UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
---- Exchange Act of 1934.
For the quarterly period ended June 30, 1998.
Transition period pursuant to Section 13 or 15(d) of the Securities
---- Exchange Act of 1934.
For the transition period from _____________ to ______________.
0-20727
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(Commission File Number)
Novoste Corporation
-------------------
(Exact Name of Registrant as Specified in Its Charter)
Florida 59-2787476
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4350-C International Blvd., Norcross, GA 30093
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone, including area code: (770) 717-0904
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
requirements for the past 90 days.
(Item 1) Yes X No
--------------- ---------------
(Item 2) Yes X No
--------------- ---------------
As of July 31, 1998, there were 10,569,312 shares of the Registrant's Common
Stock outstanding.
Exhibit Index on page: 17
Total number of pages:
1
NOVOSTE CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997 3
Condensed Statements of Operations (unaudited) for the
three and six months ended June 30, 1998 and 1997 and
the period from inception (May 22, 1992) through
June 30, 1998 4
Condensed Statements of Cash Flows (unaudited) for the
six months ended June 30, 1998 and 1997 and the period
from inception (May 22, 1992) through June 30, 1998
5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Matters 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
EXHIBIT 27 - FINANCIAL DATA SCHEDULE 53
2
NOVOSTE CORPORATION
(A Development Stage Company)
CONDENSED BALANCE SHEETS
June 30, December 31,
1998 1997
------------ ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 32,842,206 $ 35,993,933
Short-term investments 7,247,546 12,408,785
Prepaid expenses 246,409 88,099
------------ ------------
Total current assets 40,336,161 48,490,817
Property and equipment, net 1,804,807 1,061,526
License agreements, net 132,940 139,758
Other assets 299,188 103,855
------------ ------------
$ 42,573,096 $ 49,795,956
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 21,686 $ 523,678
Accrued expenses and taxes withheld 2,420,945 1,903,276
------------ ------------
Total current liabilities 2,442,631 2,426,954
------------ ------------
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $.01 par value, 25,000,000 shares authorized;
10,571,617 and 10,332,042 shares issued, respectively 105,716 103,320
Additional paid-in capital 76,644,528 74,908,631
Deficit accumulated during the development stage (36,242,950) (27,619,109)
------------ ------------
40,507,295 47,392,842
Less treasury stock, 5,780 shares of common stock at cost (23,840) (23,840)
Unearned compensation (352,990) --
------------ ------------
Total shareholders' equity 40,483,455 47,369,002
------------ ------------
$ 42,926,086 $ 49,795,956
============ ============
See accompanying notes.
3
NOVOSTE CORPORATION
(A Development Stage Company)
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
From inception
Three months ended Six months ended (May 22, 1992)
June 30, June 30, through June 30,
1998 1997 1998 1997 1998
------------------------ ------------------------- ----------------
Miscellaneous revenues $ -- $ 29,313 $ -- $ 29,313 $ 320,200
Costs and expenses:
Research and development 3,984,103 3,157,439 7,912,637 5,481,277 29,672,536
General and administrative 541,548 443,023 1,052,866 960,121 6,876,741
Marketing 505,468 152,137 871,426 290,667 3,425,527
---------- ----------- ----------- ----------- ------------
5,031,119 3,752,599 9,836,929 6,732,065 39,974,804
---------- ----------- ----------- ----------- ------------
Loss from operations (5,031,119) (3,723,286) (9,836,929) (6,702,752) $(39,654,604)
---------- ----------- ----------- ----------- ------------
Interest income 585,209 317,964 1,213,088 655,024 3,593,413
Interest expense -- -- -- (181,759)
---------- ----------- ----------- ----------- ------------
Net loss (4,445,910) ($3,405,322) ($8,623,841) ($6,047,728) $(36,242,950)
========== =========== =========== =========== ============
Net loss per share, basic
and diluted ($0.43) ($0.40) ($0.83) ($0.72)
========== =========== =========== ===========
Weighted average shares
outstanding 10,464,573 8,453,621 10,424,013 8,393,106
========== =========== =========== ===========
See accompanying notes.
