Item 1. Business
Theragenics Corporation ("Theragenics" or the "Company") was incorporated in November 1981 to commercially engage in the development, manufacture, and marketing of therapeutic radiological pharmaceuticals and devices for use primarily in the treatment of cancer. The Company's products are intended to permit a physician to introduce short-range, short-lived radioactive material directly into cancerous tissue, thereby concentrating the impact of the radiation on the cancerous tissue to be destroyed while minimizing the effect on surrounding healthy tissue. To date the Company has internally developed two products - TheraSeed, a radioactive implant designed for the treatment of localized tumors, and TheraSphere, radioactive microspheres for the treatment of liver cancer. TheraSeed is being commercially distributed in the United States while TheraSphere is being commercially distributed in Canada.
General
The conventional treatments for cancer to date have been surgery, radiation and chemotherapy. The treatments which have been most successful are those which remove or kill all of the cancerous tissue while avoiding excessive damage to the surrounding healthy, normal tissue. When the cancerous tissue cannot be completely removed or killed, the cancer usually returns to the primary site often with metastases to other areas.
The Company's products are intended to permit a physician to place short-range, short-lived radioactive material near or into a cancerous tumor, thereby concentrating the impact of the radiation on the cancerous tissue to be destroyed. The Company's products are most effective on encapsulated, confined tumors. Each of the Company's products is based on established physical principles and has the simple objective of delivering sufficient radiation to the target cancer to kill it while minimizing the radiation to surrounding tissue.
Products
TheraSeed, radioactive "seeds" approximately the size of a grain of rice which are implanted directly into a tumor, is presently marketed in the United States.
TheraSphere, microscopic radioactive glass spheres used to treat liver cancer, is presently marketed in Canada by Nordion International Inc. ("Nordion") under sublicense from Theragenics. Additionally, Theragenics has granted to Nordion an exclusive worldwide sublicense to manufacture, distribute and sell
TheraSphere for any application.
Palladium-103 ("Palladium" or "Pd-103") is the radioactive isotope providing the therapeutic benefit in the Company's TheraSeed product. The Company will be exploring and investigating opportunities to use this isotope in other potential products as they are identified.
TheraSeed Implants
Prostate cancer is expected to strike 317,100 men in the United States in 1996. The National Cancer Institute estimates that one in three men over 50 years of age have microscopic cancer of the prostate. This ratio is greater than the odds (one in eight, as estimated by the American Cancer Society) for a woman getting breast cancer. A projected 41,400 men in the United States will die of this disease in 1996. Not including experimental treatment options, treatments for prostate cancer include prostatectomy (surgical removal of the prostate gland), external beam radiation, radioactive implants, watchful waiting, hormone manipulation and castration. Not all of these treatments are for early stage disease. The Company's TheraSeed product is usually classified as a treatment for early stage disease.
TheraSeed is best suited for solid localized tumors. To date the most prevalent use of TheraSeed has been in the treatment of prostate cancer, although it has been used to treat cancers of the pancreas, lung, head and neck, oral cavity, base of the skull, brain and eye.
Treatment of early stage prostate cancer with TheraSeed is a one-time, minimally-invasive technique, usually performed under local anesthesia in an outpatient setting. The seeds are loaded into long hollow needles which are inserted through the perineum and into the prostate gland. This procedure is facilitated by the recent developments of imaging equipment such as CT scanning or transrectal ultrasound. While visualizing the gland, the physician can facilitate placement of the seeds allowing for a homogeneous distribution of the radiation.
While providing equivalent success rates to external beam radiation and surgery, TheraSeed offers the advantage of a much lower incidence of impotence and incontinence. Because no major surgery is involved, many TheraSeed patients are up and around within 48 to 72 hours, compared to recovery periods as long as four to six weeks for radical surgery. TheraSeed treatment also offers a cost advantage to the patient (or insurance company) over both surgery and external beam radiation. Cost of the TheraSeed procedure is about one-half of the cost of surgical removal and two-thirds that of external radiation.
