UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission File No. December 31, 1997 0-15443 THERAGENICS CORPORATION (Exact name of registrant as specified in its charter) Delaware 58-1528626 (State of incorporation) (I.R.S. Employer Identification Number) 5325 Oakbrook Parkway Norcross, Georgia 30093 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code:(770) 381-8338 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registerer None None Securities registered pursuant to Section 12(g) of the Act: Title of Class Common Stock, par value $.01 per share, together with the associated Common Stock Purchase Rights 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. As of March 16, 1998 the aggregate market value of the common stock of the registrant held by non-affiliates of the registrant, as determined by reference to the closing price of the Common Stock as reported on the Nasdaq National Market system, was $1,003,681,314. As of March 16, 1998 the number of shares of common stock, $.01 par value, outstanding was 14,546,106. Documents incorporated by reference: Proxy Statement for the registrant's 1998 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1997, is incorporated by reference in Part III herein. Part I Item 1. BUSINESS General Theragenics Corporation ("Theragenics" or the "Company") is a leader in the production and sales of implantable radiation devices ("seeds") used in the treatment of prostate cancer. The Company produces and sells TheraSeed(R); a FDA-licensed device based on Pd-103, a radioactive isotope. Management believes the Company is currently the only company commercially producing Pd-103 for use in medical devices. In the treatment of prostate cancer, TheraSeeds(R) are implanted ("seeding") into the prostate in a one-time, minimally invasive procedure. The radiation emitted by the seeds is contained within the immediate prostate area, killing the tumor while sparing surrounding organs. TheraSeed(R) has been shown in independent clinical studies to offer success rates that are comparable to or better than other conventional therapies, while being associated with a reduced incidence of side effects. In addition, TheraSeed(R) offers significant quality of life and cost advantages. Since 1987, TheraSeed(R) has been used by physicians in over 400 centers across the United States. Sales of TheraSeed(R) increased 58% in 1996 and 99% in 1997 due to increased and reliable production from the Company's cyclotron-based manufacturing process and higher demand for TheraSeed(R) as a result of increased marketing efforts and the release of favorable clinical data. TheraSeed(R) has also been used on a limited basis to treat cancers of the pancreas, lung, head, neck, oral cavity, brain and eye. On May 30, 1997, the Company entered into a sales and marketing agreement with Indigo Medical, Inc., a subsidiary of Johnson & Johnson, granting Indigo the exclusive worldwide right to market and sell TheraSeed(R) for the treatment of prostate cancer. Management believes the alliance with Indigo will provide for sales growth and international expansion while allowing the Company to focus its resources on maintaining its leadership in the production of Pd-103 for prostate cancer treatment and other potential applications. By leveraging the extensive worldwide marketing capability of Indigo and Johnson & Johnson, the Company has eliminated the need to develop an extensive, vertically integrated sales, marketing, education and training network for the sale of TheraSeed(R) for prostate cancer treatment. Theragenics received FDA clearance to market TheraSeed(R) in 1986 and commenced product sales in 1987. The Company has been profitable in every quarter since 1991. In 1992, management increased its control over the manufacture of TheraSeed(R) while maintaining quality and regulatory compliance by integrating into the Company the production of Pd-103. Industry Overview Prostate Cancer Excluding skin cancer, prostate cancer is the most common form of cancer, and the second leading cause of cancer deaths, in men. Based on industry data, the Company estimates that in 1995 the cost of treating prostate cancer exceeded $3.0 billion in the United States. In 1998, the American Cancer Society estimates there will be 184,500 new cases of prostate cancer and an estimated 39,200 deaths associated with the disease. Between 1989 and 1992, prostate cancer incidence rates increased dramatically, probably due to the increasing use of prostate-specific antigen (PSA) blood test screenings. In 1993 and 1994, prostate cancer incidence rates declined as the initial impact of improved diagnosis caught up with already existing but undiagnosed cases of prostate cancer. Overall from 1973 to 1994, incidence rates for white men increased from 63 to 135 per 100,000 and incidence rates for African-American men increased from 106 to 234 per 100,000. Prostate cancer incidence and mortality increase with age; 77% of men diagnosed with prostate cancer each year are over 65 years old. While rare in young men, incidence rates accelerate with age. Illustratively, incidence rates are 1 in 100,000 for men under 40, 82 in 100,000 for men ages 50-54, 518 in 100,000 for men ages 60-64, and 1,326 in 100,000 for men ages 70-74. Estimates by the United States Bureau of Census indicate the number of men most prone to prostate cancer, those 40 to 80 years old, will grow to 55 million by 2006 from 45 million in 1996. The Company estimates that in 1997, its U.S. market share in the treatment of early stage localized prostate cancer was approximately 5%. The prostate is a walnut-sized gland surrounding the male urethra, located below the bladder and adjacent to the rectum. The two most prevalent prostate diseases are benign prostatic hyperplasia ("BPH") and prostate cancer. BPH is a non-cancerous enlargement of the innermost part of the prostate. Prostate cancer is a malignant tumor that begins most often in the periphery of the gland and, like other forms of cancer, may spread beyond the prostate to other parts of the body. If left untreated, prostate cancer can metastasize to the lung or bone, resulting in death. The following table summarizes the various stages of prostate cancer. Classification Stage of Progression - - -------------- -------------------- A Clinically unsuspected B Tumor confined to the prostate gland (localized) C Tumor outside prostate capsule D Metastasized into pelvic lymph nodes D2 Metastasized into distant lymph nodes, organs, soft tissues or bone Source: American Urological Association Today Approximately 58% of new prostate cancer diagnoses are defined as being localized. Prostate cancer is typically curable when detected early, but the lack of early-stage symptoms makes diagnosis difficult. Until 1988, the best method of routine examination had been the digital rectal exam, an uncomfortable subjective determination. In 1988, a diagnostic test was developed that determines the amount of prostate specific antigen ("PSA") present in the blood. PSA is found in a protein secreted by the prostate, and elevated levels of PSA are associated with either prostatitis (a noncancerous inflammatory condition) or a proliferation of cancer cells in the prostate. As stated earlier, the number of new prostate cancers diagnosed increased significantly from 1989 to 1993 as a result of physicians' use of the PSA test. Industry studies have shown that the PSA test can detect prostate cancer as many as five years earlier than the digital rectal exam. The PSA test is currently part of the routine medical check-up for prostate assessment. Transrectal ultrasound tests and biopsies are typically performed on patients with elevated PSA readings to confirm the existence of cancer. Treatment Options In addition to seeding, prostate cancer can be treated with radical prostatectomy ("RP"), external beam radiation therapy ("EBRT"), hormone therapy, chemotherapy and watchful waiting. Some of these therapies may be combined in special cases to address a specific cancer stage or patient need. For example, TheraSeed(R) has been used in combination with EBRT to treat some locally advanced cases of prostate cancer. The treatments that have been most successful are those that remove or kill all of the cancerous tissue while avoiding excessive damage to the surrounding healthy tissue. When the cancerous tissue is not completely eliminated, the cancer typically returns to the primary site, often with metastases to other areas. The following is a summary of treatment options for prostate cancer other than seeding. Radical Prostatectomy is a major surgical procedure that involves the complete removal of the prostate gland. This procedure has been used for over 30 years and is considered to be the standard medical treatment for early-stage, localized tumors. RP typically requires a three to seven day hospital stay and a lengthy recovery period (generally four to six weeks). Side effects include impotence and incontinence. The cost of RP ranges from $20,000 to $30,000 per procedure, excluding treatment for side effects and postoperative complications. Approximately 120,000 men underwent RP in 1995. External Beam Radiation Therapy involves directing a beam of radiation at the prostate gland to destroy tumorous tissue and has been a common technique for treating many kinds of cancer since the 1950s. EBRT has typically been reserved for early-stage prostate cancer in locally advanced cases where the patient is an inappropriate surgical risk. The therapy consists of a series of daily treatments usually lasting from six to eight weeks. Rectal complications resulting from damage to the rectal wall caused by the radiation beam as it travels to the prostate are the most common side effects. Principal side effects also include incontinence and impotence, but these side effects generally occur with less frequency than they do following RP. EBRT is estimated to cost between $12,000 to $15,000 per patient. Approximately 35,000 men underwent EBRT in 1995. Ancillary Therapies, primarily consisting of hormone therapy and chemotherapy, are used to slow the growth of cancer and reduce tumor size, but are generally not intended to be curative. Ancillary therapies are often used during advanced stages of the disease to extend life and relieve symptoms. Side effects of hormonal drug therapy include increased development of breasts, impotence and decreased libido. In addition, many hormone pharmaceuticals artificially lower PSA levels in patients, which can interfere with staging the disease and monitoring its progress. Side effects of chemotherapy include nausea, hair loss and fatigue. Drug therapy and chemotherapy require long-term, repeated administration of medication on an outpatient basis. Watchful Waiting is recommended by some physicians in certain circumstances based on the severity and growth rate of the disease, as well as on the age and life expectancy of the patient. The aim of watchful waiting is to monitor the patient, treat some of the attendant symptoms and determine when more active intervention is required. Watchful waiting has gained popularity among those patients refusing treatment due to side effects associated with radical prostatectomy. Watchful waiting requires periodic physician visits and PSA monitoring. In addition to the treatment options described above, other forms of treatment as well as prevention are being developed and tested in clinical settings. The Theragenics Solution Theragenics produces TheraSeed(R), an FDA-cleared device currently used principally in seeding for the treatment of prostate cancer. In this application, TheraSeeds(R) are implanted throughout the prostate gland in a minimally invasive surgical technique under ultrasound guidance. The radiation emitted by the seeds is contained within the immediate prostate area, killing the tumor while sparing surrounding organs. The seeds, whose capsules are biocompatible, are not removed after delivering their radiation dose to the prostate. TheraSeed(R) is best suited for solid localized tumors and is typically classified as a treatment for early-stage disease. Management believes TheraSeed(R) offers significant advantages over RP and EBRT. Recent multi-year clinical studies indicate that seeding offers success rates that are comparable to or better than those of RP or EBRT plus reduced complication rates. In addition, the TheraSeed(R) treatment is a one-time outpatient procedure with a typical two to three day recovery period. By comparison, RP is an inpatient procedure typically accompanied by a three to seven day hospital stay and a four to six week recovery period, and EBRT involves six to eight weeks of daily radiation treatments. Treatment with TheraSeed(R) generally costs $10,000 to $15,000 per procedure, which is substantially lower than the cost of RP and comparable to the cost of EBRT. TheraSeed(R) is a radioactive "seed" approximately 4.5 millimeters long and 0.8 millimeters wide, or roughly the size of a grain of rice. Each seed consists of a biocompatible titanium outer capsule containing the radioactive substance Pd-103. The half-life of Pd-103, or the time required to reduce the emitted radiation to one-half of its initial level, is 17 days. The half-life characteristics result in the loss of almost all radioactivity in less than four months. Treatment Protocol Prostate cancer patients electing seed therapy first undergo a transrectal ultrasound test or CT scan, which generates a two-dimensional image of the prostate. With the assistance of a computer program, a three dimensional treatment plan is designed that calculates the number and placement of the seeds required for the best possible distribution of radiation to the prostate. Once the implant model has been constructed, the procedure is scheduled and the seeds are ordered. The number of seeds implanted normally ranges from 40 to 100, with the number of seeds varying with the size of the prostate. The procedure is usually performed under local anesthesia in an outpatient setting. An ultrasound probe is first positioned in the rectum to guide needle placement and seed location. Correct needle placement is facilitated by a template, or grid, that covers the perineum (the area between the scrotum and rectum through which the needles are inserted). This template is attached to the ultrasound probe. Implant needles loaded with seeds are assigned to the appropriate template holes as indicated in the treatment plan. Each needle is guided through the template and then through the perineum to its predetermined position within the prostate under direct ultrasound visualization. The seeds are implanted as the needle is withdrawn from the prostate. When all seeds have been inserted, the ultrasound image is again reviewed to verify seed placement. An experienced practitioner typically performs the procedure in approximately 60 to 90 minutes, with the patient often returning home at day's end. Seeding has been used as a treatment for prostate cancer since the early 1980s, when seeds containing the radioactive isotope Iodine-125 ("I-125") were implanted in prostate tumors under open surgery. However, this technique fell into disfavor because the seeds were often haphazardly arranged resulting in radiation not reaching all of the targeted cancerous prostate. Compounding this was that often an unintended radiation dose was delivered to healthy surrounding tissues, particularly the urethra and rectum. Clinical results indicate that the computer modeling, advanced imaging and other techniques used in seeding today have significantly ameliorated these drawbacks. Clinical Results Strong Efficacy Results. Clinical data indicates that seeding offers success rates that are comparable to or better than those of RP or EBRT. In a study published in Urology Times in September 1994, Drs. John Blasko and Haakon Ragde of the Northwest Tumor Institute in Seattle, Washington, in a study of 298 men with early-stage prostate cancer, found an actuarial local control rate of 96% after treatment with either PD-103 or I-125 seed implantation. A study published in 1995 by Drs. Blasko and Ragde found 100% of the 111 patients treated with TheraSeed(R) for localized early-stage prostate cancer showed no localized prostate