SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934. FOR THE TRANSITION PERIOD ___ TO ___.
Commission File Number: 0-20727
Novoste Corporation
(Exact Name of Registrant as Specified in Its Charter)
Florida 59-2787476
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3890 Steve Reynolds Blvd., Norcross, GA 30093
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone, including area code: (770) 717-0904
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Rights to Purchase Preferred Shares
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosures of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K (X).
As of February 1, 2000, there were 14,221,977 shares of Common Stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the Registrant was approximately $247,889,982 based upon the closing sales
price of the Common Stock on February 1, 2000 on the Nasdaq National Market.
Shares of Common Stock held by each officer, director, and holder of five
percent or more of the Common Stock outstanding as of February 1, 2000 have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily conclusive.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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NOVOSTE CORPORATION
FORM 10-K
INDEX
PART I.
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7a. Quantatative and Qualitative Disclosures About Market Risk
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes in Disagreements with Accountants on Accounting and Financial
Disclosure
PART III.
Item 10. Directors and Executive Officers of The Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV.
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on
Form 8-K
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PART I
Item 1. BUSINESS
In this Form 10-K, "Novoste," the "Company," "we," "us" and "our" refer to
Novoste Corporation. Novoste(R), Beta-Cath(TM) and the Novoste(R) logo are
trademarks of the Company.
The statements contained in this Form 10-K that are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding the expectations, beliefs, intentions or strategies
regarding the future. We intend that all forward-looking statements be subject
to the safe-harbor provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements reflect our views as of the date they are
made with respect to future events and financial performance, but are subject to
many uncertainties and risks which could cause our actual results to differ
materially from any future results expressed or implied by such forward-looking
statements. Examples of such uncertainties and risks include, but are not
limited to, whether the Beta-Cath System, our primary product in development,
will prove safe and effective; whether we will ever be profitable; whether we
will be able to raise additional funds, if needed whether and when we will
obtain approval of the Beta-Cath System from the United States Food and Drug
Administration (FDA) and corresponding foreign agencies; our need to achieve
manufacturing scale-up in a timely manner, and our need to provide for the
efficient manufacturing of sufficient quantities of the Beta-Cath System; our
dependence on the Beta-Cath System as the primary source of future revenue; the
uncertainty of market acceptance of vascular brachytherapy; the lack of an
alternative source of supply for the radiation source materials used in the
Beta-Cath System; our patent and intellectual property position; our need to
develop the marketing, distribution, customer service and technical support and
other functions critical to the success of our business plan; the effectiveness
and ultimate market acceptance of the Beta-Cath System; limitations on third
party reimbursement; and competition with rival developers of restenosis
reduction products. These risks are discussed under "Item 1 - Business" and
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations." Additional risk factors include those that may be set
forth in reports filed by the Company from time to time on Forms 10-Q and 8-K.
We do not undertake any obligation to update any forward-looking statements.
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 second quarter of 2000. In August 1998, we qualified to apply CE
marking to the Beta-Cath System, a requirement to sell our device in most of
Western Europe.
In 1999 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 $3.0 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 1999, stents were used in approximately 75% 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
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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 1999, approximately 600,000 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.
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 1999, 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.
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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 75% of the approximately 1.1 million PTCA procedures
performed in 1999.
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
procedures. Stents are also permanent implants which may result in unforeseen,
long-term adverse effects, and cannot be used in cases where the coronary
arteries are too tortuous or too narrow. Further, stents appear to be effective
in reducing the frequency of restenosis resulting from elastic recoil and
vascular remodeling, but they increase the degree of hyperplasia.
THE NOVOSTE SOLUTION
We have designed the Beta-Cath System to reduce the incidence of
restenosis following PTCA by delivering localized beta radiation to the
treatment site in a coronary artery. We believe that the administration of
localized beta radiation is likely to reduce coronary artery restenosis rates by
inhibiting hyperplasia and vascular remodeling. Radiation has been used
therapeutically in medicine for more than 50 years in the treatment of
proliferative cell disorders, such as cancer. Cancer therapy has primarily
involved the use of gamma radiation, which is highly penetrating and may be
hazardous unless handled and used with great care. By contrast, beta radiation
is far less penetrating and easier to use and shield than gamma radiation while
still delivering a sufficient dose to the treated coronary arteries. We view
beta radiation as well-suited for intracoronary use following PTCA, where the
objective is to treat the coronary artery with minimal exposure to adjacent
tissues.
The Beta-Cath System is a hand-held device that hydraulically delivers
beta radiation sources through a closed-end catheter to the area of the coronary
artery injured by the immediately preceding PTCA procedure. To facilitate easy
placement of the catheter, it is advanced over the same guidewire used in the
PTCA procedure. After the administration of the prescribed radiation dose to a
lesion site, which takes less than five minutes per lesion, the radiation
sources are hydraulically returned to the hand-held transfer device. We expect
to be able to reuse the radiation isotopes for up to a year due to the long
half-life of the sources.
The Beta-Cath System is designed to be safe and cost-effective and to fit
well with techniques currently used by interventional cardiologists in the cath
lab. The Beta-Cath System is designed to target the primary causes of restenosis
by inhibiting hyperplasia and vascular remodeling. The Company believes the
Beta-Cath System may provide significant cost savings by reducing (1) the need
for revascularization often required following PTCA and coronary stenting and
(2) the number of coronary stents used as a primary therapy.
OUR BUSINESS STRATEGY
Our objective is to become the leader in the commercialization of vascular
brachytherapy devices. Elements of our strategy include:
- Achieving First-to-Market Position and a Leading Market Share in the
United States and Europe. We intend to be the first-to-market in the
United States with a beta vascular brachytherapy device. We intend
to seek approvals to use the Beta-Cath System to address a wide
range of indications, including reduction of the incidence of
restenosis following PTCA and stent placement and treatment of
"in-stent" restenosis. We believe this broad label will enable us to
achieve a leading market share of vascular brachytherapy devices. We
received CE marking certification in August 1998, becoming the first
company with approval to market a vascular brachytherapy device in
Europe.
- Establishing the Beta-Cath System as the Standard of Care. Our
strategy is to introduce the Beta-Cath System into the cath lab as
the standard of care to reduce the incidence of restenosis. In
addition, we intend to conduct intensive physician-training seminars
to familiarize interventional cardiologists and radiation
oncologists with the use of the Beta-Cath System.
- Selling Directly. We intend to market the Beta-Cath System in the
United States through a direct sales force. We plan to focus our
marketing efforts on the top tier of approximately 200 high-volume
hospitals and on leading interventional cardiologists and radiation
oncologists at those institutions. The interventional cardiologists
at these hospitals perform a large portion of the PTCA procedures in
the United States and tend to adopt new cardiovascular technologies
and devices quickly. We also believe
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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 necessary licenses to store and use our beta radiation source
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 have supplemented 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, on May 4, 1999 we received United States Patent
No. 5,899,882 and on January 11, 2000 we received United States
Patent No. 6,013,020. 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 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
subsidiaries sell a version that fits over the guidewire for only a small
portion of the catheter at its far end, commonly known as a "rapid exchange"
catheter.
The Beta-Cath System is intended to be used in a cath lab by an
interventional cardiologist in conjunction with a radiation oncologist. The
cardiologist places the delivery catheter into the patient's vasculature until
the catheter reaches the targeted site. The radiation oncologist operates the
transfer device to deliver the radiation source train hydraulically to the end
of the catheter in a matter of seconds. The radiation sources remain at the
targeted site for less than five minutes to deliver a predetermined dose of
radiation.
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The radiation sources are then returned by the use of positive hydraulic
pressure applied through a different lumen of the delivery catheter. Upon
completion of each procedure, the train of radiation sources is stored safely
inside the transfer device. At the end of the day, the transfer device is
delivered to a designated radiation storage site within the hospital for
safekeeping. While the need for a cardiologist and a radiation oncologist is
expected to result in incremental physician fees, we believe the Beta-Cath
System will be cost-effective, principally by reducing (1) the need for costly
revascularization procedures often required following PTCA and coronary stenting
and (2) the number of coronary stents used as a primary therapy.
We believe the Beta-Cath System has the following advantages:
- Site-specific Therapy. The Beta-Cath System is designed to confine
radiation exposure to the targeted intervention area.
- Short Procedure Times. The Beta-Cath System is designed to enhance
patient safety and comfort, as well as to promote productivity in
the cath lab, by delivering the recommended dosage in less than five
minutes of radiation exposure per lesion.
- Utilization of Existing PTCA Techniques. Although intracoronary
radiation is a new concept in coronary artery disease treatment, the
hand-held Beta-Cath System is designed to be easily adopted and used
by the interventional cardiologist. The Beta-Cath System is very
similar to other catheter-based tools used by the cardiologist. In
addition, our system does not require the purchase or acquisition of
capital equipment by the hospital, which often requires a separate
and lengthy purchase approval.
- Multiple-Use System. The radiation source train can be reused for
numerous patients, due to the long half-life of the isotope and
because the source train does not come into contact with the
patient's blood. As a result, inventory planning will be very
straightforward, procedure costs will be attractive and last minute
treatment decisions can be made.
- Ease of Use and Accuracy of Dosing. The Beta-Cath System is a
hand-held device that is easy to operate. Because of the long
half-life of our radiation source, prescribed treatment times will
remain constant over the approved shelf life of the isotope.
Vascular brachytherapy systems that utilize short half-life isotopes
are likely to require complex case-by-case dose calculations based
on the current decay state of the isotope. In addition, they require
frequent inventory replacement due to their short half-lives.
- Designed for Safety. The Beta-Cath System utilizes localized beta
radiation, which results in total body radiation exposure
significantly less than that received during routine x-ray during
PTCA or during treatment with a gamma radiation vascular
brachytherapy device. Other safety mechanisms include: a
closed-source train lumen, special locking mechanisms to connect the
delivery catheter to the transfer device and sufficient shielding in
the transfer device to protect health care workers from beta
radiation exposure. In addition, the beta radiation sources are
delivered and, following the administration of the prescribed dose,
retrieved hydraulically in a matter of seconds, thereby minimizing
exposure to adjacent tissue.
CLINICAL TRIALS
We are currently conducting three pivotal clinical trials of the Beta-Cath
System: the START Trial, the Beta-Cath System Trial and the START 40 Trial, as
well as several other trials. These trials are intended to support pre-market
approval applications to the FDA 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.
Pivotal Trials
The Beta-Cath System Trial. On July 30, 1997 we initiated our Beta-Cath
System Trial, a randomized, triple-masked, placebo-controlled, multicenter human
clinical trial under an investigational device exemption granted by the FDA. The
Beta-Cath System Trial seeks to determine the clinical safety and effectiveness
of the Beta-Cath System in reducing coronary restenosis following PTCA or stent
placement. We initially targeted enrollment of approximately 1,100 patients in
the trial at up to 55 clinical sites, principally located in the United States.
The protocol contemplated that patients would be divided into two approximately
equal subgroups, one receiving PTCA alone and one receiving coronary stents in
addition to PTCA. Patients in each subgroup of the trial received, determined on
a random basis, either vascular brachytherapy through the Beta-Cath System using
a 30mm radiation source train or no vascular brachytherapy through a placebo
version of the Beta-Cath System. In both subgroups, patients who received the
beta radiation received dosages of 14 gray for vessels ranging from 2.70 to
3.35mm and 18 gray for vessels ranging from 3.36 to 4.00mm. The protocol
provided for telephone follow-up with patients 30 days after treatment for PTCA
patients and monthly for newly stented patients up to the eighth month, and a
follow-up angiogram eight months after the initial treatment regardless of the
treatment. The
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primary endpoint of this trial is target vessel revascularization
("TVR"), the incidence of an additional revascularization procedure in the same
vessel within eight months. Other endpoints of the trial include angiographic
restenosis, late loss index, and the incidence of major adverse cardiac events.
As is typical for patients undergoing stent placement, the patients in the
stent placement subgroup of the Beta-Cath System Trial received anti-platelet
therapy to prevent stent thrombosis, a condition which can lead to acute closure
of the treated artery. Stent thrombosis typically occurs within 30 days of
treatment in a small percentage of patients receiving stent placement. There
were incidences of stent thrombosis reported in the Beta-Cath System Trial.
These patients developed the condition later following their treatment than is
normally observed. As a result, in November 1998 we modified the Trial protocol
for the stent placement subgroup to extend the anti-platelet therapy from two
weeks to 60 days following stent placement and to provide for additional
follow-up contact with these patients in the second, third and fourth months
after treatment. On April 27, 1999 we announced approval of our intention to
increase patient enrollment in the stent placement subgroup of the Trial and to
extend the anti-platelet therapy to a minimum of 90 days following stent
placement. These changes were made based upon a recommendation made by the Data
Safety and Monitoring Board (DSMB) at its March 1999 meeting. The DSMB is an
independent committee of clinicians and statisticians that has responsibility
for review of the study protocol and clinical events at regular intervals during
patient enrollment into the Trial. Based on its review of the available data
set, including the incidence of major adverse cardiac events, the DSMB proposed
these changes to ensure sufficient data to evaluate the safety and effectiveness
of the Beta-Cath System with the revised anti-platelet therapy protocol. We
completed enrollment in the PTCA subgroup in July 1999 and enrollment in the
stent placement subgroup with the extended antiplatelet therapy in September
1999. Enrollment in the Trial was stopped on September 30, 1999 after having
enrolled a total of 1,456 patients at 58 clinical sites, principally located in
the United States. A follow-up angiogram eight months after the initial
treatment will be performed to observe the treated artery. The angiogram will be
analyzed to determine if there has been an incidence of restenosis and to
measure late loss index.
The START Trial. On September 21, 1998, we initiated the "Stents And
Radiation Therapy 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
target vessel revascularization ("TVR"), the incidence of an additional
revascularization procedure in the vessel originally treated within eight
months. The START Trial seeks to determine the safety and effectiveness of the
30mm version of the Beta-Cath System in treating "in-stent" restenosis. We
divided 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
received the beta radiation received 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. Although the START Trial protocol discouraged the placement of new
stents, approximately 23% of the enrolled patients received new stents. We
surpassed our targeted enrollment of 386 patients, and enrollment in this trial
was completed as of April 30, 1999. A total of 476 patients were enrolled at 51
sites, located principally in the United States. Follow-up angiogram eight
months after the initial treatment are currently being performed to observe the
treated artery and this process is expected to be completed prior to March 31,
2000. The angiograms will then be analyzed to determine if there has been an
incidence of restenosis and to measure late loss index. We anticipate publishing
our clinical results from the START trial no later than the second quarter of
2000.
We do not anticipate FDA approval to market the Beta-Cath System in the
United States for any indication any earlier than one year after the FDA accepts
our application for filing. Assuming the START Trial yields positive results, we
expect that our application seeking approval to market the Beta-Cath System in
the United States to treat "in-stent" restenosis will be submitted to the FDA in
the second quarter of 2000 and will be based upon the enrollment of 476 patients
in this trial.
The START 40 Trial. In addition, on June 22, 1999 we initiated the START
40 Trial. This multicenter clinical trial enrolled 200 patients who received
vascular brachytherapy using a 40 mm active radiation source train. The START 40
Trial has an identical clinical design to the START Trial and, therefore, we
will use the START Trial's control group in analyzing the clinical data from the
START 40 Trial. The purpose of this trial is to gain regulatory approval for the
longer 40mm radiation source train. Enrollment in this trial of the planned 200
patients was completed on October 22, 1999. We believe the 40mm radiation source
train may be helpful in addressing clinical concerns over the possibility of
"geographic miss" during a vascular brachytherapy procedure. Geographic miss is
the failure to delivery radiation to the intended target balloon-injury area
either due to poor alignment of the radiation source train to the
balloon-induced injury, or using too short a radiation source train compared to
the balloon injury (see further discussion at the "BRIE Trial" on the next
page).
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Feasibility 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.
BRIE Trial. We are currently conducting a 180 patient multicenter,
non-randomized registry trial in Europe, known as the BRIE trial. This registry
started in July 1998 and is intended to enhance market acceptance of the
Beta-Cath System among physicians and to collect additional clinical data to
support reimbursement approvals. As of January 17, 2000, 174 patients had been
enrolled at ten sites. We reported interim clinical results on August 31, 1999
for the first 90 patients who returned for angiographic follow-up and an update
on the first 129 patients (with 152 lesions) was presented at a medical meeting
in Europe on February 2, 2000. These patients were all enrolled prior to the
aforementioned extension of anti-platelet therapy to a minimum of 90 days. The
independent core lab has presented the following data:
PTCA Stent Total
Subgroup Subgroup Population
- --------------------------------------------------------------------------------
NUMBER OF LESIONS 57 95 152
Restenosis - Initial Obstructed Segment(1) 7% 11.7% 9.9%
- --------------------------------------------------------------------------------
(1) For purposes of the interim analysis, the core lab approximated the
target lesion by analyzing the "initial obstructed segment" of the artery,
a 5mm or 10mm segment containing the minimum lumen diameter (MLD).
Restenosis was calculated using the MLD of this segment as compared to the
interpolated reference vessel diameter at follow-up.
The core lab also provided angiographic data on a broader vessel segment
(beyond the target lesion) to determine if there were cases where the radiation
source train did not adequately cover the arterial segment revascularized by
balloon angioplasty or stent placement, a concept generally known in the
clinical community as "geographic miss". Geographic miss often reduces the
effectiveness of radiation because the target tissue is insufficiently dosed.
This broader variable of Target Vessel Restenosis was
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measured with and without late coronary occlusion, an event observed in earlier
vascular brachytherapy trials in a small percentage of stent patients, before
the need for extended anti-platelet therapy (APT) was understood. None of the
patients included in the interim BRIE data analysis received an extended APT
regimen due to the timing of their enrollment. The broader data set is as
follows:
PTCA Stent Total
Subgroup Subgroup Population
- -------------------------------------------------------------------------------
Number of Lesions 57 95 152
Target Vessel Restenosis 21% 34% 29%
Excluding Late Occlusions 20% 28% 25%
- -------------------------------------------------------------------------------
The trials are administered by our clinical and regulatory staff of eight
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 performing follow-up
examinations on patients, could delay completion of the trials for an
indeterminate amount of time. The data from these trials may not demonstrate
safety and effectiveness and may not be adequate to support our application to
the FDA for pre-market approval of the Beta-Cath System. If the Beta-Cath System
does not prove to be safe and effective in clinical trials, our business,
financial condition and results of operations will be materially adversely
affected and it could result in cessation of our business. In addition, the
clinical trials may identify significant technical or other obstacles to
obtaining necessary regulatory approvals.