TheraSeed does not represent the only currently available radioactive isotope for cancer treatment, but does offer a much
shorter half-life and a significantly greater dose rate when compared to other isotopes.
It is an objective of the Company to explore and develop other potential uses for TheraSeed in addition to the treatment of prostate cancer whether oncological or non-oncological in application. Theragenics hopes to identify and pursue opportunities for TheraSeed use either through internal resources or partnering where significant synergies can be exploited.
TheraSphere
Liver cancer, either primary or secondary to colorectal cancer, incidence has changed very little from 1995 when it was expected to afflict approximately 5,200 Canadians and approximately ten times as many Americans. Associated deaths were estimated at approximately 4,200 Canadians and 43,000 Americans in 1995. Management estimates these North American statistics represent about one-third of the world wide incidence of primary liver cancer and liver cancer secondary to colorectal cancer in areas which would present marketing opportunities to the Company. From the point of diagnosis the average survival time for a liver cancer patient using conventional therapies is one year.
TheraSphere is used to treat both primary liver cancer and secondary liver cancer in cases where the primary cancer has been or can be arrested.
Before the Canadian approval of TheraSphere, treatments for liver cancer were primarily limited to surgery, external radiation, and chemotherapy. Unfortunately surgery is indicated for only 25% of the cases mentioned above and only 25% of that number live for five years or more. External beam radiation has the drawback that the amount of radiation deliverable to the liver tumor is limited by the damage that can be done to healthy liver tissue as radiation passes from outside of the body to the tumor. Finally, chemotherapy, which is the indicated treatment for the majority of liver cancer patients, offers life extension (usually measured in months) but not without the nausea and other side effects commonly associated with it. Also, chemotherapy must be administered in a number of treatments over an extended period of time.
A TheraSphere treatment dose (less than one-tenth of a teaspoonful of material) contains approximately five million yttrium-90 glass spheres which are each about half the diameter of a human hair. Here again as in the TheraSeed treatment, the key to effectiveness lies in the ability to get the radiation dose in closest proximity to the tumor in order to sufficiently irradiate the cancerous tissue while leaving healthy tissue unaffected. This is done by inserting a catheter into the hepatic artery which carries arterial blood to the liver and injecting the TheraSphere microspheres into this bloodstream. Because of
greater blood flow to tumors compared to healthy liver tissue, the microspheres concentrate in the capillaries feeding the tumor. The concentration of microspheres in healthy tissue is much lower. Because of the ability to place the radiation source in such close proximity to the tumor, TheraSphere can deliver a radiation dose to the tumor cells five-times as strong as that which can be delivered via external beam radiation.
Although it is impossible to predict the number of liver cancer patients who might benefit from treatment with TheraSphere, the Company estimates that approximately 50% of the liver cancer patients identified above could be candidates for treatment with TheraSphere. Based on clinical data, TheraSphere offers life extension similar to the data for chemotherapy while producing less severe side effects. TheraSphere has the additional advantage of requiring only a single treatment. A series of chemotherapy treatments equivalent to a single TheraSphere treatment would cost $8,000 to $12,000 per patient.
Production
TheraSeed Implants
The Company's TheraSeed devices have substantially the same external envelopes as other seeds in use today and thus supplies of the external envelope are readily available. The production of TheraSeed is dependent upon the availability of Pd-103. In January 1993, Theragenics completed construction of a manufacturing facility to house its first cyclotron. This cyclotron produces Pd-103 and ended the Company's dependence on unreliable outside vendors. In February 1995, a second cyclotron and a facility addition to house the cyclotron were completed. As reported in Theragenics' Form 8-K dated June 29, 1995, the Company entered into two agreements dated June 29 ,1995, each for the purchase of one cyclotron. These third and fourth cyclotrons are expected to be put into service in the late third quarter of 1996 and the mid to late first quarter of 1997, respectively. Cyclotron operations constitute only one component of the TheraSeed manufacturing processes performed at the Buford and Norcross facilities. Significant attention and effort are being focused on improving all aspects of the Company's manufacturing processes with the goal to improve efficiency and provide additional capacity for TheraSeed. Long lead-times (in excess of 18 months) associated with the purchase of a cyclotron and the specially designed facilities to house the equipment creates suboptimal conditions requiring order of this equipment long in advance of its need. This lead-time factor naturally places additional burden on the Company's ability to accurately forecast sales growth. Also at issue is the fact that very rapid sales growth may necessitate multiple purchases of equipment which would then place strain on the Company's ability to finance this type of growth. It is anticipated that if TheraSeed demand continues to expand rapidly, additional cyclotrons will be
ordered.
