<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-15443
THERAGENICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 58-1528626
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5203 Bristol Industrial Way
Buford, Georgia 30518
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 271-0233
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
As of November 7, 2000 the number of shares of $.01 par value common stock
outstanding was 29,535,820.
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THERAGENICS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets - December 31, 1999 and September 30, 2000....................................... 3
Statements of Earnings for the three and nine months ended
September 30, 1999 and 2000.................................................................. 5
Statements of Cash Flows for the nine months ended
September 30, 1999 and 2000.................................................................. 6
Statement of Changes in Stockholders' Equity for the nine
months ended September 30, 2000.............................................................. 7
Notes to Financial Statements................................................................... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................................... 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK........................................................................... 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................................................ 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................... 16
SIGNATURES................................................................................................ 17
</TABLE>
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THERAGENICS CORPORATION
BALANCE SHEETS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and short-term investments $ 18,765 $ 23,321
Marketable Securities 15,137 19,991
Trade Accounts Receivable 7,333 6,431
Inventories 1,172 1,246
Deferred income tax asset 432 414
Prepaid expenses and other current assets 963 904
---------- ----------
TOTAL CURRENT ASSETS 43,802 52,307
PROPERTY AND EQUIPMENT
Buildings and improvements 20,453 26,156
Machinery and equipment 37,010 45,309
Office furniture and equipment 436 603
---------- ----------
57,899 72,068
Less accumulated depreciation and
amortization (10,676) (14,533)
---------- ----------
47,223 57,535
Land 848 832
Construction in progress 16,010 14,423
---------- ----------
TOTAL PROPERTY AND EQUIPMENT 64,081 72,790
OTHER ASSETS 160 212
---------- ----------
TOTAL ASSETS $ 108,043 $ 125,309
========== ==========
</TABLE>
<PAGE> 4
THERAGENICS CORPORATION
BALANCE SHEETS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable
Trade $ 783 $ 911
Construction 843 --
Accrued salaries, wages and payroll taxes 333 794
Income taxes payable 563 1,613
Other current liabilities 466 680
---------- ----------
TOTAL CURRENT LIABILITIES 2,988 3,998
LONG TERM LIABILITIES
Deferred income taxes 3,900 4,998
Other 78 75
---------- ----------
TOTAL LONG-TERM LIABILITIES 3,978 5,073
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 100,000
shares authorized; 29,514 and 29,532
issued and outstanding 295 295
Additional paid-in capital 59,600 59,857
Retained earnings 41,182 56,086
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 101,077 116,238
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 108,043 $ 125,309
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 5
THERAGENICS CORPORATION
STATEMENTS OF EARNINGS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUE
Product sales - affiliate $ 11,419 $ 10,487 $ 31,591 $ 33,182
Product sales - non affiliates 36 24 99 82
Licensing Fees 25 25 75 75
--------- --------- --------- ---------
Total revenue 11,480 10,536 31,765 33,339
COST OF SALES 3,458 3,579 10,025 10,356
--------- --------- --------- ---------
GROSS PROFIT 8,022 6,957 21,740 22,983
OPERATING EXPENSES
Selling, general & administrative 1,697 1,678 4,865 5,142
Research & development 203 596 482 1,515
--------- --------- --------- ---------
1,900 2,274 5,347 6,657
--------- --------- --------- ---------
EARNINGS FROM OPERATIONS 6,122 4,683 16,393 16,326
OTHER INCOME (EXPENSE)
Minimum income -- 5,444 -- 5,444
Interest income 321 505 963 1,403
Interest and financing costs (19) (35) (44) (109)
Other 29 (10) 32 --
--------- --------- --------- ---------
331 5,904 951 6,738
--------- --------- --------- ---------
EARNINGS BEFORE INCOME TAXES 6,453 10,587 17,344 23,064
Income tax expense 2,064 3,777 6,018 8,160
--------- --------- --------- ---------
NET EARNINGS $ 4,389 $ 6,810 $ 11,326 $ 14,904
--------- --------- --------- ---------
NET EARNINGS PER COMMON SHARE
Basic $ 0.15 $ 0.23 $ 0.38 $ 0.50
Diluted $ 0.15 $ 0.23 $ 0.38 $ 0.50
WEIGHTED AVERAGE SHARES
Basic 29,503 29,531 29,468 29,527
Diluted 30,065 29,903 29,923 30,064
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 6
THERAGENICS CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------------------
1999 2000
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 11,326 $ 14,904
