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Pursuant to Rule 424(b)(4)
Registration Nos. 333-72073 and 333-74443
PROSPECTUS
2,400,000 Shares
Novoste Corporation
COMMON STOCK
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NOVOSTE CORPORATION IS OFFERING 2,400,000 SHARES.
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NOVOSTE CORPORATION'S COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET UNDER
THE SYMBOL "NOVT." ON MARCH 15, 1999, THE LAST REPORTED SALE PRICE OF THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET WAS $20.50 PER SHARE.
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INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 9.
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PRICE $20 A SHARE
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<TABLE>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS NOVOSTE
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<S> <C> <C> <C>
Per Share................................. $20.00 $1.20 $18.80
Total..................................... $48,000,000 $2,880,000 $45,120,000
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Novoste and two selling shareholders have granted the underwriters the right to
purchase up to an additional 160,000 and 200,000 shares, respectively, to cover
over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares
to purchasers on March 19, 1999.
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MORGAN STANLEY DEAN WITTER
U.S. BANCORP PIPER JAFFRAY
HAMBRECHT & QUIST
March 15, 1999
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[INSIDE FRONT COVER]
[A/H diagram of the Beta-Cath System device with a description of its
contemplated benefits and its component parts. Also includes an artist's
rendering of a human heart with a closeup view of the Beta-Cath System catheter
inside a coronary artery.]
Novoste(R), Beta-Cath(TM) and the Novoste(R) logo are trademarks of the
company.
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TABLE OF CONTENTS
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Where You Can Find More Information
About Us............................ 4
Prospectus Summary.................... 5
Risk Factors.......................... 9
Special Note Regarding Forward-Looking
Statements.......................... 20
Use of Proceeds....................... 21
Price Range of Our Common Stock....... 21
Dividend Policy....................... 21
Dilution.............................. 22
Capitalization........................ 22
Selected Consolidated Financial
Data................................ 23
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Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 28
Management............................ 48
Principal and Selling Shareholders.... 57
Underwriters.......................... 59
Legal Matters......................... 61
Experts............................... 61
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
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In this prospectus, "Novoste," the "company," "we," "us" and "our" refer to
Novoste Corporation.
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus.
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Unless otherwise indicated, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option.
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WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document we file with the Commission at the Public Reference Room at the
Commission, at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following Regional Offices of the Commission: Midwest
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511; and Northeast Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048. Please call 1-800-SEC-0330 for further information
concerning the Public Reference Room. The Commission also makes these documents
available on its web site at http:\\www.sec.gov.
We have filed with the Commission a registration statement on Form S-3
under the Securities Act of 1933 relating to the common stock offered by this
prospectus. This prospectus constitutes a part of the registration statement but
does not contain all of the information set forth in the registration statement
and its exhibits. For further information, we refer you to the registration
statement and its exhibits.
The Commission allows us to "incorporate by reference" the information we
file with it, which means that we can disclose important information to you by
referring you to another document we have filed with the Commission. The
information incorporated by reference is an important part of this prospectus
and information that we file later with the Commission will automatically update
and supersede this information. We incorporate by reference the following:
- The description of common stock contained in the Registration
Statement on Form 8-A filed with the Commission on May 15, 1996;
- The description of rights to purchase preferred shares contained in
the Registration Statement on Form 8-A filed with the Commission on
October 25, 1996;
- Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as amended by the Form 10-K/A filed with the Commission on
February 22, 1999;
- Current Report on Form 8-K filed with the Commission on March 12,
1999; and
- Any future filings we make with the Commission until we sell all of
the common stock offered by this prospectus.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address or telephone number:
Novoste Corporation
3890 Steve Reynolds Blvd.
Norcross, Georgia 30093
(telephone no. 770-717-0904)
Attention: Cheryl Johnson, Vice President,
Investor Relations and Business Development
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PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and may
not contain all the information that is important to you. For a more complete
understanding of Novoste and the shares of common stock offered by this
prospectus, you should read the entire prospectus, including the consolidated
financial statements and accompanying notes.
NOVOSTE CORPORATION
THE BETA-CATH SYSTEM
Novoste has developed the Beta-Cath System, a hand-held device designed to
deliver beta, or low penetration, radiation to the site of a treated blockage in
a coronary artery to decrease the likelihood of restenosis. Restenosis, the
renarrowing of a previously treated artery, is the major limitation of
percutaneous transluminal coronary angioplasty or PTCA, a procedure used by
interventional cardiologists to open blocked coronary arteries. We are currently
conducting pivotal clinical trials of the Beta-Cath System and, assuming
positive results, intend to submit an initial pre-market approval application to
the FDA in the second quarter of 2000. In August 1998, we qualified to apply CE
marking to the Beta-Cath System, a requirement to sell our device in most of
Western Europe.
In 1998, physicians performed approximately 650,000 PTCA procedures in the
United States and approximately 500,000 PTCA procedures abroad. Studies have
shown that 30% to 50% of patients experience restenosis within six months after
PTCA. Restenosis often requires one or more additional revascularization
procedures to reopen blocked vessels. These procedures include PTCA, which has
an average cost of $20,000 in the United States, and coronary artery bypass
graft surgery, or CABG, which has an average cost of $45,000 in the United
States. It is estimated that more than $3 billion is spent annually in the
United States on revascularization procedures.
In response to the high rates of restenosis following PTCA, the placement
of coronary stents, metal implants that prop open a coronary artery, has grown
rapidly. In 1998, stents were used in approximately 60% of all PTCA procedures
performed worldwide and on average added over $2,000 to the cost of each PTCA
procedure. However, studies have shown that restenosis still occurs in
approximately 20% to 30% of the patients who receive stents. This is commonly
referred to as "in-stent" restenosis. Patients with "in-stent" restenosis often
experience recurrent restenosis and as a result are prone to multiple
revascularization procedures. We believe that the Beta-Cath System may be
effective in reducing the incidence of restenosis following PTCA and stent
placement and in treating "in-stent" restenosis, thereby reducing the need for
additional costly hospital procedures.
OUR CLINICAL TRIALS
We are currently conducting two pivotal clinical trials intended to support
applications for pre-market approval to sell the Beta-Cath System in the United
States.
In our Beta-Cath System Trial, we are seeking to determine the safety and
effectiveness of the Beta-Cath System in conjunction with both PTCA and stent
placement. The primary endpoint of this trial is the incidence of an additional
revascularization procedure in the previously treated artery within eight
months. The Beta-Cath System Trial also provides for a follow-up angiogram eight
months after treatment with the Beta-Cath System to determine whether restenosis
has occurred and to measure how much of the enlargement of the treated artery
achieved with PTCA has been lost, commonly referred to as the "late-loss index."
At March 10, 1999, we had enrolled 1,064 of the approximately 1,100 patients we
had initially targeted for enrollment in the Beta-Cath System Trial at 55
clinical sites, principally located in the United States. On March 12, 1999,
based upon the recommendation of the Data Safety Monitoring Board, an
independent commission of clinicians and statisticians that reviews clinical
events in the Trial at regular intervals, we announced our plan to increase
patient enrollment in the stent placement subgroup of the Trial by up to 300
patients subject to FDA approval of a supplement to our investigational device
exemption requesting this increase. See "Business -- Clinical Trials."
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Our other pivotal trial, the START Trial, is designed to study the safety
and effectiveness of the Beta-Cath System for treating "in-stent" restenosis.
The primary endpoint of the START Trial is the incidence of an additional
revascularization procedure in the previously treated artery within eight
months. A follow-up angiogram eight months after the initial treatment will be
performed to observe the treated artery to determine whether restenosis has
recurred and to measure the late loss index. We expect to enroll 386 patients at
up to 55 clinical sites. At March 10, 1999, we had enrolled a total of 298
patients at 46 clinical sites principally located in the United States.
Assuming the START Trial yields positive results, we intend to submit an
application to the FDA in the second quarter of 2000 to obtain approval to
market the Beta-Cath System for treating "in-stent" restenosis. Assuming timely
FDA approval of the increase in patient enrollment in the Beta-Cath System Trial
and positive results in that Trial, we intend to make an additional submission
to the FDA in the second half of 2000 to obtain approval to market the Beta-Cath
System for reducing the incidence of restenosis following PTCA or stent
placement. This additional submission would either be an amendment to our
initial application or a separate application.
In August 1998, we reported results from our feasibility study known as the
BERT Trial in which patients received treatment with the Beta-Cath System
following PTCA. This trial was not placebo-controlled and its primary endpoint
was an examination of the safety of three different radiation doses. Other
endpoints included a determination of whether restenosis had occurred six months
after treatment and a measure of the late loss index at that time. Of the 78
patients we treated and evaluated, 13 patients or 17% experienced restenosis at
the lesion site within six months following treatment. In addition, the 78
patients had an average late loss index of 9%, compared to 43% in a control
group from a previous study in which patients received only PTCA.
EUROPEAN MARKETING AND DISTRIBUTION
In August 1998, we qualified to apply CE marking to the Beta-Cath System, a
requirement to sell our device in most of Western Europe. We believe that we are
the only company that has qualified to apply CE marking to an intracoronary
radiation device. We are actively recruiting a direct sales force for the larger
European markets and independent distributors for other European markets. We
believe this combination of a direct sales force and distributors will be cost
effective, can be implemented quickly, and will enable us to capitalize on local
marketing expertise in each country. We also are currently conducting a 200
patient multicenter trial in Europe intended to enhance market acceptance of the
Beta-Cath System among physicians and to collect additional clinical data to
support future reimbursement approvals.
OUR OBJECTIVE
Our objective is to become the leader in the development and sale of
radiation devices for the reduction of restenosis, a new treatment concept
commonly referred to as vascular brachytherapy. Key elements of our strategy
include:
- Achieving first-to-market position in the United States for
beta-emitting vascular brachytherapy devices;
- Achieving a leading market share in the United States and Europe for
vascular brachytherapy devices;
- Establishing the Beta-Cath System as the standard of care for a wide
range of indications, including reduction of the incidence of
restenosis following PTCA and stent placement and in treatment of
"in-stent" restenosis;
- Marketing the Beta-Cath System via a direct sales force to target
large hospitals and to promote utilization by leading physicians;
- Investigating the Beta-Cath System for other vascular applications;
and
- Protecting and enhancing our proprietary technology.
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Novoste was incorporated in Florida in January 1987 and was capitalized and
commenced operations in May 1992. Our European operations are conducted through
three wholly-owned subsidiaries, Novoste SA/NV in Belgium, Novoste BV in The
Netherlands, and Novoste GmbH in Germany. Our executive offices are located at
3890 Steve Reynolds Boulevard, Norcross, Georgia 30093 (telephone no.
770-717-0904).
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THE OFFERING
Common stock offered................ 2,400,000 shares
Common stock to be outstanding
after the offering................ 13,120,837 shares(1)
Use of proceeds..................... To fund our ongoing Beta-Cath System
Trial and START Trial, to expand our
sales force in Europe and to establish
our sales force in the United States,
to expand our internal manufacturing
capabilities and outside sources of
supply, to investigate improvements to
and other applications for our
Beta-Cath System and for general
corporate purposes, including working
capital. See "Use of Proceeds."
Over-allotment option............... 360,000 shares, of which up to 160,000
shares are being sold by Novoste and up
to 200,000 shares are being sold by
selling shareholders. See "Principal
and Selling Shareholders" and
"Underwriting."
Nasdaq National Market symbol....... NOVT
Preferred share purchase rights..... One preferred share purchase right will
be attached to each share of common
stock sold in the offering and thus the
preferred share purchase rights are
also being offered by this prospectus.
These rights would cause substantial
dilution to any person or group who
attempts to acquire a significant
interest in our company without advance
approval from our board of directors
and thus could make an acquisition of
control of our company more difficult.
See "Risk Factors -- Issuance of
Preferred Stock May Adversely Affect
Rights of Common Shareholders or
Discourage a Takeover."
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(1) Based on the shares outstanding as of February 28, 1999. Excludes 2,357,938
shares of common stock subject to outstanding options as of February 28,
1999, at a weighted average exercise price of $12.01 per share. Also
excludes 200,000 shares of common stock subject to outstanding options as of
February 28, 1999, at a weighted average exercise price of $16.78 per share
that are contingent upon shareholder approval of amendments to our stock
option plans. See "Management -- Stock Option Plans" and note 5 to our
consolidated financial statements.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data should be read in
conjunction with and are qualified by reference to "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and
accompanying notes appearing elsewhere in this prospectus.
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YEAR ENDED DECEMBER 31,
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1998 1997 1996
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales and revenues................................ $ 19 $ 29 $ --
Costs and expenses:
Cost of sales...................................... 117 -- --
Research and development........................... 21,089 12,873 4,647
General and administrative......................... 2,528 1,736 1,575
Marketing.......................................... 3,074 1,022 581
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Loss from operations.................................. (26,789) (15,602) (6,803)
Interest income, net.................................. 2,127 1,389 864
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Net loss.............................................. $(24,662) $(14,213) $(5,939)
======== ======== =======
Basic and diluted net loss per share(1)............... $ (2.34) $ (1.64) $ (0.91)
======== ======== =======
Weighted average shares outstanding(1)................ 10,536 8,665 6,543
</TABLE>
<TABLE>
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DECEMBER 31, 1998
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ACTUAL AS ADJUSTED(2)
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(IN THOUSANDS)
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CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................... $21,797 $ 66,489
Total assets.............................................. 29,482 74,174
Accumulated deficit....................................... (52,281) (52,281)
Total shareholders' equity................................ 24,517 69,209
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(1) See note 1 to the consolidated financial statements for an explanation of
the method used to compute net loss per share.
(2) Gives effect to the sale of the 2,400,000 shares of common stock we are
offering and the application of the estimated net proceeds, after deducting
underwriting discounts and commissions and estimated offering expenses. See
"Use of Proceeds" and "Capitalization."
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks described below are not the only ones facing our
company. Additional risks not presently known to us or that we currently deem
immaterial may also impair our business operations.
Our business, financial condition or results of operations could be
materially adversely affected by any of these risks. The trading price of our
common stock could decline due to any of these risks and you may lose all or
part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in the prospectus.
DEPENDENCE ON THE SUCCESSFUL DEVELOPMENT AND COMMERCIALIZATION OF THE BETA-CATH
SYSTEM
We have not yet successfully commercialized any product in the United
States and have only recently started to sell the Beta-Cath System in Europe. We
anticipate that for the foreseeable future we will be solely dependent on the
successful development and commercialization of the Beta-Cath System. Our
failure to commercialize the Beta-Cath System would have a material adverse
effect on our business, financial condition and results of operations.
The Beta-Cath System will require further development and clinical testing,
as well as regulatory approval, before we can market it in the United States.
Our development efforts and clinical testing may not be successful. In addition,
we may be unable to:
- Show the safety and effectiveness of the Beta-Cath System in
placebo-controlled human clinical trials;
- Obtain regulatory approval of the Beta-Cath System;
- Manufacture the Beta-Cath System in commercial quantities at
acceptable costs;
- Gain any significant degree of market acceptance of the Beta-Cath
System among physicians, patients and health care payors; or
- Demonstrate that the Beta-Cath System is an attractive and
cost-effective alternative or complement to other procedures,
including coronary stents and competing vascular brachytherapy
devices.
Commercialization of the Beta-Cath System in Europe is subject to certain
additional risks. Physicians in Europe are generally less receptive to and
slower to adopt new medical devices and technologies than physicians in the
United States due to various factors. These factors include the influence of
national health care policies and reimbursement strategies of health care payors
and the frequent absence of pivotal human clinical trial results at the time a
manufacturer qualifies to apply the CE marking to a new medical device and
commences sale of the device. We may never achieve significant revenue from
sales in Europe or ever achieve or sustain profitability in our European
operations.
Because the Beta-Cath System is our sole near-term product focus, we could
be required to cease operations if it is not successfully developed or
commercialized. See "Business -- Clinical Trials," "-- The Beta-Cath System,"
"-- Marketing and Distribution," "-- Manufacturing, Sources of Supply and
Scale-Up" and "-- Government Regulation."
LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND EXPECTATION OF FUTURE
LOSSES THROUGH AT LEAST THE YEAR 2000
We have a limited history of operations. Since our inception in May 1992,
we have been primarily engaged in developing and testing our Beta-Cath System.
We have generated only limited revenue and do not have experience in
manufacturing, marketing or selling our products in quantities necessary for
achieving profitability.
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At December 31, 1998, we had accumulated a deficit of approximately $52.3
million since our inception in 1992. The commercialization of the Beta-Cath
System and other new products, if any, will require substantial additional
development, clinical, regulatory, manufacturing, sales and marketing and other
expenditures. We expect our operating losses to continue through at least 2000
as we continue to expand our product development, clinical trials and marketing
efforts. We may never commercialize the Beta-Cath System or any other product or
achieve profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
EARLY STAGE OF CLINICAL TESTING OF BETA-CATH SYSTEM; NO ASSURANCE OF ITS SAFETY
AND EFFECTIVENESS
The safety and effectiveness of the Beta-Cath System has not been
determined in a placebo-controlled, pivotal trial. We are currently conducting
multi-center human clinical trials of the Beta-Cath System to determine its
safety and effectiveness. At March 10, 1999, we had enrolled 1,064 of the
approximately 1,100 patients we had initially targeted for enrollment in the
Beta-Cath System Trial and 298 of the approximately 386 patients we anticipate
enrolling in the START Trial. On March 12, 1999, we announced our plan to
increase patient enrollment in the stent placement subgroup of the Beta-Cath
System Trial by up to 300 patients subject to FDA approval of a supplement to
our investigational device exemption requesting this increase. As is typical for
patients receiving stent placement, the patients in the stent placement subgroup
of the Beta-Cath Trial receive anti-platelet therapy to prevent stent
thrombosis, a condition which can lead to acute closure of the treated artery.
Stent thrombosis typically occurs within 30 days of treatment in a small
percentage of patients receiving stent placement. There have been reported
incidences of stent thrombosis in the Beta-Cath System Trial. These patients
developed the condition later following their treatment than is normally
observed. As a result, in November 1998, we modified the Trial protocol for the
stent placement subgroup to extend the anti-platelet therapy from two weeks to
60 days following stent placement and to provide for additional follow-up
contact with these patients in the second, third and fourth months after
treatment. The protocol modification was recommended by the Data Safety and
Monitoring Board, an independent committee of clinicians and statisticians that
has responsibility for reviewing the study protocol and clinical events at
regular intervals during patient enrollment into the Trial. Based on its review
of available data at its March 1999 meeting, which included the incidence of
major adverse cardiac events, the DSMB recommended that we increase the patient
enrollment in the stent placement subgroup to ensure sufficient data to evaluate
the safety and effectiveness of the Beta-Cath System with the revised
anti-platelet therapy protocol.
Both of our current pivotal trials require follow-up examinations with
patients after eight months. It is only after analysis of a statistically
significant number of patients in one of these trials that we would apply for
the regulatory approvals required to commence marketing the Beta-Cath System in
the United States. Various factors, including difficulties in enrolling patients
and performing follow-up examinations on patients could delay completion of
either trial for an indeterminate amount of time. Additionally, we cannot be
sure that the FDA will approve our proposed increase in the number of patients
to be enrolled in the stent placement subgroup of the Beta-Cath System Trial in
a timely manner or at all. The data from these trials, if completed, may not
demonstrate the safety and effectiveness of the Beta-Cath System and may not be
adequate to support our application to the FDA for pre-market approval. In
particular, we cannot be sure that the incidence of stent thrombosis seen in the
Beta-Cath System Trial will be resolved by the protocol modification. If the
Beta-Cath System does not prove to be safe and effective in clinical trials, our
business, financial condition and results of operations will be materially
adversely affected. In addition, the clinical trials may identify significant
technical or other obstacles to obtaining necessary regulatory approvals.
Because vascular brachytherapy in human coronary arteries is a relatively new
treatment, the long-term effects on patients are not known and likely will not
be known for several years. As a result, even if our current clinical trials
indicate the Beta-Cath System is safe and effective over an eight-month period,
we cannot be sure that the Beta-Cath System will be safe and effective over the
long term. See "Business -- Clinical Trials" and "-- Government Regulation."
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NO ASSURANCE OF REGULATORY APPROVALS
United States Pre-Market Approvals
We will not be able to commence marketing or commercial sales of the
Beta-Cath System in the United States unless we receive pre-market approval from
the FDA. We do not expect to submit a pre-market approval application until the
second quarter of 2000 at the earliest, following analysis of a statistically
significant number of patients in the START Trial. We likely will not be in
position to make an additional submission to the FDA seeking approval to market
the Beta-Cath System for reducing the incidence of restenosis following PTCA or
stent placement prior to the second half of 2000, after analysis of a
statistically significant number of patients in the Beta-Cath System Trial.
As discussed above under "Risk Factors -- Early Stage of Clinical Testing
of Beta-Cath System; No Assurance of its Safety and Effectiveness," based on its
review of available data at its March 1999 meeting, including the incidence of
major adverse cardiac events, the DSMB recommended that we increase the patient
enrollment in the stent placement subgroup of our Beta-Cath System Trial to
ensure sufficient data to evaluate the safety and effectiveness of the Beta-Cath
System with the November 1998 protocol modification. On March 12, 1999, based
upon the DSMB recommendation, we announced that we plan to increase the stent
placement subgroup in the Beta-Cath System Trial by up to 300 patients, subject
to FDA approval of a supplement to our investigational device exemption
requesting this increase. We may not receive such FDA approval in a timely
manner or at all. If the approval is not received in a timely manner, we may be
delayed in completing the Beta-Cath System Trial. If we do not receive such FDA
approval at all, it is unlikely that the FDA would accept for filing an
application for approval to market the Beta-Cath System in the United States for
use following stent placement and potentially for use following PTCA. Even if
the FDA were to accept any such application for filing, it is also unlikely that
the FDA would approve the application in a timely manner or at all. Accordingly,
failure to receive FDA approval to increase the patient enrollment in the stent
placement subgroup of the Beta-Cath System Trial under the November 1998
protocol modification would have a material adverse effect on our business,
financial condition and results of operations.
We do not anticipate FDA approval of any application to market the
Beta-Cath System in the United States for any indication any earlier than one
year after the FDA accepts the application for filing. Assuming the START Trial
yields positive results, we expect that our application submitted to the FDA
seeking approval to market the Beta-Cath System in the United States to treat
"in-stent" restenosis will be based upon the enrollment of 386 patients in that
Trial. The FDA could require that we submit results from our Beta-Cath System
Trial prior to considering our initial application for approval of our device in
treating "in-stent" restenosis. As discussed above, instead of filing an
additional, separate application, we may amend our initial application relating
to "in-stent" restenosis to seek pre-market approval of the Beta-Cath System for
use following PTCA and stent placement based upon the results of the Beta-Cath
System Trial. If we file such an amendment, the FDA would restart the statutory
review period for our initial application as of the date of the filing of the
amendment. This would cause a delay in obtaining FDA approval. Moreover, if
either Trial does not yield positive results, the FDA's consideration of any
application we have submitted could be adversely affected; any such application
could be refused filing for substantive review, or if filed, could be subject to
requests for substantial amounts of additional information, or ultimately could
be denied approval.
The FDA may request additional data or require that we conduct further
clinical trials, either of which could delay or preclude our receipt of
pre-market approval as well as require significant additional expenditures. Such
a delay or failure to receive pre-market approval would have a material adverse
effect on our business, financial condition and results of operations and could
result in cessation of our operations. Even if we receive approval based on the
results of the START Trial, we will be limited to marketing the Beta-Cath System
for use with patients who are being treated for "in-stent" restenosis in a
single coronary artery. In order to market the Beta-Cath System for a broader
range of patients, we will seek to expand the indications for which the
Beta-Cath System can be marketed to include patients receiving PTCA or stent
placement. Even if we receive approval based on the results of the Beta-Cath
System Trial, we would be limited to marketing the Beta-Cath System for use with
patients who are being treated for one lesion in a single coronary
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<PAGE> 12
artery following PTCA or stent placement. In order to market the Beta-Cath
System for use with a broader range of patients, we will be required to
demonstrate to the FDA through additional clinical trials that the Beta-Cath
System is safe and effective in treating a broader range of indications and the
FDA must approve a pre-market approval application, application amendment or
application supplement covering the broader range of indications for the device.
Foreign Pre-Market Approvals
Sales of the Beta-Cath System outside the United States are subject to
regulatory requirements that vary widely from country to country but generally
include pre-marketing governmental approval. The time required to obtain
approval for sale in foreign countries may be longer or shorter than required
for FDA approval, and the requirements for the conduct of clinical trials,
marketing authorization, pricing and reimbursement differ from those in the
United States. Moreover, the export of medical devices from the United States
must be in compliance with FDA regulations. In August 1998, we qualified to
apply CE marking to the Beta-Cath System, a requirement necessary to sell our
device in most of Western Europe. We are subject to continuing audit and
reporting requirements related to this marking. We may be delayed or precluded
from marketing the Beta-Cath System in other foreign countries. Foreign
pre-market and other regulatory approvals of the Beta-Cath System, if granted,
may include significant limitations on the indicated uses for which the device
may be marketed.
Approvals to Use, Handle and Transfer Radioactive Materials
Our business involves the import, manufacture, transfer, use and disposal
of Strontium 90 (Strontium/Yttrium), the beta-emitting radioisotope utilized in
the Beta-Cath System's radiation source train. Accordingly, manufacture,
distribution, use and disposal of the radioactive material used in the Beta-Cath
System in the United States will be subject to federal, state and/or local laws
and regulations relating to the use and handling of radioactive materials.
Specifically, we must obtain approval from the State of Georgia Department of
Natural Resources to commercially distribute our radiation sources to licensed
recipients in the United States. In addition, we must also comply with NRC,
Georgia and United States Department of Transportation regulations on the
labeling and packaging requirements for shipment of radiation sources to
hospitals or other users of the Beta-Cath System. Further, hospitals and/or
physicians in the United States may be required to amend their radiation
licenses to hold, handle and use Strontium 90 prior to receiving and using our
Beta-Cath System.
