<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NOVOSTE CORPORATION
(Exact name of Registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
FLORIDA 5047 59-2787476
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
3890 STEVE REYNOLDS BLVD.
NORCROSS, GEORGIA 30093
(770) 717-0904
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
THOMAS D. WELDON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
NOVOSTE CORPORATION
3890 STEVE REYNOLDS BLVD.
NORCROSS, GEORGIA 30093
(770) 717-0904
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
<TABLE>
<S> <C>
SETH I. TRUWIT, ESQ. PATRICK O'BRIEN, ESQ.
EPSTEIN BECKER & GREEN, P.C. ROPES & GRAY
250 PARK AVENUE ONE INTERNATIONAL PLACE
NEW YORK, NEW YORK 10177 BOSTON, MASSACHUSETTS 02110
(212) 351-4500 (617) 951-7000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this registration statement becomes effective.
---------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plan, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value(3)..... 2,300,000 $23.72 $54,556,000 $15,167
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</TABLE>
(1) Includes 300,000 shares that the underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee, based
upon the average of the high and low sales prices of the Common Stock on the
Nasdaq National Market on February 5, 1999, pursuant to Rule 457(c) under
the Securities Act.
(3) One preferred stock purchase right will attach to and trade with each share
of common stock sold in the offering. These rights are also covered by this
registration statement and the value attributable to them, if any is
reflected in the market price of the common stock.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued February 10, 1999
2,000,000 Shares
Novoste Corporation
COMMON STOCK
------------------------
NOVOSTE CORPORATION IS OFFERING 2,000,000 SHARES.
------------------------
NOVOSTE CORPORATION'S COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET UNDER
THE SYMBOL "NOVT." ON FEBRUARY 8, 1999, THE REPORTED LAST SALE PRICE OF THE
COMMON STOCK ON THE NASDAQ NATIONAL MARKET WAS $23.69 PER SHARE.
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 9.
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PRICE $ A SHARE
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS NOVOSTE
----------- ------------- -----------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total....................................... $ $ $
</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 stockholders have granted the underwriters the right to
purchase up to an additional 100,000 and 200,000 shares, respectively, to cover
over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares
to purchasers on , 1999.
------------------------
MORGAN STANLEY DEAN WITTER
PIPER JAFFRAY INC.
HAMBRECHT & QUIST
, 1999
<PAGE> 3
[INSIDE FRONT COVER]
Novoste(R), Beta-Cath(TM) and the Novoste(R) logo are trademarks of the
company.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Where You Can Find More Information
About Us............................ 4
Prospectus Summary.................... 5
Risk Factors.......................... 9
Special Note Regarding Forward-Looking
Statements.......................... 18
Use of Proceeds....................... 19
Price Range of Our Common Stock....... 19
Dividend Policy....................... 19
Dilution.............................. 20
Capitalization........................ 20
Selected Consolidated Financial
Data................................ 21
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 26
Management............................ 45
Principal and Selling Shareholders.... 54
Underwriters.......................... 56
Legal Matters......................... 57
Experts............................... 57
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.
---------------------
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.
---------------------
Unless otherwise indicated, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option.
3
<PAGE> 5
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; 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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<PAGE> 6
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 file an initial pre-market approval application with
the FDA in the first quarter of 2000. In August 1998, we received CE mark
approval to sell the Beta-Cath System in 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
efficacy 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 February 1, 1999, we had enrolled 965 of the approximately 1,100 patients we
anticipate enrolling in the Beta-Cath System Trial at 52 clinical sites,
principally located in the United States. We anticipate completion of the
follow-up angiograms by the end of 1999. Assuming this trial yields positive
results, we intend to file an application to the FDA in the first quarter of
2000 for approval to market the Beta-Cath System in the United States for
patients who are undergoing PTCA or stent placement.
