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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 May 8, 2000 the number of shares of $.01 par value common stock outstanding was 29,527,782.
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Page No.
--------
Balance Sheets - December 31, 1999 and March 31, 2000 . . . . . . . . . . . . . 3
Statements of Earnings for the three months ended
March 31, 1999 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Statements of Cash Flows for the three months ended
March 31, 1999 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Statement of Changes in Stockholders' Equity for the three
months ended March 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . 7
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . 14
ASSETS
December 31, March 31,
1999 2000
----------------- --------------
CURRENT ASSETS
Cash and short-term investments $ 18,765 $ 14,831
Marketable Securities 15,137 19,976
Trade Accounts Receivable 7,333 11,133
Inventories 1,172 1,316
Deferred income tax asset 432 360
Prepaid expenses and other current assets 963 1,035
----------------- --------------
TOTAL CURRENT ASSETS 43,802 48,651
PROPERTY AND EQUIPMENT
Buildings and improvements 20,453 25,422
Machinery and equipment 37,010 37,199
Office furniture and equipment 436 518
----------------- --------------
57,899 63,139
Less accumulated depreciation and
amortization (10,676) (11,858)
----------------- --------------
47,223 51,281
Land 848 832
Construction in progress 16,010 12,554
----------------- --------------
TOTAL PROPERTY AND EQUIPMENT 64,081 64,667
OTHER ASSETS 160 144
----------------- --------------
TOTAL ASSETS $ 108,043 $ 113,462
================= ==============
The accompanying notes are an integral part of these statements.
December 31, March 31,
1999 2000
-------------------- -----------------
CURRENT LIABILITIES
Accounts Payable
Trade $783 $1,160
Construction 843 --
Accrued salaries, wages and payroll taxes 333 481
Income taxes payable 563 1,925
Other current liabilities 466 401
-------------------- -----------------
TOTAL CURRENT LIABILITIES 2,988 3,967
LONG-TERM LIABILITIES
Deferred income taxes 3,900 4,235
Other liabilities 78 77
-------------------- -----------------
TOTAL LONG-TERM LIABILITIES 3,978 4,312
CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 100,000
shares authorized; 29,514 and 29,525
issued and outstanding 295 295
Additional paid-in capital 59,600 59,712
Retained earnings 41,182 45,176
-------------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 101,077 105,183
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $108,043 $113,462
==================== =================
The accompanying notes are an integral part of these statements.
Ended March 31,
------------------------------------------
1999 2000
------------------ -----------------
REVENUE
Product sales - affiliates $ 9,106 $ 11,230
Product sales - non affiliates 33 24
Licensing Fees 25 25
------------------ -----------------
9,164 11,279
COST OF SALES 3,380 3,302
------------------ -----------------
GROSS PROFIT 5,784 7,977
OPERATING EXPENSES
Selling, general and administrative 1,407 1,821
Research and development 139 348
------------------ -----------------
1,546 2,169
------------------ -----------------
EARNINGS FROM OPERATIONS 4,238 5,808
OTHER INCOME (EXPENSE)
Interest income 277 455
Interest and financing costs (6) (37)
Other 3 (4)
------------------ -----------------
274 414
------------------ -----------------
EARNINGS BEFORE INCOME TAXES 4,512 6,222
Income tax expense 1,632 2,228
------------------ -----------------
NET EARNINGS $ 2,880 $ 3,994
================== =================
NET EARNINGS PER COMMON SHARE
Basic $ 0.10 $ 0.14
Diluted $ 0.10 $ 0.13
WEIGHTED AVERAGE SHARES
Basic 29,427 29,521
Diluted 29,872 30,267
The accompanying notes are an integral part of these statements.