The distribution and use of the Beta-Cath System outside the United States
is subject to radiation regulatory requirements that vary from country to
country and sometimes vary within a given country. Generally, each country has a
national regulatory agency responsible for regulating the safe practice and use
of radiation in its jurisdiction. In addition, each hospital desiring to use the
Beta-Cath System is generally required to amend its license to store, handle and
receive the Strontium 90 sources in our device. Generally, these licenses are
specific to the amount and type of radioactivity utilized. In addition,
generally the use of a radiation source by a physician, either for a diagnostic
or therapeutic application, also requires a license, which again is specific to
the isotope and the clinical application.
Obtaining any of the foregoing radiation-related approvals and licenses can
be complicated and time consuming. If we or any hospital or physician is
significantly delayed in obtaining any of the foregoing approvals or any of
those approvals are not obtained, our business, financial condition and results
of operations could be materially adversely affected. See "Business -- Marketing
and Distribution" and "-- Government Regulation."
See "Business -- Government Regulation" for a discussion of certain
additional risks relating to regulation of medical devices, including ongoing
regulation of approved devices.
RAPID TECHNOLOGICAL CHANGE AND INTENSE COMPETITION
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.
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New developments in technology could render vascular brachytherapy generally or
the Beta-Cath System in particular noncompetitive or obsolete.
Vascular brachytherapy may compete with other treatment methods designed to
improve outcomes from coronary artery procedures that are well established in
the medical community, such as coronary stents. Stents are the predominant
treatment currently utilized to reduce the incidence of coronary restenosis
following PTCA and were used in approximately 60% of all PTCA procedures
performed worldwide in 1998. Manufacturers of stents include Johnson & Johnson,
Medtronic, Inc., Guidant Corporation and Boston Scientific Corporation. Stent
manufacturers often sell many products used in the cardiac catheterization labs,
commonly referred to as cath labs, and as discussed below certain of these
companies are developing vascular brachytherapy devices.
Other devices under development that use vascular brachytherapy include:
- a radioactive-tipped guidewire;
- a radioactive stent; and
- a radioactive fluid-filled balloon.
The most advanced competitive approach may be represented by the
radioactive guidewire, as we are aware that Johnson & Johnson, Tyco
International Ltd. and Guidant are investigating this general type of device in
the pivotal clinical trial stage in the United States. In March 1999, Johnson &
Johnson announced preliminary six-month angiographic results of its pivotal
trial in the United States relating to the safety and efficacy of its
catheter-based gamma radioactive-tipped wire in treating "in-stent" restenosis.
The preliminary results, which included angiographic follow-up on 86% of the 252
patients enrolled at 12 sites, showed a 59% reduction in "in-stent" restenosis
in patients receiving radiation (Iridium -- 192) compared to those patients
receiving a placebo. Johnson & Johnson announced at the same time that its
subsidiary, Cordis Corporation, plans to submit a pre-market approval
application to the FDA by mid-year 1999 for this device. In addition Boston
Scientific has a beta-emitting radioactive wire under investigation in Europe
and in March 1999, reported the results of its pilot study in the United States.
In March 1999, the principal investigator of Boston Scientific's pilot study in
the United States reported that 49 patients with "in-stent" restenosis received
treatment with a device containing a beta radioactive wire. The principal
investigator further reported that results based on six-month angiographic
follow-up of a majority of those patients indicated about 16% of the patients
experienced restenosis compared with about 66% of the patients in a historical
control group.
Many of our competitors and potential competitors have substantially
greater capital resources than we do and also have greater resources and
expertise in the areas of research and development, obtaining regulatory
approvals, manufacturing and marketing. We cannot assure you that competitors
and potential competitors will not 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 Beta-Cath System obsolete or
noncompetitive. Additionally, many of the competitors have the capability to
bundle a wide variety of products in sales to cath labs. We may be unable to
compete effectively against such competitors and other potential competitors in
terms of manufacturing, marketing and sales.
Any product we develop that gains regulatory clearance or approval will
have to compete for market acceptance and market share. An important factor in
such competition may be the timing of market introduction of competitive
products. Accordingly, we expect the relative speed with which we can develop
products, gain regulatory approval and reimbursement acceptance and supply
commercial quantities of the product to the market to be an important
competitive factor. One of our competitors, Cordis Corporation, has announced
its intention to submit a pre-market approval application to the FDA by mid-year
1999 for its gamma-emitting vascular brachytherapy device. We believe that the
primary competitive factors for products addressing restenosis include safety,
efficacy, ease of use, reliability, suitability for use in cath labs, service
and price. We also believe that physician relationships, especially
relationships with leaders in the interventional cardiology and radiation
oncology community, are important competitive factors. Physicians and hospitals
could prefer to use gamma radiation-based devices rather than beta
radiation-based devices including the Beta-Cath System. Other manufacturers may
be the first to market a vascular brachytherapy
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system to reduce the incidence of restenosis in the United States. We may also
not be the first to market a beta-emitting vascular brachytherapy system in the
United States or be able to market such a system effectively. See
"Business -- Competition."
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT FOR THE BETA-CATH SYSTEM
The Beta-Cath System, where approved for commercial sale, will be sold
primarily to hospitals. Hospitals and physicians bill various third-party
payors, such as government health programs, private health insurance plans,
managed care organizations and other similar programs, for the health care
services provided to their patients.
If and when we receive FDA approval to market the Beta-Cath System in the
United States, third-party payors may not cover procedures using the Beta-Cath
System or, if covered, third-party payors may place certain restrictions on the
circumstances in which coverage will be available. In addition, payors may deny
reimbursement if they determine a product was not used in accordance with
established payor protocol regarding cost-effective treatment methods or was
used for an unapproved indication. Third-party payors are increasingly
challenging the prices charged for medical products and services and, in some
instances, have put pressure on medical device suppliers and health care
providers to lower their prices. We are unable to predict what changes
third-party health care payors will make in their reimbursement methodologies.
Third-party payors or health care providers may not consider the Beta-Cath
System cost-effective and may not reimburse for its usage or, if they do, may
reimburse at levels that adversely affect its market acceptance and our ability
to sell the Beta-Cath System on a profitable basis.
The cost of health care has risen significantly over the past decade, and
legislators, regulators, third-party payors and health care providers have made
and may continue to make proposals to curb these costs. Failure by hospitals and
physicians to obtain reimbursement from third-party payors, changes in
third-party payors' policies toward reimbursement for the Beta-Cath System or
legislative action could have a material adverse effect on our business,
financial condition and results of operations.
Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
devices and procedures. In most markets there are private insurance systems as
well as government managed systems. Reimbursement for our products may not be
available in international markets under either government or private
reimbursement systems. See "Business -- Third-Party Reimbursement."
UNCERTAINTY OF MARKET ACCEPTANCE OF VASCULAR BRACHYTHERAPY AND THE BETA-CATH
SYSTEM
Even if we obtain regulatory approvals and reimbursement from third party
payors for the use of the Beta-Cath System, our device may not gain any
significant degree of market acceptance among physicians and patients. Vascular
brachytherapy is a new treatment method and has not been used to any significant
extent by physicians outside the context of clinical trials. We believe that
physicians' acceptance of vascular brachytherapy generally and the Beta-Cath
System in particular will be essential for our operations and we may not obtain
this acceptance. Even if we establish clinical efficacy of the Beta-Cath System,
cardiologists, radiation oncologists and other physicians may elect not to
recommend vascular brachytherapy generally or the Beta-Cath System in
particular. Even if recommended, physicians may not utilize the Beta-Cath System
in a sufficient number of procedures to generate significant revenues or to
enable us to operate profitably. In addition, market acceptance of our device
could be hindered because using the Beta-Cath System currently requires the
participation not only of an interventional cardiologist, but also a radiation
oncologist appropriately credentialed to administer our beta radiation source
train. See "Business -- Marketing and Distribution."
UNCERTAINTY REGARDING OUR ISSUED PATENT, PENDING PATENT APPLICATIONS AND OTHER
MATTERS
On November 4, 1997, we received United States Patent No. 5,683,345 on the
Beta-Cath System. United States Patent No. 5,683,345 may not offer any
protection to us. It may also be reexamined, invalidated
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or circumvented. In addition, claims under our other pending applications may
not be allowed, or if allowed, may not offer any protection or may be
reexamined, invalidated or circumvented. Competitors may have or 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 received a letter from NeoCardia, L.L.C., dated July 7, 1995, in which
NeoCardia notified us that it is the exclusive licensee of United States Patent
No. 5,199,939, or the Dake patent, and requested that we confirm that our
products did not infringe the claims of the Dake patent. On August 22, 1995 our
patent counsel responded on our behalf that we did not infringe the Dake patent.
The United States Patent and Trademark Office later reexamined the Dake
patent. In the reexamination proceeding some of the patent claims were amended
and new claims were added. We have concluded, based upon advice of patent
counsel, that our Beta-Cath System would not infringe any claim of the Dake
patent as reexamined.
In May 1997 Guidant acquired NeoCardia together with the rights under the
Dake patent. Guidant is attempting to develop and commercialize products that
may compete with the Beta-Cath System and has significantly greater capital
resources than the company. Guidant may sue for patent infringement in an
attempt to obtain damages from us and/or injunctive relief restraining us from
commercializing the Beta-Cath System in the United States. If Guidant were
successful in any such litigation, we might be required to obtain a license from
Guidant under the Dake patent to market the Beta-Cath System in the United
States, if such license were available, or be prohibited from selling the
Beta-Cath System in the United States. Any of these actions could have a
material adverse effect on our business, financial condition and results of
operations, or could result in cessation of our business.
We have two versions of our delivery catheter: a "rapid exchange" catheter
and an "over the wire" catheter. As a result of certain United States patents
held by other medical device manufacturers covering "rapid exchange" catheters,
we currently intend to sell the "over the wire" version of our delivery catheter
in the United States. If further investigation reveals that we may sell a "rapid
exchange" version in the United States without infringing the valid patent
rights of others, we might decide to do so in the future. However, we cannot
assure that we will be able to sell a "rapid exchange" version in the United
States without a license of third party patent rights or that such a license
would be available to us on favorable terms or at all. See
"Business -- Beta-Cath System Design and Advantages."
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that we will not become subject
to patent-infringement claims or litigation or interference proceedings declared
by the United States Patent and Trademark Office to determine the priority of
inventions. The defense and prosecution of intellectual property suits, or
interference proceedings and related legal and administrative proceedings are
both costly and time-consuming. Litigation may be necessary to enforce our
patents, to protect our trade secrets or know-how or to determine the
enforceability, scope and validity of the proprietary rights of others. Any
litigation or interference proceedings will result in substantial expense to us
and significant diversion of effort by our technical and management personnel.
An adverse determination in litigation or interference proceedings to which we
may become a party could subject us to significant liabilities to third parties,
require us to seek licenses from third parties, require us to redesign our
products or processes to avoid infringement or prevent us from selling our
products in certain markets, if at all. Although patent and intellectual
property disputes regarding medical devices have often been settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and could include significant ongoing royalties. Furthermore,
there can be no assurance that the necessary licenses would be available to us
on satisfactory terms, if at all, or that we could redesign our products or
processes to avoid infringement. Any adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling our products, which would have a material
adverse effect on our business, financial condition and results of operations.
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See "Business -- Patents and Proprietary Rights" for a discussion of
uncertainties with respect to the secrecy of pending patent applications filed
by others, potential loss of some of our patent and proprietary rights relating
to the Beta-Cath System for failure to pay royalties to Emory University, and
potential damages that we could suffer through the unauthorized disclosure of
information that is proprietary or confidential to us.
THE BETA-CATH SYSTEM UTILIZES RADIOACTIVE MATERIALS
Because our business involves the import, manufacture, transfer, use and
disposal of Strontium 90, our activities and those of our suppliers and
distributors, as well as those of the hospitals and physicians that utilize the
Beta-Cath System, must comply with extensive state and federal radiation safety
regulations in the United States and similar laws in other countries. Violations
of these regulations and laws by us or our suppliers or distributors, or any
malfunctions of our device or errors by hospitals and physicians in
administering treatment, could result in accidental contamination or injury to
patients, health care workers and employees, as well as unexpected remedial
costs and penalties. Any such violation or incident could adversely impact the
market for our device, lead to suspension of our trials or cessation of sales of
the Beta-Cath System and subject us to liability for personal injuries resulting
from such contamination, any of which could have a material adverse effect on
our business, financial condition and results of operations. Regulatory
enforcement action such as civil penalties or license suspension or revocation
could likewise lead to suspension of our trials or cessation of sales. In
addition, because vascular brachytherapy in coronary arteries is a new
treatment, any similar regulatory violations or incidents involving our
competitors could delay or erode acceptance of the therapy among physicians and
patients and could reduce the likelihood of regulatory approval of vascular
brachytherapy devices generally. See "Business -- Government Regulation."
DEPENDENCE ON SINGLE VENDOR TO SUPPLY RADIOISOTOPES
To date, we have obtained all our beta radiation isotope requirements from
a single supplier, Bebig Isotopentechnik und Umweltdiagnostik GmbH, a German
corporation. Our supply agreement with Bebig has an initial term ending in
November 2000. During the term, we have agreed not to purchase more than 30% of
our annual radioisotope requirements from any supplier other than Bebig. In view
of the technical expertise and capital investment required to manufacture the
radioactive sources and the limited number of manufacturers of Strontium 90, it
would be difficult to find an alternate source of supply. Our business, results
of operations and financial condition could be materially adversely affected by
Bebig's failure to provide us with beta isotopes on a timely basis during the
term of the agreement or by our inability to obtain an alternative source of
supply on a timely basis and on terms satisfactory to us following any
termination of the agreement. In addition, portions of the process used to
manufacture the materials may be proprietary to Bebig. Bebig has no obligation
to make any of its know-how or technology available to us or to any alternate
source of supply, except in limited circumstances. See
"Business -- Manufacturing, Sources of Supply and Scale-Up."
DEPENDENCE ON THIRD PARTY SUPPLIERS FOR COMPONENTS OF OUR BETA-CATH SYSTEM
We currently rely on third party manufacturers for the supply of the
hand-held transfer device, the catheter and other components of our Beta-Cath
System. The supply of these components requires a long lead time. In addition,
we could not quickly establish additional or replacement suppliers or internal
manufacturing capabilities for these components. An existing vendor's failure to
supply components in a timely manner or our inability to obtain these components
on a timely basis from another supplier could have a material adverse effect on
our ability to manufacture and therefore market the Beta-Cath System. See
"Business -- Manufacturing, Sources of Supply and Scale-Up."
LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE
At present we have limited sales and marketing capability. We intend to
sell our products directly in the United States and the larger markets in Europe
and through international distributors in other markets. We may not be able to
recruit and train adequate sales and marketing personnel to successfully
commercialize the Beta-Cath System in the United States and internationally. The
inability to recruit or retain suitable
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international distributors could also have a material adverse effect on our
business, financial condition and results of operations. We intend to contract
with one or more established market leaders in the radioisotope business to
inventory, calibrate, test and deliver the radiation sources and to provide
related licensing assistance, customer support and recovery services to
hospitals in both the United States and international markets. If we are unable
to enter into and maintain such distribution agreements with suitable
international distributors on acceptable terms, our business, financial
condition and results of operations could be materially adversely affected. See
"Business -- Marketing and Distribution."
LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK
To date, we have not yet successfully commercialized the Beta-Cath System,
and our manufacturing activities have consisted of producing small quantities of
our products for use in clinical trials and our initial product launch in
Europe. To achieve profitability, the Beta-Cath System must be manufactured in
commercial quantities in compliance with regulatory requirements and at
acceptable costs. Production in commercial quantities will require us to expand
our manufacturing capabilities and to hire and train additional personnel. We
have no experience in manufacturing our products in commercial quantities. We
may encounter difficulties in scaling up production, including problems
involving production yields, quality control and assurance, component supply and
shortages of qualified personnel. Difficulties encountered in manufacturing
scale up could have a material adverse effect on our business, financial
condition and results of operations. We cannot assure that future manufacturing
difficulties, which could have a material adverse effect on our business,
financial condition and results of operations, will not occur. See "Business --
Manufacturing, Sources of Supply and Scale-Up."
RISK OF INADEQUATE FUNDING
We anticipate that our losses will continue through at least the year 2000
as we expend substantial resources to fund clinical trials in support of
regulatory approvals, continue development of the Beta-Cath System and launch
our product first in Europe and then in the United States. Our future liquidity
and capital requirements will depend upon numerous factors, including:
- the progress of our clinical research and product development programs;
- the receipt of and the time required to obtain regulatory approvals and
clearances;
- the resources required to gain approvals;
- the resources we devote to the development, manufacture and marketing of
the Beta-Cath System;
- the resources required to hire and develop a direct sales force in the
United States and the key markets in Europe and develop distributors in
other markets;
- the resources needed to expand manufacturing capacity and facilities
requirements; and
- market acceptance and demand for the Beta-Cath System.
We believe that our existing capital resources, together with the net
proceeds from this offering, will be sufficient to fund the company through the
end of 2000, but those resources may prove insufficient. Additional capital may
be required to launch the Beta-Cath System in the United States. We may in the
future seek to raise additional funds through bank facilities, debt or equity
offerings or other sources of capital. We cannot assure that additional
financing, if required, will be available on satisfactory terms, or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EXPOSURE TO LIABILITY CLAIMS; LIMITED INSURANCE COVERAGE
The use of the Beta-Cath System entails an inherent risk of adverse
effects, including accidental radiation contamination, which could result in
product liability or other claims against us, including claims by patients,
health care workers and employees. We may not have sufficient resources to
satisfy any liability resulting from any such claims. We maintain product
liability insurance with coverage of an annual aggregate maximum of $8 million.
There can be no assurance that product liability or other claims will not exceed
the insurance
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coverage limits, that the insurance will continue to be available on
commercially reasonable terms or at all, or that a product liability or other
claim would not materially adversely affect our business, financial condition or
results of operations. See "Business -- Product Liability and Insurance."
DEPENDENCE ON KEY PERSONNEL
Our business and future operating results depend in significant part upon
the continued contributions of our key technical personnel and senior
management, many of whom would be difficult to replace. Our business and future
operating results also depend in significant part upon our ability to attract
and retain qualified management, manufacturing, technical, marketing, sales and
support personnel for our operations. Competition for such personnel is intense,
and we may not succeed in attracting or retaining such personnel. The loss of
key employees, the failure of any key employee to perform adequately or our
inability to attract and retain skilled employees, as needed, could materially
adversely affect our business, financial condition and results of operations.
See "Management -- Executive Officers and Directors" and "-- Executive
Compensation."
ISSUANCE OF PREFERRED STOCK MAY ADVERSELY AFFECT RIGHTS OF COMMON
SHAREHOLDERS OR DISCOURAGE A TAKEOVER
Under our amended and restated articles of incorporation, our board of
directors has the authority to issue up to 5,000,000 shares of preferred stock
and to determine the price, rights, preferences and privileges of those shares
without any further vote or action by our shareholders. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any shares of preferred stock that may be issued in
the future.
In October 1996 our board of directors authorized 1,000,000 shares of
Series A Participating Preferred Stock in connection with its adoption of a
shareholder rights plan, under which we issued rights to purchase Series A
Participating Preferred Stock to holders of the common stock. Upon certain
triggering events, such rights become exercisable to purchase common stock (or,
in the discretion of our board of directors, Series A Participating Preferred
Stock) at a price substantially discounted from the then current market price of
the common stock. Our shareholder rights plan could generally discourage a
merger or tender offer involving our securities that is not approved by our
board of directors by increasing the cost of effecting any such transaction and,
accordingly, could have an adverse impact on shareholders who might want to vote
in favor of such merger or participate in such tender offer.
While we have no present intention to authorize any additional series of
preferred stock, such issuance, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could also
have the effect of making it more difficult for a third party to acquire a
majority of our outstanding voting stock. The preferred stock may have other
rights, including economic rights senior to the common stock, and, as a result,
the issuance thereof could have a material adverse effect on the market value of
the common stock.
OTHER PROVISIONS DISCOURAGING A TAKEOVER
The amended and restated articles of incorporation provide for a classified
board of directors, the existence of which could discourage attempts to acquire
us. Furthermore, we are subject to the anti-takeover provisions of the Florida
Business Corporation Act, the application of which would also have the effect of
delaying or preventing a merger, takeover or other change of control of the
company and therefore could discourage attempts to acquire the company.
IMMEDIATE AND SUBSTANTIAL DILUTION TO NEW INVESTORS
Purchasers of the common stock offered by this prospectus will incur an
immediate and substantial dilution of approximately $14.75 per share in net
tangible book value from the public offering price of $20.00 per share.
Additional dilution is likely to occur upon the exercise of outstanding options.
See "Dilution."
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PRICE VOLATILITY AND FLUCTUATIONS IN OPERATING RESULTS
The market price of our common stock could decline below the public
offering price. Specific factors relating to our business or broad market
fluctuations may materially adversely affect the market price of our common
stock. The trading price of our common stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
announcements of technological innovations, new products or clinical data
announced by us or our competitors, governmental regulatory action, developments
with respect to patents or proprietary rights, general conditions in the medical
device or cardiovascular device industries, changes in earnings estimates by
securities analysts, or other events or factors, many of which are beyond our
control. In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many medical
device companies and which have often been unrelated to the operating
performance of such companies. Our revenue or operating results in future
quarters may be below the expectations of securities analysts and investors. In
such an event, the price of our common stock would likely decline, perhaps
substantially. During the twelve month period ended March 15, 1999, the closing
price of our common stock ranged from a high of $30.25 per share to a low of
$11.00 per share and ended that period at $20.50 per share.
In addition, our results of operations may fluctuate significantly from
quarter to quarter and will depend upon numerous factors, including product
development efforts, actions relating to regulatory and reimbursement matters,
progress and costs related to clinical trials, the extent to which our products
gain market acceptance, and competition. These factors may cause the price of
our stock to fluctuate, perhaps substantially. See "Price Range of the Common
Stock" and "Underwriting."
POTENTIAL ADVERSE EFFECT OF OUTSTANDING REGISTRATION RIGHTS
Holders of an aggregate of 1,034,965 shares of our common stock, including
1,018,699 shares owned by the Hillman trustees listed in the table under
"Principal and Selling Shareholders," have demand and "piggyback" registration
rights, requiring us to register these shares under the Securities Act of 1933,
as amended, upon demand of these holders or in connection with a public offering
of our shares by us. In certain cases, we or a managing underwriter of a
proposed public offering by us may impose certain limitations on the exercise of
these registration rights. We have obtained waivers of the "piggyback" rights
applicable to this offering. The exercise of these rights and the sale of any
such shares under a registration statement under the Securities Act of 1933, as
amended, or the perception that these sales could occur, could adversely affect
the prevailing market price of our common stock. These holders have agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated on behalf
of the underwriters, they will not, during the period ending 90 days after the
date of this prospectus: offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock; or enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the common stock.
INABILITY OF THE COMPANY OR OUR THIRD PARTY SUPPLIERS TO BECOME YEAR 2000
COMPLIANT
Many existing computer programs were designed to use only two digits to
identify a year in the date field without considering the impact of the upcoming
change in century. If not corrected, many computer applications could fail or
create erroneous results by or at the year 2000. We are taking steps to ensure
that our business systems software and equipment will continue to function
properly after December 31, 1999. In doing so, we have established a team, which
will work directly with management to (1) assess and test all internal
information systems and other systems that may be affected by the year 2000 date
change; (2) assess and test our products that may be affected by the year 2000
date change; (3) communicate with third parties that supply our products to
ensure they are addressing the year 2000 issue; and (4) compose a contingency
and disaster recovery plan to ensure resolution of problems that may arise as a
result of the year 2000 date change. Until we complete this assessment, we will
not be able to determine the costs of becoming year 2000 compliant, the risks of
non-compliance and our ability to conduct our business under a contingency plan.
There is an inherent uncertainty of the costs and timing of achieving compliance
on the wide variety of
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systems we use as well as the consequences of any unanticipated disruption in
our business resulting from the failure of one of our software applications. We
also rely or may rely, directly and indirectly, on external systems of business
enterprises such as suppliers and clinical research organizations, both domestic
and international, government agencies, hospitals, physicians and other third
parties for accurate exchange of data. Even if our internal systems are not
materially affected by the year 2000 computer programming issue, we could be
affected by disruptions in the operation of the enterprises with which we
interact and our business, and results of operations and financial condition
could be materially adversely affected if any such enterprises are not year 2000
compliant. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, those listed under "Risk Factors" and elsewhere
in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements.
Moreover, neither we nor any other person assumes responsibility for the
accuracy and completeness of such statements. We are under no duty to update any
of the forward-looking statements after the date of this prospectus to conform
such statements to actual results.
20
<PAGE> 21
USE OF PROCEEDS
We estimate the net proceeds to us from the sale of the shares of common
stock offered by us in this offering to be approximately $44,692,000
($47,729,800 if the underwriters' over-allotment option is exercised in full)
after deducting underwriting discounts and commissions and estimated expenses of
this offering. If the underwriters' over-allotment option is exercised, we will
not receive any proceeds from the sale of up to 200,000 shares by selling
shareholders.
We intend to use these net proceeds to fund our ongoing Beta-Cath System
Trial and START Trial, to expand our sales force in Europe and to establish our
sales force in the United States, to expand our internal manufacturing
capabilities and outside sources of supply and to investigate improvements to
and other applications for our Beta-Cath System. We expect to expend
approximately $7 million over the next three years for manufacturing equipment
and other capital expenditures. We will add the balance of the net proceeds of
this offering to working capital. Exact allocation of the proceeds and the
timing of such expenditures will depend on various factors, including the timing
of our regulatory approvals and our clinical trials.
We may also use a portion of the net proceeds of this offering for
investments in or acquisitions of complementary businesses, products or
technologies, although no such transactions are currently under negotiation.
Pending the use of the net proceeds of this offering, we will invest the funds
in short-term, interest-bearing, investment-grade securities.
PRICE RANGE OF OUR COMMON STOCK
The common stock is quoted on The Nasdaq National Market under the symbol
"NOVT." The following table sets forth the high and low closing sale prices of
our common stock, as reported by The Nasdaq National Market, for the periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1997:
First Quarter............................................... $19.000 $13.000
Second Quarter.............................................. 17.125 13.250
Third Quarter............................................... 17.500 14.875
Fourth Quarter.............................................. 26.000 16.000
1998:
First Quarter............................................... 31.813 21.500
Second Quarter.............................................. 27.125 22.063
Third Quarter............................................... 23.000 11.000
Fourth Quarter.............................................. 28.375 11.438
1999:
First Quarter (through March 15, 1999)...................... 30.250 20.375
</TABLE>
For a recent closing sale price for the common stock, see the cover page of
this prospectus. On March 9, 1999, we had approximately 116 holders of common
stock, excluding beneficial owners of shares registered in nominee or street
name.