Adjustments to reconcile net earnings to
net cash provided by operating activities
Deferred income taxes 1,022 1,116
Depreciation & amortization 2,773 3,891
Provision for reserves -- (114)
Stock-based compensation 207 142
Income tax benefit from options -- 26
Deferred rent 56 (3)
Changes in assets and liabilities:
Accounts Receivable 521 924
Inventories (240) 18
Prepaid expenses and other current assets (111) 59
Other assets -- (86)
Trade accounts payable (85) 128
Accrued salaries, wages and payroll taxes 259 461
Income taxes payable 483 1,050
Other current liabilities 287 214
---------- ----------
Net cash provided by operating activities 16,498 22,730
CASH FLOW FROM INVESTING ACTIVITIES
Purchases and construction of property and equipment (8,643) (13,409)
Purchases and maturities of marketable securities (7,180) (4,854)
Loan fees paid (105) --
---------- ----------
Net cash used by investing activities (15,928) (18,263)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and stock plan 360 89
---------- ----------
Net cash provided by financing activities 360 89
NET INCREASE IN CASH AND
SHORT-TERM INVESTMENTS 930 4,556
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 19,542 18,765
---------- ----------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $ 20,472 $ 23,321
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 7
THERAGENICS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Common Stock
------------------------- Additional
Number of Par value paid-in Retained
shares $0.01 Capital earnings Total
--------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 29,514 $ 295 $ 59,600 $ 41,182 $101,077
Exercise of stock options 9 -- 25 -- 25
Employee stock purchase plan 9 -- 64 -- 64
Stock-based compensation -- -- 142 -- 142
Tax effect from options -- -- 26 -- 26
Net earnings for the period -- -- -- 14,904 14,904
-------- -------- -------- -------- --------
BALANCE, September 30, 2000 29,532 $ 295 $ 59,857 $ 56,086 $116,238
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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THERAGENICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The interim financial statements included herein have been prepared by the
Company without audit. These statements reflect all adjustments which are, in
the opinion of management, necessary to present fairly the financial position,
results of operations, cash flows and changes in stockholders' equity for the
periods presented. All such adjustments are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The Company believes that the financial
statements and disclosures are adequate to make the information not misleading.
It is suggested that these financial statements and notes be read in conjunction
with the audited financial statements and notes for the year ended December 31,
1999, included in the Form 10-K filed by the Company.
NOTE B - CONSTRUCTION IN PROGRESS AND PURCHASE COMMITMENTS
The U.S. Department of Energy (DOE) has granted Theragenics access to unique DOE
technology for use in production of isotopes, including Pd-103 (the "DOE
Project"). This technology venture represents part of a DOE initiative to
redirect Cold War assets to peacetime use and cushion the economic impact of
U.S. Defense Department cutbacks. This project is expected to enable the Company
to significantly increase its production capacity and allow for expanded use of
Pd-103 and TheraSeed(R) beyond treatment of prostate cancer to new medical
applications. The Company is constructing a facility in Oak Ridge, Tennessee to
house the equipment, infrastructure and work force necessary to support the
production of isotopes, including Pd-103, using this DOE technology. The Company
expects to invest approximately $25 million to $30 million through 2001 to build
this manufacturing and R&D facility. Construction costs of approximately $13.9
million have been incurred on this project as of September 30, 2000, and are
included in construction in progress.
During the third quarter of 2000, fourteen cyclotrons were operational. The
Company has no current plans to add additional cyclotrons.
NOTE C - SALES AND MARKETING AGREEMENTS
During the first half of 2000, Indigo Medical, Inc. (Indigo) did not meet the
contractual minimum purchase requirements under the terms of the Sales and
Marketing Agreement between the Company and Indigo (the "Agreement"). As
provided by the Agreement, the Company invoiced Indigo for payments totaling
$5.4 million relating to the shortfall in the minimum purchase requirements. As
a result of this demand for payment, Indigo had the option to exit the Agreement
and, in August 2000, exercised this option. Under the termination provisions of
the Agreement, Indigo retains non-exclusive sales and marketing rights to
TheraSeed(R) for prostate cancer until August 10, 2001, during which time Indigo
is no longer required to meet minimum sales targets. Indigo is also prohibited
from selling a competing radioactive device for the treatment of prostate cancer
through August 10, 2002.