PRODUCT DEVELOPMENT
Research and development activities are performed by a 24-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 2.7mm 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. The capability of further modifying the length of the radiation source
trains to correspond with varying injury lengths caused by balloons used during
PTCA is a desired feature and we plan to introduce a 60mm system in 2000. 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, 1999,
1998, and 1997 were approximately $ 22.9 million, $21.1 million and $12.9
million, respectively.
SALES AND MARKETING
The Beta-Cath System is not approved by the FDA and is not currently
marketed in the United States. We obtained approval to CE Mark the Beta-Cath
System and to sell it in member countries of the European Union in August 1998.
Upon approval, we anticipate marketing the Beta-Cath System through a
moderately-sized direct sales organization in the United States. The Beta-Cath
System is currently sold by a 22 person direct sales organization (including
administrative personnel) in the larger markets of Europe, including Germany,
France, Switzerland, The Netherlands and Belgium. We believe that our strategy
of maintaining our own direct sales organization dedicated to vascular
brachytherapy will be an important factor in market development and an important
competitive advantage.
In addition to direct sales, we use distributors in the smaller markets or
where local marketing expertise is needed. At December 31, 1999 we had
distributors in Australia, New Zealand, Singapore, China, Turkey, Israel, India,
Denmark, Italy and Spain. Our distribution agreements generally grant the
distributor exclusive rights for the particular territory for a period of three
years. The distributor generally assumes responsibility for obtaining regulatory
and reimbursement approvals for such territory and agrees to certain minimum
marketing expenditures, purchase commitments and not to market another device
that competes directly with the Beta-Cath System. We intend to seek additional
regulatory and reimbursement approvals and choose a distributor in the future in
those markets where the Beta-Cath System is not yet approved. In Japan, we are
planning to work with an independent distributor to obtain
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the appropriate regulatory and reimbursement approvals and to ultimately
distribute the Beta-Cath System, if such approvals are obtained. As of December
31, 1999 we have not conducted any clinical trials in Japan and have not chosen
a distributor.
Since all of our current sales are international in nature, they are
subject to associated risks including economic or political instability,
shipping delays, fluctuations in foreign currency exchange rates and various
trade restrictions, all of which could have a significant impact on the
Company's ability to deliver products on a competitive and timely basis. Future
imposition of, or significant increases in the level of, customs duties, export
quotas, local radiation licensing approvals or other trade restrictions, could
have a material adverse effect on our business, financial condition and results
of operation. The regulation of medical devices, particularly in the European
Community, continues to expand and there can be no assurance that new laws or
regulations will not have an adverse effect on our business.
The Company is directing its sales and marketing efforts at prominent
domestic and international cardiac catheterization laboratories that perform the
majority of the interventional cardiology procedures. The Company believes that
prominent cardiac cath labs are generally more likely to keep abreast of and
utilize new technologies such as the Beta-Cath System for diagnosing and
treating restenosis. After the Company establishes a presence in major medical
centers housing such cardiac cath labs, it then intends to broaden its sales and
marketing efforts to include the growing number of smaller, community-based
cardiac cath labs. The Company's sales and marketing strategy includes
developing and maintaining a close working relationship with its customers in
order to assess and satisfy their needs for products and services. The Company
meets with clinicians both in the United States and Europe periodically to share
ideas regarding the marketplace, existing products, products under development
and existing or proposed research projects.
As part of our strategy to increase the awareness of and acceptance of
vascular brachytherapy and the Beta-Cath System in cardiac cath labs, the
Company will focus on developing peer reviewed journal articles authored by
leading experts in interventional cardiology, sponsoring publication of papers
based on research covering the performance and benefits of the Beta-Cath System
and conducting informational seminars.
Our direct sales activities target all of the medical specialists involved
in vascular brachytherapy: cardiologists, radiation therapists and medical
physicists, which results in a lengthy sales effort. To reach each of these
groups, we are using a multidisciplinary sales force consisting of experienced
medical device salespeople, clinical specialists with nursing experience in
cardiology, and medical physicists experienced in obtaining licenses for new
radioactive medical products.
MANUFACTURING, SOURCES OF SUPPLY AND SCALE-UP
Our manufacturing operations are required to comply with the FDA's quality
systems regulations, which will include an inspection of our manufacturing
facilities prior to pre-market approval. In addition, certain international
markets have quality assurance and manufacturing requirements that may be more
or less rigorous than those in the United States. Specifically, we are subject
to the compliance requirements of ISO 9001 certification and 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 systems regulations.
We have no experience manufacturing our products in the volumes that will
be necessary for us to achieve significant commercial sales. We may not be
successful in establishing or maintaining reliable, high volume manufacturing
capacity at commercially reasonable costs. If we received FDA clearance or
approval for the Beta-Cath System, we will need to expend significant capital
resources and develop manufacturing expertise to establish large scale
manufacturing capabilities. Manufacturers often encounter difficulties in
scaling up production of new products, including problems involving production
yields, quality control and assurance, component supply shortages, shortages of
qualified personnel, compliance with FDA regulations and the need for further
FDA approval of new manufacturing processes. In addition, we believe that
substantial cost reductions in our manufacturing operations will be required for
us to commercialize our catheters and system on a profitable basis. Our
inability to establish and maintain large scale manufacturing capabilities would
have a material adverse effect on our business, financial condition and results
of operations.
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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.
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 $421,900 and $30,800 in 1999 and 1998, respectively, 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.
On October 14, 1999 the Company signed a development and manufacturing
supply agreement with AEA Technologies QSA GmbH for a second source of
radioactive supply and for the development of a smaller diameter radiation
source. The agreement provides for the construction of a production line which
is expected to be finished in February 2001. The cost of this production line is
estimated at $4,000,000 and will be paid by us as construction progresses. In
addition, the agreement provides for joint ownership of all intellectual
property arising from the development work and that AEA may manufacture vascular
brachytherapy sources only for us. The development of the smaller diameter
source may not be successfully completed, the new production line may not be
completed on time or on budget, and the smaller diameter source may not be
manufacturable in commercial quantities.
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, on May
4, 1999 we received United States Patent No. 5,899,882 and on January 11, 2000
we received United States Patent No. 6,013,020. We also have filed a related
United States continuation-in-part application (which is jointly owned by us and
Emory University), and have several additional United States applications
pending covering aspects of our Beta-Cath System. The United States Patent and
Trademark Office has
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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. If further investigation reveals that we may sell a "rapid
exchange" version in the United States without infringing the valid patent
rights of others, we might decide to do so in the future. However, we cannot
assure that we will be able to sell a "rapid exchange" version in the United
States without a license of third party patent rights or that such a license
would be available to us on favorable terms or at all.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that we will not become subject
to patent-infringement claims or litigation or interference proceedings declared
by the United States Patent and Trademark Office to determine the priority of
inventions. The defense and prosecution of intellectual property suits, or
interference proceedings and related legal and administrative proceedings are
both costly and time-consuming. Litigation may be necessary to enforce our
patents, to protect our trade secrets or know-how or to determine the
enforceability, scope and validity of the proprietary rights of others. Any
litigation or interference proceedings will result in substantial expense to us
and significant diversion of effort by our technical and management personnel.
An adverse determination in litigation or interference proceedings to which we
may become a party could subject us to significant liabilities to third parties,
require us to seek licenses from third parties, require us to redesign our
products or processes to avoid infringement or prevent us from selling our
products in certain markets, if at all. Although patent and intellectual
property disputes regarding medical devices have often been settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and could include significant ongoing royalties. Furthermore,
there can be no assurance that the necessary licenses would be available to us
on satisfactory terms, if at all, or that we could redesign our products or
processes to avoid infringement. Any adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
us from manufacturing and selling our products, which would have a material
adverse effect on our business, financial condition and results of operations.
Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous. Accordingly, there can be no assurance
that current and potential competitors, many of which have substantial resources
and have made substantial investments in competing technologies, or other third
parties have not or will not file applications
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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
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, our competitors may independently develop substantially
equivalent proprietary information and techniques, or otherwise gain access to
our proprietary technology, and we may not be able to 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 75% of all PTCA procedures
performed worldwide in 1999. 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/afterloader system
- a radioactive stent; and
- a radioactive fluid-filled or coated balloon.
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In addition, the radiation sources being developed by our competition vary
between gamma, beta and x-ray. 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.
The radioactive guidewire /afterloader system is the most competitive
approach. An afterloader is a specialized piece of equipment that is used to
control movement of a radioactive guidewire and to store and shield the wire
when not in use. For devices that utilize short half-life isotopes, the
afterloader has a computer component to calculate the prescribed treatment time
based on the current decay state of the isotope.
Johnson & Johnson intends to commercialize a gamma guidewire system, which
utilizes technology licensed from Best Medical, Inc. by its Cordis division.
They submitted a premarket approval (PMA) application for an "in-stent"
restenosis indication to the FDA in June 1999. The PMA application was based on
the results of the Gamma 1, SCRIPPS, and WRIST trials, all of which demonstrated
a substantial reduction in restenosis in patients treated with gamma radiation
compared to the placebo control groups. To date, J&J has not announced FDA
approval of its device.
Guidant will also compete in the radioactive guidewire segment. They have
developed the "Galileo" beta-emitting system which consists of a source wire, an
afterloader, and a delivery catheter. Guidant is currently conducting the
multicenter INHIBIT trial which completed enrollment of 310 patients in November
1999. Lastly, Boston Scientific has also developed a beta wire system that is
used in conjunction with an afterloader and a delivery catheter. This device has
been evaluated in a 160-patient dose-finding study in Europe, which produced
positive clinical results. We are not aware of any approvals for Boston
Scientific to conduct a multicenter clinical trial of its device in the U.S.
Guidant has also developed a beta radiation coronary stent, the ACS
MULTI-LINK Radiation Coronary Stent System. They recently initiated a 30-patient
feasibility trial to study the safety of their radioactive stent. A small
private company, Isostent, Inc., has also developed a radioactive stent that has
been evaluated in several clinical trials.
Radioactive fluid filled or coated balloon catheters have been
investigated in small pilot clinical studies, and very little clinical data is
currently available. Radiance Medical 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.
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GOVERNMENT REGULATION
United States
Our Beta-Cath System is regulated in the United States as a medical
device. As such, we are subject to extensive regulation by the FDA, by other
federal, state and local authorities and by foreign governments. The FDA
regulates the clinical testing, manufacture, packaging, labeling, storage,
distribution and promotion of medical devices. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant pre-market clearance or
pre-market approval for devices, withdrawal of marketing approvals, a
recommendation by the FDA that we not be permitted to enter into government
contracts, and criminal prosecution. The FDA also has the authority to request
repair, replacement or refund of the cost of any device manufactured or
distributed.
In the United States, medical devices are classified into one of three
classes (Class I, II or III) on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under FDA
regulations Class I devices are subject to general controls (for example,
labeling, pre-market notification and adherence to good manufacturing practices
or quality systems regulations) and Class II devices are subject to general and
special controls (for example, performance standards, postmarket surveillance,
patient registries, and FDA guidelines). Class III is the most stringent
regulatory category for medical devices. Generally, Class III devices are those
that must receive pre-market approval by the FDA after evaluation of their
safety and effectiveness (for example, life-sustaining, life-supporting or
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.
A pre-market approval application must be supported by valid scientific
evidence, which typically includes extensive data, including preclinical and
human clinical trial data to demonstrate safety and effectiveness of the device.
If human clinical trials of a device are required and the device trial presents
a "significant risk," the sponsor of the trial, usually the manufacturer or the
distributor of the device, is required to file an investigational device
exemption application with the FDA and obtain FDA approval prior to commencing
human clinical trials. The investigational device exemption application must be
supported by data, typically including the results of animal and laboratory
testing. If the investigational device exemption application is approved by the
FDA and one or more appropriate Institutional Review Boards, or "IRBs," human
clinical trials may begin at a specific number of investigational sites with a
specific number of patients, as approved by the FDA.
The pre-market approval application must also contain the results of all
relevant bench tests, laboratory and animal studies, a complete description of
the device and its components, and a detailed description of the methods,
facilities and controls used to manufacture the device. In addition, the
submission should include the proposed labeling, advertising literature and
training methods (if required). Upon receipt of a pre-market approval
application, the FDA makes a threshold determination as to whether the
application is sufficiently complete to permit a substantive review. If the FDA
determines that the pre-market approval application is sufficiently complete to
permit a substantive review, the FDA will accept the application for filing and
begin an in-depth review of the pre-market approval application. An FDA review
of a pre-market approval application generally takes one to two years from the
date the pre-market approval application is accepted for filing, but may take
significantly longer. The review time is often significantly extended by the FDA
asking for more information or clarification of information previously
submitted. During the review period an advisory committee, primarily comprised
of clinicians, will likely be convened to review and evaluate the application
and provide recommendations to the FDA as to whether the device should be
approved. The FDA is not bound by those recommendations. During the review
process of the pre-market approval application, the FDA 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 or
quality systems regulations. To date, the FDA has not inspected our current
compliance with quality systems regulations with respect to the Beta-Cath
System.
If the FDA's evaluation of the pre-market approval application is
favorable, the FDA will either issue an approval letter or an "approvable
letter," containing a number of conditions which must be satisfied in order to
secure the final approval of the pre-market approval application. When and if
those conditions have been fulfilled to the satisfaction of the FDA, the agency
will issue a letter approving a pre-market approval application authorizing
commercial marketing of the device for certain indications. If the FDA's
evaluation of the pre-market approval application or manufacturing facilities is
not favorable, the FDA will deny approval of the pre-market approval application
or issue a "not approvable letter." The FDA may also determine that additional
clinical trials are necessary, in which case approval of the pre-market approval
application could be delayed for several years while additional clinical trials
are conducted and submitted in an amendment to the pre-market approval
application.
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We are currently conducting three 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 second quarter of 2000, and do not anticipate receiving a pre-market
approval for the system until at least one year after such pre-market approval
application is accepted for filing, if at all. There can be no assurance that
the FDA will act favorably or quickly on any of our submissions to the FDA. We
may encounter significant difficulties and costs in our efforts to obtain FDA
approval that could delay or preclude us from selling our products in the United
States. Furthermore, the FDA may request additional data or require that we
conduct further clinical studies, causing us to incur substantial cost and
delay. In addition, the FDA may impose strict labeling requirements, onerous
operator training requirements or other requirements as a condition of our
pre-market approval, any of which could limit our ability to market our systems.
Labeling and marketing activities are subject to scrutiny by the FDA and, in
certain circumstances, by the Federal Trade Commission. FDA enforcement policy
strictly prohibits the marketing of FDA cleared or approved medical devices for
unapproved uses. Further, if a company wishes to modify a product after FDA
approval of a pre-market approval, including any changes that could affect
safety or effectiveness, additional approvals will be required by the FDA. Such
changes include, but are not limited to: new indications for use, the use of a
different facility to manufacture, changes to process or package the device,
changes in vendors to supply components, changes in manufacturing methods,
changes in design specifications and certain labeling changes. Failure to
receive or delays in receipt of FDA approvals, including the need for additional
clinical trials or data as a prerequisite to approval, or any FDA conditions
that limit our ability to market our systems, could have a material adverse
effect on our business, financial condition and results of operations.
Any products we manufacture or distribute pursuant to FDA approvals are
subject to pervasive and continuing regulation by the FDA, including
record-keeping requirements and reporting of adverse experiences with the use of
the device. Device manufacturers are required to register their establishments
and list their devices with the FDA and certain state agencies, and are subject
to periodic inspections by the FDA and those state agencies. The Food, Drug and
Cosmetic Act requires device manufacturers to comply with good manufacturing
practices regulations. A new set of regulations, called the quality systems
regulations, went into effect June 1, 1997. The regulations require that medical
device manufacturers comply with various quality control requirements pertaining
to design controls, purchasing contracts, organization and personnel; device and
manufacturing process design; buildings, environmental control, cleaning and
sanitation; equipment and calibration of equipment; medical device components;
manufacturing specifications and processes; reprocessing of devices; labeling
and packaging; in-process and finished device inspection and acceptance; device
failure investigations; and recordkeeping requirements including compliance
files. The FDA enforces these requirements through periodic inspections of
medical device manufacturing facilities. In addition, a set of regulations known
as the medical device reporting regulations obligates manufacturers to inform
the FDA whenever information reasonably suggests that one of its devices may
have caused or contributed to a death or serious injury, or when one of its
devices malfunctions and, if the malfunction were to recur, the device would be
likely to cause or contribute to a death or serious injury.
Labeling and promotional activities are also subject to scrutiny by the
FDA. Among other things, labeling violates law if it is false or misleading in
any respect or it fails to contain adequate directions for use. Moreover, any
labeling claims that exceed the representations approved by the FDA will violate
the Food, Drug and Cosmetic Act.
Our product advertising is also subject to regulation by the Federal Trade
Commission under the Federal Trade Commission Act, which prohibits unfair
methods of competition and unfair or deceptive acts or practices in or affecting
commerce, including the dissemination of any false advertisement pertaining to
medical devices. Under the Federal Trade Commission's "substantiation doctrine,"
an advertiser is required to have a "reasonable basis" for all product claims at
the time claims are first used in advertising or other promotions.
Our business involves the import, manufacture, 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. We
and/or our supplier of radiation sources must also comply with NRC and United
States Department of Transportation regulations on the labeling and packaging
requirements for shipment of radiation sources to hospitals or other users of
the Beta-Cath System. Further, hospitals and/or physicians in the United States
may be required to amend their radiation licenses to hold, handle and use
Strontium 90 prior to receiving and using our Beta-Cath System.
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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 assurance that we will not be required to incur
significant costs to comply with laws and regulations in the future or that laws
and regulations will not have a material adverse effect upon our business,
financial condition or results of operations.
International
In order for us to market the Beta-Cath System in Europe, Japan and
certain other foreign jurisdictions, we must obtain and retain required
regulatory approvals and clearances and otherwise comply with extensive
regulations regarding safety and manufacturing processes and quality. These
regulations, including the requirements for approvals or clearance to market and
the time required for regulatory review, vary from country to country, and in
some instances within a country. There can be no assurance that we will obtain
regulatory approvals in such countries or that we will not be required to incur
significant costs in obtaining or maintaining our foreign regulatory approvals.
