UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
[ ] For the quarterly period ended September 30, 2002
[ ] Transition period pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from __________ to __________.
0-20727
(Commission File Number)
NOVOSTE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 59-2787476
------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3890 STEVE REYNOLDS BLVD.
NORCROSS, GA 30093
------------ -----
(Address of Principal Executive Offices) (Zip Code)
(770) 717-0904
(Registrant's telephone, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
(Item 1) Yes X No
--------------- ----------------
(Item 2) Yes X No
----------------- ----------------
As of October 31, 2002 there were 16,186,373 shares of the Registrant's Common
Stock outstanding.
NOVOSTE CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE NO
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2002 (unaudited) 3
and December 31, 2001
Consolidated Statements of Operations (unaudited) for the three and nine 4
months ended September 30, 2002 and 2001
Consolidated Statements of Cash Flows (unaudited) for the nine 5
months ended September 30, 2002 and 2001
Notes to Unaudited Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial 11-19
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3 Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
CERTIFICATIONS 24-25
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NOVOSTE CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 2002 December 31, 2001
------------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 18,119,111 $ 5,878,286
Short-term investments 15,251,150 31,683,627
Accounts receivable, net of allowance of
$1,108,892 and $878,424 respectively 9,205,583 16,130,721
Inventory, net 3,857,748 3,746,433
Prepaid expenses and other current assets 881,217 1,023,137
---------------- ----------------
Total current assets 47,314,809 58,462,204
---------------- ----------------
Property and equipment, net 10,190,613 9,886,711
Radiation and transfer devices, net 11,706,885 13,534,356
Receivable from officers 279,829 144,025
Other assets 1,048,818 883,311
---------------- ----------------
Total assets $ 70,540,954 $ 82,910,607
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,596,320 $ 4,026,866
Accrued expenses 9,186,296 10,917,277
Unearned revenue 1,571,624 2,786,476
Capital lease obligations 69,986 249,212
---------------- ----------------
Total current liabilities 13,424,226 17,979,831
---------------- ----------------
Long-term liabilities
Capital lease obligations 182,852 203,135
---------------- ----------------
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $.01 par value, 25,000,000 shares
authorized; 16,351,953 and 16,265,081 shares issued, 163,520 162,651
Additional paid-in capital 187,478,589 187,357,044
Accumulated other comprehensive income (loss) 51,464 (408,139)
Accumulated deficit (129,819,404) (121,383,528)
---------------- ----------------
57,874,169 65,728,028
Less treasury stock, 165,580 and 5,780 shares of
common stock at cost (639,870) (23,840)
Unrealized loss on Held-for-Sale Securities (6,000) -
Unearned compensation (294,423) (976,547)
---------------- ----------------
Total shareholders' equity 56,933,876 64,727,641
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 70,540,954 $ 82,910,607
================ ================
See accompanying notes.
3
NOVOSTE CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- ---------------------------------------
2002 2001 2002 2001
----------------- ------------------ ------------------- ------------------
Net sales $ 14,655,449 $ 20,916,639 $ 54,412,101 $ 47,497,974
Cost of sales 6,774,235 5,118,949 19,666,656 14,589,293
Impairment charge - - 6,900,000 -
----------------- ------------------ ------------------- ------------------
Gross margin 7,881,214 15,797,690 27,845,445 32,908,681
Operating expenses:
Research and development 3,501,473 2,941,372 9,624,645 10,261,939
Sales and marketing 5,850,804 8,990,636 20,613,762 25,425,965
General administrative 1,909,597 2,252,761 6,508,289 6,739,757
----------------- ------------------ ------------------- ------------------
Total operating expenses 11,261,874 14,184,769 36,746,696 42,427,661
----------------- ------------------ ------------------- ------------------
Income (loss) from operations (3,380,660) 1,612,921 (8,901,251) (9,518,980)
Interest income, interest expense
and other, net 93,786 473,320 515,376 1,680,046
----------------- ------------------ ------------------- ------------------
Income (loss) before income taxes (3,286,874) 2,086,241 (8,385,877) (7,838,934)
Income taxes - - (50,000) -
----------------- ------------------ ------------------- ------------------
Net income (loss) $ (3,286,874) $ 2,086,241 $ (8,435,877) $ (7,838,934)
================= ================== =================== ==================
Net income (loss) per share - Basic $ (0.20) $ 0.13 $ (0.52) $ (0.49)
================= ================== =================== ==================
Weighted average shares outstanding
Basic 16,286,445 16,188,275 16,292,708 16,132,954
Net income (loss) per share - Diluted $ (0.20) $ 0.13 $ ( 0.52) $ (0.49)
================= ================== =================== ==================
Weighted average shares outstanding
Diluted 16,286,445 16,418,391 16,292,708 16,132,954
See accompanying notes.
4
NOVOSTE CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended
September 30,
2002 2001
---------------- ----------------
Cash flows from operating activities:
Net loss $(8,435,877) $ (7,383,934)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,860,043 1,770,425
Issuance (cancellation) of stock for service or compensation 196,875 155,246
Amortization of deferred compensation 139,268 826,222
Amortization of radiation & transfer devices 4,993,786 3,077,099
Provision for doubtful accounts 230,468 587,920
Non-cash impairment Charge 5,065,000 -
Changes in assets and liabilities:
Accounts receivable 6,694,670 (10,041,542)
Inventory (111,315) (1,430,962)
Prepaid expenses 141,920 (617,386)
Accounts payable (1,430,546) (448,460)
Accrued expenses and taxes withheld (1,730,982) 2,812,628
Unearned revenue (1,214,852) 2,960,842
Other 307,311 (793,328)
---------------- ----------------
Net cash generated (used) by operations 6,091,149 (8,980,230)
---------------- ----------------
Cash flow from investing activities:
Maturity (purchase) of short-term investments 16,432,477 8,521,294
Purchase of property and equipment, net (2,163,945) (3,339,284)
Purchase of radiation and transfer devices (8,231,315) (9,696,590)
---------------- ----------------
Net cash provided by (used by) investing activities 6,037,217 (4,514,580)
---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 468,397 1,517,267
Purchase of Treasury Stock (616,030)
Repayment of capital lease obligations (199,509) (177,103)
---------------- ----------------
Net cash provided (used) by financing activities (347,142) 1,340,164
---------------- ----------------
Effect of exchange rate changes on cash 459,602 19,507
Net increase (decrease) in cash and cash equivalents 12,240,825 (12,135,139)
Cash and equivalents at beginning of period 5,878,286 26,512,398
---------------- ----------------
Cash and cash equivalents at end of period $18,119,111 $ 14,377,259
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
Information:
Cash paid for interest (97,331) (45,027)
Non-cash investing and financing activities:
Assets acquired under capital lease 105,000
See accompanying notes.
5
NOVOSTE CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with instructions to Article 10 of
Regulation S-X. Accordingly, such consolidated financial statements do not
include all of the information and disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all normal and recurring adjustments considered necessary for a fair
presentation have been included.
The operating results of the interim periods presented are not necessarily
indicative of the results to be achieved for the year ending December 31, 2002.
The accompanying consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 2001 included in the Company's 2001 Annual Report on Form 10-K
filed with the Securities and Exchange Commission ("SEC").
The consolidated financial statements include the accounts of Novoste
Corporation and its wholly-owned subsidiaries incorporated in August 1998 in the
Netherlands, in December 1998 in Belgium, in February 1999 in Germany, in
January 2000 in France and a dedicated sales corporation incorporated in the
state of Florida in July, 2002. Significant inter-company transactions and
accounts have been eliminated.