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THERAGENICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE C - SALES AND MARKETING AGREEMENTS - CONTINUED
If Indigo had not exercised its option to exit the Agreement, the shortfall in
the minimum purchase requirements for the first half of 2000 would have been
subject to adjustment, based on Indigo's sales of TheraSeed(R) during the second
half of 2000. Indigo's notification of termination in August 2000 eliminated the
possibility of adjustment and, accordingly, Theragenics recorded the $5.4
million purchase minimum amount due from Indigo as other income in the third
quarter of 2000. The $5.4 million payment, which was also received from Indigo
in the third quarter of 2000, added approximately $3.5 million or $0.12 per
diluted share to net earnings for the quarter.
As a result of Indigo's exit from the Agreement, the Company immediately
regained the right to sell TheraSeed(R) for prostate cancer treatment directly
to physicians and to other third-party distributors. During the third quarter of
2000, Theragenics executed non-exclusive distribution agreements with Nycomed
Amersham and Imagyn Medical Technologies, Inc. for the distribution of
TheraSeed(R). Amersham is a provider of medical diagnostics and radiotherapy
products. Imagyn manufactures and distributes medical devices, including
brachytherapy products for the treatment of cancer. The five-year agreements
give each distributor the right to distribute TheraSeed(R) immediately in the
U.S., Canada and Puerto Rico for the treatment of prostate cancer and other
solid localized cancerous tumors.
NOTE D - LITIGATION
In January 1999, the Company and certain of its officers and directors were
named as defendants in certain securities actions, alleging violations of the
federal securities laws, including Sections 10(b), 20(a) and Rule 10b-5 of the
Securities and Exchange Act of 1934, as amended. These actions have been
consolidated into a single action pending in the U.S. District Court for the
Northern District of Georgia. The complaint, as amended, purports to represent a
class of investors who purchased or sold securities during the time period from
January 29, 1998 to January 11, 1999. The amended complaint generally alleges
that the defendants made certain misrepresentations and omissions in connection
with the performance of the Company during the class period and seeks
unspecified damages. On May 14, 1999 a stockholder of the Company filed a
derivative complaint in the Delaware Court of Chancery purportedly on behalf of
the Company, alleging that certain directors breached their fiduciary duties by
engaging in the conduct that is alleged in the consolidated federal class action
complaint. The derivative action has been stayed by the agreement of the
parties. On September 3, 1999, the Company filed a motion to dismiss the
consolidated federal class action complaint on the grounds that it failed to
state a claim against the Company. On July 19, 2000, the Court granted the
Company's motion to dismiss, and granted the plaintiffs leave to amend their
complaint. On August 21, 2000, the plaintiffs filed a second amended complaint.
On October 6, the defendants filed a motion to dismiss the second amended
complaint, which is presently pending before the Court. Management believes
these charges are without merit and intends to vigorously oppose the litigation,
however, given the nature and early stage of the proceedings, the ultimate
outcome of the litigation cannot be determined at
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THERAGENICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE D - LITIGATION - CONTINUED
this time. Accordingly, no provision for any liability that might result from
this litigation has been made. The Company maintains insurance for claims of
this general nature.
In trade secret litigation filed against International Brachytherapy ("IBt"),
Theragenics claimed ownership of certain cyclotron improvements incorporated
into the cyclotrons provided to IBt by the companies' common cyclotron vendor.
In September 2000, Theragenics and IBt agreed to a settlement which had no
effect on Theragenics' financial condition or results of operations. In
connection with this litigation, IBt had sought indemnification from the
cyclotron vendor against the Company's claims. The cyclotron vendor in turn
filed for arbitration seeking determination of ownership of the cyclotron
improvements and certain other information developed by Theragenics relating to
the cyclotron technology. The cyclotron vendor is also seeking indemnification
for any amounts paid by the vendor to IBt to defend against the trade secret
claims of Theragenics, and attorney fees in the arbitration. The cyclotron
vendor is not seeking to prevent the Company from using the cyclotrons or the
related improvements or information. The parties are currently negotiating a
settlement that as proposed would have no effect on Theragenics' financial
condition or results of operations. Accordingly, no provision for any liability
has been made.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the quarter ended September 30, 2000 were $10.5 million,
compared to $11.5 million in the third quarter of 1999, a decrease of $1.0
million or 8.7%. Revenues for the nine months ended September 30, 2000 were
$33.3 million compared to $31.8 million for the first nine months of 1999, an
increase of $1.5 million or 4.7%. During the third quarter of 2000, Indigo
Medical, Inc. (Indigo) exercised an option to exit the Sales and Marketing
Agreement between Theragenics and Indigo (the "Agreement"). Since May 1997,
Indigo held the exclusive worldwide rights to distribute TheraSeed(R) for
prostate cancer under this Agreement. As a result of Indigo's exit from the
Agreement, the Company regained the right to directly market and distribute its
TheraSeed(R) product for treatment of prostate cancer to physicians and
third-party distributors. (See "Sales and Marketing Agreements" below).