cancer after treatment follow-up ranging from 12-73 months, with a median follow-up of 32 months. The actuarial disease-free rate at 54 months was 89%. Updating their previous study on patients treated with Pd-103 or I-125 for a paper published for the Seminars in Surgical Oncology 1997, Drs. Blasko, ----------------------------- Ragde, Grimm, et al. found a seven-year actuarial local (confined to the prostate) and distal (outside the prostate) disease-free rate of 97% and 95%, respectively for 320 patients treated for localized early-stage prostate cancer. They also presented therein an eight-year actuarial local and distal disease-free rate of 91% and 83%, respectively for 231 patients who were considered to represent higher risks of locally advanced prostate cancer and were treated with a combination of Pd-103 or I-125 seeding and a modified dose of EBRT. A study by Dr. Michael Dattoli of University Community Hospital, Tampa, Florida and Dr. Kent Wallner of Memorial Sloan-Kettering Cancer Center, New York, New York, published in the International Journal of Radiation Oncology, Biology and Physics in July 1996 found a three-year actuarial freedom from biochemical failure (based on PSA scores) of 79% among 73 patients with clinically localized, high risk prostate cancer who were treated with EBRT in combination with Pd-103. This compares favorably to results reported for patients treated with conventional dose EBRT alone. These locally advanced cases are significant because typical RP protocols would not classify them as suitable for surgical treatment. Reduced Incidence of Side Effects. Because TheraSeed(R) delivers a highly concentrated and confined dose of radiation directly to the prostate, healthy surrounding tissues and organs are spared excessive radiation exposure. This results in significantly fewer and less severe side effects and complications than are incurred with other conventional therapies. RP generally results in a 50-90% impotence rate and a 2-65% incontinence rate, and EBRT generally results in impotence and incontinence rates of 40-60% and 10-25%, respectively. In contrast, according to the 1995 study by the Northwest Tumor Institute described above, it was reported that 85% of seed therapy patients under 70 years of age who were potent before the procedure remained so. In addition, patients who had not had a previous transurethral prostate resection ("TURP") suffered no incontinence. Patients having a previous TURP have compromised urinary tracts and can experience higher rates of incontinence. Patients receiving seeding can expect some urinary urgency post-implantation as the Pd-103 delivers its radiation dose. Lower Treatment Cost. The total cost of seeding is approximately $10,000 to $15,000 per procedure. This is approximately one-half the cost of RP, which ranges from $20,000 to $30,000, excluding treatment for side effects and post-operative complications. Seeding cost is comparable to the cost of EBRT, which ranges from $12,000 to $15,000 for a six-to-eight week course of treatment. The following table compares the methods of treatment discussed above with a minimum of five-year outcomes data: -------------------------------------- ----------------------------- ------------------------------ ---------------------------- External Beam Radical Prostatectomy Radiation Therapy Seeding -------------------------------------- ----------------------------- ------------------------------ ---------------------------- Outpatient procedure One-time outpatient Inpatient procedure with with daily treatments for procedure lasting 3-7 day hospital stay 6-8 weeks 60-90 minutes Nature of Treatment -------------------------------------- ----------------------------- ------------------------------ ---------------------------- -------------------------------------- ----------------------------- ------------------------------ ---------------------------- Targeted Cancer Stage A and B A, B and C A and B -------------------------------------- ----------------------------- ------------------------------ ---------------------------- -------------------------------------- ----------------------------- ------------------------------ ---------------------------- Five Year Success Rate(a) 78-83% 50% 80-100% -------------------------------------- ----------------------------- ------------------------------ ---------------------------- -------------------------------------- ----------------------------- ------------------------------ ---------------------------- Recovery Period Generally 4-6 weeks None after 6-8 weeks 2-3 days -------------------------------------- ----------------------------- ------------------------------ ---------------------------- -------------------------------------- ----------------------------- ------------------------------ ---------------------------- Impotence Rate(b) 50-90% 40-60% 5-15% -------------------------------------- ----------------------------- ------------------------------ ---------------------------- -------------------------------------- ----------------------------- ------------------------------ ---------------------------- Incontinence Rate(b) 2-65% 10-25% 0-2% -------------------------------------- ----------------------------- ------------------------------ ---------------------------- -------------------------------------- ----------------------------- ------------------------------ ---------------------------- Cost Per Procedure $20,000-$30,000 $12,000-$15,000 $10,000-$15,000 -------------------------------------- ----------------------------- ------------------------------ ---------------------------- (a) Calculated as the percent of patients disease-free after five years. Rates may be actuarially computed. (b) The percent of patients with normal continence and potency prior to treatment not remaining continent or potent following the procedure. Excludes patients with previous TURPs. Management believes TheraSeed(R) represents the best available form of seeding. Another radioactive isotope, Iodine-125 ("I-125"), is also commercially available as a permanent implant. TheraSeed(R) is the first commercially available alternative isotope to I-125 since I-125's introduction in the 1970s. Management believes I-125 and Pd-103 are used with relatively equal frequency in substantially all prostate cancer seeding procedures. Another technique known as "temporary seeding," which involves the temporary placement of an Iridium-based source in or near a tumor, is used in a very small percentage of cases. Management believes Pd-103 has the following advantages over I-125: (i) Pd-103 delivers three times the initial dose rate of I-125, which can yield advantages in treating aggressive cancers, (ii) Pd-103 has approximately one-third the half-life of I-125, which shortens radiation induced side effects and exposure to medical personnel in treatment follow-up; and (iii) unlike I-125, Pd-103 is nontoxic and non-volatile as it decays. Management is not aware of any clinical studies directly comparing the efficacy of Pd-103 versus I-125. Strategy In an effort to enhance market penetration and maintain technological leadership, the Company has signed a sales and marketing agreement with Indigo Medical, Inc., a Johnson & Johnson Company. Management believes that this agreement will allow Theragenics and Indigo to take the seeding treatment of prostate cancer to levels of penetration previously unseen by leveraging the consumer marketing, health care organization network, training capacity and international capabilities of Johnson & Johnson. Production The production of TheraSeed(R) is dependent upon the availability of Pd-103, as well as Rhodium-103 ("Rh-103"), titanium, graphite and lead. With the exception of Pd-103, all of these raw materials are relatively inexpensive and readily available from third party suppliers. Pd-103 is a radioactive isotope that can be produced by neutron bombardment of Pd-102 in a nuclear reactor, or by proton bombardment of Rh-103 in a cyclotron. Following the production of Pd-103 from Rh-103 in the cyclotron, the Pd-103 is harvested from the cyclotron and moved through a number of proprietary production processes until it reaches its final seed form. To increase its control over timely, consistent and continuing availability, quality and cost of Pd-103, the Company turned away from neutron bombardment of Pd-102 and to the proton bombardment method of producing Pd-103. To accomplish this alternative method of production, the Company contracted in 1992 for the purchase of a cyclotron for in-house production of Pd-103. After the cyclotron was delivered and reliable production of Pd-103 was proven, the Company discontinued its reliance on outside vendors for irradiation services. The Company has four cyclotrons in production and is currently installing a fifth, which is scheduled to become operational during the second quarter of 1998. The Company has ordered nine additional cyclotrons, three to be installed in fiscal 1998, and six in fiscal 1999. The Company's cyclotrons are designed, built, installed and tested by a company specializing in the construction of such equipment. A number of proprietary design modifications are incorporated in the cyclotrons. These modifications are subject to confidentiality agreements with the cyclotron manufacturer and the Company's own personnel. Due to the highly sophisticated and technical nature of the equipment, the Company has in the past encountered delays and difficulties in the construction, installation and testing of its cyclotrons. Management cannot be certain that such problems will not occur in connection with the construction, installation and testing of the cyclotrons to be installed in 1998 and 1999. Cyclotron operations constitute only one component of the TheraSeed(R) manufacturing process. Because the production of TheraSeed(R) is highly sensitive and labor intensive, management is focusing significant attention and effort on automating and otherwise improving all aspects of the Company's manufacturing process. Although the automation process is difficult and time consuming, and has been subject to significant delays, management believes it can improve efficiency, further reduce radiation exposure to personnel and provide additional production capacity for TheraSeed(R). During 1997, the Company received certification that its quality control system meets all the requirements of the International Organization for Standards' ISO 9001/EN46001 Quality System Standard. The Company is currently working toward obtaining a CE mark. Receipt of a CE mark is a necessary step for any future launch of Theraseed(R) in the European Community. Marketing Strategic Alliance. In 1997, the Company entered into a sales and marketing agreement with Indigo Medical, Inc., a subsidiary of Johnson & Johnson, granting to Indigo the exclusive worldwide right to market and sell Theraseed(R) for the treatment of prostate cancer. Indigo has assumed responsibility for the education and training of urologists, radiation oncologists and other personnel involved in the use of TheraSeed(R) for the treatment of prostate cancer. Management believes the alliance with Indigo will provide for sales growth and international expansion while allowing the Company to focus its resources on maintaining its leadership in the production of Pd-103 for prostate cancer treatment and other potential applications. By leveraging the extensive worldwide marketing capability of Indigo and Johnson & Johnson, the Company eliminates the need to develop an extensive, vertically integrated sales, marketing and education and training network for the marketing of Theraseed(R) for prostate cancer. Based on the current high level of demand in the prostate cancer market and production capacity, management does not anticipate having the ability to generate significant sales in other cancer areas in the coming year. TheraSphere(R) Theragenics has also participated in the development of TheraSphere(R), a microscopic radioactive glass sphere designed for the treatment of liver cancer. The Company holds a worldwide exclusive license from the University of Missouri for the use of the technology required to produce TheraSphere(R). The Company has granted to Nordion International, Inc. ("Nordion") an exclusive worldwide sublicense to manufacture, distribute and sell TheraSphere(R) for any application. TheraSphere(R) has been approved for distribution in Canada, but has not been approved by the FDA for distribution in the United States. Under the terms of the sublicense, Nordion has agreed to obtain the necessary regulatory approvals for distribution of TheraSphere(R) in the United States and other countries. The commercial development and regulatory approval of TheraSphere(R) is still in its early stages, and management does not anticipate significant revenues from TheraSphere(R) within the foreseeable future. A TheraSphere(R) treatment dose contains approximately five million yttrium-90 glass spheres that are each approximately half the diameter of a human hair. The radiation dose is delivered to the tumor by introducing the TheraSphere(R) by catheter into the hepatic artery, which carries arterial blood to the liver. 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(R) can deliver a radiation dose to the tumor cells five times as strong as that which can be delivered via external beam radiation. Patents and Licenses; Trade Secrets The Company holds United States patents directed to Pd-103 based on its production using both cyclotrons and nuclear reactors. The Company also has corresponding patents in Canada, South Africa, Japan and the 10 countries of the European patent convention, and 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. 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. The Company also uses a strategy of confidentiality agreements and trade secret treatment to provide primary protection to a number of proprietary design modifications in the cyclotrons, as well as various production processes. The Company also holds a worldwide exclusive license from the University of Missouri for the use of technology required for producing TheraSphere(R). Theragenics 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. 