On August 19, 2002, the Company initiated a voluntary recall of the
Beta-Rail(TM) 3.5F Delivery Catheter inventory from its customers. The recall
related to the discovery by the Company of a small number of catheter-tip
separations in the 3.5F product. An extensive evaluation and improvement program
was initiated. A pre-market approval supplement was submitted to the Food and
Drug Administration ("FDA") on October 15, 2002, defining the improvements to
the product and manufacturing processes and requesting approval for re-launch of
the product. The FDA has one hundred and eighty (180) days to act on the PMA
supplement with an approval or a denial to re-launch the product. Additionally,
the FDA may require additional information from the Company prior to acting on
the application.
The impact of the 3.5F catheter recall has been included in the consolidated
financial statements of the Company and is recorded in the corresponding revenue
and expense categories as appropriate based upon the nature of the expense or
adjustment. Net sales were adjusted by approximately $3.0 million for 3.5F
catheters that were sold to customers but subsequently returned due to the
recall. Cost of sales reflects approximately $800,000 for the disposal of
existing 3.5F catheters in inventory and for the additional labor and costs in
shipping 5.0F transfer devices, radiation source trains and catheters to our
customers. Operating expenses reflect the labor and material costs involved in
testing the 3.5F catheters in order to determine the proper corrective actions
to be included in our reports to the FDA.
In the opinion of management, all adjustments (consisting of normal recurring
accruals and estimated write-downs and accruals resulting from the recall)
considered necessary for a fair presentation of Novoste's financial results and
condition have been recorded.
NOTE 2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents are comprised of certain highly liquid investments with
maturities of less than three months at the time of their acquisition. In
addition to cash equivalents, the Company has investments in commercial paper
and other securities that are classified as short-term. Management determines
the appropriate classification of debt securities at the time of purchase.
All securities are considered as available-for-sale and reported at fair value,
with the unrealized gains and losses reported in a separate component of
shareholders' equity, if significant. The amortized cost of debt securities in
this category, if significant, is adjusted for amortization included in interest
income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in investment income. At September 30, 2002, fair value
approximated net book value for all short-term investments and all were
considered available-for-sale and have been accounted for as such.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable at September 30, 2002 and December 31, 2001 include
receivables due from product sales and amounts due under lease arrangements
relating to radiation and transfer devices (see Note 5. Radiation and Transfer
Devices). The carrying amounts reported in the consolidated balance sheets for
accounts receivable approximate their fair value. The Company performs periodic
credit evaluations of its customers' financial condition and generally does not
require collateral. Management records estimates of expected credit losses and
returns of product sold.
6
During the quarter Novoste recalled all 3.5F diameter catheters (see Note 1).
The returned catheters generated credits of approximately $3 million to
customers who could use the value of the credits in a variety of ways, including
the purchase of replacement 5F catheters, the clearing of existing obligations,
the application of the value against future purchases, or the customer could
request a cash refund.
Accounts receivable at September 30, 2002 have been adjusted to reflect all
credits associated with the recall on customers with invoices outstanding. The
remaining credits for customers with no invoices outstanding have been
classified as accrued liabilities.
Bad debt expense for the three-month periods ended September 30, 2002 and 2001
amounted to $165,572 and $290,000, respectively, and for the nine-month periods
ended September 30, 2002 and 2001 were $329,680 and $590,000.
NOTE 4. INVENTORIES
Inventories are stated at the lower of cost or market value on a first-in,
first-out (FIFO) basis and are comprised of the following:
September 30, 2002 December 31, 2001
------------------ -----------------
Raw Materials $ 3,091,199 $ 1,971,347
Work in Process 265,715 811,406
Finished Goods 508,834 963,680
------------------ -----------------
Total $ 3,857,748 $ 3,746,433
================== =================
NOTE 5. RADIATION AND TRANSFER DEVICES
The Company retains ownership of the radiation source trains (RSTs) and transfer
devices (TDs). Depreciation of the costs of these assets is taken over the
estimated useful life using the straight-line method and is recorded in Cost of
Sales. Depreciation begins at the time the Beta-Cath TM System is placed into
service. The annual agreements with the Company's customers to license the use
of radiation and transfer devices are classified by the Company as operating
leases. Income is recognized ratably over the length of the lease. At September
30, 2002, deferred revenue under these leases approximated $0.8 million.
During 2001, the Company estimated the useful lives of these assets to be 18
months based upon the information available at that time. During January 2002,
the Company determined that, based upon new testing and experience, the
estimated useful lives of RSTs are twelve months and the TDs are three years.
Accordingly, depreciation has been recorded over the new estimated lives
starting at the beginning of the first quarter 2002. The Company begins
depreciation when the Beta-CathTM System is placed into service. At September
30, 2002, equipment with a cost of approximately $27.4 million, less $5.1
million reserve for impairment (See Note 11) before accumulated depreciation of
approximately $10.7 million, was subject to operating leases. Approximately $3.3
million of radiation and transfer devices were available for lease at September
30, 2002. Radiation and transfer devices stated at cost, less impairment charge,
are comprised of the following:
September 30, 2002 December 31, 2001
------------------ -----------------
Radiation and Transfer Devices $ 22,393,212 $ 18,753,747
Less: Accumulated Depreciation (10,686,329) (5,219,391)
------------------ -----------------
$ 11,706,883 13,534,356
================== =================
7
NOTE 6. RECEIVABLE FROM OFFICERS
In October 2001, the Company adopted a split-dollar life insurance plan for all
officers. The Company matches officer contributions to the plan and also
provides an advance for related payroll taxes. The payroll tax advance is
reflected as a receivable from officers on the balance sheet. The advances are
unsecured and are subject to the life insurance company's ability to repay the
Company in the future from the available funds. There were no related
compensation expenses or payroll advances for the three-month period ended
September 30, 2002. In accordance with the plan agreement, if an officer leaves
the Company for any reason, retires or in any way terminates or withdraws from
the plan, the life insurance company is obligated to repay the Company for the
tax advances prior to settlement of the account with the officer. At September
30, 2002, and December 31, 2001, the receivable from officers balance was
$279,829 and $144,025, respectively. One officer left the Company, reducing the
receivable by $34,668 during the quarter.
The Company is re-evaluating the split dollar insurance program. The
Sarbanes-Oxley Act of 2002 ("the Act") passed by Congress and signed into law in
July 2002, may limit or effectively prevent implementation of programs like the
Company's split dollar plan and we are currently evaluating the effect the Act
has on this program. The Company has ceased accepting further contributions to
the plan from Executive Officers until the analysis is concluded.
NOTE 7. LINE OF CREDIT
In August 2001, the Company obtained a $10 million revolving line of credit.
During the nine months ended September 30, 2002 the Company had borrowed as much
as $4 million against the line of credit; however, at September 30, 2002 and
December 31, 2001, the Company had no outstanding borrowings. The Company may
borrow an amount not to exceed the borrowing base as defined in the loan
agreement which is principally based on domestic accounts receivables. Interest
on outstanding balances is payable on the first of each month, calculated on the
outstanding balance, and accrues at a rate of the bank's prime rate plus 1%. The
Company granted a first priority security interest in substantially all assets
of the Company to the lender. The Company was not in violation of any of its
loan covenants at September 30, 2002. By agreement between the Company and the
lender, dated August 31, 2002, the maturity date of the original Loan Agreement
between the parties was extended to November 30, 2002. It is anticipated that a
new revolving line of credit agreement, under similar terms, will be completed
and executed prior to the expiration of the extended maturity date.
The Company also has letters of credit available under the revolving line of
credit. The lender will issue or has issued letters of credit for the Company's
account subject to certain limitations; however, all such issued letters of
credit may not exceed $500,000 in the aggregate.