Gross profit as a percentage of revenue decreased to 66.0% for the
third quarter of 2000, from 69.9% for the third quarter of 1999. This decline in
gross profit margin was primarily a result of the increase in depreciation
expense for the additional cyclotrons that were ordered almost two years ago to
meet sales forecasts made at that time by Indigo. The non-cash depreciation
charge for the quarter increased to $1.4 million from $991,000 for the third
quarter of 1999, reflecting the increase to 14 cyclotrons in operation during
the third quarter of 2000 from eight cyclotrons in the third quarter of 1999.
The increase in depreciation was partially offset by improved efficiencies and
automation in the Company's proprietary production processes, and the
utilization of certain manufacturing materials and resources in research and
development activities.
Gross profit as a percentage of revenue for the first nine months of
2000 was 68.9%, compared to 68.4% for the first nine months of 1999. The
increase in depreciation expense during the 2000 period was offset by the
increase in revenue over the first nine months of 1999. The gross profit margin
in 2000 was also aided by the improved efficiencies and automation in the
Company's proprietary production processes, and the utilization of certain
manufacturing materials and resources in research and development activities.
Consistent with Theragenics' goal to have ample capacity for future
TheraSeed(R) demand as well as to support Pd-103 research and development
activities, three cyclotrons have been placed into service during 2000. As
additional cyclotrons come on line, margins generally decline because each
machine represents excess capacity for a period while carrying its full
component of fixed costs, including depreciation. The Company currently has
fourteen cyclotrons in operation, and has no current plans to add additional
cyclotrons.
Selling, general and administrative ("SG&A") expenses were $1.7 million
in the third quarter of 2000 and the third quarter of 1999. A decline in legal
and professional fees in the third quarter of 2000 was offset by the start
up-costs related to the Company's construction project in Oak Ridge, Tennessee,
and an increase in compensation and benefits.
SG&A expenses for the nine months ended September 30, 2000 were $5.1
million, compared to $4.9 million for the first nine months of 1999, an increase
of $200,000 or 4.1%. This increase was primarily due to an increase in
compensation and benefits, and start-up costs related to the Company's
construction project in Oak Ridge, Tennessee, partially offset by a reduction in
legal and professional fees.
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The Company expects increases in SG&A expenses as a result of the
termination of the Indigo Agreement. See "Sales and Marketing Agreements" below.
Research and development (R&D) expenses increased to $596,000 in the
third quarter of 2000 from $203,000 in the third quarter of 1999. R&D expenses
also increased during the first nine months of the year, to $1.5 million in 2000
from $482,000 in 1999. The increase in R&D expenses was a result of the
Company's R&D initiatives, including activities associated with its agreement
with the Atlanta Cardiovascular Research Institute (see below), and development
efforts to improve the Company's proprietary production processes. The Company's
research and development initiatives, launched in the third quarter of 1999, are
intended to expand the application of Pd-103 and TheraSeed(R) to other
oncological and non-oncological uses, and explore options for using the
Company's expertise and capabilities in other areas. Management plans to
continue to increase efforts in research and development as its initiatives to
diversify move forward and expects future R&D expenditures to increase
significantly. However, R&D spending is dependent on the complex scheduling of
research and development activities in progress as well as the pursuit of other
appropriate opportunities as they arise. For these reasons, no assurances can be
made as to spending amounts and R&D expenses may fluctuate significantly from
period to period.