4
NOVOSTE CORPORATION
(A Development Stage Company)
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
From inception
For the six months (May 22, 1992)
ended June 30, through June 30,
1998 1997 1998
----------- ----------- ------------
Cash flows from operating activities
Net loss $(8,623,841) $(6,047,728) $(36,242,950)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 219,343 199,717 1,520,081
Issuance of stock for services or compensation 593,060 135,000 1,810,378
Changes in assets and liabilities:
Prepaid expenses (158,310) (58,738) (253,868)
Accounts payable (501,992) (132,091) 21,686
Accrued expenses and taxes withheld 517,669 34,844 2,815,452
Other (188,515) 130,719 (323,833)
----------- ----------- ------------
Net cash used by operations (8,142,586) (5,738,277) (30,653,054)
----------- ----------- ------------
Cash flows from investing activities
Maturity (purchase) of short-term investments 5,161,239 2,036,335 (7,247,546)
Purchase of property and equipment, net (962,624) (53,365) (2,988,077)
----------- ----------- ------------
Net cash provided (used) by investing activities 4,198,615 1,982,970 (10,235,623)
----------- ----------- ------------
Cash flows from financing activities
Proceeds from issuance of notes payable -- -- 4,770,150
Repayment of notes payable -- -- (2,970,150)
Proceeds from issuance of common stock 792,244 230,794 71,930,883
----------- ----------- ------------
Net cash provided by financing activities 792,244 230,794 73,730,883
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents (3,151,727) (3,524,513) 32,842,206
Cash and cash equivalents at beginning of period 35,993,933 19,954,827 --
----------- ----------- ------------
Cash and cash equivalents at end of period $32,842,206 $16,430,314 $ 32,842,206
=========== =========== ============
Supplemental disclosures of cash flow information
Cash paid for interest -- -- $ 165,137
=========== =========== ============
See accompanying notes.
5
NOVOSTE CORPORATION
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
June 30, 1998
Note 1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with instructions to Article 10 of Regulation S-X.
Accordingly, such financial statements do not include all of the information and
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
The operating results of the interim periods presented are not necessarily
indicative of the results to be achieved for the year ending December 31, 1998.
The accompanying financial statements should be read in conjunction with the
audited financial statements and notes thereto for the year ended December 31,
1997 and for the cumulative period from May 22, 1992 (inception) through
December 31, 1997, included in the Company's 1997 Annual Report on Form 10-K
filed with the Securities and Exchange Commission ("SEC").
Note 2. Net Loss Per Share
The basic and diluted loss per share is computed based on the weighted average
number of common shares outstanding. Common equivalent shares are not included
in the per share calculations where the effect of their inclusion would be
antidilutive.
Note 3. Cash Equivalents and Investments
Cash equivalents are comprised of certain highly liquid investments with
maturities of less than three months at the time of their acquisition. In
addition to cash equivalents, the Company has investments in commercial paper
that are classified as short-term (mature in more than 90 days but less than one
year). Such investments are classified as held-to-maturity, as the Company has
the ability and intent to hold them until maturity. Investments held-to-maturity
are carried at amortized cost, adjusted for the amortization or accretion of
premiums or discounts without recognition of gains or losses that are deemed to
be temporary. Premiums and discounts are amortized or accreted over the life of
the related instrument as an adjustment to yield using the straight-line method,
which approximates the effective interest method. Interest income is recognized
when earned. Fair value approximates carrying value for all cash equivalents and
investments.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Information
The statements contained in this Form 10-Q that are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding the expectations, beliefs, intentions or strategies
regarding the future. The Company intends that all forward-looking statements be
subject to the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements reflect the Company's views
as of the date they are made with respect to future events and financial
performance, but are subject to many uncertainties and risks which could cause
the actual results of the Company to differ materially from any future results
expressed or implied by such forward-looking statements. Some of these risks are
discussed below in the section "Certain Factors That May Impact Future
Operations." Additional risk factors are discussed in "Item 1 - Business" of the
Company's Form 10-K and other reports filed by the Company from time to time on
Forms 10-Q and 8-K. The Company does not undertake any obligation to update or
revise any forward-looking statement, made by it or on its behalf, whether as a
result of new information, future events, or otherwise.