NOTE 8. SEGMENT INFORMATION
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131") requires the reporting of segment information based on
the information provided to the Company's chief operating decision maker for
purposes of making decisions about allocating resources and accessing
performance. The Company's business activities are represented by a single
industry segment, the manufacture and distribution of medical devices. For
management purposes, the Company is segmented into three geographic areas:
North America, Europe and the Rest of World (Canada, Asia and South America)
8
The Company's net sales, net loss and long-lived assets by geographic area at
and for the nine months ended September 30 for 2002 and 2001 are as follows:
Net sales
United States Europe Rest of World Consolidated
------------- ------ ------------- ------------
2002 $50,833,347 $3,154,185 $424,569 $54,412,101
2001 $43,466,425 $3,527,056 $504,493 $47,497,974
Net loss
United States Europe Rest of World Consolidated
------------- ------ ------------- ------------
2002 $(5,668,243) $(2,136,145) $(631,499) $(8,435,877)
2001 $(2,529,493) $(4,844,912) $(464,529) $(7,838,934)
Long-lived assets
United States Europe Rest of World Consolidated
------------- ------ ------------- ------------
2002 $19,389,246 $2,363,735 $144,519 $21,897,500
2001 $20,039,478 $3,268,178 $113,411 $23,421,067
At September 30, 2002 and September 30, 2001, the Company's net assets outside
of the United States, consisting principally of cash and cash equivalents,
accounts receivable, transfer radiation devices and office equipment, were
approximately $4.9 million and $6.5 million, respectively.
NOTE 9. EARNINGS (LOSS) PER SHARE
The basic and diluted income or loss per share is computed based on the weighted
average number of common shares outstanding. Common equivalent shares are not
included in the per share calculations where the effect of their inclusion would
be anti-dilutive.
The following table sets forth the computation of basic and diluted earnings
(loss) per share for the three and nine month periods ended September 30, 2002
and 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
2002 2001 2002 2001
-------------- -------------- --------------- --------------
Numerator:
Net income (loss) $(3,286,874) $2,086,241 $(8,435,877) $(7,838,934)
Denominator:
Weighted-average shares outstanding 16,286,445 16,188,275 16,292,708 16,132,954
Dilutive effect of stock options and
unvested restricted stock - 230,116 - -
-------------- -------------- --------------- --------------
Denominator for diluted earnings per share 16,286,445 16,418,391 16,292,708 16,132,954
Net income (loss) per share:
Basic $(0.20) $0.13 $(0.52) $(0.49)
Diluted $(0.20) $0.13 $(0.52) $(0.49)
9
NOTE 10. SHAREHOLDERS' EQUITY
For the three and nine month periods ended September 30, 2002 changes in
shareholders' equity consisted of the following:
Three Months Nine Months
------------------ -----------------
Shareholders' equity at beginning of period $ 61,013,795 $ 64,727,641
Proceeds from exercise of 56,375 stock options ranging from
$1.00 to $6.65 per share - 364,369
Proceeds from issuance of stock under employee stock purchase
plan, 24,497shares on 6/28/02 at $4.08 per share - 104,028
Stock re-purchase of 159,800 shares (616,030) (616,030)
Deferred compensation relating to accelerated vesting of
certain stock options - 196,875
Amortization of unearned compensation 42,587 682,124
Cancellation of unvested compensation charge options - (542,856)
Unrealized loss on held-for-sale securities (6,000) (6,000)
Comprehensive loss:
Translation adjustment (213,602) 459,602
Net income (loss) (3,286,874) (8,435,877)
------------------ -----------------
Total comprehensive loss (3,500,476) (7,976,273)
------------------ -----------------
Shareholders' equity at September 30, 2002 $ 56,933,876 $ 56,933,876
================== =================
NOTE 11. IMPAIRMENT CHARGES
The company accounts for long-lived assets in accordance with the provisions
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 144 requires long-lived assets and certain identifiable intangibles to
be reviewed for impairment whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future undiscounted net cash flows expected to be generated by the
asset. If assets are impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value, less costs to sell.
In March 2002, Novoste began commercial distribution of a newer, smaller
Beta-CathTM System equipped with a 3.5F diameter catheter. Original plans were
to introduce the product slowly; however, the smaller diameter system allows
physicians to provide better and more comprehensive treatment to their patients,
and demand for the new product exceeded expectations, with the first-year goal
of installed sites being achieved in less than four months. While the older,
larger 5.0F diameter Beth CathTM Systems are still serviceable, during the
second quarter of 2002, Novoste decided to concentrate marketing and development
efforts on the 3.5F diameter Beta-CathTM System. Accordingly, the Company
evaluated the ongoing value of the 5.0F systems that are equipped to use with
30mm and 40mm radiation source trains. Based on this evaluation, the Company
determined that the transfer devices and radiation source trains, which are
long-lived assets, with a carrying amount of $8.6 million, were no longer
recoverable and wrote them down to their estimated fair value of $3.5 million,
and accrued $1.8 million for related expenses, resulting in an impairment charge
of $6.9 million for the second quarter. Fair value was based on expected future
net cash flows to be generated by the transfer devices and radiation source
trains during their remaining service lives, discounted at the risk-free rate of
interest. The remaining fair value is amortized ratably over the estimated
useful life of these assets. On August 19, 2002, Novoste announced the recall of
all 3.5F diameter catheter products (Note 1). As a result, demand for the 5.0F
diameter system increased significantly to service the patients needing vascular
brachytherapy. This increased demand should provide cash flow in excess of the
carrying value. Thus no additional impairment charge was recorded in this
quarter ended September 30, 2002.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD LOOKING INFORMATION
The statements contained in this Form 10-Q that are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding expectations, beliefs, intentions or strategies regarding
the future. The Company intends that all forward-looking statements be subject
to the safe-harbor provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements reflect the Company's views as of the
date they are made with respect to future events and financial performance, but
are subject to many uncertainties and risks which could cause the actual results
of the Company to differ materially from any future results expressed or implied
by such forward-looking statements. Some of these risks are discussed below in
the sections "Liquidity and Capital Resources" and "Certain Factors That May
Impact Future Operations and Liquidity." Additional risk factors are discussed
in other reports filed by the Company from time to time on Forms 10-K, 10-Q and
8-K, including the Company's annual report on Form 10-K for the year ended
December 31, 2001. The Company does not undertake any obligations to update or
revise any forward-looking statements, made by it or on its behalf, whether as a
result of new information, future events, or otherwise.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of our financial statements requires that
we adopt and follow certain accounting policies. Certain amounts presented in
the financial statements have been determined based upon estimates and
assumptions. Although we believe that our estimates and assumptions are
reasonable, actual results will differ and could be material.
We have included below a discussion of the critical accounting policies that we
believe are affected by our more significant judgments and estimates used in the
preparation of our financial statements, how we apply such policies, and how
results differing from our estimates and assumptions would affect the amounts
presented in our financial statements. Other accounting policies also have a
significant effect on our financial statements, and some of these policies also
require the use of estimates and assumptions. Note 1 to the Consolidated
Financial Statements discusses our significant accounting policies.
Revenue Recognition
Revenue from the sale of products is recorded when an arrangement exists,
delivery has occurred and services have been rendered, the seller's price is
fixed and determinable and collectability is reasonably assured. The Company
earns revenue from sales of catheters and from license and lease agreements to
use the radiation source trains and transfer devices included in the
Beta-Cath(TM) System.
Novoste uses distributors in countries where the distributors' experience and
knowledge of local radiation and medical device regulatory issues is considered
beneficial by the Company's management. Under the distributor arrangements,
there are generally no purchase commitments and no provisions for cancellation
of purchases. Novoste or the distributor may cancel the distributor agreements
at any time.
Revenue from sales of catheters directly to hospitals is recognized upon
shipment after the hospital has leased a Beta-Cath(TM) System and completed all
licensing and other requirements to use the system. The Company recognizes
revenue from sales of catheters to distributors at the time of shipment.
The Company retains ownership of the radiation source trains and transfer
devices and enters into either a lease or license agreement with its customers.
