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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934. For the fiscal year
ended December 31, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM
_________ to__________
Commission file number 0-25133
PHARMANETICS, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-2098302
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5301 DEPARTURE DRIVE, RALEIGH, NORTH CAROLINA 27616
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
919-954-9871
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK ($.001
PAR VALUE)
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant based upon $18.00 per share, the closing price of the Common Stock on
March 17, 2000, on the NASDAQ National Market System, was approximately
$134,076,000 as of such date. Shares of Common Stock held by each officer and
director and by each person who owns 10% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status may not be conclusive for other purposes.
As of March 17, 2000, the registrant had outstanding 7,506,681 shares of Common
Stock ($.001 par value).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 2000 Annual Meeting of
Shareholders are incorporated herein by reference into Part III.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K that are not descriptions of
historical facts are forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those set forth herein under
the heading "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Factors That May Affect Future Results" and
elsewhere, as well as in the Company's other filings with the Securities and
Exchange Commission (the "SEC"), and including, in particular, risks relating to
new product development, uncertainties regarding market acceptance of the
Company's products, government regulation, healthcare industry consolidation and
competition.
PART I
ITEM 1. BUSINESS
PharmaNetics, Inc. (the "Company") is a North Carolina holding company
incorporated in July 1998 as the parent company of Cardiovascular Diagnostics,
Inc. ("CVDI") and Coeur Laboratories, Inc. ("Coeur"). CVDI develops,
manufactures and markets rapid turnaround diagnostics to assess blood clot
formation and dissolution. CVDI's products are a proprietary analyzer and dry
chemistry tests (known as the "Thrombolytic Assessment System" or "TAS") that
provide, at the point of patient care, rapid and accurate evaluation of
hemostasis. CVDI is also establishing itself in the emerging field of
theranostics, or rapid near-patient testing, in which the diagnostic results may
influence treatment decisions. Current tests and tests under development are
used in the treatment of angina, heart attack, stroke, deep vein thrombosis and
pulmonary and arterial emboli. Coeur Laboratories, Inc. is a wholly-owned
subsidiary of CVDI; however, substantially all of its operating assets and
liabilities were sold in June 1999. See further discussion of Coeur under the
heading " Discountinued Operations".
CVDI believes that the TAS is the only stat, or "as soon as possible",
point-of-care system capable of monitoring the coagulation (formation) and lysis
(dissolution) of blood clots. Such monitoring provides information which is
critical in administering anticoagulant and thrombolytic (clot-dissolving)
drugs, which are used in the treatment of a variety of medical disorders.
Hemostatic test results must be provided quickly because a majority of the drugs
used to regulate clotting are cleared rapidly from the body, and these drugs
must be closely monitored to maintain drug levels within an effective treatment
range. CVDI believes that hospital central and stat laboratories, which
currently provide the majority of such testing, generally cannot provide timely
information to clinicians regarding drugs that affect coagulation and
thrombolysis. Delay in providing such information can be a problem because the
physician is likely to leave the patient area during this time, which may result
in a further delay of diagnosis and treatment. CVDI believes that the TAS can
provide information regarding coagulation and thrombolysis as well as drug
monitoring on a timely basis, permitting quicker diagnosis and therapeutic
intervention, which will improve hemostatic therapy and the quality of patient
care. CVDI believes that this improvement may facilitate quicker transfers out
of expensive critical care settings, reduce the overall length of hospital
stays, reduce expenditures for laboratory equipment and its associated
maintenance, and reduce the unnecessary use of pharmaceuticals. In addition,
point-of-care testing can reduce hospitals' costs by reducing the numerous
steps, paperwork and personnel used in collecting, transporting, documenting and
processing blood samples.
The Company currently sells domestically and internationally its TAS analyzer
and a menu of tests and controls. Of these tests, the Prothrombin Time ("PT"),
PT non-citrated ("PTNC"), the PT One, the activated Partial Thromboplastin Time
("aPTT"), and the Heparin Management test ("HMT") (which monitors oral
anticoagulant therapy, low level intravenous anticoagulant therapy and high
level intravenous anticoagulant therapy) have received Food and Drug
Administration ("FDA") clearance under Section 510(k) of the Food, Drug and
Cosmetic Act (the "FDC Act") and are currently sold for commercial use. Three
other tests, the Lysis Onset Time ("LOT), Ecarin Clotting Time ("ECT") and a
modified ecarin clotting time test have been sold "for investigational use
only", pending FDA review and clearance. In January 2000, the Company received
FDA clearance to market its Heparin Management Panel and Accent system. This
system combines the TAS technology and the currently marketed HMT with two new
test cards, the Heparin Titration test ("HTT") and Protamine Response test
("PRT") with the Accent, a hardware accessory to the TAS analyzer. These
products are used to facilitate anticoagulation management during
cardiopulmonary bypass procedures.
INDUSTRY OVERVIEW
Blood testing within the practice of laboratory medicine has been evolving in
response to the physician's demand for information. This demand for information
is particularly acute in blood testing, where access to timely and accurate
results is critical to effective patient care. Initially, hospital blood
analysis was performed in multiple small laboratories that typically used
time-consuming manual techniques. The accuracy of tests performed under these
conditions varied considerably depending upon, among other factors, the skill of
the laboratory personnel. The advent of automated blood testing allowed for
centralization and standardization of laboratory tests. With improved access to
blood analysis, physicians began to use laboratory tests as a primary diagnostic
tool and consequently demanded more tests and faster results. In an effort to
meet this demand, some hospitals established decentralized stat laboratories
nearer the patient. These laboratories typically rely on technology designed for
efficiency in a high-volume centralized department. CVDI believes that reliance
on this technology makes stat laboratories inadequate and expensive, creating a
need for new technology suitable for use at the point of patient care. As
diagnostics move closer to the patient, the centralized lab has had a reduced
role in the purchasing decisions for point of care systems. The physician is
more likely to have influence over the use of point of care technology given its
ability to be a valuable tool for managing therapy.
Recent advances in technology allow many routine blood tests to be performed at
the point of patient care, where the physician can most effectively use test
results. Portable, easy-to-use analyzers designed to perform blood analysis
rapidly and accurately are emerging as a solution to these current healthcare
demands. While speed is important in point-of-care testing, accuracy is
critical. Since point-of-care testing is often performed by operators who lack
special laboratory skills or training, the more error-proof the testing system,
from sample collection through archiving of the test result, the more reliable
the system will prove to be. By design,
most point-of-care tests require limited materials and minimum labor.
Point-of-care test systems must also comply with the Clinical Laboratory
Improvement Act of 1988 ("CLIA") regulations. See "Government Regulation".
Access to timely and accurate coagulation test results must be provided quickly
because a majority of the drugs used to regulate clotting are cleared rapidly
from the body and these drugs must be closely monitored to maintain drug levels
within a safe treatment range. Coagulation testing presents special challenges
in achieving test accuracy. Non-anticoagulated blood begins to clot as soon as
it leaves the body, therefore point-of-care coagulation testing is the only
viable approach to get results and make necessary medical decisions.
TECHNOLOGY
The Company's core technology relating to both the TAS analyzer and test cards
is currently protected by a number of U.S. and corresponding international
patents. The TAS card technology combines a mixture of dry reagents and
paramagnetic iron oxide particles ("PIOP") that is contained within the card's
reaction chamber. The test card has the approximate dimensions and half the
thickness of a standard credit card. Blood samples are introduced into this
reagent/particle mixture, dissolving the dry reagent and freeing the magnetic
particles to move within the card's chamber. When the oscillating magnetic field
is generated by the TAS analyzer, the magnetic particles within the TAS card's
reaction chamber move in response to the magnetic field. An optical sensor
within the TAS analyzer monitors the motion of the magnetic particles without
touching the blood sample. When movement diminishes to a predetermined
amplitude, the TAS system determines that a clot has been formed.
Conversely, the same technology is used to measure the time required for a clot
to dissolve. The Company's technology permits the measurement of clot
dissolution by introducing a sample of blood to a mixture of magnetic particles
and reagents including a clot-forming chemical, thereby inducing a clot. The
system then measures the amount of time required for the induced clot to
dissolve. The Company believes that TAS is the only point-of-care system capable
of monitoring both coagulation and dissolution of clots. Furthermore, an
additional benefit to CVDI is the flexibility of the TAS technology, which
allows for further expansion of the Company's menu of tests, since new tests can
be developed by using different reagents in the test cards.
PRODUCTS
TAS ANALYZER
The TAS analyzer weighs approximately four pounds and is about the size of a
typical office telephone. The TAS analyzer has a four-line LCD display, which is
driven by software to prompt the technician to input the user and patient ID
numbers, sample type, and timing of application of the blood.
TAS can test unprocessed whole blood or plasma. Whole blood is obtained by
drawing blood from a patient, often into a tube containing sodium citrate, which
stabilizes the blood prior to testing. The process of citrating blood requires
no special training or skill, and can be done at the point of patient care by
the same person who performs the TAS test, without adding any significant time
to the process. Plasma, which is typically used in laboratory testing, is whole
blood which has had various cellular components removed through spinning in a
centrifuge for 10 to 15 minutes.
The analyzer and test cards are designed to work effectively in a decentralized
testing environment where they are used by healthcare personnel who do not need
formal central laboratory training. To operate TAS, a test card is swiped
through the magnetic strip reader of the analyzer, which automatically initiates
quality controls and begins to elicit information from the operator through a
series of prompts outlining the operating procedure for the specific test to be
performed. The test card is then inserted into the TAS analyzer. A single drop
of unprocessed, noncitrated or citrated whole blood or plasma is then placed
into the reaction chamber of the test card, which already contains the
appropriate mixture of dry reagents and PIOP for the test being performed.
Typically within three minutes, the screen on the TAS analyzer displays a
numerical test result, which is comparable to the result which would be achieved
in a central laboratory using traditional testing procedures. The portable
analyzer has been designed with a memory capability, may be connected to a
printer, and with a software upgrade may be connected to the hospital's patient
information system. The internal memory of the TAS analyzer allows for the
storage of up to 1,000 individual test results and has an alphanumeric keypad
that allows for the input of up to a 20-character patient identification code.
Additionally, the keypad provides for coded entry so only authorized personnel
can gain access to the system. The analyzer can operate either on wall current
or on an internal rechargeable battery. It is currently marketed by the
Company's distributor, Bayer Diagnostics ("Bayer"), as the Rapidpoint Coag
analyzer.
ACCENT
The Accent is a hardware accessory to the TAS analyzer cleared for marketing by
the FDA in January 2000. The Accent is a microprocessor-based device that
connects to the TAS analyzer and automatically calculates the information
required by physicians to manage the anticoagulation of patients during
cardiopulmonary bypass procedures. It is used in conjunction with the HTT, PRT
and HMT cards and will be marketed by Bayer as Rapidpoint ACCENT. The data
collected by Accent can be transferred to a printer
and/or hospital information system for storage.
FDA CLEARED TEST CARDS
The following describes CVDI's test cards that have been cleared by the FDA:
The PT test is a general screening test that is used to assess a patient's
baseline hemostatic function or to monitor the use of oral anticoagulants, such
as warfarin. Warfarin is widely used in the United States for long-term
treatment in patients who have previously developed clots, including after heart
attacks to inhibit coagulation to reduce the risk of developing additional
clots. A physician uses the PT test to monitor and maintain drug levels within a
safe treatment range; too little warfarin will not prevent a new clot from
developing, but too much of the drug may result in a bleeding complication. CVDI
manufactures and markets three different types of PT test cards, a general
purpose PT test card routinely used in the United States, the PT One, which uses
a more sensitive scale of measurement, and the PT-NC, which is used with finger
stick samples. The PT One is currently the preferred test for all indications in
Europe and is rapidly becoming popular in the United States.
The aPTT test is a coagulation screening test which may be used in conjunction
with the PT to provide a global assessment of a patient's ability to form a
clot. In addition, the aPTT test is used to monitor heparin, an injectable
anticoagulant. Hospitals routinely use heparin as the initial treatment for
patients with a clot, including patients suffering from heart attacks or
strokes. Heparin also prevents clots from forming in patients undergoing
procedures involving particular risks of clotting, such as angiograms, open
heart surgeries, dialyses and certain other surgeries. Heparin must be closely
monitored to assure adequate anticoagulation without increasing the risk of
developing a bleeding complication. Time is particularly important when
monitoring heparin, since the intravenously administered drug affects a
patient's coagulation system within minutes.
Generally, aPTT tests are incapable of monitoring high levels of heparin.
Currently, the activated clotting time ("ACT") test and the HMT are used to
monitor high levels of heparin. The Company developed and markets its HMT for
monitoring patients requiring high dose heparin therapy during procedures such
as open heart surgery or dialysis. For example, during the course of an open
heart surgery, the patient's blood may be tested as many as four to six times to
assure an adequate heparin effect. The Company believes that its HMT is a more
effective test than the ACT because it is easier to use and less prone to
operator error. Also, unlike ACT, HMT is not sensitive to changes in blood
temperature or dilution, such as typically occur during bypass surgery. The
Company believes that HMT more closely correlates with a precise but
time-consuming laboratory measurement of heparin concentration than does ACT.