5
<PAGE> 7
Our second pivotal trial, the START Trial, is designed to study the safety
and efficacy 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 February 1, 1999, we had enrolled a total of 193
patients at 36 clinical sites principally located in the United States. Assuming
this trial also yields positive results, we intend to file an application with
the FDA to obtain approval to market the Beta-Cath System for treating
"in-stent" restenosis.
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 received CE mark approval to commercialize the Beta-Cath
System in Europe. We believe that we are the only company that has CE mark
approval for 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 180 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 and 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.
---------------------
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).
6
<PAGE> 8
THE OFFERING
Common stock offered................ 2,000,000 shares
Common stock to be outstanding
after the offering................ 12,715,087 shares(1)
Use of proceeds..................... To fund our ongoing Beta-Cath System
Trial and START Trial, to establish and
expand our sales force in the United
States and Europe, 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............... 300,000 shares, of which up to 100,000
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."
- ---------------
(1) Based on the shares outstanding as of February 8, 1999. Excludes 2,363,688
shares of common stock subject to outstanding options as of February 8,
1999, at a weighted average exercise price of $11.99 per share. Also
excludes 200,000 shares of common stock subject to outstanding options as of
February 8, 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.
7
<PAGE> 9
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
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
-------- -------- -------
Loss from operations.................................. (26,789) (15,602) (6,803)
Interest income, net.................................. 2,127 1,389 864
-------- -------- -------
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>
<CAPTION>
DECEMBER 31, 1998
------------------------
ACTUAL AS ADJUSTED(2)
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(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................... $21,797 $ 65,951
Total assets.............................................. 29,482 73,636
Accumulated deficit....................................... (52,281) (52,281)
Total shareholders' equity................................ 24,517 68,671
</TABLE>
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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 2,000,000 shares of common stock we are
offering at an assumed public offering price of $23.69 per share and the
application of the estimated net proceeds, after deducting underwriting
discounts and commissions and estimated offering expenses. See "Use of
Proceeds" and "Capitalization."
8
<PAGE> 10
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 efficacy 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, including the influence of national health
care policies and reimbursement strategies of health care payors. 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.
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
9
<PAGE> 11
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 EFFICACY
The safety and efficacy of the Beta-Cath System or of any beta vascular
brachytherapy device 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 efficacy. At February 1, 1999, we
had enrolled 965 of the approximately 1,100 patients we anticipate enrolling in
the Beta-Cath System Trial and 193 of the approximately 386 patients we
anticipate enrolling in the START Trial. These multi-center trials require
follow-up examinations with patients after eight months. It is only after
completion of 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. The data from these trials, if
completed, may not demonstrate safety and efficacy of the Beta-Cath System and
may not be adequate to support our application to the FDA for pre-market
approval. 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 we could be required to cease our
operations. 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."
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 file a pre-market approval application until the
first quarter of 2000 following successful completion of the Beta-Cath System
Trial, and do not anticipate receiving approval until at least one year after
submission of our application. 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 Beta-Cath System Trial, we will be limited
to marketing the Beta-Cath System for use with patients who are being treated
for one lesion in a single coronary artery. Based upon the results of the START
Trial, we will seek to expand the indications for which the Beta-Cath System may
be marketed to include patients with "in-stent" restenosis in only one coronary
artery. In order to market the Beta-Cath System for use with a broader range of
patients, we will be required to demonstrate through additional clinical trials
that the Beta-Cath System is safe and effective in treating a broader range of
indications.
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. We received CE mark approval to
commercialize the Beta-Cath System in
10
<PAGE> 12
Europe in August 1998, but are subject to continuing audit requirements. 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 Distribute Radioactive Materials
Our business involves the manufacture, distribution, 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 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 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 in the United States are required to amend their
licenses to hold, handle and use Strontium 90 prior to receiving and using our
Beta-Cath System.
The sale 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. 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.
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<PAGE> 13
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 and Boston Scientific has
it under investigation in Europe and in a pilot study in the United States.
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. In addition, 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. We may not be the first to market a beta radiation system
to reduce the incidence of restenosis 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.