Revenue recognition begins once an agreement has been executed, the system has
been shipped, and all licensing and other requirements to use the system have
been completed. The revenue is recognized ratably over the term of the
agreement. The terms of the operating lease signed with customers located in the
United States requires, as dictated by FDA regulatory approval, replacement and
servicing of the radiation source train and transfer device at six-month
intervals or number of usages. No other post-sale obligations exist.
11
The Company sells its catheters with no right of return except in cases of
product malfunction or shipping errors. A reserve has been recorded against
revenue for known returns and an estimate of unknown returns. In connection with
the introduction of the 3.5F catheter system in the second quarter of 2002 the
Company exchanged some 5F catheters for 3.5F catheters for its customers. The
exchange of these catheters was expected to continue in the future until the
3.5F system had been fully launched to all customer sites. At June 30, 2002, the
Company had recorded a reserve for approximately $1,000,000 to recognize the 5F
catheters purchased prior to June 30, 2002 that were expected to be returned in
the future in exchange for 3.5F catheters. At September 30, 2002, a reserve of
$750,000 is recorded to reflect management's estimate of 5.0F catheters sold
prior to September 30, 2002 that are expected to be returned for 3.5F catheters
upon FDA approval and re-launch of the 3.5F product.
Radiation and Transfer Devices and Amortization of Costs
The Company retains ownership of the radiation source trains (RSTs) and transfer
devices (TDs) that are manufactured by third party vendors. The costs to
acquire, test and assemble these assets are recorded as incurred. The Company
has determined that based upon experience, testing and discussions with the FDA
the estimated useful life of RSTs and TDs exceeds one year and is potentially as
long as four years. Accordingly, the Company classifies these assets as
long-term assets. Depreciation of the costs of these assets is included in Cost
Of Sales and is recognized over their estimated useful lives using the
straight-line method. Depreciation begins at the time the Beta- CathTM System is
placed into service. Valuation reserves are recorded for the balance of
unamortized costs of TDs and RSTs that are not available for use by a customer.
The Company has invested significant resources to acquire RSTs and TDs that make
up the Beta-CathTM System and offers multiple treatment length catheters (each
of which requires a different TD and RST). The acquisition of these various
length systems are based upon demand forecasts derived from available
information provided by the Company's Sales and Marketing organizations. If
actual demand were less favorable, or of a different mixture of treatment
lengths than those projected by management, additional valuation allowances
might be required which would negatively impact operating profits.
During the second quarter of 2002, Novoste decided to concentrate marketing and
development efforts on the 3.5 F diameter Beta-CathTM System. Accordingly, the
Company evaluated the recoverability of the carrying value for 5.0F devices and
other assets to determine if an impairment charge was necessary. The Company
performed this evaluation in accordance with the provisions of Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("FAS 144"). Based on this evaluation, the Company
determined that an impairment charge was warranted (See Note 11).
Stock Based Compensation
Novoste applies the provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("FAS 123"). As permitted by
FAS 123, the Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25") and related interpretations. Accordingly, no compensation
expense is recognized for stock option grants to employees for which the terms
are fixed. The Company grants stock options generally for a fixed number of
shares to employees, directors, consultants and independent contractors with an
exercise price equal to the fair market value of the shares at the date of
grant. Compensation expense is recognized for increases in the estimated fair
value of common stock for any stock options with variable terms.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task Force (EITF)
Issue No. 96-18, Accounting for Equity Instruments that Are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
Any compensation expense related to grants that do not vest immediately is
amortized over the vesting period of the stock options using the straight-line
method as that methodology most closely approximates the way in which the option
holder earns those options.
12
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for the estimated losses resulting
from the inability of our customers to make required payments. Most of our
customers are hospitals located in the U.S., however, some are distributors of
our products in foreign countries or hospitals located in Europe. The amount
recorded in the allowances is based primarily on management's evaluation of the
financial condition of the customers. If the financial condition of any
customers deteriorates, additional allowances may be required. Allowances are
also maintained for future sales returns and allowances based on an analysis of
recent trends of product returns.
Inventories
Novoste values its inventories at the lower of cost or market value on a
first-in, first-out (FIFO) basis. Provisions are recorded for excess or obsolete
inventory equal to the cost of the inventory. Shelf-life expiration or
replacement products in the marketplace may cause product obsolescence. If
actual product demand and market conditions were less favorable than those
projected by management, additional provisions might be required which would
negatively impact operating profits. Novoste evaluates the adequacy of these
provisions quarterly.
OVERVIEW
Novoste commenced operations as a medical device company in May, 1992. Beginning
in 1994, the Company devoted substantially all of its efforts to developing the
Beta-CathTM System. The Company commenced the active marketing of the
Beta-CathTM System in Europe in January, 1999, for use as an adjunctive
procedure in patients with ischemic heart disease. On November 3, 2000, Novoste
received U.S. marketing approval for the 30-millimeter Beta-CathTM System from
the FDA for use in patients suffering from in-stent restenosis, a condition in
which coronary stents become clogged with new tissue growth, and shipped its
first commercial system on November 27, 2000. The number of commercial sites in
the U.S. increased rapidly throughout 2001, and in the first nine months of
2002, the Company added approximately 50 new sites, bringing the total U.S.
sites to over 400 at September 30. The Company now has in excess of 500
commercial sites worldwide.
The Company is reporting an operating loss in the third quarter 2002 driven by
lower revenues and the expense of recalling the 3.5F catheters as well as
increased competition for vascular brachytherapy. At September 30, 2002 we had
an accumulated deficit of approximately $129.8 million.
RESULTS OF OPERATIONS
Net loss for the three months ended September 30, 2002 was $3,286,874 or $(0.20)
per share, as compared to a net income of $2,086,241 or $0.13 per share for the
three months ended September 30, 2001. Net loss for the nine months ended
September 30, 2002 was $8,435,877, or $(0.52) per share as compared to a net
loss of $7,838,934, or $(0.49) per share for the nine months ended September 30,
2001. The net loss for the three months ended September 30, 2002 compared to the
prior year was due primarily to the voluntary recall of the 3.5F catheter in the
quarter.
The impact of the 3.5F catheter recall has been included in the consolidated
financial statements of the Company and is recorded in the corresponding revenue
and expense categories as appropriate based upon the nature of the expense or
adjustment. Net sales were adjusted by approximately $3.0 million for 3.5F
catheters that were sold to customers but subsequently returned due to the
recall. Cost of sales reflects approximately $800,000 for the disposal of
existing 3.5F catheters in inventory and for the additional labor and costs in
shipping 5.0F transfer devices, radiation source trains and catheters to our
customers. Operating expenses reflect the labor and material costs involved in
testing the 3.5F catheters in order to determine the proper corrective actions
to be included in our reports to the FDA.
Net Sales. Net sales were $14,655,449 and $54,412,101 in the three and nine
months ended September 30, 2002, respectively, as compared to net sales of
$20,916,639 and $47,497,974 for the three and nine months ended September 30,
2001, respectively. Net sales recorded in the United States for the three and
nine-month periods ended September 30, 2002 were $14,007,782 and $50,833,347
respectively, as compared to $19,437,626 and $43,466,425, respectively, for the
same periods ended September 30, 2001. Comparatively, international net sales
decreased 56% to $647,668 for the three-month period and 11% to $3,578,754 for
the nine-month period in 2002, compared to $1,479,013 for the three-month period
and $4,031,549 for the nine-month periods ending September 30, 2001.