TheraSphere
Production of TheraSphere requires the services of a number of outside vendors - all of which provide services which can be provided through alternative sources. Theragenics, through its exclusive worldwide sublicense of the TheraSphere product to Nordion, has given Nordion worldwide manufacturing responsibility for the product.
Marketing
TheraSeed Implants
Increased awareness of the TheraSeed product is the primary focus of Theragenics' Marketing program. In June of 1994, results of a five-year clinical study conducted by Dr. John Blasko, Director of the Northwest Tumor Institute in Seattle, Washington, showed seed therapy to be comparable if not superior to surgery or external beam radiation for early stage prostate cancer. In 1995 Theragenics continued its work to see that this data was available to the medical and lay communities. Theragenics continues to support the expansion of this study.
The Company continues to distribute patient information booklets to physician customers, patient support groups and any person calling the Company's Cancer Information Center.
In 1995, marketing efforts increased dramatically. A higher volume of advertising placements aimed at men over the age of 50 and retirement communities yielded significant benefits as indicated by increased sales and increased calls to the Company's Cancer Information Center.
Theragenics continues to support the writing of scholarly articles by doctors using TheraSeed and the placement of these articles in prestigious medical journals. Attendance at small and large meetings of medical clinicians remains a top priority as physician acceptance continues to grow.
The Company is pleased that it was able to play a part in providing more equitable Medicare reimbursement for urologists and radiation oncologists who perform the seed implant procedure.
TheraSphere
The Company does not directly market its TheraSphere product. Under a manufacturing and marketing licensing agreement with Nordion International, Inc. ("Nordion"), a Canadian company, Nordion has the right to produce and market the TheraSphere
product worldwide for all applications. Also under the agreement, Nordion has substantially all responsibility for seeking regulatory approval of the product in the United States and other countries as it chooses. Nordion is a leading worldwide producer, marketer and supplier of radioisotope products and related equipment. Under a prior licensing agreement, Nordion has distributed the TheraSphere product in Canada since 1991.
Patents and Licenses
TheraSeed Implants
Theragenics holds patents for certain TheraSeed technologies in the United States, Canada, South Africa, Japan and the ten countries of the European patent convention. Theragenics also holds patents in the United States and South Africa for additional TheraSeed technologies and has a PCT patent application on file for Japan, Australia, New Zealand, Canada, and Europe (representing 16 European countries) as well as a direct filing in Mexico.
TheraSphere
The Company holds a worldwide exclusive license from the University of Missouri for the use of technology required for producing TheraSphere. Theragenics also holds the rights to all improvements developed by the University of Missouri on this technology. The Company, in turn, sublicenses exclusive worldwide rights to this technology and all improvements to Nordion International. The University of Missouri holds patents for the TheraSphere technology in several countries including the United States, Canada, Australia, South Africa, Japan and the ten countries of the European patent convention. Pursuant to its license agreement with the University of Missouri, the Company is obligated to pay the University the greater of a fixed annual amount or a percentage of the gross sales amount derived from the sale of TheraSphere.
Theragenics holds patents for technology concerning methods for delivery of the product in several countries including the United States, Canada, Australia, Argentina, South Africa and the ten countries of the European patent convention and has patent applications on file in other countries including Japan. The Company licenses this technology to Nordion for worldwide use.