Three Months
Ended March 31,
---------------------------------------
1999 2000
----------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Earnings $ 2,880 $ 3,994
Adjustments to reconcile net earnings to
net cash provided by operating activities
Deferred income taxes 143 407
Depreciation and amortization 846 1,193
Provision for reserves - (272)
Stock based compensation 47
69
Income tax benefit from options 21
Deferred rent - (1)
Changes in assets and liabilities:
Accounts Receivable 2,893 (3,793)
Inventories (9) 121
Prepaid expenses and other current assets (9) (72)
Other assets 2 4
Trade accounts payable 150 377
Accrued salaries, wages and payroll taxes 36 148
Income taxes payable 1,471 1,362
Other current liabilities (16) (65)
------------------ --------------
Net cash provided by operating activities 8,456 3,471
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases and construction of property and equipment (1,825) (2,626)
Purchases and maturities of marketable securities (2,681) (4,839)
Other - 16
----------------- ---------------
Net cash used by investing activities (4,506) (7,449)
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of stock options and stock purchase plan 97 44
----------------- ---------------
Net Cash provided by financing activities 97 44
NET INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 4,047 (3,934)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 19,542 18,765
----------------- ---------------
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $ 23,589 $ 14,831
================= ===============
The accompanying notes are an integral part of these statements.
Common Stock Additional
Number of Par value paid-in Retained
shares $0.01 capital earnings Total
---------------- --------------- ------------------ ------------------ ------------------
BALANCE, December 31, 1999 29,514 $295 $59,600 $41,182 $101,077
Exercise of stock options 8 - 22 22
Employee stock purchase plan 3 - 22 22
Stock-based compensation 47 47
Tax effect from options 21 21
Net earnings for the period 3,994 3,994
-------------- ---------------- ----------------- ----------------- ------------------
BALANCE, March 31, 2000 29,525 $295 $59,712 $45,176 $105,183
============== ================ ================= =================== =================
The accompanying notes are an integral part of these statements.
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.
Approximately $7.9 million of construction in progress consists of payments made for manufacturing equipment and facilities expansion at the Company’s location in the Atlanta, Georgia area. At March 31, 2000, the remaining purchase commitments for this expansion were not significant.
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® 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 $25.0 million to $30.0 million through 2001 to build this manufacturing and R&D facility. Construction costs of approximately $4.1 million have been incurred on this project as of March 31, 2000, and are included in construction in progress.
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 fails to state a claim against the Company. There has not yet been a ruling on the Company’s motion. 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 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 has claimed ownership of certain cyclotron improvements incorporated into the cyclotrons provided to IBt by the companies’ common cyclotron vendor. IBt is seeking indemnification from the cyclotron vendor against the Company’s claims. The cyclotron vendor has 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 in the process of conducting discovery and the ultimate outcome of this uncertainty cannot be determined at this time. Accordingly, no provision for any liability that might result from this uncertainty has been made.
Revenues for the first quarter of 2000 were $11.3 million, compared to $9.2 million for the first quarter of 1999, an increase of $2.1 million, or 22.8%. The increase in revenues was attributable to a rebound in the sales of TheraSeed(R)that was supported by sales and marketing programs generated by the Company's marketing partner, Indigo Medical, Inc., a Johnson & Johnson company. Management and Indigo recognize the dynamic nature of the brachytherapy market and the need to make sales and marketing adjustments to anticipate and react to this changing marketplace. As part of this process of adjustment, Indigo has advised the Company that it is continuing to fine-tune its sales and marketing programs in search for the optimal balance between patient awareness programs and physician relationships.
Gross profit as a percentage of revenue increased to 70.7% for the first quarter of 2000, from 63.1% for the first quarter of 1999. Accounting for this improvement in gross profit margin was the increase in revenue discussed above, plus a $78,000 decline in cost of sales in the first quarter of 2000 as compared to the first quarter of 1999. Although eleven cyclotrons were operational during the first quarter of 2000, compared to eight cyclotrons in the first quarter of 1999, 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 offset the increase in cyclotron-related costs.