In January 2000, the HTT and PRT were cleared for marketing by the FDA. The HTT
and PRT cards are combined with the currently marketed HMT to provide a system
for total individualized heparin management during cardiac surgery. Heparin
managment is complicated due to patients' widely variable response to this drug
as well as its clearance rate from the blood during surgery. Heparin dosing
based on weight-based protocols is often unreliable, particularly in complicated
cases with patients receiving simultaneous therapy. This approach should make it
easier and cost effective to incorporate individual heparin mangement into
routine practice.
TEST CARDS UNDER DEVELOPMENT
Continuing research and development is focused on expanding the current menu of
tests for the TAS analyzer. CVDI is currently developing the following new
tests:
Test Description
Low Range Heparin Management Used principally in cardiac
catheterization and interventional
cardiology. It is designed to monitor the
effects of low to moderate levels of
heparin on clotting
Low Range Fibrinogen ("LRF") Test to monitor the effects of ancrod, a
fibrinogen lowering drug for the treatment
of stroke under development at Knoll AG
Therapeutic Anticoagulant Test for monitoring and screening
potential treatments for patients with
sepsis
Ecarin Clotting Time("ECT") Test to monitor direct thrombin inhibitors
like hirudin, which is in development for
use in patients treated for heart attack
or prevention of deep vein thrombosis
Modified Ecarin Clotting Time Test to allow the monitoring of an
antithrombin drug under development at
AstraZeneca
SK Panel Test to assess response to streptokinase;
provides a physican with information to
assist in choosing the appropriate dose of
the thrombolytic drug
Lysis Onset Time("LOT") Test to monitor a patient's lytic response
to any thrombolytic drug used for the
treatment of heart attack, stroke, or
other thrombotic diseases
Low Molecular Weight Heparin Test to monitor the anticoagulant effect
of low molecular weight heparins and other
anticoagulant drugs used for the treatment
and prevention of thrombotic diseases
Synethic Xa Test to monitor new synthetic Xa
inhibitors in various stages of
development by pharmaceutical companies
IIb/IIIa (Platelets) Test to monitor the effect of new platelet
antagonists in partnership with Bayer AG
AT Test to determine levels of antithrombin;
can be used to monitor AT therapy
QUALITY CONTROL PRODUCTS
The Company also develops and manufactures single-use "crush-vial" controls for
each test card. These controls allow quality assurance testing at the point of
care. In addition, the Company has developed an Electronic Quality Control
("EQC") card used to test analyzer function. This card was cleared by the FDA
during 1999.
SALES AND MARKETING
CVDI commenced marketing TAS products in May 1995. In the beginning, CVDI
initiated a sales and marketing strategy with a direct sales force targeting
hospitals with over 200 beds. Through this initiative CVDI achieved its goal of
gaining recognition for its technology and was able to attract several strategic
partners. As consolidation in the health care industry began to occur, the
marketing focus was shifted to begin targeting major corporate accounts and
integrated health networks ("IHNs"). To accomplish this CVDI signed an exclusive
development and distribution agreement with Dade International, Inc. ("Dade") in
1996 to market the PT and aPTT tests. In 1996, CVDI also entered into an
agreement with Avecor Cardiovascular to distribute CVDI's Heparin Management
Test ("HMT") to hospitals.
In August 1998, the agreements with Dade and Avecor were terminated effective
December 1998, at which time Chiron Diagnostics Corporation ("Chiron
Diagnostics") became CVDI's new distribution partner pursuant to the agreement
discussed below. In connection with the CVDI's termination of the Dade
agreement, CVDI agreed to continue to supply for 3 years the cards currently
sold to Dade's contracted customers. In November 1998, Bayer acquired Chiron
Diagnostics and it became a part of Bayer Diagnostics. The Company believes
Bayer's position as a global leader in diagnostics will make it a good partner.
In August 1998, CVDI signed a five-year global distribution agreement, subject
to minimum annual sales, with Chiron Diagnostics to distribute CVDI's PT, aPTT,
HMT and LHMT test cards. At that time, CVDI received an up-front investment of
$6 million from Chiron Diagnostics in exchange for 600,000 shares of common
stock. As noted above, in November 1998, Bayer acquired Chiron Diagnostics and
it became a part of Bayer Diagnostics. CVDI believes that Bayer Diagnostics has
a strong global presence and that its shared strategy for expanding rapid
diagnostic platforms into critical care settings and its considerable presence
in these specialized areas of the hospital will lead to increased placements of
TAS products. CVDI also believes that the TAS products are complementary with
Bayer Diagnostics' leading market position in blood gas analysis. Bayer
Diagnostics began marketing CVDI's products covered by the agreement in January
1999, following the termination of the distribution agreements with Dade and
Avecor Cardiovascular. In addition, Bayer Diagnostics has the contingent right
to distribute outside the U.S. certain test cards currently under development
and a right of first refusal for distribution of these tests in the U.S.
Under the agreement with Bayer Diagnostics (the "Bayer Distribution Agreement"),
Bayer Diagnostics agreed to purchase minimum quantities of CVDI's products
covered by the Bayer Distribution Agreement during the term of the Bayer
Distribution Agreement at pre-determined prices. The Bayer Distribution
Agreement is renewable for successive five-year terms. CVDI has the right to
terminate the Bayer Distribution Agreement if (1) Bayer Diagnostics does not
meet annual or semiannual sales targets, (2) Bayer Diagnostics fails to make
payments when due to the Company, or (3) a distributor appointed by Bayer
Diagnostics sells products which are competitive with CVDI. Either party may
terminate the Agreement upon the occurrence of any of the following: (1) the
insolvency of
the other party; (2) material breach of the Bayer Distribution Agreement by
other party which is not cured; or (3) certain types of "change-in-control"
transactions by the other party.
The Company also markets TAS products in Europe and other foreign countries. In
Europe there are a large number of recognized experts in the fields of
hematology and cardiology. Until the signing of the Bayer Distribution Agreement
in August 1998, the Company's strategy had been to sell primarily through
selected independent distributors. Bayer Diagnostics has become CVDI's exclusive
distributor in these territories.
To further the goal of establishing itself in the emerging field of
theranostics, the Company has entered into collaborative agreements with Knoll
AG and AstraZeneca in which the Company is developing test cards for potential
suse in patient identification and monitoring of therapies affecting coagulation
being investigated by these companies. Under certain of these agreements, CVDI
has agreed to develop and supply test cards. Under each of these agreements,
CVDI has granted the other party rights to purchase TAS products and test cards
at pre-determined prices. Each of these agreements can be terminated by either
party following the other party's failure to cure a material breach of the
agreement. In relation to the development of the ECT card to monitor a thrombin
inhibitor, CVDI has a worldwide exclusive sublicense from Knoll to make, use and
sell the ECT test. The Company is focused on becoming a leader in the
theranostic testing market, specifically managing new therapeutics which affect
coagulation. Many drugs currently under development may require faster, more
accurate assessment given short half-lives and narrow therapeutic windows, and
thus the Company believes physicians will increasingly demand therapeutic drug
monitoring. CVDI's intent is to enter into additional collaborations to expand
its theranostic test card menu. Within the cardiovascular market, drugs
affecting coagulation, such as thrombin inhibitors, platelet inhibitors and low
molecular weight heparins, are under development by pharmaceutical companies.
The Company's strategy is to increase its number of collaborations, expand
current collaborations, increase involvement of leading research centers and
physician "thought leaders" and further the involvement of Bayer in providing
outcome studies related to new theranostic tests. During 1999, the Company
announced the initiation of clinical studies at the Cleveland Clinic and entered
into a two-year agreement with the Duke Clinical Research Institute ("DCRI").
Under the terms of the agreement with the DCRI, it has agreed to refer the
Company's technology to any pharmaceutical company initiating clinical trials
for developmental anticoagulants that DCRI determines require monitoring. This
agreement actively involves the physician in the determination of how
therapeutics affecting coagulation will be managed.
The Company's strategy is to focus its theranostic test development efforts on
drugs in Phase II or Phase III development by the pharmaceutical company which
helps reduce development risk as these drugs have a greater chance of approval
than those just beginning clinical trials. Additionally, under this model the
pharmaceutical company pays for the clinical trials and provides the Company
access to the regulatory data associated with the test to be used in submitting
a 510(k). This approach is designed to allow the Company to cost-effectively
develop its tests.
The commercial success of the Company's products will depend upon their
acceptance by the medical community as being useful and cost-effective. Market
acceptance will depend upon several factors, including the establishment of the
utility and cost-effectiveness of the Company's tests and the receipt of
regulatory clearances in the United States and elsewhere. The availability of
point-of-care hemostasis test systems has been limited to date, so by selling
point-of-care hemostasis test products, the Company is targeting an essentially
new market. Diagnostic tests similar to those developed by the Company are
generally performed by a central laboratory at a hospital or clinic. The
approval of the purchase of diagnostic equipment by a hospital is generally
controlled by its central laboratory. The Company expects there will be
resistance by central laboratories to yield control of tests they have
previously performed. The Company will also have to demonstrate to physicians
that its diagnostic products perform as intended, meaning that the level of
accuracy and precision attained by the Company's products must be comparable to
test results achieved by central laboratory systems. Failure of the Company's
products to achieve market acceptance would have a material adverse effect on
the Company.
The Company is substantially dependent upon Bayer Diagnostics as its principal
distributor for marketing and distribution of its products. There can be no
assurance that Bayer Diagnostics will be successful in marketing or selling the
Company's products or that the Company could build a cost-effective and adequate
sales and marketing staff. The loss of one or more of the Company's distributors
or the inability to enter into agreements with new distributors to sell TAS
products in additional countries could have a material adverse effect on the
Company.
COMPETITION
The medical diagnostic testing industry is characterized by rapidly evolving
technology and intense competition. The currently marketed TAS menu competes in
the coagulation and hematology testing market with manufacturers providing
testing equipment to central and stat laboratories of hospitals, since such
laboratories currently perform a substantial portion of such testing, and with
other point-of-care coagulation and hematology test system manufacturers.
Laboratories provide some of the same tests performed by TAS; however, these
laboratory tests generally require the use of skilled technicians and complex,
expensive equipment. The Company believes that TAS offers several advantages
over these laboratory-based instruments, including faster results, ease-of-use,
reduced opportunity for error and cost-effectiveness.
CVDI has several competitors, including Roche Diagnostics (which acquired
Boehringer Mannheim Corporation in 1998), International Technidyne Corporation
("ITC") and Medtronic, that manufacture and market point-of-care coagulation and
hematology test systems. ITC, in particular, has a large installed base of
systems, which it has been selling for over 20 years. Despite the fact that the
Company believes that TAS competes favorably with these systems, ITC's installed
base could give it a competitive advantage. Although the market for
point-of-care coagulation and hematology test systems is in its early stages of
development, CVDI believes that potential customers will base their purchasing
decisions upon a combination of factors, including accuracy and precision,
speed, cost-effectiveness, data management, ease-of-use, compliance with CLIA
guidelines, and availability of a comprehensive test menu.
If CVDI introduces additional blood tests beyond its initial coagulation and
hematology tests, it will compete with other companies that market similar
products to hospitals for use in laboratories and at the point of patient care.
Other manufacturers and academic institutions may be conducting research and
development with respect to blood testing technologies and other companies may
in the future engage in research and development activities regarding products
competitive with those of the Company. Many of the companies in the medical
technology industry, including those listed above, have substantially greater
capital resources, research and development staffs, sales and manufacturing
capabilities and manufacturing facilities than the Company. Such entities may be
developing or could in the future attempt to develop additional products
competitive with TAS. Many of these companies also have substantially greater
experience than CVDI in research and development, obtaining regulatory
clearances, manufacturing and marketing, and may therefore represent significant
competition for the Company. There can be no assurance that CVDI's competitors
will not succeed in developing or marketing technologies and products that will
be more effective or less expensive than those being marketed by CVDI or that
would render CVDI's technology and products obsolete or noncompetitive.
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company pursues patent applications to provide protection from competitors.
A number of U.S. and corresponding international patents have been issued to
CVDI covering various aspects of the TAS technology. These patents expire
between 2004 and 2013. The Company has filed, and is pursuing, a number of
additional U.S. and international patent applications.
The Company's success will depend in part on its ability to enforce its patents,
to preserve its trade secrets and to operate without infringing the proprietary
rights of third parties. The Company's ability to protect its proprietary
position is also in part dependent on the issuance of additional patents on
current and future applications. No assurance can be given that any patent
applications will be issued, that the scope of any patent protection will
exclude competitors or provide competitive advantages to the Company, that any
of the Company's patents will be held valid if subsequently challenged or that
others will not claim rights in or ownership to the patents and other
proprietary rights held by the Company. Furthermore, others may have or will
develop similar products, duplicate the Company's products or design around the
Company's patents. If any relevant claims of third-party patents are upheld as
valid and enforceable, the Company could be prevented from practicing the
subject matter claimed in such patents or could be required to obtain licenses
from the patent owners of each of such patents or to redesign its products or
processes to avoid infringement. Such licenses may not be available or, if
available, could be on terms unacceptable to the Company.
The Company also relies upon unpatented trade secrets to protect its proprietary
technology. In particular, CVDI believes that its custom-designed automated test
card production line embodies proprietary process technology. Others may
independently develop or otherwise acquire equivalent technology or otherwise
gain access to CVDI's proprietary technology and CVDI may not ultimately be able
to protect meaningful rights to such unpatented proprietary technology. There
has been substantial litigation regarding patent and other intellectual property
rights in the medical device industry.