DIVIDEND POLICY
While we have made a distribution of the rights under our shareholder
rights plan, as described in Note 5 to the consolidated financial statements, we
have never declared or paid any cash dividends on our capital stock. Our board
of directors currently intends to retain all future earnings, if any, to fund
the growth and development of our business, and, therefore, does not anticipate
paying any cash dividends in the foreseeable future.
21
<PAGE> 22
DILUTION
Our net tangible book value at December 31, 1998 was $24,124,564, or $2.25
per share. Net tangible book value per share is equal to our total tangible
assets less our total liabilities, divided by the number of shares of common
stock outstanding. After giving effect to the sale by us of the shares of common
stock offered by this prospectus and the application of the estimated net
proceeds, our pro forma net tangible book value at December 31, 1998 would have
been approximately $68,816,564, or $5.25 per share. This represents an immediate
increase in net tangible book value of $3.00 per share to existing shareholders
and an immediate dilution in net tangible book value of $14.75 per share to
purchasers of common stock in this offering. The foregoing assumes no exercise
of outstanding stock options. In the event the holders of the 2,309,238 shares
subject to options to purchase shares of common stock outstanding as of December
31, 1998 at a weighted average exercise price of $11.60 per share, exercised
these options for cash and we included these option exercises in the foregoing
calculations, the net tangible book value per share before the offering would be
$3.91, the pro forma net tangible book value after the offering would be $6.20
per share, and the dilution to new investors would be $13.80.
If the underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value per share of the common stock after this offering
would be $5.38 per share, which would result in dilution to new investors in
this offering of $14.62 per share. Up to 100,000 shares included in the
underwriters' over-allotment option consist of shares issuable upon exercise of
outstanding options held by one of the selling shareholders at an exercise price
of $.25 per share.
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998,
and as adjusted after giving effect to the sale of the 2,400,000 shares of
common stock offered by us and the application of the estimated net proceeds
after deducting underwriting discounts and commissions and estimated offering
expenses. You should read the information in this table in conjunction with the
consolidated financial statements and related notes appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------
ACTUAL AS ADJUSTED
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
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,
10,704,817 shares issued, and 13,104,817 shares issued as
adjusted(1)............................................... 107 131
Additional paid-in capital.................................. 77,023 121,691
Accumulated deficit......................................... (52,281) (52,281)
Unearned compensation....................................... (308) (308)
-------- --------
24,541 69,233
Less treasury stock, 5,780 shares, at cost.................. (24) (24)
-------- --------
Total shareholders' equity.................................. $ 24,517 $ 69,209
======== ========
</TABLE>
- ---------------
(1) Excludes 2,357,938 shares of common stock subject to outstanding stock
options under our stock option plans, as of February 28, 1999, which had a
weighted average exercise price of $12.01 per share. The foregoing also does
not include options to purchase an aggregate of 200,000 shares of our common
stock outstanding as of February 28, 1999, at a weighted average exercise
price of $16.78 per share that are subject to shareholder approval of
amendments to our stock option plans. See "Management -- Stock Option Plans"
and note 5 to our consolidated financial statements.
22
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data.
The selected consolidated financial data in the table as of and for the years
ended December 31, 1998, 1997 and 1996 are derived from our consolidated
financial statements which have been audited by Ernst & Young LLP, independent
auditors, as indicated in their report included elsewhere in this prospectus.
The selected consolidated financial data as of and for the years ended December
31, 1995 and 1994 are derived from our financial statements which have also been
audited by Ernst & Young LLP and which have not been included in this
prospectus. You should read this data in conjunction with the consolidated
financial statements and accompanying notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales and revenues........................ $ 19 $ 29 $ -- $ 17 $ 73
Costs and expenses:
Cost of sales............................... 117 -- -- -- --
Research and development.................... 21,089 12,873 4,647 2,089 1,404
General and administrative.................. 2,528 1,736 1,575 466 526
Marketing................................... 3,074 1,022 581 659 292
-------- -------- -------- ------- -------
Loss from operations.......................... (26,789) (15,602) (6,803) (3,197) (2,149)
Interest income (expense), net................ 2,127 1,389 864 (21) (47)
-------- -------- -------- ------- -------
Net loss...................................... $(24,662) $(14,213) $ (5,939) $(3,218) $(2,196)
======== ======== ======== ======= =======
Basic and diluted net loss per share(1)....... $ (2.34) $ (1.64) $ (0.91) $ (0.87) $ (0.77)
======== ======== ======== ======= =======
Weighted average shares outstanding(1)........ 10,536 8,665 6,543 3,679 2,837
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................... $ 21,797 $ 46,064 $ 26,849 $ (906) $(1,267)
Total assets.................................. 29,482 49,796 29,255 2,057 982
Accumulated deficit........................... (52,281) (27,619) (13,406) (7,467) (4,249)
Total shareholders' equity (deficit).......... 24,517 47,369 28,434 318 (413)
</TABLE>
- ---------------
(1) See note 1 to the consolidated financial statements for an explanation of
the method used to compute net loss per share.
23
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Novoste commenced operations as a medical device company in May 1992.
Beginning in 1994, we devoted substantially all of our efforts to developing the
Beta-Cath System.
For the period since our capitalization through December 31, 1998 we earned
minimal revenues and experienced significant losses in each period. At December
31, 1998 we had an accumulated deficit of approximately $52.3 million. We expect
to continue to incur significant operating losses through at least 2000 as we
conduct clinical trials, seek regulatory approval or clearance for our products,
continue research and development projects, expand our sales and marketing
efforts in contemplation of product introduction and market development, and
increase our administrative activities to support our growth.
The clinical trials may not demonstrate the safety and effectiveness of the
Beta-Cath System. Additionally, we may not obtain necessary approvals for the
Beta-Cath System from the FDA, the State of Georgia Department of Natural
Resources or other state or foreign governmental agencies. Our research and
development efforts may not be successfully completed. We may not successfully
introduce the Beta-Cath System or attract any significant level of market
acceptance for the Beta-Cath System or any other product we develop. We may
never achieve significant revenues from sales of our Beta-Cath System and we may
never achieve or sustain profitability. See "Risk Factors -- Dependence on the
Successful Development and Commercialization of the Beta-Cath System," "-- Early
Stage of Clinical Testing of Beta-Cath System; No Assurance of Its Safety and
Effectiveness," "-- No Assurance of Regulatory Approvals, "-- Uncertainty of
Market Acceptance of Vascular Brachytherapy and the Beta-Cath System" and
"-- Limitations on Third Party Reimbursement for the Beta-Cath System."
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 1998 and 1997
The net loss for the year ended December 31, 1998 was $24,662,000, or
($2.34) per share, as compared to $14,213,000 or ($1.64) per share for the year
earlier. The increase in net loss for the year ended December 31, 1998 compared
to the year earlier was due primarily to increased spending related to the
company's clinical trials as well as marketing and product development expenses
related to the company's entry into the European market.
Net Sales and Revenues. Net sales and revenues were $19,000 for the year
ended December 31, 1998 as compared to $29,000 for the year ended December 31,
1997. Revenues for the year ended December 31, 1998 included the company's first
sale of the Beta-Cath System in Europe as well as a royalty payment. Revenue for
the year ended December 31, 1997 was related to the sale of the blood
containment device product line in May 1997.
Cost of Sales. Cost of sales were incurred in 1998 as the company
commenced the manufacture of its catheter in Scotland and realized its first
product sale. Due to the relatively low production volumes, cost of sales
exceeded net sales in 1998. The company expects cost of sales to also exceed
sales in 1999 as the company increases both its European production and sales
activities.
Research and Development Expenses. Research and development expenses
increased 64%, to $21,089,000 for the year ended December 31, 1998 from
$12,873,000 for the year ended December 31, 1997. These increases were primarily
a result of (a) costs of patient enrollment and follow-up in two pivotal
clinical trials, the Beta-Cath System Trial and the START Trial, as well as a
market registry trial in Europe, (b) the cost of supplying the Beta-Cath System
to all the clinical sites, (c) the cost of equipping a new production line at
the supplier of radioactive sources in the amount of 1,000,000 DM (approximately
$600,000), (d) legal and filing costs associated with domestic and foreign
patent applications, (e) services provided by outside consultants in the
development of the Beta-Cath System, and (f) costs related to the establishment
of manufacturing activities in Scotland to support product sales in Europe.
24
<PAGE> 25
General and Administrative Expenses. General and administrative expenses
increased 46% to $2,528,000 for the year ended December 31, 1998 from $1,736,000
for the year ended December 31, 1997. These increases were primarily the result
of additional management personnel, higher salaries and costs associated with
the installation and implementation of the company's new software system.
Options to purchase 200,000 shares of our common stock, which were
outstanding as of February 8, 1999 at a weighted average exercise price of
$16.78 per share, have been issued subject to shareholder approval of certain
amendments to our stock option plans. We anticipate seeking approval of the
amendments to these plans at our 1999 Annual Meeting of Shareholders. Since
these options are subject to such approval, we will incur a non-cash
compensation charge relating to these options to the extent that, on the date
shareholders approve the amendments, the fair market value of our common stock
is greater than the exercise prices of these options. If we assume the
amendments are approved and that the fair market value of our common stock on
the date of approval is $23.69 per share, which is the closing sale price of the
common stock on February 8, 1999, the non-cash compensation charge with respect
to the 200,000 options currently subject to the foregoing contingency would
total $1,382,000 or an average of approximately $350,000 per year over the four
year vesting periods of these options commencing in 1999.
Marketing Expenses. Marketing expenses increased 201% to $3,074,000 for
the year ended December 31, 1998 from $1,022,000 for the year ended December 31,
1997. These increases were primarily the result of higher personnel, trade show,
consulting and promotional literature costs associated with launching the
company's product and setting up a direct sales operation in Europe. The company
expects sales and marketing costs to significantly increase in the future as the
European operations are expanded and if and when the Beta-Cath System is
approved in the United States and launched commercially.
Interest Income. Interest income increased 53% to $2,127,000 for the year
ended December 31, 1998 from $1,389,000 for the year ended December 31, 1997.
The increase in net interest income was primarily due to larger average cash
equivalents and short-term investment balances after the company's secondary
public offering in November 1997.
Comparison of Years Ended December 31, 1997 and 1996
The net loss for the year ended December 31, 1997 was $14,213,000, or
($1.64) per share, as compared to $5,939,000 or ($0.91) per share for the year
earlier. The increase in net loss for the year ended December 31, 1997 compared
to the year earlier was due primarily to increased spending for research and
development as well as increased marketing, general and administrative expenses
related to our development of the Beta-Cath System, offset by increased interest
income earned from the investment of the net proceeds from the initial public
offering in May 1996 and the secondary public offering in November 1997.
Revenues. Miscellaneous revenues were $29,000 for the year ended December
31, 1997. No revenue was earned in the year earlier. This revenue related to the
sale of the blood containment device product line in May 1997 for cash and a
continuing royalty.
Research and Development Expenses. Research and development expenses
increased 177%, to $12,873,000 for the year ended December 31, 1997 from
$4,647,000 for the year ended December 31, 1996. These increases were primarily
a result of (a) the cost of manufacturing the Beta-Cath System for the clinical
trials, (b) the cost of conducting the Beta-Cath System Trial in the United
States in addition to follow-up costs associated with the initial clinical
feasibility studies, (c) a milestone payment of 617,000 DM ($360,000) in June
1997 to the company's radioisotope supplier upon meeting delivery requirements,
(d) the accrual of an additional 737,000 DM (approximately $430,000) to be paid
prior to March 31, 1998 to the same supplier upon meeting certain production
volumes, (e) twelve monthly reimbursements of approximately 100,000 DM
($60,000), to the same supplier of costs to increase production capacity, (f)
the increased size of the Company's research and development staff, (g) the
legal and filing costs associated with domestic and foreign patent applications,
and (h) services provided by outside consultants in the development of the
Beta-Cath System.
General and Administrative Expenses. General and administrative expenses
increased 10% to $1,736,000 for the year ended December 31, 1997 from $1,575,000
for the year ended December 31, 1996.
25
<PAGE> 26
These increases were primarily a result of additional personnel, higher salaries
and increased costs associated with being a public company such as director and
officer liability insurance, legal and accounting fees.
Marketing Expenses. Marketing expenses increased 76% to $1,022,000 for the
year ended December 31, 1997 from $581,000 for the year ended December 31, 1996.
These increases were primarily the result of increased trade show costs,
consulting fees and higher salaries.
Interest Income. Interest income increased 61% to $1,389,000 for the year
ended December 31, 1997 from $864,000 for the year ended December 31, 1996. The
increase in net interest income was primarily due to larger average cash
equivalents and short-term investment balances after the company's initial
public offering in May 1996 and secondary public offering in November 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the years ended December 31, 1998, 1997 and 1996, the company used
cash to fund operations of $21.4 million, $11.7 million and $5.0 million,
respectively. Cash used to fund operations since inception was approximately
$43.9 million. The increases in cash used in operations were due primarily to
higher expenses associated with increased research and development activities,
the expansion of marketing activities in Europe and increased general and
administrative expenses to support increased operations. The company's
expenditures for equipment and improvements have aggregated $3.9 million since
inception. At December 31, 1998, the company had commitments to purchase $3.9
million in inventory components of the Beta-Cath System over the next two years
and $400,000 in production equipment. Future cash needs for operating activities
and production equipment purchases are anticipated to be higher than historical
levels because of the development, manufacturing scale-up and commercialization
of the Beta-Cath System. The company expects capital expenditures over the next
three years to be $7 million.
The company's principal source of liquidity at December 31, 1998 consisted
of cash, cash equivalents and short-term investments of $26.0 million. The
short-term investments consist of commercial paper; such investments are not
market risk sensitive investments that could result in losses from market
fluctuations. The company did not have any credit lines available or outstanding
borrowings at December 31, 1998.
The company anticipates that its operating losses will continue through at
least 2000 as it expends substantial resources in funding clinical trials in
support of regulatory approvals, and continues to expand research and
development and marketing activities. We believe that our existing capital
resources, together with the net proceeds from this offering, will be sufficient
to fund the company through the end of 2000, but those resources may prove
insufficient. We cannot assure that additional financing, if required, will be
available on satisfactory terms, or at all. However, the company's future
liquidity and capital requirements will depend upon numerous factors, including:
the progress of the company's clinical research and product development
programs; the receipt of and the time required to obtain regulatory clearances
and approvals; the resources required to gain approvals; the resources the
company devotes to the development, manufacture and marketing of its products;
the resources required to hire and develop a direct sales force in the United
States, develop distributors internationally, and to expand manufacturing
capacity; market acceptance and demand for its products; and other factors.
Additional capital may be required to launch the Beta-Cath System in the United
States. Novoste may in the future seek to raise additional funds through bank
facilities, debt or equity offerings or other sources of capital. There can be
no assurance that additional financing, if required, will be available on
satisfactory terms, or at all.
IMPACT OF YEAR 2000
We are in the process of evaluating the potential impact of what is
commonly referred to as the year 2000 issue, concerning the inability of certain
computer systems to properly recognize and process dates starting with the year
2000 and beyond. We are taking steps to ensure that our business systems
software and equipment will continue to function properly after December 31,
1999. In doing so, we have established a team, which will work directly with
management to (1) assess and test all internal information systems and other
systems that may be affected by the year 2000 date change; (2) assess and test
our products that may be affected by the year 2000 date change; (3) communicate
with third parties that supply our products to ensure
26
<PAGE> 27
they are addressing the year 2000 issue; and (4) compose a contingency and
disaster recovery plan to ensure resolution of problems that may arise as a
result of the year 2000 date change. Until we complete this assessment, we will
not be able to determine the costs of becoming Year 2000 compliant, the risks of
non-compliance and our ability to conduct our business under a contingency plan.
The Beta-Cath System does not contain any real time clocks and therefore
the device itself does not present any year 2000 issues.
With respect to our information technology business systems, the assessment
of equipment and software was started in September 1998. In addition, in
anticipation of in-house manufacturing, in January 1998 we purchased a complete
manufacturing software package that includes integrated financial modules that
replaces our previous financial software program. The contract for the purchase
of the new software package requires year 2000 compliance.
We will commence testing shortly to determine that our internal systems are
year 2000 compliant. We expect to complete testing and establish compliance with
respect to all of our systems and products by June 30, 1999, subject to possible
equipment upgrades during 1999 and ongoing communications with third parties. We
believe that this time frame will allow internal auditing and testing of our
systems, as well as further remediation, if necessary.
We plan to devote the necessary resources to resolve all significant year
2000 issues in a timely manner. Based upon current estimates, we believe that
our direct costs for year 2000 compliance will consist of costs related to the
staff time devoted to year 2000 compliance. We do not expect capital
expenditures will be necessary for year 2000 related compliance costs and
capital expenditures in these areas have not been material for historical
periods.
Regardless of the year 2000 compliance of our systems and products, we may
be adversely affected by disruptions in the operations of the enterprises with
which we interact. These business enterprises include suppliers, clinical
research organizations, corporate partners, both domestic and international,
government agencies, hospitals, physicians and other third parties. We cannot
reasonably predict the impact on our operations and financial condition if any
such businesses are adversely affected by the year 2000 issue.
Statements made herein about the implementation of various phases of our
year 2000 program, the costs expected to be associated with that program and the
results we expect to achieve constitute forward-looking information. There are
many uncertainties involved in the year 2000 issue and the following important
factors, among others, could affect the impact of the year 2000 issue: (1) the
inherent uncertainty of the costs and timing of achieving compliance on the wide
variety of systems used by us, (2) the reliance on the efforts of vendors,
customers, government agencies and other third parties beyond our control to
achieve adequate compliance and avoid disruption of our business in early 2000
and (3) the uncertainty of the ultimate costs and consequences of any
unanticipated disruption of our business resulting from the failure of one of
our applications or of a third party's systems.
27
<PAGE> 28
BUSINESS
GENERAL
Novoste has developed the Beta-Cath System, a hand-held device designed to
deliver beta, or low penetration, radiation to the site of a treated blockage in
a coronary artery to decrease the likelihood of restenosis. Restenosis, the
renarrowing of a previously treated artery, is the major limitation of
percutaneous transluminal coronary angioplasty or PTCA, a procedure used by
interventional cardiologists to open blocked coronary arteries. We are currently
conducting pivotal clinical trials of the Beta-Cath System and, assuming
positive results, intend to submit an initial pre-market approval application to
the FDA in the second quarter of 2000. In August 1998, we qualified to apply CE
marking to the Beta-Cath System, a requirement to sell our device in most of
Western Europe.
In 1998, physicians performed approximately 650,000 PTCA procedures in the
United States and approximately 500,000 PTCA procedures abroad. Studies have
shown that 30% to 50% of patients experience restenosis within six months after
PTCA. Restenosis often requires one or more additional revascularization
procedures to reopen blocked vessels. These procedures include PTCA, which has
an average cost of $20,000 in the United States, and coronary artery bypass
graft surgery, or CABG, which has an average cost of $45,000 in the United
States. It is estimated that more than $3 billion is spent annually in the
United States on revascularization procedures.
In response to the high rates of restenosis following PTCA, the placement
of coronary stents, metal implants that prop open a coronary artery, has grown
rapidly. In 1998, stents were used in approximately 60% of all PTCA procedures
performed worldwide and on average added over $2,000 to the cost of each PTCA
procedure. However, studies have shown that restenosis still occurs in
approximately 20% to 30% of the patients who receive stents. This is commonly
referred to as "in-stent" restenosis. Patients with "in-stent" restenosis often
experience recurrent restenosis and as a result are prone to multiple
revascularization procedures. We believe that the Beta-Cath System may be
effective in reducing the incidence of restenosis following PTCA and stent
placement and in treating "in-stent" restenosis, thereby reducing the need for
additional costly hospital procedures.
INDUSTRY OVERVIEW
Coronary Artery Disease. Coronary artery disease is the leading cause of
death in the United States. More than 13 million people in the United States
currently suffer from coronary artery disease, which is generally characterized
by the progressive accumulation of plaque as a result of the deposit of
cholesterol and other fatty materials on the walls of the arteries. The
accumulation of plaque leads to a narrowing of the interior passage, or lumen,
of the arteries, thereby reducing blood flow to the heart muscle. When blood
flow to the heart muscle becomes insufficient, oxygen supply is restricted and a
heart attack and death may result. Depending on the severity of the disease and
other variables, patients will be treated either surgically with CABG or less
invasively with a PTCA procedure.
Coronary Artery Bypass Graft Surgery. Coronary artery bypass graft
surgery, or CABG, was introduced as a treatment for coronary artery disease in
the 1950's. CABG is a highly invasive, open surgical procedure in which blood
vessel grafts are used to bypass the site of a blocked artery, thereby restoring
blood flow. CABG, still considered the most durable treatment for coronary
artery disease, is generally the primary treatment for severe coronary artery
disease involving multiple vessels. In addition, CABG is often a treatment of
last resort for patients who have undergone other less invasive procedures like
PTCA but require revascularization. However, CABG has significant limitations,
including medical complications such as stroke, multiple organ dysfunction,
inflammatory response, respiratory failure and post-operative bleeding, each of
which may result in death. In addition, CABG is a very expensive procedure and
requires a long recovery period. In the United States, the average cost of
undergoing CABG, including hospital stay, is approximately $45,000; and the
average recuperation period following discharge from the hospital is at least
four to six weeks. In 1998, approximately 400,000 CABG procedures were performed
in the United States. Several new minimally invasive surgical techniques have
been commercialized which attempt to lessen the cost and trauma of CABG
procedures while maintaining efficacy.
28
<PAGE> 29
PTCA. Since its introduction in the late 1970s, PTCA has emerged as the
principal less invasive alternative to CABG. PTCA is a procedure performed in a
cath lab by an interventional cardiologist. During PTCA, a guidewire is inserted
into a blood vessel through a puncture in the leg (or arm, in some cases) and
guided through the vasculature to a diseased site in the coronary artery. A
balloon-tipped catheter is then guided over the wire to the deposit of plaque or
lesion occluding the artery. Once the balloon is positioned across the lesion
inside the vessel, the balloon is inflated and deflated several times.
Frequently, successively larger balloons are inflated at the lesion site,
requiring the use of multiple balloon catheters. The inflation of the balloon
cracks or reshapes the plaque and the arterial wall, thereby expanding the
arterial lumen and increasing blood flow. However, the inflation of the balloon
typically results in injury to the arterial wall. In 1998, it is estimated that
more than 650,000 PTCA procedures were performed in the United States and
approximately 500,000 procedures were performed outside the United States. The
average cost of each PTCA procedure in the United States is approximately
$20,000, or less than one-half of the average cost of CABG. The length of stay
and recuperation period are substantially less than those required for CABG.
Though PTCA has grown rapidly as a highly effective, less invasive therapy
to treat coronary artery disease, the principal limitation of PTCA is the high
rate of restenosis, the renarrowing of a treated artery, which often requires
reintervention. Studies have indicated that, within six months after PTCA,
between 30% and 50% of PTCA patients experience restenosis.
Pathology of Restenosis. Restenosis is typically defined as the
renarrowing of a treated coronary artery within six months of a
revascularization procedure such as PTCA to less than 50% of its normal size.
Restenosis is a vascular response to the arterial trauma caused by PTCA. Due to
multiple mechanisms controlling vascular repair, restenosis may occur within a
short period after a revascularization procedure or may develop over the course
of months or years.
Restenosis that occurs within a day of a revascularization procedure is
usually attributed to elastic recoil (acute loss of diameter) of the artery.
Restenosis also may result from hyperplasia, which is the excessive
proliferation of cells at the treatment site, or from vascular remodeling of the
arterial segment, which is a slow contraction of a vessel wall. Hyperplasia is a
physiological response to injury, similar to scarring, which occurs in wound
healing. Vascular remodeling is a contraction of the vessel caused by a
thickening of the outside wall of the artery. In response to an arterial injury
from revascularization, the body sets off a biochemical response to repair the
injured site and protect it from further harm. This response will include a
signal to adjacent cells of the arterial wall to multiply. Often this cell
proliferation goes unchecked, resulting in a much thicker and inelastic arterial
wall and in reduced blood flow. Hyperplasia and vascular remodeling are the
primary causes of restenosis.
Coronary Stenting. Coronary stents are expandable, implantable metal
devices permanently deployed at a lesion site. Stents maintain increased lumen
diameter by mechanically supporting the diseased site in a coronary artery. Of
all the non-surgical treatments seeking to improve upon PTCA, stents have been
the most successful in improving the outcome immediately following the procedure
and reducing the incidence of restenosis. In a typical stent procedure, the
artery is pre-dilated at the lesion site with a balloon catheter, and the stent
is delivered to the site of the lesion and deployed with the use of a second
balloon catheter which expands the stent and firmly positions it in place. This
positioning may be followed by a third expansion, using a high-pressure balloon
to fully deploy and secure the stent. Once placed, stents exert radial force
against the walls of the coronary artery to enable the artery to remain open and
functional.
Studies have concluded that the rate of restenosis in patients receiving
coronary stents following PTCA is approximately 30% lower than in patients
treated only by PTCA. Since their commercial introduction in the United States
in 1994, the use of stents has grown rapidly, and it is estimated that they were
utilized in approximately 60% of the approximately 1.1 million PTCA procedures
performed in 1998.
Despite their rapid adoption, stents have certain drawbacks. The use of
stents increases the cost of a PTCA procedure, especially when, as is often the
case, two or more stents are used. In addition, studies have shown that
restenosis still occurs in approximately 20% to 30% of the patients who receive
stents following PTCA. This is commonly referred to as "in-stent" restenosis.
Studies have shown that patients with "in-stent" restenosis often experience
recurrent restenosis and as a result are prone to multiple revascularization
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procedures. Stents are also permanent implants which may result in unforeseen,
long-term adverse effects, and cannot be used in cases where the coronary
arteries are too tortuous or too narrow. Further, stents appear to be effective
in reducing the frequency of restenosis resulting from elastic recoil and
vascular remodeling, but they increase the degree of hyperplasia.