Delays in receipt of approvals to market our products, failure to receive these
approvals or future loss of previously received approvals could have a material
adverse effect on our business, financial condition, and results of operations.
The time required to obtain approval for sale in foreign countries may be
longer or shorter than that required for FDA approval, and the requirements may
differ. The European Union has promulgated rules requiring that medical devices
placed on the market after June 14, 1998 bear CE marking, a legal symbol
attesting to compliance with the appropriate directive which, in our case, is
the medical devices directive. We qualified to apply CE marking to the Beta-Cath
System in August 1998, which allows us to sell the device in the 18 countries of
the European Economic Area, or EEA, and Switzerland. Although the medical
devices directive is intended to ensure free movement within the EEA of medical
devices that bear the CE marking, many countries in the EEA have imposed
additional requirements, such as labeling in the national language and
notification of placing the device on the market. In addition, regulatory
authorities in European countries can demand evidence on which conformity
assessments for CE-marked devices are based and in certain circumstances can
prohibit the marketing of products that bear the CE marking. Many European
countries maintain systems to control the purchase and reimbursement of medical
equipment under national health care programs, and the CE marking does not
affect these systems. The Company's products have not received regulatory
approval in Japan nor have they been approved for government reimbursement in
Japan.
In addition, there are generally foreign regulatory barriers other than
pre-market approval (including separate regulations concerning the distribution,
use, handling and storage of radiation sources), and the export of devices must
be in compliance with FDA regulations. The distribution and use of the Beta-Cath
System outside the United States is subject to radiation regulatory requirements
that vary from country to country and sometimes vary within a given country.
Generally, each country has a national regulatory agency responsible for
regulating the safe practice and use of radiation in its jurisdiction. In
addition, each hospital desiring to use the Beta-Cath System is generally
required to amend its radiation license to hold, handle and use the Strontium 90
sources in our device. Generally, these licenses are specific to the amount and
type of radioactivity utilized. In addition, generally the use of a radiation
source by a physician, either for a diagnostic or therapeutic application, also
requires a license, which again is specific to the isotope and the clinical
application.
Obtaining any of the foregoing radiation-related approvals and licenses
can be complicated and time consuming. If we or any hospital or physician is
significantly delayed in obtaining any of the foregoing approvals or any of
those approvals are not obtained, our business, financial condition and results
of operations could be materially adversely affected.
THIRD PARTY REIMBURSEMENT
We expect that our sales volumes and prices of our products will be
heavily dependent on the availability of reimbursement from third-party payors
and that individuals may not be willing or able to pay directly for 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
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procedure performed, the third-party payor, the insurance plan, and other
factors. Medicare reimburses hospitals a prospectively determined fixed amount
for the costs associated with an in-patient hospitalization based on the
patient's discharge diagnosis, and reimburses physicians a prospectively
determined fixed amount based on the procedure performed, regardless of the
actual costs incurred by the hospital or physician in furnishing the care and
unrelated to the specific devices used in that procedure. Medical and other
third-party payors are increasingly scrutinizing whether to cover new products
and the level of reimbursement for covered products.
The FDA has classified the Beta-Cath System as an experimental device and
accordingly its use in the human clinical trials in the United States is not
reimbursable under the Medicare program or by private insurers until after the
pre-market approval is achieved, if ever. The classification of the Beta-Cath
System as experimental has materially increased the costs of conducting clinical
trials in the United States, and such costs have had a material effect on our
business, financial condition and results of operations.
In international markets, market acceptance of the Beta-Cath System may be
dependent in part upon the availability of reimbursement within the prevailing
healthcare payment systems. Reimbursement systems vary significantly by country,
and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. In foreign markets, reimbursement is
obtained from a variety of sources, including government sponsored healthcare
and private health insurance plans. In some countries the healthcare systems are
centrally organized, but in most cases there is a degree of regional autonomy
either in deciding whether to pay for a particular procedure or in setting the
reimbursement level. The way in which new devices enter the healthcare system
depends on the system: there may be a national appraisal process leading to a
new procedure or product coding, or it may be a local decision made by the
relevant hospital department. The latter is particularly the case where |a
global payment is made that does not detail specific technologies used in the
treatment of a patient. In most foreign countries there are also private
insurance plans that may offer reimbursement for alternative therapies. Although
not as prevalent as in the United States, managed care is gaining prevalence in
certain European countries. We will seek international reimbursement approvals,
although there can be no assurance that any such approvals will be obtained in a
timely manner or at all. Failure to receive international reimbursement
approvals could have an adverse effect on market acceptance of our products in
the international markets in which such approvals are sought.
We believe that reimbursement in the future will be subject to increased
restrictions such as those described above, both in the United States and in
foreign markets. We believe that the overall escalating cost of medical products
and services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products we offer. In the United States or foreign
markets third-party reimbursement and coverage may not be available or adequate,
current reimbursement amounts may be decreased in the future and future
legislation, regulation, or reimbursement policies of third-party payors could
have a material adverse affect on 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, such claims could be
asserted and we may not have sufficient resources to satisfy any liability
resulting from such claims. We maintain product liability insurance with
coverage of an annual aggregate maximum of $8 million. Product liability claims
could exceed such insurance coverage limits, such insurance may not continue to
be available on commercially reasonable terms or at all, and a product liability
claim could have a material adverse affect on our business, financial condition
or results of operations.
EMPLOYEES AND CONSULTANTS
As of December 31, 1999 we directly employed 118 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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ADDITIONAL RISK FACTORS
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 started to actively sell the Beta-Cath System in Europe and
certain Asian countries in 1999. We anticipate that for the foreseeable future
we will be solely dependent on the successful development and commercialization
of the Beta-Cath System. Our failure to commercialize the Beta-Cath System would
have a material adverse effect on our business, financial condition and results
of operations.
The Beta-Cath System will require further development and clinical
testing, as well as regulatory approval, before we can market it in the United
States. Our development efforts and clinical testing may not be successful. In
addition, we may be unable to:
- Show the safety and effectiveness of the Beta-Cath System in
placebo-controlled human clinical trials;
- Obtain regulatory approval of the Beta-Cath System;
- Manufacture the Beta-Cath System in commercial quantities at
acceptable costs;
- Gain any significant degree of market acceptance of the
Beta-Cath System among physicians, patients and health care
payors; or
- Demonstrate that the Beta-Cath System is an attractive and
cost-effective alternative or complement to other procedures,
including coronary stents and competing vascular brachytherapy
devices.
Commercialization of the Beta-Cath System in Europe is subject to certain
additional risks. Physicians in Europe are generally less receptive to and
slower to adopt new medical devices and technologies than physicians in the
United States due to various factors, 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. Our sales in 1999 aggregated
$1,823,394.
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.
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, 1999 we had accumulated a deficit of approximately $83.2
million since our inception in 1992. The commercialization of the Beta-Cath
System and other new products, if any, will require substantial additional
development, clinical, regulatory, manufacturing, sales and marketing and other
expenditures. We expect our operating losses to continue through at least 2000
as we continue to expand our product development, clinical trials and marketing
efforts. We may never commercialize the Beta-Cath System or any other product or
achieve profitability.
CLINICAL TESTING OF BETA-CATH SYSTEM; NO ASSURANCE OF ITS SAFETY AND EFFICACY
The safety and effectiveness of the Beta-Cath System has not been
determined in a placebo-controlled, pivotal trial. We are currently conducting
three multi-center human clinical trials of the Beta-Cath System to determine
its safety and effectiveness. At September 30, 1999 we completed enrollment in
both the PTCA and stent placement subgroups of the Beta-Cath System Trial and
had enrolled a total of 1,456 patients at 58 clinical sites. We completed
enrollment in the START Trial in April 1999, having enrolled 476 patients at 51
sites, principally located in the United States.
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As is typical for patients receiving stent placement, the patients in the
stent placement subgroup of the Beta-Cath System Trial receive anti-platelet
therapy to prevent stent thrombosis, a condition which can lead to acute closure
of the treated artery. Stent thrombosis typically occurs within 30 days of
treatment in a small percentage of patients receiving stent placement. There
were incidences of stent thrombosis reported in the Beta-Cath System Trial.
These patients developed the condition later following their treatment than is
normally observed. As a result, in November 1998, we modified the Trial protocol
for the stent placement subgroup to extend the anti-platelet therapy from two
weeks to 60 days following stent placement and to provide for additional
follow-up contact with these patients in the second, third and fourth months
after treatment. On April 27, 1999 we announced approval of our intention to
increase patient enrollment in the stent placement subgroup of the Trial by up
to 300 more patients and to extend the anti-platelet therapy to a minimum of 90
days following stent placement. These changes were made based upon a
recommendation made by the Data Safety and Monitoring Board (DSMB) at its March
1999 meeting. Based on its review of the available data set, including the
incidence of major adverse cardiac events, the DSMB proposed these changes to
ensure sufficient data to evaluate the safety and effectiveness of the Beta-Cath
System with the revised anti-platelet therapy protocol.
All three of our current pivotal trials require follow-up examinations
with patients after eight months. It is only after analysis of a statistically
significant number of patients in one of these trials that we would apply for
the regulatory approvals required to commence marketing the Beta-Cath System in
the United States. Various factors, including 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 the
safety and effectiveness of the Beta-Cath System and may not be adequate to
support our application to the FDA for pre-market approval. In particular, we
cannot be sure that (1) the incidence of stent thrombosis seen in the Beta-Cath
System Trial will be resolved by the protocol modification, (2) the incidence of
geographic miss seen in the BRIE trial and other trials by our competitors will
be addressed by better physician training and technique and the use of longer
radiation sources, or (3) the doses used will provide optimal results. If the
Beta-Cath System does not prove to be safe and effective in clinical trials, our
business, financial condition and results of operations will be materially
adversely affected. In addition, the clinical trials may identify significant
technical or other obstacles to obtaining necessary regulatory approvals.
Because vascular brachytherapy in human coronary arteries is a relatively new
treatment, the long-term effects on patients are not known and likely will not
be known for several years. As a result, even if our current clinical trials
indicate the Beta-Cath System is safe and effective over an eight-month period,
we cannot be sure that the Beta-Cath System will be safe and effective over the
long term.
NO ASSURANCE OF REGULATORY APPROVALS
United States Pre-Market Approvals.
We will not be able to commence marketing or commercial sales of the
Beta-Cath System in the United States unless we receive pre-market approval from
the FDA. We do not expect to submit a pre-market approval application until the
second quarter of 2000 at the earliest, following analysis of a statistically
significant number of patients in the START Trial.
We do not anticipate FDA approval to market the Beta-Cath System in the
United States for any indication any earlier than one year after the FDA accepts
our application for filing. Assuming the START Trial yields positive results, we
expect that our application seeking approval to market the Beta-Cath System in
the United States to treat "in-stent" restenosis will be submitted to the FDA
first and will be based upon the enrollment of 476 patients in that Trial. The
FDA could require that we submit results from our Beta-Cath System Trial prior
to considering our initial application for approval of our device in treating
"in-stent" restenosis. Instead of filing an additional, separate application, we
may amend our initial application relating to "in-stent" restenosis to seek
pre-market approval of the Beta-Cath System for use following PTCA and stent
placement based upon the results of the Beta-Cath System Trial. If we file such
an amendment, the FDA would restart the statutory review period for our initial
application as of the date of the filing of the amendment. This would cause a
delay in obtaining FDA approval. Moreover, if either Trial does not yield
positive results, the FDA's consideration of any application we have submitted
could be adversely affected; any such application could be refused filing for
substantive review, or if filed, could be subject to requests for substantial
amounts of additional information, or ultimately could be denied approval.
The FDA may request additional data or require that we conduct further
clinical trials, either of which could delay or preclude our receipt of
pre-market approval as well as require significant additional expenditures. Such
a delay or failure to receive pre-market approval would have a material adverse
effect on our business, financial condition and results of operations and could
result in cessation of our operations. Even if we receive approval based on the
results of the START Trial, we will be limited to marketing the Beta-Cath System
for use with patients who are being treated for "in-stent" restenosis in a
single coronary artery. In order to market the Beta-Cath System for a broader
range of patients, we will seek to expand the indications for which the
Beta-Cath System can be marketed to include patients receiving PTCA or stent
placement. Even if we receive approval based on the results of the Beta-Cath
System Trial, we would be limited to marketing the Beta-Cath System for use with
patients who are being treated for one lesion in a
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single coronary artery following PTCA or stent placement. In order to market the
Beta-Cath System for use with a broader range of patients, we will likely be
required to demonstrate to the FDA through additional clinical trials that the
Beta-Cath System is safe and effective in treating a broader range of
indications and the FDA must approve a pre-market approval application,
application amendment or application supplement covering the broader range of
indications for the device.
Foreign Pre-Market Approvals.
Sales of the Beta-Cath System outside the United States are subject to
regulatory requirements that vary widely from country to country but generally
include pre-marketing governmental approval. The time required to obtain
approval for sale in foreign countries may be longer or shorter than required
for FDA approval, and the requirements for the conduct of clinical trials,
marketing authorization, pricing and reimbursement differ from those in the
United States. Moreover, the export of medical devices from the United States
must be in compliance with FDA regulations. In August 1998 we qualified to apply
CE marking to the Beta-Cath System, a requirement necessary to sell our device
in most of Western Europe. We are subject to continuing audit and reporting
requirements related to this marking. We may be delayed or precluded from
marketing the Beta-Cath System in other foreign countries. Foreign pre-market
and other regulatory approvals of the Beta-Cath System, if granted, may include
significant limitations on the indicated uses for which the device may be
marketed.
Approvals to Use, Handle and Transfer Radioactive Materials.
Our business involves the import, manufacture, transfer, use and disposal
of Strontium 90 (Strontium/Yttrium), the beta-emitting radioisotope utilized in
the Beta-Cath System's radiation source train. Accordingly, manufacture,
distribution, use and disposal of the radioactive material used in the Beta-Cath
System in the United States will be subject to federal, state and/or local laws
and regulations relating to the use and handling of radioactive materials.
Specifically, we must obtain approval from the State of Georgia Department of
Natural Resources to commercially distribute our radiation sources to licensed
recipients in the United States. In addition, we must also comply with NRC,
Georgia and United States Department of Transportation regulations on the
labeling and packaging requirements for shipment of radiation sources to
hospitals or other users of the Beta-Cath System. Further, hospitals and/or
physicians in the United States may be required to amend their radiation
licenses to hold, handle and use Strontium 90 prior to receiving and using our
Beta-Cath System.
The distribution and use of the Beta-Cath System outside the United States
is subject to radiation regulatory requirements that vary from country to
country and sometimes vary within a given country. Generally, each country has a
national regulatory agency responsible for regulating the safe practice and use
of radiation in its jurisdiction. In addition, each hospital desiring to use the
Beta-Cath System is generally required to amend its license to store, handle and
receive the Strontium 90 sources in our device. Generally, these licenses are
specific to the amount and type of radioactivity utilized. In addition,
generally the use of a radiation source by a physician, either for a diagnostic
or therapeutic application, also requires a license, which again is specific to
the isotope and the clinical application.
Obtaining any of the foregoing radiation-related approvals and licenses
can be complicated and time consuming. If we or any hospital or physician is
significantly delayed in obtaining any of the foregoing approvals or any of
those approvals are not obtained, our business, financial condition and results
of operations could be materially adversely affected.
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;
21
<PAGE>
- 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 will be sufficient to fund the Company
through 2000. We cannot assure that additional financing, if required, will be
available on satisfactory terms, or at all.
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.
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.
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.
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.
22
<PAGE>
ISSUANCE OF PREFERRED STOCK MAY ADVERSELY AFFECT RIGHTS OF COMMON SHAREHOLDERS
OR DISCOURAGE A TAKEOVER
Under our amended and restated articles of incorporation, our board of
directors has the authority to issue up to 5,000,000 shares of preferred stock
and to determine the price, rights, preferences and privileges of those shares
without any further vote or action by our shareholders. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any shares of preferred stock that may be issued in
the future.
In October 1996 our board of directors authorized 1,000,000 shares of
Series A Participating Preferred Stock in connection with its adoption of a
shareholder rights plan, under which we issued rights to purchase Series A
Participating Preferred Stock to holders of the common stock. Upon certain
triggering events, such rights become exercisable to purchase common stock (or,
in the discretion of our board of directors, Series A Participating Preferred
Stock) at a price substantially discounted from the then current market price of
the common stock. Our shareholder rights plan could generally discourage a
merger or tender offer involving our securities that is not approved by our
board of directors by increasing the cost of effecting any such transaction and,
accordingly, could have an adverse impact on shareholders who might want to vote
in favor of such merger or participate in such tender offer.
While we have no present intention to authorize any additional series of
preferred stock, such issuance, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could also
have the effect of making it more difficult for a third party to acquire a
majority of our outstanding voting stock. The preferred stock may have other
rights, including economic rights senior to the common stock, and, as a result,
the issuance thereof could have a material adverse effect on the market value of
the common stock.
OTHER PROVISIONS DISCOURAGING A TAKEOVER
The amended and restated articles of incorporation provide for a
classified board of directors, the existence of which could discourage attempts
to acquire us. Furthermore, we are subject to the anti-takeover provisions of
the Florida Business Corporation Act, the application of which would also have
the effect of delaying or preventing a merger, takeover or other change of
control of the Company and therefore could discourage attempts to acquire the
Company.
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 1, 2000, the
closing price of our common stock ranged from a high of $30.25 per share to a
low of $11.00 per share and ended that period at $23.375 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.
23
<PAGE>
PART II
Item 5 . MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market (Nasdaq
symbol: NOVT) since May 1996. The number of record holders of the Company's
Common Stock at February 1, 2000 was 121, excluding beneficial owners of shares
registered in nominee or street name. The Company has not paid any dividends
since its inception, other than the distribution of the Shareholder Rights
described in Item 1: Issuance Of Preferred Stock May Adversely Affect Rights of
Common Shareholders or Discourage a Takeover, and does not intend to pay any
dividends in the foreseeable future.