LICENSES
TOKUYAMA SODA LICENSE
CVDI is a party to a License Agreement with Tokuyama Soda Company, Ltd.
("Tokuyama") pursuant to which CVDI granted Tokuyama exclusive rights to
manufacture and sell PT and aPTT tests and analyzers in Myanmar, Brunei, Hong
Kong, Indonesia, Japan, Malaysia, China, Philippines, Taiwan, South Korea,
Singapore and Thailand (the "Tokuyama License"). The Tokuyama License requires
that CVDI negotiate in good faith with Tokuyama for 90 days prior to marketing
or licensing in these Asian nations any new products that CVDI develops related
to the licensed tests or analyzer technology.
Until the earlier of October 2004 or the expiration of the last Japanese patent
covering the licensed technology, Tokuyama must pay CVDI royalties based on
Tokuyama's net sales of licensed products, subject to annual minimums through
September 2000. CVDI can terminate the Tokuyama License if Tokuyama fails to
make a required payment or report (or makes a false report), or if Tokuyama
voluntarily ceases the manufacture and sale of licensed products for 12 months,
and if, in any such case, Tokuyama fails to remedy such default within 60 days
after notice thereof from CVDI.
In December 1995, CVDI and Tokuyama amended the Tokuyama License to, among other
things, provide the Company with the right to market PT and aPTT tests and
analyzers in an Asian country (other than Japan, Taiwan and South Korea) if
Tokuyama has not
attained annual net sales of $250,000 in the country by June 30, 1996 (or within
12 months of the time when export to such country becomes authorized). In the
event CVDI exercises this right, it and Tokuyama may both market in the country
and must each pay royalties to the other. To date, CVDI has not exercised this
right. The amendment also provides that CVDI owns all rights outside Asia to
Tokuyama improvements to the CVDI's technology, and must pay royalties to
Tokuyama based on CVDI net sales of products incorporating such improvements.
CVDI received royalty payments under this agreement of $89,507, $22,399 and
$30,741 during the years ended December 31, 1999, 1998, and 1997 , respectively.
MANUFACTURING
CVDI operates a manufacturing facility in Raleigh, North Carolina to assemble
TAS analyzers. Vendors currently provide all molded parts, mechanical components
and printed circuit boards. CVDI assembles the components and provides final
mechanical, electrical and chemistry testing of each analyzer. CVDI believes
that it has sufficient capacity to accommodate anticipated demand.
CVDI also operates proprietary automated test card production equipment at its
Raleigh facility. This automated production equipment was custom designed by
CVDI and built to its specifications. CVDI believes that this production
machinery embodies proprietary process technology. The equipment has been
designed to allow for increased production as dictated by customer demand.
Current annual manufacturing capacity is approximately 10 million cards.
The FDC Act requires the Company to manufacture its products in registered
establishments and in accordance with Good Manufacturing Practice ("GMP"), now
known as Quality System Regulations ("QSR"). CVDI is registered as a medical
device manufacturer and is subject to periodic inspections by the FDA. In
addition, CVDI has maintained ISO 9001 certification since 1997.
To be successful, the Company must manufacture its products in compliance with
regulatory requirements, in sufficient quantities and on a timely basis, while
maintaining product quality and acceptable manufacturing costs. The Company has
limited experience producing its products in large commercial quantities. The
Company may not be able to manufacture accurate and reliable products in large
commercial quantities on a timely basis and at an acceptable cost.
Most of the raw materials and components used to manufacture CVDI's TAS products
are readily available. However, certain of these materials are obtained from a
sole supplier or a limited group of suppliers. PIOP and some reagents used in
the TAS test cards are obtained from single sources. However, CVDI maintains
enough supply to produce test cards for an extended period of time. The Company
believes that, in the event of an interruption in the availability of supplies,
the Company has enough supply at its facility to fulfill its needs until an
alternative source can be procured. The Company seeks to maintain long-term
agreements with its suppliers when possible. The reliance on sole or limited
suppliers and the inability to maintain long-term agreements with suppliers
involves several risks, including the inability to obtain an adequate supply of
required raw materials and components and reduced control over pricing, quality
and timely delivery. Any interruption in supply could have a material adverse
effect on the Company.
GOVERNMENT REGULATION
FDA
The medical devices marketed and manufactured by the Company are subject to
extensive regulation by the FDA. Pursuant to the FDC Act, the FDA regulates the
clinical testing, manufacture, labeling, distribution and promotion of medical
devices. Noncompliance with applicable requirements can result in, among other
things:
o fines
o injunction
o civil penalties
o recall or seizure of products
o total or partial suspension of production
o failure of the government to grant premarket clearance or premarket approval
("PMA") for devices o withdrawal of marketing approvals or
o criminal prosecution.
The FDA also has the authority to request repair, replacement or refund of the
cost of any device manufactured or distributed by the Company.
Before a new device can be introduced into the market, the manufacturer must
generally obtain marketing clearance through either a 510(k) notification (a
"510(k)") or the more time-consuming PMA process. The Company believes that its
products qualify for the 510(k) approval process. Commercial distribution of a
device for which a 510(k) is required can begin only after the FDA issues an
order finding the device to be "substantially equivalent" to a predicate legally
marketed medical device. The FDA has recently been requiring a more rigorous
demonstration of substantial equivalence than in the past. It generally takes
from four to twelve months from submission of a 510(k) to obtain a 510(k)
clearance, but it may take longer. The FDA may determine that a proposed device
is not substantially equivalent to a legally marketed device, or that additional
information is needed before a substantial equivalence determination can be
made. A request for additional data may require that additional clinical studies
of the device's safety and efficacy be performed. A "not substantially
equivalent" determination or a request for additional information could delay
the market introduction of new products that fall into this category and could
have a material adverse effect on the Company's business, financial condition
and results of operations. For any of the Company's products that are cleared
through the 510(k) process, modifications or enhancements that could
significantly affect the safety or efficacy of the device or that constitute a
major change to the intended use of the device will require a new 510(k). If the
FDA requires the Company to submit a new 510(k) for any modification to the
device the Company may be prohibited from marketing the modified device until
the 510(k) is cleared by the FDA.
CVDI received 510(k) clearance to market its PT and aPTT test cards, along with
a first generation analyzer, in 1988. In 1993, CVDI received 510(k) clearance
for the current TAS analyzer to be marketed with PT and aPTT tests and received
510(k) clearance in May 1995 to commercially market the HMT test. CVDI received
510(k) clearance for PT, HMT and aPTT controls in 1996 and for PT-NC controls in
1997. During 1999, the Company received 510(k) clearance for its EQC card. In
January 2000, CVDI received 510(k) clearance for the HTT and PRT tests as well
as the Accent accessory for the TAS analyzer. CVDI submitted a 510(k) for its SK
Panel in September 1993. This submission was withdrawn in October 1994, after
consultation with the FDA, pending the conclusion of additional clinical
evaluations of the SK Panel. The SK Panel and LOT tests are currently available
to be sold in Europe for investigational use only in connection with clinical
evaluations of the safety and effectiveness of the products. In addition, CVDI
submitted a 510(k) application for the LHMT test card in December 1999. In
January 1998, CVDI submitted a 510(k) application for the ECT test card and in
August 1998, the FDA notified CVDI that it would require additional data before
commencing its review of this application. The Company currently plans to
resubmit the 510(k) after compiling the requested additional data. The Company
may not be able to obtain necessary regulatory approvals on a timely basis, or
at all, and delays in receipt of or failure to receive such approvals, the loss
of previously received approvals, or failure to comply with existing or future
regulatory requirements would have a material adverse effect on the Company's
business, financial condition and results of operations.
Pursuant to FDA policy, manufacturers of devices labeled "for investigational
use only" must establish a controlled program under which investigational
devices are distributed to or utilized only by individuals, laboratories or
healthcare facilities that have provided the manufacturer with a written
certification of compliance indicating that:
o the device will be used for investigational purposes only
o results will not be used for diagnostic purposes without confirmation of the
diagnosis under another medically established diagnostic device or procedure
o all investigations will be conducted with approval from an institutional
review board ("IRB"), using an IRB-approved study protocol, and patient
informed consent and
o the device will be labeled, and labeling will be maintained, in accordance
with the applicable labeling regulations
Failure of CVDI or recipients of CVDI's "investigational use only" products to
comply with these requirements could result in enforcement action by the FDA
that would adversely affect CVDI's ability to conduct testing necessary to
obtain market clearance and, consequently could have a material adverse effect
on the Company.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including recordkeeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their facilities and list their devices with the FDA, and are subject
to periodic inspections by the FDA and certain state agencies. The FDC Act
requires devices to be designed and manufactured in accordance with QSR
regulations which impose certain procedural and documentation requirements upon
the Company with respect to design, manufacturing and quality assurance
activities. The FDA has approved changes to the regulations which will and have
increased the cost of complying with QSR requirements.
Labeling and promotion activities are subject to scrutiny by the FDA and in
certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for unapproved uses.
REGULATIONS ON EXPORT
Export of products that have market clearance from the FDA in the United States
do not require FDA authorization. However, foreign countries often require an
FDA certificate for products for export (a "CPE"). To obtain a CPE, the device
manufacturer must certify to the FDA that the product has been granted clearance
in the United States and that the manufacturing facilities appeared to be in
compliance with QSRs at the time of the last FDA inspection. The FDA will refuse
to issue a CPE if significant outstanding QSR violations exist.
Export of products subject to the 510(k) requirements, but not yet cleared to
market, are permitted without FDA authorization provided certain requirements
are met. Unapproved products subject to the PMA requirements must be approved by
the FDA for export. To obtain FDA export approvals certain requirements must be
met and information must be provided to the FDA, including documentation
demonstrating that the product is approved for import into the country to which
it is to be exported and, in some instances, safety data from animal or human
studies. There can be no assurance that the FDA will grant export approval when
such approval is necessary, or that the countries to which the devices are to be
exported will approve the devices for import.
CVDI has obtained CPEs for the PT, PT One, aPTT and HMT tests and the TAS
analyzer. Failure of the Company to obtain a CPE for the export of its products
in the future could have a material adverse effect on the Company. Products
which the Company exports that do not have premarket clearance in the United
States include the SK Panel, the LOT test, the ECT test and the modified ECT
test. The Company believes that these products are subject to the 510(k)
requirements and, consequently, has not requested FDA approval for export.
However, there can be no assurance that the FDA would agree with the Company
that a 510(k) is needed rather than a PMA. If the FDA disagreed, it could
significantly delay and impair CVDI's ability to continue exporting these tests
and could have a material adverse effect on the Company.
FOREIGN REGULATIONS
Sales of the Company's test products outside the United States are also subject
to foreign regulatory requirements that vary widely from country to country.
These laws and regulations range from simple product registration requirements
in some countries to complex clearance and production controls in others. As a
result, the processes and time periods required to obtain foreign marketing
approval may be longer or shorter than those necessary to obtain FDA approval.
These differences may affect the efficiency and timeliness of international
market introduction of the Company's products, and there can be no assurance
that the Company will be able to obtain regulatory approvals or clearances for
its products in foreign countries. Delays in receipt of, or a failure to
receive, such approvals or clearances, or the loss of any previously received
approvals or clearances, could have a material adverse effect on the Company.
In order to market the Company's products in the member countries of the
European Union (the "EU"), the Company is required to comply with the European
Medical Devices Directive ("MDD") and to obtain CE Mark certification for the
TAS analyzer. The CE Mark denotes conformity with European standards for safety
and allows certified devices to be placed on the market in all EU countries.
Medical devices may not be sold in EU countries unless they display the CE Mark.
All of the applicable Company products marketed in Europe have obtained CE Mark
certification. There can be no assurance that the Company will be successful in
maintaining CE Mark certification of its products. The TAS Analyzer also must
and does meet the requirements of the Electromagnetic Capability Directive. In
Japan, the Company relies upon its collaborative partner, Tokuyama, to comply
with applicable regulations regarding the product listing, manufacture and sale
of products in that country. The Company believes that the Company's products
are in compliance with applicable regulations in Japan. Failure to maintain CE
Mark certification in Europe or to obtain or maintain other foreign regulatory
approvals could have a material adverse effect on the Company's business,
financial condition and results of operations.
CLIA
The Company's products are also subject to the requirements of CLIA (Clinical
Laboratories Improvement Amendments). This law requires all laboratories,
including those performing blood chemistry tests, to meet specified standards in
the areas of personnel qualification, administration, participation in
proficiency testing, patient test management, quality control, quality assurance
and inspections. The regulations have established three levels of regulatory
control based on test complexity -- "waived", "moderate complexity" and "high
complexity". The PT, aPTT and HMT tests performed by TAS have been categorized
by the FDA and the Centers for Disease Control and Prevention (the "CDC") as
moderate complexity tests. There can be no assurance that these tests will not
be recategorized, or that other tests performed by the TAS will not be
categorized as high complexity tests or that such a categorization will not have
a material adverse effect on the Company. Furthermore, there can be no assurance
that regulations under and future administrative interpretations of CLIA will
not have an adverse impact on the potential market for the Company's products.