13
Net sales declined for the quarter ended September 30, 2002 due primarily to the
recall of the 3.5F catheter. Approximately $3.0 million of 3.5F catheters sold
prior to the date of the recall were credited to customers' accounts. Catheter
revenue was negatively impacted by the reserve for future 5.0F catheter
exchanges, and lease revenue has declined because the higher lease revenue from
the larger number of new sites opened in the first nine months of 2001 has not
been replaced by lease revenue from the renewal of those sites. Although the
sites continue to use the Beta-CathTM System, competitive pressure has not
allowed the Company to charge continued leasing fees.
Revenues increased for the nine month period ended September 30, 2002 over the
same period a year ago due entirely to the increase in the number of domestic
sites utilizing the Beta-CathTM System at September 30, 2002 as compared to the
same period in 2001.
The Company anticipates revenues to be at risk until, and if, the FDA approves
the relaunch of the 3.5F catheter. The Company's primary competitor, Guidant,
distributes a catheter size that is smaller than the 5.0F catheter that the
Company is now dependent upon for its revenue. The smaller catheter can be a
competitive advantage for Guidant. If other competitive advantages enjoyed by
the Company are compromised by delays in, or failure to, obtain FDA approval to
relaunch the 3.5F catheter. The Company's revenue may also be negatively
impacted in 2003 and future years by the introduction of drug eluting stents.
Cost of Sales. Cost of sales of $6,774,235 and $26,566,655 were incurred in the
three and nine months ended September 30, 2002, respectively. The nine-month
period includes an impairment charge of $6.9 million (See Note 11), which
negatively impacted gross margins. Reflecting cost of sales and impairment
charges, gross margins for the three and nine month periods ending September 30,
2002 were $7,881214, or 56% and $27,845,445, or 51%, respectively. Excluding the
impairment charge, gross margins were $7,881,214, or 56%, for the three months
and $34,745,445 or, 64%, for the nine months. Cost of sales for the three and
nine months ended September 30, 2001 were $5,118,949 and $14,589,293,
respectively, and gross margins were 76%, or, $15,797,690, and $32,908,681 or,
69%, for the same periods respectively in 2001. The decrease in the gross margin
for the third quarter of 2002 is due to higher amortization costs of the 5.0F
devices as well as increased cost of sales due to the recall. The average
selling price of the Company's catheters has also declined by approximately 5%
for the nine months ending September 30, 2002 due to increased competition for
vascular brachytherapy cases. The Company will continue to incur higher cost of
sales until the 5.0F devices are fully amortized and the Company has re-launched
its 3.5F catheter.
Factors impacting cost of sales and gross margins in future quarters will
include the utilization of catheters at the sites using the Beta-CathTM System
and the costs to service the existing devices as well as new 3.5F devices
planned to be installed once the FDA has approved re-launching the 3.5F
catheter.
Research and Development Expenses. Research and development expenses increased
19% to $3,501,473 and decreased 6% to $9,624,645 for the three and nine months
ended September 30, 2002, respectively, from $2,941,372 and $10,261,939 for the
three and six months ended September 30, 2001. The decrease for the nine month
period was primarily the result of decreased clinical trial activity as a result
of the completion of pivotal trials for the Beta-CathTM System used in coronary
applications in 2001. However, in 2002, the Company began two new clinical
trials to test the safety and effectiveness of radiation in peripheral
applications which resulted in the increase in research and development
expenditures for the three months ended September 30, 2002. The two trials,
MOBILE (More Beta radiation In the Lower Extremities) and BRAVO (Beta Radiation
for treatment of Arterial-Venous graft Outflow), have begun and the Company is
currently enrolling clinical trial sites and patients. The Company anticipates
increasing research and development expenses in the remainder of 2002 as it
anticipates increased enrollment in the two new trials and as it pursues product
improvements and line extensions in its current product offerings, some of which
may require additional clinical trials.
Sales and Marketing Expenses. Sales and marketing expenses decreased 35% to
$5,850,804 for the three months and 19% to $20,613,762 for nine months ended
September 30, 2002, respectively, from $8,990,636 and $25,425,965 for the three
and nine months ended June 30, 2001. These expenses declined because of lower
product launch costs incurred in 2002 than in 2001. Additional costs such as
commissions, travel, literature, trade shows, and samples were incurred last
year to facilitate introduction of the Beta-CathTM System in the US market and
the start-up procedures and training of new sites in 2001. The Company expects
these costs to remain relatively constant as a percent of revenue for the
balance of 2002.
14
General and Administrative Expenses. General and administrative expenses
decreased 15% to $1,909,597 for the three months ended September 30, 2002 and
increased 3% to $6,508,289 for the nine months ended September 30, 2002, from
$2,252,761 and $6,739,757 for the three and nine months ended September 30,
2001. The decrease for the third quarter 2002 is mainly due to decreased costs
associated with European operations and the consolidations of offices in Europe.
Other Income and Expenses. Other income decreased 80% to $93,786 for the three
months ended September 30, 2002 and 69% to $515,376 for the nine months ended
September 30, 2002, from $473,320 and $1,680,046 for the three and nine months
ended September 30, 2001. The decrease is mainly due to the dramatic decline in
interest rates for short-term investments. Interest income is down 110% from the
same quarter last year and down 65% year to date. In addition, the Company
incurred some interest costs associated with temporary borrowing from the line
of credit.
LIQUIDITY AND CAPITAL RESOURCES
Operating
During the nine months ended September 30, 2002, the Company generated cash from
operations of $6.1 million and for the nine months ended September 30, 2001 used
$9.0 million of cash in operations. The $15.1 million change from cash used by
operations to cash generated by operating activities was primarily attributable
to decreasing accounts receivable in 2002 resulting from decreasing revenue, as
opposed to the increase in accounts receivable in 2001 due to the product launch
in the US. Other changes in inventory, accounts payable, accrued expenses and
unearned revenue offset one another and between the periods reflect the increase
in working capital needed in 2001 to fund the Beta-CathTM System launch offset
by the decrease in working capital in the nine months ended September 30, 2002
as the number of sites, and revenue growth slowed.
Investing
Net cash provided by and used in investing activities for the nine months ended
September 30, 2002 and 2001 was $6.0 million and $4.5 million, respectively. The
construction of the plant for manufacturing 3.5F radiation source trains is
complete. The decreased purchase of radiation devices in 2002 reflects the
slower rate of opening new sites in 2002, maturity of the market place, with
fewer transfer devices needed. The Company anticipates that the purchase of
radiation devices will continue, although at a slower rate, as the Company
converts accounts to the 3.5F System after it is re-launched.
Financing
The Company's financing activities include equity offerings, borrowings under a
revolving credit facility and borrowings and repayments of capital leases.
Proceeds from the issuance of stock were received from the exercise of stock
options and the acquisition of stock by the Employee Stock Purchase Plan. The
Company purchased 159,800 shares of its common stock at an average price of
$3.855 under an authorized share repurchase program. The Company may decide,
based upon market conditions and price of its common stock, to purchase
additional shares. The total authorized repurchase was for up to $5 million, of
which the remaining authorized repurchase is $4,384,00. Financing activities for
the nine months ended September 30, 2002 and 2001 provided net cash of $0.3
million and $1.3 million, respectively, mainly through issuance of stock.
In August 2001, the Company entered into a $10 million accounts receivable
revolving line of credit with a financial institution (lender) that matured in
August 2002. By agreement between the Company and the financial institution, the
maturity date of the original Loan Agreement between the parties was extended to
November 30, 2002. At September 30, 2002, the Company had no outstanding
borrowings. The Company may borrow an amount ("advances") not to exceed the
borrowing base as defined in the loan agreement, which was $8.2 million at
September 30, 2002. Interest is payable on the first of each month calculated on
the outstanding balance and accrues at the rate of the lender's prime rate plus
1% (5.75% at September 30, 2002). At such time that the Company achieves three
consecutive months of profitability, the rate decreases to the prime rate. The
Company granted a first priority security interest in substantially all of its
assets to secure the line of credit. Additionally, the loan agreement contains
certain financial and non-financial covenants. The Company was not in violation
of any of its loan covenants at September 30, 2002. It is anticipated that a new
revolving line of credit agreement with the existing lender, under similar
terms, will be completed and executed during the fourth quarter 2002.