The range of high and low closing sale prices for the Common Stock is as
follows:
QUARTER ENDED HIGH LOW
----------------------- ------- ------
Year Ended December 31,
1998
March 31, 1998 $ 31.813 $ 21.50
June 30, 1998 $ 27.125 $22.063
September 30, 1998 $ 23.000 $ 11.00
December 31, 1998 $ 28.375 $11.438
Year Ended December 31,
1999
March 31, 1999 $ 30.25 $18.875
June 30, 1999 $ 27.875 $ 19.75
September 30, 1999 $ 24.75 $16.875
December 31, 1999 $ 17.688 $ 11.00
On February 1, 2000 the last reported sale price for the Common Stock was
$23.375.
Item 6. 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, 1999, 1998 and 1997 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 Report on Form
10-K. The selected consolidated financial data as of and for the years ended
December 31, 1996 and 1995 are derived from our financial statements which have
also been audited by Ernst & Young LLP and which have not been included in this
Report on Form 10-K. 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 Report on Form 10-K.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales and revenues ................... $ 1,823 $ 19 $ 29 $ -- $ 17
Costs and expenses:
Cost of sales .......................... 1,642 117 -- -- --
Research and development ............... 22,889 21,089 12,873 4,647 2,089
Sales and Marketing .................... 6,606 3,074 1,022 581 659
General and administrative ............. 3,775 2,528 1,736 1,575 466
-------- -------- -------- -------- --------
Loss from operations ...................... (33,089) (26,789) (15,602) (6,803) (3,197)
Interest income (expense), net ........... 2,169 2,127 1,389 864 (21)
-------- -------- -------- -------- --------
Net loss ................................. $(30,920) $(24,662) $(14,213) $ (5,939) $ (3,218)
======== ======== ======== ======== ========
Basic and diluted net loss per share(1) .. $ (2.30) $ (2.34) $ (1.64) $ (0.91) $ (0.87)
======== ======== ======== ======== ========
Weighted average shares outstanding(1) ... 13,433 10,536 8,665 6,543 3,679
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................... $ 38,821 $21,797 $46,064 $26,849 $ (906)
Total assets...................... 49,367 29,482 49,796 29,255 2,057
Accumulated deficit............... (83,201) (52,281) (27,619) (13,406) (7,467)
Total shareholders' equity ....... 43,065 24,517 47,369 28,434 318
</TABLE>
- --------------
(1) See note 1 to the consolidated financial statements for an explanation of
the method used to compute net loss per share.
Item 7. 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 we earned minimal revenues and
experienced significant losses in each period. At December 31, 1999 we had an
accumulated deficit of approximately $83.2 million. We expect to continue to
incur significant operating losses through at least 2000 as we complete 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. 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
2000.
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 State of Georgia Department of Natural
Resources or other state or foreign governmental agencies. Our research and
development efforts may not be successfully completed. We may not successfully
introduce the Beta-Cath System or attract any significant level of market
acceptance for the Beta-Cath System or any other product we develop. We may
never achieve significant revenues from sales of our Beta-Cath System and we may
never achieve or sustain profitability.
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 1999 and 1998
The net loss for the year ended December 31, 1999 was $30,920,000, or
($2.30) per share, as compared to $24,662,000, or ($2.34) per share, for the
year earlier. The increase in net loss for the year ended December 31, 1999 was
due primarily to increased spending related to the Company's clinical trials as
well as sales and marketing expenses related to the Company's direct sales
operation in Europe.
Net Sales and Revenues. Net sales and revenues were $1,823,000 for the
year ended December 31, 1999 as compared to $19,000 for the year ended December
31, 1998. The Company recorded its first sale of the Beta-Cath System in
December 1998 and began actively marketing the device during the second quarter
of 1999. Net sales and revenues includes sales of the Beta-Cath catheter and
installation fees for the Beta-Cath transfer device. The Company's distributor
for the markets of Australia, New Zealand and China accounted for 14% of net
sales in 1999.
Cost of Sales. Cost of sales consist primarily of direct labor, allocated
manufacturing overhead, third-party contractor costs, royalties and the
acquisition cost of raw materials and accessories. Our gross margin in 1999 was
$181,000, or 10% of net sales, compared to a negative gross margin of ($98,000)
in 1998. The increase in gross margin on both an absolute and percentage basis
is
25
<PAGE>
due to the higher sales and production volumes and improved production yields as
the Company transitions out of the start-up phase. The Company expects gross
margins to continue to improve in the future with higher sales and production
volumes.
Research and Development Expenses. Research and development expenses
increased 9% to $22,889,000 for the year ended December 31, 1999 from
$21,089,000 for the year ended December 31, 1998. These increases were primarily
a result of (a) costs of patient enrollment and follow-up in three pivotal
clinical trials: the Beta-Cath System Trial, the START Trial and the START 40
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) legal and filing costs
associated with domestic and foreign patent applications; and (d) costs related
to the ongoing development of the Beta-Cath System; including a smaller
radiation source and catheter.
Sales and Marketing Expenses. Sales and marketing expenses increased 215%
to $6,606,000 for the year ended December 31, 1999 from $3,074,000 for the year
ended December 31, 1998. 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 expenses to increase
significantly in the future as distribution is expanded in Europe, and if and
when the Beta-Cath System is approved by the FDA and launched commercially in
the U.S.
General and Administrative Expenses. General and administrative expenses
increased 49% to $3,775,000 for the year ended December 31, 1999 from $2,528,000
for the year ended December 31, 1998. 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. The
Company expects general and administrative expenses to increase in the future in
support of a higher level of operations.
Interest Income. Interest income increased 2% to $2,169,000 for the year
ended December 31, 1999 from $2,127,000 for the year ended December 31, 1998.
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 March 1999.
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.
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.
Sales and Marketing Expenses. Sales and 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.
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
26
<PAGE>
management personnel, higher salaries and costs associated with the installation
and implementation of the Company's new software system.
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.
LIQUIDITY AND CAPITAL RESOURCES
During the years ended December 31, 1999, 1998 and 1997, the Company used
cash to fund operations of $30.7 million, $21.4 million and $11.7 million,
respectively. 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. At December 31, 1999,
the Company had commitments to purchase $3.7 million in inventory components of
the Beta-Cath System. In addition, on October 14, 1999 the Company signed a
development and manufacturing supply agreement with AEA Technologies QSA GmbH
for a second source of radioisotope supply and for the development of a smaller
diameter source. This agreement provides for the construction of a production
line over the period October 1, 1999 to February 2001. The cost of this
production line is estimated at $4,000,000 and will be paid by the Company as
construction progresses. 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 approximately $9 million.
The Company's principal source of liquidity at December 31, 1999 consisted
of cash, cash equivalents and short-term investments of $41.4 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, 1999.
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
2000. However, the Company's ability to continue its operations is dependent
upon the successful execution of financings and achieving profitable operations.
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
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. Expenses in
connection with remediating its systems were not significant. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
The Company will continue to monitor its mission critical computer applications
and those of its suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
27
<PAGE>
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's cash equivalents and short-term investments are subject to market
risk, primarily interest-rate and credit risk. The Company's investments are
managed by outside professional managers within investment guidelines set by the
Company. Such guidelines include security type, credit quality and maturity and
are intended to limit market risk by restricting the Company's investments to
high credit quality securities with relatively short-term maturities.
The table below presents principal amounts and related weighted average interest
rates by year of maturity for the Company's investment portfolio. All
investments mature, by policy, in one year or less.
<TABLE>
<CAPTION>
Fair Value
(in thousands) 2000 2001 2002 2003 Total 12/31/99
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash equivalents
Fixed rate $6,801 $-- $-- $-- $6,801 $6,801
Average interest rate 5.92%
Available for sale investments
Fixed rate 34,333 -- -- -- 34,333 34,333
Average interest rate 5.55%
</TABLE>
FOREIGN CURRENCY RISK
International revenues from the Company's foreign direct sales and distributor
sales comprised 100% of total revenues for the year ended December 31, 1999.
With the exception of the Australian, Chinese and New Zealand distributor, which
sales are denominated in U.S. dollars, sales are denominated in Euros. The
Company experienced an immaterial amount of transaction gains and losses for the
year ended December 31, 1999. The Company is also exposed to foreign exchange
rate fluctuations as the financial results of its Dutch, Belgian, German and
French subsidiaries are translated into U.S. dollars in consolidation. As
exchange rates vary, these results when translated, may vary from expectations
and adversely impact overall expected profitability. The net effect of foreign
exchange rate fluctuations on the Company during the year ended December 31,
1999 was not material.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, with the report of the independent
auditors, listed in Item 14, are included in this Annual Report on Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
Not applicable.
28
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
NAME AGE POSITION
---- --- --------
Thomas D. Weldon... 44 Chairman
William A. Hawkins. 45 Chief Executive Officer,
President and Director
David N. Gill...... 45 Chief Operating Officer and
Chief Financial Officer
Raoul Bonan, M.D... 52 Vice President, Clinical
Affairs and Medical Director
Michel E. Lussier.. 43 Vice President, European Operations
Joan M. Macdonald, Ph.D. 42 Vice President, Regulatory Affairs
Cheryl R. Johnson.. 37 Vice President, Investor Relations and
Business Development and Secretary
Adam G. Lowe ...... 37 Vice President, Quality
Assurance
Donald J. Webber .. 37 Vice President, Manufacturing
Donald C. Harrison, M.D 65 Director(2)
J. Stephen Holmes.. 56 Director(1)
Stephen I. Shapiro. 55 Director(1)
Charles E. Larsen.. 48 Director
Pieter J. Schiller. 61 Director(2)
Norman R. Weldon, Ph.D 65 Director
William E. Whitmer. 66 Director(2)
- ----------------
(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 a
Director since our capitalization in May 1992, becoming Chairman in June 1998.
Mr. Weldon also served as Chief Executive Officer from May 1992 until April
1999, upon the promotion of Mr. Hawkins. On April 1, 1999 Mr. Weldon and Mr.
Larsen co-founded The Innovation Factory, a life sciences company incubator. Mr.
Weldon serves as the Chairman and Chief Executive Officer of The Innovation
Factory. 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, joined
the Company as President in June 1998 and became Chief Executive Officer in
April 1999. 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.
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
29
<PAGE>
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 upon 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. In September 1999 Dr. Bonan completed his leave of
absence and returned to clinical practice at the Montreal Heart Institute. He
has agreed to continue to serve as our Medical Director and Vice President of
Clinical Affairs on a part-time basis through August 31, 2000. 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.
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.
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.
Adam G. Lowe. Mr. Lowe joined the Company in June 1999 as our Vice
President, Quality Assurance. From July 1993 to June 1999 Mr. Lowe worked for
various divisions of C.R. Bard, Inc., a diversified medical device manufacturer,
having served most recently as the Vice President, Quality at Bard Access
Systems. Mr. Lowe received a B.S. in Materials Science and Engineering from
North Carolina State University and became an ASQ Certified Quality Engineer in
1992.
Donald J. Webber. Mr. Webber joined the Company in March 1998 as Director
of Manufacturing and has served as our Vice President, Manufacturing since
January 2000. From July 1996 through March 1998, Mr. Webber worked for Abiomed,
Inc., a manufacturer of cardiac products, as Director of Operations. From
January 1995 to July 1996, Mr. Webber was employed by Cabot Medical Corporation,
a medical device manufacturer, as Plant Manager and from 1988 to 1995 he was
employed by Cordis Corporation, a manufacturer of cardiovascular products. Mr.
Webber received an MBA from Nova Southeastern University and a B.S. degree in
Industrial Engineering from the State University of New York, Binghamton.
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., is currently a member of the Medical Advisory Board of The
Proctor & Gamble Company and also serves as a director of four private,
healthcare-related companies. 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.
30
<PAGE>
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.
Charles E. Larsen. Mr. Larsen co-founded the Company and has served as a
Director since our capitalization in May 1992. From February 28, 1997 until May
3, 1999 Mr. Larsen was Senior Vice President and Chief Technical Officer of the
Company, having served from May 1992 through February 1997 as our Senior Vice
President and Chief Operating Officer. Effective May 3, 1999, Mr. Larsen
resigned as an employee of Novoste and signed a one-year agreement to provide
technical consulting services. On April 1, 1999 Mr. Larsen co-founded The
Innovation Factory, a life sciences company incubator, with Mr. Weldon. Mr.
Larsen serves as the President of The Innovation Factory. Mr. Larsen co-founded
and was Vice President and Director of Novoste Puerto Rico, Inc. 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.
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, now integrated into IBM's healthcare
consulting group with clients in the health care industry. Since 1999, he has
also been employed with two venture capital firms, Advanced Technology Ventures
and Galen Associates. 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. Since 1987, Mr. Schiller has been a general partner of
Advanced Technology Ventures ("ATV"), a venture capital firm located in Waltham,
Massachusetts, where he specializes in health care investing. Mr. Schiller
served as a Director of CollaGenex Phamaceuticals, Inc. from September 1995
until June 1999. In addition, he currently serves as a director of eight
private, health-care related companies as a representative of ATV. Prior to ATV,
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. Dr. Weldon serves on the Advisory Board of the
Investment Company of America and as a director of two of its funds. 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.
Dr. Norman R. Weldon is the father of Mr. Thomas D. Weldon.
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.
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 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 Class II directors: Dr.
Donald C. Harrison, William A. Hawkins and Pieter J.
31
<PAGE>
Schiller, will expire at the annual meeting of shareholders in 2001; 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 2002.
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. Donald C. Harrison, 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. On November 12, 1999
the Board granted each of its non-employee directors a five-year non-qualified
stock option to purchase 5,000 shares of our common stock at an exercise price
of $13.75 per share. All of these options become exercisable at the earlier of
March 31, 2001 or the date of the 2001 Annual Meeting. Vesting of these options
ceases on such date as the option holder ceases to serve as a director.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid or
accrued by us during 1997, 1998 and 1999 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 1999 and whose compensation during 1999
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 (1) COMPENSATION (7)
- ---------------------------- ---- -------- -------- -------------- ---------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas D. Weldon ............... 1999 $193,769(13) $ 46,505 -- -- -- $ 2,769
Chairman and CEO (2) .......... 1998 242,923 84,219 -- -- -- 1,974
1997 182,500 19,600 -- -- -- 1,460
William A. Hawkins(2) .......... 1999 287,500 72,000 -- $518,750(4) 25,000 2,769
President and CEO ............. 1998 160,417 49,127 $ 91,635(3) 360,500(5) 460,000 2,056
David N. Gill .................. 1999 219,300 53,664 -- 235,625(6) 60,000 3,333
Chief Operating Officer ...... 1998 201,578 59,743 -- -- 30,000 3,333
and Chief Financial Officer .. 1997 160,000 28,200 25,000(3) -- 35,000 2,250
Raoul Bonan, M.D ............... 1999 177,576(9) 40,000 15,454(3) -- -- 83,333(10)
VP -- Clinical Affairs ....... 1998 125,277 207,000(8) 16,028(3) -- 125,000 2,343
Michel Lussier ................. 1999 139,493 43,248 31,341(11) -- 10,000 11,957(12)
VP - European Operations ..... 1998 33,343 -- -- -- 98,900 --
Joan M. Macdonald, Ph.D ........ 1999 140,550 28,600 -- -- 10,000 2,439
VP - Regulatory Affairs ...... 1998 130,449 33,207 -- -- 25,000 2,240
1997 117,500 13,800 -- -- -- 1,599
</TABLE>
- --------
(1) See "Stock Options" below for the exercise price and vesting terms of the
options granted.
(2) On April 1, 1999 Mr. Hawkins succeeded Mr. Weldon as Chief Executive
Officer.
(3) Consists of reimbursement of moving and temporary living expenses.
32
<PAGE>
(4) Consists of 25,000 restricted shares, with the value based upon the $20.75
per share closing sales price of our common stock on July 1, 1999. These
shares contain restrictions which lapse at the annual rate of 8,333
shares, commencing July 1, 2000.
(5) 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. These
shares contain restrictions which lapse at the annual rate of 3,500
shares, commencing June 1, 1999.
(6) Consists of 10,000 restricted shares, with the value based upon the $23.56
per share closing sales price of our common stock on February 8, 1999.
These shares contain restrictions which lapse at the annual rate of 2,500
shares, commencing February 8, 2000.
(7) Consists of employer contributions to the Defined Contribution 401(k)
Plan, except for Dr. Bonan.
(8) 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.
(9) Part-time employee effective September 1, 1999 until August 31, 2000.
(10) Consists of a loan in the amount of $80,000 which the Company has agreed
to forgive on August 31, 2000 and $3,333 of employer contributions to the
Defined Contribution 401(K) Plan.
(11) Consists of payments made to the Belgian social security system and a
private pension plan.
(12) Consists of an automobile allowance.
(13) $105,769 of this amount is attributable to the period of 1999 when
Mr. Weldon served as CEO.
STOCK OPTIONS
The following table sets forth certain information concerning options
granted in 1999 to executive officers named in the Summary Compensation Table:
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE APPRECIATION FOR
SECURITIES OPTIONS OPTION TERM(2)
UNDERLYING GRANTED TO EXERCISE ------------------------------
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 ............. 25,000 4.6% 11.00 10/26/09 $ 172,946 $ 438,279
David N. Gill .................. 50,000 9.2% 23.56 2/8/09 740,838 1,877,429
10,000 1.8% 11.00 10/26/09 69,178 175,312
Michel Lussier ................. 10,000 1.8% 11.00 10/26/09 69,178 175,312
Joan M. Macdonald .............. 10,000 1.8% 11.00 10/26/09 69,178 175,312
</TABLE>
- ----------
(1) All options become fully exercisable upon a Change of Control (as defined
in our stock option plan covering employees). Each grant 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.
(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.
OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information concerning the number
and value realized of options exercised during 1999, and the number and value of
unexercised options held as at December 31, 1999, by the individuals named in
the Summary Compensation Table.
33
<PAGE>
AGGREGATED OPTION EXERCISES IN 1999 AND OPTION VALUES AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS AT
SHARES AT DECEMBER 31, 1999 DECEMBER 31, 1999(1)
ACQUIRED ON VALUE ---------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- -------------- ----------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas D. Weldon ................... 388,375 $7,233,484 -- -- $ -- $ --
William A. Hawkins ................. -- -- 90,000 395,000 142,500 565,000
David N. Gill ...................... 5,000 69,063 55,000 113,750 185,625 164,688
Raoul Bonan, M.D ................... -- -- 50,000 75,000 118,750 --
Michel Lussier ..................... -- -- 35,150 73,750 166,963 357,813
Joan M. Macdonald, Ph. D ........... 20,000 156,000 58,434 34,166 423,330 73,750
</TABLE>
- ----------
(1) Based on the closing sale price of the common stock as of December 31,
1999 ($16.50 per share) minus the applicable exercise price.