Laboratories that perform either moderate or high complexity tests must meet
certain standards, with the major difference in requirements being quality
control and personnel standards. Quality control standards for moderate
complexity tests (not modified by laboratories) are being implemented in stages,
while laboratories performing high complexity and modified moderate complexity
tests currently must meet all of the quality control requirements. Personnel
standards for high complexity tests require that personnel have more education
and experience than personnel conducting moderate complexity tests. All
laboratories performing moderately complex or highly complex tests are required
to obtain either a registration certificate or certification of accreditation
from the Health Care Financing Administration. With certain specified
exceptions, each site for laboratory testing must file a separate application
and separately meet all CLIA requirements. Multiple laboratory sites within a
hospital located at contiguous buildings on the same campus and under common
direction may file a single application. As a result of the CLIA requirements,
hospitals may be discouraged from expanding point-of-care testing. Because CLIA
certification must be obtained by laboratories, the Company does not possess
sufficient data to make a determination as to the cost of certification to a
laboratory or the potential inhibiting effect of CLIA certification on the
purchase of the Company's products by laboratories.
OTHER REGULATIONS
The Company and its products are also subject to a variety of state and local
laws and regulations in those states or localities where its products are or
will be marketed. Any applicable state or local laws or regulations may hinder
the Company's ability to market its products in those states or localities. Use
of the Company's products will also be subject to inspection, quality control,
quality assurance, proficiency testing, documentation and safety reporting
standards pursuant to the Joint Commission on Accreditation of Healthcare
Organizations. Various states and municipalities may also have similar
regulations.
Manufacturers are also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations now or in the future or that such laws or regulations will not have
a material adverse effect upon the Company.
Changes in existing requirements or adoption of new requirements or policies
could adversely affect the ability of the Company to comply with regulatory
requirements.
REIMBURSEMENT
The Company's ability to commercialize its products successfully may depend in
part on the extent to which reimbursement for the cost of such products and
related treatment will be available from government health administration
authorities (such as the Health Care Financing Administration (the "HCFA")),
which determines Medicare reimbursement levels, private health insurers and
other organizations ("Payors"). Payors are increasingly challenging the prices
of medical products and services. Payors may deny reimbursement if they
determine that a prescribed device has not received appropriate FDA or other
governmental regulatory clearances, is not used in accordance with
cost-effective treatment methods, or is experimental, unnecessary or
inappropriate. Also, the trend towards managed healthcare in the United States
and the concurrent growth of organizations such as HMOs, which could control or
significantly influence the purchase of healthcare services and products, as
well as legislative proposals to reform healthcare or reduce government
insurance programs, may result in customers demanding lower prices for the
Company's TAS products. The cost containment measures that healthcare providers
are instituting and the impact of any healthcare reform could have an adverse
effect on the Company's ability to sell its products and may have a material
adverse effect on the Company.
Effective October 1991, HCFA adopted new regulations providing for the inclusion
of capital-related costs in the prospective payment system, under which
providers are reimbursed on a per-discharge basis at fixed rates unrelated to
actual costs, based on diagnostic related groups. Under this system of
reimbursement, equipment costs generally will not be reimbursed separately, but
rather, will be included in a single, fixed-rate, per-patient reimbursement.
These regulations are being phased in over a 10-year period, and, although the
full implications of these regulations cannot yet be known, the Company believes
that the new regulations will place more pressure on hospitals' operating
margins, causing them to limit capital expenditures. These regulations could
have an adverse effect on the Company's results of operations if hospitals
decide to defer obtaining medical equipment as a result of any such limitation
on their capital expenditures. The Company is unable to predict the effect on
the Company, if any, of additional government regulations, legislation or
initiatives or changes by other Payors affecting reimbursement or other matters
which may influence decisions to obtain medical equipment.
There can be no assurance that reimbursement in the United States or foreign
countries will be available for any of the Company's products, or that if
available it will not be decreased in the future, or that any reduction in
reimbursement amounts will not reduce the demand for or the price of the
Company's products. The unavailability of third-party reimbursement or the
inadequacy of the reimbursement for medical procedures using the Company's tests
would have a material adverse effect on the Company. Moreover, the Company is
unable to forecast what additional legislation or regulations, if any, relating
to the healthcare industry or third-party coverage and reimbursement may be
enacted in the future or what effect such legislation or regulations would have
on the Company.
DISCOUNTINUED OPERATIONS
In June 1999, the Company sold substantially all of the operating assets and
liabilities of Coeur Laboratories, Inc. ("Coeur") to Coeur Acquisition L.L.C., a
private investment firm financed by Bison Investments. Prior to this sale, the
Company operated Coeur as a manufacturer and seller of disposable power
injection syringes. Upon the sale of Coeur, the Company retained Coeur's cash,
receivables and certain other assets.
PRODUCT LIABILITY AND INSURANCE
The Company faces an inherent business risk of exposure to product liability
claims in the event that the use of its products is alleged to have resulted in
adverse effects. The Company maintains product liability insurance with coverage
of up to $11 million per claim, with an annual aggregate policy limit of $12
million. There can be no assurance that liability claims will not exceed the
coverage limits
of such policies or that such insurance will continue to be available on
commercially acceptable terms, or at all. Consequently, product liability claims
could have a material adverse effect on the company's business, financial
condition and results of operations.
EMPLOYEES
The Company had 69 employees as of December 31, 1999. Ten employees were engaged
in research and development (7 of which have Ph D's), 29 in manufacturing and
quality control, 14 in engineering, 8 in sales/marketing and 8 in
finance/administration. Many of the Company's executive and technical personnel
have had experience with biomedical diagnostics companies. None of the Company's
employees are covered by a collective bargaining agreement and the Company
believes that employee relations are good.
The Company's success depends to a significant extent upon management and
technical personnel, none of whom have employment agreements with the Company.
Although the Company maintains a $500,000 key man life insurance policy on its
chief executive officer, the loss of the service of this officer could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company also believes that its future success will
depend in large part upon its ability to attract and retain highly skilled
technical, management and sales and marketing personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. The Company's failure to
attract, hire and retain these personnel would have a material adverse effect on
the Company.
ITEM 2. PROPERTIES
The Company's executive offices are located at 5301 Departure Drive, Raleigh,
North Carolina 27616, and its telephone number is (919) 954-9871. The Company
occupies approximately 55,000 square feet of development, production and
administration space at that location pursuant to a facility lease that runs
through January 2001. The Company believes that its facilities are adequate for
its current needs and that suitable additional space will be available as
required.
ITEM 3. LEGAL PROCEEDINGS
In March 2000, the Company received a letter from Polyten Plastics LLC
("Polyten"), the parent company of the purchaser of substantially all of the
assets of the Company's Coeur Laboratories, Inc. subsidiary, tendering a claim
for indemnification against the Company for losses, if any, arising out of
claims filed by Medrad, Inc. against Liebel-Flarsheim Company ("LF"), Coeur
Laboratories, Inc. and others. The Medrad complaint asserts several claims,
including federal trademark dilution and patent misappropriation and
infringement, in connection with Coeur's manufacture and sale to LF, and LF's
subsequent sale of adapters and syringes for use with medical injection delivery
systems allegedly manufactured by Medrad. Although Polyten has not yet been
named in the lawsuit, it has asserted the right to indemnification from the
Company in the event it sustains any losses from this litigation based on the
grounds that Polyten did not assume liability for the alleged infringement in
connection with its purchase of the Coeur assets. Although the Company cannot
guarantee its success on the merits of this matter, the Company believes the
Medrad claims are unsubstantiated and intends to defend, and/or assist in the
defense, of the claims vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the fourth
quarter ended December 31, 1999.
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth information with respect to all the executive officers
of the Company, including their names, ages, positions with the Company and
business experience during the last five years as of March 31, 2000.
John P. Funkhouser, age 46, was elected President, Chief Executive Officer and a
director of the Company in October 1993 upon the Company's acquisition of Coeur.
In February 1998, Mr. Funkhouser was appointed Chairman of the Board of
Directors of the Company. Mr. Funkhouser has also served as President and Chief
Executive Officer of Coeur from 1992 until completion of the sale of Coeur in
June 1999. Before his employment with Coeur, Mr. Funkhouser was a General
Partner with Hillcrest Group, a venture capital firm, and worked for over nine
years in managing venture capital portfolio companies. Mr. Funkhouser holds a
B.A. from Princeton University and an M.B.A. from the University of Virginia.
Dick D. Timmons II, age 54, was elected Vice President and Chief Operating
Officer of the Company in January 1998. Since October 1997, Mr. Timmons had
served as Vice President of Manufacturing of the Company. Before joining the
Company, Mr. Timmons spent 22 years in operations and product development
positions of increasing responsibility with the Diagnostic Products Division of
Abbott Laboratories and Johnson & Johnson. From 1994 until October 1997, he
served as Director of Operations at Direct Access Diagnostics, an HIV testing
service, and from 1988 until 1994, he was Director of Technology Transfer at
Ortho Diagnostics Systems, a medical diagnostic test company. Mr. Timmons holds
a B.S. in Industrial Engineering from Purdue University and an M.B.A. from Lake
Forest School of Management.
Michael D. Riddle, age 46, has been Executive Vice President of Sales,
Marketing, and Business Development since January 1999. Mr. Riddle also served
as Vice President, Sales and Marketing, from January 1995 to January 1999. Prior
to joining the Company, Mr. Riddle was employed by American Home Products for
seven years in various positions, most recently as Vice President of Sales and
Marketing for Sherwood Medical Devices. Mr. Riddle attended Bromley College of
Technology (Kent, United Kingdom).
Peter J. Scott, age 51, joined the Company as its Vice President of Quality
Assurance and Regulatory Affairs in October 1997. Prior to joining the Company,
Mr. Scott was employed by Gaymar Industries Inc., a medical device company, for
seven years as Director of Quality Assurance and Regulatory Affairs. Mr. Scott
holds a B.S. from Tusculum College and an M.B.A. from Mt. St. Mary's College,
and is a Certified ASQ Quality Engineer.
Cynthia Pritchard, Ph.D., age 48, has served as Executive Director of Research
and Development since 1997. Dr. Pritchard has been director and principal
scientist since joining the Company in 1992. Prior to joining the Company, Dr.
Pritchard had over 20 years in diagnostic test development experience with Syva,
Serono, Becton Dickenson and Gene-Trak Systems. Dr. Pritchard holds a B.A. in
Bacteriology from the University of South Florida and a Ph. D. In Biochemistry
from Virginia Tech.
Paul T. Storey, age 33, was elected Treasurer and Secretary in February 1998.
Since December 1997, Mr. Storey has also served as Director of Finance of the
Company. Prior to joining the Company, Mr. Storey was employed for more than
eight years at KPMG Peat Marwick LLP, most recently as a senior manager. Mr.
Storey is a Certified Public Accountant and holds a B.A. in Accounting from
Furman University.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Price Range of Common Stock
The common stock of the Company's subsidiary, Cardiovascular
Diagnostics Inc., traded on the Nasdaq National Market under the
symbol "CVDI" until the holding company reorganization effected on
December 2, 1998, after which the Company's common stock began trading
on the Nasdaq National Market under the symbol "PHAR". The following
sets forth the quarterly high and low closing sales prices of the
common stock of CVDI and the Company, as applicable, for the fiscal
years ended December 31, 1999 and 1998 as reported by Nasdaq. These
prices are based on quotations between dealers, which do not reflect
retail mark-up, mark-down or commissions, and do not necessarily
represent actual transactions.
High Low
Fiscal year ended December 31, 1999
First Quarter $6 2 5/8
Second Quarter 7 3 3/4
Third Quarter 7 13/16 4 1/2
Fourth Quarter 9 1/4 4 13/16
Fiscal year ended December 31, 1998
First Quarter $9 6 3/8
Second Quarter 8 1/2 5
Third Quarter 7 3/4 4 7/8
Fourth Quarter 7 3/4 3 5/8
(b) Approximate Number of Equity Security Holders
As of December 31, 1999, the number of record holders of the Company's Common
Stock was approximately 150, and the Company believes that the number of
beneficial owners was approximately 1,700.
(c) Dividends
The Company has never paid a cash dividend on its Common Stock and anticipates
that for the foreseeable future any earnings will be retained for use in its
business and, accordingly, does not anticipate the payment of cash dividends on
its Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data presented below summarizes certain financial data
and should be read in conjunction with the more detailed financial statements of
the Company and the notes thereto included elsewhere in this Annual Report on
Form 10-K along with said financial statements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business".