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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 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. 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
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<PAGE> 15
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.
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 manufacture, distribution, 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, as
well as unexpected remedial costs and penalties. Any such violation or incident
could adversely impact the market for our device or lead to suspension of our
trials or cessation of sales of the Beta-Cath System. 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."
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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 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;
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<PAGE> 17
- the resources needed to expand manufacturing capacity and facilities
requirements; and
- market acceptance and demand for the Beta-Cath System.
We may in the future seek to raise additional funds through bank
facilities, debt or equity offerings or other sources of capital. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EXPOSURE TO PRODUCT LIABILITY CLAIMS; LIMITED INSURANCE COVERAGE
The use of the Beta-Cath System entails an inherent risk of adverse effects
which could result in product liability claims against us. 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 claims
will not exceed the insurance coverage limits, that the insurance will continue
to be available on commercially reasonable terms or at all, or that a product
liability 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.
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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 $18.31 per share in net
tangible book value from an assumed public offering price of $23.69 per share.
Additional dilution is likely to occur upon the exercise of outstanding options.
See "Dilution."
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 February 8, 1999, the
closing price of our common stock ranged from a high of $31.81 per share to a
low of $11.00 per share and ended that period at $23.69 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.
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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 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.
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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 $44,153,563
($46,383,741 if the underwriters' over-allotment option is exercised in full)
assuming a public offering price of $23.69 per share and 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 the United States and
Europe, 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 February 8, 1999).................... 30.250 23.563
</TABLE>
For a recent closing sale price for the common stock, see the cover page of
this prospectus. On February 5, 1999, we had approximately 115 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.
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<PAGE> 21
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 $68,278,127, or $5.38 per share. This represents an immediate
increase in net tangible book value of $3.13 per share to existing shareholders
and an immediate dilution in net tangible book value of $18.31 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 $6.33
per share, and the dilution to new investors would be $17.36.
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 $5.43 per share, which would result in dilution to new investors in
this offering of $18.26 per share. Up to 200,000 shares included in the
underwriters' over-allotment option consist of shares issuable upon exercise of
outstanding options held by 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 2,000,000 shares of
common stock offered by us at an assumed public offering price of $23.69 per
share 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 12,704,817 shares issued as
adjusted(1)............................................... 107 127
Additional paid-in capital.................................. 77,023 121,157
Accumulated deficit......................................... (52,281) (52,281)
Unearned compensation....................................... (308) (308)
-------- --------
24,541 68,695
Less treasury stock, 5,780 shares, at cost.................. (24) (24)
-------- --------
Total shareholders' equity.................................. $ 24,517 $ 68,671
======== ========
</TABLE>
- ---------------
(1) Excludes 2,363,688 shares of common stock subject to outstanding stock
options under our stock option plans, as of February 8, 1999, which had a
weighted average exercise price of $11.99 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 8, 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.
20
<PAGE> 22
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.
21
<PAGE> 23
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 efficacy of the
Beta-Cath System. Additionally, we may not obtain necessary approvals for the
Beta-Cath System from the FDA, the Nuclear Regulatory Commission 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 Efficacy," "-- 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.
22
<PAGE> 24
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.
23
<PAGE> 25
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. Novoste believes that current cash
balances and short-term investments, together with interest thereon, will be
sufficient to meet the Company's operating and capital requirements through
1999. 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. 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 they are addressing the
year 2000 issue; and (4) compose a contingency and disaster recovery plan to
ensure
24
<PAGE> 26
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.
25
<PAGE> 27
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 file an initial pre-market approval application with
the FDA in the first quarter of 2000. In August 1998, we received CE mark
approval to sell the Beta-Cath System in 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.