EMPLOYMENT AGREEMENTS
Agreement with William A. Hawkins. William A. Hawkins has an employment
agreement with us, under which he serves as our President and Chief Executive
Officer and reports to our Chairman.
Under his employment agreement, Mr. Hawkins currently receives a base
salary of $300,000 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. The amount of any
bonus is 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 $720,000. If we terminate Mr. Hawkins for
Unsatisfactory Performance, he would also be entitled to acceleration of the
vesting of his options and restricted shares to the extent described in "Stock
Options" and the "Summary Compensation Table" above.
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,
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 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.
34
<PAGE>
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 $1,080,000. 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. 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 original employment agreement, Dr. Bonan
received a base salary of $200,000 per year, which was increased to $220,000 on
June 1, 1999, 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.
Effective September 1, 1999 Dr. Bonan returned to clinical practice at the
Montreal Heart Institute and became a part-time employee of the Company. The
terms of his employment contract were amended such that Dr. Bonan's salary for
the period September 1, 1999 to August 31, 2000 is $70,000, payable in bi-weekly
installments of $2,692. In addition, the contract amendments included a loan to
Dr. Bonan in the amount of $80,000 which will be forgiven upon the successful
completion of the contract on August 31, 2000.
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 4,100,000 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 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 are exercisable during an option holder's
employment or engagement and for 45 days after termination. In certain
instances, options may remain exercisable for a maximum of one year. All options
under this plan accelerate upon a Change of Control other than performance based
options, the acceleration of the exercise of which are determined by the
Committee at the time of the change in 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 1, 2000, options to purchase 3,974,401 shares of
common stock have been granted under this plan.
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. We
currently have 200,000 shares reserved for issuance upon exercise of options
granted under the Director Plan.
35
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of February 1, 2000, 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 "Item 11 -- Executive Compensation," and (iv) all
executive officers and directors as a group, together with their respective
percentage ownership of such shares:
NUMBER(1) PERCENTAGE
-------- ---------
Thomas D. Weldon(2)(3)(4) .......................... 707,952 5.0%
Charles E. Larsen(4) ............................... 576,161 4.1
Henry L. Hillman, Elsie Hilliard Hillman and C G ...
Grefenstette, Trustees(5)(6) ..................... 441,587 3.1
C.G. Grefenstette and Thomas G. Bigley, Trustees(5 . 582,112 4.1
President and Fellows of Harvard College ........... 847,000 6.0
c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston, MA 02210
Norman R. Weldon, Ph.D.(3)(8) ...................... 375,571 2.6
Willam A. Hawkins .................................. 133,000 *
David N. Gill ...................................... 87,500 *
Raoul Bonan, M.D ................................... 55,065 *
Michel Lussier ..................................... 35,900 *
Joan M. Macdonald, Ph.D ............................ 91,267 *
J. Stephen Holmes .................................. 33,500 *
William E. Whitmer ................................. 31,000 *
Stephen I. Shapiro ................................. 27,813 *
Pieter J. Schiller ................................. 25,718 *
Donald C. Harrison, M.D ............................ 10,000 *
All executive officers and directors as a group (16)
persons)(9) ...................................... 2,212,985 15.1%
- ----------
* 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: Donald C. Harrison, M.D. -- 10,000 shares;
J. Stephen Holmes -- 27,500 shares; William E. Whitmer -- 27,500 shares;
David N. Gill -- 77,500 shares; Pieter J. Schiller -- 17,500 shares;
Norman R. Weldon -- 12,500 shares; Stephen I. Shapiro -- 17,500 shares;
William A. Hawkins - 90,000 shares; Raoul Bonan - 50,000 shares; and
Michel Lussier - 35,150 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.
(5) Address is 2000 Grant Building, Pittsburgh, PA 15219.
(6) Consists of 436,587 shares held by a trust for the benefit of Henry L.
Hillman (the "HLH Trust") and 5,000 shares purchased by Richard M.
Johnston, an officer of The Hillman Company, through exercising an option
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 7 below).
(7) 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.
(8) 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.
36
<PAGE>
(9) See notes 1, 2, 3 and 8 above. Also includes 124,900 shares of common
stock and 101,476 shares of common stock that can be acquired within 60
days from February 1, 2000, upon exercise of options held by executive
officers not named in the Summary Compensation Table under "Item 11 --
Executive Compensation."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 3, 1999 Mr. Charles E. Larsen resigned as an employee and became a
technical consultant to the Company under an agreement with a one-year term. An
aggregate of $86,154 in consulting fees were paid to Mr. Larsen during 1999.
37
<PAGE>
PART IV
Item 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. The following consolidated financial statements of the Company and Report
of Ernst & Young LLP, Independent Auditors, are included in this report:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998, and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998, and 1997
Notes to Consolidated Financial Statements
14 (a) 2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Consolidated financial statement schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and therefore
have been omitted.
14 (a) 3. EXHIBITS
See Index to Exhibits on pages 53 - 54.
38
<PAGE>
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, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
Ernst & Young LLP
Atlanta, Georgia
February 8, 2000
39
<PAGE>
NOVOSTE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
--------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 7,091,025 $ 2,352,517
Short-term investments .................................. 34,332,667 23,695,451
Accounts receivable ..................................... 968,804 8,775
Inventories ............................................. 2,513,981 537,351
Prepaid expenses and other current assets ............... 216,742 168,142
------------- -------------
Total current assets ............................ 45,123,219 26,762,236
------------- -------------
Property and equipment, net ............................... 3,509,203 2,327,467
Other assets .............................................. 734,980 392,529
------------- -------------
$ 49,367,402 $ 29,482,232
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 1,112,678 $ 1,059,591
Accrued expenses ........................................ 5,189,880 3,905,548
------------- -------------
Total current liabilities ....................... 6,302,558 4,965,139
------------- -------------
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; 14,201,632 and 10,704,817 shares issued,
respectively ......................................... 142,016 107,048
Additional paid-in capital .............................. 128,182,542 77,022,814
Accumulated other comprehensive income .................. 57,722 --
Accumulated deficit ..................................... (83,201,214) (52,281,002)
------------- -------------
45,181,066 24,848,860
Less treasury stock, 5,780 shares of common stock at cost (23,840) (23,840)
Unearned compensation ................................... (2,092,382) (307,927)
------------- -------------
Total shareholders' equity ...................... 43,064,844 24,517,093
------------- -------------
$ 49,367,402 $ 29,482,232
============= =============
</TABLE>
See accompanying notes.
40
<PAGE>
NOVOSTE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Net sales and revenues ............ $ 1,823,394 $ 18,775 $ 29,313
Cost of sales ..................... 1,642,395 116,633 --
------------ ------------ ------------
Gross margin ...................... 180,999 (97,858) 29,313
------------ ------------ ------------
Operating expenses:
Research and development ........ 22,889,182 21,088,740 12,872,867
Sales and marketing ............. 6,606,337 3,074,245 1,021,990
General and administrative ...... 3,775,154 2,527,917 1,736,333
------------ ------------ ------------
Total operating expenses .......... 33,270,673 26,690,902 15,631,190
------------ ------------ ------------
Loss from operations .............. (33,089,674) (26,788,760) (15,601,877)
Interest income ................... 2,169,462 2,126,867 1,388,482
------------ ------------ ------------
Net loss .......................... $(30,920,212) $(24,661,893) $(14,213,395)
============ ============ ============
Net loss per share ................ $ (2.30) $ (2.34) $ (1.64)
============ ============ ============
Weighted average shares outstanding $ 13,433,226 10,536,034 8,665,345
============ ============ ============
</TABLE>
See accompanying notes.
41
<PAGE>
NOVOSTE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
---------------------------- Paid-In Comprehensive
Shares Amount Capital Income
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 ........ 8,252,687 82,580 41,772,791 --
------------ ------------ ------------ ------------
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 .......................... -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1997 ...... 10,326,262 103,320 74,908,631
------------ ------------ ------------ ------------
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 --
Issuance of stock for
compensation to an officer,
at $25.75 per share .............. 6,000 60 154,440 --
Amortization of unearned
compensation ..................... -- -- -- --
Exercise of stock options at
$0.25 to $16.00 per share ........ 339,775 3,398 967,075 --
Net loss .......................... -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1998 ...... 10,699,037 $ 107,048 $ 77,022,814 $ --
------------ ------------ ------------ ------------
Issuance of stock in secondary
offering at $20 per share, net
of issuance costs of $3,776,228 . 2,560,000 25,600 47,398,172 --
Issuance of restricted stock for
compensation to officers, 10,000
shares at $23.56, 25,000 shares
at $20.75 ....................... 35,000 350 754,025 --
Deferred compensation relating to
issuance of certain stock options -- -- 1,792,500 --
Deferred consulting charges on
stock option grants ............. -- -- 234,597 --
Amortization of unearned
compensation and deferred
consulting ...................... -- -- 112,500 --
Exercise of stock options at $0.25
to $17.25 per share ............. 901,815 9,018 867,934 --
Comprehensive income (loss):
Translation adjustment ........... -- -- -- 57,722
Net loss ......................... -- -- -- --
Total comprehensive loss ....... -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1999 ...... 14,195,852 $ 142,016 $128,182,542 $ 57,722
============ ============ ============ =============
<CAPTION>
Accumulated Treasury Unearned
Deficit Stock Compensation TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 ........ (13,405,714) (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) -- -- (14,213,395)
------------ ------------ ------------ ------------
Balance at December 31, 1997 ...... (27,619,109) (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 ..... -- -- (360,500) --
Issuance of stock for
compensation to an officer,
at $25.75 per share .............. -- -- -- 154,500
Amortization of unearned
compensation ..................... -- -- 52,573 52,573
Exercise of stock options at
$0.25 to $16.00 per share ........ -- -- -- 970,473
Net loss .......................... (24,661,893) -- -- (24,661,893)
------------ ------------ ------------ ------------
Balance at December 31, 1998 ...... $(52,281,002) $ 23,840) $ (307,927) $ 24,517,093
------------ ------------ ------------ ------------
Issuance of stock in secondary
offering at $20 per share, net
of issuance costs of $3,776,228 . -- -- -- 47,423,772
Issuance of restricted stock for
compensation to officers, 10,000
shares at $23.56, 25,000 shares
at $20.75 ....................... -- -- (754,375) --
Deferred compensation relating to
issuance of certain stock options -- -- (1,792,500) --
Deferred consulting charges on
stock option grants ............. -- -- -- 234,597
Amortization of unearned
compensation and deferred
consulting ...................... -- -- 762,420 874,920
Exercise of stock options at $0.25
to $17.25 per share ............. -- -- -- 876,952
Comprehensive income (loss):
Translation adjustment ........... -- -- -- 57,722
Net loss ......................... (30,920,212) -- -- (30,920,212)
------------
Total comprehensive loss ....... -- -- -- (30,862,490)
------------ ------------ ------------ ------------
Balance at December 31, 1999 ...... $(83,201,214) $ (23,840) $ (2,092,382) $ 43,064,844
============ ============ ============ ============
</TABLE>
See accompanying notes.
42
<PAGE>
NOVOSTE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997
------------------ ------------------ --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss..................................................... $ (30,920,212) $ (24,661,893) $ (14,213,395)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization.............................. 929,769 671,286 422,863
Issuance of stock for services or compensation............. 347,097 786,938 270,000
Amortization of deferred compensation...................... 762,420 250,274 68,000
Change in assets and liabilities:
Accounts receivable........................................ (960,029) (8,775) --
Inventory.................................................. (1,976,630) (537,351) --
Prepaid expenses and other current assets................. (48,600) (80,043) 38,250
Accounts payable........................................... 53,087 535,913 367,732
Accrued expenses and taxes withheld........................ 1,284,332 2,002,272 1,238,101
Other...................................................... (298,366) (360,254) 152,719
-------------- -------------- --------------
Net cash used by operations.................................. (30,827,132) (21,401,633) (11,655,730)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments, net...................... (10,637,216) (11,286,666) (4,820,092)
Purchase of property and equipment, net...................... (2,097,868) (1,923,590) (273,027)
-------------- -------------- --------------
Net cash used by investing activities........................ (12,735,084) (13,210,256) (5,093,119)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock....................... 48,300,724 970,473 32,787,955
-------------- -------------- --------------
Net cash provided by financing activities.................... 48,300,724 970,473 32,787,955
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents......... 4,738,508 (33,641,416) 16,039,106
Cash and cash equivalents at beginning of period............. 2,352,517 35,993,933 19,954,827
-------------- -------------- --------------
Cash and cash equivalents at end of period................... $ 7,091,025 $ 2,352,517 $ 35,993,933
============== ============== ==============
</TABLE>
See accompanying notes.
43
<PAGE>
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. 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 year.
During years prior to 1998 the Company was in the development stage. In
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. 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 The Netherlands,
Belgium, Germany and France. Significant intercompany accounts and transactions
have been eliminated.
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
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.
CASH EQUIVALENTS 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 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. Investments held-to-maturity are carried at
amortized cost, adjusted for the amortization or accretion of premiums or
discounts without recognition of gains or losses that are deemed to be
temporary. Premiums and discounts are amortized or accreted over the life of the
related instrument as an adjustment to yield using the straight-line method,
which approximates the effective interest method. Interest income is recognized
when earned.
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.
44
<PAGE>
In 1998 the Company reclassified all investments from held-to-maturity to
available-for-sale. Management expected that, based on cash needs of the
Company, certain investments would be sold in 1999 prior to their maturity dates
and therefore, the Company no longer had 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, 1999 or 1998 as
unrealized gains and losses on investments sold (such sales proceeds aggregating
$70,186,000 in 1999 and $22,683,000 in 1998) were not significant.
At December 31, 1999 and 1998, fair value approximates net book value for
all short term investments.
CONCENTRATIONS OF FINANCE RISK
The Company's cash equivalents and short-term investments are subject to
market risk, primarily interest-rate and credit risk. The Company's investments
are managed by outside professional managers within investment guidelines set by
the Company. Such guidelines include security type, credit quality and maturity
and are intended to limit market risk by restricting the Company's investments
to high credit quality securities with relatively short-term maturities.
FOREIGN CURRENCY RISK
International revenues from the Company's foreign direct sales and
distributor sales comprised 100% of total revenues for the year ended December
31, 1999. With the exception of the Australian, Chinese and New Zealand
distributor, sales are denominated in Euros. The Company experienced an
immaterial amount of transaction gains and losses in 1999. The Company is also
exposed to foreign exchange rate fluctuations as the financial results of its
Dutch, Belgian, German and French subsidiaries are translated into U.S. dollars
in consolidation. As exchange rates vary, these results, when translated, may
vary from expectations and adversely impact overall expected profitability. The
net effect of foreign exchange rate fluctuations on the Company during 1999 was
not material.
INVENTORIES
Inventories are stated at the lower of estimated standard costs or market
and are comprised of the following:
1999 1998
----------- ----------
Raw materials... $ 380,589 $ 154,927
Work in process. 21,518 --
Finished goods.. 2,111,874 382,424
----------- ----------
Total...... $ 2,513,981 $ 537,351
=========== ==========
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 3 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:
1999 1998
----------- -----------
Furniture and fixtures ........................ $ 820,285 $ 759,594
Office equipment .............................. 2,167,823 1,138,949
Laboratory equipment .......................... 300,555 182,089
Leasehold improvements ........................ 1,174,191 705,677
Production equipment .......................... 1,431,585 1,010,262
----------- -----------
5,894,439 3,796,571
Less: Accumulated depreciation and amortization (2,385,236) (1,469,104)
----------- -----------
$ 3,509,203 $ 2,327,467
=========== ===========
45
<PAGE>
REVENUE RECOGNITION
Revenues from sales of products, including sales to distributors, are
recognized at the time of shipment, when customer acceptance is assured.
Allowances are 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 market 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 to employees 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.
The Company provides pro forma disclosure as required under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123") (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 or stock option grants on the agreement dates with
such shares or options valued at the fair value on the date of grant and include
certain registration rights. During 1999, 1998 and 1997 approximately $374,000,
$198,000 and $68,000, respectively, were charged to operations as amortization
of the deferred compensation recorded under these agreements.
3. COMMITMENTS AND CONCENTRATIONS OF SUPPLIERS
The Company is committed under operating leases for its facility and
various office equipment. Rent expense was approximately $523,000, $199,000 and
$150,000 for 1999, 1998 and 1997, respectively. The total future minimum rental
payments are as follows:
2000.............................. $ 492,000
2001.............................. 519,000
2002.............................. 529,000
2003.............................. 484,000
2004.............................. 21,000
------------
$ 2,045,000
============
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. Royalty fees to the physician aggregated $11,254
in 1999 and have been expensed in Cost of Goods Sold.
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. Royalty fees to Emory
University aggregated $36,331 in 1999 and have been expensed in Cost of Goods
Sold.
During 1999 the Company obtained all of its requirements of radiation
source materials (totaling $1,270,000 in 1999) pursuant to an agreement, as
amended (the "Supply Agreement"), with a single German supplier, Bebig
Isotopentechnik und Umweltdiagnostik GmbH. At December 31, 1999 the Company had
commitments to purchase $3.7 million of various inventory components for the
Beta-Cath System. In addition, on October 14, 1999 the Company signed a
development and manufacturing supply agreement with AEA Technologies QSA GmbH
for a second source of radioisotope supply and for the development of a smaller
diameter source. This
46
<PAGE>
agreement provides for the construction of a production line over the period
October 1, 1999 to February 2001. The cost of this production line is estimated
at $4,000,000 and will be paid by the Company as construction progresses.
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.
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:
1999 1998
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 33,106,168 $ 21,159,851
R&D tax credit carryforwards .... 1,380,352 1,018,455
Other .......................... 38,764 60,735
------------ ------------
34,525,284 22,239,041
Valuation allowance ............... (34,525,284) (22,239,041)
------------ ------------
$ -- $ --
============ ============
At December 31, 1999 and 1998 no net deferred tax assets were recorded as
their future benefit is not assured. No income taxes were paid during 1999, 1998
or 1997. The Company has approximately $87,100,000 of net operating losses for
federal income tax purposes available to offset future taxable income. Such
losses expire in 2007 through 2019 and are subject to certain limitations in the
event of a change in ownership. Net operating loss carryforwards aggregating
approximately $4,008,000 representing cumulative exercises of non-qualified
stock options will result in a credit to contributed capital when recognized.