Other
Theragenics holds patents related to another product used in the treatment of brain cancer. Because of the significant investment required and the uncertain return, this product is not being commercially developed by Theragenics. Therefore, the Company is unable to determine the value of these patents, if any.
The Company may file additional patent applications from time-to-time and considers the ownership of patents important, but not necessarily essential, to its operations. In general, the Company will rely upon its personnel, trade secrets, and its products' current position in a highly regulated industry, as well as patent protection, to establish barriers-to-entry and to maintain its industry position. It is possible that others may independently develop similar technology or otherwise obtain access to the Company's know-how. It is not certain that any patents which may be granted to the Company will be valid and enforceable or will withstand a challenge by litigation.
Competition
In general, competition to TheraSeed stems from conventional methods of treating localized cancer such as surgery, chemotherapy, and external beam radiation. Presently, surgery and external beam radiation comprise the vast majority of the prostate cancer treatment market, and those methods are viewed as Theragenics' main competition. In addition, Iodine (I-125) ("Iodine") is commercially available as a permanent implant and also competes with TheraSeed. However, TheraSeed utilizes Palladium-103 (Pd-103) ("Palladium") as the isotope for its permanent implant whose properties are very different from Iodine. Iodine's dose rate is one-third that of Palladium and its half-life is three times longer than Palladium's. Such properties represent competitive advantages for Palladium in treating certain kinds of cancer. The Company is aware of no other similar radioactive products competing directly with TheraSeed. Theragenics is the only company in the world, known to management, that commercially produces Pd-103.
Liver Cancer, which TheraSphere treats, can also be treated by surgery, external beam radiation, and chemotherapy. TheraSphere does not represent a cure for liver cancer but has been shown to prolong life expectancy of the patient and enhance the quality of life during that period. Theragenics is not aware of any other implant available for this type treatment.
There are many companies, both public and private, engaged in research on new and innovative methods of treating cancer. Also, there are many companies both public and private, including many large, well-known pharmaceutical, medical and chemical companies, engaged in radiological pharmaceutical and device research. Significant developments by any of these companies could lessen or eliminate the demand for any or all of the Company's products.
Governmental Regulation
The Company's present and intended future activities in the development, manufacture and sale of cancer therapy products are
subject to various laws and regulations, regulatory approvals and guidelines. Within the U.S., the Company's therapeutic radiological devices must comply with the United States Federal Food, Drug and Cosmetic Act which is enforced by the Food and Drug Administration (FDA). The Company's handling of radioactive materials is governed by the state of Georgia in agreement with the Nuclear Regulatory Commission of the United States Government. TheraSeed has regulatory approval for commercial distribution in the United States and Canada, while TheraSphere has regulatory approval for commercial distribution only in Canada. The Company to the best of its knowledge is in compliance with all its licenses for handling radioactive material.
The effect of various governments' regulations can delay the marketing of products for a considerable period of time or impose costly procedures upon the Company's activities.
The Company is not currently conducting any clinical trial of TheraSphere; but under the terms of the current licensing agreement with Theragenics, Nordion will attempt to obtain regulatory approvals in the United States, Europe, and other areas of the world at its expense and discretion. Regulatory approval of the TheraSphere product has been granted in Canada and the product is presently being marketed in that jurisdiction by Nordion.
Most countries require approval for the sale of pharmaceuticals and medical devices. These approvals are time-consuming and expensive and can delay or discourage the marketing and development of a company's products in those areas.
Employees
As of March 20, 1996, the Company had 44 full-time employees (including executive personnel). Of this total, twenty-eight are engaged in development and/or production of the Company's products. The balance of the Company's employees is engaged in marketing and general corporate activities.
The Company's ability to market its products and services, to develop marketable products and to establish and then maintain its competitive position in light of technological developments will depend, to a significant extent, upon its ability to attract and retain qualified personnel. In recognition of this, the Company has granted many of its employees stock options which are contingent on their continued employment. Competition for such personnel is, and should continue to be, intense.
Item 2.