Overview
Novoste commenced operations as a medical device company in May 1992. Commencing
in 1994 the Company has devoted substantially all of its efforts to developing
the Beta-Cath(TM) System, an intraluminal beta radiation catheter delivery
system designed to reduce the frequency of restenosis subsequent to percutaneous
transluminal coronary angioplasty ("PTCA").
For the period since its capitalization through June 30, 1998 the Company has
earned minimal non-recurring revenues and experienced significant losses in each
period. At June 30, 1998 the Company had an accumulated deficit of approximately
$36.2 million. Novoste expects to incur significant operating losses through at
least 2000 as the Company continues research and development projects, conducts
its clinical trials in the United States, Canada and Europe, seeks regulatory
approval or clearance for its products, expands its sales and marketing efforts
in contemplation of product introduction and market development, and increases
its administrative activities to support growth of the Company.
The development, manufacture, sale and distribution of medical devices such as
the Company's Beta-Cath(TM) System are subject to numerous regulations imposed
by governmental authorities, principally the FDA and corresponding state and
foreign agencies. The regulatory process is lengthy, expensive and uncertain.
FDA approval of a Pre Market Approval ("PMA") application and approval from the
Nuclear Regulatory Commission (NRC) are required before the Beta-Cath(TM) System
can be marketed in the United States. Securing FDA approval will require
submission to the FDA of extensive clinical data and technical information. The
Company expects to receive approval of the Beta-Cath(TM) System for sale in
Europe during the third quarter of 1998. However, the Company does not expect
regulatory approval of the Beta-Cath(TM) System for sale in the United States
prior to 2000 and there can be no assurance when or if such approvals will be
obtained.
In 1996 and 1997 the Company conducted a feasibility clinical trial at four
hospitals under an Investigational Device Exemption ("IDE") granted by the FDA
to determine the clinical safety of the Beta-Cath(TM) System for use in coronary
arteries and a total of 85 patients were enrolled. As of March 31, 1998, 64 of
the 85 patients had received angiographic follow-up analyzed in a core lab. Of
the 64 patients
7
14% were reported restenotic. This data suggests a 67% reduction in the rate of
restenosis in patients who received treatment with the Beta-Cath(TM) System when
compared to a historical control group (from the Lovastatin Restenosis Trial)
which received PTCA only and had been selected based upon inclusion and
exclusion criteria similar to those utilized by the Company. Arteries treated
with the Beta-Cath(TM) System on average maintained 100% of the enlargement
achieved with PTCA (a "late loss index" of 0%). The following table compares the
Company's data on the 64 patients to the historical control group:
Novoste Lovastatin
Feasibility Placebo
Studies Group
------- -----
No. of Treated Patients... 64 161
Restenosis Rate........... 14% 42%
Late Loss Index........... 0% 43%
On July 30, 1997 the Company initiated a randomized, triple-masked, placebo-
controlled, multicenter human clinical trial under an IDE granted by the FDA to
determine the clinical safety and efficacy of the Beta-Cath(TM) System for use
in coronary arteries. The Company expects to enroll approximately 1,100 patients
in the trial at up to 45 medical sites located in the United States as well as
additional sites located in Europe and Canada. The patients will be divided into
two approximately equal subgroups, one for PTCA alone and one with coronary
stenting. Each subgroup of the trial will be randomized to either intracoronary
radiation therapy or a placebo control. In both subgroups patients who receive
the beta radiation will receive dosages of 14Gy for vessels ranging from at
least 2.7 to 3.35 millimeters and 18Gy for vessels ranging from 3.35 to 4.0
millimeters. A follow-up review of patients 30 days after treatment and a
follow-up angiogram eight months after the initial treatment will be performed
to observe the treated artery. The angiograms will be analyzed to determine
whether there has been an incidence of restenosis and to measure the late loss
index (the extent of the loss in the enlargement of lumen achieved with PTCA).
As of July 28, 1998 a total of 467 patients had been enrolled at 30 medical
centers.
On July 9, 1998 the Company received approval from the FDA for an
Investigational Device Exemption (IDE) supplement to begin the "STents And
Radiation Therapy" (START) Trial, designed to determine the safety and efficacy
of ICRT in treating "in-stent restenosis." Novoste expects to enroll 386
patients in this trial starting in September 1998.