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(R). Theragenics holds patents for technology concerning methods for delivery of TheraSphere(R) in several countries, including the United States, Canada, Australia, Argentina, South Africa and the 10 countries of the European patent convention, and has patent applications on file in other countries, including Japan. The Company exclusively licenses this technology to Nordion for worldwide use. The Company relies to a significant degree on trade secrets, proprietary know-how and technological advances that are either not patentable or which the Company chooses not to patent. In particular, the Company has designed certain modifications to its cyclotrons as well as various production processes that it deems to be proprietary. The Company seeks to protect non-patented proprietary information, in part, by confidentiality agreements with suppliers, employees and consultants. Competition The Company competes in a market characterized by technological innovation, extensive research efforts and significant competition. In general, TheraSeed(R) competes with conventional methods of treating localized cancer such as RP and EBRT. RP currently represents the standard medical treatment for early-stage, localized prostate cancer. RP has a long history of favorable clinical results and physicians have developed a high degree of familiarity and comfort with this procedure. EBRT is also a well-established method of treatment and is widely accepted for patients who do not represent a good surgical risk or whose prostate cancer has advanced beyond the stage for which surgical treatment is indicated. RP and EBRT are therefore well entrenched in the medical community and in the universities and schools providing medical education. Management believes that if general conversion from these established procedures to TheraSeed(R) treatment does occur, such conversion will be the result of a combination of equivalent or better efficacy, reduced incidence of side effects and complications, lower cost, other quality of life issues and pressure by health care providers and patients. In addition, I-125 is commercially available as a permanent implant and competes with TheraSeed(R). Management believes I-125 and Pd-103 are used with relatively equal frequency in prostate cancer seeding procedures. I-125's dose rate is approximately one-third that of Pd-103, however, and its half-life is three times longer. Management believes Pd-103 enjoys a competitive advantage over I-125 based on: (i) a higher dose rate, which can yield advantages in treating aggressive cancers, (ii) a shorter half-life, which shortens radiation induced side effects and exposure to medical personnel in treatment follow-up; and (iii) Pd-103 is nontoxic and non-volatile as it decays. Management is aware of no other similar radioactive products competing directly with TheraSeed(R). A number of small companies have announced their intentions to produce I-125 and/or Pd-103 seeds for the treatment of prostate cancer. One such company, a small start-up, consisting of certain former Theragenics' employees, has indicated that they will have one cyclotron installed by the third quarter of 1998 for the purpose of producing Pd-103 for medical devices. Theragenics has initiated legal action against the company for infringement of trade secrets and the legal action is ongoing. To the best of Management's knowledge, Theragenics is still the only company in the world currently producing quantities of Pd-103 for medical devices on a commercial basis. Many companies, both public and private, are researching new and innovative methods of preventing and treating cancer. In addition, many companies, including many large, well-known pharmaceutical, medical device and chemical companies, are engaged in radiological pharmaceutical and device research. Significant developments by any of these companies could lessen or eliminate the demand for the Company's products. Government Regulation The Company's present and intended future activities in the development, manufacture and sale of cancer therapy products are subject to various laws, regulations, regulatory approvals and guidelines. Within the United States, the Company's therapeutic radiological devices must comply with the U.S. Federal Food, Drug and Cosmetic Act, which is enforced by the FDA. The Company is also required to adhere to applicable FDA regulations for Good Manufacturing Practices, including extensive record keeping and reporting and periodic inspections of manufacturing facilities. The Company obtained FDA 510(k) clearance in 1986 to market TheraSeed(R) for, in general, the treatment of localized solid tumors. A new 510(k) clearance is required for any modifications in the device or its labeling that could significantly affect the safety or effectiveness of the original product. The Company's handling of radioactive materials is governed by the State of Georgia in agreement with the NRC. The users of TheraSeed(R) are also required to possess licenses issued either by the states in which they reside or the NRC (depending upon which state is involved and the production process used). The Company's expansion plans require the Company to secure additional permits and licenses from a number of environmental, health and safety regulatory agencies. The Company believes, but cannot assure, that it will be able to acquire the permits and licenses necessary for its planned expansion of its manufacturing capacity in accordance with the Company's timetable for its expansion. The Company to date has not experienced delays in licensing any of its facilities or cyclotrons. The Company is required under its radioactive materials license to maintain radiation control and radiation safety personnel, procedures, equipment and processes, and to monitor its facilities and its employees and contractors. The Company is also required to provide financial assurance that end-of-life radiological decommissioning of its cyclotrons and other radioactive areas of its property that contain radioactive materials will be adequately funded by the Company. The Company's decommissioning obligations will increase as its production capacity is expanded. The Company disposes of low level radioactive waste to licensed commercial radioactive waste treatment or disposal facilities for incineration or land disposal. Management believes the Company is in compliance with all state and federal regulations. The Company provides training and monitoring of its personnel to facilitate the proper handling of all materials. Employees As of December 31, 1997, the Company had 111 full-time employees (including full-time temporary employees and executive personnel). Of this total, 84 were engaged in development and production of the Company's products. The remainder were engaged in marketing and general corporate activities. The Company's employees are not represented by a union or a collective bargaining unit, and management considers employee relations to be good. Item 2. Properties The Company owns a 15,245 square-foot, single-story building in Buford, Georgia, leases a 10,752 square-foot, single-story building in Norcross, Georgia, and leases a 2,692 square-foot suite of offices in a four-story office building in Norcross, Georgia. The larger Norcross facility houses the Company's assembly, shipping, and administrative operations, the smaller Norcross facility provides executive office space and the Buford facility houses the Company's cyclotrons and its raw material processing operations. In 1996, the Company purchased 30 acres of land adjacent to its Buford facility. Management is using this land for long-term expansion of the Company's production facilities as manufacturing expands to meet increasing sales demand. Currently under construction on this land is a single story manufacturing facility of approximately 80,000 square feet. Eventually all functions currently housed in the leased Norcross facilities will be relocated to this new site adjacent to its current Buford facility. Item 3. Legal Proceedings There are currently no material legal proceedings pending or, to the knowledge of management, threatened against the Company. 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 1997. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock is traded on the Nasdaq National Market ("Nasdaq"). The trading symbol for the Company's Common Stock on Nasdaq is "THRX." The high and low prices as reported on Nasdaq for the Company's Common Stock for each quarterly period in 1996 and 1997 are as follows: High Low ---- --- 1996 First Quarter............................................$12.25 $7.00 Second Quarter............................................18.63 8.63 Third Quarter.............................................19.25 11.75 Fourth Quarter............................................25.63 16.00 1997 First Quarter.............................................27.50 15.75 Second Quarter............................................25.38 15.05 Third Quarter.............................................50.00 22.25 Fourth Quarter............................................54.00. 33.00 As of March 16, 1998, the closing price of the Company's Common Stock was $69 per share. Also, as of that date, there were approximately 706 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. On February 14, 1997, the Company's Board of Directors adopted a Stockholder Rights Plan (the "Rights Plan"). The Rights Plan contains provisions to protect the Company's stockholders in the event of an unsolicited offer to acquire the Company, including offers that do not treat all stockholders equally, the acquisition in the open market of shares constituting control without offering fair value to all stockholders and other coercive, unfair or inadequate takeover bids and practices that could impair the ability of the Board of Directors to represent stockholders' interests fully. Pursuant to the Rights Plan, the Board of Directors declared and paid a dividend of one share purchase right (a "Right") for each outstanding share of Common Stock held of record as of February 28, 1997. The Rights, which will expire in February 2007, initially will be represented by, and traded together with, the Common Stock. The Rights are not currently exercisable and do not become exercisable unless certain events occur, including the acquisition of, or commencement of a tender offer for, 15% or more of the outstanding Common Stock. Each Right represents the right to purchase from the Company one share of Common Stock at a purchase price of $120.00, subject to adjustment. In the event certain triggering events occur, including the acquisition of 20% or more of the outstanding Common Stock each Right that is not held by the 20% or more stockholder will entitle its holder to purchase additional shares of Common Stock having a market value of twice the purchase price. As a result, the Rights Plan could add substantially to the cost of acquiring the Company, and consequently could delay or prevent a change in control of the Company. These effects could adversely affect the market price of the Common Stock. Prior to the time the Rights become exercisable, the Board of Directors may redeem the rights at a redemption price of $.01 per Right. The description and terms of the Rights are set forth in a Rights Agreement dated as of February 17, 1997 by and between the Company and SunTrust Bank, Atlanta, as Rights Agent. Dividend Policy The Company has never declared or paid a cash dividend on its Common Stock. It is the present policy of the Board of Directors to retain all earnings to support operations and to finance expansion. Consequently, the Board of Directors does not anticipate declaring or paying cash dividends on the Common Stock in the foreseeable future. The Company's current credit facility restricts the Company's ability to pay dividends if such dividend payment would cause a default under any of the credit facility's financial covenants. Decisions on the payment and amount of future dividends on the Common Stock will depend on the Company's results of operations, capital requirements and financial condition and other relevant factors as determined by the Board of Directors. Stock Split On March 16, 1998, the Company announced a two-for-one stock split to be effected in the form of a 100% stock dividend payable on April 15, 1998 to shareholders of record at the close of business on March 31, 1998. Item 6. Selected Financial Data The selected financial data set forth below as of December 31, 1996 and 1997 and for each of the years in the three-year period ended December 31, 1997 have been derived from the financial statements of the Company included elsewhere herein, which have been audited by Grant Thornton LLP, independent certified public accountants. The selected financial data as of December 31, 1993, 1994 and 1995 and for each of the years in the two-year period ended December 31, 1994 have been derived from the financial statements of the Company, which have been audited by Grant Thornton LLP but are not included herein. The selected financial data set forth below should be read in conjunction with the financial statements of the Company and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. Year Ended December 31, 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- (Dollars and shares in thousands, except per share data) Statement of Earnings Data: Product sales..................................................... $4,091 $4,723 $7,782 $12,257 $12,170 Product sales - affiliate -- -- -- -- 12,287 Licensing fees.................................................... -- -- 85 100 100 ------ ----- ------ ------- ------- 4,091 4,723 7,867 12,357 24,557 Cost of product sales............................................. 1,678 1,791 2,645 3,736 6,141 Selling, general and administrative............................... 1,607 1,844 2,396 3,198 4,819 Research and development.......................................... 36 15 18 7 55 ------ ----- ------ ------- ------ 3,321 3,650 5,059 6,941 11,015 Other income (expense)............................................ (86) 110 64 36 1,306 ------- ------ ------ ------- ------ Net earnings before income taxes, extraordinary credit and cumulative effect of change in accounting principle......................................................... 684 1,183 2,872 5,452 14,848 Income tax expense................................................ 254 453 1,100 2,067 5,350 ------ ------ ------ ------ ------- Net earnings before extraordinary credit and change in accounting method............................................................ 430 730 1,772 3,385 9,498 Extraordinary credit.............................................. -- -- -- -- -- Change in accounting method....................................... 2,860 -- -- -- -- ------ ------ ------ ------ ------- Net earnings...................................................... $3,290 $ 730 $1,772 $3,385 $9,498 ====== ====== ====== ====== ====== Earnings per common share-basic Income before accounting change................................. $ 0.04 $ 0.07 $ 0.16 $ 0.29 $ 0.69 Cumulative effect of a change in accounting principle.......................................... $ 0.26 -- -- -- -- Net Income.................................................... $ 0.30 $ 0.07 $ 0.16 $ 0.29 $ 0.69 Weighted average shares-basic..................................... 10,800 10,935 11,103 11,625 13,763 Earnings per common share-assuming dilution Income before accounting change............................... $ 0.04 $ 0.06 $ 0.15 $ 0.28 $ 0.66 Cumulative effect of a change in accounting principle.......................................... $ 0.24 -- -- -- -- Net Income.................................................... $ 0.28 $ 0.06 $ 0.15 $ 0.28 $ 0.66 Weighted average shares-diluted................................... 11,705 11,588 11,848 12,291 14,309 December 31, 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- (In thousands) Balance Sheet Data: Cash and short-term investments.................................. $3,083 $2,317 $3,266 $2,986 $30,162 Property, plant and equipment, net............................... 5,647 8,458 10,073 17,586 28,986 Total assets..................................................... 12,619 14,169 16,878 23,689 71,140 Long-term debt, including current installments................... 1,330 1,989 1,519 3,458 -- Shareholders' equity............................................. 