Item 2. Properties
The Company owns a 10,500 square foot, single story,
prefabricated building in Buford, Georgia, leases a 10,752 square foot, single story, brick building in Norcross, Georgia and leases a 2,692 square foot, suite of offices in a four-story office building in Norcross, Georgia. The 10,752 square foot Norcross facility houses the Company's assembly, shipping, marketing and administrative operations. The 2,692 square foot Norcross facility provides executive office space while the Buford facility houses the Company's two cyclotrons and its raw material processing operations. The Buford facility is currently being expanded to house two additional cyclotrons. It is anticipated that the Buford facility and neighboring land will provide the core for expansion as manufacturing expands to meet increasing sales demand and will eventually be expanded to include all functions currently housed in the leased Norcross facility.
Item 3.
Item 3. Legal Proceedings
There are currently no material legal proceedings pending or, to the knowledge of the Company, threatened against the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of its security holders during the fourth quarter of calendar 1995.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded over the counter and reported on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System. The trading symbol for the Company's Common Stock is "THRX." The high and low prices as reported by NASDAQ for the Company's Common Stock for each quarterly period in 1994 and 1995 are as follows:
As of March 20, 1996, the closing price of the Company's Common Stock was $7-7/8 per share. Also, as of that date, there were approximately 681 holders of record of the Company's Common Stock. The number of record holders does not reflect the number of beneficial owners of the Company's Common Stock for whom shares are held by depositary trust companies, brokerage firms and others.
Dividend Policy
The Company has not paid cash dividends in the past and does not currently plan to do so. It is the present policy of the Company's Board of Directors to retain future earnings to finance the growth and development of the Company's business. Any change in current policy will depend upon the financial condition, capital requirements and earnings of the Company as well as other factors which the Board of Directors may deem relevant.
Item 6.
Item 6. Selected Financial Data
Set forth below are selected financial data derived from the statements of operations of the Company for the years ended December 31, 1991, 1992, 1993, 1994 and 1995 and the balance sheets of the Company at December 31, 1991, 1992, 1993, 1994 and 1995.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
THERAGENICS CORPORATION
STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE THREE YEARS ENDING DECEMBER 31,
Supplemental Schedule of Non Cash Financing Activities
During 1995, the Company realized an income tax benefit from the exercise and early disposition of certain stock options, resulting in an increase in the deferred tax asset and additional paid in capital of $713,000.
Supplementary Cash Flow Disclosure:
The accompanying notes are an integral part of these statements.
THERAGENICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1994 and 1995
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Theragenics Corporation (the "Company") was organized in November 1981 to develop, manufacture, and market radiological pharmaceuticals and devices used in the treatment of cancer.
The Company manufactures and markets primarily one product, which is used in the treatment of cancer. Use of the Company's product is regulated by the U.S. Food and Drug Administration (FDA). The Company sells its product primarily to hospitals, physicians and other health service providers in the United States. The Company therefore is directly affected by FDA regulations and the well being of the health care industry.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:
1. Use of Estimates in Preparation of Financial Statements
In preparing financial statements in conformity with Generally Accepted Accounting Principles ("GAAP"), management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. Accounts Receivable
The Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. If amounts become uncollectible, they will be charged to operations when that determination is made.
3. Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the specific identification method. Inventory costs consist primarily of costs incurred in the extraction, purification and irradiation processes of an isotope which is the basic component of the Company's primary product.
THERAGENICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4. Depreciation
Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives on a straight-line basis. Estimated service lives are as follows:
Building 30 years Machinery, leasehold improvements, furniture and equipment 5-10 years
A significant portion of the Company's depreciable assets are utilized in the production of its product. Management periodically evaluates the realizability of its depreciable assets in light of its current industry environment. Management believes that no impairment of depreciable assets exists at December 31, 1995. It is possible, however, that management's estimates concerning the realizability of the Company's depreciable assets could change in the near term due to changes in the Company's technological and regulatory environment.