There can be no assurance that the Company's research and development efforts
will be successfully completed. There can be no assurance that clinical trials
will be completed in a timely fashion or demonstrate the safety and efficacy of
the Beta-Cath(TM) System. Additionally, there can be no assurance that the
Beta-Cath(TM) System will be approved by the FDA, the NRC, any foreign
governmental agency, or that the Beta-Cath(TM) System or any other product
developed by Novoste will be successfully introduced or attain any significant
level of market acceptance. There can be no assurance that the Company will ever
achieve either significant revenues from sales of its Beta-Cath(TM) System or
ever achieve or sustain profitability.
Results of Operations
Net loss for the three months ended June 30, 1998 was $4,446,000, or ($0.43) per
share, as compared to $3,405,000, or ($0.40) per share, for the three months
ended June 30, 1997. Net loss for the six months ended June 30, 1998 was
$8,624,000, or ($0.83) per share, as compared to $6,048,000 or ($0.72) per share
for the year earlier period. The increase in net loss for the three and six
months ended June 30, 1998
8
compared to the year earlier period is primarily due to increased spending for
research and development as well as increased marketing related to the Company's
development of its Beta-Cath(TM) System, offset by increased interest income
earned from the investment of the net proceeds from the secondary public
offering in November 1997.
Revenues. No revenues were earned in the three and six months ended June 30,
1998. Miscellaneous revenues were $29,000 for the three and six months ended
June 30, 1997, due to the sale of a product line.
Research and Development Expenses. Research and development expenses increased
26% to $3,984,000 for the three months ended June 30, 1998 from $3,157,000 for
the three months ended June 30, 1997. For the six months ended June 30, 1998,
research and development expenses increased 44% to $7,913,000 from $5,481,000
for the same period in 1997. These increases were primarily a result of (a)
patient enrollment and follow-up costs in the Company's clinical trials, (b)
services provided by outside consultants in the development of the Beta-Cath(TM)
System and manufacture of its components, (c) cost overruns related to a new
production line at its supplier of radioactive sources (see Liquidity and
Capital Resources), and (d) the increased size of the Company's research and
development staff. The Company expects research and development expenses to
further increase in the immediate future as the Company continues clinical
trials of its Beta-Cath(TM) System in both the U.S. and selected foreign
countries.
General and Administrative Expenses. General and administrative expenses
increased 22% to $542,000 for the three months ended June 30, 1998 from $443,000
for the three months ended June 30, 1997. For the six months ended June 30, 1998
general and administrative expenses increased 10% to $1,053,000 from $960,000,
for the same period in 1997. This increase for the three month period was
primarily a result of additional personnel and higher salaries. The Company
expects general and administrative expenses to increase in the future in support
of a higher level of operations.
Marketing Expenses. Marketing expenses increased 232% to $505,000 for the three
months ended June 30, 1998 from $152,000 for the three months ended June 30,
1997. For the six months ended June 30, 1998, marketing expenses increased 199%
to $871,000 from $291,000 for the same period in 1997. These increases primarily
relate to preparation for the European commercial launch of the Beta-Cath(TM)
System and arise from increased trade show costs, consulting fees and higher
staff and salaries. The Company expects sales and marketing expenses to
significantly increase in the future, if and when the Beta-Cath(TM) System is
approved in the U.S. and other countries.
Interest Income. Net interest income increased 84% to $585,000 for the three
months ended June 30, 1998 from $318,000 for the three months ended June 30,
1997. For the six months ended June 30, 1998 interest income increased 85% to
$1,213,000 from $655,000 for the same period in 1998. The increase in interest
income was primarily due to larger cash equivalents and short-term investment
balances after the Company's secondary public offering in November 1997.
Liquidity and Capital Resources
The Company has financed its activities since inception up to May 23, 1996, the
date of the Company's initial public offering, through private placements of its
Common Stock, Class B Common Stock and promissory notes. Since inception through
June 30, 1998 the Company obtained funds aggregating approximately $71.9 million
in net proceeds from the issuance of Common Stock and Class B Common Stock
(including approximately $30.6 million in net proceeds from its initial public
offering which closed in May 1996 and approximately $32.2 million in net
proceeds from its secondary public offering which closed in November 1997), and
approximately $1.8 million in net proceeds from the issuance of convertible
promissory notes.