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<PAGE> 28
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
27
<PAGE> 29
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 four 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 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 mark 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 four 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 four 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 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 efficacy of
the Beta-Cath System in reducing coronary restenosis following PTCA or stent
placement. We expect to enroll approximately 1,100 patients in the trial at up
to 55 clinical sites, principally located in the United States. The patients are
being divided into two approximately equal subgroups, one receiving PTCA alone
and one receiving coronary stents in addition to PTCA. At February 1, 1999, we
had enrolled 965 of the approximately 1,100 patients we anticipate enrolling in
the Beta-Cath System Trial at 52 clinical sites, principally located in the
United States. 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 brachyther-
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apy 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.
A telephone follow-up with patients 30 days after treatment and a follow-up
angiogram eight months after the initial treatment is performed. 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.
As is typical for patients receiving stent placement, the patients in the
stent 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. To date, six patients in the
Beta-Cath System Trial have experienced stent thrombosis. While this represents
a normal incidence, we noted that these patients developed the condition longer
after their treatment than is normally observed. As a result, in October 1998,
we modified the trial protocol for the stent subgroup to extend the
anti-platelet therapy from two weeks to 60 days and to provide for additional
follow-up contact with these patients in the second, third and fourth months
after treatment. Given that the trial is triple-masked, we will not be able to
draw any conclusions from this experience until the trial is complete.
We anticipate completion of the patient follow-up in our Beta-Cath System
Trial in the fourth quarter of 1999. If the trial is successful, we intend to
file during the first quarter of 2000 an application to the FDA to obtain
pre-market approval to sell the Beta-Cath System in the United States.
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 efficacy 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 February 1, 1999, we had
enrolled a total of 193 patients at 36 clinical sites.
We anticipate completion of the enrollment in the approximately 386 patient
START Trial in the second quarter of 1999. After we receive the results of the
follow-up angiograms on the patients, and provided the trial is successful we
intend to file with the FDA an application to obtain pre-market approval to sell
the Beta-Cath System in the United States to treat "in-stent" restenosis in
coronary arteries.
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. The data from these trials, if
completed, may not demonstrate safety and efficacy and may not be adequate to
support our application to the FDA for pre-market approval of the Beta-Cath
System. 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
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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. The results of these trials provide
some preliminary validation of the efficacy 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 36% in the radiation treatment group.
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.
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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.
In August 1998 we received CE mark approval to commercialize the Beta-Cath
System in Europe and recorded our first sale in December 1998. We believe that
we are the only company that has CE mark approval for 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 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
system 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 CE mark directives
in order to produce products for sale in Europe. We received ISO 9001/EN 46001
certification from our European notified body in April 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 system 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
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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, 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.
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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.
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.
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
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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 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
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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.
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. 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.
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.
We are also aware of one company, Isostent, Inc., which is developing a
radioactive stent. 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
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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.
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. In addition, 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.
Although we believe that we are the first in the United States to have initiated
an FDA-approved human clinical trial of a radiation system for reducing the
incidence of restenosis, we may not be the first to market such a 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 and by foreign
governments. The FDA regulates the clinical testing, manufacture, labeling,
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 efficacy. Under FDA regulations
Class I devices are subject to general controls (for example, labeling,
pre-market notification and adherence to quality system regulations) and Class
II devices are subject to general and special controls (for example, performance
standards, patient registries, and FDA guidelines). Generally, Class III devices
are those that must receive pre-market approval by the FDA after evaluation of
their safety and efficacy (for example, life-sustaining, life-supporting and
implantable devices, or new devices that have not been found substantially
equivalent to other Class II legally marketed devices). The Beta-Cath System is
a Class III device, which will require the FDA's pre-market approval prior to
its commercialization.
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A pre-market application must be supported by valid scientific evidence,
which typically includes extensive data, including preclinical and human
clinical trial data to demonstrate safety and efficacy of the device. If human
clinical trials of a device are required and the device 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 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," 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 such 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 generally will
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 system regulations with respect to the Beta-Cath System.