5. Patent Costs
The Company capitalizes the costs of patent applications for its products. Amortization is computed on a straight line basis over the estimated economic lives of the patents, commencing at the date of grant of the related patent. Patent costs are net of accumulated amortization of $29,366 and $37,276 at December 31, 1994 and 1995, respectively.
6. Research and Development Costs
The costs of research and development and consumable supplies and materials to be used for the development of the Company's intended products are expensed when incurred.
7. Net Earnings Per Common Share
The net earnings per common share is based on the weighted average number of common shares and common equivalent shares outstanding during each period (11,709,218 in 1993, 11,582,793 in 1994 and 11,759,178 in 1995).
THERAGENICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Fully diluted information is not presented, as fully diluted earnings per share is not materially different from the primary earnings per share presented.
8. Statements of Cash Flows
For purposes of reporting cash flows, cash and short-term investments include cash on hand, cash in banks and commercial paper with original maturities of less than 90 days.
9. Marketable Securities
The Company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115), effective January 1, 1994. The adoption of SFAS 115 had no effect upon prior periods.
At December 31, 1994, marketable securities are categorized as available for sale and as a result are stated at fair value, which approximated cost. The Company held no marketable securities at December 31, 1995.
10. Stock Based Compensation
The Company stock option plans are accounted for under APB Opinion 25, Accounting for Stock Issued to Employees, and related interpretations.
NOTE C - INVENTORIES
Inventory consists of the following:
THERAGENICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995
NOTE C - INVENTORIES - CONTINUED
"Raw material to be recovered" includes finished products which cannot be sold due to loss of radiation. The irradiated isotope contained in these products can be recovered and reused through a purification process.
NOTE D - CONSTRUCTION IN PROGRESS
At December 31, 1995, construction in progress represented payments made for the construction of manufacturing equipment and facility expansion. Total cost of this project is expected to be approximately $9,000,000, and is expected to be completed in February 1997.
At December 31, 1994, construction in progress represented payments made for the construction of manufacturing equipment which was completed and placed in service during 1995.
NOTE E - INCOME TAXES
The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS" and "FASB") No. 109, Accounting for Income Taxes, which requires a change from the deferred method to the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.
The Company implemented SFAS 109 as of January 1, 1993. The deferred tax asset recorded is primarily a result of the recognition of the Company's net operating loss carryforward. The cumulative effect on prior years of the change in accounting principle increased net earnings by $2,860,000 ($.24 per share) and is included in earnings for 1993. The effect of the change on 1993 was to decrease net earnings before cumulative effect of a change in accounting principle by $248,000 ($.02 per share) and increase net earnings by $2,612,000 ($.22 per share).
THERAGENICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995
NOTE E - INCOME TAXES - Continued
The provision for income tax is summarized as follows:
Significant components of the deferred tax asset are as follows:
The significant portions of the operating loss carryforwards were incurred while the Company was in the development stage. Upon receiving clearance to market its "TheraSeed " product from the U.S. Food and Drug Administration (FDA) in 1986, the Company commenced manufacturing and distribution of its product in 1987. Since emerging from the development stage in 1989, the Company has utilized approximately $3,900,000 of these operating loss carryforwards through December 31, 1995 by generating taxable income. In order to realize income benefit from the remaining operating loss carryforwards at December 31, 1995, it will be necessary for the Company to generate future taxable income of approximately $5,900,000, prior to the expiration of the operating loss carryforward periods. Based on the Company's results of operations subsequent to receiving FDA clearance to market for its product, and on expected future results of operations, management believes that currently it is more likely than not that the income tax benefits of the operating loss carryforwards will be realized within the carryforward period. The amount of deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
THERAGENICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1993 and 1994
NOTE E - INCOME TAXES - Continued
The provision for income taxes differs from the amount of income tax determined by applying the applicable federal rates due to the following:
For income tax purposes only, the Tax Reform Act of 1986 enacted an alternative minimum tax system for corporations (the "AMT"). AMT is imposed at a 20% rate on the Company's AMT income which is determined by making statutory adjustments to regular taxable income. A company pays the greater of the taxes computed under the "regular" tax system or the AMT system. Because AMT net operating loss carryforwards may only be utilized to offset 90% of the AMT income, the Company was subject to the AMT in 1993, 1994 and 1995, resulting in an alternative minimum tax of $6,000, $20,000 and $18,000, respectively. These amounts will be allowed as a credit carryover to reduce the regular tax liability in future years, but not below the AMT of such years.