Additionally, the Company has $1,380,000 in research and development tax credits
which expire in 2008 through 2019 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
47
<PAGE>
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. 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
2,080,723 shares of Common Stock for future issuances under the Plan. As of
December 31, 1999 there are 143,516 shares available for grant.
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 187,500 shares of Common Stock for future issuances under the Plan. As
of December 31, 1999 there are 55,000 shares available for grant.
Activity under the above-described two plans is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF PRICE PER AVERAGE
SHARES SHARE PRICE
--------------- ---------------- -----------
<S> <C> <C> <C>
Outstanding at January 1, 1997...... 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
-----------
Options granted................... 715,800 11.000 - 28.375 19.42
Options exercised................. (901,815) .250 - 17.250 0.98
Options forfeited................. (53,516) 3.200 - 28.250 16.48
-----------
Outstanding at December 31, 1999.... 2,069,707 1.000 - 29.625 18.30
===========
Exercisable at December 31, 1999...... 568,648 1.000 - 24.000 14.56
===========
</TABLE>
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>
$ 1.00 - 3.20 116,800 3.6 $ 3.01 116,800 $ 3.01
8.00 - 12.25 532,400 8.5 11.18 164,025 10.87
13.00 - 13.75 162,249 7.8 13.49 29,439 13.34
14.00 - 20.94 272,425 6.8 18.10 103,675 18.98
21.00 - 24.00 626,500 8.4 23.60 102,875 23.77
24.75 - 29.63 359,333 8.5 26.90 51,834 27.83
---------- ----------
2,069,707 7.9 18.30 568,648 14.56
========== ==========
</TABLE>
During the period October 1998 to February 1999, options to purchase
200,000 shares were granted at prices per share ranging from $11.75 to $28.00
per share, which were subject to shareholder approval in May 1999. When approval
was obtained, the market price per share exceeded the exercise price, and the
Company incurred compensation of $1,792,500 which will be expensed over the four
year vesting period of these options ($532,000 in 1999).
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
48
<PAGE>
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; $101,250, $270,000 and $270,000 was expensed in 1999, 1998 and 1997,
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 1999, 1998 and 1997: risk-free interest rates of
5.20%, 5.35% and 6.29%, respectively; no dividend yields; volatility factor of
the expected market price of the Company's common stock of 0.577, 0.736 and
0.666 in 1999, 1998 and 1997, 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.
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>
1999 1998 1997
--------------- --------------- --------------
<S> <C> <C> <C>
Pro forma net loss...................... $ (37,131,898) $ (27,761,134) $ (14,821,827)
Pro forma net loss per share............ (2.76) (2.63) (1.71)
Weighted-average fair value of options
granted............................... 11.30 14.61 11.08
</TABLE>
During 1998 and 1999 the Company granted a total of 49,000 shares of
restricted Common Stock from the Plan to certain officers of the Company. These
shares will vest over the three or four year vesting period from the date of
grant 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 dates, the value of the shares awarded totaled $1,114,875
and has been recorded as unearned compensation in the statement of shareholders'
equity. Such unearned compensation is being amortized to compensation expense
over the vesting periods of the awards.
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 1999, 1998 and 1997 the Company matched 33
1/3% of the first 6% of employee contributions, aggregating $90,000, $72,000 and
$29,000, respectively.
49
<PAGE>
7. GEOGRAPHIC AREA INFORMATION
The Company's business activities are represented by a single industry
segment, the manufacture and distribution of medical devices. For management
purposes, the Company is segmented into three geographic areas: North America
(which consists of royalty income), Europe and Rest of World (Asia and South
America). The Company's net sales by geographic area are as follows:
United States Europe Rest of World Total
------------- --------- ------------- -----------
1999 $ 18,000 $ 1,510,000 $ 295,000 $ 1,823,000
1998 10,000 9,000 -- 19,000
The Company's distributor for the markets of Australia, New Zealand and
China accounted for 14% of net sales in 1999. At December 31, 1999 the Company's
net assets outside of the United States, consisting principally of accounts
receivable, inventory and office equipment, are approximately $2,216,000.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on February 15, 2000.
NOVOSTE CORPORATION
By: s/William A. Hawkins
-------------------------
William A. Hawkins
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on February 15, 2000.
<TABLE>
<S> <C>
s/William A. Hawkins Chief Executive Officer, President and Director
- ---------------------------- (Principal Executive Officer)
William A. Hawkins
s/David N. Gill Chief Operating Officer and Chief Financial Officer
- ---------------------------- (Principal Financial and Accounting Officer)
David N. Gill
s/Thomas D. Weldon Chairman
- ----------------------------
Thomas D. Weldon
s/Donald C. Harrison Director
- ----------------------------
Donald C. Harrison, M.D.
s/J. Stephen Holmes Director
- ----------------------------
J. Stephen Holmes
s/Charles E. Larsen Director
- ----------------------------
Charles E. Larsen
s/Pieter J. Schiller Director
- ----------------------------
Pieter J. Schiller
s/Stephen I. Shapiro Director
- ----------------------------
Stephen I. Shapiro
s/Norman R. Weldon Director
- ----------------------------
Norman R. Weldon, PhD.
s/William E. Whitmer Director
- ----------------------------
William E. Whitmer
</TABLE>
51
<PAGE>
INDEX TO EXHIBITS
Exhibit
Numbers Description
- ------- -----------
3.1 Articles of Incorporation of Registrant, as amended.(1)
3.2 Form of Amended and Restated Articles of Incorporation of Registrant
filed on May 28, 1996.(1)
3.2(a) Copy of First Amendment to Amended and Restated Articles of
Incorporation of Novoste Corporation filed with the Department of
State of the State of Florida on November 1, 1996.(2)
3.3(a) Copy of Amended and Restated By-Laws of Registrant adopted December
20, 1996. (3)
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)
4.17(a) Amended and Restated Rights Agreement, dated as of July 29, 1999,
between Novoste Corporation and American Stock Transfer & Trust
Company, which includes as Exhibit B thereto the Form of Right
Certificate.(2)
4.17(b) Amended and Restated Summary of Rights to Purchase Preferred Shares
of Novoste Corporation.(2)
*4.19 Restricted Stock Award Agreement with David N. Gill. (8)
*10.1 Copy of Stock Option Plan of Registrant, as amended. (3)
H10.2 License Agreement, dated January 30, 1996, between Emory University
and Registrant.(1)
H10.3 Clinical Research Study Agreement, dated January 30, 1996, by Emory
University and Registrant. (1)
H10.4 License Agreement, dated January 31, 1996, between Spencer B. King
III, M.D. and Registrant. (1)
H10.5 Restenosis Therapy Project Development and Supply Agreement, dated
November 28, 1994, with Registrant, relating to the supply of
radioactive beta isotopes. (1)
H10.6 Option to Purchase Assets Agreement dated August 22, 1995, with
Registrant relating to the purchase of assets of Registrant's
supplier of radioactive beta isotopes. (1)
H10.10 Frame Agreement with Bebig Isotopentechnik und Umweltdiagnostik GmbH
regarding purchases and investment grant. (3)
*10.12 Copy of Non-Employee Director Stock Option Plan. (3)
H10.13 Memorandum of Understanding between Registrant and Bebig
Isotopentechnik und Umweltdiagnostik GmbH regarding purchases and
investment grant dated April 23, 1997. (4)
10.14 Employment Agreement with William A. Hawkins III. (5)
*10.15 Employment Agreement with Raoul Bonan, M.D. (5)
10.16 Restricted Stock Award Agreement with William A. Hawkins III. (5)
10.17 Non-Incentive Stock Option Agreement with William A. Hawkins III.
(5)
52
<PAGE>
H10.18 Amendment to Framework Agreement and Security Agreement with Bebig
GmbH. (5)
10.19 Lease, dated October 23, 1998, between Weeks Realty, L.P. and
Registrant. (6)
H10.20 Manufacturing and Supply Agreement dated April 21, 1998 between
Registrant and SeaMED Corporation. (7)
#10.20a Manufacturing and Supply Agreement dated September 1, 1999 between
Registrant and SeaMED, a Plexus Company.
*10.22 Restricted Stock Award dated July 1, 1999 between Novoste
Corporation and William A. Hawkins. (9)
*10.23 Modifications to Employment Agreement with Dr. Raoul Bonan, July 1,
1999. (10)
*10.24 Further modifications to Employment Agreement with Dr. Raoul Bonan,
August 11, 1999. (10)
H10.25 Development and Manufacturing Agreement between AEA Technology - QSA
GmbH and Novoste Corporation. (10)
*10.26 Consulting Agreement, dated July 26, 1999 with Mr. Charles E.
Larsen.
23.1 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
- -------------------
H Portions have been omitted and filed separately with the Securities and
Exchange Commission pursuant to an order granting confidential treatment.
(1) Filed as same numbered Exhibit to the Registrant's Registration Statement
on Form S-1 (File No. 333-4988).
(2) Filed as same numbered Exhibit to the Registrant's Report on Form 8-A/A
filed on August 3, 1999.
(3) Filed as Appendix 1 and 2 to the Registrant's Proxy Statement for its 1999
Annual Meeting of Stockholders filed on April 12, 1999.
(4) Filed as same numbered Exhibit to the Registrant's Registration Statement
on Form S-3 (File No. 333-38573).
(5) Filed as same numbered Exhibit to the Registrant's Report on Form 10-Q
filed on August 11, 1998.
(6) Filed as same numbered Exhibit to the Registrant's Report on Form 10-Q
filed on November 9, 1998.
(7) Filed as same numbered Exhibit to the Registrant's Report on Form 8-K
filed on January 27,1999.
(8) Filed as same numbered Exhibit to the Registrant's Registration Statement
on Form S-3 (File No. 333-72073).
(9) Filed as same numbered Exhibit to the Registrant's Report on Form 10-Q
filed on August 11, 1999.
(10) Filed as same numbered Exhibit to the Registrant's Report on Form 10-Q
filed on November 5, 1999.
* Constitutes a compensatory plan, contract or arrangement.
# Portions have been omitted and filed separately with the Securities and
Exchange Commission, pursuant to a request for confidential treatment.
53
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Forms S-8 No. 333-10660 and 333-10662) pertaining to the Novoste
Corporation Stock Option Plan and the Non-Employee Director Stock Option Plan of
our report dated February 8, 2000, with respect to the consolidated financial
statements of Novoste Corporation included in the Annual Report (Form 10-K) for
the year ended December 31, 1999.
/s/ Ernst & Young, LLP
February 15, 2000
Atlanta, Georgia
54
Exhibit 10.20A
Manufacturing Supply Agreement
between
SeaMED A Plexus Company
and
Novoste Corporation
September 1, 1999
1
<PAGE>
Manufacturing Supply Agreement
LIST OF EXHIBITS
Exhibit A Products, Pricing & Lead-time
Exhibit B-1 Pre-Production Pricing Formula
Exhibit B-2 Production Pricing Formula
2
<PAGE>
SUPPLY AGREEMENT
This Basic Order Agreement and all attachments (called the "Agreement") is made
by Novoste Corporation ( "Buyer" ) its principal place of business at 3890 Steve
Reynolds Boulevard, Norcross, GA 30093 and SeaMED A Plexus Company,
("Contractor") its principal place of business at 21621 30th Avenue SE,
Bothell, Washington 98021. This Agreement sets forth the mutual understanding by
which the Buyer and the Contractor will conduct business for the life of this
Agreement.
Whereas, the Contractor has the facilities and expertise to manufacture, test,
service and distribute electronic devices.
Whereas, Buyer desires to engage the services and the facilities of Contractor
for the production and ongoing maintenance of electronic devices known as the
Alpha IV ("Norse") and the Nova ("Nodoubt") (hereinafter collectively "Product")
and other related electronic assemblies as may be specified in the future;
In return for the exclusive authorization to build the Buyer's Product both
parties agree as follows:
I. DEFINITIONS
A. "Medical Device Reporting" ("MDR") shall be defined as any event
which is required to be reported to the FDA in accordance with 21
CFR Part 803.
B. "Certificate of Compliance" shall be defined as Contractor's
notification that the Product (including subassemblies for service)
conforms to all established qualification criteria agreed to between
both the Contractor and Buyer.
C. "Buyer's Equipment" shall be defined as capital equipment such as
production molds, fixtures or testing equipment purchased for and
charged to the Buyer specifically to manufacture and test the
Product.
D. "Product Complaint" shall be defined in accordance with the relevant
sections of the CGMP / QSR and EN46001 regulations.
E. "Pre-production Product" shall be defined as the fabrication of
products in the manufacturing area under CGMP / QSR and EN46001
control using pre-production released documentation.
II. GENERAL TERMS AND CONDITIONS
A. This Agreement is a supply agreement whereby the Buyer agrees to
purchase all of its requirements for the term shown from the
contractor; it does not obligate Buyer to purchase any specific
quantity (except as defined further in Section IV.) but only
establishes the terms and conditions for such purchases if they
occur. All such quantities will be specified on Buyer's Purchase
Orders, issued under the provision of this Agreement and
incorporated herein by reference.
B. If any term of this Agreement conflicts with any term of an issued
Purchase Order, this Agreement shall take precedence. Any terms or
conditions in the Purchase Order not covered under this agreement
must be specified on the front of purchase orders and must be
mutually and explicitly agreed to by both the Buyer and Contractor.
3
<PAGE>
C. Buyer may add products to the list of "Products" available for
purchase hereunder by adding such products to a Purchase Order that
is accepted by Contractor. Such added products shall be deemed
"Products" as defined herein as though listed in Exhibit A,
(Products, Pricing and Lead-time), at the time of executing this
Agreement. The price for which such added products shall be
available for purchase under this Agreement shall be as stated on
such accepted Purchase Orders(s), subject to the provisions of this
Agreement. The Buyer shall amend Exhibit A to reflect the added
Products and relevant pricing.
D. Payment - Payment for any shipment of product is due thirty (30)
calendar days subsequent to the date of invoice for such shipment.
Unless otherwise specified or required by law, all prices will be
quoted and billed exclusive of federal, state, or local excise,
sales, or other similar taxes. Such taxes, where applicable, will
appear as additional terms on invoices.
III. PURCHASE ORDERS
A. The term "Purchase Order" shall mean Buyer's written Purchase Order
form and any documents incorporated therein by reference.
B. Acceptance by Contractor is limited to the provisions of the
Agreement and the Purchase Order. No additional or different
provisions proposed by Buyer shall apply and are hereby rejected. In
addition, the parties agree that this Agreement and issued Purchase
Orders constitute a Contract for the Sale of Goods and satisfy all
statutory and legal formalities of a contract.
IV. PURCHASE TERM
A. The term during which Buyer may issue Purchase Orders for Product
under this Agreement ("Purchase Term") will begin on April 20, 1998
and end three (3) years after the date of the sale and shipment of
the first production unit from Contractor to Buyer. Production units
shall be defined as units which are released and manufactured to
Revision A level drawings by the Contractor. This Agreement governs
Purchase Orders issued by Buyer during the Purchase Term and any
extension so long as Buyer has requested that the Product be
delivered within two (2) months beyond the end of the Purchase Term
or any extension.
B. The initial Purchase Term of this Agreement shall end on August 31,
2001 subject to the following:
1) Buyer agrees to buy all Product from Contractor during the
Purchase Term.
2) Buyer's target procurement rate for Product from January 1,
2000 through August 31, 2001 ("Interim Term") is XXXXX units.
3) If Buyer purchases less than XXXXX Products during the period
1/1/00 - 8/31/01, then Buyer shall pay Contractor an
additional amount to offset development costs. This additional
amount shall be equal to 15% of the total NRE cost for Project
Nodoubt (estimated at XXXXX as of July 9, 1999).
- --------------------------------------------------------------------------------
Confidential treatment has been requested for portions of this page of this
exhibit. The copy filed herewith omits the information subject to the
confidentiality request. Omissions are designated as "XXXXX". The portions
omitted have been filed separately with the Securities and Exchange Commission
pursuant to such request for confidential treatment.
4
<PAGE>
4) If Buyer purchases more than XXXXX Products but less than
XXXXX Products during the period 1/1/00 - 8/31/01, Buyer shall
pay Contractor a prorated amount to offset development costs.
Such amount shall be calculated by dividing 15% of the total
NRE cost for Project Nodoubt by XXXXX and then multiplying
this number by the quantity less than XXXXX ("shortfall"). For
example, if Buyer purchases XXXXX Products during the Interim
Term, then Buyer shall pay Contractor an additional amount of
XXXXX - calculated as follows: XXXXX.
5) If Buyer purchases more than XXXXX Products from Contractor
during this Term, no additional amount shall be charged to
Buyer as described herein.
V. PRODUCT PRICING
A. PREPRODUCTION PRICING will be conducted on an actual time and
material basis and will include gross margin. Refer to Exhibit B-1
for SeaMED's pricing formula. Refer to the Norse and Nodoubt Project
Plans for pricing targets.
B. PRODUCTION PRICING
(i) Initial production pricing will be established within one (1)
month from completion of the pre-production units and
acceptance of a Final Design Review or Production Readiness
Review. Labor and Material costs determined from
pre-production and the pricing formula in Exhibit B-2 will be
utilized to establish the initial selling price An initial
review of costs and adjustments to selling price based on
changes in material and labor costs will occur after a first
review at three months and on an annual basis thereafter.
(Contractor agrees to open books to Buyer for verification of
material and labor costs.) Rates will be fixed for one (1)
year from the completion of pre-production units. Refer to the
Norse and Nodoubt Project Plans for pricing targets.
(ii) Prices include all charges such as packaging, packing, and all
taxes except sales, use, and other such taxes imposed upon the
sale or transfer of Product. Buyer shall have no liability for
such taxes if it has complied with statutory resale tax
certificate requirements. If Buyer is liable to pay these
taxes, they shall be specifically listed in Contractor's
invoice.
VI. DELIVERY, LEAD-TIME AND FLEXIBILITY
A. Buyer's Purchase Orders shall state Contractor's committed delivery
date for Product. TIME AND RATE OF DELIVERY ARE OF THE ESSENCE OF
ALL PURCHASES MADE UNDER THIS AGREEMENT. The minimum agreed period
between Buyer's issuance of a Purchase Order and the scheduled
delivery date ("Lead-time") shall be as stated in Exhibit A.