THE NOVOSTE SOLUTION
We have designed the Beta-Cath System to reduce the incidence of restenosis
following PTCA by delivering localized beta radiation to the treatment site in a
coronary artery. We believe that the administration of localized beta radiation
is likely to reduce coronary artery restenosis rates by inhibiting hyperplasia
and vascular remodeling. Radiation has been used therapeutically in medicine for
more than 50 years in the treatment of proliferative cell disorders, such as
cancer. Cancer therapy has primarily involved the use of gamma radiation, which
is highly penetrating and may be hazardous unless handled and used with great
care. By contrast, beta radiation is far less penetrating and easier to use and
shield than gamma radiation while still delivering a sufficient dose to the
treated coronary arteries. We view beta radiation as well-suited for
intracoronary use following PTCA, where the objective is to treat the coronary
artery with minimal exposure to adjacent tissues.
The Beta-Cath System is a hand-held device that hydraulically delivers beta
radiation sources through a closed-end catheter to the area of the coronary
artery injured by the immediately preceding PTCA procedure. To facilitate easy
placement of the catheter, it is advanced over the same guidewire used in the
PTCA procedure. After the administration of the prescribed radiation dose to a
lesion site, which takes less than five minutes per lesion, the radiation
sources are hydraulically returned to the hand-held transfer device. We expect
to be able to reuse the radiation isotopes for up to a year due to the long
half-life of the sources.
The Beta-Cath System is designed to be safe and cost-effective and to fit
well with techniques currently used by interventional cardiologists in the cath
lab. The Beta-Cath System is designed to target the primary causes of restenosis
by inhibiting hyperplasia and vascular remodeling. The Company believes the
Beta-Cath System may provide significant cost savings by reducing (1) the need
for revascularization often required following PTCA and coronary stenting and
(2) the number of coronary stents used as a primary therapy.
OUR BUSINESS STRATEGY
Our objective is to become the leader in the commercialization of vascular
brachytherapy devices. Elements of our strategy include:
- Achieving First-to-Market Position and a Leading Market Share in the
United States and Europe. We intend to be the first-to-market in the
United States with a beta-emitting vascular brachytherapy device. We
intend to seek approvals to use the Beta-Cath System to address a wide
range of indications, including reduction of the incidence of restenosis
following PTCA and stent placement and treatment of "in-stent"
restenosis. We believe this broad label will enable us to achieve a
leading market share of vascular brachytherapy devices. We received CE
marking certification in August 1998, becoming the first company with
approval to market a vascular brachytherapy device in Europe.
- Establishing the Beta-Cath System as the Standard of Care. Our strategy
is to introduce the Beta-Cath System into the cath lab as the standard of
care to reduce the incidence of restenosis. In addition, we intend to
conduct intensive physician-training seminars to familiarize
interventional cardiologists and radiation oncologists with the use of
the Beta-Cath System.
- Selling Directly. We intend to market the Beta-Cath System in the United
States through a direct sales force. We plan to focus our marketing
efforts on the top tier of approximately 200 high-volume hospitals and on
leading interventional cardiologists and radiation oncologists at those
institutions. The interventional cardiologists at these hospitals perform
a large portion of the PTCA procedures in the United States and tend to
adopt new cardiovascular technologies and devices quickly. We also
believe we can leverage the reputation of these early adopters in the
clinical community to generate wider demand. In addition, we believe
these hospitals have or will be able to obtain relatively quickly the
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necessary licenses to store and use beta radiation and are likely to have
radiation oncologists with the appropriate credentials to use the
Beta-Cath System's radiation sources. We have commenced marketing the
Beta-Cath System in Europe through a direct sales force in larger
markets, which we intend to supplement with independent distributors in
other markets.
- Investigating the Beta-Cath System for Other Vascular
Applications. Restenosis is also common after revascularization of
peripheral or non-coronary arteries. In addition, a similar phenomena
frequently occurs in veins adjacent to an arterial-venous shunt used for
patients undergoing hemodialysis for end-stage renal disease. We intend
to leverage our core catheter and localized vascular brachytherapy
technologies to expand our product offerings to other vascular markets
where cell proliferation is of clinical significance and radiation
results in improved clinical efficacy.
- Protecting and Enhancing our Proprietary Technology. We believe that our
patent position may offer a competitive advantage. On November 4, 1997 we
were issued United States Patent No. 5,683,345 on the Beta-Cath System.
We have also filed a related United States continuation-in-part
application (which is jointly owned by us and Emory University), and have
additional United States applications pending covering aspects of our
Beta-Cath System. With respect to our United States filings, we have
filed, or will file in due course, counterpart applications in the
European Patent Office and certain other countries. We intend to obtain
further protection of our proprietary technology and to defend our
intellectual property rights against infringement.
BETA-CATH SYSTEM DESIGN AND ADVANTAGES
The primary components of the Beta-Cath System are:
Radiation Source Train. The beta radiation administered by the Beta-Cath
System emanates from a "train" of several miniature sealed sources containing
Strontium 90 (Strontium/Yttrium), a beta-emitting radioisotope. We currently
manufacture trains in both 30mm and 40mm lengths, with the longer length
intended for use on longer lesions. The use of beta, rather than gamma,
radiation is intended to make the Beta-Cath System safer and easier to use in
the cath lab environment. In addition, due to the long half-life (approximately
28 years) of Strontium 90, and because the source train will not come into
contact with a patient's blood or tissue, the radiation sources are expected to
be reused for up to one year. Beta radiation from the Strontium 90 source is
easily shielded from health care workers by the use of approximately
one-half-inch-thick quartz in the transfer device.
Transfer Device. The transfer device is a multiple-use, hand-held
instrument used to deliver, retrieve and then store the radiation sources when
not in use. The transfer device:
- transfers the radiation sources to and from the delivery catheter via a
proprietary hydraulic delivery system;
- contains a radiation source sensing system which is interlocked with a
gating system to prevent the radiation sources from exiting the transfer
device until the delivery catheter is locked in place and to prevent
removal of the delivery catheter prior to the return of the radiation
sources to the transfer device; and
- completely shields the beta radiation energy from health care workers
when the radiation source train is housed inside it.
Delivery Catheter. The delivery catheter is a single-use, multi-lumen
catheter that provides a pathway for the radiation sources to be rapidly
delivered and retrieved from the coronary arterial segment to be treated. The
delivery catheter is positioned by advancing it over the same guidewire used
during the immediately preceding PTCA procedure. The radiation sources are
delivered and retrieved through a dual-lumen closed hydraulic circuit, which
uses a fluid-filled standard syringe to create the hydraulic pressure. We
currently intend to sell a version of the catheter in the United States that
fits over most of the length of the guidewire used in the PTCA procedure,
commonly known as an "over the wire" catheter, and to have our European
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subsidiaries sell a version that fits over the guidewire for only a small
portion of the catheter at its far end, commonly known as a "rapid exchange"
catheter.
The Beta-Cath System is intended to be used in a cath lab by an
interventional cardiologist in conjunction with a radiation oncologist. The
cardiologist places the delivery catheter into the patient's vasculature until
the catheter reaches the targeted site. The radiation oncologist operates the
transfer device to deliver the radiation source train hydraulically to the end
of the catheter in a matter of seconds. The radiation sources remain at the
targeted site for less than five minutes to deliver a predetermined dose of
radiation. The radiation sources are then returned by the use of positive
hydraulic pressure applied through the delivery catheter. Upon completion of
each procedure, the train of radiation sources is stored safely inside the
transfer device. At the end of the day, the transfer device is delivered to a
designated radiation storage site within the hospital for safekeeping. While the
need for a cardiologist and a radiation oncologist is expected to result in
incremental physician fees, we believe the Beta-Cath System will be
cost-effective, principally by reducing (1) the need for costly
revascularization procedures often required following PTCA and coronary stenting
and (2) the number of coronary stents used as a primary therapy.
We believe the Beta-Cath System has the following advantages:
- Site-specific Therapy. The Beta-Cath System is designed to confine
radiation exposure to the targeted intervention area.
- Short Procedure Times. The Beta-Cath System is designed to enhance
patient safety and comfort, as well as to promote productivity in the
cath lab, by delivering the recommended dosage in less than five minutes
of radiation exposure per lesion.
- Utilization of Existing PTCA Techniques. Although intracoronary
radiation is a new concept in coronary artery disease treatment, the
hand-held Beta-Cath System is designed to be easily adopted and used by
the interventional cardiologist. The Beta-Cath System is very similar to
other catheter-based tools used by the cardiologist. In addition, our
system does not require the purchase or acquisition of capital equipment
by the hospital, which often requires a separate and lengthy purchase
approval.
- Multiple-Use System. The radiation source train can be reused for
numerous patients, due to the long half-life of the isotope and because
the source train does not come into contact with the patient's blood. As
a result, inventory planning will be very straightforward, procedure
costs will be attractive and last minute treatment decisions can be made.
- Ease of Use and Accuracy of Dosing. The Beta-Cath System is a hand-held
device that is easy to operate. Because of the long half-life of our
radiation source, prescribed treatment times will remain constant over
the approved shelf life of the isotope. Vascular brachytherapy systems
that utilize short half-life isotopes are likely to require complex
case-by-case dose calculations based on the current decay state of the
isotope. In addition, they require frequent inventory replacement due to
their short half-lives.
- Designed for Safety. The Beta-Cath System utilizes localized beta
radiation, which results in total body radiation exposure significantly
less than that received during routine x-ray during PTCA or during
treatment with a gamma radiation vascular brachytherapy device. Other
safety mechanisms include: a closed-source train lumen, special locking
mechanisms to connect the delivery catheter to the transfer device and
sufficient shielding in the transfer device to protect health care
workers from beta radiation exposure. In addition, the beta radiation
sources are delivered and, following the administration of the prescribed
dose, retrieved hydraulically in a matter of seconds, thereby minimizing
exposure to adjacent tissue.
CLINICAL TRIALS
We are currently conducting two pivotal clinical trials of the Beta-Cath
System: the Beta-Cath System Trial and the START Trial. These trials are
intended to support pre-market approval applications to the FDA
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to market our device in the United States to reduce the incidence of coronary
restenosis following PTCA, stent placement and the treatment of "in-stent"
restenosis. We have also completed the BERT Trial, a feasibility study of the
Beta-Cath System that was not placebo-controlled. The results of two placebo-
controlled clinical trials of vascular brachytherapy devices using gamma
radiation have been reported recently. The data from our BERT Trial, together
with the results of the two gamma trials, suggest that vascular brachytherapy
may be an effective treatment for coronary restenosis.
Novoste Trials
The BERT Trial. In August 1998, we reported results from a feasibility
trial of our Beta-Cath System, known as the Beta Energy Restenosis Trial, or
BERT Trial. The BERT Trial was conducted at two United States medical centers
under an investigational device exemption granted by the FDA and at a Canadian
and a European site. The purpose of the BERT Trial was to evaluate the safety
and clinical feasibility of the Beta-Cath System in administering vascular
brachytherapy following PTCA to patients having single-vessel de novo
(previously untreated) lesions. To examine the safety of different radiation
doses, we randomly assigned patients to receive a dose of 12, 14 or 16 gray. The
patient follow-up dictated by the study protocol consisted of: (1) monthly
telephone calls for the first six months, (2) a diagnostic angiogram at six
months, and (3) future telephone follow-up at one and two years after treatment.
As a feasibility study, the BERT Trial was not intended to generate
statistically significant results.
Of the 85 patients enrolled in the BERT Trial, 78 returned for an angiogram
six months after the procedure and these patients exhibited a restenosis rate at
the lesion site of 17% (13 patients). This represents a greater than 50%
reduction in the occurrence of restenosis in patients who received treatment
with the Beta-Cath System when compared to the historical control group, from
the Lovastatin Restenosis Trial published in 1994, who received PTCA only and
had been selected based upon inclusion and exclusion criteria similar to those
utilized by us in the BERT Trial. Additionally, the data revealed a greater than
75% improvement in the "late loss index" when compared to that control group.
The late loss index is a measure of how much of the artery enlargement achieved
by PTCA is lost within six months of the procedure. No patients in the BERT
Trial reported any major adverse complications associated with the use of the
Beta-Cath System.
In addition to the 13 patients who exhibited restenosis at the lesion site,
an additional six patients exhibited vessel narrowing outside of the lesion
site. In these patients, the narrowing occurred in an area at the extreme edges
of the location of the radiation source train during treatment. The PTCA
balloons used to treat three of these patients were longer than were allowed by
the trial protocol. Two other patients appeared to experience normal disease
progression in lesions, located at the edges of the radiation treatment area,
that the initial PTCA procedure did not treat. The sixth patient received
treatment in accordance with the protocol and experienced narrowing outside the
treated lesion.
The protocol of the BERT Trial did not include the elective use of coronary
stents, but did permit the use of stents, if medically indicated, following
PTCA. A subgroup of 13 patients received stents and only one patient experienced
restenosis at the lesion site.
While the results of the BERT Trial encouraged us to commence our current
pivotal trials, any valid conclusion as to the safety and efficacy of the
Beta-Cath System can only be drawn from larger statistically powered,
placebo-controlled trials such as our current pivotal trials.
The Beta-Cath System Trial. On July 30, 1997 we initiated our Beta-Cath
System Trial, a randomized, triple-masked, placebo-controlled, multicenter human
clinical trial under an investigational device exemption granted by the FDA. The
Beta-Cath System Trial seeks to determine the clinical safety and effectiveness
of the Beta-Cath System in reducing coronary restenosis following PTCA or stent
placement. We initially targeted enrollment of approximately 1,100 patients in
the trial at up to 55 clinical sites, principally located in the United States.
The protocol contemplates that patients will be divided into two approximately
equal subgroups, one receiving PTCA alone and one receiving coronary stents in
addition to PTCA. At March 10, 1999, we had enrolled 1,064 patients in the
Beta-Cath System Trial at 55 clinical sites, principally located in the United
States.
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As is typical for patients receiving stent placement, the patients in the
stent placement subgroup of the Beta-Cath Trial receive anti-platelet therapy to
prevent stent thrombosis, a condition which can lead to acute closure of the
treated artery. Stent thrombosis typically occurs within 30 days of treatment in
a small percentage of patients receiving stent placement. There have been
reported incidences of stent thrombosis in the Beta-Cath System Trial. These
patients developed the condition later following their treatment than is
normally observed. As a result, in November 1998, we modified the Trial protocol
for the stent placement subgroup to extend the anti-platelet therapy from two
weeks to 60 days following stent placement and to provide for additional
follow-up contact with these patients in the second, third and fourth months
after treatment.
On March 12, 1999, we announced our plan to increase patient enrollment in
the stent placement subgroup of the Trial by up to 300 patients subject to FDA
approval of a supplement to our investigational device exemption requesting this
increase. The planned increase is a result of a recommendation made by the Data
Safety and Monitoring Board at its March 1999 meeting. The DSMB is an
independent committee of clinicians and statisticians that has responsibility
for review of the study protocol and clinical events at regular intervals during
patient enrollment into the Trial. Based on its review of the available data
set, including the incidence of major adverse cardiac events, the DSMB proposed
increasing patient enrollment in the stent placement subgroup to ensure
sufficient data to evaluate the safety and effectiveness of the Beta-Cath System
with the revised anti-platelet therapy protocol.
Approximately 60% of the patients enrolled at March 10, 1999 were in the
subgroup receiving stents in addition to PTCA. In light of the greater than
contemplated enrollment in the subgroup receiving stents, we may enroll up to
approximately 100 additional patients in order to increase the total number
treated following PTCA without stent placement.
Assuming timely FDA approval of our investigational device supplement to
increase patient enrollment in the stent placement subgroup, we expect that all
necessary patient enrollment into the Beta-Cath System Trial will be finished by
mid-year 1999.
Patients in each subgroup of the trial receive, determined on a random
basis, either vascular brachytherapy through the Beta-Cath System using a 30mm
radiation source train or no vascular brachytherapy through a placebo version of
the Beta-Cath System. In both subgroups, patients who receive the beta radiation
receive dosages of 14 gray for vessels ranging from 2.70 to 3.35mm and 18 gray
for vessels ranging from 3.36 to 4.00mm. The protocol provides for telephone
follow-up with patients 30, 60, 90 and 120 days after treatment and a follow-up
angiogram eight months after the initial treatment. The primary endpoint of the
trial is the incidence of additional revascularization procedures. The secondary
endpoints of the trial include a determination of the incidence of restenosis, a
measurement of the late loss index and the frequency of major, adverse cardiac
events.
The START Trial. On September 21, 1998, we initiated the "Stents And
Radiation Trial" or START Trial, a randomized, triple-masked,
placebo-controlled, multicenter human clinical trial, under an investigational
device exemption granted by the FDA. The primary endpoint of this trial is the
incidence of additional revascularization procedures in the previously treated
artery within eight months of treatment. The START Trial seeks to determine the
safety and effectiveness of the Beta-Cath System in treating "in-stent"
restenosis. We expect to enroll 386 patients at up to 55 clinical sites,
principally located in the United States. We are dividing patients into two
approximately equal subgroups, one receiving vascular brachytherapy through the
Beta-Cath System and the other receiving no vascular brachytherapy through a
placebo version of the Beta-Cath System. Patients who receive the beta radiation
will receive dosages of 16 gray for vessels ranging from 2.70 to 3.35mm and 20
gray for vessels ranging from 3.36 to 4.00mm, slightly higher doses than those
used in our Beta-Cath System Trial because of radiation shielding from stents
previously implanted in a procedure unrelated to this trial. Through January
1999, the patients receiving beta radiation were treated with 30mm source
trains. We are now also utilizing a 40mm source train in conjunction with longer
angioplasty balloons for patients with longer lesions. A follow-up angiogram
eight months after the initial treatment will be performed to observe the
treated artery. The angiograms will be analyzed to determine whether there has
been an incidence of restenosis and to measure the late loss index. As of March
10, 1999, we had enrolled a total of
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298 patients at 46 clinical sites. We anticipate completion of the enrollment in
the approximately 386 patient START Trial in the second quarter of 1999.
Timing of Submission of Pre-Market Approval Applications
Assuming the START Trial yields positive results, we intend to submit an
application to the FDA in the second quarter of 2000 to obtain approval to
market the Beta-Cath System for treating "in-stent" restenosis. Assuming timely
FDA approval of the increase in patient enrollment in the Beta-Cath System Trial
and positive results in that Trial, we intend to make an additional submission
to the FDA in the second half of 2000 to obtain approval to market the Beta-Cath
System for reducing the incidence of restenosis following PTCA or stent
placement. This additional submission would either be an amendment to our
initial application or a separate application.
The trials are administered by our clinical and regulatory staff of
seventeen people. We use consultants to monitor the clinical sites and to assist
in training. We also have engaged an independent contract research organization
and consultants to compile data from the trials and to perform statistical and
reimbursement analyses.
Various factors, including difficulties in enrolling patients and
performing follow-up examinations on patients could delay completion of the
trials for an indeterminate amount of time. Additionally, we cannot be sure that
the FDA will approve our proposed increase in the number of patients to be
enrolled in the stent placement subgroup of the Beta-Cath System Trial in a
timely manner or at all. The data from these trials, if completed, may not
demonstrate safety and effectiveness and may not be adequate to support our
application to the FDA for pre-market approval of the Beta-Cath System. In
particular, we cannot be sure that the incidence of stent thrombosis seen in the
Beta-Cath System Trial will be resolved by the protocol modification. If the
Beta-Cath System does not prove to be safe and effective in clinical trials, our
business, financial condition and results of operations will be materially
adversely affected and it could result in cessation of our business. In
addition, the clinical trials may identify significant technical or other
obstacles to obtaining necessary regulatory approvals.
Vascular Brachytherapy Trials Using Gamma Radiation
To our knowledge, third parties have completed two clinical trials of
vascular brachytherapy devices to date. These trials were randomized,
double-blinded, placebo-controlled trials. While these trials were not pivotal,
their results provide some preliminary validation of the effectiveness of
vascular brachytherapy devices in reducing the incidence of coronary restenosis
following PTCA.
The SCRIPPS Trial. The SCRIPPS trial was the first such study and the
results were published in the New England Journal of Medicine in June 1997. In
this trial, Dr. Paul Teirstein et al. studied the safety and efficacy of
catheter-based intracoronary gamma radiation plus stenting to reduce the
incidence of coronary restenosis in patients with previous restenosis.
Fifty-five patients were enrolled into the study at the Scripps Clinic and
received stent placement; 26 were assigned to the radiation (Iridium-192) group
and 29 were assigned to the placebo group. The patients receiving radiation
exhibited a restenosis rate of 17% compared to 54% in the placebo control group,
or an improvement of approximately 68%. Additionally, the late loss index in the
radiation group was 12% compared to 60% in the control group.
The WRIST Trial. In the Washington Radiation for In-Stent restenosis Trial
(WRIST), 130 patients with "in-stent" restenosis were randomized to receive
treatment with either gamma radiation (Iridium-192) or non-radioactive placebo.
The results of the WRIST trial have not yet been published but were announced by
Ron Waksman, M.D., the principal investigator of the trial, at a cardiology
conference held in November 1998. This trial was initiated at the Washington
Hospital Center in February 1997 and completed enrollment with 100 patients with
native coronary arteries and 30 patients with saphenous vein grafts from
previous bypass surgeries. Angiographic follow-up at six months revealed about a
67% lower incidence of restenosis in patients receiving radiation (16%) than
those who did not (48%). Similarly, the late loss index was improved from 90% in
the non-irradiated group to approximately 38% in the radiation treatment group.
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The principal investigators of these trials are investigators in Novoste's
current pivotal trials.
We were not involved in the SCRIPPS trial or WRIST trial and the
information set forth above is based solely on the results reported by the
principal investigators of those trials. We cannot be sure that the reported
results are accurate or complete or that results from gamma vascular
brachytherapy devices will bear any correlation to results of trials using beta
vascular brachytherapy devices, including the results from our current pivotal
trials.
PRODUCT DEVELOPMENT
Research and development activities are performed by a 20-person
product-development team. We have also retained consultants to assist in many
research and development activities, including design and manufacture of the
Beta-Cath System, monitoring the clinical trials relating to the Beta-Cath
System and advising in key aspects of radiation health physics and dosimetry.
The focus of our current development efforts is the design of future
generation components of the Beta-Cath System. We intend to introduce a delivery
catheter with a smaller outer diameter so that arteries smaller than 2.70mm can
be treated, thereby expanding our market opportunity into smaller coronary
vessels. Likewise, we anticipate modifying the transfer device to have a more
ergonomic design and to incorporate additional features. Additional future
development efforts will focus on modifying the Beta-Cath System for use in
peripheral applications, such as arterial-venous shunts and the femoral
arteries. In addition, the capability of further modifying the length of the
radiation-source trains to correspond with varying lesion lengths, and the
corresponding injury lengths caused by varying length balloons used during PTCA,
is potentially a desired feature of future systems. There can be no assurance
that we will be successful in developing these or other products.
Research and development expenses for the years ended December 31, 1998,
1997, and 1996 were approximately $21.1 million, $12.9 million, and $4.6
million, respectively.
MARKETING AND DISTRIBUTION
We anticipate marketing the Beta-Cath System through a direct sales force
in the United States and in the larger European markets and to use distributors
in other markets. We believe such a combination of direct sales force and
distributors will be cost effective, can be implemented quickly, and will enable
us to capitalize on local marketing expertise in each country.
If marketing approval in the United States is obtained, we initially plan
to focus our marketing efforts on the top tier of approximately 200 high-volume
hospitals and on leading interventional cardiologists and radiation oncologists
at those institutions. Through this effort we will initially aim to identify
well-respected clinical supporters for the Beta-Cath System and to leverage
their reputation in the clinical community to generate wider utilization. We
will also conduct seminars to educate and train physicians about the Beta-Cath
System, which we believe, will be a key factor in encouraging physicians to use
our products. We believe that we can market the Beta-Cath System to these
hospitals and cardiologists and radiation oncologists with a moderately-sized,
focused direct-sales organization, initially consisting of approximately 18 to
24 sales representatives, augmented by clinical specialists.
We qualified in August 1998 to apply CE marking to the Beta-Cath System, a
requirement to sell our device in most of Western Europe, and recorded our first
sale there in December 1998. We believe that we are the only company that has
qualified to apply CE marking to an intracoronary radiation device. We are
actively recruiting a direct sales force for the larger European markets as well
as independent distributors for other international markets. We will operate
under written distribution agreements with our distributors. Distributors
generally will have the exclusive right to sell our products within a defined
territory. These distributors also typically market other medical products,
although we will seek to obtain covenants from our distributors prohibiting them
from marketing medical devices that compete directly with the Beta-Cath System.
Our distributors will purchase our products at a discount from the end user list
price and resell the products to hospitals and clinics. The distributor and
end-user prices vary from country to country. We currently have nine employees
based in Europe directly involved with developing sales in Europe. We also are
currently
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conducting a 200 patient multicenter trial in Europe intended to enhance market
acceptance of the Beta-Cath System among physicians and to collect additional
clinical data.
For each geographic market, we intend to select an established market
leader in the radio isotope business to calibrate, test, inventory and deliver
the radiation sources and to provide related licensing assistance, customer
support and disposal services to the purchasing hospital. There can be no
assurance that we will be able to secure arrangements with international
distributors or radio isotope providers on satisfactory terms, or at all. See
"Government Regulation."
MANUFACTURING, SOURCES OF SUPPLY AND SCALE-UP
Our manufacturing operations are required to comply with the FDA's quality
systems regulations, which will include an inspection of our manufacturing
facilities prior to pre-market approval. In addition, certain international
markets have quality assurance and manufacturing requirements that may be more
or less rigorous than those in the United States. Specifically, we are subject
to the compliance requirements of ISO 9001 certification and medical devices
directives in order to produce products for sale in Europe. We received EN ISO
9001 and EN46001 certification from our European notified body in July 1998. We
are subject to periodic inspections by regulatory authorities to ensure such
compliance. See "Government Regulation."
We conduct quality audits of suppliers and we are establishing a vendor
certification program. All suppliers of components must also be in compliance
with Novoste's and the FDA's quality systems regulations.