At December 31, 1995, the Company had approximate net federal operating loss carryforwards for regular tax and AMT purposes as follows:
THERAGENICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995
NOTE F - NOTES PAYABLE
In December 1995, the Company entered into an amended and restated loan and security agreement (the "loan agreement") with a financial institution. This loan agreement incorporated and restated the Company's existing term loan and line of credit facility. A summary of the applicable terms follows.
Term Loan
The term loan is payable in monthly installments of $51,862, including interest at 8.47%. $1,989,119 and $1,519,497 were outstanding under the term loan at December 31, 1994 and 1995, respectively. Interest expense of approximately $140,000 and $106,000 was capitalized with expansion of the manufacturing facility and construction of certain manufacturing equipment during 1994 and 1995, respectively.
Line of Credit
The loan agreement provides for a line of credit of up to $1,000,000. Interest on outstanding borrowings is payable monthly at the prime rate or, at the Company's option, may be payable at the LIBOR rate plus 2%. There was no outstanding borrowings under the line of credit at December 31, 1994 or 1995.
Revolving Credit Facility
The loan agreement also provides for a revolving credit facility of up to $2,000,000. The maximum borrowings under the revolving credit facility can be increased to $4,000,000 under certain conditions. These conditions include, among other things, that the Company achieve certain minimum earnings levels, as defined, for four consecutive quarters. The Company has met the minimum earnings requirements as of December 31, 1995, and management expects that the revolving credit facility will be increased to $4,000,000 during 1996. Interest on outstanding borrowings is payable monthly at the prime rate or, at the Company's option, may be payable at the LIBOR plus 2%. No amounts were outstanding under the revolving credit facility at December 31, 1995.
All outstanding borrowings under the revolving credit facility are due in April 1997. However, the outstanding borrowings can be repaid in sixty equal and consecutive monthly installments commencing in May 1997 if the Company meets certain minimum earnings levels, as defined, and certain other financial ratios
THERAGENICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995
NOTE F - NOTES PAYABLE - Continued
for the year ending December 31, 1996. Additionally, certain mandatory repayments based on "excess cash flow", as defined, would be required commencing in May 1998 and annually thereafter.
All outstanding borrowings under the loan agreement are collateralized by substantially all of the Company's assets. Provisions of the loan agreement limit the amount of annual capital expenditures, the incurrence of additional debt and, among other things, require the maintenance of certain minimum financial ratios. As of December 31, 1995, the Company was in compliance with the provisions of the loan agreement.
NOTE G - COMMITMENTS AND CONTINGENCIES
Licensing Agreement
The Company holds a worldwide exclusive license from the University of Missouri for the use of technology, patented by the University, used in the Company's "TheraSphere" product. The licensing agreement provides for the payment of royalties based on the level of sales and on lump sum payments received pursuant to a licensing agreement with Nordion International, Inc. (see below).
The Company has granted certain of its geographical rights under the licensing agreement with the University of Missouri to Nordion International, Inc., a Canadian company which is a producer, marketer and supplier of radioisotope products and related equipment. Under the Nordion agreement, the Company will receive a licensing fee for each geographic area in which Nordion receives new drug approval. The Company will also be entitled to a percentage of future revenues earned by Nordion as royalties under he agreement. Royalties from this agreement for each of the three years in the period ended December 31, 1995 were not significant.
In March 1995, the Company received approximately $85,000 from Nordion for the right to use certain patents and to manufacture, distribute, and sell TheraSphere for all applications worldwide.
Letter of Credit
The Company has a letter of credit outstanding for approximately $315,000 relating to regulatory requirements.
THERAGENICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995
NOTE G - COMMITMENTS AND CONTINGENCIES - Continued
Lease Commitment
The Company leases office space under a noncancelable lease which expires in December 1998. Approximate minimum lease payments under the lease are as follows: 1996, $64,000; 1997, $67,000; 1998, $69,000.
Rent expense was approximately $70,000, $61,000 and $61,500 for the years ended December 31, 1993, 1994 and 1995, respectively
NOTE H - TRANSACTIONS WITH RELATED PARTIES
Certain shareholders and directors provide consulting services to the Company. Total consulting fees paid to shareholders and directors were approximately $77,500, $5,500 and $1,000 during the years ended December 31, 1993, 1994 and 1995, respectively.
NOTE I - STOCK OPTIONS AND WARRANTS
The Company's board of directors has approved three stock option plans which in aggregate cover up to 2,200,000 shares of common stock. The plans provide for the expiration of options ten years from the date of grant and requires the exercise price of the options granted to be at least equal to 100% of market value on the date granted. Stock option transactions for the three years ended December 31, 1995 are summarized below:
As of December 31, 1995, options covering approximately 773,000
THERAGENICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995
NOTE I - STOCK OPTIONS AND WARRANTS - Continued
shares were exercisable. Expiration dates for these options range from 1996-2005.
Two hundred thousand warrants (200,000) were exercised during 1993, resulting in proceeds to the Company of $175,000. The Company also has warrants outstanding at December 31, 1995, covering 100,000 shares of common stock. The warrants are exercisable at a price of $7.50 per share and expire in May 1999.
The Company follows the practice of recording amounts received upon the exercise of options by crediting common stock and additional capital. No changes are reflected in the statements of operations as a result of the grant or exercise of options. The Company realizes an income tax benefit from the exercise or early disposition of certain stock options. This benefit results in an increase to the deferred tax asset and an increase in additional paid-in capital.
NOTE J - MAJOR CUSTOMERS
During 1994, there were sales to one major customer that equaled approximately ten percent of sales. During 1993 and 1995, there were no customers which individually comprised ten percent of sales.
NOTE K - EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution 401(k) Plan covering all employees with at least six months of service and at least 21 years of age. The Plan permits participants to defer a portion of their compensation through payroll deductions. The Company may, at its discretion, contribute to the Plan on behalf of participating employees. No such Company discretionary contributions have been made during any of the three years ended December 31, 1995.
Note L - RECENTLY ISSUED ACCOUNTING STANDARD
The Company currently accounts for the issuance of stock options to employees in accordance with Accounting Principles Board Opinion ("APB") Number 25, "Accounting for Stock Issued to Employees." In October 1995, the FASB issued SFAS Number 123 ("SFAS 123"), "Accounting for Stock Based Compensation." SFAS 123 allows for the continued use of the method prescribed by APB 25, referred to as intrinsic value method. SFAS 123 also provides an
THERAGENICS CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1994 and 1995
NOTE L - RECENTLY ISSUED ACCOUNTING STANDARD - Continued
alternative method, referred to as the fair value method. If the intrinsic value method of accounting for the issuance of stock options is used, then SFAS 123 requires disclosure of pro forma net income and earnings per share, as if the fair value method had been used.
Management anticipates that the Company will continue to account for the issuance of stock options to employees in accordance with APB 25. Therefore, the only effect of adopting SFAS 123 will be the new disclosure requirements. These disclosure requirements are effective for the year ending December 31, 1996.
File No. 0-15443
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS FILED WITH
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1995
under
The Securities Exchange Act of 1934
THERAGENICS CORPORATION
(Exact Name of Registrant as specified in its charter)
THERAGENICS CORPORATION
INDEX TO EXHIBITS
Page No.
10.22 Line of Credit Facility and Revolving Credit 45 Facility between Theragenics Corporation and Bank South, N.A. 24.1 Consent of Independent Certified Public 89 Accountant for Incorporation by Reference of Audit Statement into Registration Statement