PHARMANETICS, INC. AND SUBSIDIARIES
Selected Consolidated Financial Data (in thousands, except per share data)
Year Ended
December 31,
------------
RESULTS OF OPERATIONS 1999 1998 1997 1996 1995
--------- -------- -------- -------- ---------
Net sales $3,909 $4,141 $2,924 $1,830 $ 584
Cost of goods sold 3,179 2,847 2,845 1,827 881
Gross profit 730 1,294 79 3 (297)
Operating expenses:
General and administrative 2,715 2,815 3,204 2,564 1,884
Sales and marketing 799 707 1,316 1,855 1,241
Research and development 2,777 2,509 2,440 2,229 1,775
Total operating expenses 6,291 6,031 6,960 6,648 4,900
Other income, net 147 514 1,421 851 458
Net loss from continuing operations (5,414) (4,223) (5,460) (5,794) (4,739)
Discontinued operations:
Income from operations 18 580 781 673 787
Loss on disposal (826) - - - -
--------- -------- -------- -------- ---------
Net loss $(6,222) $(3,643) $(4,679) $(5,121) $(3,952)
--------- -------- -------- -------- ---------
Basic and diluted loss per common share
From continuing operations $(0.72) $(0.60)` $(0.81) $(0.88) $(0.89)
Net loss $(0.83) $(0.52) $(0.70) $(0.78) $(0.74)
Weighted average shares outstanding 7,469 7,007 6,722 6,566 5,323
As of December 31,
------------------
FINANCIAL CONDITION 1999 1998 1997 1996 1995
--------- -------- -------- -------- ---------
Cash and cash equivalents $3,661 $3,998 $5,885 $2,716 $16,237
Short term investments 1,500 3,703 - 5,973 -
Total assets 11,647 18,693 17,685 18,351 23,986
Long term debt, excluding current
portion 862 1,626 2,351 67 499
Total liabilities 2,039 2,949 4,492 683 2,176
Accumulated deficit (30,484) (24,262) (20,619) (15,940) (10,819)
Shareholders' equity $9,608 $15,744 $13,193 17,668 21,810
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This discussion contains forward-looking statements. The Company's actual
results might differ materially from those projected in the forward-looking
statements for various reasons, including market acceptance risk, development
and clinicial trials risk, the possibility of pressure from managed care
hospitals to decrease prices, the availability of products from vendors, the
timing of orders from customers, the ability to determine proper inventory
levels, dependence on third party distributors and collaborative partners and
the possibility of additional competition entering the point-of-care hemostasis
monitoring market. Additional information concerning factors that could cause
actual results to materially differ from those in the forward-looking statements
is contained herein (including under the heading " -- Factors That May Affect
Future Results") and in the Company's other SEC filings, copies of which are
available upon request.
PharmaNetics, Inc., through its wholly-owned subsidiary Cardiovascular
Diagnostics ("CVDI"), develops, manufactures and markets rapid turnaround
diagnostics to assess blood clot formation and dissolution. CVDI's products are
a proprietary cardiovascular analyzer and dry chemistry tests (known as the
"Thrombolytic Assessment System" or "TAS") that provide, at the point of patient
care, rapid and accurate evaluation of hemostasis. CVDI is also establishing
itself in the emerging field of theranostics, or rapid near-patient testing, in
which the diagnostic results may influence treatment decisions. Current tests
and tests under development are used in the treatment of angina, heart attack,
stroke, deep vein thrombosis and pulmonary and arterial emboli. The Company is
located in Raleigh, North Carolina, within a 55,000 square foot facility housing
office space, research labs and manufacturing clean rooms.
In June 1999, the Company sold substantially all of the operating assets and
liabilities of Coeur Laboratories, Inc. ("Coeur") to Coeur Acquisition L.L.C., a
private investment firm financed by Bison Investments. Prior to this sale, the
Company operated Coeur as a manufacturer and seller of disposable power
injection syringes. Upon the sale of Coeur, the Company retained Coeur's cash,
receivables and certain other assets.
The Company currently derives income from the following sources: TAS product
sales; interest income; and development income recognized in connection with
collaboration agreements. Coeur product sales in 1999, 1998 and 1997 represented
32%, 53% and 62%, respectively, of total Company sales.
The TAS technology is used at the point of patient care which provides many
potential benefits, including faster results for better treatment of patients,
reduced usage of blood products for bleeding complications, quicker patient
transfers from costly critical care settings and reduced hospital costs due to
less paperwork and personnel time in processing blood samples. Currently,
product sales mainly consist of the Company's routine test cards, the PT, aPTT
and HMT tests along with the related controls and analyzers. Upon introduction
of these products in 1993 and 1995, the Company distributed the products through
a direct sales force. However, given a consolidating hospital industry, CVDI
determined that distribution arrangements, rather than a direct sales force,
were needed to penetrate the market. In August 1998 CVDI signed a global
distribution agreement with Chiron Diagnostics, now known as Bayer Diagnostics,
which has replaced or will replace the distribution agreements which existed
prior to such date. Bayer's strength is in critical care areas of the hospital
which should facilitate the placement of the TAS technology.
In addition, the Company's strategy has evolved towards becoming more focused on
the development of specialty tests for drugs, some with narrow ranges between
over- and under-dosage. Rapid diagnostic capabilities may improve patient care
and turnover, and there is a market trend to obtain diagnostic information
faster in order to effect therapy sooner. The Company believes that physicians
are beginning to see the need for drug management tools and consequently, the
Company is seeking greater involvement of physician thought leaders during
development. The Company also believes that these trends should allow the
Company to obtain higher pricing of these specialty tests. As a result, the
Company exhibited the flexibility of the TAS platform and the potential to
expand its menu of specialty tests by signing collaboration agreements with
Knoll AG, AstraZeneca and Aventis to monitor the effects of certain new drugs
that are in clinical trials or currently being marketed. Increased placement of
specialty tests may also further demand for analyzers and routine anticoagulant
tests. The Company believes it is well positioned in its development efforts to
expand its menu of tests to monitor developmental drugs where rapid therapeutic
intervention is needed.
RESULTS OF OPERATIONS
All prior period financial information has been restated to present the results
of operations of Coeur as a discontinued segment.
YEAR ENDED DECEMBER 31, 1999 VS. YEAR ENDED DECEMBER 31, 1998. Sales for the
year ended December 31, 1999 decreased 6% to $3.9 million compared to $4.1
million in 1998. This decline was largely attributable to decreased analyzer
revenue from Knoll in 1999 compared to 1998. Of total analyzer revenue in 1998
of $1.5 million, $1.4 million was the result of sales to Knoll for their
clinical trials. Total analyzer revenue in 1999 was $795,000. 1999 revenue from
test card sales totaled $2.8 million, a 16% increase compared to 1998. The gross
profit margin in 1999 was 19% compared to 31% in 1998 mainly due to lower
average sale prices for TAS analyzers and routine cards.
Total operating expenses for 1999 of $6.3 million represents an increase of 4%
compared to 1998. General and administrative expenses declined slightly compared
to 1998, which included one-time expenses related to the formation of the
holding company. Sales and marketing expenses increased slightly due to higher
personnel costs compared to 1998. Research and development expenses increased
approximately 11% in 1999 compared to 1998. The change was primarily due to
increased personnel costs.
Interest expense for the year ended December 31, 1999 decreased to $313,000
compared to $378,000 in the prior year as the Company continued to pay down its
debt. Interest income decreased slightly in 1999 compared to 1998 due to
decreased average investment balances during the year as funds were used to
support operations.
Grant and development income decreased in 1999 approximately $543,000 compared
to 1998. The decrease in grant income was expected as the Company's NIH grant
expired during 1998. Development income also decreased as fewer milestones
related to
collaborative agreements were reached during 1999 compared to 1998.
YEAR ENDED DECEMBER 31, 1998 VS. YEAR ENDED DECEMBER 31, 1997. Sales for the
year ended December 31, 1998 increased 42% to $4.1 million compared to $2.9
million in 1997. TAS analyzer revenue increased in 1998 approximately $239,000
to $1.5 million. The increase was due to a large order from Knoll received early
in the year offset by decreases in sales to Dade, the Company's primary
distributor until December 1998. Test card revenue of approximately $2.4 million
represented an increase of approximately $856,000, principally due to sales of
specialty cards to Knoll and Astra. The gross profit margin in 1998 was 31%
compared to 5% in 1997, the increase attributable to higher volumes of test
cards and higher average sale prices for analyzers and test cards.
Total operating expenses for 1998 of $6.0 million represent a decrease of
approximately $900,000 or 13% compared to 1997. General and administrative
expenses declined due to lower litigation expenses and fewer personnel. Sales
and marketing expenses also declined due to fewer personnel and the elimination
of a sales office in Germany in late 1997. The reduced personnel also led to
decreased travel costs compared to 1997. Research and development expenses
increased approximately 2% in 1998 compared to 1997, primarily due to increased
personnel costs and slightly higher supply costs.
Interest expense for the year ended December 31, 1998 was $378,000 compared to
$2,000 in the prior year. The increase was due to the long-term debt financing
obtained by the Company in December 1997. Interest income decreased
approximately $63,000 in 1998 compared to 1997 due to decreased investment
balances during the year as funds were used to support operations.
Grant and development income in 1998 was approximately $643,000, a $460,000
decrease compared to 1997. The decrease in grant income was expected as the
Company's NIH grant expired during 1998. Development income also decreased as
fewer milestones related to collaborative agreements were reached during 1998
compared to 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents and short-term
investments of $5.2 million and working capital of $6.5 million, as compared to
$7.7 million and $11.1 million, respectively, at December 31, 1998. The
Company's cash position was increased during the year due to the sale of Coeur,
more than offset by the funding of operating losses and repayment of debt.
During 1999, the Company used cash in operating activities of $3.1 million. The
use of cash was due to funding the net operating loss of the Company, partially
offset by funding provided by decreased receivables and inventories.
Net cash provided by investing activities was $3.5 million in 1999. The net cash
provided in 1999 resulted mainly from the maturities of short-term investments
and the proceeds from the sale of Coeur. These inflows were offset by capital
expenditures for 1999 of $404,000. These capital expenditures were primarily for
additional automated TAS test card production equipment and leasehold
improvements. The Company expects to incur capital expenditures of $400,000 to
$500,000 during 2000.
Cash used in financing activities was $709,000 in 1999. Net cash used in
financing activities for 1999 resulted from debt repayments and payments under
capital leases.
The Company expects to incur additional operating losses during 2000. The
Company's working capital requirements will depend on many factors, primarily
the volume of subsequent orders of TAS products from distributors, primarily
Bayer Diagnostics. In addition, the Company expects to incur costs associated
with clinical trials for new test cards. The Company may acquire other products,
technologies or businesses that complement the Company's existing and planned
products, although the Company currently has no understanding, commitment or
agreement with respect to any such acquisitions. In addition, the Company may
consider a joint venture or the sale of manufacturing rights to complete the
commercialization of its routine anticoagulant monitoring tests. Management
believes that its existing capital resources and cash flows from operations,
including that from under its distribution agreement with Bayer Diagnostics,
will be adequate to satisfy its planned capital requirements through 2000. As
discussed below, the Company completed a private placement of equity in February
2000 that improved the Company's liquidity. If additional liquidity becomes
necessary in the future, the Company will consider external sources of financing
as needed. These financings may take the form of equity financings such as a
private placement, a secondary public offering of common stock or additional
equity infusions from collaborative partners, as well as debt financings such as
a working capital line of credit.
RECENT DEVELOPMENTS
In February 2000, the Company completed a $12 million private placement of
preferred stock convertible into common stock at $10 per share, together with
attachable five-year warrants to purchase an additional 240,000 shares of common
stock at $10 per share, to selected institutional and accredited investors. The
Company plans to use the proceeds to complete its test development of existing
projects as well as to pursue new opportunities for therapeutic management.
YEAR 2000 COMPLIANCE
The Company suffered no disruption of operations or adverse events in regards to
the Year 2000. In addition, to the Company's knowledge, no adverse events were
experienced by key suppliers or customers that impacted operations or future
plans of the Company. Expenses related to the Company's Year 2000 compliance
program, mainly related to internal personnel time, totaled approximately
$60,000, and were expensed as incurred.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS 133 is
effective for financial statements for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company does not currently engage in
derivative or hedging structures.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 impacts the recognition of revenue in relation to payments received under
research and development arrangements. Recognition of revenue for up-front
payments related to non-contingent research and development reimbursement is
deferred and recognized over the period of development. The Company will
implement the provisions of SAB 101 as necessary during 2000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that may affect the Company's future operating
results and stock price, including: risks associated with development of new
tests, particularly specialty tests that rely on development, regulatory
approval, commercialization and market acceptance of collaborators' new drugs;
market acceptance of TAS; the Company's continuing losses and the resulting
potential need for additional capital in the future; managed care and continuing
market consolidation, which may result in price pressure, particularly on
routine tests; and FDA regulations and other regulatory guidelines affecting the
Company and/or its collaborators. The market price of the common stock could be
subject to significant fluctuations in response to variations in the Company's
quarterly operating results as well as other factors which may be unrelated to
the Company's performance. The stock market in recent years has experienced
extreme price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of and announcements concerning
public companies. Such broad fluctuations may adversely affect the market price
of the Company's common stock. Securities of issuers having relatively limited
capitalization or securities recently issued in an initial public offering are
particularly susceptible to volatility based on short-term trading strategies of
certain investors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the normal course of business, the Company is exposed to variety of risks
including market risk associated with interest rate movements. The Company's
exposure to market risk for changes in interest rates relates primarily to the
Company's investment portfolio and long-term debt. The Company's investments
consist of highly liquid investments with maturities at the date of purchase
between three and nine months. Due to the short-term nature of the Company's
debt investments and the Company's intention to hold these investments until
maturity, the impact of interest rate changes would not have a material impact
on the Company's results of operations. In addition, the Company has long-term
debt obligations at a fixed interest rate. Given the fixed rate nature of this
debt, the impact of interest rate changes also would not have a material impact
on the Company's results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
Certain information required by Part III is omitted from this report because the
Registrant intends to file a definitive proxy statement for its 2000 Annual
Meeting of Shareholders (the "Proxy Statement") within 120 days after the end of
its fiscal year pursuant to Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended, and the information included therein is
incorporated herein by reference to the extent provided below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K concerning the Registrant's
executive officers is set forth under the heading "Executive Officers of the
Company" located at the end of Part I of this Form 10-K.