We have no experience manufacturing our products in the volumes that will
be necessary for us to achieve significant commercial sales. We may not be
successful in establishing or maintaining reliable, high volume manufacturing
capacity at commercially reasonable costs. If we received FDA clearance or
approval for the Beta-Cath System, we will need to expend significant capital
resources and develop manufacturing expertise to establish large scale
manufacturing capabilities. Manufacturers often encounter difficulties in
scaling up production of new products, including problems involving production
yields, quality control and assurance, component supply shortages, shortages of
qualified personnel, compliance with FDA regulations and the need for further
FDA approval of new manufacturing processes. In addition, we believe that
substantial cost reductions in our manufacturing operations will be required for
us to commercialize our catheters and system on a profitable basis. Our
inability to establish and maintain large scale manufacturing capabilities would
have a material adverse effect on our business, financial condition and results
of operations.
Single-Source Supplier of Beta Radiation Source Trains
We have obtained all of our requirements for our beta radioactive sources
to date pursuant to an agreement with a single supplier, Bebig Isotopentechnik
und Umweltdiagnostik GmbH, a German corporation and a related option agreement
to purchase assets. Under the supply agreement, we advanced Bebig a monthly
investment grant of 100,000 Deutsche Marks (approximately $60,000) for a period
of 15 months from November 1996 through January 1998 to equip a new production
line for the exclusive production of radioactive sources for us. These grants
totaled 1.5 million DM (approximately $900,000). In June 1997 we also made a
milestone payment of 617,000 DM (approximately $360,000) and a further payment
of 737,000 DM (approximately $430,000) in March 1998 upon Bebig meeting certain
production milestones. In addition, we made a 700,000 DM (approximately
$414,000) payment in November 1998 and are obligated to make a final 300,000 DM
(approximately $178,000) payment in March 1999, which has been accrued at
December 31, 1998, relating to cost overruns on the new production line, which
became operational in October 1998. All payments to Bebig have been expensed as
research and development.
Our supply agreement with Bebig has an initial term ending in November
2000. Under the supply agreement, Bebig has agreed not to sell, lease, license
or otherwise transfer radioactive Strontium 90 sources to any other party for
use in treatment of restenosis. We, in turn, have agreed not to purchase, lease,
or otherwise acquire directly or indirectly more than 30% of our annual
requirement for radioactive sources of "like" isotope for use in the treatment
of restenosis from any other party. Bebig is required to comply with various
regulatory requirements with respect to the supply of radiation sources. Bebig
has agreed to manufacture radioactive sources at an agreed-upon base price.
Bebig also has agreed to grant us an exclusive, worldwide,
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fully-paid license to use inventions, improvements or discoveries Bebig may make
relating to vascular brachytherapy devices. We, in turn, have agreed to grant a
similar license to Bebig relating to any inventions, improvements or discoveries
we may make relating to sealed radioactive sources, provided Bebig does not use
those inventions, improvements or discoveries for vascular brachytherapy
applications. In view of the technical expertise and capital investment required
to manufacture the radioactive sources and the limited number of manufacturers
of Strontium 90, it would be difficult to find an alternate source of supply
without significant lead time. Our business, results of operations and financial
condition could be materially adversely affected by Bebig's failure to provide
us with beta isotopes on a timely basis during the term of the agreement or by
our inability to obtain an alternative source of supply on a timely basis and on
terms satisfactory to us following any termination of the agreement. In
addition, portions of the process used to manufacture the materials may be
proprietary to Bebig.
On July 23, 1998, we executed a further amendment to our agreements with
Bebig, whereby we received a lien on all tangible and intangible assets used by
Bebig in the design and manufacture of the Strontium 90 radioactive sources. In
addition, under that amendment, we have exercised our option to purchase the
tangible assets, and obtain a fully paid license to all intellectual property
used in the manufacture of the radioactive sources, for $4,019,400. The purchase
price is payable in the form of a license fee payable on a per train basis over
four years commencing in 1998, though we have no obligation to purchase any
units after the expiration or termination of the supply agreement. These license
payments aggregated $30,800 in 1998 and have been recorded as inventory costs.
In the event we do not pay the full purchase price for the assets before
September 1, 2002, Bebig will have no obligation to make any of its know-how or
technology available to us or any other source of supply. We are also obligated
to pay Bebig the cost (not to exceed 500,000 DM, or approximately $300,000) to
decontaminate its Strontium 90 line assets under certain circumstances.
Supply of Other Components by Third Parties
We currently rely on third party manufacturers for the supply of the
hand-held transfer device, the catheter and other components of our Beta-Cath
System. The supply of these components requires a long lead time. In addition,
we could not establish quickly additional or replacement suppliers or internal
manufacturing capabilities for these components. An existing vendor's failure to
supply components in a timely manner or our inability to obtain these components
on a timely basis from another supplier could have a material adverse effect on
our ability to manufacture the Beta-Cath System and, therefore, on our ability
to market the Beta-Cath System.
PATENTS AND PROPRIETARY TECHNOLOGY
Our policy is to protect our proprietary position by, among other methods,
filing United States and foreign patent applications. On November 4, 1997 we
were issued United States Patent No. 5,683,345 on the Beta-Cath System. We also
have filed a related United States continuation-in-part application (which is
jointly owned by us and Emory University), and have additional United States
applications pending covering aspects of our Beta-Cath System. The United States
Patent and Trademark Office has indicated that certain claims pending in the
United States continuation-in-part application and in another application are
allowable. With respect to United States Patent No. 5,683,345, the
continuation-in-part and our other pending United States patent applications, we
have filed, or will file in due course, counterpart applications in the European
Patent Office and certain other countries.
Like other firms that engage in the development of medical devices, we must
address issues and risks relating to patents and trade secrets. United States
Patent No. 5,683,345 may not offer any protection to us because competitors may
be able to design functionally equivalent devices that do not infringe this
patent. It may also be reexamined, invalidated or circumvented. In addition,
claims under our other pending applications may not be allowed, or if allowed,
may not offer any protection or may be reexamined, invalidated or circumvented.
In addition, competitors may have or may obtain patents that will prevent, limit
or interfere with our ability to make, use or sell our products in either the
United States or international markets.
We received a letter from NeoCardia, L.L.C., dated July 7, 1995, in which
NeoCardia notified us that it was the exclusive licensee of United States Patent
No. 5,199,939, or the Dake patent, and requested that we confirm that our
products did not infringe the claims of the Dake patent. On August 22, 1995 our
patent counsel responded on our behalf that we did not infringe the Dake patent.
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The United States Patent and Trademark Office later reexamined the Dake
patent. In the reexamination proceeding some of the patent claims were amended
and new claims were added. We have concluded, based upon advice of patent
counsel, that our Beta-Cath System would not infringe any claim of the Dake
patent as reexamined.
In May 1997 Guidant acquired NeoCardia together with the rights under the
Dake patent. Guidant is attempting to develop and commercialize products that
may compete with the Beta-Cath System and has significantly greater capital
resources than the company. Guidant may sue for patent infringement in an
attempt to obtain damages from us and/or injunctive relief restraining us from
commercializing the Beta-Cath System in the United States. If Guidant were
successful in any such litigation, we might be required to obtain a license from
Guidant under the Dake patent to market the Beta-Cath System in the United
States, if such license were available, or be prohibited from selling the
Beta-Cath System in the United States. Any of these actions could have a
material adverse effect on our business, financial condition and results of
operations, or could result in cessation of our business.
We have two versions of our delivery catheter: a "rapid exchange" catheter
and an "over the wire" catheter. As a result of certain United States patents
held by other device manufacturers covering "rapid exchange" catheters, we
currently intend to sell the "over the wire" version of our delivery catheter in
the United States. If further investigation reveals that we may sell a "rapid
exchange" version in the United States without infringing the valid patent
rights of others, we might decide to do so in the future. However, we cannot
assure that we will be able to sell a "rapid exchange" version in the United
States without a license of third party patent rights or that such a license
would be available to us on favorable terms or at all.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that we will not become subject
to patent-infringement claims or litigation or interference proceedings declared
by the United States Patent and Trademark Office to determine the priority of
inventions. The defense and prosecution of intellectual property suits, or
interference proceedings and related legal and administrative proceedings are
both costly and time-consuming. Litigation may be necessary to enforce our
patents, to protect our trade secrets or know-how or to determine the
enforceability, scope and validity of the proprietary rights of others. Any
litigation or interference proceedings will result in substantial expense to us
and significant diversion of effort by our technical and management personnel.
An adverse determination in litigation or interference proceedings to which we
may become a party could subject us to significant liabilities to third parties,
require us to seek licenses from third parties, require us to redesign our
products or processes to avoid infringement or prevent us from selling our
products in certain markets, if at all. Although patent and intellectual
property disputes regarding medical devices have often been settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and could include significant ongoing royalties. Furthermore,
there can be no assurance that the necessary licenses would be available to us
on satisfactory terms, if at all, or that we could redesign our products or
processes to avoid infringement. Any adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling our products, which would have a material
adverse effect on our business, financial condition and results of operations.
Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous. Accordingly, there can be no assurance
that current and potential competitors, many of which have substantial resources
and have made substantial investments in competing technologies, or other third
parties have not or will not file applications for, or have not or will not
receive, patents and will not obtain additional proprietary rights relating to
products made, used or sold or processes used or proposed to be used by us.
We have developed certain of our patent and proprietary rights relating to
the Beta-Cath System in conjunction with Emory University Hospital, a leader in
the research of intravascular radiation therapy. To obtain the exclusive rights
to commercialize the Beta-Cath System for the treatment of restenosis, we
entered
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into a license agreement with Emory. Under this agreement, Emory assigned to us
all of Emory's rights to one pending United States patent application and
exclusively licensed to us its rights under another United States application
and related technology. Emory made no representation or warranty with respect to
its ownership of the assigned patent application, and made only limited
representations as to its ownership of the licensed patent application and
related technology. Under the agreement Emory will be entitled to royalty
payments based upon net sales of the Beta-Cath System. The term of the agreement
runs through the later of (i) the date the last patent covered by the agreement
expires or (ii) January 2016 (unless earlier terminated as provided in the
agreement). Any inventions developed jointly by our personnel and Emory during
the term of the license agreement are owned jointly by Emory and us. If Emory
terminated the agreement as a result of our failure to pay such royalties or any
other breach of our obligations under such agreement, our rights to use jointly
owned patents (including any patent issuing from the continuation-in-part
application which has been filed) would become non-exclusive and we would have
no rights to use future patents owned exclusively by Emory. In addition, if we
breach our obligations under the license agreement, we could be required by
Emory to cooperate in licensing the pending jointly-owned United States patent
application and our foreign counterparts to third parties so that they would be
able to commercialize and sell the Beta-Cath System.
All of the physicians on staff at Emory who were involved in the
development of the Beta-Cath System, including Spencer B. King III, M.D., have
assigned their rights in the technology, if any, to Emory and/or us. In
addition, we have entered into a license agreement with Dr. King. Under the
terms of this agreement, Dr. King is entitled to receive a royalty on the net
sales of the Beta-Cath System (excluding consideration paid for the radioactive
isotope), subject to a maximum of $5,000,000.
We employ a full time manager of intellectual property to prepare invention
records and to coordinate the prosecution of new intellectual property. We
typically obtain confidentiality and invention assignment agreements in
connection with employment, consulting and advisory relationships. These
agreements generally provide that all confidential information developed or made
known to the individual by us during the course of the individual's relationship
with us, is to be kept confidential and not disclosed to third parties, except
in specific circumstances. There can be no assurance, however, that these
agreements will provide meaningful protection or adequate remedies for us in the
event of unauthorized use, transfer or disclosure of such information or
inventions.
Furthermore, no assurance can be given that competitors will not
independently develop substantially equivalent proprietary information and
techniques, or otherwise gain access to our proprietary technology, or that we
can meaningfully protect our rights in unpatented proprietary technology.
COMPETITION; RAPID TECHNOLOGICAL CHANGE
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 System
in particular noncompetitive or obsolete.
Vascular brachytherapy may compete with other treatment methods designed to
improve outcomes from coronary artery procedures that are well established in
the medical community, such as coronary stents. Stents are the predominant
treatment currently utilized to reduce the incidence of coronary restenosis
following PTCA and were used in approximately 60% of all PTCA procedures
performed worldwide in 1998. Manufacturers of stents include Johnson & Johnson,
Medtronic, Inc., Guidant Corporation and Boston Scientific Corporation. Stent
manufacturers often sell many products used in the cath lab and, as discussed
below, certain of these companies are developing vascular brachytherapy devices.
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Other devices under development that use vascular brachytherapy, include:
- a radioactive-tipped guidewire;
- a radioactive stent; and
- a radioactive fluid-filled balloon.
In addition, the radiation sources being developed by our competition vary
between gamma, beta and x-ray.
The most advanced competitive approach is represented by the radioactive
guidewire, as we are aware of three companies which are in the pivotal clinical
trial stage in the United States. Johnson & Johnson has completed patient
enrollment into its trial, the Gamma One trial, whose purpose is to assess the
use of Best Medical International's manually advanced gamma wire in treating
"in-stent" restenosis. In March 1999, Johnson & Johnson announced preliminary
six-month angiographic results of its pivotal trial in the United States
relating to the safety and efficacy of its catheter-based gamma
radioactive-tipped wire in treating "in-stent" restenosis. The preliminary
results, which included angiographic follow-up on 86% of the 252 patients
enrolled at 12 sites, showed a 59% reduction in "in-stent" restenosis in
patients receiving radiation (Iridium -- 192) compared to those patients
receiving a placebo. Johnson & Johnson announced at the same time that its
subsidiary, Cordis Corporation, plans to submit a pre-market approval
application to the FDA by mid-year 1999 for this device. The U.S. Surgical
division of Tyco International Ltd. is investigating its gamma wire/ afterloader
system in an "in-stent" restenosis trial called the ARTISTIC Trial. Lastly,
Guidant is currently evaluating its beta wire/afterloader system in the INHIBIT
Trial, also for "in-stent" restenosis.
Boston Scientific, through its Schneider AG subsidiary, is also developing
a beta wire/afterloader system which is under investigation in Europe and in a
pilot study in the United States. In March 1999, the principal investigator of
Boston Scientific's pilot study in the United States reported that 49 patients
with "in-stent" restenosis received treatment with a device containing a
beta-emitting radioactive wire. The principal investigator further reported that
results based on six-month angiographic follow-up of a majority of those
patients indicated about 16% of the patients experienced restenosis compared
with about 66% of the patients in a historical control group.
Most of the radioactive guidewires are used in conjunction with an
afterloader, a specialized piece of equipment that is typically computer
controlled. It is used to automatically calculate treatment times, control
movement of the guidewire, and to store and shield the guidewire when not in
use. This equipment is large, complex, and expensive. Guidewires with
gamma-emitting radioactive tips have been used for some time in cancer therapy.
Gamma radiation is significantly more penetrating and therefore more hazardous
to use than beta radiation. For example, health care workers must leave the cath
lab during administration of gamma radiation to ensure their safety by limiting
their ongoing exposure to gamma radiation. In addition, gamma radiation impacts
patient tissue beyond the treatment site. Nevertheless, physicians and hospitals
could prefer to use gamma radiation-based devices rather than beta
radiation-based devices, including the Beta-Cath System.
We are also aware of several companies, including Guidant Corporation,
which are developing radioactive stents. In theory, such a stent would address
hyperplasia in addition to elastic recoil and vascular remodeling. However,
feasibility clinical studies published to date have not demonstrated
improvements in coronary restenosis. The issues appear to be the inability of
the stent to effectively treat areas of the artery beyond the ends of the stent
and the difficulty in optimizing the dose of a short half-life device which is
permanently implanted. From a logistical perspective, hospitals may have
difficulty in keeping an inventory of stents that have sufficient radioactivity
at the time of implant due to the short shelf life of stents impregnated with
short half-life isotopes.
Radioactive fluid filled balloon catheters have been investigated in small
pilot clinical studies, and very little clinical data is currently available.
Mallinckrodt, Inc., Tyco International Ltd., and Guidant are known to have
active development projects in this area. This approach would involve injecting
a short half-life radioactive liquid down a catheter to inflate a balloon. The
disadvantages of this approach include the risks of fluid leaks inside the cath
lab, balloon rupture, the need to fractionate dosing to prevent ischemia, and
the disposal of the catheter which has been contaminated with radioactive
material.
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Many of our competitors and potential competitors have substantially
greater capital resources than we do and also have greater resources and
expertise in the areas of research and development, obtaining regulatory
approvals, manufacturing and marketing. We cannot assure you that competitors
and potential competitors will not succeed in developing, marketing and
distributing technologies and products that are more effective than those we
will develop and market or that would render our technology and products
obsolete or noncompetitive. Additionally, many of the competitors have the
capability to bundle a wide variety of products in sales to cath labs. We may be
unable to compete effectively against such competitors and other potential
competitors in terms of manufacturing, marketing and sales.
Any product we develop that gains regulatory clearance or approval will
have to compete for market acceptance and market share. An important factor in
such competition may be the timing of market introduction of competitive
products. Accordingly, we expect the relative speed with which we can develop
products, gain regulatory approval and reimbursement acceptance and supply
commercial quantities of the product to the market to be an important
competitive factor. One of our competitors, Cordis Corporation, has announced
its intention to submit a pre-market approval application to the FDA by mid-year
1999 for its gamma-emitting vascular brachytherapy device. We believe that the
primary competitive factors for products addressing restenosis include safety,
efficacy, ease of use, reliability, suitability for use in cath labs, service
and price. We also believe that physician relationships, especially
relationships with leaders in the interventional cardiology community, are
important competitive factors. Other manufacturers may be the first to market a
vascular brachytherapy device in the United States. In addition, we may not be
the first to market a beta-emitting vascular brachytherapy system in the United
States or to market such a system effectively.
GOVERNMENT REGULATION
United States
Our Beta-Cath System is regulated in the United States as a medical device.
As such, we are subject to extensive regulation by the FDA, by other federal,
state and local authorities and by foreign governments. The FDA regulates the
clinical testing, manufacture, packaging, labeling, storage, distribution and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant pre-market clearance or pre-market approval for devices,
withdrawal of marketing approvals, a recommendation by the FDA that we not be
permitted to enter into government contracts, and criminal prosecution. The FDA
also has the authority to request repair, replacement or refund of the cost of
any device manufactured or distributed.
In the United States, medical devices are classified into one of three
classes (Class I, II or III) on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under FDA
regulations Class I devices are subject to general controls (for example,
labeling, pre-market notification and adherence to good manufacturing
practice/quality systems regulation) and Class II devices are subject to general
and special controls (for example, performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Class III is the most
stringent regulatory category for medical devices. Generally, Class III devices
(for example, life-sustaining, life-supporting or implantable devices, or new
devices that have not been found substantially equivalent to legally marketed
devices) are those that must receive pre-market approval by the FDA after
evaluation of their safety and effectiveness. The Beta-Cath System is a Class
III device, which will require the FDA's pre-market approval prior to its
commercialization.
A pre-market approval application must be supported by valid scientific
evidence, which typically includes extensive data, including preclinical and
human clinical trial data to demonstrate safety and effectiveness of the device.
If human clinical trials of a device are required and the device trial presents
a "significant risk," the sponsor of the trial, usually the manufacturer or the
distributor of the device, is required to file an investigational device
exemption application with the FDA and obtain FDA approval prior to commencing
human clinical trials. The investigational device exemption application must be
supported by data, typically including the results of animal and laboratory
testing. If the investigational device exemption application is approved by the
FDA and one or more appropriate Institutional Review Boards, or "IRBs,"
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human clinical trials may begin at a specific number of investigational sites
with a specific number of patients, as approved by the FDA.
The pre-market approval application must also contain the results of all
relevant bench tests, laboratory and animal studies, a complete description of
the device and its components, and a detailed description of the methods,
facilities and controls used to manufacture the device. In addition, the
submission should include the proposed labeling, advertising literature and
training methods (if required). Upon receipt of a pre-market approval
application, the FDA makes a threshold determination as to whether the
application is sufficiently complete to permit a substantive review. If the FDA
determines that the pre-market approval application is sufficiently complete to
permit a substantive review, the FDA will accept the application for filing and
begin an in-depth review of the pre-market approval application. An FDA review
of a pre-market approval application generally takes one to two years from the
date the pre-market approval application is accepted for filing, but may take
significantly longer. The review time is often significantly extended by the FDA
asking for more information or clarification of information previously
submitted. During the review period an advisory committee, primarily comprised
of clinicians, will likely be convened to review and evaluate the application
and provide recommendations to the FDA as to whether the device should be
approved. The FDA is not bound by those recommendations. During the review
process of the pre-market approval application, the FDA should conduct an
inspection of the manufacturer's facilities to ensure that the facilities are in
compliance with the applicable good manufacturing practices requirements. To
date, the FDA has not inspected our current compliance with quality systems
regulations with respect to the Beta-Cath System.
If the FDA's evaluation of the pre-market approval application is
favorable, the FDA will either issue an approval letter or an "approvable
letter," containing a number of conditions which must be satisfied in order to
secure the final approval of the pre-market approval application. When and if
those conditions have been fulfilled to the satisfaction of the FDA, the agency
will issue a letter approving a pre-market approval application authorizing
commercial marketing of the device for certain indications. If the FDA's
evaluation of the pre-market approval application or manufacturing facilities is
not favorable, the FDA will deny approval of the pre-market approval application
or issue a "not approvable letter." The FDA may also determine that additional
clinical trials are necessary, in which case approval of the pre-market approval
application could be delayed for several years while additional clinical trials
are conducted and submitted in an amendment to the pre-market approval
application.
We are currently conducting two pivotal trials of the Beta-Cath System
under an investigational device exemption granted by the FDA. There can be no
assurance as to when, or if, we will complete the enrollment for our current
pivotal clinical trials or that data from such trials, if completed, will be
adequate to support approval of a pre-market approval application.
The process of obtaining a pre-market approval and other required
regulatory approvals can be expensive, uncertain and lengthy, and there can be
no assurance that we will ever obtain such approvals. At the earliest, we do not
anticipate submitting a pre-market approval application for the Beta-Cath System
until the second quarter of 2000, and do not anticipate receiving a pre-market
approval for the system until at least one year after such pre-market approval
application is accepted for filing, if at all. There can be no assurance that
the FDA will act favorably or quickly on any of our submissions to the FDA. We
may encounter significant difficulties and costs in our efforts to obtain FDA
approval that could delay or preclude us from selling our products in the United
States. Furthermore, the FDA may request additional data or require that we
conduct further clinical studies, causing us to incur substantial cost and
delay. In addition, the FDA may impose strict labeling requirements, onerous
operator training requirements or other requirements as a condition of our pre-
market approval, any of which could limit our ability to market our systems.
Labeling and marketing activities are subject to scrutiny by the FDA and 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 application, additional approvals will be required by the
FDA if the modification affects safety or effectiveness. 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,
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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. See "Risk Factors -- No Assurance of Regulatory
Approvals" and "-- Early Stage of Clinical Testing of Beta-Cath System; No
Assurance of its Safety and Effectiveness".
Any products we manufacture or distribute pursuant to FDA approvals are
subject to pervasive and continuing regulation by the FDA, including
record-keeping requirements and reporting of adverse experiences with the use of
the device. Device manufacturers are required to register their establishments
and list their devices with the FDA and certain state agencies, and are subject
to periodic inspections by the FDA and those state agencies. The Food, Drug and
Cosmetic Act requires device manufacturers to comply with good manufacturing
practices regulations. A new set of good manufacturing practices regulations,
called the quality systems regulations, went into effect June 1, 1997. The
regulations require that medical device manufacturers comply with various
quality control requirements pertaining to design controls, purchasing controls,
organization and personnel; device and manufacturing process design; buildings,
environmental control, cleaning and sanitation; equipment and calibration of
equipment; medical device components; manufacturing specifications and
processes; reprocessing of devices; labeling and packaging; in-process and
finished device inspection and acceptance; device failure investigations; and
recordkeeping requirements including complaint files. The FDA enforces these
requirements through periodic inspections of medical device manufacturing
facilities. In addition, a set of regulations known as the medical device
reporting regulations obligates manufacturers to inform the FDA whenever
information reasonably suggests that one of its devices may have caused or
contributed to a death or serious injury, or when one of its devices
malfunctions and, if the malfunction were to recur, the device would be likely
to cause or contribute to a death or serious injury.
Labeling and promotional activities, including advertising, are also
subject to scrutiny by the FDA. Among other things, labeling violates the law if
it is false or misleading in any respect or it fails to contain adequate
directions for use. Moreover, any labeling claims that exceed the
representations approved by the FDA will violate the Food, Drug and Cosmetic
Act.
Our product advertising is also subject to regulation by the Federal Trade
Commission under the Federal Trade Commission Act, which prohibits unfair
methods of competition and unfair or deceptive acts or practices in or affecting
commerce, including the dissemination of any false advertisement pertaining to
medical devices. Under the Federal Trade Commission's "substantiation doctrine,"
an advertiser is required to have a "reasonable basis" for all product claims at
the time claims are first used in advertising or other promotions.
Our business involves the import, manufacture, transfer, use and disposal
of Strontium 90 (Strontium/ Yttrium), the beta-emitting radioisotope utilized in
the Beta-Cath System's radiation source train. Accordingly, manufacture,
distribution, use and disposal of the Beta-Cath System will also be subject to
federal, state and/or local laws and regulations relating to the use and
handling of radioactive materials. Specifically, we must obtain approval from
the State of Georgia Department of Natural Resources to commercially distribute
our radiation sources to licensed recipients in the United States. We and/or our
supplier of radiation sources must also comply with NRC and United States
Department of Transportation regulations on the labeling and packaging
requirements for shipment of radiation sources to hospitals or other users of
the Beta-Cath System. Further, hospitals and/or physicians in the United States
may be required to amend their radiation licenses to hold, handle and use
Strontium 90 prior to receiving and using our Beta-Cath System.