Contractor will use reasonable efforts to supply Product in
accordance with Buyer's required ship dates. Shipment delays
requested by Buyer or due to Buyer supplied materials, design
changes, software or other factors under the primary control of the
Buyer may result in an inventory deposit from Buyer to Contractor.
- --------------------------------------------------------------------------------
5
<PAGE>
Confidential treatment has been requested for portions of this page of this
exhibit. The copy filed herewith omits the information subject to the
confidentiality request. Omissions are designated as "XXXXX". The portions
omitted have been filed separately with the Securities and Exchange Commission
pursuant to such request for confidential treatment.
6
<PAGE>
B. All shipments shall be F.O.B. Origin, with title passing to Buyer at
time of final approval at Contractor's facility. Buyer shall select
the carrier and shall pay transportation charges.
C. Buyer may require that shipments of Product under this Agreement be
shipped by Contractor to various destinations. The Purchase Order
issued by the Buyer will clearly specify the "SHIP TO" location for
each Product.
D. Buyer and Contractor recognize that each program is unique and will
require program specific ordering parameters. These parameters are
mutually agreed to after the bill of material is finalized and
production quantities are provided to the Contractor in the form of
a purchase order or delivery forecast. The following parameters
offer a typical scenario where the Buyer may, without cost or
liability, increase or decrease the order quantity by mutual
agreement. Contractor will use reasonable efforts to meet Buyer's
scheduling needs.
Order Parameters
--------------------------------------------------------------------
0 to 3 Months Firm PO's, Schedule unchangeable
--------------------------------------------------------------------
4 to 6 Months Firm PO's. May move up to 30% of scheduled
deliveries on PO's out 30 days without penalty, or
in 30 days depending on material availability.
--------------------------------------------------------------------
7 to 12 Months May move up to 40% of scheduled deliveries on PO's
out 60 days without penalty, or in 60 days
depending on material availability. Delivery
slides >60 days will require an inventory deposit.
--------------------------------------------------------------------
E. During the Pre-Production phase the Contractor will order materials
in sufficient quantities to meet the requirements of the Engineering
Project Plan and initial pre-production schedule. The Contractor
will typically order critical materials and sub-assemblies at a rate
of 110% of demand.
G. Buyer shall place purchase orders for the first six (6) months of
production and maintain six (6) months of firm purchase orders on a
month to month rolling basis. Buyer will provide Contractor on a
monthly basis with a minimum twelve (12) month schedule of demand
for the product. The schedule will show firm orders for months 1-6
and forecasted demand for months 7-12. Contractor will request
written authorization from Buyer to use the 7-12 month forecast to
procure long lead materials, determine economic order quantity buys
of components or unique parts, and lot size Printed Circuit Board
Assemblies on a quarterly basis. Prior to entering full production
Buyer and Contractor will review the final bill of material, discuss
material lead times and production ordering parameters. Buyer and
Contractor agree to develop a material ordering plan which will
ensure timely delivery of material to meet production objectives,
while limiting the exposure to materials in the event of a program
shut down.
H. EXCESS AND OBSOLETE MATERIALS
(i) During the performance of this supply Agreement, Contractor
will purchase materials to support the requirements of the
Buyers program. Certain materials which Contractor will
acquire will be subject to minimum-buy requirements and
quantity price breaks which may result in excess material
accumulation which will be the responsibility of the Buyer
provided that Buyer has approved such purchases. Additionally,
design changes may cause materials to become obsolete.
Obsolete materials due to a design change will be returned to
suppliers when possible. Non-returnable inventory will be
charged and delivered to the Buyer.
(ii) During the performance of this supply agreement, Contractor
will provide the Buyer with periodic updates of the status and
amount of excess or obsolete material.
7
<PAGE>
(iii) Contractor will use its best effort to minimize the impact of
excess material and/or obsolete materials on Buyer's program.
Contractor will return materials to suppliers for credit, less
restocking fees, when appropriate. However, final costs
associated with the accumulation of excess and obsolete
materials are chargeable and payable by the Buyer. Any excess
or obsolete inventories will be charged to the Buyer at
Contractor's cost plus 20% material burden, but without
profit. Disposition of excess or obsolete materials will be
coordinated with the Buyer to minimize the impact of cost to
the Buyer where possible. Buyer's targeted maximum
obsolescence budget is $50,000 maximum.
VII. WARRANTY
A. LIMITED WARRANTY
(i) Contractor warrants for twelve (12) months from date of
shipment to Buyer's customer from Buyer's facility that all
Product shall be free from defects in material and
workmanship, and shall conform to applicable specifications,
drawings, samples and descriptions referred to in this
Agreement, (provided shipment to Buyer's customer from Buyer's
facility occurs within three months from date of invoice to
the Buyer and the unit has only been subject to receiving and
inspection at Buyer's facility). Contractor warrants it has
the right to convey the Product and that the Product is free
of all liens and encumbrances.
(ii) Contractor shall correct such Product at its facility. At
Buyer's option, Contractor shall complete an assessment of the
returned product, (typically within five (5) days of receipt),
and repair or replace all defective Product (typically within
fifteen (15) days of receipt) unless otherwise specified. Turn
around times will vary depending on the complexity of the
product. Inbound freight will be the responsibility of the
Buyer. Contractor agrees to pay return freight to the customer
and method of shipment will be consistent with the method of
inbound freight to the Contractor. Contractor will pay for
inbound freight for any new units delivered dead on arrival
(DOA) to Buyer or Buyer's customer. DOA is defined as any
product that does not perform substantially in compliance with
the applicable specifications upon receipt by Buyer or Buyer's
Customer.
(iii) Buyer warrants that the shipment of the Product is lawful
under the FDC Act and that the Buyer holds all necessary
marketing clearance and approvals from the FDA.
B. NON-WARRANTY
(i) Repair services outside the scope of the warranties described
in this Section VII shall be provided by the Contractor and/or
the Buyer pursuant to a Repair and Service Agreement to be
negotiated in good faith by the parties and signed within a
reasonable time following execution of this Agreement.
C. SUPPLY OF REPLACEMENT PARTS
(i) Contractor agrees to provide Buyer, upon request, Buyer's
requirements of replacement parts or a designee of the Buyer
to: (a) provide non-warranty repair services to Buyer's
customers, should Contractor not provide such repairs, and (b)
provide warranty repair services at authorized third party
service centers world-wide selected by the Buyer with
Contractor's consent. Buyer shall pay for such replacement
parts consistent with Contractor's current spares pricing
methodology, plus freight and shipping charges actually
incurred by the Contractor. The cost of replacement parts
required pursuant to (A) above, including freight and shipping
charges, shall be at the Contractor's expense as part of its
warranty services. No third party repairs would occur without
mutual consent of Contractor and Buyer.
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(ii) Contractor warrants that for a period of time beginning on the
date of delivery to the Buyer or the Buyer's designee of any
replacement parts provided pursuant to this Section A, Limited
Warranty, and continuing thereafter for ninety (90) days
following delivery of such replacement parts to the Buyer's
Customer (but in no event to exceed six (6) months from the
date of delivery of such replacement parts to the Buyer), each
such part shall be free from defects in material and
workmanship. In the event any replacement part provided
pursuant to this Section does not conform with the above, the
Buyer or, at the Buyer's option, the Buyer's designee shall
return such replacement part to the Contractor, and the
Contractor shall, within seven (7) days following the receipt
(dependent on material availability), promptly repair or
replace such replacement part without charge and refund to the
Buyer or the Buyer's designee freight paid by the Buyer or the
Buyer's designee for the original and return shipment, such
freight cost not to exceed the then current surface rate,
freight charge charged by United Postal Service ("UPS") or, if
such UPS freight charge is not readily available, the rate
charged by a shipping company similar to UPS.
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VIII. CONFIDENTIAL INFORMATION AND ADVERTISING
A. Contractor and Buyer shall each maintain as confidential any
specifications, drawings, blueprints, data, business information,
trade secrets, manufacturing processes, or other confidential
information which Contractor or Buyer learns or acquires by virtue
of this Agreement, except that Contractor or Buyer may disclose
Confidential Information pursuant to the order or requirement of a
court, administrative agency or other governmental body. Buyer or
Contractor must notify the other party in writing of the need for
such disclosure and take all steps possible to assure that a
protective order exists prior to disclosure. Contractor and Buyer
further agrees to protect the "Confidential Information" against
disclosure to unauthorized persons.
B. Contractor may disclose confidential information to Contractor's
employees who have a need to know and a legal duty to protect such
confidential information. At Buyer's written request Contractor
agrees to destroy or otherwise dispose of all confidential
information, except as prohibited by regulatory or safety agencies.
C. Without Buyer's prior written consent, Contractor shall not in any
manner disclose (except as required for financing), advertise, or
publish the existence of this Agreement nor the terms of
transactions under this Agreement, which shall be considered as part
of the "Confidential Information".
D. The term confidential information shall not include information
which is in the public domain at the time of disclosure or
afterward, except where such information becomes public due to a
breach by the disclosing party of its obligations hereunder, nor
shall the term confidential information in possession at the time of
disclosure or which may be disclosed by a third party having the
right to disclose the same.
IX. OWNERSHIP
A. Specifications - Contractor acknowledges that the specifications and
all related writings, drawing, artwork, computer assisted designs
and similar works are and shall be the exclusive property of Buyer,
and Buyer retains all right, title and interest, including
copyright, relating to such material. Upon termination of this
Agreement for any reason with the exception of breach by Buyer,
Contractor agrees to return to Buyer all copies of the
specifications and related materials within twenty (20) business
days of such termination; this material shall be complete in every
respect, as to permit an experienced manufacturer to manufacture,
assemble, maintain and service the Product described in this
Agreement. In the event of Breach by the Buyer, Contractor will
return all the documentation with 20 days of resolution of any
outstanding technical issues and payment of outstanding engineering
or production invoices. If termination occurs prior to building the
product, Contractor will provide a data package containing all
information updated as of the date of termination. The material
shall include a full drawing package in reproducible form and any
revisions or updates, including but not limited to; GSF Autocad and
ProE files, fabrication drawings, approved supplier list, test
specifications, tooling specifications and drawings, manufacturing
assembly instructions, routings, quality assurance protocols, test
equipment, specs and drawings and engineering change notice history,
device master files, and device history records. Transfer of
information will be product specific not including Contractor's
proprietary policies and procedures.
B. Buyer's Equipment - Contractor shall install, maintain and account
for Buyer's Equipment at Contractor's facility or Contractor's
subcontractor's facility. Contractor hereby acknowledges that the
Buyer's Equipment is the sole and exclusive property of Buyer. Buyer
shall provide identification and ownership tags (also called asset
tags) for the Buyer's Equipment, and Contractor shall ensure that
such tags are properly placed and maintained on all Buyer's
Equipment. Contractor hereby covenants that, during the term of this
Agreement.
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(i) Contractor and any subcontractor of Contractor using Buyer's
Equipment shall utilize Buyer's Equipment solely for
manufacturing Buyer's requirements of the Product as provided
hereunder,
(ii) Contractor shall not encumber any of the Buyer's Equipment,
nor shall Contractor permit the Buyer's Equipment to become
encumbered as a result of any act or omission of Contractor or
a subcontractor of Contractor.
C. Within Twenty (20) business days following termination (with the
exception of termination due to breach by Buyer )or expiration of
this Agreement, Contractor agrees to properly pack and return to
Buyer, or cause to be properly packed and returned to Buyer, F.O.B.
point of shipment, all Buyer Equipment, the same to be shipped to
such facility as Buyer directs at Buyer's expense.
D. Improvements - Contractor hereby acknowledges that improvements
funded by the Buyer, which are unique to Buyer's program, shall be
the sole property of Buyer, and Contractor shall provide Buyer, at
Buyer's request and at a reasonable charge, reasonable assistance in
securing patents for such improvements. Contractor agrees to
promptly disclose improvements to Buyer and to execute documents
reasonably requested by Buyer to evidence Buyer's ownership of such
improvements. Manufacturing process improvements developed by the
Contractor shall be the property of the Contractor.
X. INDEMNITY
A. Buyer agrees to indemnify and hold Contractor, its affiliated
entities, and their respective officers, directors, shareholders,
employees and agents, harmless from and against all claims, losses,
damages, liability, costs and expenses (including, without
limitation, attorney's fees and legal costs and disbursements)
incurred on account of any injury to persons or property arising out
of Buyer's negligence, reckless conduct or willful misconduct;
provided, that Buyer's liability hereunder shall be reduced
proportionately by the percentage of fault, if any, that may
ultimately be assigned or imposed on Contractor by a court or
arbitrator as a result of the Contractor's own negligence, reckless
conduct or willful misconduct. In the event any claim is asserted or
any suit is filed against Contractor for which Buyer is or may be
required to indemnify Contractor under this provision, Contractor
shall give Buyer prompt written notice of same. In the event of any
such claim or suit against the Contractor, Contractor may at its
option tender defense of the claim or suit to Buyer, in which case
the Contractor shall cooperate with Buyer, at Buyer's request and
expense, in the defense of such claim or suit, and Buyer shall have
the sole right to defend and/or settle such a claim or suit,
including selecting counsel of its choice. Regardless of whether or
not Contractor tenders defense of the claim or suit to Buyer, and
regardless of whether or not any such tender is accepted or rejected
by Buyer, the requirement of this paragraph that Buyer fully
indemnify Contractor remains in full force and effect.
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B. Contractor agrees to indemnify and hold Buyer, its affiliated
entities, and their respective officers, directors, shareholders,
employees and agents (hereinafter "Indemnitees") harmless from and
against all claims, losses, damages, liability, costs and expenses
(including, without limitation, attorney's fees and legal costs and
disbursements) incurred on account of any injury to persons or
property arising out of the Contractor's manufacture of the product,
provided, that Contractor's liability hereunder shall be reduced
proportionately by the percentage of fault, if any, that may
ultimately be assigned or imposed on Buyer by a court of law or
arbitrator as a result of the Buyer's own negligence, reckless
conduct or willful misconduct. In the event any claim is asserted or
any suit is filed against Buyer for which Contractor is or may be
required to indemnify Buyer under this provision, Buyer shall give
Contractor prompt written notice of same. In the event of any such
claim or suit against the Buyer, Buyer may at its option tender
defense of the claim or suit to Contractor, in which case the Buyer
shall cooperate with Contractor, at Contractor's request and
expense, in the defense of such claim or suit, and Contractor shall
have the sole right to defend and/or settle such a claim or suit,
including selecting counsel of its choice. Regardless of whether or
not Buyer tenders defense of the claim or suit to Contractor, and
regardless of whether or not any such tender is accepted or rejected
by Buyer, the requirement of this paragraph that Contractor fully
indemnify Buyer remains in full force and effect
XI. FORCE MAJEURE
Neither party shall be considered to be in default in respect of any
obligation hereunder, if failure of performance shall be due to Force
Majeure. If either party is affected by a Force Majeure event, such party
shall, within ten (10) days of its occurrence, give notice to the other
party stating the nature of the event, its anticipated duration and any
action being taken to avoid or minimize its effect. The suspension of
performance shall be of no greater scope and no longer duration than is
required and the non-performing party shall use reasonable efforts to
remedy its inability to perform. Force Majeure shall mean, without
limitation, explosion, flood, fire, war (whether declared or otherwise),
accident, labor strike, or other labor disturbance, sabotage, acts of God,
or acts of regulatory agencies.
XII. REGULATORY MATTERS
A. Complaints and Service Reports - Buyer shall forward to Contractor
as required copies of customer complaints, user reports, MDR's and
Service reports relating to the manufacture and operation of the
Product and Contractor will cooperate fully with the Buyer in
investigating such complaints. In the event that customer complaints
or user reports are received by the Contractor they are to be
forwarded to the Buyer. Upon the request of the Buyer, and at a
charge mutually agreed upon between the parties, Contractor will,
when appropriate, investigate any Product subject to a complaint and
will promptly provide Buyer with a written report on such
investigation.
B. Registration - Contractor hereby represents to Buyer that it shall,
at its sole cost and expense, timely register with the FDA as a
Contract Medical Device Manufacturer, or cause to be timely
registered with the FDA, in accordance with the Federal Food, Drug
and Cosmetic Act 21 CFR Part 807 as amended. Additionally, the
Contractor represents that it is and will retain its ISO9001
certification and maintain a quality system in compliance with
EN46001 for the duration this Agreement.
C. FDA Inspection Reports - Contractor shall provide the Buyer with
copies of any FDA Form 483 observations, follow-up warning letters
and/or close-out reports for those portions of FDA CGMP / QSR
compliance inspection reports relating specifically to the
manufacture of the Product(s) for any facility where the Product(s)
is manufactured.
D. Contacts - Each party shall designate an individual within their
organization to be the primary contact regarding regulatory issues.
Such individual can be changed by giving written notice thereof to
the other party.
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XIII. NOTICES
A. Any notice given under this Agreement shall be written or sent by
telex or facsimile. Written notice shall be sent by registered mail
or by certified mail, postage prepaid, return receipt requested. Any
telex or facsimile notice must be followed within three (3) days by
written notice. All notices shall be effective when first received
at the following addresses:
If to Contractor: If to Buyer:
Greta Stednick David Gill
Customer Support Manager Chief Operating Officer
SeaMED A Plexus Company Novoste Corporation
21621 30th Avenue SE 3890 Steve Reynolds Boulevard
Bothell, WA 98021 Norcross, GA 30093
with copies to: with copies to:
Vice President and General Manager John Love
Vice President, Regulatory Affairs Joan MacDonald
and Quality Assurance
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XIV. TERMINATION
A. Upon any material breach of the terms and provisions herein, this
agreement may be terminated by either party hereto if such breach is
not corrected within sixty (60) calendar days after written notice
to the defaulting party calling for remedy of such breach. If any
provision of this agreement gives any party the right to terminate
this agreement, upon the occurrence or non-occurrence of certain
stipulated events, such termination shall be effective upon written
notice to the other party.
B. In the event that this agreement is terminated, the parties agree as
follows:
(i) Regardless of which party terminates the agreement, Buyer
shall buy from Contractor, at cost plus material handling, any
and all transferable parts which are in inventory or are on
order and non-cancelable by Contractor. Buyer shall reimburse
Contractor for all finished goods, work in process and raw
materials inventory either on hand or on order and
non-cancelable, purchased and/or manufactured as a result of
Buyer's purchase orders or approved production forecasts.