The other information required by Item 10 of Form 10-K is incorporated by
reference to the information under the headings "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference to
the information under the heading "Proposal No. 1- Election of
Directors-Information Concerning the Board of Directors and Its Committees",
"Other Information - Compensation of Executive Officers", "Compensation of
Directors", "Report of the Compensation Committee on Executive Compensation",
"Compensation Committee Interlocks and Insider Participation", and "Performance
Graph" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by reference to
the information under the heading "Other Information - Principal Shareholders"
in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by reference to
the information under the heading "Other Information - Certain Transactions" in
the Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following Financial Statements, Financial Statement Schedules and
Exhibits are filed as part of this report or incorporated herein by reference:
(1) Financial Statements.
See Index to Consolidated Financial Statements on page F-1.
(2) Financial Statement Schedules.
Schedule II, Valuation and Qualifying Accounts, is found on page S-1 of this
Form 10-K.
All other schedules for which provision is made in Regulation S-X are not
required under the related instructions, are inapplicable, or the required
information is given in the financial statements, including the notes thereto
and therefore, have been omitted.
(3) Exhibits Filed.
Exhibit
Number Description
3.3(a) Bylaws.
3.4(f) Amended and Restated Articles of Incorporation filed
with the North Carolina Secretary of State on
February 24, 2000
4.1(a) Form of Common Stock certificate.
10.2(a)* License Agreement with Tokuyama Soda Company, Ltd.,
dated October 6, 1988.
10.3(a) Form of International Distributor Agreement.
10.4(a)* Purchasing Agreement with VHA Inc., dated April
1,1995
10.5(a) Lease Agreement dated November 21, 1990 relating to
5301 Departure Drive, Raleigh, as amended.
10.8(a) 1994 Stock Plan, as amended.
10.9(a) 1995 Stock Plan, as amended.
10.10(a)* License Agreement with Duke University, dated
January 22, 1993.
10.18(b)* Amendment Agreement, dated December 14, 1995, to
License Agreement with Tokuyama Soda Company, Ltd.
10.19(c)* Distribution Agreement, dated October 18, 1996, with
Dade International.
10.20(d)* Patent Sublicense Agreement, dated December 1, 1996,
with Knoll AG.
10.21(d) Development Agreement, dated August 21, 1996, with
Bayer Corporation.
10.22(e)* Distribution Agreement with Chiron Diagnostics
Corporation dated August 28, 1998
10.23(e) Common Stock Purchase Agreement with Chiron
Diagnostics Corporation dated August 28, 1998
10.24(f) Series A Preferred Stock and Warrant Purchase
Agreement dated February 24, 2000
10.25(f) Form of Warrant between the Company and the Series A
Investors dated February 25, 2000
21.1(a) List of Subsidiaries.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
* Confidential treatment requested
(a) Incorporated herein by reference to the identically-numbered exhibits to
the Registrant's Registration Statement on Form S-1 (Registration No.
33-98078) initially filed October 12, 1995, as amended.
(b) Incorporated herein by reference to the identically-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995
(c) Incorporated herein by reference to the identically-numbered exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996
(d) Incorporated herein by reference to the identically-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996
(e) Incorporated herein by reference to the identically-numbered exhibit to the
Registrant's Registration Statement on Form S-4 (No. 333-66017) as filed
with the SEC on October 22, 1998
(f) Incorporated by reference to the identically-numbered exhibit to the
Registrant's Current Report on Form 8-K filed March 1, 2000
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.
PHARMANETICS, INC.
Date: By: /s/ John P. Funkhouser
-----------------------
John P. Funkhouser
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/ John P. Funkhouser President, Chief Executive Officer and Chairman 3/27/2000
- ------------------------- (Principal Executive Officer) ---------
John P. Funkhouser
/s/ Paul T. Storey Treasurer and Director of Finance 3/27/2000
- ------------------------- (Principal Financial and Accounting ---------
Paul T. Storey Officer)
/s/ William A. Hawkins Director 3/27/2000
- ------------------------- ---------
William A. Hawkins
/s/ John K. Pirotte Director 3/27/2000
- ------------------------- ---------
John K. Pirotte
/s/ Stephen R. Puckett Director 3/27/2000
- ------------------------- ---------
Stephen R. Puckett
/s/ Philip R. Tracy Director 3/27/2000
- ------------------------- ---------
Philip R. Tracy
/s/ Frances L. Tuttle Director 3/27/2000
- ------------------------- ---------
Frances L. Tuttle
PHARMANETICS, INC.
AND SUBSIDIARIES
INDEX
Page(s)
Consolidated Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7 - F-16
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
PharmaNetics, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity, and cash flows
present fairly, in all material respects, the financial position of
PharmaNetics, Inc. and subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 of these statements in accordance with auditing standards generally
accepted in the United States, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Raleigh, North Carolina
March 7, 2000
F-2
PHARMANETICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
ASSETS 1999 1998
------------ ------------
Current assets:
Cash and cash equivalents $ 3,660,906 $ 3,997,916
Short term investments, held-to-maturity (estimated
market value of $1,498,590 and $3,706,075, respectively) 1,500,000 3,703,119
Receivables:
Trade, net of allowance for doubtful accounts of $29,556
and $14,226, respectively 823,338 1,797,279
Other 142,943 271,256
------------ ------------
Total receivables 966,281 2,068,535
Inventories 1,329,493 2,397,434
Other current assets 190,500 299,236
------------ ------------
Total current assets 7,647,180 12,466,240
Property and equipment, net 3,203,117 4,542,924
Patents and intellectual property, net 568,718 1,546,956
Other noncurrent assets 227,917 137,091
------------ ------------
$ 11,646,932 $ 18,693,211
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 209,724 $ 429,237
Accrued expenses 171,849 168,694
Current portion of long-term debt 785,544 723,873
Current portion of capital lease obligations 9,396 1,020
------------ ------------
Total current liabilities 1,176,513 1,322,824
------------ ------------
Long-term debt, less current portion 840,739 1,626,283
Capital lease obligations, less current portion 21,399 --
------------ ------------
Total noncurrent liabilities 862,138 1,626,283
------------ ------------
Total liabilities 2,038,651 2,949,107
------------ ------------
Commitments and contingencies (Notes 9 and 16)
Shareholders' equity:
Preferred stock, no par value; authorized 1,000,000 shares - Series A
participating preferred stock, voting; no shares issued or outstanding at
December 31, 1999 and 1998
Common stock, $.001 par value; authorized 10,000,000 shares; 7,480,919 and
7,452,781 issued and outstanding at December
31, 1999 and 1998, respectively 7,481 7,453
Additional paid-in capital 40,085,212 40,009,593
Accumulated deficit (30,484,412) (24,261,942)
Unearned compensation -- (11,000)
------------ ------------
Total shareholders' equity 9,608,281 15,744,104
------------ ------------
$ 11,646,932 $ 18,693,211
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
PHARMANETICS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Net sales $ 3,909,379 $ 4,140,763 $ 2,924,008
----------- ----------- -----------
Cost of sales:
Materials and labor 1,226,004 1,076,173 1,579,525
Overhead 1,953,291 1,770,455 1,265,689
----------- ----------- -----------
Total cost of sales 3,179,295 2,846,628 2,845,214
----------- ----------- -----------
Gross profit 730,084 1,294,135 78,794
----------- ----------- -----------
Operating expenses:
General and administrative 2,715,272 2,814,506 3,203,971
Sales and marketing 798,792 707,143 1,315,266
Research and development 2,777,274 2,509,160 2,440,286
----------- ----------- -----------
Total operating expenses 6,291,338 6,030,809 6,959,523
----------- ----------- -----------
Loss from operations (5,561,254) (4,736,674) (6,880,729)
----------- ----------- -----------
Other income (expense):
Interest expense (312,856) (377,966) (1,638)
Interest income 270,304 225,806 288,531
Grant income -- 137,993 278,121
Development income 100,000 505,000 825,000
License fee and royalty income 89,507 22,399 30,741
----------- ----------- -----------
Other income, net 146,955 513,232 1,420,755
----------- ----------- -----------
Loss from continuing operations (5,414,299) (4,223,442) (5,459,974)
Discontinued operations:
Income from operations of Coeur Laboratories, Inc.
(net of income taxes of $13,685, $67,250
and $82,083, respectively) 17,922 580,289 780,763
Loss on disposal of Coeur Laboratories, Inc.
(including income taxes of $14,000) (826,093) -- --
----------- ----------- -----------
Net loss (6,222,470) (3,643,153) (4,679,211)
Other comprehensive loss -- -- (48,078)
----------- ----------- -----------
Net and comprehensive loss $(6,222,470) $(3,643,153) $(4,727,289)
=========== =========== ===========
Basic and diluted net loss per common share:
From continuing operations $ (0.72) $ (0.60) $ (0.81)
=========== =========== ===========
From discontinued operations $ (0.11) $ .08 $ .11
=========== =========== ===========
Basic and diluted net loss per common share $ (0.83) $ (0.52) $ (0.70)
=========== =========== ===========
Weighted average number of outstanding common shares 7,469,461 7,007,390 6,722,491
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
PHARMANETICS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1999, 1998 and 1997
Additional Accumulated
Number of Common Paid-In Other Comprehensive Accumulated
Shares Stock Capital (Income) Loss Deficit
---------- ------------ ------------ ----------------- --------------
Balances at December 31, 1996 6,663,986 $ 6,664 $ 33,682,330 $(48,078) $(15,939,578)
Stock options exercised 86,532 86 144,417
Amortization of unearned compensation
Net loss for the year ended
December 31, 1997 (4,679,211)
Other comprehensive loss 48,078
---------- ------------ ------------ ----------------- --------------
Balances at December 31, 1997 6,750,518 6,750 33,826,747 -- (20,618,789)
Issuance of 600,000 shares of common stock to
Chiron Diagnostics 600,000 600 5,999,400
Stock options exercised 90,263 91 106,958
Stock-based compensation 12,000 12 76,488
Amortization of unearned compensation
Net loss for the year ended
December 31, 1998 (3,643,153)
---------- ------------ ------------ ----------------- --------------
Balances at December 31, 1998 7,452,781 7,453 40,009,593 -- (24,261,942)
Stock options exercised 16,138 16 24,631
Stock-based compensation 12,000 12 50,988
Amortization of unearned compensation
Net loss for the year ended
December 31, 1999 (6,222,470)
---------- ------------ ------------ ----------------- --------------
Balances at December 31, 1999 7,480,919 $ 7,481 $ 40,085,212 $ -- $(30,484,412)
========== ============ ============ ================= ==============
Total
Unearned Shareholders'
Compensation Equity
------------ -------------
Balances at December 31, 1996 $ (33,000) $ 17,668,338
Stock options exercised 144,503
Amortization of unearned compensation 11,000 11,000
Net loss for the year ended
December 31, 1997 (4,679,211)
Other comprehensive loss 48,078
------------ -------------
Balances at December 31, 1997 (22,000) 13,192,708
Issuance of 600,000 shares of common stock to
Chiron Diagnostics 6,000,000
Stock options exercised 107,049
Stock-based compensation 76,500
Amortization of unearned compensation 11,000 11,000
Net loss for the year ended
December 31, 1998 (3,643,153)
------------ -------------
Balances at December 31, 1998 (11,000) 15,744,104
Stock options exercised 24,647
Stock-based compensation 51,000
Amortization of unearned compensation 11,000 11,000
Net loss for the year ended
December 31, 1999 (6,222,470)
------------ -------------
Balances at December 31, 1999 $ -- $ 9,608,281
============ =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
PHARMANETICS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows For
the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(6,222,470) $(3,643,153) $(4,679,211)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock based compensation 51,000 76,500 --
Depreciation and amortization 890,424 906,311 775,510
Amortization of intangible assets 222,850 250,043 196,434
Loss on disposal of Coeur Laboratories, Inc. 826,093 -- --
Amortization of discount on investments, net (46,881) (43,650) (22,743)
Amortization of unearned compensation 11,000 11,000 11,000
Provision for doubtful accounts -- 11,228 --
Provision for inventory obsolescence 95,462 147,000 220,000
Gain on disposal of fixed assets -- -- (2,276)
Change in operating assets and liabilities:
Receivables 1,066,777 (192,091) (596,148)
Inventories 261,365 306,172 (1,199,254)
Other assets (91,621) (28,330) 6,661
Accounts payable and accrued expenses (145,880) (1,003,629) 1,004,612
----------- ----------- -----------
Net cash used in operating activities (3,081,881) (3,202,559) (4,285,415)
----------- ----------- -----------
Cash flows (used in) from investing activities:
Purchases of property and equipment (404,452) (511,110) (1,494,564)
Proceeds from sales of property and equipment -- -- 3,433
Costs incurred to obtain patents and other intangibles (52,849) (81,458) (63,969)
Purchases of short-term investments, held to maturity (3,250,000) (3,659,469) (2,503,852)
Proceeds from maturities of investments 5,500,000 -- 8,500,000
Proceeds from sale of segment 1,661,150 -- --
----------- ----------- -----------
Net cash (used in) provided by investing activities 3,453,849 (4,252,037) 4,441,048
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- -- 3,005,404
Principal payments on long-term debt and capital
lease obligations (733,625) (539,059) (185,338)
Proceeds from exercise of stock options 24,647 107,049 144,503
Proceeds from issuance of stock to Chiron Diagnostics -- 6,000,000 --
----------- ----------- -----------
Net cash (used in) provided by financing activities (708,978) 5,567,990 2,964,569
----------- ----------- -----------
Effect of exchange rates on cash -- -- 48,078
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents (337,010) (1,886,606) 3,168,280
Cash and cash equivalents at beginning of year 3,997,916 5,884,522 2,716,242
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,660,906 $ 3,997,916 $ 5,884,522
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest expense $ 334,467 $ 368,234 $ 1,638
=========== =========== ===========
Cash paid during the year for income taxes $ 13,685 $ 67,250 $ 42,819
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
PHARMANETICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
PharmaNetics, Inc. (the "Company") is a holding company incorporated in July
1998 as the parent company of Cardiovascular Diagnostics, Inc. ("CVDI"). CVDI
was incorporated in November 1985 and develops, manufactures and markets rapid
turnaround diagnostics to assess blood clot formation and dissolution. CVDI
develops tests based on its proprietary dry chemistry diagnostic test system,
known as the Thrombolytic Assessment System ("TAS"), to provide rapid and
accurate evaluation of hemostasis at the point of patient care. Coeur
Laboratories, Inc. ("Coeur"), which sells and manufactures disposable power
injection syringes, is a wholly-owned subsidiary of Cardiovascular Diagnostics,
Inc., however, in June 1999, substantially all of the operating assets and
liabilities of Coeur were sold. Cardiovascular Diagnostics Europe, BV ("CDE") is
a wholly-owned Dutch company that distributed the Company's products in Europe
until March 1997 when it ceased operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, including Coeur through June 15, 1999. All
intercompany balances and transactions have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less at the date of purchase to be cash equivalents.