9
During the six months ended June 30, 1998 and 1997 the Company used cash to fund
operations of $8.1 million and $5.7 million, respectively. Cash used to fund
operations since inception was approximately $30.6 million. The increase in cash
used in operations was due primarily to increased research and development
activities and initiation of marketing activities related to the Beta-Cath(TM)
System. The Company's expenditures for equipment and improvements have
aggregated $3.0 million since inception. Future cash needs for operating
activities are anticipated to be higher than historical levels because of the
development, manufacturing scale-up and commercialization of the Beta-Cath(TM)
System, subject to the factors discussed below.
The Company's principal source of liquidity at June 30, 1998 consisted of cash,
cash equivalents and short-term investments of $40.1 million. The Company did
not have any credit lines available or outstanding borrowings at June 30, 1998.
The Company has obtained all of its requirements of radioactive sources to date
pursuant to an agreement with a single supplier, Bebig Isotopentechnik and
Umweltdiagnostik GmbH, (the "Supplier"), a German corporation. On July 23, 1998
the Company executed an amendment to its framework agreement with the Supplier,
whereby it agreed to reimburse DM 1 Million ($560,000) in cost overruns for a
new production line. This amount was accrued at March 31, 1998 and charged to
research and development expense. The Company received a lien on all tangible
and intangible assets used by the Supplier in the design and manufacture of the
Strontium 90 radioactive sources. In addition, the agreement provides for the
Company's exercise of an option to purchase the tangible assets, and obtain a
fully-paid license to all intellectual property used in the manufacture of the
radioactive sources, for $4,019,400. This amount will be paid in the form of a
license fee on certain production quantities prior to August 31, 2002.
The Company anticipates that its operating losses will continue through at least
2000 because it plans to expend substantial resources in funding clinical trials
in support of regulatory approvals, and continues to expand research and
development and marketing activities. Novoste believes that current cash
balances and short-term investments, together with interest thereon, will be
sufficient to meet the Company's operating and capital requirements through
1999. However, the Company's future liquidity and capital requirements will
depend upon numerous factors, including the progress of the Company's clinical
research and product development programs; the receipt of and the time required
to obtain regulatory clearances and approvals; the resources required to gain
approvals; the resources the Company devotes to the development, manufacture and
marketing of its products; the resources required to hire and develop a direct
sales force in the United States, develop distributors internationally, and to
expand manufacturing capacity; market acceptance and demand for its products;
and other factors. Novoste may in the future seek to raise additional funds
through bank facilities, debt or equity offerings or other sources of capital.
There can be no assurance that additional financing, if required, will be
available on satisfactory terms, or at all.
Impact of Year 2000
In July 1998 the Company installed and implemented a complete manufacturing
software package that includes integrated financial modules that replaced the
Company's then existing financial software program. The vendor of the new
software package has warranted that it is compliant with year 2000 requirements.
The Company believes that any year 2000 problems encountered by suppliers are
not likely to have a material adverse effect on the Company's operations. There
can be no assurance, however, that such problems will not arise.
10
Additional Risk Factors
Limited Operating History. The Company has a limited history of operations.
Since its inception in May 1992 the Company has been primarily engaged in
research and development of its Beta-Cath(TM) System. The Company has generated
only limited revenue and does not have experience in manufacturing, marketing or
selling its products in quantities necessary for achieving profitability. There
can be no assurance that the Company's products will be commercialized or that
the Company will achieve significant revenues from either international or
United States sales. In addition, there can be no assurance that the Company
will achieve or sustain profitability in the future.
History of Losses and Expectation of Future Losses. The Company has experienced
significant operating losses since inception and as of June 30, 1998 had an
accumulated deficit of $36.2 million. The development and further
commercialization of the Company's current products and other new products, if
any, will require substantial development, clinical, regulatory, manufacturing
and other expenditures. The Company expects its operating losses to continue
through at least the year 2000 as the Company continues to expand its product
development, clinical trials, and marketing efforts.