11,034 11,810 14,769 19,385 67,033 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Theragenics was founded in 1981 and is engaged in the manufacture and sale of TheraSeed(R), a rice-sized device used for the treatment of localized prostate cancer in a one-time, minimally invasive procedure. In 1986, the Company received FDA clearance for its principal product, TheraSeed(R), for use in any solid localized tumor. Sales increased 58% in 1996 and 99% in 1997 due to increased and reliable production from the Company's cyclotrons and increased demand for TheraSeed(R) as a result of growing market acceptance of this treatment alternative for prostate cancer. Production of Pd-103, the radioisotope supplying the therapeutic radiation of TheraSeed(R), has always been a controlling factor in the Company's efforts to generate sales. To increase its control over the timely and consistent availability, quality and cost of Pd-103, the Company converted from reactor produced Pd-103 to an alternative means of producing Pd-103 using a cyclotron. In 1992, the Company contracted for the purchase of a cyclotron for in-house production of Pd-103. After the cyclotron was delivered and reliable production of Pd-103 was demonstrated, the Company discontinued its reliance on outside vendors for irradiation services. In view of the scale of the investment necessary to add cyclotrons, the time and effort required to develop the production process, and the Company's limited access to debt and equity capital, the Company undertook a slow and measured roll-out of its TheraSeed(R) product. Management focused primarily on the careful development of relationships with the physician community and on ensuring that the Company's production capabilities could meet demand for its product. The Company added additional cyclotrons in 1995, 1996, and 1997 for a total of four cyclotrons. Four additional cyclotrons are scheduled to become operational in 1998 and six in 1999. Because a cyclotron does not become available for production until approximately 18 months after it is ordered, the accuracy of the Company's long-term plans can significantly affect its results of operations. The delivery of cyclotrons prior to a commensurate increase in demand could adversely impact margins, while inadequate cyclotron capacity could limit the Company's ability to meet demand and achieve maximum sales growth. The Company is well underway on a $28 million capital expansion project that includes the purchase of four additional cyclotrons and the construction of a new production facility. Although no assurances can be given, management expects that one new cyclotron will become operational in April, 1998, or shortly thereafter and the next three becoming operational at three month intervals. Contracts were signed for six additional cyclotrons to be delivered in 1999. Again, while no assurances can be given, Management expects one to be operational at the end of the first quarter 1999, three additional by the end of third quarter 1999, and two more by the end of the fourth quarter of 1999, or shortly thereafter. Each of these cyclotrons, including the facility to house each, are estimated to cost less than $5,000,000. On May 30,1997, the Company entered into a sales and marketing agreement with Indigo Medical, Inc., a subsidiary of Johnson & Johnson, granting the exclusive worldwide right to market and sell Theraseed(R) for the treatment of prostate cancer. Under the terms of the agreements, Indigo has assumed responsibility for the education and training of urologists, radiation oncologists and other personnel involved in the use of TheraSeed(R) as well as all other sales and marketing activities. The Company continues to be responsible for all manufacturing and distribution for TheraSeed(R). Results of Operations Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Product sales were $24.6 million in 1997 compared to $12.4 million in 1996, an increase of $12.2 million, or 98.4%. Market acceptance of the Company's TheraSeed(R) treatment alternative for prostate cancer grew during 1997. Concurrently, the Company was able to reliably increase production from its cyclotron-based manufacturing and thereby take advantage of increased demand. Sales also reflect that the Company had four cyclotrons available during much of 1997 to meet sales demand as compared to only two cyclotrons throughout 1996. Licensing fees represent royalty payments with respect to the Company's licensed TheraSphere(R) technology. Management does not expect licensing fees to become material in the foreseeable future. See Note F of Notes to Financial Statements. Cost of product sales was $6.1 million in 1997 compared to $3.7 million in 1996, an increase of $2.4 million, or 64.9%. This increase was due primarily to incremental staffing and cyclotron related costs. Staffing increases were necessary to respond to and anticipate sales growth. Cyclotron operating costs and depreciation increased as all four of the Company's cyclotrons were in service by February, 1997. As cyclotrons come on-line, margins decline because each machine represents excess capacity for a period while carrying its full component of fixed costs, including depreciation. As a percentage of product sales, cost of product sales decreased from 30.5% in 1996 to 25.0% in 1997. This decrease resulted from economies of scale. Selling, general and administrative expense was $4.8 million in 1997 compared to $3.2 million in 1996, an increase of $1.6 million, or 50.6%. Primary contributors to this increase were legal and professional fees and compensation and related expense. Legal and professional expense fees increased as the Company completed the Theragenics/Indigo Sales and Marketing Agreement and initiated legal action against a small company founded by former employees. Compensation and related expenses rose as the number of employees increased and salaries were increased reflecting the larger scope of the Company's operations and the need to attract and retain qualified employees. There were also higher expenditures in a number of areas representing support for higher sales levels. Despite these increases, selling, general and administrative expense as a percentage of net sales decreased from 26.1% in 1996 to 19.7% in 1997 due to economies of scale. During the periods presented, the Company had no ongoing pure research function. As in the past, much of the development component of research and development of product and processes is incorporated in the manufacturing area and therefore is included in the cost of goods sold category. Management may choose to develop a more traditional research and development program if and when appropriate opportunities are identified and resources are in place. Other income (expense) during the periods presented consist principally of interest income, interest expense and the write-off of unamortized loan costs as a result of loan refinancing. Interest income jumped dramatically, reflecting interest on funds received as a result of the secondary stock offering completed in April, 1997. Since these funds will largely be used to fund the Company's expansion program in 1998 and 1999, management expects other income to return to levels consistent with historical amounts. The Company's effective income tax rate was approximately 38% in 1996 and approximately 36% in 1997. Liquidity and Capital Resources During 1995, 1996 and 1997, the Company's principal cash needs related to capital spending to increase manufacturing capacity. To manufacture TheraSeed(R), the Company purchases, installs and operates cyclotrons, which involves significant capital investment. The Company has funded its capacity expansions in 1995 and 1996, principally from cash flows from operations and bank borrowings, and in 1997 from cash flows from operations and the proceeds from the secondary offering of common stock completed in April, 1997. The Company had cash and short-term investments of $30.2 million at December 31, 1997, compared to $3.0 million at December 31, 1996. Working capital was $39.0 million at December 31, 1997, This compares to $1.3 million at year end 1996, which included $3.5 million representing the current portion of long-term obligations. Cash provided by operating activities was, $5.7 million and $14.2 million during 1996 and 1997, respectively. These amounts primarily represent net income supplemented in 1997 by an increase in income tax payable and trade accounts payable, and in all years by the tax sheltering effects of depreciation and deferred tax expense. Offsetting these items were increases in accounts receivable. Cash used in investing activities was $8.6 million and $21.2 million in 1996 and 1997, respectively, consisting in each of these years primarily of purchases of property and equipment. Spending in 1996 represents the continuation of a project to add cyclotrons three and four to the facility, the purchase of 30 acres of land for the Company's expansion project and spending on an assembly automation project. Spending in 1997 primarily represents the beginning of a project to add four cyclotrons and a new manufacturing facility having an estimated total cost of approximately $28 million. As of December 31, 1997, approximately $11 million had been spent on this expansion project and less than $2 million on other capital projects. Theragenics invested in marketable securities and held $8.4 million of those securities at December 31, 1997 as disclosed in Note B-3 in the Notes to Financial Statements attached hereto. On January 23, 1998, the Company entered into six agreements, each for the purchase of one additional cyclotron. Each cyclotron, including the facility to house it, is expected to cost less than $5 million. The Company has made payments to date on these six cyclotrons totaling approximately $5.5 million as of March 16, 1998. Cash provided (used) by financing activities was $(21,000), $2.6 million and $34.2 million in 1995, 1996 and 1997, respectively. Cash flows from financing activities relates principally to bank borrowings and repayments thereof, proceeds from the exercise of stock options and warrants, and in 1997, proceeds from the secondary placement of common stock, and common stock sold to Indigo Medical as part of a sales and marketing agreement. Management intends to continue its efforts toward increasing its Pd-103 production capacity. As such, over the next two fiscal years, the Company intends to construct facilities, purchase cyclotrons, purchase other production equipment, invest in research and development, invest in automation, and provide for working capital and general corporate needs. Management believes that current cash balances, cash from future operations and its credit facility, will be sufficient to meet its working capital and capital expenditure requirements for at least the next 12 months. In the event additional financing becomes necessary, management may choose to raise those funds through other methods of financing as appropriate. YEAR 2000 ISSUE: Some computer systems used today were designed and developed using two digits, rather than four, to specify the year. Consequently, such systems may recognize a date of "00" as the year 1900 instead of year 2000. This may cause many computer systems to fail or create inaccurate results unless corrective measures are taken. We are currently implementing, or we have plans to implement, upgrades to computer systems to properly recognize dates after December 31, 1999. The financial impact associated with upgrades to systems to address the year 2000 issue is not expected to have a material effect on the Company's financial position or results of operations in any given year. This document contains certain forward-looking statements within the meaning of the private securities litigation reform act of 1995 including, without limitation, statements regarding possible benefits associated with the alliance with Indigo Medical Inc., future costs of sales, S, G & A expenses, research and development, costs and timetable for capacity expansion and the sufficiency of the Company's liquidity and capital resources. From time to time, the Company may 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, government regulation of the therapeutic radiological, pharmaceutical and device business, dependence on health care professionals, competition from conventional and newly developed methods of treating localized cancer, and dependence on a third party cyclotron manufacturer. Quarterly Results The following table sets forth certain consolidated statements of operations data for each of the Company's last eight quarters. This unaudited quarterly information has been prepared on the same basis as the annual audited information presented elsewhere in this Form 10K, reflects all adjustments (consisting only of normal, recurring adjustments) necessary in management's opinion for a fair presentation of the information for the periods covered and should be read in conjunction with the financial statements and notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period. Quarterly data presented may not reconcile to totals or full year results due to rounding. 1996 1997 ---- ---- First Second Third Fourth First Second Third Fourth Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr --- --- --- --- --- --- --- --- (Dollars and shares in thousands, except per share data) Total revenues $2,798 $2,727 $3,144 $3,688 $4,107 $6,172 $7,018 $7,260 ------ ------ ------ ------ ------ ------ ------ ------ Cost of product sales 753 888 958 1,137 1,145 1,559 1,580 1,856 Selling, general and 693 771 722 1,012 1,185 1,391 1,180 1,063 administrative Research and Development 1 1 1 4 4 30 11 10 Other income (expense) 27 26 17 (34) 16 328 499 462 ------ ----- ------ ------ ----- ------ ----- ------ Net earnings before income 1,378 1,093 1,480 1,501 1,789 3,520 4,746 4,793 taxes Income tax expense 524 415 562 566 680 1,338 1,803 1,529 ------ ----- ----- ------ ----- ------ ----- ------ Net earnings $ 854 $ 678 $ 918 $ 935 $1,109 $2,182 $2,943 $3,264 ====== ====== ====== ====== ====== ====== ====== ====== Earnings per common share: Basic $0.07 $0.06 $0.08 $0.08 $0.09 $0.15 $0.20 $0.22 Diluted $0.07 $0.06 $0.08 $0.08 $0.09 $0.15 $0.20 $0.22 Weighted average shares outstanding Basic: 11,505 11,588 11,658 11,748 11,836 14,229 14,449 14,537 Diluted 12,290 12,204 12,298 12,372 12,381 14,730 15,030 15,094 Inflation Management does not believe that the relatively moderate levels of inflation which have been experienced in the United States in recent years have had a significant effect on the Company's net sales or profitability. Item 8. Financial Statements and Supplementary Data See Index to Financial Statements (Page 34) and following pages. Item 9. Changes in and Disagreements on Accounting and Financial Disclosure Not Applicable PART III Item 10. Directors and Officers of Registrant* Item 11. Executive Compensation* Item 12. Security Ownership of Certain Beneficial Owners and Management* Item 13. Certain Relationships and Related Transactions* - - ------------------------------ *Theinformation called for by Items 10, 11, 12 and 13 is omitted from this Report and is incorporated by reference to the definitive Proxy Statement to be filed by the Company not later than 120 days after December 31, 1997, the close of its fiscal year. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. a) The following documents are filed as part of this Report. 1. Financial Statements See index to financial statements on page 34 2. Financial Schedules See the index to financial schedules on page 34 3. Exhibits 3.1 - Certificate of Incorporation (1) 3.2 - Certificate of Amendment to Certificate of Incorporation (1) 3.3 - Certificate of Amendment to Certificate of Incorporation (1) 3.4 - By-Laws (1) 4.1 - See Exhibits 3.1 - 3.4 for provisions in the Company's Certificate of Incorporation and By-Laws defining the rights of holders of the Company's Common Stock. 4.2 - Form of Warrant issued to the Representatives of the Underwriters of the Company's Public Offering (1) 4.3 - Warrant Agreements dated May 1, 1989 between the Company and James Devas (4) 4.4 - Warrant Agreement dated May 8, 1993 between the Company and James Devas (9) 10.1 - License Agreement with University of Missouri, as amended (1) 10.2 - Agreement with Atomic Energy of Canada, Ltd. (1) 10.3 - Reassignment and Release Agreement among the Company, John L. Russell, Jr., and Georgia Tech Research Institute (1) 10.4 - 1986 Incentive and Non-Incentive Stock Option Plan (1) 10.5 - Letter of Agreement between the Company and Yale-New Haven Hospital (2) 10.6 - Lease between the Company and T. Rowe Price Realty Income Fund II dated July 14, 1988 (2) 10.7 - Form of Purchase Agreement between the Company and ten institutional investors (3) 10.8 - Form of Custody Agreement between the Company and IBJ Schroder Bank & Trust Company (3) 10.9 - 1990 Incentive and Non-Incentive Stock Option Plan (5)* 10.10 - Employment Agreement of Bruce W. Smith (5)* 10.11 - Purchase Agreement between Theragenics Corporation and Production Equipment Manufacturer (6) 10.12 - Term Loan and Security Agreement between Theragenics Corporation and Heller Financial, Inc. (7) 10.13 - Purchase Agreement between Theragenics Corporation and Production Equipment Manufacturer (8) 10.14 - Amendment to Purchase Agreement between Theragenics Corporation and Production Equipment Manufacturer (9) 10.15 - Employment Agreement of John V. Herndon dated August 1, 1993 (9)* 10.16 - Employment Agreement of M. Christine Jacobs* (14) 10.17 - Lease between the Company and T. Rowe Price Realty Income Fund II dated January 1, 1994 (9) 10.18 - Agreement with Nordion International Inc. (11) 10.19 - Purchase Agreements between Theragenics Corporation and Production Equipment Manufacturer (12) 10.20(a) Purchase Agreement dated December 27, 1996 between Theragenics Corporation and Ion Beam Applications s.a. (15) 10.20(b) Purchase Agreement dated December 27, 1996 between Theragenics Corporation and Ion Beam Applications s.a. (15) 10.20(c) Purchase Agreement dated December 27, 1996 between Theragenics Corporation and Ion Beam Applications s.a. (15) 10.20(d) Purchase Agreement dated December 27, 1996 between Theragenics Corporation and Ion Beam Applications s.a. (15) 10.21 - Second Amended and Restated Loan and Security Agreement by and between Theragenics Corporation and NationsBank, N.A. (South), Dated as of December 9, 1996 (15) 10.22 - First modification of Second Amended and Restated Loan and Security Agreement between Theragenics Corporation and NationsBank, N.A., Dated September 30, 1997. 