If the FDA's evaluations 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 filing pre-market approval applications for the Beta-Cath System
until the first quarter 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
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subject to scrutiny by the FDA and, in certain circumstances, by the Federal
Trade Commission. FDA enforcement policy strictly prohibits the marketing of FDA
cleared or approved medical devices for unapproved uses. Further, if a company
wishes to modify a product after FDA approval of a pre-market approval,
including any changes that could affect safety or efficacy, additional
clearances or approvals will be required by the FDA. Such changes include, but
are not limited to: new indications for use, the use of a different facility to
manufacture, changes to process or package the device, changes in vendors to
supply components, changes in manufacturing methods, changes in design
specifications and certain labeling changes. Failure to receive or delays in
receipt of FDA clearance or approvals, including the need for additional
clinical trials or data as a prerequisite to clearance or 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.
Any products we manufacture or distribute pursuant to FDA clearances or
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
FDA requires devices to be manufactured in accordance with quality system
regulations, which impose certain procedural and documentation requirements upon
us with respect to manufacturing and quality-assurance activities. Other
applicable requirements include the FDA's medial device reporting regulations,
which will require that we provide information to the FDA on deaths or serious
injuries alleged to have been associated with the use of our marketed devices,
as well as product malfunctions that would likely cause or contribute to a death
or serious injury if the malfunction were to recur. Failure to meet these
pervasive FDA requirements could subject us and/or our employees to injunction,
prosecution, civil fines, seizure or recall of products, prohibition of
manufacturing, distribution, sales or marketing or suspension or withdrawal of
any previously granted approvals.
Our business involves the manufacture, distribution, 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. In addition,
we must obtain a license from the NRC to commercially distribute such radiation
sources as well as to comply with all applicable regulations. 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 in the United States are required to
expand their 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
incorporated into 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 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
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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. Europe has promulgated rules that require that medical products sold
after June 15, 1998 must have CE mark status, an international symbol of
adherence to quality assurance standards and compliance with applicable European
medical device directives. We received the CE mark in August 1998, which allows
us to sell our Beta-Cath System in Europe. Although European directives are
intended to ensure free movement within Europe of medical devices that bear the
CE mark, some European countries have imposed additional requirements for
approvals or pre-market notifications. 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 mark. Many European countries maintain
systems to control the purchase and reimbursement of medical equipment under
national health care programs, and the CE mark 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 sale 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 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 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
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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. Countries with government sponsored
healthcare, such as the United Kingdom, have a centralized, nationalized
healthcare system. New devices are brought into the system through negotiations
between departments at individual hospitals at the time of budgeting. In most
foreign countries, there are also private insurance systems that may offer
payments for alternative therapies. Although not as prevalent as in the United
States, health maintenance organizations are emerging 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 liability claims. Although we have
not experienced any product liability 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 commercially reasonable terms or at all, or that a product
liability 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
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<PAGE> 45
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> 46
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..................... 60 Director(2)
Norman R. Weldon, Ph.D. ............... 64 Director
William E. Whitmer..................... 66 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> 47
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> 48
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.
Dr. Norman R. Weldon is the father of Mr. Thomas D. Weldon.
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<PAGE> 49
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> 50
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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<PAGE> 51
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.
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<PAGE> 52
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
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<PAGE> 53
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.
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 approved in 1992, we currently have
an aggregate of 3,400,000 shares reserved for issuance upon exercise of options
thereunder. 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
52
<PAGE> 54
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 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 8, 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 8, 1999, options to purchase 200,000 shares of our common stock
had been granted, 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 8,
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 8, 1999, options to purchase 10,000 shares had been granted,
subject to shareholder approval of the plan amendments.
53
<PAGE> 55
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of February 8, 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)............................ 807,252 7.3% 6.2%
Charles E. Larsen(4)(5)................................. 676,161 6.1 5.2
Henry L. Hillman, Elsie Hilliard Hillman and C.G.