During the course of our Beta-Cath System Trial, there were two incidents
in which there was a delay in retrieval of the radiation source train from the
target site. In one incident, an over-tightened valve on the catheter delayed
return of the source train and in the other incident there was insufficient
fluid left in the syringe to power the hydraulic retrieval of the radiation
source train. In March 1998, the NRC notified medical licensees of these
incidents, but required no specific action or written response by us or any
other third party. While the NRC made recommendations in this notice, Novoste
believes that substantially all of these recommendations had already been
addressed by the trial protocol.
We are also subject to numerous federal, state and local laws relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire-hazard control and disposal of hazardous or potentially
hazardous substances. There can be no assurance that we will not be required to
incur significant
44
<PAGE> 45
costs to comply with such laws and regulations now or in the future, or that
such laws or regulations will not have a material adverse effect upon our
ability to do business.
Changes in existing requirements or adoption of new requirements or
policies could adversely affect our ability to comply with regulatory
requirements. Our failure to comply with regulatory requirements could have a
material adverse effect on our business, financial condition or results of
operations. There can be no assurance that we will not be required to incur
significant costs to comply with laws and regulations in the future or that laws
and regulations will not have a material adverse effect upon our business,
financial condition or results of operations.
International
In order for us to market the Beta-Cath System in Europe, 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. There can be no assurance that we will obtain
regulatory approvals in such countries or that we will not 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.
The time required to obtain approval for sale in foreign countries may be
longer or shorter than that required for FDA approval, and the requirements may
differ. The European Union has promulgated rules requiring that medical devices
placed on the market after June 14, 1998 bear CE marking, a legal symbol
attesting to compliance with the appropriate directive which, in our case, is
the medical devices directive. We qualified to apply CE marking to the Beta-Cath
System in August 1998, which allows us to sell the device in the 18 countries of
the European Economic Area, or EEA, and Switzerland. Although the medical
devices directive is intended to ensure free movement within the EEA of medical
devices that bear the CE marking, many countries in the EEA have imposed
additional requirements, such as labeling in the national language and
notification of placing the device on the market. In addition, regulatory
authorities in European countries can demand evidence on which conformity
assessments for CE-marked devices are based and in certain circumstances can
prohibit the marketing of products that bear the CE marking. Many European
countries maintain systems to control the purchase and reimbursement of medical
equipment under national health care programs, and the CE marking does not
affect these systems. The Company's products have not received regulatory
approval in Japan nor have they been approved for government reimbursement in
Japan.
In addition, there are generally foreign regulatory barriers other than
pre-market approval (including separate regulations concerning the distribution,
use, handling and storage of radiation sources), and the export of devices must
be in compliance with FDA regulations. The distribution and use of the Beta-Cath
System outside the United States is subject to radiation regulatory requirements
that vary from country to country and sometimes vary within a given country.
Generally, each country has a national regulatory agency responsible for
regulating the safe practice and use of radiation in its jurisdiction. In
addition, each hospital desiring to use the Beta-Cath System is generally
required to amend its radiation license to hold, handle and use the Strontium 90
sources in our device. Generally, these licenses are specific to the amount and
type of radioactivity utilized. In addition, generally the use of a radiation
source by a physician, either for a diagnostic or therapeutic application, also
requires a license, which again is specific to the isotope and the clinical
application.
Obtaining any of the foregoing radiation-related approvals and licenses can
be complicated and time consuming. If we or any hospital or physician is
significantly delayed in obtaining any of the foregoing approvals or any of
those approvals are not obtained, our business, financial condition and results
of operations could be materially adversely affected.
THIRD-PARTY REIMBURSEMENT
We expect that our sales volumes and prices of our products will be heavily
dependent on the availability of reimbursement from third-party payors and that
individuals may not be willing or able to pay directly for
45
<PAGE> 46
the costs associated with the use of our products. Our products typically are
purchased by clinics and hospitals, which bill various third-party payors, such
as governmental programs and private insurance plans, for the healthcare
services provided to their patients. Third-party payors carefully review and
increasingly challenge the prices charged for medical products and services.
Reimbursement rates from private companies vary depending on the procedure
performed, the third-party payor, the insurance plan, and other factors.
Medicare reimburses hospitals a prospectively determined fixed amount for the
costs associated with an in-patient hospitalization based on the patient's
discharge diagnosis, and reimburses physicians a prospectively determined fixed
amount based on the procedure performed, regardless of the actual costs incurred
by the hospital or physician in furnishing the care and unrelated to the
specific devices used in that procedure. Medical and other third-party payors
are increasingly scrutinizing whether to cover new products and the level of
reimbursement for covered products.
The FDA has classified the Beta-Cath System as an experimental device and
accordingly its use in the human clinical trials in the United States is not
reimbursable under the Medicare program or by private insurers until after the
pre-market approval is achieved, if ever. The classification of the Beta-Cath
System as experimental has materially increased the costs of conducting clinical
trials in the United States, and such costs have had a material effect on our
business, financial condition and results of operations.
In international markets, market acceptance of the Beta-Cath System may be
dependent in part upon the availability of reimbursement within the prevailing
healthcare payment systems. Reimbursement systems vary significantly by country,
and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. In foreign markets, reimbursement is
obtained from a variety of sources, including government sponsored healthcare
and private health insurance plans. In some countries the healthcare systems are
centrally organized, but in most cases there is a degree of regional autonomy
either in deciding whether to pay for a particular procedure or in setting the
reimbursement level. The way in which new devices enter the healthcare system
depends on the system: there may be a national appraisal process leading to a
new procedure or product coding, or it may be a local decision made by the
relevant hospital department. The latter is particularly the case where a global
payment is made that does not detail specific technologies used in the treatment
of a patient. In most foreign countries there are also private insurance plans
that may offer reimbursement for alternative therapies. Although not as
prevalent as in the United States, managed care is gaining prevalence in certain
European countries. We will seek international reimbursement approvals, although
there can be no assurance that any such approvals will be obtained in a timely
manner or at all. Failure to receive international reimbursement approvals could
have an adverse effect on market acceptance of our products in the international
markets in which such approvals are sought.
We believe that reimbursement in the future will be subject to increased
restrictions such as those described above, both in the United States and in
foreign markets. We believe that the overall escalating cost of medical products
and services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products we offer. There can be no assurance as to
either United States or foreign markets that third-party reimbursement and
coverage will be available or adequate, that current reimbursement amounts will
not be decreased in the future or that future legislation, regulation, or
reimbursement policies of third-party payors will not otherwise adversely affect
the demand for our products or our ability to sell our products on a profitable
basis, particularly if our system is more expensive than competing products or
procedures. If third-party payor coverage or reimbursement is unavailable or
inadequate, our business, financial condition, and results of operations could
be materially adversely affected.
PRODUCT LIABILITY AND INSURANCE
Our business entails the risk of product and other liability claims,
including claims by patients, health care workers and employees. Although we
have not experienced any product liability or other claims to date, there can be
no assurance that such claims will not be asserted or that we will have
sufficient resources to satisfy any liability resulting from such claims. The
Company maintains product liability insurance with coverage of an annual
aggregate maximum of $8 million. There can be no assurance that product
liability claims will not exceed such insurance coverage limits, that such
insurance will continue to be available on
46
<PAGE> 47
commercially reasonable terms or at all, or that a product liability or other
claim would not materially adversely affect our business, financial condition or
results of operations.
FACILITIES
In November 1998, we entered into a five year lease (cancelable after three
years) for a 48,000 square foot facility in Norcross, Georgia. We moved all of
our operations, except manufacturing, to this facility in January 1999. We have
maintained approximately 12,000 square feet of our previous facility to house
our manufacturing operations including a 1,700 square foot Class 100,000 clean
room. Concurrent with the move into our new facility, our commitment under our
previous lease agreements was terminated at no cost to us. Our European
operations are housed in a 2,000 square foot leased space in Brussels, Belgium.
We believe that these facilities are adequate to serve our needs through at
least 2001.
EMPLOYEES AND CONSULTANTS
As of December 31, 1998, we directly employed 89 full-time individuals.
Most of our employees have prior experience with medical device or
pharmaceutical companies. We believe that we maintain good relations with our
employees. None of our employees is represented by a union or covered by a
collective bargaining agreement. Our success will depend in large part upon our
ability to attract and retain qualified employees. We face competition in this
regard from other companies, research and academic institutions and other
organizations.
We maintain continuing relationships with a number of independent
consultants that have contributed to the development of our products and work on
specific development projects. These relationships are integral to our continued
success and the generation of new products from the research and development
departments.
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<PAGE> 48
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Thomas D. Weldon....................... 43 Chief Executive Officer and Chairman
William A. Hawkins..................... 44 President and Director
Charles E. Larsen...................... 47 Senior Vice President, Chief Technical
Officer and Director
David N. Gill.......................... 44 Chief Operating Officer and Chief
Financial Officer
Raoul Bonan, M.D. ..................... 51 Vice President, Clinical Affairs and
Medical Director
Thomas K. Brooks....................... 42 Vice President, Sales and Marketing
Cheryl R. Johnson...................... 36 Vice President, Investor Relations and
Business Development and Secretary
Michel E. Lussier...................... 42 Vice President, European Operations
Joan M. Macdonald, Ph.D. .............. 41 Vice President, Regulatory Affairs
Donald C. Harrison, M.D. .............. 64 Director
J. Stephen Holmes...................... 55 Director(1)
Stephen I. Shapiro..................... 54 Director(1)
Pieter J. Schiller..................... 61 Director(2)
Norman R. Weldon, Ph.D. ............... 64 Director
William E. Whitmer..................... 65 Director(2)
</TABLE>
- ---------------
(1) Member of Stock Option and Compensation Committee.
(2) Member of Audit Committee.
Thomas D. Weldon. Mr. Weldon co-founded the company and has served as
Chief Executive Officer and as a Director since our capitalization in May 1992.
In June 1998, Mr. Weldon became Chairman of the company. Mr. Weldon co-founded
and was President, Chief Executive Officer and a Director of Novoste Puerto Rico
Inc., a manufacturer of disposable cardiovascular medical devices, from 1987 to
May 1992, prior to its sale. Previous responsibilities included management
positions at Arthur Young & Company and Key Pharmaceuticals. Mr. Weldon received
a B.S. in Industrial Engineering from Purdue University and an M.B.A. in
Operations and Systems Management from Indiana University.
William A. Hawkins. Mr. Hawkins was elected Director in May 1998 and
became President in June 1998. From April 1997 to May 1998, Mr. Hawkins was a
Corporate Vice President of American Home Products Corporation and President of
its Sherwood Davis & Geck division. He is a past board member of the Health
Industry Manufacturers Association (HIMA). Since January 1995, he has been a
director of PharmaNetics, Inc., a Nasdaq-listed company. From October 1995 until
April 1997, Mr. Hawkins was President of Ethicon Endo-Surgery, Inc., a medical
device subsidiary of Johnson & Johnson. From January 1995 to October 1995, Mr.
Hawkins served as Vice President in charge of United States operations of
Guidant Corporation and President of Devices for Vascular Intervention, a
medical device company and a subsidiary of Guidant. Prior to joining Guidant,
Mr. Hawkins held several positions with IVAC Corporation, a medical device
company, most recently serving as President and Chief Executive Officer from
1991 until 1995. Mr. Hawkins holds a B.S. in Engineering and Biomedical
Engineering from Duke University and an M.B.A. from the University of Virginia.
Charles E. Larsen. Mr. Larsen co-founded the company and has served as its
Senior Vice President and as a Director since our capitalization in May 1992.
Since February 28, 1997, Mr. Larsen has been Chief Technical Officer of the
company, having served from May 1992 through February 1997 as our Chief
Operating Officer. Mr. Larsen co-founded and was Vice President and Director of
Novoste Puerto Rico, Inc.
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<PAGE> 49
from 1987 to May 1992. From 1983 through 1987, Mr. Larsen was a manager of
manufacturing engineering at Cordis Corporation. Mr. Larsen received a B.S. in
Mechanical Engineering from New Jersey Institute of Technology.
David N. Gill. Mr. Gill has served as the company's Chief Financial
Officer since July 1996 and as Chief Operating Officer since February 28, 1997.
From August 1995 to June 1996, Mr. Gill served as Chief Financial Officer of
SPEA Software AG prior to its sale. From 1992 to 1995, Mr. Gill served as
President and Director of Dornier Medical Systems, Inc., a medical device
company, and from 1990 to 1992 as its Vice President of Finance. Mr. Gill
received an M.B.A. from Emory University and a B.S. degree in Accounting from
Wake Forest University, and is a Certified Public Accountant.
Raoul Bonan, M.D. Dr. Bonan, an interventional cardiologist, joined
Novoste as Medical Director and V.P., Clinical Affairs in June 1998. Dr. Bonan
is presently taking a leave of absence from the Montreal Heart Institute where
he has been a staff member from 1978 until May 1998, and was Chief of the
Cardiac Catheterization Laboratory from 1986 to 1994. Dr. Bonan was a clinical
investigator in the Beta-Cath System Trial and the BERT Trial prior to joining
Novoste. Dr. Bonan is a Fellow of the American College of Cardiology, the
European Society of Cardiology, and the American Heart Association.
Additionally, he serves on the editorial and review boards of several medical
journals, including Circulation and the Journal of the American College of
Cardiology. Dr. Bonan received a B.A. degree in Mathematics and his Medical
Degree in Paris, France. Dr. Bonan subsequently completed internships and
postgraduate training in Paris and Montreal, Canada.
Thomas K. Brooks. Mr. Brooks has served as the company's Vice President of
Sales and Marketing since January 1995 and had also served as Vice President of
Business Development from January 1995 to July 1996. From 1986 through December
1994, Mr. Brooks served in various sales, marketing, and business development
positions with Boston Scientific Corporation, a manufacturer of medical devices,
most recently as manager of new business development. From 1983 through 1986,
Mr. Brooks held various sales positions for Ethicon Endo-Surgery Division of
Johnson & Johnson. Mr. Brooks received a B.A. in Business Administration from
Monmouth College.
Cheryl R. Johnson. Ms. Johnson joined the company in July 1992 as Director
of Marketing and Business Development and Secretary, served as Director of
Administration and Business Development of the company from January 1995 until
July 1996 and has served as Vice President, Investor Relations and Business
Development from July 1996. From August 1989 to June 1992, Ms. Johnson worked in
planning and business development capacities at BOC Health Care, most recently
as its business development manager. Ms. Johnson received an M.B.A. from the
Kellogg School at Northwestern University and a B.S. degree in Chemical
Engineering from the Georgia Institute of Technology.
Michel E. Lussier. Mr. Lussier joined Novoste as Vice President and
General Manager, European Operations in October 1998. Mr. Lussier served as Vice
President and General Manager of European Operations for InControl Inc., a
medical device company, from September 1994 until September 1998, when the
company was acquired by Guidant Corporation. From 1980 to 1994 Mr. Lussier was
employed by Medtronic, Inc., a medical device company, most recently serving as
its European Business Director, Cardiac Pacing. Mr. Lussier is currently Vice
President of the International Association of Prosthesis Manufacturers (IAPM)
and Chairman of its Strategy Committee. Mr. Lussier holds a B.S. in Electrical
Engineering and an M.S. in Biomedical Engineering, both from the University of
Montreal, and he earned an M.B.A. from the European Institute of Business
Administration-INSEAD.
Joan M. Macdonald, Ph.D. Dr. Macdonald joined the company in January 1994,
as our Director of Regulatory Affairs, served as our Vice President, Regulatory
and Clinical Affairs from January 1996 to May 1998 and has been our Vice
President, Regulatory Affairs since June 1998. From September 1990 through
September 1993, Dr. Macdonald worked for CIBA Vision Corporation, a manufacturer
of ophthalmic products, having served most recently as Director, Worldwide
Regulatory Strategy. Dr. Macdonald received a Ph.D. degree in Physiology from
the Medical College of Wisconsin and M.S. and B.S. degrees in Zoology from the
University of Wisconsin.
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<PAGE> 50
Donald C. Harrison, M.D. Dr. Harrison was elected a Director of the
company in December 1998. He has been Professor of Medicine and Cardiology,
University of Cincinnati, and Senior Vice President and Provost for Health
Affairs, University of Cincinnati Medical Center, since 1986. Dr. Harrison has
been a director of EP Technologies, Inc., InControl Inc. and SciMed Life
Systems, Inc., and is a member of the Medical Advisory Boards of Hewlett Packard
Company, Syntex Corporation and The Proctor & Gamble Company. He is a past
President of the American Heart Association and was Chief of Cardiology at
Stanford University School of Medicine. Dr. Harrison holds an M.D. from
University of Alabama School of Medicine and a B.S. in Chemistry from Birmingham
Southern College.
J. Stephen Holmes. Mr. Holmes has served as a Director of the company
since October 1992. He became President of Weck Closure Systems, a medical
device company, in February 1998. For two years prior thereto, Mr. Holmes was
Executive Manager of Saber Endoscopy, LLC, a medical device company he formed in
February 1996. From 1992 through 1995, Mr. Holmes was a private investor, having
founded several start-ups from 1979 through 1991, including Adler Instrument
Company, Inc., SOLOS Ophthalmology, Inc. and SOLOS Endoscopy, Inc., which he
founded in 1982, 1988 and 1990, respectively, and in which he sold his interests
in 1988, 1991 and 1991, respectively. Mr. Holmes received a B.S. in Marketing
from the University of Evansville.
Stephen I. Shapiro. Mr. Shapiro has served as a Director of the company
since October 1996. Mr. Shapiro previously served as a Director of the company
from August 1995 until his resignation in March 1996. Since 1982, he has been a
Managing Principal of The Wilkerson Group, a division of International Business
Machines Corporation, a management consulting group with clients in the health
care industry. From 1970 to 1982, Mr. Shapiro held a variety of technical
management and strategic planning positions with Union Carbide Clinical
Diagnostics and Becton Dickinson and Company. Mr. Shapiro received a B.S. degree
in Chemical Engineering from the Massachusetts Institute of Technology and an
M.S. degree in Chemical Engineering from the University of California at
Berkeley.
Pieter J. Schiller. Mr. Schiller has served as a Director of the company
since March 1996. Mr. Schiller has served as a Director of CollaGenex
Pharmaceuticals, Inc. since September 1995. Since 1987, Mr. Schiller has been a
general partner of ATV, a venture capital firm located in Boston, Massachusetts,
where he specializes in health care investing. Mr. Schiller served Allied Signal
and its predecessor companies from 1961 through 1986 in various capacities,
including Treasurer and Vice-President, Planning and Development. From 1983 to
1986, he served as Executive Vice-President of Allied Health and Scientific
Products Company, a multi-national manufacturer of biomedical and analytical
instruments and supplies. Mr. Schiller received his M.B.A. from New York
University and a B.A. in Economics from Middlebury College.
Norman R. Weldon, Ph.D. Dr. Weldon co-founded the company and was Chairman
of the Board from our capitalization in May 1992 until May 1998. Dr. Weldon is
Treasurer and Managing Director of Partisan Management Group, a venture capital
fund he co-founded in 1993. From 1986 until May 1996, Dr. Weldon served as
President and Chief Executive Officer and as a Director of Corvita Corporation,
a medical device company Dr. Weldon co-founded in 1986. In July 1996 Pfizer Inc.
consummated its acquisition of Corvita. From 1979 to 1987, Dr. Weldon served as
President and Chief Executive Officer of Cordis Corporation. From 1964 to 1979,
Dr. Weldon served CTS Corporation in various capacities, including as its
President and Chief Executive Officer beginning in 1976. Dr. Weldon received,
from Purdue University, a Ph.D. in Economics, an M.S. in Industrial Management
and a B.S. in Biochemistry.
William E. Whitmer. Mr. Whitmer has served as a Director of the company
since October 1992. Mr. Whitmer is a Certified Public Accountant and management
consultant. From 1989 until his retirement in 1992, he was a partner of Ernst &
Young, having served as the Associate Managing Director of that firm's southern
United States management consulting group. From 1968 through 1989, Mr. Whitmer
was a partner of Arthur Young & Company, having served as the Managing Partner
of its East and Southeast United States regions of the management consulting
practice from 1975 through 1989. Mr. Whitmer received a B.A. in Economics from
Denison University.
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<PAGE> 51
Dr. Norman R. Weldon is the father of Mr. Thomas D. Weldon.
We anticipate that prior to June 1999, Mr. Hawkins will become our Chief
Executive Officer and that Mr. Thomas D. Weldon will continue to serve as our
Chairman. We also anticipate that Mr. Larsen will resign as an executive officer
in March 1999, but continue to serve as a director. See "-- Employment
Agreements."
The company's Board of Directors is divided into three classes, each of
which will serve a term of three years, with one class being elected each year.
Each of the Company's directors has been elected to serve until his successor
has been elected and duly qualified. The terms of the Class III directors:
Thomas D. Weldon, Charles E. Larsen and Norman R. Weldon, will expire at the
annual meeting of shareholders in 1999; the terms of the Class I directors: J.
Stephen Holmes, William E. Whitmer and Stephen I. Shapiro, will expire at the
annual meeting of shareholders in 2000; the terms of the following Class II
directors, William A. Hawkins and Pieter J. Schiller, will expire at the annual
meeting of shareholders in 2001. The Board appointed Dr. Donald C. Harrison to
the Board in December 1998. He serves as a Class II Director and is subject to
reelection by the shareholders at the 1999 Annual Meeting of Shareholders to
serve the balance of the Class II term, expiring at the annual meeting of
shareholders in 2001.
The Board of Directors has a Stock Option and Compensation Committee,
comprised of J. Stephen Holmes and Stephen I. Shapiro. The Stock Option and
Compensation Committee establishes compensation policies and determines
compensation for our executive officers, as well as administering the company's
1992 Amended and Restated Stock Option Plan. The Board itself administers the
Non-Employee Director Stock Option Plan. The Board of Directors also has an
Audit Committee, comprised of Messrs. William E. Whitmer and Pieter J. Schiller.
The Audit Committee reviews our audit and financial procedures and recommends
any changes with respect thereto to the Board of Directors.
Officers are elected annually and serve at the pleasure of the Board of
Directors.
We have obtained key-man life insurance policies on the lives of Mr. Thomas
D. Weldon and Mr. Larsen in the amount of $1,000,000 and $750,000, respectively,
under each of which we are the sole beneficiary.
COMPENSATION OF DIRECTORS
Non-employee directors are reimbursed their expenses and receive a fee of
$2,000 per Board meeting attended. Such directors who are members of a committee
of the Board of Directors receive a fee of $2,000 annually per committee in
which such director is a member, regardless of the number of committee meetings
attended by such director during the course of the year. During 1998,
non-employee directors received an annual retainer of $5,000 paid quarterly.
On December 18, 1998 the Board granted each of its non-employee directors a
five-year non-incentive stock option to purchase 10,000 shares of our common
stock at an exercise price equal to $20.94 per share. With respect to each such
option, options to purchase 5,000 shares become exercisable at the earlier of
March 31, 1999 or the date of the 1999 Annual Meeting of Shareholders and the
5,000 share balance becomes exercisable at the earlier of March 31, 2000 or the
date of the 2000 Annual Meeting of Shareholders. That portion of the options
granted to Dr. Weldon that vest in 2000 are subject to shareholder approval of
the amendments to the Non-Employee Director Stock Option Plan. On December 18,
1998 the Board also granted, subject to shareholder approval of the amendments
to our Non-Employee Director Stock Option Plan, Dr. Harrison a five-year
non-incentive stock option to purchase 5,000 shares of our common stock at an
exercise price equal to $20.94 per share, all of which options become
exercisable at the earlier of March 31, 2001 or the date of the 2001 Annual
Meeting of Shareholders. Vesting of all of the foregoing options ceases on such
date as the option holder ceases to serve as a director.
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<PAGE> 52
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid or
accrued by us during 1996, 1997 and 1998 to (1) our Chief Executive Officer and
(2) the four other most highly compensated executive officers who were serving
as executive officers at the end of 1998 and whose compensation during 1998
exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------
ANNUAL COMPENSATION COMMON
---------------------------------- STOCK
NAME AND OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS COMPENSATION
------------------ ---- -------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas D. Weldon............. 1998 $242,923 $ 84,219 -- -- -- $1,974(1)
Chairman and CEO 1997 182,500 19,600 -- -- 1,460(1)
1996 142,500 13,600 -- -- -- --
William A. Hawkins(2)........ 1998 160,417 49,127 $91,635(3) $360,500(4) 460,000(5)(6) 2,056(1)
President
Charles E. Larsen............ 1998 204,506 58,346 -- -- -- 3,333(1)
Chief Technical 1997 163,750 19,600 -- -- -- 2,250(1)
Officer 1996 130,000 13,600 -- -- -- --
David N. Gill................ 1998 201,578 59,743 -- -- 30,000(6) 3,333(1)
Chief Operating 1997 160,000 28,200 25,000(3) -- 35,000(6) 2,250(1)
Officer and Chief 1996 67,464 13,600 -- 65,000(6) --
Financial Officer
Raoul Bonan, M.D.(2)......... 1998 125,277 207,000(7) 16,028(3) 125,000(6) 2,343(1)
VP -- Clinical Affairs
</TABLE>
- ---------------
(1) Consists of employer contributions to the Defined Contribution 401(k) Plan.
(2) Commenced employment on June 1, 1998.
(3) Consists of reimbursement of moving expenses.
(4) Consists of 14,000 restricted shares, with the value based upon the $25.75
per share closing sale price of our common stock on June 1, 1998, the date
on which Mr. Hawkins commenced employment, a condition of the award.
Restricted shares contain restrictions on transfer which lapse over time,
upon a Change of Control (as that term is defined in the Stock Option Plan
covering employees) or upon the occurrence of certain events of termination
of employment. The restrictions lapse at the annual rate of 3,500 shares,
commencing June 1, 1999. In the event of a termination of Mr. Hawkins'
employment by us for Unsatisfactory Performance, in addition to those shares
that are then no longer subject to the foregoing transfer restrictions, an
additional 3,500 shares will no longer be subject to such restrictions
unless all such restrictions shall have previously lapsed. In the event of a
Change of Control or termination of Mr. Hawkins' employment by him for Good
Reason or termination of his employment by us without Cause, all
restrictions on transfer will lapse. See "Employment Agreements" below. At
December 31, 1998, Mr. Hawkins held 14,000 restricted shares at an aggregate
market value of $397,250, based on the $28.375 closing sale price of our
common stock on December 31, 1998. Dividends are paid on the restricted
shares at the same time and at the same rate as dividends paid to all
shareholders of common stock.