As part of its R&D initiatives, the Company has an agreement with the
Atlanta Cardiovascular Research Institute (ACRI) to conduct a pre-clinical
animal study addressing the use of Pd-103 for the prevention of restenosis (the
"ACRI Agreement"). Restenosis is the reclosing of arteries that often occurs
after coronary angioplasties. It is estimated that nearly half of the 350,000
coronary angioplasties done in the United States each year fail or restenosis
within the first few months of the operation. In the first phase of the study,
which began in April 2000, the Company delivered catheter-based Pd-103 devices
to ACRI for determination of whether the devices can inhibit restenosis-like
changes in pig coronary arteries after balloon angioplasty and stent
implantation. The preliminary data from Phase I of the study, reported in August
2000, showed that the inhibitory effects of Pd-103 are similar to that of other
emitters, both beta and gamma, with efficacy possibly achieved with a lower
dose. Based on the preliminary data, the Company is continuing its pre-clinical
animal study, and expects longer-term data to be available in early 2001. The
Company has also contracted with a European trialist and has met with regulators
in Europe to discuss conducting clinical feasibility trials in humans for
coronary in-stent restenosis in Europe in 2001. Any human trials in Europe will
be dependent upon the successful results of the ongoing additional pre-clinical
animal studies.
Other income for the third quarter of 2000, excluding minimum income
described below, increased to $460,000 from $331,000 for the third quarter of
1999, and to $1.3 million for the first nine months of 2000 from $951,000 for
the comparable period in 1999. These increases were attributable to additional
funds being available for investment during the 2000 periods as a result of cash
generated from operations. Funds available for investment have and will continue
to be utilized for the Company's current and future expansion programs and
research and development activities. As funds continue to be used for these
programs and activities, management expects other income to decline accordingly.
The Company recognized $5.4 million of other income in the third
quarter of 2000 related to purchase minimum shortfalls under the Sales and
Marketing Agreement with Indigo. This increased net earnings during the third
quarter of 2000 by $3.5 million, or $.12 per diluted share. (See "Sales and
Marketing Agreements" below).
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The Company's effective income tax rate was approximately 36% for the
third quarter of 2000, compared to 32% for the third quarter of 1999. The
Company's effective income tax rate was approximately 35% for each of the
nine-month periods. The Company's income tax rate in each period is lower than
the statutory rates primarily due to the recognition of tax credits generated by
the Company's investments in its expansion projects and research activities, and
tax-exempt interest income.
SALES AND MARKETING AGREEMENTS
During the first half of 2000, Indigo Medical, Inc. (Indigo) did not
meet the contractual minimum purchase requirements under the terms of the Sales
and Marketing Agreement between the Company and Indigo (the "Agreement"). As
provided by the Agreement, the Company invoiced Indigo for payments totaling
$5.4 million relating to the shortfall in the minimum purchase requirements. As
a result of this demand for payment, Indigo had the option to exit the Agreement
and, in August 2000, exercised this option. Under the termination provisions of
the Agreement, Indigo retains non-exclusive sales and marketing rights to
TheraSeed(R) for prostate cancer until August 10, 2001, during which time Indigo
is no longer required to meet minimum sales targets. Indigo is also prohibited
from selling a competing radioactive device for the treatment of prostate cancer
through August 10, 2002. Theragenics and Indigo have agreed to cooperate to
ensure to the greatest extent possible that the needs of TheraSeed(R) customers
are met.
If Indigo had not exercised its option to exit the Agreement, the
shortfall in the minimum purchase requirements for the first half of 2000 would
have been subject to adjustment, based on Indigo's sales of TheraSeed(R) during
the second half of 2000. Indigo's notification of termination in August 2000
eliminated the possibility of adjustment and, accordingly, Theragenics recorded
the $5.4 million purchase minimum amount due from Indigo as other income in the
third quarter of 2000. The $5.4 million payment, which was also received from
Indigo in the third quarter of 2000, added approximately $3.5 million or $0.12
per diluted share to net earnings for the quarter.
As a result of Indigo's exit from the Agreement, the Company
immediately regained the right to sell TheraSeed(R) for prostate cancer
treatment directly to physicians and to other third-party distributors. During
the third quarter of 2000, Theragenics executed non-exclusive distribution
agreements with Nycomed Amersham and Imagyn Medical Technologies, Inc. for the
distribution of TheraSeed(R). Amersham is a provider of medical diagnostics and
radiotherapy products. Imagyn manufactures and distributes medical devices,
including brachytherapy products for the treatment of cancer. The five-year
agreements give each distributor the right to distribute TheraSeed(R)
immediately in the U.S., Canada and Puerto Rico for the treatment of prostate
cancer and other solid localized cancerous tumors. Each distributor has also
chosen TheraSeed(R) as their only palladium-based product. Management expects
that the unit price for TheraSeed(R) under these two non-exclusive distribution
agreements will approximate the unit price received from Indigo. The Company
intends to enter into additional non-exclusive distribution agreements in order
to take advantage of multiple distribution channels and expand its market
coverage.