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 additional cyclotrons are expected to be operational during 2000, bringing the total number of cyclotrons in operation to fourteen. 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. While the Company expects to continue its efforts to improve the efficiencies in its proprietary production processes, cost savings from additional improvements, if any, may not offset the cost increases associated with additional cyclotrons. Accordingly, gross margins are expected to decline to the extent that additional cyclotrons create capacity more rapidly than the growth in demand for Pd-103 based products.
Selling, general and administrative ("SG&A") expenses were $1.8 million during the first quarter of 2000 compared to $1.4 million during the first quarter of 1999, an increase of $400,000 or 28.6%. The 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. Printing and distribution costs for the Company's proxy statement and annual report were also incurred in the first quarter of 2000. The comparable printing and distribution costs for the prior year were incurred in the second quarter of 1999.
Research and development (R&D) expenses were $348,000 in the first quarter of 2000, compared to $139,000 in the first quarter of 1999. The increase in R&D expenses was a result of activities related to the Company's R&D initiatives and development efforts to improve the Company's proprietary production processes. During the third quarter of 1999, the Company launched research and development initiatives to expand the application of Pd-103 and TheraSeed(R)to other oncological and non-oncological uses, and explore options for using its 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.
In March 2000, the Company announced that it had signed an agreement with the Atlanta Cardiovascular Research Institute (ACRI) to begin a two-phase 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 is delivering 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, and to assess the long-term consequences of this treatment model. The second phase of the study will have similar objectives, except that the Company will be delivering stent-based Pd-103 devices to ACRI for use in the studies.
Other income was $414,000 in the first quarter of 2000 compared to $274,000 during the same period in 1999. The increase was attributable to additional funds being available for investment during the 2000 period. 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's effective income tax rate was approximately 35.8% and 36.2% for the first quarter of 2000 and 1999, respectively.
The Company had cash, short-term investments and marketable securities of $34.8 million at March 31, 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, partially offset by capital expenditures. Working capital was $44.7 million at March 31, 2000, compared to $40.8 million at December 31, 1999.
The Company's principal source of cash in the first quarter of 2000 was cash generated from operations. Cash provided by operations was $3.5 million in the first quarter of 2000. Cash generated from operations consists of net earnings plus non-cash expenses such as depreciation and deferred income tax expense.
The Company's primary use of cash in the first quarter of 2000 related to capital spending to increase manufacturing capacity. Cash used for capital expenditures was $2.6 million during the first quarter of 2000. These expenditures related primarily to the addition of cyclotrons and supporting facilities, the Company's new headquarters facility and the Company's DOE Project (see below). The Company's headquarters facility became operational during the first quarter of 2000.
As of March 31, 2000, eleven cyclotrons were fully operational. Three additional cyclotrons and supporting facilities are expected to become operational during 2000. Cyclotron and supporting facility related costs included in construction in progress totaled approximately $7.9 million at March 31, 2000. Remaining costs to complete the cyclotrons and supporting facilities are not expected to be significant.
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. 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 $4.1 million have been incurred on the DOE Project through March 31, 2000. The Company expects to invest an additional $21.0 - $26.0 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 ongoing capital expansion projects in 2000, the Company expects to significantly increase its spending for R&D. The ACRI Agreement commenced in April 2000, 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 5% of revenue in 2000, depending on whether appropriate R&D opportunities arise.
Cash provided by financing activities was $44,000 in the first quarter 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.
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, future cost of sales, R&D efforts and expenses, SG&A expenses, expansion plans, the DOE Project, the development of new technologies, processes and products, 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, inability to obtain, construct or install necessary parts or modifications to production equipment or facilities,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 Indigo's marketing and sales programs, acceptance and efficacy of Pd-103 for other applications, government regulation of the therapeutic radiological pharmaceutical and device business, dependence on health care professionals, and competition from other brachytherapy products and conventional and newly developed methods of treating localized cancer.
Not applicable.
See Note C to the Company’s financial statements included in Item 1 of this report, which is incorporated by reference hereby.
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.
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