(5) Includes options to purchase 120,000 shares of our common stock, which are
subject to shareholder approval of amendments to our stock option plan
covering employees. See note 5 to the consolidated financial statements for
a discussion of potential compensation charges relating to the shareholder
approval of amendments to the stock option plan covering employees.
(6) See "Stock Options" below for the exercise price and vesting terms of the
options granted.
(7) Of which $154,500 consists of the issuance of 6,000 shares of common stock
on June 1, 1998, based on the $25.75 per share closing sale price of our
common stock on that date, which was the date Dr. Bonan's employment
commenced, a condition of this sign-on bonus.
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STOCK OPTIONS
The following table sets forth certain information concerning options
granted in 1998 to executive officers named in the Summary Compensation Table:
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED(1) FISCAL YEAR PER SHARE DATE 5% 10%
- ---- ----------- ------------ --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
William A. Hawkins......... 240,000(3) 20.4% $24.00 4/10/2008 $3,622,433 $9,179,957
100,000(4) 8.5 24.00 4/10/2008 1,509,347 3,824,982
120,000(5) 10.2 11.75 10/16/2008 886,741 2,247,177
Raoul Bonan, M.D........... 100,000(6) 8.5 24.00 4/10/2008 1,509,347 3,824,982
25,000(7) 2.1 11.75 10/16/2008 184,738 468,162
David N. Gill.............. 30,000(6) 2.6 28.25 2/27/2008 532,988 1,350,697
</TABLE>
- ---------------
(1) All options become fully exercisable upon a Change of Control (as defined in
our stock option plan covering employees).
(2) Amounts reported in this column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration of
their term, assuming the specified compounded rates of appreciation of the
common stock over the term of the options. These numbers are calculated
based on rules promulgated by the Securities and Exchange Commission. Actual
gains, if any, in option exercises are dependent on the time of such
exercise and the future performance of the common stock.
(3) First exercisable at the annual rate of 60,000 shares commencing June 1,
1999 and become fully exercisable, upon a termination of Mr. Hawkins'
employment for Good Reason or upon a termination of his employment by us
without cause. If we terminate Mr. Hawkins' employment for Unsatisfactory
Performance, in addition to the options then currently exercisable in
accordance with the annual rate described above, options to purchase an
additional 60,000 shares also become exercisable as of the date of
termination (though in no event shall more than 240,000 options be
exercisable under such grant). See "Employment Agreements" below.
(4) Options become exercisable in full on June 1, 2003 or upon the earlier of
(i) the date (the "Trigger Date") on which the average closing sale prices
of our common stock for twenty (20) consecutive trading days equals or
exceeds $48.00 per share, other than by reason of the announcement of a
Change of Control on or before June 1, 1999, provided the Trigger Date
occurs prior to June 1, 2001, and (ii) the date of termination of employment
by Mr. Hawkins for Good Reason. See "Employment Agreements" below.
(5) Consists of ten-year options granted under the stock option plan covering
employees, exercisable cumulatively at the annual rate of one quarter of the
number of underlying shares, commencing one year from the date of grant.
These options are subject to shareholder approval of amendments to the stock
option plan covering to employees. See note 5 to the consolidated financial
statements for a discussion of potential compensation charges relating to
the shareholder approval of amendment to the stock option plan covering
employees.
(6) Consists of ten-year options granted under the stock option plan covering
employees, exercisable cumulatively at the annual rate of one quarter of the
number of underlying shares, generally commencing one year from the date of
grant.
(7) Consists of ten-year options granted under the stock option plan covering
employees, exercisable in full commencing one year from the date of grant.
---------------------
On February 8, 1999, we granted Mr. Gill an option to purchase 50,000
shares of our common stock at $23.56 per share, exercisable at the annual rate
of 12,500 shares commencing one year after the date of grant, and a 10,000 share
restricted stock award, valued at $236,900 based upon the $23.69 per share
closing sale price of our common stock on February 8, 1999. The transfer
restrictions on the shares subject to the restricted stock award lapse at the
annual rate of 2,500 shares per year, commencing one year from the date of
issuance,
53
<PAGE> 54
subject to his continued employment. The vesting of the option and the
restricted shares accelerate in full upon a Change of Control (as defined in the
stock option plan covering employees). The option has been granted subject to
shareholder approval of certain amendments to the stock option plan covering
employees. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Management -- Stock Option Plans" and note 5 to the
consolidated financial statements.
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information concerning the number
and value realized of options exercised during 1998, and the number and value of
unexercised options held as at December 31, 1998, by the individuals named in
the Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN 1998 AND OPTION VALUES AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS AT
SHARES AT DECEMBER 31, 1998 DECEMBER 31, 1998(1)
ACQUIRED ON --------------------------- ---------------------------
NAME EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas D. Weldon.......... -- -- 388,375 -- $10,923,047 --
William A Hawkins......... -- -- 460,000(2) -- $3,482,500(3)
Charles E. Larsen......... 100,000 $1,212,500 291,875 -- 8,208,984 --
David N. Gill............. 16,250 244,063 25,000 88,750 405,468 917,500
Raoul Bonan, M.D.......... -- -- -- 125,000 -- 871,875
</TABLE>
- ---------------
(1) Based on the closing sale price of the common stock as of December 31, 1998
($28.375 per share) minus the applicable exercise price.
(2) Of which 120,000 are subject to shareholder approval of amendments to the
stock option plan covering employees.
(3) Of which $1,995,500 represents the value of options subject to shareholder
approval of amendments to the stock option plan covering employees.
EMPLOYMENT AGREEMENTS
Agreement with William A. Hawkins. William A. Hawkins has an employment
agreement with us, under which he serves as our President and reports to our
Chairman and Chief Executive Officer. We have agreed to elect Mr. Hawkins as our
Chief Executive Officer on or prior to June 1, 1999, the first anniversary of
his employment. Upon that election, Mr. Hawkins will report directly to our
Board.
Under his employment agreement, Mr. Hawkins currently receives a base
salary of $275,000 per year. Under his agreement, Mr. Hawkins also received
stock options and restricted shares upon commencement of his employment. We have
described these options and restricted shares in the "Summary Compensation
Table" and "Stock Options" above.
Under his employment agreement, Mr. Hawkins also is entitled to participate
in our discretionary annual incentive cash plan for executive officers,
established to reward participating individuals for their contribution to the
accomplishment of key annual corporate objectives. For calendar year 1998, Mr.
Hawkins was entitled to a minimum cash bonus of 20% of his annual base salary.
The amount of any bonus in subsequent years will be determined at the discretion
of the compensation committee.
We may terminate Mr. Hawkins' employment for Cause without any further
liability to us. We also may terminate Mr. Hawkins' employment for
Unsatisfactory Performance, which means termination following a vote of no
confidence based upon his unsatisfactory performance of his employment duties by
a majority of our whole Board (excluding Mr. Hawkins). Upon such a termination,
Mr. Hawkins is entitled to a lump sum, cash severance payment within 60 days of
the date of termination of employment equal to 240% of his annual base salary in
effect on the date of termination of employment. Based upon his current annual
salary, this payment would aggregate $660,000. If we terminate Mr. Hawkins for
Unsatisfactory Performance, he would also be entitled to acceleration of the
vesting of his options and restricted shares to the extent described in "Stock
Options" and the "Summary Compensation Table" above.
54
<PAGE> 55
We also may terminate Mr. Hawkins' employment for any other reason or no
reason upon 30 days' prior written notice but subject to the severance payment
described below.
Mr. Hawkins' employment agreement also terminates upon his death or
permanent disability. Mr. Hawkins may terminate his employment at any time on 90
days' notice to us and may also terminate his employment at any time for Good
Reason. Good Reason means, subject to certain limitations:
- our material breach of or default under the employment agreement
(including but not limited to our failure to designate Mr. Hawkins as the
Chief Executive Officer on or about June 1, 1999), which is not cured by
us within 30 days after our receipt of prior written notice from Mr.
Hawkins;
- a material reduction in Mr. Hawkins' duties or a material interference
with the exercise of Mr. Hawkins' authority by the Board (not arising
from any disabling physical or mental disability Mr. Hawkins may sustain)
which would be inconsistent with his position as President and/or Chief
Executive Officer which is not remedied by our Board within 30 days after
its receipt of prior written notice from Mr. Hawkins; or
- a relocation of our principal executive offices to a location whose
distance is more than twenty-five (25) miles from its location at June 1,
1998, and which relocation was not approved by Mr. Hawkins.
Upon our termination of Mr. Hawkins' employment for any reason other than
Cause or Unsatisfactory Performance or his termination of employment for Good
Reason, Mr. Hawkins is entitled to a lump sum, cash severance payment within 60
days of the date of termination of employment equal to 360% of his annual base
salary in effect on the date of termination of employment. Based upon his
current annual salary, this payment would aggregate $990,000. Mr. Hawkins would
also be entitled to the full acceleration of the vesting of his options and
restricted shares as described in the Option Grant Table and Summary
Compensation Table above.
Agreement with Dr. Raoul Bonan. Dr. Raoul Bonan has an employment
agreement with us, under which he serves as our Vice President and Medical
Officer and reports directly to our President. Under his employment agreement,
Dr. Bonan currently receives a base salary of $200,000 per year and received
options and shares of common stock upon commencement of his employment. We have
described these options and shares in the "Summary Compensation Table" and
"Stock Options" above.
We may terminate Dr. Bonan's employment for Cause without any further
liability to us. In the event of the termination of Dr. Bonan's employment by
reason of his death, we must pay Dr. Bonan's estate three months' base
compensation. We also may terminate Dr. Bonan's employment without Cause upon 45
days' prior notice. If we terminate Dr. Bonan's employment without Cause prior
to May 31, 1999, then no severance shall be payable to him unless we shall then
have in place a written severance policy applicable to our employees generally.
If we terminate Dr. Bonan's employment without Cause after May 31, 1999, he is
entitled to $100,000 as his sole severance compensation.
Dr. Bonan may terminate his employment at any time, although he has agreed
to endeavor to provide us with at least 90 days' notice.
Each of the other individuals named in the Summary Compensation Table is
employed at will. All individuals named in the Summary Compensation Table are
subject to agreements containing certain non-competition and confidentiality
provisions.
STOCK OPTION PLANS
Under our stock option plan, initially adopted in 1992, we have issued, or
have reserved for issuance, upon exercise of stock options granted thereunder,
an aggregate of 3,400,000 shares. Under this plan, incentive stock options, as
defined in section 422 of the Internal Revenue Code, may be granted to employees
and non-incentive stock options may be granted to employees, officers,
consultants and independent contractors, and such other persons as the Stock
Option and Compensation Committee determines in its sole discretion, at exercise
prices equal to at least 100% (with respect to incentive stock options) and at
least 85% (with respect to non-incentive stock options) of the fair market value
of our common stock on the date of grant. In addition
55
<PAGE> 56
to selecting the optionees, the Committee determines the number of shares of
common stock subject to each option, the term of each stock option (not to
exceed 10 years), the time or times when the option becomes exercisable, and
otherwise administers this plan. Options granted under this plan may be
exercised only during an option holder's employment or engagement with us and,
in certain instances, for a limited time thereafter depending upon the nature of
the termination, but in no event beyond one year after such termination. All
options under this plan accelerate upon a Change of Control. A Change of Control
means (1) the sale or other disposition to a person, entity or group (as defined
in Rule 13d-5 under the Exchange Act) of 50% or more of the company's
consolidated assets, (2) the acquisition of 50% or more of the company's
outstanding common stock by a person or group (as defined in Rule 13d-5) or (3)
if the majority of the company's board of directors consists of persons other
than continuing directors (those approved for nomination by a majority of the
board of directors). As of February 28, 1999, options to purchase 3,399,700
shares of common stock have been granted under this plan.
In December 1998, the Committee approved amendments to this plan
principally to:
- increase the number of shares of common stock reserved for issuance by
700,000 to 4,100,000 shares;
- increase the maximum number of shares from 350,000 shares to 500,000
shares that may be subject to options granted to any person or entity
within any calendar year; and
- provide that term of all options under the plan survive termination of
employment or engagement with us for a limited period, up to a maximum of
one year.
As of February 28, 1999, options to purchase 190,000 shares of our common stock
had been granted under this plan, subject to shareholder approval of these plan
amendments.
We may also grant non-incentive stock options to our non-employee directors
under our non-employee director stock option plan. Options granted under this
plan may have exercise prices not less than the fair market value on the date of
their grant and may be exercised for a period of no more than five years from
the date of grant. The Committee prescribes the vesting period for these options
at the time of their grant. All options under this plan accelerate upon a Change
of Control. The Change of Control definition under this plan is identical to
that contained in the stock option plan covering employees. As of February 28,
1999 all of the shares available for issuance under our non-employee director
stock option plan had been granted. On December 18, 1998, our Board of Directors
amended this plan, subject to shareholder approval, to:
- increase the number of shares of our common stock reserved for issuance
by 100,000 to 200,000 shares; and
- delete the provisions limiting the maximum number of shares of common
stock that may be subject to options granted to any non-employee director
within any one calendar year.
As of February 28, 1999, options to purchase 10,000 shares had been granted
under this plan, subject to shareholder approval of the plan amendments.
56
<PAGE> 57
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of February 28, 1999, information with
respect to the beneficial ownership of the common stock by (i) each person known
by the company to own beneficially five percent or more of such common stock,
(ii) each director of the company, (iii) each person named in the Summary
Compensation Table under "Management -- Executive Compensation," (iv) each
selling shareholder and (v) all executive officers and directors as a group,
together with their respective percentage ownership of such shares before this
offering and as adjusted to reflect the sale of the common stock offered
pursuant to this prospectus:
<TABLE>
<CAPTION>
PERCENTAGE
BEFORE THE AFTER THE
NUMBER(1) OFFERING OFFERING
--------- ---------- ---------
<S> <C> <C> <C>
Thomas D. Weldon(2)(3)(4)(5)............................ 797,252 7.2% 5.9%
Charles E. Larsen(4)(5)................................. 676,161 6.1 5.0
Henry L. Hillman, Elsie Hilliard Hillman and C.G.
Grefenstette, Trustees(6)(7).......................... 441,587 4.1 3.4
C.G. Grefenstette and Thomas G. Bigley,
Trustees(6)(8)........................................ 582,112 5.4 4.4
President and Fellows of Harvard College(9)............. 775,000 7.2 5.9
c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston, MA 02210
Paul Tudor Jones, II(10)................................ 794,200 7.4 6.1
c/o Tudor Investment Corporation
One Liberty Plaza (51st Floor)
New York, NY 10006
Norman R. Weldon, Ph.D.(3)(11).......................... 360,571 3.4 2.7
David N. Gill........................................... 45,000 * *
Stephen I. Shapiro...................................... 23,026 * *
J. Stephen Holmes....................................... 28,500 * *
William E. Whitmer...................................... 25,000 * *
Pieter J. Schiller...................................... 18,718 * *
William A. Hawkins...................................... 17,000 * *
Raoul Bonan, M.D........................................ 6,500 * *
Donald C. Harrison, M.D................................. 5,000 * *
All executive officers and directors as a group (15
persons)(5)(12)....................................... 2,146,314 18.3% 15.2%
</TABLE>
- ---------------
* Less than 1%.
(1) A person is deemed to be the beneficial owner of common stock that can be
acquired within 60 days from February 28, 1999 upon the exercise of
options, and that person's options are assumed to have been exercised (and
the underlying shares of common stock outstanding) in determining such
person's percentage ownership. Accordingly, the following shares issuable
upon exercise of options have been included in the shares beneficially
owned by the following persons: Thomas D. Weldon -- 388,375 shares; Charles
E. Larsen -- 291,875 shares; Donald C. Harrison, M.D. -- 5,000 shares; J.
Stephen Holmes -- 22,500 shares; William E. Whitmer -- 22,500 shares; David
N. Gill -- 35,000 shares; Pieter J. Schiller -- 12,500 shares; Norman R.
Weldon -- 7,500 shares; and Stephen I. Shapiro -- 12,500 shares.
(2) Includes 10,000 shares held in trust for the benefit of Mr. Weldon's
children and 5,000 shares held by Mr. Weldon as custodian for his nephew;
Mr. Weldon disclaims beneficial ownership of such shares.
(3) Includes 102,571 shares held by The Weldon Foundation, Inc., a Florida
not-for-profit corporation in which Thomas D. Weldon and Norman R. Weldon
are directors. Mr. Weldon and Dr. Weldon disclaim beneficial ownership of
all shares held by The Weldon Foundation, Inc.
(4) Address is c/o Novoste Corporation, 3890 Steve Reynolds Blvd., Norcross, GA
30093.
57
<PAGE> 58
(5) As part of the underwriters' over-allotment option, each of Mr. Weldon and
Mr. Larsen has agreed to sell up to 100,000 shares of common stock to the
underwriters for the purposes of covering over-allotments at the price
offered to the public less underwriting discounts and commissions. If the
underwriters exercise the over-allotment option in full, Mr. Weldon will
beneficially own 697,252 shares or 5.1% of the common stock after the
offering, Mr. Larsen will beneficially own 576,161 shares or 4.2% of the
common stock after the offering and all executive officers and directors as
a group would own 13.6% of the common stock after the offering.
(6) Address is 2000 Grant Building, Pittsburgh, PA 15219.
(7) Consists of 436,587 shares held by a trust for the benefit of Henry L.
Hillman (the "HLH Trust") and 5,000 shares subject to options which were
granted to Richard M. Johnston, an officer of The Hillman Company. Pursuant
to an agreement with The Hillman Company, if Mr. Johnston exercises these
options, he does so on behalf of The Hillman Company or a wholly owned
subsidiary thereof. The Trustees of the HLH Trust are Henry L. Hillman,
Elsie Hilliard Hillman and C.G. Grefenstette (the "HLH Trustees"). The HLH
Trustees share voting and investment power with respect to the shares of
record held by the HLH Trust. Does not include an aggregate of 582,112
shares held by four trusts for the benefit of members of the Hillman family
(see note 8 below).
(8) Includes 145,528 shares held by each of four irrevocable trusts for the
benefit of members of the Hillman family (the "Hillman Family Trusts"). Mr.
Grefenstette and Thomas G. Bigley are trustees of these four trusts and
share voting and dispositive power over the trusts' assets.
(9) Pursuant to Amendment No. 1 to a Schedule 13G which was filed with the
Commission on February 12, 1999.
(10) Pursuant to Amendment No. 1, dated August 21, 1998 to a Schedule 13D dated
October 22, 1997, which was jointly filed with the Commission by Tudor
Investment Corporation ("TIC"), Paul Tudor Jones, II ("Jones"), The Raptor
Global Fund Ltd. ("Raptor Ltd."), The Raptor Global Fund L.P. ("Raptor
L.P."), Tudor Arbitrage Partners L.P. ("TAP"), Tudor Global Trading LLC
("TGT"), Tudor BVI Futures, Ltd. ("Tudor BVI"), The Upper Mill Capital
Appreciation Fund Ltd. ("Upper Mill"), and Tudor Proprietary Trading,
L.L.C. ("TPT"). The address of each of TIC, Jones, Raptor L.P., TAP and TGT
is c/o Tudor Investment Corporation, 600 Steamboat Road, Greenwich, CT
06830. The business address of each of Raptor Ltd., Tudor BVI and Upper
Mill is c/o Curacao International Trust Company N.V., Kaya Flamboyan 9,
Curacao, Netherlands Antilles. The business address of TPT is The Upper
Mill, Kingston Road, Ewell, Surrey KT17 2AF, England. Jones disclaims
beneficial ownership of the shares beneficially owned by Raptor Ltd.
(164,000 shares), Raptor L.P. (59,000 shares), TAP (34,900 shares), Tudor
BVI (322,368 shares), Upper Mill (132,808 shares), TPT (81,124 shares) and
TGT as sole general partner of TAP (34,900 shares).
(11) Includes 14,250 shares held by Dr. Weldon's spouse but excludes all shares
held by Dr. Weldon's adult children, none of whom reside with Dr. Weldon.
(12) See notes 1, 2, 3 and 11 above. Also includes 50,350 shares of common stock
and 195,807 shares of common stock that can be acquired within 60 days from
February 28, 1999, upon exercise of options held by executive officers not
named in the Summary Compensation Table under "Management -- Executive
Compensation."
58
<PAGE> 59
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the underwriters named below, for whom Morgan
Stanley & Co. Incorporated, U.S. Bancorp Piper Jaffray Inc. and Hambrecht &
Quist LLC are acting as representatives, have severally agreed to purchase, and
the company has agreed to sell to them, severally, the respective number of
shares of common stock set forth opposite the names of such underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ----------
<S> <C>
Morgan Stanley & Co. Incorporated........................... 1,023,000
Hambrecht & Quist LLC....................................... 279,000
U.S. Bancorp Piper Jaffray Inc.............................. 558,000
Adams, Harkness & Hill, Inc................................. 30,000
Credit Suisse First Boston.................................. 60,000
Dain Rauscher Wessels....................................... 30,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 60,000
ING Furman Selz............................................. 60,000
J.P. Morgan Securities Inc.................................. 60,000
NationsBanc Montgomery Securities, Inc...................... 60,000
Needham & Company, Inc...................................... 30,000
SG Cowen Securities Corporation............................. 60,000
Thomas Weisel Partners LLC.................................. 30,000
Tucker Anthony Incorporated................................. 30,000
Volpe, Welty & Company...................................... 30,000
----------
Total....................................................... 2,400,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of common stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The underwriters are obligated to take
and pay for all of the shares of common stock offered hereby (other than those
covered by the underwriters' overallotment option described below) if any such
shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $.72 a share under the public offering price. Any underwriter
may allow, and such dealers may reallow, a concession not in excess of $.10 a
share to other underwriters or to certain dealers. After the initial offering of
the shares of common stock, the offering price and other selling terms may from
time to time be varied by the representatives.
The company and the selling shareholders have granted to the underwriters
an option, exercisable for 30 days from the date of this prospectus, to purchase
up to an aggregate of 360,000 additional shares of common stock at the public
offering price set forth on the cover page hereof, less underwriting discounts
and commissions. The underwriters may exercise such option solely for the
purpose of covering overallotments, if any, made in connection with the offering
of the shares of common stock offered hereby. To the extent such option is
exercised, each underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of common stock as the number set forth next to such underwriter's name
in the preceding table bears to the total number of shares of common stock set
forth next to the names of all underwriters in the preceding table. If the
underwriters' option is exercised in full, the total price to the public would
be $55,200,000, the total underwriters' discounts and commission would be
$3,312,000 and total proceeds to the company and the selling shareholders would
be $48,128,000 and $3,760,000, respectively.
59
<PAGE> 60
Each of the company and the directors, executive officers and certain other
stockholders of the company has agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the underwriters, it will not,
during the period ending 90 days after the date of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer or
dispose of, directly or indirectly, any shares of common stock or
any securities convertible into or exercisable or exchangeable for
common stock; or
- enter into any swap or other arrangement that transfers to another,
in whole or in part, any of the economic consequences of ownership
of the common stock,
whether any such transaction described above is to be settled by delivery
of common stock or such other securities, in cash or otherwise.
The restrictions described in this paragraph do not apply to:
- the sale of shares to the underwriters,
- the issuance by the company of shares of common stock upon the
exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the underwriters
have been advised in writing; or
- transactions by any person other than the company relating to shares
of common stock or other securities acquired in open market
transactions after the completion of the offering of the shares.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may overallot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover overallotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities, and may
end any of these activities at any time.
The underwriters and dealers may engage in passive market making
transactions in the common stock in accordance with Rule 103 of Regulation M
promulgated by the Securities and Exchange Commission. In general, a passive
market maker may not bid for, or purchase, the common stock at a price that
exceeds the highest independent bid. In addition, the net daily purchases made
by any passive market maker generally may not exceed 30% of its average daily
trading volume in the common stock during a specified two month prior period, or
200 shares, whichever is greater. A passive market maker must identify passive
market making bids as such or maintain the market price of the common stock
above independent market levels. Underwriters and dealers are not required to
engage in passive market making and may end passive market making activities at
any time.
In addition, the underwriters have agreed to reimburse the company for
certain expenses in connection with the offering and the company and the
underwriters have agreed to indemnify each other against certain liabilities,
including liabilities under the Securities Act.
60
<PAGE> 61
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of common
stock offered by this prospectus will be passed upon for Novoste by Epstein
Becker & Green, P.C., New York, New York. Certain legal matters will be passed
upon for the underwriters by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of the company as of December 31,
1998 and 1997, and for each of the three years in the period ended December 31,
1998, appearing in this prospectus and registration statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere in this prospectus, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
61
<PAGE> 62
NOVOSTE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997, and 1996......................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 63
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Novoste Corporation
We have audited the accompanying consolidated balance sheets of Novoste
Corporation (the "Company") as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Atlanta, Georgia
February 9, 1999
F-2
<PAGE> 64
NOVOSTE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,352,517 $35,993,933
Short-term investments.................................... 23,695,451 12,408,785
Inventories............................................... 537,351 --
Prepaid expenses and other current assets................. 176,917 88,099
----------- -----------
Total current assets.............................. 26,762,236 48,490,817
Property and equipment, net................................. 2,327,467 1,061,526
License agreements, net..................................... 126,121 139,758
Other assets................................................ 266,408 103,855
----------- -----------
$29,482,232 $49,795,956
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,059,591 $ 523,678
Accrued employee costs.................................... 1,064,840 448,048
Accrued clinical expenses................................. 1,328,000 430,300
Accrued contract development expenses..................... 941,802 860,196
Other accrued expenses.................................... 570,906 164,732
----------- -----------
Total current liabilities......................... 4,965,139 2,426,954
----------- -----------
Commitments and contingencies
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; 10,704,817 and 10,332,042 shares issued,
respectively........................................... 107,048 103,320
Additional paid-in capital................................ 77,022,814 74,908,631
Accumulated deficit....................................... (52,281,002) (27,619,109)
Unearned compensation..................................... (307,927) --
----------- -----------
24,540,933 47,392,842
Less treasury stock, 5,780 shares of common stock at
cost................................................... (23,840) (23,840)
----------- -----------
Total shareholders' equity........................ 24,517,093 47,369,002
----------- -----------
$29,482,232 $49,795,956
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 65
NOVOSTE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Net sales and revenues................................ $ 18,775 $ 29,313 $ --
------------ ------------ -----------
Operating expenses:
Cost of sales....................................... 116,633 -- --
Research and development............................ 21,088,740 12,872,867 4,646,583
General and administrative.......................... 2,527,917 1,736,333 1,574,678
Marketing........................................... 3,074,245 1,021,990 581,280
------------ ------------ -----------
26,807,535 15,631,190 6,802,541
------------ ------------ -----------
Loss from operations.................................. (26,788,760) (15,601,877) (6,802,541)
Interest income....................................... 2,126,867 1,388,482 950,791
Interest expense...................................... -- -- (87,331)
------------ ------------ -----------
Net loss.............................................. $(24,661,893) $(14,213,395) $(5,939,081)
============ ============ ===========
Basic and diluted net loss per share.................. $ (2.34) $ (1.64) $ (0.91)
============ ============ ===========
Weighted average shares outstanding................... 10,536,034 8,665,345 6,543,129
</TABLE>
See accompanying notes.