Contractor shall complete any work in process if so requested
by Buyer as if no termination notice was given.
(ii) If Buyer terminates this agreement, and if Buyer requests
Contractor's assistance in establishing an alternate source
for the production of the product, Contractor shall provide to
Buyer design details, tooling and WIP relating to the product.
Buyer shall be responsible for all costs associated with
establishing an alternate source, including but not limited to
copying records and transferring transferable parts to an
alternate source. . Buyer shall also reimburse Contractor for
all outstanding costs incurred and all non-cancelable
committed costs associated with the Limited Production Phase
of this agreement. Contractor shall provide a complete listing
of parts including traceability records.
XV. SURVIVAL
The provisions of this Agreement dealing with Delivery, Payment and
Off-Set, Warranty, Confidential Information and Advertising, Intellectual
Property Indemnity, Changes Term of Availability, U.S. Customs, Marking,
Duty Drawback Requirements, and Compliance with Laws, shall survive
termination or expiration of this Agreement for a period of 5 years.
XVI. GENERAL
A. Only the authorized representatives of the parties may amend or
waive provisions of this Agreement, which amendment shall only be
effective if in writing and signed by such representatives. If
either party fails to enforce any term of this Agreement, failure to
enforce on that occasion shall not prevent enforcement on any other
occasion.
B. As used in this Agreement, except where otherwise noted, the term
"days" shall mean business days.
C. Contractor, including its agents and employees, is an independent
contractor and not an agent or employee of Buyer. Without limiting
the generality of the foregoing, Contractor is not authorized to
represent or make any commitments on behalf of Buyer, and Buyer
expressly disclaims any liability therefore.
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D. All rights and remedies conferred by this Agreement, by any other
instrument, or by law are cumulative and may be exercised singularly
or concurrently. If any provision of this Agreement is held invalid
by any law or regulation of any government or by any court, such
invalidity shall not affect the enforceability of any other
provisions hereof. This Agreement and any Purchase Orders issued
hereunder shall be governed by and interpreted in accordance with
the laws of the State of Washington.
E. Neither party shall assign this Agreement or any of their respective
duties and obligations hereunder without the prior written consent
of the other party: provided, however, that this Agreement must be
assumed by any company that is the successor to all or substantially
all of the business and property of the Contractor or Buyer.
XVII. BUSINESS REVIEWS
A. Buyer and Contractor shall, each at their own expense, meet
periodically to review performance and business transacted, and to
identify and resolve those issues which have arisen since the last
business review meeting.
B. Buyer and Contractor shall furnish agenda items not later than one
(1) week prior to scheduled business review meetings. Minutes shall
document action items, open items, and committed dates which may be
the result from such business review meetings, and shall be sent by
the drafting party to the other party within ten (10) days after
each meeting.
XVIII. INSURANCE
A. Contractor agrees to carry at all times, and with companies
acceptable to Buyer, insurance of the kinds and in the amounts
listed below:
(i) Worker's Compensation statutory limits in each state in which
Contractor is required to provide Worker's Compensation
coverage.
(ii) Comprehensive General Liability - including Contractual
Liability, Independent Contractor's Liability, Products and/or
Completed Operations Liability, and Personal Injury / Property
Damage Coverage's in a combined single limit of not less than
$2,000,000 aggregate with $1,000,000 per occurrence. In
addition, Umbrella Liability with a combined single limit of
not less than $3,000,000.
(iii) Automobile Liability for owned, non-owned and hired vehicles
in a combined single limit of not less than $1,000,000.
(iv) Business Interruption of not less than $15,000,000.
B. Buyer agrees to carry at all times, and with companies acceptable to
Contractor, insurance of the kinds and in the amounts listed below:
(i) Comprehensive General Liability - including Contractual
Liability, Independent Contractor's Liability, Products and/or
Completed Operations Liability, and Personal Injury / Property
Damage Coverage's in a combined single limit of not less than
$2,000,000 aggregate with $1,000,000 per occurrence.
(ii) Umbrella Liability a combined single limit of not less than
$3,000,000.
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XIX. LIMITATION OF LIABILITY
Except as otherwise provided in this Agreement, neither party shall be
liable to the other for special, indirect, incidental, consequential or
punitive damages.
XX. NO IMPLIED LICENSE
The parties understand that, except as may be otherwise expressly stated
herein, neither the Terms or Conditions of this Agreement, nor the acts of
either party arising out of this Agreement or related to Buyer's purchase,
use, sale, or other distribution of Product may be considered in any way
as a grant of any license whatsoever under any of Buyer's present or
future patents, copyrights, trademarks, trade secrets, or other
proprietary rights, nor is any such license granted by implication,
estoppel, or otherwise.
XXI. APPROVALS
IN WITNESS WHEREOF, the authorized representatives of the parties have
executed this Agreement under seal as of the date(s) set forth below.
SeaMED A Plexus Company Novoste Corporation
Contractor Buyer
By: By:
----------------------------------- -----------------------------------
(Signature) (Signature)
----------------------------------- -----------------------------------
(Printed Name) (Printed Name)
----------------------------------- -----------------------------------
(Title) (Title)
----------------------------------- -----------------------------------
(Date) (Date)
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Exhibit A
Products Pricing Target Lead Time
-------- ------- ----------------
Alpha IV TBD 12-14 wks ARO*
Nova TBD 14-16 wks ARO*
*This lead time is based on Contractor's assurance that it will have
sufficient capacity and resources to meet Buyer's requested schedule
needs. The target lead time stated herein excludes material availability.
The target lead time can be significantly delayed if there is no material
on hand or on order via Buyer's Purchase Orders or other long lead
procurement authorizations. Buyer acknowledges that Contractor's standard
lead time is 25 wks ARO. This standard lead time can be improved when
Buyer and Contractor work together to plan appropriately.
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<PAGE>
Exhibit B-1
Pre-Production Pricing Formula
Pre-Production unit costs are difficult to determine prior to actually
manufacturing a product. For this reason, SeaMED Corporation bases the unit
price on a formula derived from the actual material and labor costs incurred.
The following formula is used to calculate pre-production unit price:
Actual Material Cost
+
Outplant Services
(PCBA & Cable Assembly, etc.)
+
Material Support Costs
(20% of Material & Outplant Costs)
+
Actual Burdened Assembly Hours @ $58hr
+
Actual Burdened Test Hours @$58hr
=
Total Direct Manufacturing Cost
Total Unit Price = (Total Direct Manufacturing Cost divided by XXXXX)
The above calculation yields a Pre-Production Gross Margin of XXXXX
of Unit Price
o Material Support Costs include Receiving, Receiving Inspection, Sustaining
Engineering, Stores, Purchasing, Production Control, Facilities, QSR, and
ISO controls. Material Support Costs are affected by the complexity of the
product being manufactured, the volume of product ordered and frequency of
purchase orders, and the number of unique custom mechanical parts in the
bill of material.
o Assembly and Test Burdened Rates are adjusted annually, and include
salary, benefits, and a portion of the above
o Gross margin includes Sales, General, Administrative Costs, and profit.
- --------------------------------------------------------------------------------
18
<PAGE>
Confidential treatment has been requested for portions of this page of this
exhibit. The copy filed herewith omits the information subject to the
confidentiality request. Omissions are designated as "XXXXX". The portions
omitted have been filed separately with the Securities and Exchange Commission
pursuant to such request for confidential treatment.
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Exhibit B-2
Production Pricing Formula
Accurate production pricing can only be established after the pre-production
effort has been completed and actual labor and material information is
available. Within one month of completion of pre-production units the following
formula will be used to establish go forward pricing.
Total Material Cost
+
Out plant Services
(PCBA & Cable Assembly, etc.)
+
Material Support Costs
(20% of Material & Outplant Costs)
+
Burdened Assembly Hours @ $58hr
+
Burdened Test Hours @ $58hr
=
Total Direct Manufacturing Cost
Total Unit Price = (Total Direct Manufacturing Cost divided by XXXXX)
The above calculation yields a Production Gross Margin of XXXXX of Unit Price
o Material includes a material yield factor.
o Material Support Costs include Receiving, Receiving Inspection, Sustaining
Engineering, Stores, Purchasing, Production Control, Facilities, QSR, and
ISO controls. Material Support Costs are affected by the complexity of the
product being manufactured, the volume of product ordered and frequency of
purchase orders, and the number of unique custom mechanical parts in the
bill of material.
o Assembly and Test Burdened Rates are adjusted annually, and include
salary, benefits, and a portion of the above.
o Gross margin includes Sales, General, Administrative Costs, and Profit.
- --------------------------------------------------------------------------------
Confidential treatment has been requested for portions of this page of this
exhibit. The copy filed herewith omits the information subject to the
confidentiality request. Omissions are designated as "XXXXX". The portions
omitted have been filed separately with the Securities and Exchange Commission
pursuant to such request for confidential treatment.
20
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EXHIBIT 10.26
--------------------------------------------------------------------
CONSULTING AGREEMENT
--------------------------------------------------------------------
Date: July 26, 1999
NOVOSTE: NOVOSTE CORPORATION
3890 Steve Reynolds Blvd.
Norcross, Georgia 30093
Name of Consultant: Charles E. Larsen
SSN: ###-##-####
Address: Charles E. Larsen
6080 Cherokee Trace
Cumming, GA 30131
Telephone: (770) 844-8985
Name and Address of Novoste Contact:
William A. Hawkins
3890 Steve Reynolds Blvd.
Norcross, GA 30093
Term of Consulting Service: From May 03, 1999 to May 03, 2000.
Novoste and Consultant agree:
1. Scope of Work
Consultant will perform the consulting services for Novoste Corporation
("Novoste") described as follows and in attached Schedule 1 (the
"Services"):
o Consultant will provide the same types of services he provided while
employed at Novoste as Chief Technical Officer. These include, but
are not limited to, the job functions listed in Novoste's 1999 Job
Description for the position Chief Technical Officer, which is
attached hereto as Schedule 1.
o Consultant's main responsibilities will be in assisting the
research, design and development efforts at Novoste. However,
Consultant's experience and expertise in the Medical Device Industry
may be utilized with respect to other aspects of the business.
o Also, Consultant will assist with administering the maintenance of
Novoste's facilities.
99-0016-CSA
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2. Compensation
Novoste will pay Consultant a consulting fee in the amount and on the
terms set forth below:
o As compensation for Services, Novoste will pay Consultant relatively
equal payments on a biweekly basis, the combined total for a year of
such payments (26 payments) being one hundred forty thousand dollars
($140,000.00).
o Reasonable expenses and travel expenses, including meals,
transportation, and housing, incurred during performance of the work
as specified under this agreement will be reimbursed by Novoste.
Additionally, Novoste will provide Consultant with a computer and
adequate work space during the term of this Agreement.
o For the consulting fee of $140, 000.00 per year, Consultant will be
expected to work a yearly average of approximately forty (40) hours
per month.
o Consultant is not an employee of Novoste and will not receive any
benefits other than the above defined consulting fee and reimbursed
expenses. Thus, Consultant is not eligible for participation in the
Novoste Employee Bonus Plan or the Novoste 401(k) Plan and does not
benefit from Health Care Insurance, Life & Accidental Death or
Dismemberment Insurance, and Long-term Disability Insurance provided
by Novoste to its employees.
3. Manner of Performance
(a) This agreement is binding on Consultant, an individual named Charles
E. Larsen. Consultant represents that Consultant has the requisite
expertise, ability and legal right to render the Services and will
perform the Services in an efficient manner. Consultant will abide
by all laws, rules and regulations that apply to the performance of
the services, including applicable requirements regarding equal
employment opportunity and the provisions of any Executive Orders
and related rules. Consultant when on Novoste's premises will comply
with Novoste's policies with respect to conduct of visitors.
(b) Consultant may retain third parties to assist in the rendering of
Services only upon approval by Novoste and only upon written
agreement by such third parties, a copy of which shall be provided
to Novoste, that they agree to be bound by all the terms and
conditions of this agreement as if Consultant hereunder.
4. Confidentiality
In the course of this agreement, it is anticipated that Consultant will
learn of information that Novoste regards as confidential or proprietary.
Consultant will keep confidential this information and any other
information which Consultant may acquire with respect to Novoste's
business, including, but not limited to, information developed by
Consultant and information relating to new products, customers, pricing
99-0016-CSA
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2
<PAGE>
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know-how, processes, and practices, unless and until Novoste consents in
writing to disclosure, or unless such knowledge and information otherwise
becomes generally available to the public through no fault of Consultant.
Consultant will not disclose to others, without Novoste's written consent,
the fact that it is acting on behalf of Novoste and will not publish on
the subject of this consulting relationship without first providing
Novoste with the opportunity to review and offer reasonable objection to
the contemplated publication. This undertaking to keep information
confidential will survive the termination of this agreement. At the
termination of this agreement, Consultant will return to Novoste all
physical specimens, devices, and prototypes, and all drawings,
specifications, manuals and other printed or reproduced material
(including information stored on machine readable media) provided by
Novoste to Consultant and all copies of such information made by
Consultant.
5. Conflicts of Interest
Consultant represents that it has advised Novoste in writing prior to the
date of signing this agreement of any relationship with third parties,
including competitors of Novoste, which would present a conflict of
interest with the rendering of the Services, or which would prevent
Consultant from carrying out the terms of this agreement or which would
present a significant opportunity for the disclosure of confidential
information. Consultant will advise Novoste of any such relationships that
arise during the term of this agreement. Novoste will then have the option
to terminate this agreement without further liability to Consultant,
except to pay for Services actually rendered.
Consultant has advised Novoste that in addition to being an independent
consultant for Novoste, Consultant separately owns, operates and is an
employee of The Innovation Factory, LLC, a company located at 4350-A,
International Blvd., Norcross, GA 30093. Consultant declares that The
Innovation Factory does not present a conflict of interest and
furthermore, is not and will not be engaged in the development,
management, manufacture, distribution or sale of Radiotherapy products or
services during the term of this Agreement and for at least one year
thereafter.
6. Relationship with Others
During the term of this agreement and for one year after its termination
date, Consultant will not perform services in the specific area in which
Consultant actually has consulted under this agreement for any other
entity engaged in the development, management, manufacture, distribution
or sale of Radiotherapy products or services.
7. Independent Contractor
Consultant is an independent contractor, not an employee of Novoste; and
nothing in this Consulting Agreement shall render Consultant an employee
of Novoste. Although Consultant is an independent contractor and not an
employee of Novoste, Novoste will be responsible for deducting from
Consultant's paychecks all federal, state, and local income taxes and
Social Security contributions.
99-0016-CSA
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
8. Ownership of Developments
All written materials and other works which may be subject to copyright
and all patentable and unpatentable inventions, discoveries, and ideas
(including but not limited to any computer software) which are made,
conceived or written by Consultant during the term of this agreement, and
for 90 days after it expires, and which are based upon the Services
performed by Consultant for Novoste ("Developments") shall become
Novoste's property. Consultant represents and warrants that Consultant's
employer, The Innovation Factory, has no ownership, license or other
rights to the aforementioned Developments, and Consultant is under no
obligation to assign, license or transfer rights to the aforementioned
Developments to Consultant's employer, The Innovation Factory.
Consultant agrees to hold all Developments confidential in accordance with
paragraph 4 of this agreement.
9. Disclosure and Transfer of Developments
Consultant will disclose promptly to Novoste each Development and, upon
Novoste's request and at Novoste's expense, Consultant will assist
Novoste, or anyone it designates, in filing patent or copyright
applications in any country in the world. Each copyrightable work, to the
extent permitted by law, will be considered a work made for hire and the
authorship and copyright of the work shall be in Novoste's name.
Consultant will execute all papers and do all things which may be
necessary or advisable, in the opinion of Novoste, to process such
applications and to vest in Novoste, or its designee, all the right, title
and interest in and to the Developments. If for any reason Consultant is
unable to effectuate a full assignment of any Development, Consultant will
transfer to Novoste, or its designee, its transferable rights, whether
they be exclusive or nonexclusive, or as a joint inventor or partial owner
of the Development.
10. Disclosures to Novoste
If during the term of this agreement, Consultant discloses any
copyrightable works, inventions, discoveries, or ideas to Novoste which
were conceived or written prior to this agreement or which are not based
upon the Services performed by consultant for Novoste under this
agreement, Novoste will have no liability to Consultant because of its use
of such works, inventions, discoveries or ideas.
11. Term
The term of this agreement is as specified on the first page of this
agreement, but in no event will the term of this agreement extend beyond
three years from the date of this agreement.
99-0016-CSA
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
12. Termination
Novoste may terminate this Consulting Agreement effective the day of
notice by giving Consultant written notice of termination if Consultant:
(a) breaches any of its obligations under Paragraphs 4,6, 8 or 9 of the
agreement; or (b) fails to provide the standard of performance of Services
that substantially meets Novoste's reasonable expectations; or (c) fails
at any time to provide the contracted services defined in section 1,
section 2 and schedule 1 of this agreement. If Novoste determines that it
no longer requires the services of Consultant it may terminate this
agreement by giving Consultant thirty (30) days written notice.
13. General
No assignment by Consultant of this agreement or any sums due under it
will be binding on Novoste without Novoste's prior written consent. This
agreement supersedes all prior agreements and understandings between the
parties respecting the subject matter of this agreement, with the
exception of Agreements signed between Consultant and Novoste as a
condition of Consultant's previous employment with Novoste. This agreement
may not be changed or terminated orally by or on behalf of either party
and nothing in any attachments or schedules to this agreement may vary the
terms of this agreement.
In the event the terms of any attachments or schedules are inconsistent
with the terms of the numbered paragraphs of this agreement, the terms of
the numbered paragraphs of this agreement shall control.
In the event either party breaches this agreement, the other party will
have the right to terminate the agreement. In the event of the actual or
threatened breach of any of the terms of paragraphs 4, 6, 8, and 9,
Novoste will have the right to specific performance and injunctive relief.
The rights granted by this paragraph are in addition to all other remedies
and rights available at law or in equity.
This agreement shall be construed according to the laws of Georgia for
contracts made within that state.
The undersigned warrant and represent that they have authority to enter
this agreement on behalf of Novoste or Consultant, respectively.
NOVOSTE CORPORATION CONSULTANT
- ----------------------------------- ----------------------------------------
William A. Hawkins, President & CEO Charles E. Larsen
Date: _____________________________ Date: __________________________________
- --------------------------------------------------------------------------------
5
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