In addition, the Company also has letters of credit available under the line of
credit. The lender will issue or have issued letters of credit for the Company's
account not exceeding (i) the lesser of the committed revolving line or the
15
borrowing base minus (ii) the outstanding principal balance of the Advances and
minus (iii) the Cash Management Sublimit as defined below; however, the
aggregate face amount of all outstanding letters of credit (including drawn, but
unreimbursed letters of credit) may not exceed $500,000. Each letter of credit
will have an expiration date of no later than 180 days after the revolving
maturity date, but the Company's reimbursement obligation will be secured by
cash, on terms acceptable to the lender, at any time after the revolving
maturity date, if the term of the Agreement is not extended by the Lender. The
Company did not have any letters of credit outstanding at September 30, 2002.
The Company may use up to $500,000 for the Lender's Cash Management Sublimit,
which may include merchant service, direct deposit of payroll, business credit
card, and check cashing services identified in various cash management services
agreements related to such services. All amounts the Lender advances under any
such cash management services will be treated as advances under the committed
revolving line.
Commitments
At September 30, 2002 the Company had commitments to purchase $2.1 million of
inventory components for the Beta-Cath(TM) System over the next six months.
On June 20, 2001, the Company amended its manufacturing and supply agreement
(Agreement) with Bebig Isotopen-und Medizintechnik GmbH, a German corporation
(Bebig), to manufacture and supply the Company with radioactive sealed
Strontium-90 seed trains. During each calendar year under the four-year
contract, the Company guarantees to pay to Bebig minimum annual payments which
will total $7.5 million over the tenure of the agreement. All product purchases
are credited against the annual guaranteed payment. Any product payments in
excess of the annual guaranteed payment can be credited against the guaranteed
payment of the next year. In the event that the Company does not purchase
product to exceed the annual guaranteed payment, the deficiency will be due and
payable to Bebig within thirty days after the end of each year during the
four-year contract period. The Company expects to exceed the guaranteed amount
in 2002.
On October 14, 1999 the Company signed a development and manufacturing supply
agreement with AEA Technologies QSA GmbH for the development of a smaller
diameter source. This agreement provided for the construction of a production
line with a cost of construction estimated at $4.0 million and was paid by the
Company as construction was completed. The final cost of construction was
approximately $4.8 million and it became operational during the third quarter
2002.
Significant proportions of key components and processes relating to the
Company's products are purchased from single sources due to technology,
availability, price, quality, and other considerations. Key components and
processes currently obtained from single sources include isotopes, protective
tubing for catheters, proprietary connectors, and certain plastics used in the
design and manufacture of the transfer device. In the event a supply of a key
single-sourced material or component was delayed or curtailed, the Company's
ability to produce the related product in a timely manner could be adversely
affected. The Company attempts to mitigate these risks by working closely with
key suppliers regarding the Company's product needs and the maintenance of
strategic inventory levels.
The Company has entered into a license agreement with a physician pursuant to
which he is entitled to receive a royalty on the net sales of the Beta-CathTM
System (excluding consideration paid for the radioactive isotope), subject to a
maximum aggregate payment of $5,000,000. Royalty fees to the physician
aggregated $132,899 and $191,312 for the three months ended September 30, 2002
and 2001, respectively, and have been expensed in Cost of Sales. As of September
30, 2002, aggregate payments of $1,218,153 have been made under the license
agreement.
On January 30, 1996, the Company entered into a license agreement whereby Emory
University assigned its claim to certain technology to the Company for royalties
based on net sales (as defined in the agreement) of products derived from such
technology, subject to certain minimum royalties. After the first commercial
sale of royalty bearing products by Novoste, minimum royalties were due to Emory
University in the following amounts: year 2 after the first commercial sale -
$10,000; year 3 - $15,000; year 4 - $25,000; and years 5-10 $50,000 per year.
The royalty agreement term is consistent with the life of the related patent and
applies to assignments of the patent technology to a third party. Royalty fees
to Emory University aggregated $268,566 and $424,778 for the three months ended
September 30, 2002 and 2001, respectively, and have been expensed in Cost of
Sales.
16
Liquidity
The Company's principal source of liquidity at September 30, 2002 consisted of
cash, cash equivalents and short-term investments of $33.4 million.
The Company had significant operating losses through the second quarter of 2001,
but was profitable for the remaining two quarters of 2001 and in the first
quarter of 2002. Although the third quarter shows a net loss, cash was generated
by operations and the Company believes that existing cash and cash expected to
be generated from operations will be sufficient to meet its working capital,
financing and capital expenditure requirements for the foreseeable future. The
Company's future liquidity and capital requirements will depend upon numerous
factors, including the risks discussed at "Certain Factors That May Impact
Future Operations And Liquidity" below, and the following, among others: market
demand for its products; approval by the FDA to relaunch the 3.5F catheter; the
resources required to maintain a direct sales force in the United States and in
the larger markets of Europe; the resources required to introduce enhancements
to and expansion of the Beta-Cath TM System product line; the resources the
Company devotes to the development, manufacture and marketing of its products;
resources expended to license or acquire new technologies; and the progress of
the Company's clinical research and product development programs. Novoste may in
the future seek to raise additional funds through bank facilities, debt or
equity offering or other sources of capital. Additional financing, if, required,
may not be available on satisfactory terms, or at all.
We expect during the remainder of 2002 and first quarter of 2003 to allocate
resources to prepare for and execute the relaunch of the 3.5F catheter when and
if the FDA approves our pre-market approval supplement. Upon relaunch of the
3.5F catheter we will work to open additional 3.5F sites which will require
additional purchases of transfer devices and radiation source trains. We believe
that our cash generated from operations and existing cash reserves will be
sufficient to meet our liquidity and capital spending needs at least through the
end of 2003.
RISK FACTORS
Voluntary Recall of Beta-Rail(TM) 3.5F Delivery Catheter
On August 19, 2002, the Company initiated a voluntary recall of the
Beta-Rail(TM) 3.5F Delivery Catheter inventory from its customers. The recall
related to the discovery by the company of a small number of catheter-tip
separations in the 3.5F product. An extensive evaluation and improvement program
was initiated. A pre-market approval supplement was submitted to the Food and
Drug Administration ("FDA") on October 15, 2002, defining the improvements to
the product and manufacturing processes and requesting approval for re-launch of
the product. The FDA has one hundred and eighty (180) days to act on the PMA
supplement with an approval or a denial to re-launch the product. Additionally,
the FDA may require additional information from the company prior to acting on
the application. A significant delay beyond the end of 2002 could impact the
Company's competitive advantages in radiation licenses and negatively impact its
market share. Failure to receive or delays in receipt of FDA approval to
re-launch the product in a timely manner could have a material adverse effect on
our business, financial condition and results of operations. Should the FDA deny
the Company's request to relaunch the 3.5F catheter the Company would not be
able to recover its investment in 3.5F technology and could substantially
impair its ability to compete in vascular brachytherapy.
We Are Dependent On The Successful Commercialization Of One Product, The
Beta-Cath(TM)System.
We began to commercialize the Beta-Cath TM System in the United States in
November 2000. Substantially all of our revenue in the first nine months of 2002
was from sales in the United States. We anticipate that for the foreseeable
future we will be solely dependent on the continued successful commercialization
of the Beta-Cath TM System; however; in the future we may be unable to
manufacture the Beta-Cath (TM ) System in commercial quantities at acceptable
costs or to demonstrate that the Beta-Cath (TM ) System is an attractive and
cost-effective alternative or complement to other procedures, including coronary
stents, competing vascular brachytherapy devices, or drug coated stents. Because
the Beta-Cath (TM ) System is our sole near-term product focus, we could be
required to cease operations if new technology rendered vascular brachytherapy
non-competitive. Our failure to continue commercialization of the Beta-Cath TM
System would have a material adverse effect on our business, financial condition
and results of operations.