Grefenstette, Trustees(6)(7).......................... 441,587 4.1 3.5
C.G. Grefenstette and Thomas G. Bigley,
Trustees(6)(8)........................................ 582,112 5.4 4.6
President and Fellows of Harvard College(9)............. 825,000 7.7 6.5
c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston, MA 02210
Paul Tudor Jones, II(10)................................ 794,200 7.4 6.2
c/o Tudor Investment Corporation
One Liberty Plaza (51st Floor)
New York, NY 10006
Norman R. Weldon, Ph.D.(3)(11).......................... 370,571 3.5 2.9
David N. Gill........................................... 42,500 * *
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)(12).......................................... 2,147,982 18.4% 15.7%
</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 8, 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 -- 32,500 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.
(3) Includes 112,571 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.
54
<PAGE> 56
(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 707,252 shares or 5.3% of the common stock after the
offering and Mr. Larsen will beneficially own 576,161 shares or 4.4% 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 a Schedule 13F which was filed with the Commission on September
30, 1998.
(10) Pursuant to Amendment No. 1, dated August 24, 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.
(161,900 shares), Raptor L.P. (58,300 shares), TAP (34,500 shares), Tudor
BVI (206,468 shares), Upper Mill (113,908 shares), TPT (59,624 shares) and
TGT as sole general partner of TAP (34,500 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 189,975 shares of common stock that can be acquired within 60 days from
February 8, 1999, upon exercise of options held by executive officers not
named in the Summary Compensation Table under "Management -- Executive
Compensation."
55
<PAGE> 57
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, 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...........................
Piper Jaffray Inc...........................................
Hambrecht & Quist LLC.......................................
Total.......................................................
========
</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 $ a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in excess
of $ 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 300,000 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' options is exercised in full, the total price to the public would
be $ , the total underwriters' discounts and commission would be
$ and total proceeds to the company and the selling shareholders would
be $ and $ , respectively.
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.
56
<PAGE> 58
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.
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.
57
<PAGE> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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> 66
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> 67
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> 68
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> 69
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> 70
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> 71
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 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> 72
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> 73
[LOGO]
<PAGE> 74
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION
The estimated expenses of this offering, all of which are to be paid by the
Registrant, are as follows:
<TABLE>
<S> <C>
S.E.C. Registration Fee..................................... $ 15,167
N.A.S.D. Filing Fee......................................... 5,955
Nasdaq National Market Qualification Fee.................... 17,500
Accounting Fees............................................. 50,000
Legal Fees and Expenses..................................... 225,000
Blue Sky Qualification Fees and Expenses.................... 5,000
Printing and Engraving...................................... 68,000
Transfer Agent's Fees and Expenses.......................... 5,000
Miscellaneous Expenses...................................... 28,378
----------
Total............................................. $ 450,000
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 607.0850 of the Florida Business Corporation Act grants
corporations the power to indemnify their directors, officers, employees and
agents in accordance with the provisions thereof, Article VI of Registrant's
Amended and Restated Articles of Incorporation and Article VIII of Registrant's
By-laws provide for indemnification of Registrant's directors, officers, agents
and employees to the full extent permissible under Action 607.0850 of the
Florida Business Corporation Act.
See also Section 9 of the Underwriting Agreement.
Registrant maintains directors' and officers' liability insurance coverage
with an aggregate policy limit of $10,000,000 of each policy year.
ITEM 16. EXHIBITS
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S> <C> <C>
* 1 -- Form of Underwriting Agreement.
4.1 -- Form of Specimen Common Stock Certificate of Registrant.(1)
4.2 -- Registration Rights Agreement, dated July 28, 1995, by and
among Registrant, Norman R. Weldon, Thomas D. Weldon,
Charles E. Larsen, the Hillman Investors (as defined
therein), Noro-Moseley Partners-III, L.P. and Advanced
Technology Ventures IV, L.P.(1)
4.4 -- Registration Rights Agreement, dated September 20, 1995,
between Registrant and Karen C. Vinjamuri.(1)
4.17 (a) -- Form of Rights Agreement, dated as of October 25, 1996,
between Registrant and American Stock Transfer & Trust
Company, which includes as Exhibit B thereto the Form of
Right Certificate.(2)
4.17 (b) -- Summary of Rights to Purchase Preferred Shares of
Registrant.(2)
4.18 -- Employment Agreement between Registrant and Raoul Bonan,
M.D..(3)
* 4.19 -- Restricted Share Award Agreement with David N. Gill.