10.23 - Second Modification of Second Amended and Restated Loan and security Agreement between Theragenics Corporation and NationsBank, N.A., Dated November 26, 1997. 10.24 - Rights Agreement dated as of February 17, 1997 between the Company and SunTrust Bank, Atlanta (16) 10.25 - Theragenics Corporation 1995 Stock Option Plan (17)* 10.26 - 1997 Stock Incentive Plan (18)* 10.27 - Marketing and Sales Agreement by and between the Company and Indigo Medical, Inc. dated May 30, 1997 (19) 24.1 - Consent of Independent Public Accountants for Incorporation by Reference of Audit Report into Registration Statements 27.1 - Financial Data Schedule for the years ended December 31, 1997 and 1996 (for SEC use only) 27.2 - Financial Data Schedule for the interim periods in the year ended December 31, 1997 27.3 - Financial Data Schedule for the interim periods in the year ended December 31, 1996 * Management contract or compensatory plan or arrangement identified pursuant to Item 14(a)(3) of Form 10-K (1) Incorporated by reference to the exhibits filed with the Company's registration statement on Form S-1, File No. 33-7097, and post-effective amendments thereto. (2) Incorporated by reference to the exhibits to the report on Form 10-K for the period ended December 31, 1988. (3) Incorporated by reference to the exhibits to the report on Form 10-Q for the period ended June 30, 1989. (4) Incorporated by reference to the exhibits to the report on Form 10-K for the period ended December 31, 1989. (5) Incorporated by reference to the exhibits to the report on Form 10-K for the period ended December 31, 1990. (6) Incorporated by reference to the exhibits to the report on Form 10-K for the period ended December 31, 1991. (7) Incorporated by reference to the exhibits to the report on Form 10-K for the period ended December 31, 1992. (8) Incorporated by reference to the exhibits to the report on Form 10-Q for the period ended June 30, 1993. (9) Incorporated by reference to the exhibits to the report on Form 10-K for the period ended December 31, 1993. (10) Incorporated by reference to the exhibits to the report on Form 10-K for the period ended December 31, 1994. (11) Incorporated by reference to the exhibits to the report on Form 8-K dated March 23, 1995. (12) Incorporated by reference to the exhibits to the report on Form 8-K dated June 29, 1995. (13) Incorporated by reference to the exhibits to the report on Form 10-K for the period ended December 31, 1995. (14) Incorporated by reference to the exhibits to the report on Form 10-K for the period ended December 31, 1996. (15) Incorporated by reference to the exhibits to the report on Form 8-K dated January 13, 1997. (16) Incorporated by reference to the exhibits to the Company's registration statement on Form 8-1 filed February 27, 1997. (17) Incorporated by reference to the exhibits to the Common Stock Registration Statement on for S-8, file #333- 15313. (18) Incorporated by reference to appendix B to the Company's proxy statement for its 1997 Annual Meeting of Stockholders filed on schedule 14A. (19) Incorporated by reference to the exhibits to the report on Form 10Q for the period ended September 30, 1997. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the last quarter of the most recent fiscal year. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THERAGENICS CORPORATION (Registrant) By:/s/ M. Christine Jacobs M. Christine Jacobs Chief Executive Officer Dated: March 27, 1998 Norcross, Georgia Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Title Date /s/ M. Christine Jacobs Chief Executive Officer 3/27/98 M. Christine Jacobs (Principal Executive Officer); Director /s/ Bruce W. Smith Chief Financial Officer, 3/27/98 Bruce W. Smith Treasurer (Principal Financial Officer) and Secretary /s/ Charles Klimkowski Director, Chairman 3/27/98 Charles Klimkowski /s/ John V. Herndon Director 3/27/98 John V. Herndon /s/ Orwin L. Carter Director 3/27/98 Orwin L. Carter /s/ Peter A.A. Saunders Director 3/27/98 Peter A.A. Saunders /s/ Otis W. Brawley Director 3/27/98 Otis W. Brawley THERAGENICS CORPORATION TABLE OF CONTENTS Page REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ................35 (For the periods ended December 31, 1995, 1996 and 1997) FINANCIAL STATEMENTS Balance Sheets - December 31, 1996 and 1997 .............36 Statements of Earnings for the Three Years Ended December 31, 1997 .......................................37 Statement of Shareholders' Equity for the Three Years Ended December 31, 1997 .................38 Statements of Cash Flows for the Three Years Ended December 31, 1997 .......................................40 NOTES TO FINANCIAL STATEMENTS ...........................42 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Theragenics Corporation We have audited the balance sheets of Theragenics Corporation (a Delaware corporation) as of December 31, 1996 and 1997, and the related statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Theragenics Corporation as of December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Atlanta, Georgia January 15, 1998 THERAGENICS CORPORATION BALANCE SHEETS December 31, 1996 1997 --------------------- ---------------------- ASSETS CURRENT ASSETS Cash and short-term investments $ 2,986,123 30,161,614 Marketable securities -- 8,391,807 Trade accounts receivable, less allowance of $0 in 1996 and $65,446 in 1997 2,258,936 2,925,390 Inventories 229,298 433,873 Prepaid expenses and other current assets 133,625 160,620 -------------------- ------------------- Total current assets 5,607,982 42,073,304 PROPERTY, PLANT AND EQUIPMENT - AT COST Building and improvements 3,333,728 3,333,728 Leasehold improvements 138,978 138,978 Machinery and equipment 11,522,064 14,698,623 Office furniture and equipment 65,057 66,464 -------------------- -------------------- 15,059,827 18,237,793 Less accumulated depreciation (3,237,684) (4,695,669) ------------------- -------------------- 11,822,143 13,542,124 Land 525,372 525,754 Construction in progress 5,238,056 14,917,788 ------------------- -------------------- 17,585,571 28,985,666 OTHER ASSETS Deferred income tax asset 360,000 -- Patent costs 80,685 71,836 Other 55,183 9,503 ------------------- -------------------- 495,868 81,339 ------------------- -------------------- Total Assets 23,689,421 $ 71,140,309 =================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt 3,458,436 -- Trade accounts payable 330,375 1,435,154 Accrued salaries, wages and payroll taxes 459,421 689,610 Income taxes payable -- 845,364 Other current liabilities 56,677 137,097 ------------------- --------------------- Total current liabilities 4,304,909 3,107,225 DEFERRED INCOME TAXES -- 1,000,000 COMMITMENTS AND CONTINGENCIES -- -- SHAREHOLDERS' EQUITY Common stock authorized 50,000,000 shares of $.01 par value; issued and outstanding, 11,814,278 in 1996 and 14,537,841 in 1997 118,143 145,378 Additional paid-in capital 17,616,560 55,740,366 Retained earnings 1,649,809 11,147,340 ------------------- --------------------- ------------------- --------------------- 19,384,512 67,033,084 ------------------- --------------------- =================== ===================== Total Liabilities and Shareholders' Equity $ 23,689,421 $ 71,140,309 =================== ===================== The accompanying notes are an integral part of these statements. THERAGENICS CORPORATION STATEMENTS OF EARNINGS Year ended December 31, 1995 1996 1997 -------------------- ---------------------- --------------------- REVENUE Product sales $ 7,781,962 $ 12,257,165 $ 12,169,724 Product sales - affiliate -- -- 12,287,650 Licensing fees 85,431 100,000 100,000 -------------------- ---------------------- --------------------- -------------------- ---------------------- --------------------- 7,867,393 12,357,165 24,557,374 -------------------- ---------------------- --------------------- COSTS AND EXPENSES Cost of product sales 2,645,730 3,735,669 6,141,330 Selling, general and 2,395,846 3,198,663 4,818,650 administrative Research and development 17,954 6,952 55,390 -------------------- ---------------------- --------------------- -------------------- ---------------------- --------------------- 5,059,530 6,941,284 11,015,370 -------------------- ---------------------- --------------------- OTHER INCOME (EXPENSE) Interest income 143,424 126,953 1,361,890 Interest expense (51,967) (84,517) (21,095) Other (26,995) (6,311) (35,268) --------------------- --------------------- -------------------- -------------------- ---------------------- --------------------- 64,462 36,125 1,305,527 -------------------- ---------------------- --------------------- Net earnings before income taxes 2,872,325 5,452,006 14,847,531 Income tax expense 1,100,000 2,067,500 5,350,000 -------------------- ---------------------- --------------------- Net earnings $ 1,772,325 $ 3,384,506 $ 9,497,531 ==================== ====================== ===================== Net earnings per common share Basic $ .16 $ .29 $ .69 ==================== ====================== ===================== Diluted $ .15 $ .28 $ .66 ==================== ====================== ===================== Theragenics Corporation STATEMENTS OF SHAREHOLDERS' EQUITY For the three years ended December 31, 1997 Retained Common stock Additional earnings Number of Par value paid-in (accumulated shares $.01 capital deficit) Total Balance, December 31, 1994 10,961,887 $ 109,618 $ 15,207,453 $ (3,507,022) $ 11,810,049 Exercise of stock options, net of 17,102 common shares redeemed 432,898 4,330 469,717 - 474,047 Income tax benefit from stock options exercised - - 713,000 - 713,000 Net earnings for the year - - - 1,772,325 1,772,325 ------------- ---------- -------------- -------------- ------------- Balance, December 31, 1995 11,394,785 113,948 16,390,170 (1,734,697) 14,769,421 Exercise of stock options, net of 11,723 common shares redeemed 379,493 3,795 398,163 - 401,958 Exercise of warrants 40,000 400 299,600 - 300,000 Income tax benefit from stock options exercised - - 528,627 - 528,627 Net earnings for the year - - - 3,384,506 3,384,506 ------------ ---------- -------------- -------------- ------------- Balance, December 31, 1996 11,814,278 118,143 17,616,560 1,649,809 19,384,512 Theragenics Corporation STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED For the three years ended December 31, 1996 Retained Common stock Additional earnings Number of Par value paid-in (accumulated shares $.01 capital deficit) Total ------------------------ ----------- ------------- ------------ Issuance of common stock in secondary public offering, net of offering costs of $2,482,701 2,300,000 23,000 31,994,299 - 32,017,299 Issuance of common stock to Johnson & Johnson Development Corporation 254,453 2,544 4,997,456 - 5,000,000 Exercise of stock options, net of 1,000 common shares redeemed 149,110 1,491 492,615 - 494,106 Exercise of warrants 20,000 200 149,800 - 150,000 Income tax benefit from stock options exercised - - 489,636 - 489,636 Net earnings for the year - - - 9,497,531 9,497,531 ---------- --------- ---------- ---------- ---------- Balance, December 31, 1997 14,537,841 $ 145,378 $55,740,366 $ 11,147,340 $67,033,084 ========== ========= ========== =========== ========== The accompanying notes are an integral part of these statements. Theragenics Corporation STATEMENTS OF CASH FLOWS Year ended December 31, 1995 1996 1997 -------------- ------------- ------------- Cash flows from operating activities: Net earnings $ 1,772,325 $ 3,384,506 $ 9,497,531 Adjustments to reconcile net earnings to net cash provided by operating activities: Deferred income taxes 1,082,000 1,972,000 1,850,000 Depreciation and amortization 828,072 1,114,919 1,466,834 Provision for doubtful accounts receivable - - 65,446 Loss on disposal of property and equipment 1,677 - - Change in assets and liabilities: Accounts receivable (603,221) (923,291) (731,900) Inventories 25,206 (62,343) (204,575) Prepaid expenses and other current assets 24,280 (66,104) (26,995) Other assets - - 45,680 Trade accounts payable 121,982 (17,816) 1,104,779 Accrued salaries, wages and payroll taxes 115,006 234,283 230,189 Other current liabilities (17,214) 47,369 80,056 Income taxes payable - - 845,364 --------- ----------- ----------- Net cash provided by operating activities 3,350,113 5,683,523 14,222,409 --------- ----------- ----------- Cash flows from investing activities: Purchase and construction of property and equipment (2,426,961) (8,555,876) (12,858,080) Purchase of marketable securities - - (8,391,807) Maturities of marketable securities 50,000 - - Patent costs (3,632) - - --------- ----------- ----------- Net cash used by investing activities (2,380,593) (8,555,876) (21,249,887) --------- ----------- ----------- Theragenics Corporation STATEMENTS OF CASH FLOWS - CONTINUED Year ended December 31, 1995 1996 1997 -------------- ---------------- --------------- Cash flows from financing activities: Proceeds from long-term debt - 2,450,225 - Repayment of long-term debt (469,622) (511,286) (3,458,436) Proceeds from issuance of common stock, net - - 37,017,299 Proceeds from exercise of stock options and warrants 474,047 701,958 644,106 Debt issue costs (25,070) (48,759) - -------------- ---------------- --------------- Net cash (used) provided by financing activities (20,645) 2,592,138 34,202,969 -------------- ---------------- --------------- Net increase (decrease) in cash and short-term investments 948,875 (280,215) 27,175,491 Cash and short-term investments at beginning of year 2,317,463 3,266,338 2,986,123 -------------- ---------------- --------------- Cash and short-term investments at end of year $ 3,266,338 $ 2,986,123 $ 30,161,614 ============== ================ =============== Supplemental Schedule of Non Cash Financing Activities During 1995, 1996 and 1997, the Company realized an income tax benefit from the exercise and early disposition of certain stock options of approximately $713,000, $529,000 and $490,000, respectively. Supplementary Cash Flow Disclosure Interest paid, net of amounts capitalized $ 54,000 $ 82,000 $ 29,000 Income taxes paid $ 15,000 $ 99,000 $ 2,655,000 The accompanying notes are an integral part of these statements. Theragenics Corporation NOTES TO FINANCIAL STATEMENTS December 31, 1996 and 1997 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, TheraSeed(R), which is used primarily in the treatment of prostate cancer. Use of the Company's product is regulated by the U.S. Food and Drug Administration (FDA). Under a marketing and sales agreement executed with Indigo Medical, Inc. (Indigo) in May 1997, (see Note F) all TheraSeed(R) products used in the treatment of prostate cancer are sold to Indigo. The TheraSeed(R) product is utilized by hospitals, physicians and other health service providers in the United States. The Company therefore is directly affected by changes in technology, as it may apply to cancer treatment, and 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 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.Cash and Short-Term Investments For purposes of reporting cash flows, cash and short-term investments include cash on hand, cash in banks and variable rate demand notes with original maturities of less than 90 days. 3.Marketable Securities Marketable securities are classified as available for sale and are reported at fair value. Fair value is based upon quoted market prices. At December 31, 1997, marketable securities consisted of municipal and hospital authority obligations. Marketable securities of $6,891,807 mature within one year and marketable securities of $1,500,000 mature in 2004 with a put option exercisable in 1998. At December 31, 1997, the fair value of marketable securities approximated amortized cost. No marketable securities were held at December 31, 1996. Theragenics Corporation NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 4.Inventories Inventories are stated at the lower of cost or market. Cost is determined using the specific identification method which approximates the first-in, first-out (FIFO) method. Inventories consist primarily of work in process. 