Drug-Eluting Stents Or Other New Technology Could Render Vascular Brachytherapy
Generally Or The Beta-Cath TM System In Particular Noncompetitive Or Obsolete.
Competition in the medical device industry, and specifically the markets for
cardiovascular devices, is intense and characterized by extensive research and
development efforts and rapidly advancing technology. New developments in
technology could render vascular brachytherapy generally, or the Beta-Cath TM
System in particular, noncompetitive or obsolete.
17
Vascular brachytherapy competes with other treatment methods designed to improve
outcomes from coronary artery procedures that are well established in the
medical community, such as coronary stents. Stents are the predominant treatment
currently utilized to reduce the incidence of coronary restenosis following
Percutaneous Transluminal Coronary Angioplasty ("PTCA") and were used in greater
than 80% of all PTCA procedures performed worldwide in 2001. Manufacturers of
stents include Johnson & Johnson, Medtronic, Inc., Guidant Corporation and
Boston Scientific Corporation. Stent manufacturers often sell many products used
in the cardiac catheterization labs, commonly referred to as cath labs, and as
discussed below, certain of these companies have developed vascular
brachytherapy devices.
Johnson & Johnson and Guidant compete directly with Novoste for market
acceptance of vascular brachytherapy and each has substantially greater capital
resources and greater resources and experience at introducing new products than
does Novoste. The Company may not be able to compete effectively against Johnson
& Johnson or Guidant in the vascular brachytherapy market.
Many of these same companies and others are researching coatings and treatments
to coronary stents that could reduce restenosis and possibly be more acceptable
to a medical community already experienced at using stents. Clinical trial
results have reported a significant reduction in restenosis rates to below 10%.
In addition, Johnson & Johnson recently received unanimous recommendation for
approval by a FDA advisory panel that its drug eluting stent be approved for
distribution in the U.S. Full FDA approval could be expected as early as
December 2002. If drug-eluting stents are approved for sale it could have a
material adverse effect on Novoste's business.
Our Patents And Proprietary Technology May Not Adequately Protect Our
Proprietary Products.
Our policy is to protect our proprietary position by, among other methods,
filing United States and foreign patent applications. On November 4, 1997 we
were issued United States Patent No. 5,683,345, on May 4, 1999 we received
United States Patent No. 5,899,882 (which is jointly owned by us and Emory
University) and on January 11, 2000 we received United States Patent No.
6,013,020, all related to the Beta CathTM System. We also have several
additional United States applications pending covering other aspects of our
Beta-CathTM System. The United States Patent and Trademark Office has indicated
that certain claims pending in another United States application are allowable.
With respect to the above identified United States Patents and our other pending
United States patent applications, we have filed, or will file in due course,
counterpart applications in the European Patent Office and certain other
countries.
Like other firms that engage in the development of medical devices, we must
address issues and risks relating to patents and trade secrets. United States
Patent No. 5,683,345 may not offer adequate protection to us because competitors
may be able to design functionally equivalent devices that do not infringe them.
They could also be reexamined, invalidated or circumvented. Furthermore, claims
under our other pending applications may not be allowed, or if allowed, may not
offer any protection or may be reexamined, invalidated or circumvented. In
addition, competitors may have or may obtain patents that will prevent, limit or
interfere with our ability to make, use or sell our products in either the
United States or international markets.
We May Be Unable To Compete Effectively Against Larger, Better Capitalized
Companies.
Many of our competitors and potential competitors have substantially greater
capital resources than we do and also have greater resources and expertise in
the area of research and development, obtaining regulatory approvals,
manufacturing and marketing. Our competitors and potential competitors may
succeed in developing, marketing and distributing technologies and products that
are more effective than those we will develop and market or that would render
our technology and products obsolete or noncompetitive. Additionally, many of
the competitors have the capability to bundle a wide variety of products in
sales to cath labs or to effectively reduce the price of competing VBT products.
We have experienced significant pricing pressure from the largest VBT
competitor, Guidant. We may be unable to compete effectively against such
competitors and other potential competitors in terms of manufacturing,
marketing, distribution, sales and servicing.
18
Compliance With Applicable Government Regulations Will Be Expensive And
Difficult.
Our Beta-CathTM System is regulated in the United States as a medical device. As
such, we are subject to extensive regulation by the FDA, by other federal, state
and local authorities and by foreign governments. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant pre-market clearance or
pre-market approval for devices, withdrawal of marketing approvals, a
recommendation by the FDA that we not be permitted to enter into government
contracts, and criminal prosecution. The FDA also has the authority to request
repair, replacement or refund of the cost of any device manufactured or
distributed.
The process of obtaining a pre-market approval and other required regulatory
approvals can be expensive, uncertain and lengthy, and we may be unsuccessful in
obtaining additional approvals to market new versions of the Beta-CathTM System
or new indications for the Beta-Cath System. The FDA may not act favorably or
quickly on any of our submissions to the agency. We may encounter significant
difficulties and costs in our efforts to obtain additional FDA approvals that
could delay or preclude us from selling new products in the United States.
Furthermore, the FDA may request additional data or require that we conduct
further clinical studies, causing us to incur substantial cost and delay. In
addition, the FDA may impose strict labeling requirements, strict operator
training requirements or other requirements as a condition of our market
approval, any of which could limit our ability to market our systems. Labeling
and marketing activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. FDA enforcement policy strictly
prohibits the marketing of FDA cleared or approved medical devices for
unapproved uses. Further, if a company wishes to modify a product after FDA
approval of a pre-market approval, including any changes that could affect
safety or effectiveness, additional approvals will be required by the FDA. Such
changes include, but are not limited to: new indications for use, the use of a
different facility to manufacture, changes to process or package the device,
changes in vendors to supply components, changes in manufacturing methods,
changes in design specifications and certain labeling changes. Failure to
receive or delays in receipt of FDA approvals, including the need for additional
clinical trials or data as a prerequisite to approval, or any FDA conditions
that limit our ability to market our systems, could have a material adverse
effect on our business, financial condition and results of operations.
The Hospitals With Which We Do Business May Be Delayed In Obtaining Or May Be
Unable To Obtain The Licenses To Hold, Handle And Use Radiation That Are
Required For Our Products.
Our business involves the import, export, manufacture, distribution, use and
storage of Strontium-90 (Strontium/Yttrium), the beta-emitting radioisotope
utilized in the Beta-CathTM System 's radiation source train. Hospitals in the
United States are required to have radiation licenses to hold, handle and use
radiation. Many of the hospitals and/or physicians in the United States have
been required to amend their radiation licenses to include Strontium-90 prior to
receiving and using our Beta-CathTM System. Depending on the state in which the
hospital is located, its license amendment will be processed by and its use of
the isotope will be regulated by The State of Georgia Department of Natural
Resources ("DNR"), in agreement states, or by The United States Nuclear
Regulatory Commission ("NRC"). Obtaining any of the foregoing radiation-related
approvals and licenses can be complicated and time consuming and may take longer
in the NRC States (sixteen states). A significant majority of the approved
license amendments have been in Non-NRC states. If a significant number of
hospitals are delayed in obtaining approvals for the use of strontium-90, or if
those approvals are not obtained or are withdrawn as a result of regulatory
actions or sanctions, our business, financial condition and results of operation
could be materially adversely affected.
We May Be Unable To Obtain Foreign Approval To Market Our Products.