INVESTMENTS
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for Certain
Investments in Debt and Equity Securities." Premiums are amortized and discounts
accreted using the effective interest rate method over the remaining terms of
the related securities. Gains and losses on the sale of securities are
determined using the specific-identification method.
INVENTORIES
Inventories are stated at the lower of standard cost (which approximates cost on
a first-in, first-out basis) or market. The Company assesses its inventory on a
periodic basis and recognizes reserves for obsolescence when necessary.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the respective assets,
which range from three to seven years. Leasehold improvements are amortized over
the shorter of the estimated useful lives of the improvements, or the term of
the facility lease.
Expenditures for repairs and maintenance are charged to expense as incurred. The
costs of major renewals and betterments are capitalized and depreciated over
their estimated useful lives. Upon disposition, the cost and related accumulated
depreciation of property and equipment are removed from the accounts and any
resulting gain or loss is reflected in operations.
PATENTS AND INTELLECTUAL PROPERTY
Patents and intellectual property costs are capitalized and are amortized using
the straight-line method over their estimated useful lives. Periods of
amortization are evaluated periodically to determine whether later events and
circumstances warrant revised estimates of useful lives.
F-7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its property and equipment, patents
and intellectual property in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of " ("SFAS No. 121"). SFAS No. 121 requires
recognition of impairment of long-lived assets in the event the net book value
of such assets exceeds the future undiscounted cash flows attributable to such
assets. No such impairments were required to be recognized during the years
ended December 31, 1999, 1998 and 1997.
REVENUE AND INCOME RECOGNITION POLICIES
Revenue from the sale of products is recorded at the time the goods are shipped
or when title passes. Income under license and development agreements is
recorded upon the achievement of certain milestones contained in these
agreements. Income from research grants is recognized when amounts are expended
for the specific purpose stated in the grant. The Company periodically enters
into agreements to sell its products under fixed price contracts. Management
evaluates these contracts and recognizes a reserve if it becomes evident that
the Company will incur losses under these agreements. No such reserves were
necessary at December 31, 1999 or 1998.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities. These
assets, liabilities and tax carryforwards are determined using enacted tax rates
in effect for the year in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts more likely than not expected to be realized.
LOSS PER COMMON SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed using the weighted
average number of shares of common and dilutive potential common shares
outstanding during the period. The Company's diluted EPS for the years ended
December 31, 1999, 1998 and 1997 is the same as basic EPS because, for loss
periods, potential common shares (such as options) are not included in computing
diluted EPS since the effect would be antidilutive. Options currently
outstanding that could be dilutive in the future are summarized in Note 10.
STOCK OPTIONS
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS No. 123"). As permitted by SFAS
No. 123, the Company has chosen to continue to apply APB Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations in accounting for its stock plans. Accordingly, no compensation
expense has been recognized for stock options granted to employees with an
exercise price equal to or above the trading price per share of the Company's
common stock on the grant date. Note 10 summarizes the compensation cost for the
Company's plans if the grants had been based on the fair value at the grant
dates consistent with SFAS No. 123.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about the Fair
Value of Financial Instruments" ("SFAS No. 107") requires the disclosure of fair
value information about financial instruments, whether or not recognized on the
balance sheet, for which it is practicable to estimate the value. Where quoted
market prices are not readily available, fair values are based on quoted market
prices of comparable instruments. The carrying amount of cash and cash
equivalents, accounts receivable and accounts payable approximates fair value
because of the short maturity of those instruments. The estimated values of the
Company's short-term investments are provided in Note 2. The fair value of the
Company's long-term debt is provided in Note 8.
F-8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131") replaces
the "industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS No. 131 did not affect results of operations or financial position of the
Company but did affect the disclosure of segment information. Note 11 summarizes
segment information concerning the Company.
COMPREHENSIVE INCOME (LOSS)
Beginning in 1998, the Company has adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No.
130 requires the Company to display an amount representing comprehensive income
(loss) for the period in a financial statement which is displayed with the same
prominence as other financial statements. As required by SFAS No. 130, prior
year information has been modified to conform with the new presentation. There
were no items of other comprehensive income (loss) for the year ended December
31, 1999 or 1998. The Company's only items of other comprehensive income (loss)
for the year ended December 31, 1997 relate to foreign currency translation
adjustments.
2. SHORT-TERM INVESTMENTS
Investment securities at December 31, 1999 and 1998 are all classified as
held-to-maturity and are summarized as follows:
Gross Unrealized
Amortized ----------------------- Estimated
Cost Gains Losses Market Value
---------- ---------- ---------- ----------
1999
Held-to-maturity:
U.S. Agency obligations $1,500,000 $ -- $ 1,410 $1,498,590
========== ========== ========== ==========
1998
Held-to-maturity:
U.S. Treasury obligations $2,468,221 $ 8,707 $ 6,479 $2,470,449
U.S. Agency obligations 1,234,898 728 -- 1,235,626
---------- ---------- ---------- ----------
$3,703,119 $ 9,435 $ 6,479 $3,706,075
========== ========== ========== ==========
3. INVENTORIES
Inventories at December 31, 1999 and 1998 consisted of the following:
1999 1998
---- ----
Raw materials $ 1,100,794 $ 1,860,650
Finished goods 228,699 536,784
----------- -----------
$ 1,329,493 $ 2,397,434
=========== ===========
F-9
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998 consisted of the following:
1999 1998
---- ----
Molds and equipment $4,288,174 $6,344,757
Furniture, fixtures and IT equipment 1,088,875 1,030,520
Leasehold improvements 1,302,856 1,276,304
Equipment under capital leases 284,724 266,291
---------- ----------
6,964,629 8,917,872
Less accumulated depreciation and amortization 3,761,512 4,374,948
---------- ----------
$3,203,117 $4,542,924
========== ==========
5. PATENTS, INTELLECTUAL PROPERTY AND INTANGIBLE ASSETS
Patents, intellectual property and intangible assets at December 31, 1999 and
1998 consisted of the following:
1999 1998
---- ----
Goodwill $ -- $1,802,506
Patents 582,729 598,888
Other 197,446 257,446
---------- ----------
780,175 2,658,840
Less accumulated amortization 211,457 1,111,884
---------- ----------
$ 568,718 $1,546,956
========== ==========
Upon the disposal of Coeur during 1999, as discussed in Note 1, the unamortized
balance of goodwill was written off.
6. RESEARCH AND DEVELOPMENT GRANTS
The Company has recognized as other income the National Institutes of Health
Small Business Innovation Research grant awards as follows:
1999 1998 1997
---- ---- ----
Phase II grant award of $750,000 for research related to rapid
monitoring of antithrombin agents $ -- $137,993 $278,121
7. DEVELOPMENT INCOME
During 1999, 1998 and 1997, the Company recognized $100,000, $505,000 and
$825,000, respectively, of development income related to collaboration
agreements with other entities. All development income was the result of the
Company meeting milestones under the terms of these collaboration agreements.
8. LONG-TERM DEBT
Long-term debt as of December 31, 1999 and 1998 consisted of the following:
1999 1998
---- ----
Convertible financial assistance agreement $ -- $ 50,000
Notes payable 1,626,283 2,300,156
---------- ----------
1,626,283 2,350,156
Current portion of long-term debt 785,544 723,873
---------- ----------
Long-term debt, excluding current portion $ 840,739 $1,626,283
========== ==========
In January 1994, the Company received a $50,000 loan pursuant to a convertible
financial assistance agreement to fund research. The funds were used only for
direct costs related to the approved project. The $50,000, plus accrued interest
at 7.5% per annum, was due and paid in January 1999.
F-10
8. LONG-TERM DEBT (continued)
In December 1997, the Company received a loan for $3,005,404 from Transamerica
Business Credit Corporation to fund working capital and capital expenditures.
The loan has an interest rate of 15%, payable monthly, and is collateralized by
existing fixed assets and new equipment financed under the loan. The loan
includes certain covenants relating to, among other things, the maintenance of
the collateral. Management believes the Company was in compliance with these
covenants at December 31, 1999. The aggregate amounts of maturities on this loan
are as follows: 2000, $785,544; and 2001, $840,739.
The fair value of long-term debt is estimated by discounting the future cash
flows using current rates that would be offered to the Company for similar debt
issues. The fair values of long-term debt at December 31, 1999 and 1998 were
approximately $1,444,000 and $2,420,000, respectively.
9. LEASES
The Company leases its office space under a noncancelable operating lease
agreement which extends into 2001. In addition, the Company leases certain
equipment under various capital and operating lease agreements. Rent expense
related to operating leases totaled $413,010, $427,811 and $471,592 for the
years ended December 31, 1999, 1998 and 1997, respectively. Future minimum lease
payments as of December 31, 1999 are as follows:
Year ending December 31,
Capital Operating
Leases Leases
-------- --------
2000 $ 11,580 $419,823
2001 11,580 70,994
2002 11,580 22,391
2003 965 15,295
-------- --------
Total minimum lease payments $ 35,705 $528,503
========
Imputed interest (4,910)
--------
Present value of minimum lease
Payments 30,795
Less current maturities 9,396
--------
Long-term capital lease obligations $ 21,399
========
10. STOCK OPTIONS
The Company maintains two stock option plans whereby nonqualified and incentive
stock options may be granted to employees, consultants and directors of the
Company. Under these plans, options to purchase common stock are granted at a
price determined by the Board of Directors. The options may be exercised during
specified future periods and generally vest over four years and generally expire
ten years from the date of grant. In 1994, the Company established the 1994
Stock Plan in which 639,249 shares of the Company's common stock were reserved
for issuance. In 1995, the shareholders of the Company approved, effective upon
completion of the Company's initial public offering, the adoption of the
Company's 1995 Stock Plan in which 838,150 shares of the Company's common stock
were reserved for issuance.
F-11
10. STOCK OPTIONS (continued)
A summary of the status of the Company's Plans as of December 31, 1999, 1998 and
1997, and changes during the years ending on those dates is presented below:
1999 1998 1997
----------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- ------- -------- ------- --------
Outstanding at beginning of year 841,066 $ 3.19 878,190 $ 2.88 757,796 $ 2.15
Granted 453,500 $ 5.80 67,634 $ 5.01 323,375 $ 4.88
Exercised (16,138) $ 1.53 (90,263) $ 1.19 (86,532) $ 1.67
Forfeited (66,541) $ 5.03 (14,495) $ 4.75 (116,449) $ 4.58
--------- -------- ------- -------- ------- --------
Outstanding at end of year 1,211,887 $ 4.09 841,066 $ 3.19 878,190 $ 2.88
========== ======== ======= ======== ======= ========
Options exerciseable at year-end 623,261 527,161 498,280
========== ======= =======
The weighted average fair value of options granted during the years ended
December 31, 1999, 1998 and 1997 was $3.90, $2.83 and $3.14, respectively.
The following table summarizes information about the Plan's stock options at
December 31, 1999:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/99 Life Price at 12/31/99 Prices
----------------- ----------- ------------ -------- ------------ ----------
$0.79 332,766 4.5 years $ .79 332,765 $ .79
$3.75-$4.50 186,621 6.5 years $ 4.34 166,371 $ 4.41
$5.00-$6.38 687,500 9.1 years $ 5.58 119,125 $ 5.15
$10.00 5,000 6.4 years $ 10.00 5,000 $ 10.00
--------- -------
1,211,887 623,261
========= =======
For purposes of the proforma disclosures required by SFAS No. 123, the fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Dividend yield 0% 0% 0%
Volatility 69% 51% 65%
Risk free interest rate 6.1% 5.40% 5.75%
Expected life of options 6 years 6 years 6 years
For purposes of the proforma disclosures required by SFAS No. 123, the estimated
fair value of equity instruments is amortized to expense over their respective
vesting periods. Had compensation cost for the Company's stock-based
compensation plans, as described above, been determined consistent with SFAS No.