5.Property, Equipment, Depreciation and Amortization Property and equipment are recorded at historical cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated services lives on a straight-line basis. Depreciation and amortization expense related to property and equipment charged to operations was approximately $810,000, $1,044,000 and $1,458,000 for 1995, 1996 and 1997, respectively. Estimated services lives are as follows: Building and improvements 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, 1997. 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 technological and regulatory environment. The primary machinery and equipment utilized in the Company's manufacturing process has been acquired from one vendor. Currently, the Company has contracts for additional manufacturing equipment with this vendor. Management believes that the vendor has the ability to continue to deliver the equipment in accordance with the terms of the contracts. Any inability of the vendor to meet its obligations for delivery of the equipment could have an adverse affect on the Company's ability to increase its production capacity. 6.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 $47,295 and $56,144 at December 31, 1996 and 1997, respectively. Amortization related to patent costs charged to operations was approximately $8,000, $10,000 and $9,000 for 1995, 1996 and 1997, respectively. Theragenics Corporation NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 7.Income Taxes The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets when it is more likely than not that the asset will not be realized. 8.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. 9.Advertising The Company expenses the cost of advertising as incurred. Advertising expense for the years ended December 31, 1995, 1996 and 1997 was approximately $139,000, $229,000 and $230,000, respectively. 10. Earnings Per Share The Company adopted Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings Per Share, in the fourth quarter of 1997. Basic net earnings per common share is based upon the weighted average number of common shares outstanding during the period. Diluted net earnings per common share is based upon the weighted average number of common shares outstanding plus dilutive potential common shares, including options and warrants outstanding during the period. All comparative earnings per share data for prior periods presented has been restated. 11. Stock Based Compensation The Company's stock option plans are accounted for under the intrinsic value method in which compensation expense is recognized for the amount, if any, that the fair value of the underlying common stock exceeds the exercise price at the date of grant. Theragenics Corporation NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 12. Fair Value of Financial Instruments The Company's financial instruments include cash, cash equivalents, marketable securities and long-term debt. The carrying value of cash and cash equivalents approximates fair value due to the relatively short period to maturity of the instruments. Marketable securities are classified as available for sale and are reported at fair value. The carrying value of the Company's long-term obligations approximates fair value based upon borrowing rates currently available to the Company for borrowings with comparable maturities. 13. Hedging Activities The Company enters into foreign exchange forward contracts to hedge the price risks associated with equipment purchase commitments denominated in foreign currencies. The forward contracts typically mature concurrently with payments required under the equipment purchase contracts. The Company does not hold foreign exchange forward contracts for trading or speculative purposes. Gains and losses are deferred and accounted for as part of the underlying transactions. At December 31, 1997, foreign exchange forward contracts were not significant. NOTE C - CONSTRUCTION IN PROGRESS Construction in progress consists primarily of payments made for construction of manufacturing equipment and facilities expansion. Total cost of this project is expected to be approximately $54,000,000 and is expected to be completed in various stages through 1999. Total outstanding commitments of this project at December 31, 1997 are approximately $40,000,000. Construction of equipment and facilities totaling approximately $4,900,000 and $3,000,000 were completed and placed in service during 1996 and 1997, respectively. Theragenics Corporation NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1997 NOTE D - INCOME TAXES The provision for income taxes is summarized as follows: 1995 1996 1997 -------------- ------------- ------------ Current tax expense $ 18,000 $ 95,500 $ 3,500,000 Deferred tax expense 1,082,000 1,972,000 1,850,000 -------------- ------------- ------------ $ 1,100,000 $ 2,067,500 $ 5,350,000 ============== ============= ============ The Company's temporary differences result in a deferred income tax asset at December 31, 1996 and a deferred income tax liability at December 31, 1997, summarized as follows: December 31, ---------------------------------- 1996 1997 ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 870,000 $ - Tax credit carryforwards 174,000 - Nondeductible accruals and allowances 50,000 60,000 Other 14,000 - ------------ ------------ Gross deferred tax asset 1,108,000 60,000 Deferred tax liabilities: Depreciation 748,000 (1,060,000) ----------- ------------ Net deferred tax asset (liability) $ 360,000 $ (1,000,000) =========== ============ The provision for income taxes differs from the amount of income tax determined by applying the applicable federal rates due to the following: Year ending December 31, ------------------------ 1995 1996 1997 -------- ----------- --------- Tax at applicable federal rates $ 977,000 $ 1,854,000 $ 5,097,000 State tax, net 115,000 208,000 254,000 Tax exempt interest - - (40,000) Other 8,000 5,500 39,000 --------- ----------- --------- $ 1,100,000 $ 2,067,500 $ 5,350,000 ========= =========== ========= Theragenics Corporation NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1997 NOTE E - NOTES PAYABLE The Company has entered into an amended and restated loan and security agreement ("the loan agreement") with a bank. The loan agreement provides for a revolving credit facility of up to $15,000,000. Interest on outstanding borrowings is payable monthly at the prime rate or at a LIBOR based rate. The LIBOR based rate ranges from LIBOR plus 1.5% to LIBOR plus 2%, and is determined by the Company's debt service coverage ratio, as defined in the loan agreement. At December 31, 1996, $3,458,436 was outstanding under the revolving credit facility with an effective interest rate of 8.25%. No amounts were outstanding under the revolving credit agreement at December 31, 1997. Outstanding borrowings under the loan agreement are collateralized by substantially all of the Company's assets. Provisions of the loan agreement limit the incurrence of additional debt and require the maintenance of certain minimum financial ratios, among other things. As of December 31, 1997, the Company was in compliance with the provisions of the loan agreement. NOTE F - COMMITMENTS AND CONTINGENCIES Marketing and Sales Agreement In May 1997, the Company executed an agreement with Indigo Medical, Inc. (Indigo), a subsidiary of Johnson & Johnson Development Corporation (Johnson & Johnson), granting Indigo the exclusive worldwide right to market and sell TheraSeed(R) for the treatment of prostate cancer for a period of seven years with a provision for successive three year renewals. In accordance with this agreement, all TheraSeed(R) products used for the treatment of prostate cancer are sold to Indigo. Concurrently with the execution of the agreement, Johnson & Johnson purchased 254,453 shares of the Company's common stock. 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). Theragenics Corporation NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1997 NOTE F - COMMITMENTS AND CONTINGENCIES - Continued Licensing Agreement - Continued 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 Nordian receives new drug approval. The Company will also be entitled to a percentage of future revenues earned by Nordion as royalties under the agreement. Royalties from this agreement for each of the three years in the period ended December 31, 1997 were not significant. In 1995, 1996 and 1997, the Company received approximately $85,000, $100,000 and $100,000, respectively, 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. Lease Commitment The Company leases space and office equipment under noncancelable leases which expire at various dates through April 2000. Approximate minimum lease payments under the leases are as follows: 1998, $162,000; 1999, $25,000; 2000, $1,200. Rent expense was approximately $61,500, $76,000 and $179,000 for the years ended December 31, 1995, 1996 and 1997, respectively. Theragenics Corporation NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1997 NOTE G - STOCK OPTIONS AND WARRANTS Stock Options The Company's board of directors has approved four stock option plans which in aggregate cover up to 2,700,000 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 transaction for each of the three years in the period ended December 31, 1997 are summarized below: 1995 1996 1997 --------------------- --------------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- ------ -------- ------- --------- ------ Outstanding, beginning of year 1,226,716 $2.09 997,716 $ 3.11 826,500 $ 7.22 Granted 221,000 5.38 220,000 15.92 269,000 35.80 Exercised (450,000) 1.29 (391,216) 2.21 (150,110) 3.59 Forfeited - - - - (52,000) 5.38 --------- ------ -------- ------- --------- ----- Outstanding, end of year 997,716 $3.11 826,500 $ 7.22 893,390 $16.54 ========= ====== ======== ======= ========= ===== The following table summarizes information about stock options outstanding at December 31, 1997: Options Outstanding Options Exercisable -------------------------------------------- ------------------------------ Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Excise Outstanding at Contractual Exercise Exercisable at Exercise Price December 31, 1997 Life (Years) Price December 31, 1997 Price ----------- ----------------- ------------ ------------ ----------------- -------- $1.00-3.50 138,175 3.0 $ 2.03 138,175 $ 2.03 $5.38-6.38 278,215 7.6 5.59 113,881 5.78 $15.25-16.88 208,000 9.0 15.94 64,000 15.86 $23.50 24,000 9.5 23.50 - - $37.00 245,000 10.0 37.00 - - ------- ----- ----- ----------- ------ 893,390 7.9 $16.54 316,056 $ 6.18 ======= ===== ===== =========== ====== Theragenics Corporation NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1997 NOTE G - STOCK OPTIONS AND WARRANTS - Continued The Company follows the practice of recording amounts received upon the exercise of certain options by crediting common stock and additional paid-in capital. No charges 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 a reduction to income taxes payable and an increase in additional paid-in capital. The Company uses the intrinsic value method in accounting for its stock option plans. In applying this method, no compensation cost has been recognized. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under those plans, the Company's net earnings and earnings per share would have resulted in the pro forma amounts indicated below: 1995 1996 1997 ----------- ----------- ----------- Net earnings As reported $ 1,772,325 $ 3,384,506 $ 9,497,531 Pro forma 1,750,736 3,015,123 8,628,538 Basic net earnings per common share As reported $ .16 $ .29 $ .69 Pro forma .16 .26 $ .63 Diluted net earnings per common share As reported $ .15 $ .28 $ .66 Pro forma .15 .24 $ .61 For purposes of the pro forma amounts above, the fair value of each option grant was estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for grants in 1995, 1996 and 1997, respectively; expected volatility of 70%, 70% and 68%, risk-free interest rates of 5.86%, 6.33% and 5.87%; and expected lives of 5.5 years, 7 years and 3.7 years. Warrants 40,000 warrants were exercised during 1996 and 20,000 warrants were exercised during 1997, resulting in proceeds to the Company of $300,000 and $150,000, respectively. At December 31, 1997, there are outstanding warrants covering 40,000 shares of common stock. The warrants are exercisable at a price of $7.50 per share and expire in May 1999. Theragenics Corporation NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1997 NOTE H - EARNINGS PER SHARE Earnings per common share was computed as follows: Year ended December 31, 1997 ---------------------------- Earnings Shares Per share (Numerator) (Denominator) Amount ------------ -------------- ----------- Net earnings $ 9,497,531 ============ Basic net earnings per common share Earnings available to common shareholders $ 9,497,531 13,762,844 $ .69 =========== Effect of dilutive securities Options and warrants 545,876 Diluted net earnings per common share $ 9,497,531 14,308,720 $ .66 ============ ============== =========== Year ended December 31, 1997 ------------------------------ Earnings Shares Per share (Numerator) (Denominator) Amount -------------- -------------- ----------- Net earnings $ 3,384,506 ============ Basic net earnings per common share Earnings available to common shareholders $ 3,384,506 11,624,778 $ .29 ===== Effect of dilutive securities Options and warrants 666,462 Diluted net earnings per common share $ 3,384,506 12,291,240 $ .28 ============ ========== ===== Theragenics Corporation NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1997 NOTE H - EARNINGS PER SHARE - Continued Year ended December 31, 1995 Earnings Shares Per share (Numerator) (Denominator) Amount Net earnings $ 1,772,325 ============ Basic net earnings per common share Earnings available to common shareholders $ 1,772,325 11,102,869 $ .16 ======= Effect of dilutive securities Options and warrants 745,181 Diluted net earnings per common share $ 1,772,325 11,848,050 $ .15 ============ =========== ======= NOTE I - MAJOR CUSTOMERS In 1997, sales to Indigo Medical, Inc. (Indigo) represented 50% of total sales. Additionally, approximately 86% of accounts receivable were from Indigo at December 31, 1997. Indigo is a subsidiary of a stockholder of the Company. During 1995 and 1996, there were no customers which individually comprised ten percent or more of sales. NOTE J - 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. Company discretionary contributions were approximately $40,000, $14,000 and $35,000 for 1995, 1996 and 1997, respectively. Page 53 Theragenics Corporation NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 and 1997 NOTE K - QUARTERLY FINANCIAL DATA (UNAUDITED) The following summarizes certain quarterly results of operations (in thousands, except per share amounts): Quarters ended March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- Year ended December 31, 1997: Net revenue $ 4,107 $6,172 $ 7,018 $ 7,260 Gross profit 2,962 4,613 5,437 5,404 Net earnings 1,109 2,182 2,943 3,264 Basic net earnings per common share $ .09 $ .15 $ .20 $ .22 Diluted net earnings per common share $ .09 $ .15 $ .20 $ .22 Year ended December 31, 1996: Net revenue $ 2,798 $2,727 $ 3,144 $ 3,688 Gross profit 2,045 1,840 2,186 2,550 Net earnings 854 678 918 935 Basic net earnings per common share $ .07 $ .06 $ .08 $ .08 Diluted net earnings per common share $ .07 $ .06 $ .08 $ .08 NOTE L - NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) has issued the following Statements of Financial Accounting Standards (SFAS): SFAS 130, Reporting Comprehensive Income, which is effective for fiscal years beginning after December 15, 1997. SFAS 130 requires companies to include details about comprehensive income that arise during a reporting period. Comprehensive income includes revenue, expenses, gains and losses that bypass the income statement and are reported directly in a separate component of equity. SFAS 131, Disclosure about Segments of An Enterprise and Related Information, which is effective for fiscal years beginning after December 15, 1997. SFAS 131 requires companies to report information about an entity's different types of business activities and the different economic environments in which it operates, referred to as operating segments. Management does not expect the adoption of these new standards to have a material impact on the Company's results of operations or financial condition. THERAGENICS CORPORATION INDEX TO EXHIBITS Page No. 10.23 - First modification of Second Amended and 55 Restated Loan and Security Agreement between Theragenics Corporation and NationsBank, N.A., Dated September 30, 1997. 