In order for us to market the Beta-CathTM System in Japan and certain other
foreign jurisdictions, we must obtain and retain required regulatory approvals
and clearances and otherwise comply with extensive regulations regarding safety
and manufacturing processes and quality. These regulations, including the
requirements for approvals or clearance to market and the time required for
regulatory review, vary from country to country, and in some instances within a
country. We may not be able to obtain regulatory approvals in such countries or
may be required to incur significant costs in obtaining or maintaining our
foreign regulatory approvals. Delays in receipt of approvals to market our
products, failure to receive these approvals or future loss of previously
received approvals could have a material adverse effect on our business,
financial condition, and results of operations.
19
Item 3. Quantitative And Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company's cash equivalents and short-term investments are subject to market
risk, primarily interest-rate and credit risk. The Company's investments are
managed by outside professional managers within investment guidelines set by the
Company. Such guidelines include security type, credit quality and maturity, and
are intended to limit market risk by restricting the Company's investments to
high credit quality securities with relatively short-term maturities.
At September 30, 2002, the Company had $18.1 million in cash equivalents with a
weighted average interest rate of 1.281% and $15.3 million in available-for-sale
investments with a weighted average interest rate of 2.559%.
Item 4. Controls and Procedures
We maintain systems of internal controls and procedures for financial reporting
("Internal Controls") and disclosure controls and procedures ("Disclosure
Controls") designed to provide reasonable assurance as to the reliability of our
financial and other disclosures included in this report. Within the 90 days
prior to the filing date of this quarterly report, we carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the design and operation of our Internal Controls and
Disclosure Controls ("Controls Evaluation").
In the course of the Controls Evaluation, we sought to identify errors, controls
problems and/or acts of fraud, and to confirm that appropriate corrective
actions, including process improvements, were being undertaken. Among other
matters, we sought to determine whether there were any "significant
deficiencies" or "material weaknesses" in the Company's Internal Controls. In
professional auditing literature, "significant deficiencies" are referred to as
"reportable conditions"; they are control issues that could have a material
adverse effect on the ability to record, process, summarize and report financial
data in the financial statements. A "material weakness" is defined in the
auditing literature as a particularly serious reportable condition where the
internal control does not reduce to a relatively low level the risk that
misstatements caused by error or fraud may occur in amounts that would be
material in relation to the financial statements and not be detected within a
timely period by employees in the normal course of performing their assigned
functions.
Subsequent to the 2001 audit performed by our independent auditors, Ernst &
Young LLP ("E & Y"), the auditors identified and reported to management and to
the Company's audit committee deficiencies, which were designated "reportable
conditions" but not "material weaknesses". Based upon this report we have taken
actions to address and correct the reportable conditions and strengthen our
Internal Controls.
Our CEO and CFO have concluded that, subject to the inherent limitations in all
control systems, our Disclosure Controls are effective in timely alerting them
to material information relating to the Company that is required to be included
in our periodic Securities and Exchange Commission filings, and that our
Internal Controls are effective to provide reasonable assurance that our
financial statements are fairly presented in conformity with generally accepted
accounting principles.
We will continue to evaluate the effectiveness of our Controls Procedures and of
the corrective actions we have taken with regard to the deficiencies noted by E
& Y on an ongoing basis, and we will take such further actions as are dictated
by such continuing reviews.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
On October 16, 2002, the Board of Directors of the Company adopted two
amendments to its Second Amended and Restated By-laws (the "By-laws"). In
general, the amendments set forth certain notice requirements for shareholders
when calling a special meeting of the Company's shareholders or submitting
shareholder proposals (either a shareholder nomination of directors or other
business) at annual meetings of the Company's shareholders. In addition, the
amendment to the By-laws relating to the calling of a special meeting also
establishes certain timing requirements for the setting of the record and
meeting dates.
Specifically, the amendments provide that, in addition to any other applicable
requirements, for a shareholder to properly call a special meeting, the
shareholder must deliver to the Secretary of the Company written notice and must
include in such notice certain required information. Business transacted at the
special meeting will be limited to the purposes stated in such notice. The
Secretary will determine if the notice complies with the information
requirements set forth in the By-laws. If the Secretary determines that the
notice complies with the information requirements set forth in the By-laws, the
Secretary will notify the Board of Directors. The Board of Directors will then
meet or take action by written consent within 10 days from receiving such notice
from the Secretary in order to fix (1) a record date to determine the
shareholders entitled to receive notice of and to vote at the special meeting
and (2) a date and location for the special meeting of shareholders. The record
date set by the Board of Directors may not precede or be more than 10 days after
the date of the meeting or written consent of the Board of Directors that fixed
such record date. The date of the special meeting selected by the Board of
Directors may not be earlier than 45 days or later than 70 days after the record
date.
The amendments also provide that, in addition to any other applicable
requirements, for a shareholder proposal (either a shareholder nomination of
directors or other business) to be properly brought before an annual meeting of
shareholders, a shareholder must have delivered to the Secretary written notice
not less than 90 days nor more than 120 days prior to the first anniversary of
the date of the annual meeting for the prior year, except in certain
circumstances. Such written notice must set forth certain required information
including, if applicable, that information regarding each of the director
nominees that would otherwise be required by the proxy rules promulgated by the
Securities and Exchange Commission.
The foregoing description of the amendments to the By-laws does not purport to
be complete and is qualified in its entirety by reference to the amendments
which are attached as Exhibit 99.1 to the Company's 8-K filed on October 17,
2002, and incorporated herein by reference.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information
None.
21
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT
NUMBER DESCRIPTION
-------- -----------
3.1 Articles of Incorporation of Registrant, as amended. (1)
3.2 Form of Amended and Restated Articles of Incorporation of
Registrant filed on May 28, 1996. (1)
3.2(a) Copy of First Amendment to Amended and Restated Articles of
Incorporation of Novoste Corporation filed with the
Department of State of the State of Florida on November 1,
1996. (2)
3.3(a) Copy of Amended and Restated By-Laws of Registrant adopted
December 20, 1996. (3)
3.4 First Amendment to Second Amended and Restated By-Laws dated
October 16, 2002 (4)
______________________
(1) Filed as same numbered Exhibit to the Registrant's Registration Statement
on Form S-1 (File No. 333-4988).
(2) Filed as same numbered Exhibit to the Registrant's Report on Form 8-A/A
filed on August 3, 1999.
(3) Filed as Exhibit A to the Registrant's Proxy Statement for its 2001 Annual
Meeting of Stockholders filed on April 30, 2001.
(4) Filed as Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed
on October 17, 2002.
(b) Reports on Form 8-K.
On August 20, 2002, the Company filed a current report on Form 8-K to
disclose its voluntary recall of its Beta-Cath(TM) 3.5F delivery catheters.
On October 17, 2002, the Company filed a current report on Form 8-K to
report the appointment of a new Chief Executive Officer and an amendment to
the Company's Second Amended and Restated Bylaws.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NOVOSTE CORPORATION
/s/Alfred J. Novak /s/ Edwin B. Cordell, Jr.
-------------------------------- -----------------------------------
ALFRED J. NOVAK EDWIN B. CORDELL, JR.
Chief Executive Officer Vice President - Finance and
(Principal Executive Officer) Chief Financial Officer
(Principal Financial & Accounting Officer)
November 14, 2002
-----------------
Date
23
CERTIFICATIONS
I, Alfred J. Novak, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Novoste Corporation.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other executive officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other executive officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other executive officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ ALFRED J. NOVAK
---------------------------------------
ALFRED J. NOVAK
Chief Executive Officer
24
CERTIFICATIONS
I, Edwin B. Cordell, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Novoste Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other executive officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us, particularly during
the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other executive and I have disclosed, based on our most
recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other executive officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ EDWIN B. CORDELL, JR.
---------------------------
EDWIN B. CORDELL, JR.
Chief Financial Officer
25
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