 Long-Term Cash Incentive Plan* (incorporated by reference to Exhibit 10.24 of the Company’s Form 10-K for the year ended December 31, 2007)
 
10.19
Employment Agreement dated May 6, 2005 by and between the Company and Patrick Ferguson* (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed May 12, 2005)
 
10.20
Theragenics Corporation 2006 Stock Incentive Plan* (incorporated by reference to Appendix A to the Company’s definitive proxy statement for its May 9, 2006 annual meeting of stockholders filed with the Securities and Exchange Commission on March 27, 2006).
 
10.20A
First Amendment to Theragenics Corporation 2006 Stock Incentive Plan* (incorporated by reference to Exhibit 18.1 on Form 8-K filed November 13, 2006)
 
10.21
Rights Agreement dated February 14, 2007 between the Company and Computershare Investor Services LLC (incorporated by reference to Exhibit 99.1 of the Company’s registration statement on Form 8-A/A filed February 16, 2007)
 
10.22
Theragenics Corporation Incentive Stock Option Award for 2008, 2009 and 2010 grants* (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated February 25, 2008)
 
10.23
Restricted Stock Award for 2008, 2009 and 2010 grants, pursuant to the Theragenics Corporation 2006 Stock Incentive Plan* (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K dated February 25, 2008)
 
10.24
Theragenics Corporation 2008 Long-Term Cash Incentive Plan* (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K dated February 25, 2008)
 
10.25
Stock Purchase Agreement dated as of July 16, 2008 with respect to NeedleTech Products, Inc. by and among Theragenics Corporation, as Purchaser, Ronald Routhier, as Sellers’ Representative, the individual Stockholders of NeedleTech Products, Inc. listed on Schedule 1 to the Agreement, as Sellers, and Rockland Trust Company, as Special Fiduciary and Trustee (incorporated by reference to Exhibit 2.1 of the Company’s form 8-K filed on July 21, 2008).
 
10.26
Employment Agreement between NeedleTech Products, Inc. and Ronald Routhier, dated as of July 28, 2008* (incorporated by reference to Exhibit 10.1 of the Company’s form 8-K filed on July 31, 2008).
 
 
IV-3

 
 
10.26A
Amendment to Employment Agreement dated December 31, 2008, between NeedleTech Products, Inc. and Ronald Routhier*
 
10.27
Employment Agreement between NeedleTech Products, Inc. and Russell Small, dated as of July 28, 2008* (incorporated by reference to Exhibit 10.2 of the Company’s form 8-K filed on July 31, 2008)
 
10.27A
Amendment to Employment Agreement dated December 31, 2008, between NeedleTech Products, Inc. and Russell Small*
 
10.28
Employment Agreement between CP Medical Corporation and Janet Zeman dated August 6, 2008 (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q filed on November 6, 2008)
 
10.28A
Amendment to Employment Agreement dated December 31, 2008, between CP Medical Corporation and Janet Zeman*
 
10.29
Theragenics Corporation 2009 Long-Term Cash Incentive Plan* (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated March 4, 2009)
 
10.30
Standard Form Commercial Lease between Chartier-Tate, LLC and NeedleTech Products, Inc. dated April 19, 2006 and Amendment dated May 22, 2008 (incorporated by reference to Exhibit 10.40 of the Company’s Form 10-K for the year ended December 31, 2008)
 
10.31
Employment Agreement between Theragenics Corporation and Joseph Plante, dated as of January 6, 2011*
 
10.32
Theragenics Corporation Cash Incentive Plan*
 
23.1
Consent of Dixon Hughes PLLC
 
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
 
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
 
32.1
Certification of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
32.2
Certification of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
* Management contract or compensatory plan.
 
 
IV-4

 
 
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: February 25, 2011
     
Buford, 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
 
2/25/11
M. Christine Jacobs
 
(Principal Executive Officer)
   
   
President and Chairman
   
         
/s/ Francis J. Tarallo
   
Chief Financial Officer (Principal Financial
 
2/25/11
Francis J. Tarallo
 
and Accounting Officer) and Treasurer
   
         
 /s/ Kathleen A. Dahlberg    
Director
 
2/25/11
Kathleen A. Dahlberg
       
         
/s/ K. Wyatt Engwall
   
Director
 
2/25/11
K. Wyatt Engwall
       
         
 /s/ John V. Herndon
 
 
Director
 
2/25/11
John V. Herndon
       
         
/s/ C. David Moody, Jr.
 
 
Director
 
2/25/11
C. David Moody, Jr.
       
         
/s/ Peter A.A. Saunders
 
 
 
Director
 
2/25/11
Peter A. A. Saunders
       
 
 
IV-5

 

THERAGENICS CORPORATION®
 
TABLE OF CONTENTS
 
   
Page
     
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
F-2
     
CONSOLIDATED FINANCIAL STATEMENTS
   
     
Consolidated Statements of Operations and Comprehensive Earnings (Loss) for each of the three years in the period ended December 31, 2010
 
F-3
     
Consolidated Balance Sheets as of December 31, 2010 and 2009
 
F-4
     
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2010
 
F-5
     
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2010
 
F-7
     
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
F-9
     
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE
 
S-1
     
Schedule II - Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2010
 
S-2
 
 
F-1

 
 
Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and
Shareholders of Theragenics Corporation
 
We have audited the accompanying consolidated balance sheets of Theragenics Corporation and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations and comprehensive earnings (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
 
The Company was not required to have, nor were we engaged to perform, an examination of management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, included in Management’s Report on Internal Control over Financial Reporting, referred to in Item 9A of the Company’s Annual report on Form 10-K, and, accordingly, we do not express an opinion thereon.
 
/s/ DIXON HUGHES PLLC
 
Atlanta, Georgia
February 25, 2011
 
 
F-2

 

Theragenics Corporation and Subsidiaries
 
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE EARNINGS (LOSS)
 
 Year ended December 31,
 
(Amounts in thousands, except per share data)
 
   
2010
   
2009
   
2008
 
Revenue
                 
Product sales
  $ 80,683     $ 77,151     $ 66,447  
License and fee income
    1,501       1,175       911  
      82,184       78,326       67,358  
Cost of sales
    49,155       44,953       36,264  
Gross profit
    33,029       33,373       31,094  
                         
Operating expenses
                       
Selling, general and administrative
    24,013       22,020       20,500  
Amortization of purchased intangibles
    3,077       3,441       2,410  
Research and development
    1,942       2,160       1,300  
Change in estimated value of asset held for sale
                (142 )
Impairment of goodwill and tradenames
                70,376  
Loss (gain) on sale of equipment
    111       3       (5 )
      29,143       27,624       94,439  
                         
Earnings (loss) from operations
    3,886       5,749       (63,345 )
                         
Other income (expense)
                       
Interest income
    99       25       1,065  
Interest expense
    (976 )     (865 )     (841 )
Other, net
    294       3       53  
      (583 )     (837 )