10.24 - Second Modification of Second Amended and 58 Restated Loan and security Agreement between Theragenics Corporation and NationsBank, N.A., Dated November 26, 1997. 24.1 Consent of Independent Public Accountants 68 for Incorporation by Reference of Audit Statement into Registration Statement FIRST MODIFICATION OF SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS MODIFICATION is made as of this 30th day of September, 1997, by and between THERAGENICS CORPORATION, a Delaware corporation ("Borrower"), and NATIONSBANK, N.A. ("Lender"). R E C I T A L S --------------- WHEREAS, Lender and Borrower are parties to that certain Second Amended and Restated Loan Agreement, dated as of December 9, 1996 (the "Loan Agreement"), pursuant to which Lender has agreed to make one or more loans from time to time to the Borrower in accordance with the terms and conditions thereof; and WHEREAS, Lender and Borrower desire to modify the Loan Agreement in certain respects in accordance with the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises, the covenants and agreements contained herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Borrower and Lender do hereby agree that all capitalized terms used herein shall have the meanings ascribed thereto in the Loan Agreement as amended hereby (except as otherwise expressly defined or limited herein) and do hereby further agree as follows: 1. Amendment of Loan Agreement. Subject to the fulfillment of the conditions precedent to the effectiveness of this Modification which are set forth below, Section 1.1 of the Loan Agreement is hereby amended by deleting the definition of the term "Revolving Credit Facility Expiration Date" in its entirety and by substituting in lieu thereof the following new definition of such term: "Revolving Credit Facility Expiration Date - December 31, 1997." 1. No Other Amendments. Except for the amendment expressly set forth and referred to in Section 1 above, the Loan Agreement shall remain unchanged and in full force and effect and is hereby in all respects ratified and confirmed. Nothing in this Modification is intended, or shall be construed, to constitute a novation or an accord and satisfaction of any of the Obligations or to modify, affect or impair the perfection or continuity of Lender's security interests in, security titles to or other Liens on any Collateral for the Obligations. 1. Representations and Warranties. To induce Lender to enter into this Modification, the Borrower does hereby warrant, represent and covenant to Lender that each representation or warranty of the Borrower set forth in the Loan Agreement is hereby restated and reaffirmed as true and correct on and as of the date hereof as if such representation or warranty were made on and as of the date hereof (except to the extent that any such representation or warranty expressly relates to a prior specific date or period), and no Default or Event of Default has occurred and is continuing as of this date under the Loan Agreement as amended by this Modification; and (b) the Borrower has the power and is duly authorized to enter into, deliver and perform this Modification, and this Modification is the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms. 1. Reference to and Effect on the Credit Documents. Upon the effectiveness of this Modification, on and after the date hereof, each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof" or words of like import referring to the Loan Agreement, and each reference in the other Loan Documents to "the Loan Agreement," "thereunder," "thereof" or words of like import referring to the Loan Agreement, shall mean and be a reference to the Loan Agreement as amended hereby. 1. Reimbursement of Costs and Expenses. The Borrower hereby agrees to reimburse Lender on demand for all costs (including reasonable attorneys' fees) incurred by Lender in negotiating, documenting and consummating this Modification, the other documents referred to herein, and the transactions contemplated hereby and thereby. 1. Conditions Precedent to Effectiveness of this Modification. The effectiveness of this Modification and the amendment provided in Section 1 above are subject to the truth and accuracy in all material respects of the representations and warranties of the Borrower contained in Section 3 above and the Lender's receipt of one or more duly executed counterparts of this Modification. 1. Counterparts. This Modification may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which when taken together shall constitute one and the same instrument. 1. Governing Law. This Modification shall be governed by, and construed in accordance with, the internal laws of the State of Georgia applicable to contracts made and performed in such state. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have caused this Modification to be duly executed and delivered as of the day and year specified at the beginning hereof. BORROWER: THERAGENICS CORPORATION By: Name: /s/ Bruce W. Smith ------------------- Bruce W. Smith Title: Secretary, Treasurer & Chief Financial Officer LENDER: NATIONSBANK, N.A. By: Name: /s/ Michael S. Paulson ---------------------- Michael S. Paulson Title: Vice President SECOND MODIFICATION OF SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS MODIFICATION is made as of this 26th day of November, 1997, by and between THERAGENICS CORPORATION, a Delaware corporation ("Borrower"), and -------- NATIONSBANK, N.A. ("Lender"). ------ R E C I T A L S --------------- WHEREAS, Lender and Borrower are parties to that certain Second Amended and Restated Loan and Security Agreement, dated as of December 9, 1996, as amended by that certain First Modification of Second Amended and Restated Loan and Security Agreement, dated as of September 30, 1997 (the "Loan Agreement"), pursuant to which Lender has agreed to make one or more loans from time to time to the Borrower in accordance with the terms and conditions thereof; and WHEREAS, Lender and Borrower desire to modify the Loan Agreement in certain respects in accordance with the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises, the covenants and agreements contained herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Borrower and Lender do hereby agree that all capitalized terms used herein shall have the meanings ascribed thereto in the Loan Agreement as amended hereby (except as otherwise expressly defined or limited herein) and do hereby further agree as follows: 1. Amendments of Loan Agreement. Subject to the fulfillment of the ---------------------------- conditions precedent to the effectiveness of this Modification which are set forth below, the Loan Agreement shall be amended as follows: (a) Section 1.1 of the Loan Agreement is hereby amended by adding to Section 1.1, the following new definitions: Additional Facility - the uncommitted credit facility described in Section 2.5 hereof. Additional Facility Advances - advances, if any, made by Lender under the Additional Facility. Annual Maintenance Capital Expenditures - for any calendar year, the number of Cyclotrons of Borrower in service as of December 31 of the previous year, multiplied by $40,000. Applicable Interest Rate Margin - the interest rate margin determined pursuant to Section 2.4(D) hereof. Current Assets - as of any date, the amount of the current assets of a Person shown on a balance sheet of such Person at such date in accordance with GAAP. Current Liabilities - as of any date, the amount of the current liabilities of a Person shown on a balance sheet of such Person at such date in accordance with GAAP. Current Ratio - the ratio of Borrower's Current Assets to Borrower's Current Liabilities. Indebtedness for Money Borrowed/EBITDA Ratio - as of the last day of any fiscal quarter of Borrower, (a) Borrower's Indebtedness for Money Borrowed on such day divided by (b) Borrower's EBITDA for Borrower's most recently completed four (4) quarters. Quarterly Maintenance Capital Expenditures - for each calendar quarter during a year for which Annual Maintenance Capital Expenditures has been calculated, such Annual Maintenance Capital Expenditures divided by four (4). (a) Section 1.1 of the Loan Agreement is hereby further amended by deleting from Section 1.1, the terms "Debt Service Coverage Ratio," "Interest Period," "Loans," "Maturity Date," "Revolving Credit Facility Expiration Date," and "Revolving Credit Maximum Availability," and by substituting in lieu thereof, the following new definitions of such terms: Debt Service Coverage Ratio - for the four (4) calendar quarters ending on the applicable calculation date, (a)(i) Borrower's EBITDA for such period, minus (ii) taxes paid during such period, minus (iii) any dividends or other distributions to shareholders made during such period, minus (iv) the sum of Quarterly Maintenance Capital Expenditures for each quarter ending during such period divided by (b) total principal and interest paid on Indebtedness for Money Borrowed during such period. Interest Period - (a) in the case of the determination of any Adjusted LIBOR, a one, two, three, four, five or six month period as selected by Borrower, but (b) in the event any Interest Period would end on a day which is not a Business Day, such Interest Period shall be deemed to end on the immediately succeeding Business Day unless such extension would cause such Interest Period to end on the next calendar month in which case such Interest Period shall be deemed to end on the immediately preceding Business Day, (c) any Interest Period which begins on a day for which there is no numerically corresponding day in the calendar month in which such Interest Period ends shall expire on the immediately preceding Business Day, and (d) Borrower shall not be entitled to select any Interest Period which extends beyond the Revolving Credit Facility Expiration Date. Loans - all loans and advances made by Lender pursuant to this Agreement, including, without limitation, the Revolving Credit Loans. Maturity Date - The Revolving Credit Facility Expiration Date, or such earlier date as the Obligations shall become due (whether by acceleration or otherwise). Revolving Credit Facility Expiration Date - November 26, 2000. Revolving Credit Maximum Availability - $15,000,000 (as such amount may be adjusted from time to time pursuant to this Agreement). (a) Section 1.1 of the Loan Agreement is hereby further amended by deleting from Section 1.1, the terms, "Term-Out Requirements," "Treasury Rate," and "Treasury Rate Advance." (a) The Loan Agreement is hereby further amended by deleting Section 2.1(B) in its entirety and by substituting in lieu thereof, the following new Section 2.1(B), the effect of which is to delete provisions relating to a term-out option: (B) On the Revolving Credit Facility Expiration Date, the entire unpaid balance of the Revolving Credit Loans shall be due and payable. For a period of thirty (30) days prior to November 26,1998, Borrower may request a twelve-month extension of the Revolving Credit Facility Expiration Date, which extension may be approved or not by Lender in its sole and absolute discretion. (a) The Loan Agreement is hereby further amended by deleting Section 2.2(A) in its entirety and by substituting in lieu thereof, the following new Section 2.2(A), the effect of which is to delete reference to Treasury Rate Advances: (A) A request for a Revolving Credit Loan shall be made, or shall be deemed to be made, in the following manner: (i) Borrower shall give Lender written notice (or telephonic notice promptly confirmed in writing) substantially in the form of Exhibit C attached hereto, signed by an authorized officer of Borrower, provided that in the case of Prime Rate Advances, such notice shall be given to Lender not later than 10:00 a.m. (Atlanta, Georgia time) on the Business Day of the date of a proposed Prime Rate Advance and in the case of LIBOR Advances, such notice shall be given to Lender at least two (2) Business Days prior to the date of a proposed LIBOR Advance, and further provided that any notice given to Lender under this Section shall be given to Lender prior to 10:00 a.m. (Atlanta, Georgia time) in order for such Business Day to count towards the minimum number of Business Days required; (ii) the becoming due of any other Obligation, to the extent not paid by Borrower, on the due date thereof, after giving effect to any applicable grace periods, shall be deemed, at Lender's discretion, irrevocably to be a request for a Revolving Credit Loan on the due date in the amount then so due and (iii) pursuant to the terms of Borrower's autoborrow account or similar account with Lender. (a) The Loan Agreement is hereby further amended by deleting Sections 2.4(B) and 2.4(C) in their entireties, and by substituting in lieu thereof, the following new Sections 2.4(B) and 2.4(C), the effect of which is to revise the applicable margin for Advances on an Adjusted LIBOR basis and to delete reference to the term-out option: (B) Interest Rate. The unpaid principal balance of the Revolving Credit Loans shall bear interest at a rate per annum equal to the Prime Rate; provided, however, that Borrower may, by a written notice (or by telephonic notice promptly confirmed in writing) delivered to Lender not later than 10:00 am (Atlanta, Georgia time) on the second Business Day prior to any Interest Period designated by Borrower in such notice, direct that interest accrue on the unpaid principal balance of the Revolving Credit Loans (or any portion thereof which is in an amount of not less than $250,000 or any greater integral multiple thereof) outstanding from time to time during such Interest Period at a rate per annum equal to the sum of the Adjusted LIBOR for such Interest Period plus the Applicable Interest Rate Margin in effect from time to time and as more fully set forth in Section 2.4(D) below; and provided, further, that (i) upon the occurrence and during the continuation of any Event of Default, Lender may, upon notice to Borrower, suspend Borrower's right to use the aforesaid Adjusted LIBOR option, and (ii) Borrower may not have more than four (4) Adjusted LIBOR-based interest rates in effect hereunder at any one time. Each such designation by Borrower of an interest rate for the Revolving Credit Loans based on the Adjusted LIBOR and of an Interest Period applicable thereto shall be irrevocable and shall remain in effect throughout such Interest Period. Upon determining any interest rate based on the Adjusted LIBOR for an Interest Period requested by Borrower, Lender shall notify the Borrower by telephone (which may be confirmed in writing by Lender) of such determination, and such determination shall, in the absence of manifest error, be final, conclusive and binding for all purposes. (C) Reserved. (a) The Loan Agreement is hereby further amended by deleting Section 2.4(D) in its entirety and by substituting in lieu thereof, the following new Section 2.4(D), the effect of which is to delete reference to Treasury Rate Advances and to replace the pricing grid in its entirety: (D) Applicable Interest Rate Margin. The Applicable Interest Rate Margin for LIBOR Advances shall be the interest rate margin determined by Lender based upon Borrower's Indebtedness for Money Borrowed/EBITDA Ratio for the four (4) quarter period ending on the last day of the most recent fiscal quarter for which financial statements