Risk of Inadequate Funding. The Company anticipates that its operating losses
will continue through at least 2000 because it plans to expend substantial
resources in funding clinical trials in support of regulatory approvals and
continues to expand research and development and marketing activities. Novoste
believes that current cash balances and short-term investments, together with
interest thereon, will be sufficient to meet the Company's operating and capital
requirements through 1999. However, the Company's future liquidity and capital
requirements will depend upon numerous factors, including the progress of the
Company's clinical research and product development programs; the receipt of and
the time required to obtain regulatory clearances and approvals; the resources
required to gain approvals; the resources the Company devotes to the
development, manufacture, and marketing of its products; the resources required
to hire and develop a direct sales force in Europe and the United States; the
rate of sales in Europe, expansion of manufacturing capacity and other
facilities requirements; market acceptance and demand for its products; and
other factors. Novoste may in the future seek to raise additional funds through
bank facilities, debt or equity offerings or other sources of capital. There can
be no assurance that additional financing, if required, will be available on
satisfactory terms, or at all.
Dependence on Beta-Cath(TM) System; Market Acceptance. The Company anticipates
that for the foreseeable future it will be solely dependent on the successful
development and commercialization of the Beta-Cath(TM) System. The Beta-Cath(TM)
System will require further development, as well as regulatory clearance or
approval, before it can be marketed in the United States or internationally.
There can be no assurance that the Company's development efforts will be
successful or that the Beta-Cath(TM) System will be shown to be safe or
effective, cleared or approved by regulatory authorities, capable of being
manufactured in commercial quantities at acceptable costs, approved by payors
for reimbursement or successfully marketed. In addition, there can be no
assurance that demand for the Beta-Cath(TM) System will be sufficient to allow
profitable operations. Failure of the Beta-Cath(TM) System to be successfully
commercialized would have a material adverse effect on the Company's business,
financial condition and results of operations.
Early Stages of Clinical Trials; No Assurance of Safety and Efficacy. The
Beta-Cath(TM) System is in an early stage of clinical testing, and there can be
no assurance as to when, if ever, its safety and efficacy in reducing the
frequency of restenosis will be demonstrated. The Company has commenced a
randomized,
11
triple-masked, placebo-controlled, multicenter, human clinical trial under an
Investigational Device Exemption ("IDE") granted by the U.S. Food and Drug
Administration ("FDA") to determine the clinical safety and efficacy of the
Beta-Cath(TM) System for use in coronary arteries. The Company anticipates
completing enrollment in this pivotal clinical trial by March 31, 1999. Various
factors, including difficulties in enrolling patients or scheduling physicians,
could delay completion for an indeterminate amount of time.
The multicenter trial will require the treatment of a statistically significant
number of patients, and clinical follow-ups of such patients after eight months.
It is only after completion of these trials that the Company would apply to the
FDA for the regulatory approval required to commence marketing of the
Beta-Cath(TM) System in the U.S. Subsequent experience may uncover unforeseen
problems with the therapy which could require removal of the product from the
market or additional testing. There can be no assurance that the Beta-Cath(TM)
System or any of the Company's other products will prove to be safe and
effective in clinical trials or ultimately will be approved for marketing by the
United States or foreign regulatory authorities. The Company does not expect to
submit an application for pre-market approval ("PMA") for its Beta-Cath(TM)
System until the first quarter of 2000, and there can be no assurance that the
Company will ever submit a PMA or that, if submitted, such PMA will be approved
by the FDA. If the Beta-Cath(TM) System does not prove to be safe and effective
in clinical trials, the Company's business, financial condition and results of
operations will be materially adversely affected and could result in cessation
of the Company's business. In addition, the clinical trials may identify
significant technical or other obstacles to be overcome prior to obtaining
necessary regulatory approvals. Even if such obstacles are identified and
overcome, commercialization of the Beta-Cath(TM) System may be delayed.
Limited Sales, Marketing and Distribution Experience. At present the Company has
no sales and a limited marketing capability. The Company intends to sell its
products both inside the United States and in the key European markets directly.