To the extent that the Company is able to obtain sales directly to
physicians for its own account, the distributors' margin, which can run
approximately 25% to 30%, would be captured by Theragenics, in addition to its
margin as manufacturer. For sales through the non-exclusive distributor
agreements, this margin will be captured by the distributor, similar to the
Indigo
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Agreement. Since the Company does not currently intend to build its own sales
force, Theragenics' ability to capture TheraSeed(R) accounts for direct to
physician sales will primarily be a function of Indigo's transition out of the
TheraSeed(R) market, and the sales and marketing success of competitors,
including the Company's non-exclusive distributors.
The Company expects that SG&A expenses could increase by up to $2.0
million in the next year as it supports its brand in an attempt to increase
demand for TheraSeed(R). It is expected that this support will take the form of
TheraSeed(R) brand advertising to consumers and physicians, clinical studies
aimed at showing the superiority of TheraSeed(R) in the treatment of prostate
cancer, technical field support to TheraSeed(R) customers and other customer
service and patient information activities.
Over the past thirteen years, and prior to Indigo exiting from the
Agreement, the Company took all orders for TheraSeed(R), performed all customer
service and patient information functions, and shipped TheraSeed(R) directly to
physicians. Because these functions have always been performed by Theragenics,
minimal interruption of service or product delivery to current customers is
expected. However, as with any significant change, transition challenges
associated with these marketing and distribution changes may arise that could
significantly impact the TheraSeed(R) market and thereby Theragenics' near term
financial performance.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash, short-term investments and marketable securities
of $43.3 million at September 30, 2000, compared to $33.9 million at December
31, 1999. Marketable securities consist primarily of high-credit quality
municipal obligations, in accordance with the Company's investment policies. The
increase in cash, short-term investments and marketable securities was a result
of cash generated by operations, including the receipt of the purchase minimum
payment from Indigo, partially offset by capital expenditures. Working capital
was $48.3 million at September 30, 2000, compared to $40.8 million at December
31, 1999. The Company also has an Unsecured Credit Agreement with a financial
institution that provides for maximum borrowings of $40.0 million under two
lines of credit, and an additional uncommitted $10.0 million line of credit.
Letters of credit totaling approximately $400,000 were outstanding under the
terms of the Unsecured Credit Agreement at September 30, 2000.
The $22.7 million in cash generated from operations was the Company's
principal source of cash during the first nine months of 2000. Cash generated
from operations consists of net earnings plus non-cash expenses such as
depreciation, amortization and deferred income tax expense. Depreciation and
amortization for the first nine months of 2000 was $3.9 million, compared to
$2.8 million for the first nine months of 1999. The increase in depreciation and
amortization was a result of the increase in the number of cyclotrons that were
operational during 2000.
The Company's primary use of cash in the first nine months of 2000
related to capital spending to increase manufacturing capacity and totaled $13.4
million during the period. These expenditures related primarily to the Company's
DOE Project (see below), the addition of cyclotrons and supporting facilities
and the Company's new headquarters facility.
The U.S. Department of Energy (DOE) has granted Theragenics access to
unique DOE technology for use in production of isotopes, including Pd-103 (the
"DOE Project"). This technology venture represents part of a DOE initiative to
redirect Cold War assets to peacetime
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use and cushion the economic impact of U.S. Defense Department cutbacks. The
Company expects that the use of this technology will significantly increase its
capacity and allow for expanded use of Pd-103 and TheraSeed(R) beyond treatment
of prostate cancer to new medical applications. The Company also believes that
the DOE Project may allow it to explore options for applying this technology to
other uses, though there are no assurances that this will be achieved. The
Company is constructing a facility in Oak Ridge, Tennessee to house the
equipment, infrastructure and work force necessary to support the production of
isotopes, including Pd-103, using this DOE technology. Construction costs of
approximately $13.9 million have been incurred on the DOE Project through
September 30, 2000. The Company expects to invest an additional $11.1 million -
$16.1 million through 2001 to complete this manufacturing and R&D facility.