have been provided to Lender, effective as of the second Business Day after the financial statements referred to in Sections 7.1(I)(i) and 7.1(I)(ii) hereof, and an accompanying certificate of the chief financial officer of Borrower in the form of Exhibit B attached hereto, are delivered by Borrower to Lender for the fiscal quarter most recently ended, expressed as a per annum rate of interest as follows: ------------------------------------------- ========================= If Borrower's Indebtedness for Money Then, the Applicable Borrowed/EBITDA Ratio is: Interest Rate Margin shall be: ------------------------------------------- ========================= Less than 1.0 to 1.0 1.500% =========================================== ========================= Greater than or equal to 1.0 to 1.0 but 1.625% Less than 1.5 to 1.0 =========================================== ========================= Greater than or equal to 1.5 to 1.0 but 1.750% Less than 2.0 to 1.0 =========================================== ========================= Greater than or equal to 2.0 to 1.0 but 1.875% Less than 2.5 to 1.0 =========================================== ========================= Greater than or equal to 2.5 to 1.0 2.000% =========================================== ========================= In the event that Borrower fails to timely provide the financial statements and certificate referred to above in accordance with the terms of Sections 7.1(I)(i) and 7.1(I)(ii) hereof, and without prejudice to any additional rights under Section 9.3 hereof or otherwise, no downward adjustment of the Applicable Interest Rate Margin in effect for the preceding quarter shall occur until the actual delivery of such financial statements and certificate. (a) The Loan Agreement is hereby further amended by deleting Section 2.4(E) and by substituting in lieu thereof, the following new Section 2.4(E), the effect of which is to delete reference to Treasury Rate Advances and to Section 2.4(C): (E) Conversions and Continuations. (i) Borrower may on any Business Day, subject to the giving of a proper Notice of Conversion/Continuation as hereinafter described, elect (A) to continue all or any part of a LIBOR Advance by selecting a new Interest Period therefor, to commence on the last day of the immediately preceding Interest Period, or (B) subject to the availability of interest rates as provided in Sections 2.4(B) and 2.4(D) hereof, to convert all or any part of a Loan of one type into a Loan of another type; provided, however, that Lender shall not be obligated to convert any outstanding Loan into or continue any outstanding Loan as a LIBOR Advance when any Default or Event of Default has occurred and is continuing. Any conversion of a LIBOR Advance into a Prime Rate Advance shall be made on the last day of the Interest Period for such LIBOR Advance. (ii) Whenever Borrower desires to convert or continue Loans under Section 2.4(E)(i), Borrower shall give Lender written notice (or telephonic notice promptly confirmed in writing) substantially in the form of Exhibit D, signed by an authorized officer of Borrower, on the requested conversion date by 10:00 a.m. in the case of a conversion into a Prime Rate Advance, and by 10:00 a.m. at least two (2) Business Days before the requested conversion or continuation date in the case of a conversion into or continuation of a LIBOR Advance. Each such Notice of Conversion/Continuation shall be irrevocable and shall specify the aggregate principal amount of the Loans to be converted or continued, the date of such conversion or continuation (which shall be a Business Day) and whether the Loans are being converted into or continued as a LIBOR Advance (and, if so, the duration of the Interest Period to be applicable thereto) or a Prime Rate Advance. If upon the expiration of any Interest Period in respect of any LIBOR Advance, Borrower shall have failed to deliver the Notice of Conversion/Continuation, Borrower shall be deemed to have elected to convert such LIBOR Advance to a Prime Rate Advance. (a) Section 2.4(H) of the Loan Agreement is hereby amended by deleting the reference to Treasury Rate Advances in the first sentence thereof. (a) The Loan Agreement is hereby further amended by adding the following new Section 2.5 immediately following the existing Section 2.4: Additional Facility. -------------------- (A) Subject to the terms and conditions of this Agreement, the Borrower may request on or prior to November 1, 2000, the Additional Facility on any Business Day; provided, however, that the Borrower may not request the Additional Facility or an Additional Facility Advance after the occurrence or during the existence of an Event of Default. The aggregate amount of the Additional Facility and the outstanding Additional Facility Advances thereunder shall not exceed $25,000,000. The maturity date for the Additional Facility Advances shall be not later than November 1, 2000. The Lender is not committed to provide the Additional Facility or to make any Additional Facility Advances, and the decision of the Lender to provide the Additional Facility or to make Additional Facility Advances to the Borrower shall be at the Lender's sole and absolute discretion, and shall be subject to customary due diligence, appropriate internal credit approval and formal documentation. (B) In connection with any request for the Additional Facility, the Borrower shall (i) deliver to the Lender a notice of Additional Facility and such other loan documents as Lender may be reasonably request to further document and evidence the Additional Facility; and (ii) provide revised projections to the Lender which shall be in form and substance reasonably satisfactory to the Lender and shall demonstrate the Borrower's ability to timely repay such Additional Facility and any Additional Facility Advances thereunder and to comply with the covenants contained in this Agreement or such other covenants as shall be reasonably established by Lender based upon Borrower's then-current credit situation. (k) The Loan Agreement is hereby further amended by deleting Section 4.2(B) and by substituting in lieu thereof, the following new Section 4.2(B), the effect of which is to amend provisions relating to payment of the unused commitment fee: (B) Borrower shall pay to Lender an unused commitment fee on the aggregate unused amount of the Revolving Credit Maximum Availability (which will accrue from the date hereof) at a rate of .35% per annum; provided, however, that such unused commitment fee shall not be due for any month during which the average used amount of the Revolving Credit Maximum Availability for such month is greater than thirty-five percent (35%) of the Revolving Credit Maximum Availability. Such unused commitment fee shall be computed on the basis of a hypothetical year of 360 days for the actual number of days elapsed, shall be payable monthly in arrears on the last day of each month, commencing on December 31, 1997 and on the Revolving Credit Facility Expiration Date, shall be fully earned when due, and shall be non-refundable when paid. For purposes hereof, the aggregate stated amount for all Letters of Credit then outstanding shall be deemed a use of the Revolving Credit Maximum Availability. (l) The Loan Agreement is hereby further amended by deleting Sections 7.2(K), 7.2(L), 7.2(M), 7.2(N), 7.2(O) and 7.2(P) in their entireties and by substituting in lieu thereof the following new Sections 7.2(K), 7.2(L), 7.(M), 7.2(N), 7.2(O) and 7.2(P), the effect of which is to (i) amend the negative covenants entitled "Limitation on Indebtedness," "Minimum Tangible Net Worth," --------------------------- ----------------------------- "Debt Service Coverage Ratio," and Funded Debt Ratio," (ii) delete the negative --------------------------- ----------------- covenants entitled "Leverage Ratio," "Capital Expenditures" and "Cyclotron --------------- --------------------- Purchases," and (iii) renumber the negative covenants entitled "Dividends, ---------- Distributions, Etc." and "Negative Negative Pledge": - - ------------------- ------------------------ (K) Limitation on Indebtedness. Create, incur, assume or ---------------------------- suffer to exist any Indebtedness, except: (i) Indebtedness evidenced by or arising under this Agreement, the Letter of Credit Agreement or any of the other Loan Documents; (ii) unsecured current liabilities (other than those for Money Borrowed) incurred in the ordinary course of business for current purposes, including, without limitation, trade payables incurred in the ordinary course of business, and which are not represented by a promissory note or other evidence of indebtedness and are not more than thirty (30) days past due; (iii) Indebtedness described on Schedule 7.2(K) hereto, (iv) Purchase Money Indebtedness not otherwise inconsistent with the terms of this Agreement, (v) renewals or extensions of any of the Indebtedness described in items (i) through (iv) above (but so long as any indebtedness described in items (ii), (iii) or (iv) above is not increased after the date hereof), and (vi) additional unsecured Indebtedness (other than Indebtedness permitted under any of clauses (i) through (v) above) of up to $250,000 in the aggregate at any time outstanding. (L) Minimum Tangible Net Worth. Borrower's Tangible Net Worth -------------------------- shall not be less than $58,000,000.00 on December 31, 1997, and Borrower shall maintain a Tangible Net Worth as of the last day of each fiscal quarter of Borrower ending after December 31, 1997, which is not less than the sum of the minimum Tangible Net Worth of Borrower required hereunder for the last day of the fiscal quarter immediately preceding the fiscal quarter ending on the applicable calculation date plus seventy-five (75%) of Borrower's Net Income after taxes for the quarter ending on the applicable calculation date (rounded up to the nearest $100,000, but such sum shall not be reduced if Borrower suffers a net loss in any fiscal quarter). (M) Current Ratio. Borrower's Current Ratio shall not be less -------------- than 1.5 to 1.0 as of the end of any fiscal quarter or fiscal year ending on or after December 31, 1997. (N) Debt Service Coverage Ratio. As of December 31, 1997, and ---------------------------- as of the end of each fiscal quarter thereafter, Borrower's Debt Service Coverage Ratio shall not be less than 1.5 to 1.0. (O) Indebtedness for Money Borrowed/EBITDA Ratio. As of ------------------------------------------------ December 31, 1997, and as of the end of each fiscal quarter thereafter, Borrower shall not permit Borrower's Indebtedness for Money Borrowed/EBITDA Ratio to exceed 3.0 to 1.0. (P) Negative, Negative Pledge. Borrower shall not, directly or ------------------------- indirectly, enter into any agreement (other than the Loan Documents and documents relating to Permitted Liens) with any Person that prohibits or restricts or limits the ability of Borrower to create, incur, pledge, or suffer to exist any Lien upon any assets of Borrower. (Q) Dividends, Distributions, Etc. Borrower shall not declare ------------------------------- or pay any dividend on its capital stock (other than stock dividends) or make any payment to purchase, redeem, retire or acquire any of its capital stock or any option, warrant or other right to acquire such capital stock if such declaration or payment would cause a Default or Event of Default under any of the financial covenants set forth in this Section 7.2. (m) Section 10.4(B) of the Loan Agreement is hereby amended by deleting the reference to "Treasury Rate Advance" from the third sentence thereof, and by substituting in lieu thereof, a reference to "Prime Rate Advance." (n) The Loan Agreement is hereby further amended by deleting the existing Exhibit B and Exhibit D entitled "Chief Financial Officer's Certificate" and - - --------- --------- "Form of Notice of Conversion/Continuation," respectively, in their entireties, and by substituting in lieu thereof, the Exhibit B and Exhibit D attached --------- --------- hereto. 1. No Other Amendments. Except for the amendments expressly set forth and -------------------- referred to in Section 1 above, the Loan Agreement shall remain unchanged and in full force and effect and is hereby in all respects ratified and confirmed. Nothing in this Modification is intended, or shall be construed, to constitute a novation or an accord and satisfaction of any of the Obligations or to modify, affect or impair the perfection or continuity of Lender's security interests in, security titles to or other Liens on any Collateral for the Obligations. 1. Representations and Warranties. To induce Lender to enter into this -------------------------------- Modification, the Borrower does hereby warrant, represent and covenant to Lender that (a) each representation or warranty of the Borrower set forth in the Loan Agreement is hereby restated and reaffirmed as true and correct on and as of the date hereof as if such representation or warranty were made on and as of the date hereof (except to the extent that any such representation or warranty expressly relates to a prior specific date or period), and no Default or Event of Default has occurred and is continuing as of this date under the Loan Agreement as amended by this Modification; and (b) the Borrower has the power and is duly authorized to enter into, deliver and perform this Modification, and this Modification is the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms. 1. Reference to and Effect on the Credit Documents. Upon the effectiveness of ------------------------------------------------ this Modification, on and after the date hereof, each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof" or words of like import referring to the Loan Agreement, and each reference in the other Loan Documents to "the Loan Agreement," "thereunder," "thereof" or words of like import referring to the Loan Agreement, shall mean and be a reference to the Loan Agreement as amended hereby. 1. Reimbursement of Costs and Expenses. The Borrower hereby agrees to reimburse ----------------------------------- Lender on demand for all costs (including reasonable attorneys' fees) incurred by Lender in negotiating, documenting and consummating this Modification, the other documents referred to herein, and the transactions contemplated hereby and thereby. 1. Conditions Precedent to Effectiveness of this Modification. The effectiveness ---------------------------------------------------------- of this Modification and the amendments provided in Section 1 above are subject to (i) the truth and accuracy in all material respects of the representations and warranties of the Borrower contained in Section 3 above, and (ii) the Lender's receipt of one or more duly executed counterparts of this Modification, a duly executed replacement note in an original principal amount of $15,000,000 and copies of Borrower's board of directors resolutions approving this Modification and the new promissory note, certified by the Borrower's corporate secretary. 1. Counterparts. This Modification may be executed in multiple counterparts, ------------ each of which shall be deemed to be an original and all of which when taken together shall constitute one and the same instrument. 1. Governing Law. This Modification shall be governed by, and construed in -------------- accordance with, the internal laws of the State of Georgia applicable to contracts made and performed in such state. IN WITNESS WHEREOF, the parties hereto have caused this Modification to be duly executed and delivered as of the day and year specified at the beginning hereof. BORROWER: THERAGENICS CORPORATION By: /s/ Bruce W. Smith Name: Bruce W. Smith Title: Secretary, Treasurer & Chief Financial Officer LENDER: NATIONSBANK, N.A. By: /s/ Michael S. Paulson Name: Michael S. Paulson Title: Vice President CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Theragenics Corporation We hereby consent to the incorporation by reference of our report dated January 15, 1998, appearing in your Annual Report on Form 10-K for the year ended December 31, 1997, in the Company's Registration Statements on Form S-8, file numbers 333-15313, 333-40737, and 333-40653. Atlanta, Georgia March 30, 1998