There can be no assurance that the Company will be able to recruit and train
adequate sales and marketing personnel to successfully commercialize the
Beta-Cath(TM) System in the key markets of Europe and the United States. The
Company intends to select one or more established market leaders in the
radioisotope business to inventory and deliver the radiation sources and provide
related training, testing and support services to hospitals in both the United
States and international markets. The inability to recruit or retain one or more
such entities for this purpose could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on a Key Supplier. The Company currently purchases all radiation
source materials from a single supplier. The Company believes that because of
the technical expertise and capital investment required to manufacture the
radiation source materials, it could be extremely difficult and expensive to
find an alternate source of supply. Any failure or disruption in the ability of
the supplier to provide the radiation source materials could have a material
adverse effect on the business, financial condition and results of operations of
the Company.
Fluctuations in Operating Results. The Company's results of operations may
fluctuate significantly from quarter to quarter and will depend upon numerous
factors, including product development efforts, actions relating to regulatory
and reimbursement matters, progress of clinical trials, the extent to which the
Company's products gain market acceptance, and competition.
12
Possible Volatility of Stock Price. The stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. In
addition, the market price of the shares of Common Stock is likely to be highly
volatile. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new products by the Company or its
competitors, FDA and international regulatory actions, actions with respect to
reimbursement matters, developments with respect to patents or proprietary
rights, public concern as to the safety of products developed by the Company or
others, changes in health care policy in the United States and internationally,
changes in stock market analyst recommendations regarding the Company, other
medical device companies or the medical device industry generally, and general
market conditions may have a significant effect on the market price of the
Common Stock.
Product Development. The focus of the Company's current development efforts is
to design future generation components of the Beta-Cath(TM) System. The medical
device industry is characterized by rapid and significant technological change.
Therefore, the Company's future success will depend in a large part on the
Company's ability to continue to respond to such changes, as well as expand the
applications for which its products are used, through the timely development and
successful introduction of enhanced and new versions of its Beta-Cath(TM)
System. Product research and development will require substantial expenditures
and will be subject to inherent risks, and there can be no assurance that any
new product introduced will receive regulatory approval or will be commercially
successful.
Highly Competitive Market; Risk of Alternative Therapies. Competition in the
medical device industry, and specifically the market for cardiovascular devices,
is intense. Many companies are developing devices and therapies to improve the
outcome of coronary revascularization procedures and to reduce the frequency of
restenosis, such as coronary stents. Other companies have various radiation
therapy products under development to reduce restenosis. In addition, drugs,
gene therapy and other minimally invasive catheter-based procedures are
currently being developed. Many of the Company's competitors and potential
competitors have substantially greater financial resources than the Company and
also have greater resources and expertise in the areas of research and
development, obtaining regulatory approvals, manufacturing and marketing. There
can be no assurance that the Company's competitors will not succeed in
developing, marketing and distributing technologies and products that are more
effective than those developed and marketed by the Company or that would render
the Company's technology and products obsolete or noncompetitive. Additionally,
there is no assurance that the Company will be able to compete effectively
against such competitors in terms of manufacturing, marketing and sales.
Patents and Proprietary Technology. The medical device industry has been
characterized by extensive litigation regarding patents and other intellectual
property rights and companies in the medical device industry have employed
intellectual property litigation to gain a competitive advantage. There can be
no assurance that the Company will not become subject to patent infringement
claims or litigation or interference proceedings declared by the USPTO to
determine the priority of inventions. The defense and prosecution of
intellectual property suits, USPTO interference proceedings and related legal
and administrative proceedings are both costly and time consuming. Litigation
may be necessary to enforce patents issued to the Company, to protect trade
secrets or know-how owned by the Company or to determine the enforceability,
scope and validity of the proprietary rights of others. Any litigation or
interference proceedings will result in substantial expense to the Company and
significant diversion of effort by the Company's technical and management
personnel. An adverse determination in litigation or interference proceedings to
which the Company may become a party could subject the Company to significant
liabilities to third parties or require the Company to seek licenses from third
parties or require
13
the Company to redesign its products or processes to avoid infringement or
prevent the Company from selling its products in certain markets, if at all.