123, the Company's net loss and net loss per share would have been increased to
the pro forma amounts indicated below. The compensation costs disclosed here may
not be representative of the effects on pro forma net income in future years.
1999 1998 1997
---- ---- ----
Net loss As reported $ (6,222,470) $ (3,643,153) $ (4,679,211)
Pro forma (7,051,334) (4,022,591) (5,011,787)
Net loss per common share As reported $ (0.83) $ (0.52) $ (0.70)
Pro forma (0.94) (0.57) (0.75)
F-12
11. SEGMENT INFORMATION
Prior to the sale of substantially all the operating assets and liabilities of
Coeur, the Company organized and managed its business primarily on the basis of
its operating divisions, CVDI and Coeur. Each of these segments earned revenue,
incured expenses and has discrete financial information available to it. Segment
expenses include allocations of certain expenses to each segment. Management
evaluates the performance of its segments based on net income (loss). The
accounting policies of the segments are the same as those described in the
"Summary of Significant Accounting Policies".
The table below presents information concerning revenues, net income (loss) and
segment assets:
1999
-----------------------------------------------------------
CVDI Coeur Consolidated
------------ ------------- ------------
Revenues $ 3,909,379 $ 1,800,883 $ 5,710,262
Net income (loss) $( 5,414,299) $ 17,922 $ (5,396,377)
Total assets $ 11,646,932 $ -- $ 11,646,932
1998
-----------------------------------------------------------
CVDI Coeur Consolidated
------------ ------------- ------------
Revenues $ 4,140,763 $ 4,649,459 $ 8,790,222
Net income (loss) $ (4,223,442) $ 580,289 $ (3,643,153)
Total assets $ 14,460,017 $ 4,233,194 $ 18,693,211
1997
-----------------------------------------------------------
CVDI Coeur Consolidated
------------ ------------- ------------
Revenues $ 2,924,008 $ 4,694,465 $ 7,618,473
Net income (loss) $ (5,459,974) $ 780,763 $ (4,679,211)
Total assets $ 13,477,483 $ 4,207,020 $ 17,684,503
During the years ended December 31, 1999, 1998 and 1997 there were sales to
customers that exceeded 10% of net consolidated sales. Sales to these customers
were:
1999 1998 1997
---- ---- ----
Customer A (Coeur) $1,128,373 $2,137,715 $2,291,581
Customer B (Coeur) 436,003 1,490,867 1,375,728
Customer C 991,345 1,311,611 1,276,566
Customer D 1,857,353 3,690 --
Customer E 431,380 1,755,820 --
As of December 31, 1999 and 1998, there were outstanding receivables from
customers that exceeded 10% of total trade receivables. Receivables from these
customers as a percentage of total trade receivables were as follows: 1999 -
customer C, 19%; customer D, 37%; customer F, 40%; 1998 - customer C, 41%;
customer F, 35%.
The Company had operations in two geographic regions, the United States and
Europe, until March 31, 1997. At that date, the Company closed its European
office and European sales are now made through foreign distributors. During
1997, revenues from those foreign operations were approximately $99,000,
substantially all of which were from customers in Europe and the United Kingdom.
F-13
11. SEGMENT INFORMATION (continued)
The Company generated revenue from sales to different geographic areas for 1999,
1998 and 1997 as follows:
1999 1998 1997
----------------------- ----------------------- -----------------------
Coeur CVDI Coeur CVDI Coeur CVDI
---------- ---------- ---------- ---------- ---------- ----------
United States $1,622,549 $3,007,657 $3,661,512 $1,459,339 $3,441,219 $2,081,796
United Kingdom 48,885 83,157 601,045 246,138 769,942 188,498
Germany -- 440,042 85,425 2,028,111 233,817 116,657
Sweden -- 327,750 -- 247,495 -- 78,116
Other foreign sales 129,449 50,773 301,477 159,680 249,487 458,941
---------- ---------- ---------- ---------- ---------- ----------
Total sales $1,800,883 $3,909,379 $4,649,459 $4,140,763 $4,694,465 $2,924,008
========== ========== ========== ========== ========== ==========
12. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and accounts
receivable. The Company places its temporary cash in accounts with federally
insured depository institutions. At December 31, 1999 the Company had a majority
of its cash and cash equivalents in one financial institution.
Concentrations of credit risk with respect to trade receivables exist due to the
Company's small customer base. Periodic credit evaluations of customers'
financial condition are performed and generally no collateral is required. The
Company establishes reserves for expected credit losses and such historical
losses, in the aggregate, have not exceeded management's expectations.
13. LICENSE AGREEMENTS
The Company entered into a license agreement with Tokuyama Soda Company, Ltd.
("TS"), as amended in December 1995, pursuant to which the Company granted TS
exclusive rights to manufacture and sell PT and aPTT tests and analyzers in
certain Asian countries. The Company received royalty payments under this
agreement of $89,507, $22,399 and $30,741 during the years ended December 31
1999, 1998 and 1997, respectively.
14. INCOME TAXES
Income tax expense consisted entirely of current state taxes of $27,753, $67,250
and $82,083 for the years ended December 31, 1999, 1998 and 1997, respectively.
A reconciliation of expected income tax at the statutory Federal rate of 34%
with the actual income tax expense for the years ended December 31, 1999, 1998
and 1997 is as follows:
1999 1998 1997
---- ---- ----
Expected income tax benefit at federal statutory rate $(2,115,640) $(1,215,508) $(1,563,159)
State tax provision (benefit) (210,074) 7,351 (175,748)
Goodwill amortization 303,681 62,830 62,830
Compensation paid with incentive stock options 3,740 3,740 3,740
Other 35,775 5,361 7,373
Distribution premium -- 850,000 --
Research and development credit (166,625) -- --
Change in valuation allowance 2,176,896 353,776 1,747,047
----------- ----------- -----------
Net income tax provision $ 27,753 $ 67,250 $ 82,083
=========== =========== ===========
F-14
14. INCOME TAXES (continued)
The components of the net deferred tax assets and net deferred tax liabilities
as of December 31, 1999 and 1998 were as follows:
1999 1998
---- ----
Deferred tax assets:
Accrued expenses $ 2,000 $ 5,000
Alternative minimum tax credits 9,000 9,000
Net operating loss carryforward 11,014,000 8,922,000
Research and development credits 395,000 229,000
Foreign tax credits 35,000 35,000
Other 84,000 85,000
------------ ------------
Total gross deferred tax assets 11,539,000 9,285,000
Valuation allowance (10,615,000) (8,417,000)
------------ ------------
Net deferred tax assets 924,000 868,000
------------ ------------
Deferred tax liabilities:
Patents 176,000 171,000
Investment adjustment 490,000 490,000
Fixed assets 258,000 207,000
------------ ------------
Total gross deferred tax liabilities 924,000 868,000
------------ ------------
Net deferred taxes $ -- $ --
============ ============
At December 31, 1999 and 1998, the Company had approximately $28,773,000 and
$23,402,000, respectively, of combined federal net operating losses. These
losses expire in varying amounts beginning in 2004 if not utilized. At December
31, 1999 and 1998 for state income tax purposes, Cardiovascular Diagnostics,
Inc. had net operating loss carryforwards of approximately $25,725,000 and
$20,169,000, respectively. These carryforwards expire in varying amounts
beginning in 2008 if not utilized. To the extent that Coeur's net operating
losses incurred through 1994 (approximately $2,000,000 at December 31, 1999) are
utilized in the future, the benefit will reduce the excess cost over fair value
of net assets acquired. The 1999 and 1998 valuation allowance includes an
allowance against net operating losses generated by tax only deductions for
stock options for approximately $140,000, for which the benefit will go directly
to shareholders equity.
Due to the Company's history of operating losses and uncertainty regarding its
ability to generate taxable income in the future, management has determined that
a valuation allowance equal to the amount of net deferred tax assets is required
at December 31, 1999 and 1998.
As a result of changes in ownership in prior years, as defined by Internal
Revenue Code Section 382, the utilization of Coeur's loss carryforwards
generated through December 31, 1993 and the Company's consolidated loss
carryforwards generated through January 1994 will be subject to an annual
limitation of $175,000 and $482,000, respectively.
An additional change in ownership occurred in 1995 in connection with the
Company's initial public offering which subjects the loss carryforwards
generated during the period from January 1994 to December 1995 to an incremental
annual limitation of $1,954,000 per year.
15. SUBSEQUENT EVENT
On February 25, 2000, the Company issued 120,000 shares of convertible Series A
Preferred Stock, no par value per share for $100 per share in a private offering
to accredited investors. The total proceeds from this offering, net of offering
costs, were approximately $11,300,000. Dividends are 6% per annum, payable
quarterly in-kind or in cash at the Company's option. Each preferred share is
convertible into ten shares of common stock after three months at the option of
the holder. Holders of the preferred stock will vote with the common on an as
converted basis on all matters except where a separate class vote is required by
law. In addition, for each share of preferred stock , the holders of the
preferred stock received a five-year warrant to purchase two shares of common
stock at a price equal to $10 per share.
16. CONTINGENCIES
In March 2000, the Company received a letter from Polyten Plastics LLC
("Polyten"), the parent company of the purchaser of substantially all of the
assets of the Company's Coeur Laboratories, Inc. subsidiary, tendering a claim
for indemnification against the Company for losses, if any, arising out of
claims filed by Medrad, Inc. against Liebel-Flarsheim Company ("LF"), Coeur
Laboratories, Inc. and others. The Medrad complaint asserts several claims,
including federal trademark dilution and patent misappropriation and
F-15
16. CONTINGENCIES (continued)
infringement, in connection with Coeur's manufacture and sale to LF, and LF's
subsequent sale of adapters and syringes for use with medical injection delivery
systems allegedly manufactured by Medrad. Although Polyten has not yet been
named in the lawsuit, it has asserted the right to indemnification from the
Company in the event it sustains any losses from this litigation based on the
grounds that Polyten did not assume liability for the alleged infringement in
connection with its purchase of the Coeur assets. Although the Company cannot
guarantee its success on the merits of this matter, the Company believes the
Medrad claims are unsubstantiated and intends to defend, and/or assist in the
defense, of the claims vigorously.
F-16
PHARMANETICS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1999, 1998 and 1997
Balance at Charge to Balance at
Beginning Costs and End
of Period Expenses Deductions of Period
-------- ---------- ------------ --------
YEAR ENDED DECEMBER 31, 1999
Deducted from asset accounts:
Accounts Receivable Reserve (a) $ 14,226 $ 40,000 $ 24,670 (f) $ 29,556
======== ========== ============ ========
Inventory Reserves (b) $ 85,000 $ 95,462 $ 80,462 (e) $100,000
======== ========== ============ ========
Added liability accounts:
Warranty Reserves (c) $ 10,000 -- $ 4,058 (g) $ 5,942
======== ========== ============ ========
YEAR ENDED DECEMBER 31, 1998
Deducted from asset accounts:
Accounts Receivable Reserve (a) $ 3,792 $ -- $ 794 (f) $ 14,226
======== ========== ============ ========
Inventory Reserves (b) $231,339 $ 147,000 $293,339 (e) $ 85,000
======== ========== ============ ========
Added liability accounts:
Warranty Reserves (c) $ 38,571 -- $ 28,571 (d) $ 10,000
======== ========== ============ ========
YEAR ENDED DECEMBER 31, 1997
Deducted from asset accounts:
Accounts Receivable Reserves (a) $ 5,000 $ -- $ 1,208 (f) $ 3,792
======== ========== ============ ========
Inventory Reserves (b) $ 48,256 $ 220,000 $36,917 (e) $231,339
======== ========== ============ ========
Added to liability accounts:
Warranty Reserves (c) $ 43,845 $ -- $ 5,274 (g) $ 38,571
======== ========== ============ ========
(a) Represents an allowance for both product returns and doubtful accounts.
Activity represents doubtful accounts only. Revenues have been reduced
directly for product returns.
(b) Represents an allowance for excess and aging inventory and lower of cost
or market adjustments.
(c) Represents an allowance for estimated costs to be incurred under
warranty obligations.
(d) Represents reduction in warranty reserves and costs incurred to fulfill
warranty claims.
(e) Represents inventory items written down to lower of cost or market.
(f) Represents uncollectible accounts written off.
(g) Represents costs incurred to fulfill warrranty claims.
S-1
Report of Independent Accountants
The Board of Directors and Shareholders
PharmaNetics, Inc.
Our report on the consolidated financial statements of PharmaNetics, Inc. and
subsidiaries is included on page F-2 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related
consolidated financial statement schedule, Schedule II--Valuation and Qualifying
Accounts, included on page S-1 of this Form 10-K.
In our opinion, the consolidated financial statement schedule referred to above,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information required
to be included therein.
PRICEWATERHOUSECOOPERS LLP
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
Raleigh, North Carolina
March 7, 2000