As part of the DOE Project, the Company has leased land in the Oak Ridge,
Tennessee area and equipment previously used by the government to produce
isotopes. As a result of the sensitive nature of the equipment, the specialized
technology involved and the restrictions on access to unique DOE-operated
facilities, the Company has contracted with the DOE's primary contractor for the
Oak Ridge government installation to handle certain technical and operational
services that are critical to the project, including moving, reassembling and
recommissioning equipment currently in storage, designing and fabricating new
parts and modifications to the equipment and DOE facilities; and operating and
providing ongoing access to the DOE facilities. The success of the project is
dependent on the continued cooperation of the DOE and its primary contractor,
which could be adversely affected by future changes in governmental program
priorities and funding. If the equipment cannot be moved and recommissioned
successfully, if there are problems with the operation or modification of the
DOE-operated facilities, or if unforeseen challenges arise, the project may not
be successful or the costs or timeliness associated with the project could
exceed current estimates.
In addition to using cash to fund the DOE Project and other capital
expansion projects in 2000 and 2001, the Company expects to significantly
increase its spending for R&D. Pre-clinical animal studies addressing the use of
Pd-103 for the prevention of restenosis are underway, and other R&D activities
are also occurring (see "Results of Operations", above). The Company expects
that R&D expense spending may total up to approximately 5% of revenue in 2000,
depending on whether appropriate R&D opportunities arise.
Cash provided by financing activities was $89,000 in the first nine
months of 2000, consisting of cash proceeds from the exercise of stock options
and the Company's Employee Stock Purchase Plan.
The Company believes that current cash and investment balances, cash
from future operations and credit facilities, will be sufficient to meet its
currently anticipated working capital and capital expenditure requirements. In
the event additional financing becomes necessary, management may choose to raise
those funds through other means of financing as appropriate.
FORWARD LOOKING AND CAUTIONARY STATEMENTS
This document contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 including,
without limitation, statements regarding sales and marketing efforts,
Theragenics' establishment of new sales, marketing and distribution initiatives
for TheraSeed(R), Theragenics' and Indigo's cooperation to see that the needs of
TheraSeed(R) customers are met, market opportunities and transition challenges
that may
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arise, effectiveness of non-exclusive distribution agreements, plans for new
distributors, pricing to third party distributors, future cost of sales, R&D
efforts and expenses, SG&A expenses, other income, expansion plans, the DOE
Project, and the sufficiency of the Company's liquidity and capital resources.
From time to time, the Company may also make other forward-looking statements
relating to such matters as well as anticipated financial performance, business
prospects, technological developments, research and development activities and
similar matters. These forward-looking statements are subject to certain risks,
uncertainties and other factors which could cause actual results to differ
materially from those anticipated, including risks associated with the
management of growth, research and development activities, effectiveness and
execution of marketing and sales programs of Theragenics, Indigo, and other
non-exclusive distributors, access to alternative distribution channels,
potential changes in product pricing and competitive conditions, continued
acceptance of TheraSeed(R) by the market, execution and effectiveness of a
transition from Indigo to Theragenics, execution and effectiveness of
competitors and their ability to capitalize on this period of change, acceptance
and efficacy of Pd-103 for other applications, adverse changes in governmental
program priorities and budgetary funding by the relevant governmental
authorities, potential costs and delays in the startup and refinement of
technology and related equipment, potential equipment failure, potential
inability to obtain, construct or install necessary parts or modifications to
production equipment or facilities, government regulation of the therapeutic
radiological pharmaceutical and device business and third-party reimbursement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note D to the Company's financial statements included in Item 1 of this
report, which is incorporated by reference hereby.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibit is filed as a part of this report;
Exhibit 27 Financial Data Schedule (for SEC use only)
(b) The Company filed a Form 8-K on August 17, 2000 stating that
it had issued a press release announcing that Indigo Medical,
Inc. had exercised an option to exit a marketing and sales
agreement with Theragenics Corporation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGISTRANT:
THERAGENICS CORPORATION
By: /s/ M. Christine Jacobs
---------------------------------------
M. Christine Jacobs
Chief Executive Officer
/s/ Bruce W. Smith
---------------------------------------
Bruce W. Smith
Treasurer and Chief Financial Officer
Dated: November 7, 2000
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