Although patent and intellectual property disputes regarding medical devices
have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. Furthermore, there can be no assurance that the necessary licenses
would be available to the Company on satisfactory terms, if at all, or that the
Company could redesign its products or processes to avoid infringement. Any
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing and
selling its products, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
Government Regulation. Clinical testing, manufacture, promotion and sale of the
Company's products are subject to extensive regulation by numerous governmental
authorities in the United States, principally the FDA, and corresponding foreign
regulatory agencies. The Federal Food, Drug, and Cosmetic Act ("FDC Act"), and
other federal and state statutes and regulations govern or influence the
testing, manufacture, labeling, advertising, distribution and promotion of drugs
and devices. Noncompliance with applicable requirements can result in fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, failure of the government to grant premarket clearance
or premarket approval for devices, refusal to authorize the marketing of
products or to allow the Company to enter into government supply contracts, and
criminal prosecution. The Company's Beta-Cath(TM) System is regulated as a Class
III medical device for which FDA approval of a PMA application must be obtained
prior to U.S. commercial sales. Failure to receive or delays in receipt of FDA
clearances or approvals could have a material adverse effect on the Company's
business, financial condition and results of operations.
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain approval for sale internationally may be longer or
shorter than that required for FDA approval, and the requirements may differ.
The European Union ("EU") has promulgated rules which require that medical
products receive by June 12, 1998 the right to affix the CE mark, an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives. While the Company intends to
satisfy the requisite policies and procedures that will permit it to receive the
CE mark certification for the Beta-Cath(TM) System, there can be no assurance
that the Company will be successful in meeting the European certification
requirements and failure to receive the right to affix the CE mark will prohibit
the Company from selling the product in member countries of the European Union.
14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting of stockholders on May 1, 1998 and
solicited votes by proxy in connection with such meeting.
(b) The following matters were approved by the shareholders:
(i) The approval of the following nominees to the Board of Directors:
8,939,494 in favor, 0 against, and 2,595 broker non-votes for both
Pieter J. Schiller and William A. Hawkins.
(ii) The ratification of amendments to the Company's Amended and Restated
Stock Option Plan (the "Plan Amendments"), which Plan Amendments (a)
increase the number of shares of Common Stock reserved for issuance
thereunder by 700,000 shares to 3,400,000 shares, (b) increase the
maximum number of shares from 100,000 to 350,000 with respect to
options that may be granted to any person or entity eligible within
one calendar year, (c) allow the Stock Option and Compensation
Committee to determine as of the date of grant the acceleration, if
any, of the exercisability of a performance-based option upon a
Change in Control (as defined) of the Company. Shareholders approved
Plan Amendments by votes as follows: 4,447,997 in favor, 1,639,615
against, 3,521 abstained, and 2,850,956 broker non-votes.
(iii) The ratification of the appointment of Ernst & Young LLP as
independent auditors of the Company for the year ending December 31,
1998. The proposal received 8,939,389 votes in favor, 0 against,
2,700 abstained, and 0 broker non-votes.
Item 5. Other Matters
William A. Hawkins was elected to the office of President of the Company
effective June 1, 1998. Thomas D. Weldon, previous President & CEO, remains the
Company's CEO and was elected to the additional post of Chairman on May 1, 1998.
Dr. Norman Weldon retired as Chairman effective May 1, 1998 but remains a
director of the Company. Dr. Raoul Bonan was elected Medical Director and Vice
President of Clinical Affairs effective June 1, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
(10) Material Contracts
(27) Financial data schedule
(b) The Company did not file any reports on Form 8-K during the three months
ended June 30, 1998.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NOVOSTE CORPORATION
August 7, 1998 /s/ Thomas D. Weldon
- --------------------- -------------------------------
Date Thomas D. Weldon
Chairman & Chief Executive Officer
August 7, 1998 /s/ David N. Gill
- --------------------- -------------------------------
Date David N. Gill
Vice President - Finance,
Chief Operating Officer
and Chief Financial Officer
(Principal Financial & Accounting Officer)
16
EXHIBIT INDEX
Exhibit Page
Number Exhibit Description Number
- ------ -------------------------------- ------
10.14 Employment Agreement with William A. Hawkins III
10.15 Employment Agreement with Dr. Raoul Bonan
10.16 Restricted Stock Award Agreement with William A. Hawkins III
10.17 Non-Incentive Stock Option Agreement with William A. Hawkins III
*10.18 Amendment to Framework Agreement and Security Agreement with
Bebig GmbH
27 Financial data schedule 53
- --------------------------------------------------------------------------------
* Portions have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.
17