F-4
<PAGE> 66
NOVOSTE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL
---------------------- --------------------- PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION
----------- -------- ---------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996... 2,477,342 $ 24,826 1,611,269 $ 16,113 $ 7,760,175 $ (7,466,633) $ --
Issuance of stock for
consulting services 2,422
shares at $6.00 per share,
33,520 shares at $6.38 per
share, 678 shares at $9.50
per share, and 435 shares at
$9.375 per share............ 37,066 371 -- -- 407,667 -- --
Issuance of stock for
deferred compensation to
employees at $3.20 per
share....................... 102,945 1,029 -- -- 328,395 -- --
Conversion of debt to common
stock....................... 497,349 4,974 -- -- 1,860,109 -- --
Exchange of Class B for
common stock................ 1,611,269 16,113 (1,611,269) (16,113) -- -- --
Exercise of stock warrants at
$4.00 to $4.50 per share.... 62,104 621 -- -- 267,597 -- --
Cashless exercise of
warrants.................... 889,912 8,899 -- -- (8,899) -- --
Issuance of stock in initial
public offering at $14.00
per share, net of issuance
costs of $2,973,746......... 2,400,000 24,000 -- -- 30,602,254 -- --
Exercise of stock options at
$3.00 to $3.20 per share.... 174,700 1,747 -- -- 555,493 -- --
Net loss..................... -- -- -- -- -- (5,939,081) --
----------- -------- ---------- -------- ----------- ------------ ---------
Balance at December 31,
1996........................ 8,252,687 82,580 -- -- 41,772,791 (13,405,714) --
----------- -------- ---------- -------- ----------- ------------ ---------
Issuance of stock for
consulting services 6,250
shares at $14.50 per
share....................... 6,250 62 -- -- 360,563 -- --
Issuance of stock in
secondary Offering at $19.50
per share, net of issuance
costs of $2,306,422......... 1,770,000 17,700 -- -- 32,190,878 -- --
Exercise of stock options at
$0.25 to $14.00 per share... 297,825 2,978 -- -- 584,399 -- --
Repurchase of stock at $16.00
per Share................... (500) -- -- -- -- --
Net loss..................... -- -- -- -- -- (14,213,395) --
----------- -------- ---------- -------- ----------- ------------ ---------
Balance at December 31,
1997........................ 10,326,262 103,320 -- -- 74,908,631 (27,619,109) --
----------- -------- ---------- -------- ----------- ------------ ---------
Issuance of stock for
consulting services, 10,000
shares at $29.625 per share,
3,000 shares at $22.0625 per
share....................... 13,000 130 -- -- 632,308 -- --
Issuance of stock for
deferred compensation to an
officer, at $25.75 per
share....................... 14,000 140 -- -- 360,360 -- (360,500)
Issuance of stock for
compensation to an officer,
at $25.75 per share......... 6,000 60 -- -- 154,440 -- --
Amortization of unearned
compensation................ -- -- -- -- -- -- 52,573
Exercise of stock options at
$0.25 to $16.00 per share... 339,775 3,398 -- -- 967,075 -- --
Net loss..................... -- -- -- -- -- (24,661,893) --
----------- -------- ---------- -------- ----------- ------------ ---------
Balance at December 31,
1998........................ 10,699,037 $107,048 -- $ -- $77,022,814 $(52,281,002) $(307,927)
=========== ======== ========== ======== =========== ============ =========
<CAPTION>
TREASURY
STOCK TOTAL
-------- ------------
<S> <C> <C>
Balance at January 1, 1996... $(15,840) $ 318,641
Issuance of stock for
consulting services 2,422
shares at $6.00 per share,
33,520 shares at $6.38 per
share, 678 shares at $9.50
per share, and 435 shares at
$9.375 per share............ -- 408,038
Issuance of stock for
deferred compensation to
employees at $3.20 per
share....................... -- 329,424
Conversion of debt to common
stock....................... -- 1,865,083
Exchange of Class B for
common stock................ -- --
Exercise of stock warrants at
$4.00 to $4.50 per share.... -- 268,218
Cashless exercise of
warrants.................... -- --
Issuance of stock in initial
public offering at $14.00
per share, net of issuance
costs of $2,973,746......... -- 30,626,254
Exercise of stock options at
$3.00 to $3.20 per share.... -- 557,240
Net loss..................... -- (5,939,081)
-------- ------------
Balance at December 31,
1996........................ (15,840) 28,433,817
-------- ------------
Issuance of stock for
consulting services 6,250
shares at $14.50 per
share....................... -- 360,625
Issuance of stock in
secondary Offering at $19.50
per share, net of issuance
costs of $2,306,422......... -- 32,208,578
Exercise of stock options at
$0.25 to $14.00 per share... -- 587,377
Repurchase of stock at $16.00
per Share................... (8,000) (8,000)
Net loss..................... -- (14,213,395)
-------- ------------
Balance at December 31,
1997........................ (23,840) 47,369,002
-------- ------------
Issuance of stock for
consulting services, 10,000
shares at $29.625 per share,
3,000 shares at $22.0625 per
share....................... -- 632,438
Issuance of stock for
deferred compensation to an
officer, at $25.75 per
share....................... -- --
Issuance of stock for
compensation to an officer,
at $25.75 per share......... -- 154,500
Amortization of unearned
compensation................ -- 52,573
Exercise of stock options at
$0.25 to $16.00 per share... -- 970,473
Net loss..................... -- (24,661,893)
-------- ------------
Balance at December 31,
1998........................ $(23,840) $ 24,517,093
======== ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 67
NOVOSTE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................. $(24,661,893) $(14,213,395) $ (5,939,081)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization...................... 671,286 422,863 316,082
Issuance of stock for services or compensation..... 786,938 270,000 408,038
Amortization of deferred compensation.............. 250,274 68,000 46,000
Change in assets and liabilities:
Inventory....................................... (537,351) -- --
Prepaid expenses and other current assets....... (88,818) 38,250 (111,721)
Accounts payable................................ 535,913 367,732 (61,597)
Accrued expenses and taxes withheld............. 2,002,272 1,238,101 577,098
Other........................................... (360,254) 152,719 (272,418)
------------ ------------ ------------
Net cash used by operations.......................... (21,401,633) (11,655,730) (5,037,599)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments, net.............. (11,286,666) (4,820,092) (7,588,693)
Purchase of property and equipment, net.............. (1,923,590) (273,027) (449,730)
------------ ------------ ------------
Net cash used by investing activities................ (13,210,256) (5,093,119) (8,038,423)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable.............. -- -- 2,561,700
Repayment of notes payable........................... -- -- (1,800,150)
Proceeds from issuance of common stock............... 970,473 32,787,955 31,451,712
------------ ------------ ------------
Net cash provided by financing activities............ 970,473 32,787,955 32,213,262
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents........................................ (33,641,416) 16,039,106 19,137,240
Cash and cash equivalents at beginning of period..... 35,993,933 19,954,827 817,587
------------ ------------ ------------
Cash and cash equivalents at end of period........... $ 2,352,517 $ 35,993,933 $ 19,954,827
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest............................... $ 101,312
============
Conversion of fixed rate promissory notes to related
parties and accrued interest to common stock....... $ 1,865,083
============
Conversion of deferred compensation to common
stock.............................................. $ 329,424
============
</TABLE>
See accompanying notes.
F-6
<PAGE> 68
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Novoste Corporation (the "Company") was incorporated on January 8, 1987 and
remained dormant until May 22, 1992 (date of inception) at which time it was
capitalized. During years prior to 1998 the Company was in the development
stage. The Company is a medical device company which is engaged in
commercializing the Beta-Cath System, an intraluminal beta radiation catheter
delivery system designed to reduce restenosis subsequent to percutaneous
transluminal coronary angioplasty. In the course of its development activities
the Company has sustained operating losses and expects losses to continue for at
least the next two years.
During 1998 the Company received CE mark approval to sell the Beta-Cath
System in Europe and recorded its first sale of commercial product in December
1998. Previously, all revenues had been from the sale of certain patent rights,
option payments, contract fees and the sale of a particular product line. To
achieve profitable operations, the Company must successfully complete the
development and clinical trials of its product, obtain required regulatory
approvals and achieve market acceptance. The Company plans to continue to
finance the Company with a combination of stock sales and revenues from product
sales. The Company's ability to continue its operations is dependent upon
successful execution of financings and achieving profitable operations. There
can be no assurance that these efforts will be successful.
The consolidated financial statements include the accounts of Novoste
Corporation and its wholly-owned subsidiaries incorporated in August 1998 in The
Netherlands and in December 1998 in Belgium. Significant intercompany accounts
and transactions have been eliminated. At December 31, 1998 the Company's net
assets outside of the United States, consisting principally of inventory, are
approximately $87,000. Such assets are located in Belgium, Scotland and The
Netherlands.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
BASIC AND DILUTED LOSS PER SHARE
In 1997 the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted loss per share with basic and diluted loss per share. Unlike primary
loss per share, basic loss per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted loss per share is very similar to
the previously reported fully diluted loss per share. The basic and diluted loss
per share is computed based on the weighted average number of common shares
outstanding. Common equivalent shares are not included in the per share
calculations where the effect of their inclusion would be antidilutive. Options
to purchase shares of common stock are not included in the computation of
diluted loss per share since the effect would be antidilutive. Unvested shares
granted to an officer in 1998 (see Note 5) are not included in the loss per
share calculations.
CASH AND SHORT-TERM INVESTMENTS
The Company maintains cash equivalents and investments in several large
well-capitalized financial institutions, and the Company's investment policy
disallows investment in any debt securities rated less than "investment-grade"
by national ratings services. Cash equivalents are comprised of certain highly
liquid investments with original maturities of less than three months. In
addition to cash equivalents, the Company has investments in commercial paper
and certificates of deposit that are classified as short-term (mature in more
than 90 days but less than one year). Management determines the appropriate
classification of debt
F-7
<PAGE> 69
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity.
Marketable equity securities and debt securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses
reported in a separate component of shareholders' equity, if significant. The
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in investment income. Realized gains and losses and declines in value
judged to be other-than-temporary on available-for-sale securities are included
in investment 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.
In 1998, the Company reclassified all investments from held-to-maturity to
available-for-sale. Management expects that, based on cash needs of the Company,
certain investments may be sold in fiscal year 1999 prior to their maturity
dates and therefore, the Company no longer has the positive intent and ability
to hold these securities to maturity. The reclassification of short term
investments from held-to-maturity to available-for-sale securities did not
impact the Company's financial statements for the year ended December 31, 1998
as unrealized gains and losses on investments sold (such sales proceeds
aggregating $22,683,000) were not significant.
At December 31, 1998 and 1997, fair value approximated net book value for
all short term investments.
INVENTORIES
Inventories are stated at the lower of estimated standard costs or market
and are comprised of the following at December 31, 1998:
<TABLE>
<S> <C>
Finished goods.............................................. $382,424
Raw materials............................................... 154,927
--------
Total............................................. $537,351
========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets
ranging from 5 to 7 years. Leasehold improvements are amortized over the
remaining term of the related lease using the straight-line method. Repairs and
maintenance are expensed as incurred.
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Furniture and fixtures...................................... $ 759,594 $ 324,175
Office equipment............................................ 1,138,949 541,566
Laboratory equipment........................................ 182,089 171,695
Leasehold improvements...................................... 705,677 480,946
Production equipment........................................ 1,010,262 429,026
----------- ----------
3,796,571 1,947,408
Less: Accumulated depreciation and amortization............. (1,469,104) (885,882)
----------- ----------
$ 2,327,467 $1,061,526
=========== ==========
</TABLE>
F-8
<PAGE> 70
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LICENSE AGREEMENTS
License agreements are amortized on a straight-line basis over periods
ranging from fifteen to twenty years. The amortization periods are based on the
lives of the license agreements or the approximate remaining lives of the
related patents, whichever is appropriate. Accumulated amortization on license
agreements at December 31, 1998 and 1997 totaled $84,382 and $70,745,
respectively.
MISCELLANEOUS SALES
On May 15, 1997 the Company sold all of the technology, intellectual
property and equipment relating to the "Pulse Plus" blood containment device
product line for $130,000 in cash and a continuing royalty. During each 12-month
period following the date of the first sale of the device (the "Royalty
Period"), the Company shall receive a royalty equal to $.10 per unit on the
initial 500,000 units sold and $.08 per unit on all units sold in excess of
500,000. The purchaser guaranteed minimum royalty payments of $10,000 for the
first Royalty Period, $20,000 for the second Royalty Period and $30,000 for the
third Royalty Period. The Company received a minimum royalty payment of $10,000
for the first Royalty Period in 1998. Royalties shall cease with the expiration
of the last related patent. The Company recorded a $29,313 gain on the sale of
the product line as miscellaneous revenue in 1997.
REVENUE RECOGNITION
Revenues from sales of products are recognized at the time of shipment with
allowances provided for estimated returns and warranty costs.
RESEARCH AND DEVELOPMENT AND PATENT COSTS
All research and development costs are charged to operations as incurred.
Legal fees and other direct costs incurred in obtaining and protecting patents
are expensed as incurred.
STOCK BASED COMPENSATION
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 value of the shares at the date of grant. The Company
has elected to follow Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25") and related Interpretations in accounting
for its employee stock options. Under APB 25 no compensation expense is
recognized for stock option grants for which the terms are fixed. Compensation
expense is recognized for increases in the estimated fair value of common stock
for any stock options with variable terms.
In October 1995 the FASB issued Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("Statement 123"), which
changes the accounting for stock based compensation to non-employees and
provides an alternative to APB 25 in accounting for stock-based compensation to
employees. However, the Company elected to continue to account for stock-based
compensation to employees in accordance with APB 25 and to disclose the impact
of the alternative accounting (see Note 5).
2. CONSULTING AGREEMENTS
The Company has agreements with certain physicians, various consultants and
others with terms ranging from one to five years. Substantially all of these
agreements provide for stock grants on the agreement dates with such shares
valued at the fair market value on the date of grant and include certain
registration rights. During 1998, 1997 and 1996 approximately $198,000, $68,000,
and $46,000, respectively, were charged to operations as amortization of the
deferred compensation capitalized under these agreements.
F-9
<PAGE> 71
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. COMMITMENTS AND CONCENTRATIONS OF SUPPLIERS
The Company is committed under operating leases for its facility and
various office equipment. Rent expense was approximately $199,000, $150,000, and
$143,000 for 1998, 1997 and 1996, respectively. The total future minimum rental
payments are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 463,000
2000........................................................ 466,000
2001........................................................ 467,000
2002........................................................ 411,000
2003........................................................ 387,000
----------
$2,194,000
==========
</TABLE>
The Company has entered into a license agreement with a physician pursuant
to which he is entitled to receive a royalty on the net sales of the Beta-Cath
System (excluding consideration paid for the radioactive isotope), subject to a
maximum payment of $5,000,000.
On January 30, 1996 the Company entered into a license agreement whereby
Emory University assigned its claim to certain technology to the Company for
royalties based on net sales (as defined in the agreement) of products derived
from such technology, subject to certain minimum royalties. The royalty
agreement term is consistent with the life of the related patent and applies to
assignments of the patent technology to a third party.
The Company has obtained all of its requirements of radiation source
materials (totaling $175,000 in 1998) pursuant to an agreement, as amended (the
"Supply Agreement"), with a single German supplier. The Company has accrued
300,000 DM (approximately $178,000) of research and development expense related
to cost overruns to equip a new production line at the supplier which became
operational in 1998. At December 31, 1998, the Company had commitments to
purchase $3,900,000 of inventory components for the Beta-Cath System over the
next two years and $400,000 to purchase production equipment.
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 were 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.
F-10
<PAGE> 72
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the corresponding amounts used for income tax purposes. Significant
components of the Company's deferred tax assets for federal and state income
taxes are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 21,159,851 $ 11,232,853
R&D tax credit carryforwards............................ 1,018,455 618,441
Other................................................... 60,735 34,274
------------ ------------
22,239,041 11,885,568
Valuation allowance....................................... (22,239,041) (11,885,568)
------------ ------------
$ -- $ --
============ ============
</TABLE>
At December 31, 1998 and 1997 no net deferred tax assets were recorded as
their future benefit is not assured. No income taxes were paid during 1998, 1997
or 1996. The Company has approximately $55,650,000 of net operating losses for
federal income tax purposes available to offset future taxable income. Such
losses expire in 2007 through 2018 and are subject to certain limitations in the
event of a change in ownership. Net operating loss carryforwards aggregating
approximately $4,007,000 will result in a credit to contributed capital when
recognized. Additionally, the Company has $1,018,000 in research and development
tax credits which expire in 2008 through 2018 unless utilized earlier.
5. SHAREHOLDERS' EQUITY
SHAREHOLDER RIGHTS PLAN
On October 25, 1996 the Company's Board of Directors declared a dividend of
one Right for each share of Common Stock held of record at the close of business
on November 25, 1996. The Rights are generally not exercisable until 10 days
after an announcement by the Company that a person has acquired at least 15% of
the Company's Common Stock. Each Right, should it become exercisable, will
entitle the owner to buy 1 1/100th of a share of new Series A participating
preferred stock at an exercise price of $85. The Rights, which do not have any
voting rights, may be redeemed by the Company at a price of $.01 per Right at
any time prior to a person's or group's acquisition of 15% or more of the
Company's Common Stock.
In the event the rights become exercisable as a result of the acquisition
of at least 15% of the Company's Common Stock, each Right will entitle the
owner, other than the acquiring person, to buy at the Rights' then current
exercise price a number of shares of Common Stock with a market value equal to
twice the exercise price. In addition, unless the acquiring person owns more
than 50% of the outstanding shares of Common Stock, the Board of Directors may
elect to exchange all outstanding Rights (other than those owned by such
acquiring person or affiliates thereof) at an exchange ratio of one share of
Common Stock per Right. The Rights expire on November 25, 2006 unless they are
earlier exercised, redeemed, or exchanged. As a result of the adoption of the
Shareholders' Rights Plan, 1,000,000 shares of authorized preferred stock have
been reserved and designated as Series A Participating Preferred Stock.
STOCK OPTION PLANS AND STOCK GRANT
The Company's Board of Directors adopted on May 26, 1992 the Novoste
Corporation Stock Option Plan (the "Plan") under which options designated as
either incentive or non-qualified stock options may be issued to employees,
officers, directors, consultants and independent contractors of the Company or
any parent, subsidiary or affiliate of the Company. Options granted under the
Plan are at prices not less than the fair market value on the date of grant and
may be exercised for a period of ten years from the date of grant.
F-11
<PAGE> 73
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options granted under the Plan have vesting periods ranging from immediately to
four years. The Plan includes a provision for options to accelerate and become
immediately and fully exercisable upon a 50% or more change in control as
defined in the Amended and Restated Stock Option Plan. The Company has reserved
2,309,538 shares of Common Stock for future issuances under the Plan. As of
December 31, 1998 there are 65,250 shares available for issuance.
On August 20, 1996 the Stock Option and Compensation Committee of the Board
of Directors of the Company adopted a Non-Employee Director Stock Option Plan
(the "Director Plan"). Concurrently, stock options covering 45,000 shares were
granted, which vest over a three year period and exercises thereof are
contingent upon the individuals' continued service as directors. The Company has
reserved 100,000 shares of Common Stock for future issuances under the Plan. As
of December 31, 1998 there are no shares available for issuance.
Activity under the above-described plans is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF PRICE PER AVERAGE
SHARES SHARE PRICE
---------------- ---------------- ---------
<S> <C> <C> <C>
Outstanding at January 1, 1996.............. 1,795,075 $ .250 - 3.200
Options granted............................. 209,250 8.000 - 14.000 $10.23
Options exercised........................... (174,700) 3.000 - 3.250 3.19
Options forfeited........................... (17,850) 3.250 3.20
---------
Outstanding at December 31, 1996............ 1,811,775 .250 - 14.000 2.29
Options granted............................. 144,250 13.000 - 24.000 16.86
Options exercised........................... (297,812) .250 - 14.000 1.97
Options forfeited........................... (9,850) 3.200 - 16.000 5.51
---------
Outstanding at December 31, 1997............ 1,648,363 .250 - 24.000 3.60
---------
Options granted............................. 1,055,250 11.750 - 29.625 21.21
Options exercised........................... (339,775) .250 - 16.000 3.11
Options forfeited........................... (54,600) 3.200 - 24.000 10.38
---------
Outstanding at December 31, 1998............ 2,309,238 .250 - 29.625 11.60
---------
Exercisable at December 31, 1998............ 1,009,239 .250 - 24.000 1.68
=========
</TABLE>
The options granted during 1998 include options as to 120,000 shares which
will vest upon the achievement of specified milestones. Should such milestones
not be achieved, 100,000 of such options will vest in 2003.
F-12
<PAGE> 74
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES SHARES LIFE (YEARS) PRICE EXERCISABLE PRICE
- -------------- --------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .25 - 3.20 990,500 3.9 $ .84 925,188 $ .67
8.00 - 12.25 259,313 8.9 10.95 41,438 9.66
13.00 - 13.75 137,250 9.4 13.40 5,000 13.19
14.00 - 20.94 241,675 9.0 18.03 33,363 15.16
21.50 - 24.00 494,500 9.2 23.82 4,250 24.00
24.75 - 29.63 186,000 9.2 27.64 -- --
--------- ---------
2,309,238 6.9 11.60 1,009,239 1.68
========= =========
</TABLE>
In addition to the foregoing, in October 1998, January and February 1999,
options to purchase 200,000 shares (including 120,000 shares granted to the
Company's President) were granted at prices per share ranging from $11.75 to
$28.00 per share subject to shareholder approval in May 1999. Assuming such
shareholder approval is obtained, to the extent that the quoted market price per
share exceeds the exercise price on such approval date, the Company will incur
compensation expense over the four year vesting periods of these options.
On May 20, 1996 the Company amended an option to purchase 100,000 shares of
Common Stock at $3.20 per share of which options for 75,000 shares had not yet
become exercisable. As amended, options to purchase such 75,000 shares became
exercisable at the annual rate of 25,000 shares beginning May 20, 1997, subject
to acceleration upon the achievement of three specified milestones at the rate
of 25,000 shares per milestone. The Company is recording total non-cash
compensation expense of $810,000 ratably over the three year period ending May
19, 1999, subject to acceleration if the specified milestones are met at earlier
dates; $270,000, $270,000 and $168,750 was expensed in 1998, 1997 and 1996,
respectively, relating to these options.
Pro forma information regarding net loss and net loss per share is required
by Statement 123, which also requires that the information be determined as if
the Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method prescribed by that Statement. The
fair value for options granted prior to the initial public offering was
estimated at the date of grant using the Minimum Value pricing model. The fair
value for options granted subsequent to the initial public offering was
estimated at the date of grant using the Black-Scholes option pricing model. The
following weighted-average assumptions were used in the appropriate models for
1998, 1997 and 1996: risk-free interest rates of 5.35%, 6.29%, and 6.69%,
respectively; no dividend yields; volatility factor of the expected market price
of the Company's common stock of 0.736, 0.666 and 0.928 in 1998, 1997 and 1996,
respectively; and a weighted-average expected life of the option of 6 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, the Black-Scholes option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
F-13
<PAGE> 75
NOVOSTE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Pro forma net loss............................ $(27,761,134) $(14,821,827) $(6,175,817)
Pro forma net loss per share.................. (2.63) (1.71) (0.94)
Weighted-average fair value of options
granted..................................... 14.61 11.08 6.97
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999.
During June 1998, the Company granted 14,000 shares of restricted Common
Stock from the Plan to an officer. These shares will vest over a four year
period through June 1, 2002 provided that the officer is still employed by the
Company, and the officer has voting rights once the shares vest. Based on the
quoted market value per share at the grant date, the value of the shares awarded
totaled $360,500 and has been recorded as unearned compensation in the statement
of shareholders' equity. Such unearned compensation is being amortized to
compensation expense over the four year vesting period. In February 1999 a
similar grant of 10,000 shares of Common Stock was made to another officer; the
unearned compensation related to this grant totaled $236,900.
RECAPITALIZATION
On May 28, 1996 all of the 1,611,269 outstanding shares of Class B Common
Stock were converted on a one-for-one basis into shares of Common Stock and
accrued salaries of $320,624 were converted into 100,195 shares of Common Stock.
In addition, on May 28, 1996 the holders of warrants for 1,261,899 shares made
cashless exercises thereof to purchase an aggregate of 889,912 shares of Common
Stock (after giving effect to the conversion on a one-for-one basis of shares of
Class B Common Stock issued upon exercise of such warrants). Holders of
additional warrants exercised such warrants in full to purchase 62,104 shares of
Common Stock for $268,218 on or prior to May 28, 1996.
6. EMPLOYEE BENEFIT PLAN
Effective January 1, 1997, the Company adopted a Defined Contribution
401(k) Plan in which all employees who are at least 21 years of age are eligible
to participate. Contributions of up to 15% of compensation to the 401(k) Plan
may be made by employees through salary withholdings. Company matching
contributions are discretionary. In 1998 and 1997 the Company matched 33 1/3% of
the first 6% of employee contributions, aggregating $72,000 and $29,000.
F-14
<PAGE> 76
(NOVOSTE LOGO)