* 5 -- Opinion by Epstein Becker & Green, P.C., as to legality.
23.1 -- Consent of Ernst & Young LLP (contained on page II-5).
</TABLE>
II-1
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S> <C> <C>
* 23.2 -- Consent of Epstein Becker & Green, P.C. (included in Exhibit
5).
24 -- Power of Attorney (contained as part of Signature Page).
</TABLE>
- ---------------
* To be filed by amendment.
(1) Filed as same numbered Exhibit to the Registrant's Registration Statement on
Form S-1 (File No. 333-4988).
(2) Filed as same numbered Exhibit to the Registrant's Registration Statement on
Form 8-A filed November 5, 1996.
(3) Filed as Exhibit 10.15 to Registrant's Form 10-Q for the three months ended
June 30, 1998.
(b) Financial Statement Schedules: Not applicable
ITEM 17. UNDERTAKINGS
Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1993, as amended (the "Act") may be permitted to directors, officers and
controlling persons of Registrant pursuant to the provisions of its Amended and
Restated Certificate of Incorporation, its By-Laws, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant for expenses incurred or
paid by a director, officer or controlling person of Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Registrant hereby further undertakes that:
1. For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
2. For purposes of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-2
<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant
certifies that it has reasonable grounds to believe it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on the 9th day of
February, 1999.
NOVOSTE CORPORATION
By: /s/ DAVID N. GILL
------------------------------------
David N. Gill
Chief Operating Officer and Chief
Financial Officer
POWER OF ATTORNEY TO SIGN AMENDMENTS
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears
below does hereby constitute and appoint Thomas D. Weldon and David N. Gill, and
each of them, with full power to act without the other, his true and lawful
attorney-in-fact and agent for him and in his name, place and stead, in any and
all capacities, to sign any or all amendments to this Registration Statement,
including without limitation any registration statement for the same offering
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises in order to effectuate the same,
as fully, for all intents and purposes, as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ THOMAS D. WELDON Chairman of the Board, Chief February 9, 1999
- ----------------------------------------------------- Executive Officer and
Thomas D. Weldon Director
(Principal Executive Officer)
/s/ WILLIAM A. HAWKINS Director February 9, 1999
- -----------------------------------------------------
William A. Hawkins
/s/ DAVID N. GILL Chief Financial Officer February 9, 1999
- ----------------------------------------------------- (Principal Financial and
David N. Gill Accounting Officer)
Director February , 1999
- -----------------------------------------------------
Donald C. Harrison, M.D.
/s/ CHARLES E. LARSEN Director February 9, 1999
- -----------------------------------------------------
Charles E. Larsen
/s/ J. STEPHEN HOLMES Director February 9, 1999
- -----------------------------------------------------
J. Stephen Holmes
/s/ PIETER J. SCHILLER Director February 9, 1999
- -----------------------------------------------------
Pieter J. Schiller
/s/ STEPHEN I. SHAPIRO Director February 9, 1999
- -----------------------------------------------------
Stephen I. Shapiro
</TABLE>
II-3
<PAGE> 77
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ NORMAN R. WELDON Director February 9, 1999
- -----------------------------------------------------
Norman R. Weldon, Ph.D.
Director February , 1999
- -----------------------------------------------------
William E. Whitmer
</TABLE>
II-4
<PAGE> 78
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
February 9, 1999 in the Registration Statement (Form S-3) and related prospectus
of Novoste Corporation for the registration of 2,300,000 shares of its Common
Stock.
ERNST & YOUNG LLP
Atlanta, Georgia
February 9, 1999
II-5
