UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 [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) 271-0233 Securities registered pursuant to Section 12(b) of the Act: None Title of Class Name of each exchange on which registered - -------------- ----------------------------------------- Common Stock, $.01 New York Stock Exchange par value together with the associated ommon Stock Purchase Rights Securities registered pursuant to Section 12(g) of the Act: None 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. -2- Explanatory Note: This Amendment No. 1 on Form 10-K/A is filed solely to correct the inadvertent omission of the typed signature of Grant Thornton LLP, the Company's independent accountants, from the audit report and Consent of Independent Accountants included in the electronic version of the Company's Form 10-K for the year ended December 31, 1997 filed with the Securities and Exchange Commission ("SEC"). This filing does not reflect any substantive changes from the previously filed Form 10-K, but rather merely corrects the Form 10-K on file with the SEC in electronic format to conform to the original paper copy. -3- 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 10 2. Financial Schedules Not applicable 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) -4- 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) -5- 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 ** Included herein -6- (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. -7- (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. -8- SIGNATURE 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/ Bruce W. Smith ------------------ Bruce W. Smith Secretary, Treasurer and Chief Financial Officer Dated: October 15, 1998 Norcross, Georgia -9- THERAGENICS CORPORATION TABLE OF CONTENTS Page REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ................11 (For the periods ended December 31, 1995, 1996 and 1997) FINANCIAL STATEMENTS Balance Sheets - December 31, 1996 and 1997 .............12 Statements of Earnings for the Three Years Ended December 31, 1997 .......................................13 Statement of Shareholders' Equity for the Three Years Ended December 31, 1997 .................14 Statements of Cash Flows for the Three Years Ended December 31, 1997 .......................................16 NOTES TO FINANCIAL STATEMENTS ...........................18 -10- 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. /s/ GRANT THORNTON LLP - ---------------------- Atlanta, Georgia January 15, 1998 -11- 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. -12- 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 ==================== ====================== ===================== -13- 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 -14- 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. -15- 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) --------- ----------- ----------- -16- 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. -17- 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. -18- 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. -19- 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. -20- 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. -21- 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 ========= =========== ========= -22- 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). -23- 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. -24- 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 ======= ===== ===== =========== ====== -25- 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. -26- 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 ============ ========== ===== -27- 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. -28- 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. -29- THERAGENICS CORPORATION INDEX TO EXHIBIT Page No. 24.1 Consent of Independent Public Accountants 31 for Incorporation by Reference of Audit Report into Registration Statements -30- 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. /s/ GRANT THORNTON LLP ------------------ Atlanta, Georgia March 31, 1998