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, 2000 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 (NO 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 $8.00 per share, the closing price of the Common Stock on
March 16, 2001, on the NASDAQ National Market System, was approximately
$62,242,000 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 16, 2001, the registrant had outstanding 7,851,948 shares of Common
Stock (no par value).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 2001 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 Might Affect Future Results" and
elsewhere, as well as in the Company's other filings with the Securities and
Exchange Commission, and including, in particular, the ability of the Company to
implement its business strategy, 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"), through its wholly-owned subsidiary
Cardiovascular Diagnostics, Inc. ("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. CVDI's current
tests and tests under development are used in the treatment of angina, heart
attack, stroke, deep vein thrombosis and pulmonary and arterial emboli.
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 following have received
Food and Drug Administration, or FDA, clearance under Section 510(k) of the
Food, Drug and Cosmetic Act and are currently sold for commercial use:
Prothrombin Time ("PT"); PT non-citrated ("PTNC"); PT One; activated Partial
Thromboplastin Time ("aPTT"); Heparin Management test ("HMT"); and Heparin
Management Panel and Accent system which 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. The Low Range Heparin Management Test ("LHMT")
has been cleared by the FDA and will begin to be sold during 2001. 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". In
addition, the Company has obtained a Humanitarian Device Exemption, or HDE, for
its ECT card, which is used in managing patients suffering from heparin induced
thrombocytopenia, or HIT. HDE approval is an accelerated FDA authorization
process to market devices used in rare disease states where no existing solution
is available.
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
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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, or CLIA, and its 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, or 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 the
blood 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 passed
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
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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, as the Rapidpoint Coag analyzer.
ACCENT
The Accent is a hardware accessory to the TAS analyzer cleared for marketing by
the FDA during 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
is 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, and 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 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 angiography, open
heart surgery, dialysis 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. 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 comparable tests
because it is easier to use and less prone to operator error. Also, it 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 comparable tests.
During 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
management 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. CVDI believes the HTT/PRT
approach should make it easier and cost effective to incorporate individual
heparin mangement into routine practice.
The LHMT card was also cleared for marketing by the FDA during 2000. This test
is used principally in cardiac catheterization and interventional cardiology
procedures. It is designed to monitor the effects of low to moderate levels of
heparin.
The Company also received approval from the FDA during 2000 for a HDE for its
ECT card, which is used in managing patients suffering from heparin induced
thrombocytopenia. The approval covers the use of the test for managing patients
who receive Refludan while undergoing cardiopulmonary bypass.
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TEST CARDS UNDER DEVELOPMENT
The Company is continuing research and development focused on expanding the
current menu of tests for the TAS analyzer. CVDI is currently developing the
following new tests:
Test Description
Enoxaparin Test Test to monitor the anticoagulant effect of
enoxaparin (Aventis) used for the treatment
and prevention of thrombotic diseases
Protein C Test 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
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
QUALITY CONTROL PRODUCTS
The Company also develops single-use "crush-vial" controls for each test card.
These controls are produced by CVDI and a contract manufacturer and allow
quality assurance testing at the point of care. In addition, the Company sells
an Electronic Quality Control ("EQC") card used to test analyzer function.
SALES AND MARKETING
CVDI's marketing strategy for its PT, aPTT and HMT test cards relies on a
distribution partner. In December 1998, previous distribution agreements with
Dade Behring and Avecor Cardiovascular were terminated, at which time Chiron
Diagnostics Corporation 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 three 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.
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 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. 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, Bayer Diagnostics agreed to purchase
minimum quantities of CVDI's products covered by the Bayer agreement during the
term of the Bayer agreement at pre-determined prices. The Bayer agreement is
renewable for successive five-year terms. CVDI has the right to terminate the
Bayer 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
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agreement by the 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 and Bayer Diagnostics is
CVDI's exclusive distributor in these territories.
The Company's strategy is to increasingly focus 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. To further the goal of establishing itself in the emerging field of
theranostics, the Company has entered into collaborative agreements with Aventis
Pharmaceuticals, Knoll AG and AstraZeneca in which the Company is developing
test cards for potential use 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 use the reagent within the test.
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 working with other
pharmaceutical companies to engage in outcome studies related to new theranostic
tests. During 2000, the Company continued to expand it's clinical trial
programs with the Enoxaparin card. Additionally, a multi-center study was
initiated with the TIMI Study Group at Harvard Medical School to investigate the
predictive value of the LOT test in patients receiving thrombolytic therapy.
The Company believes that the use of the test in combination with the
electrocardiogram will provide physicians with a valuable tool to help
physicians with an early predictor of failed therapy.
The Company's strategy is focusing its theranostic test development efforts on
drugs in Phase II or Phase III development. The Company believes this will help
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. If the Company is unsuccessful in implementing its business
strategy, its results of operations will be adversely impacted.
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 central laboratories
will resist yielding 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 routine test cards, the PT,
aPTT, and HMT and the related controls and analyzer. Bayer also distributes the
specialty cards HTT and PRT. 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 current TAS menu competes in the
coagulation and hematology testing market with manufacturers that provide
testing equipment to central and stat laboratories of hospitals. These
laboratories currently perform a substantial portion of such testing. The TAS
menu also competes 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
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results, ease-of-use, reduced opportunity for error and cost-effectiveness.
CVDI has several competitors, including Roche Diagnostics, 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
that compete 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 might have developed
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 might 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 might 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. 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 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. 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.
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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 improvements made by Tokuyama to 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 $58,909, $89,507 and
$22,399 during the years ended December 31, 2000, 1999, and 1998, respectively.
MANUFACTURING
CVDI operates its manufacturing facility 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. In addition, CVDI operates proprietary
automated test card production equipment. 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.
Upon moving into a new facility during 2001, manufacturing capacity will
increase to approximately 15 million cards.
The FDC Act requires the Company to manufacture its products in registered
establishments and in accordance with Good Manufacturing Practice, or GMP, now
known as Quality System Regulations, or 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 might 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, some 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, design control, labeling, distribution and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things:
. fines
. injunction
. civil penalties
. recall or seizure of products
. total or partial suspension of production
. failure of the government to grant premarket clearance or premarket
approval ("PMA") for devices
. withdrawal of marketing approvals or
. 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.
-8-
Before a new device can be introduced into the market, the manufacturer must
generally obtain marketing clearance through either a 510(k) notification, the
HDE process or the more time-consuming PMA process. All of the Company's
currently cleared products have qualified for either the 510(k) process or the
accelerated HDE 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) application to obtain a 510(k) clearance, but it might
take longer. The FDA might 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 might 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 might be prohibited
from marketing the modified device until the 510(k) is cleared by the FDA.
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:
. the device will be used for investigational purposes only;
. results will not be used for diagnostic purposes without confirmation of
the diagnosis under another medically established diagnostic device or
procedure;
. all investigations will be conducted with approval from an institutional
review board, or IRB, using an IRB-approved study protocol, and patient
informed consent; and
. 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, or 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 LOT test, the ECT test and the modified ECT test.
-9-
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 Company is required to comply with the European Medical
Devices Directive 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 the Clinical
Laboratory Improvement Act of 1988, or CLIA. The CLIA 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, HMT, HTT and PRT tests performed by TAS have been
categorized by the FDA and the Centers for Disease Control and Prevention 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 by the FDA
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 might 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
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Healthcare Organizations. Various states and municipalities might 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, or 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. In addition, under
current HCFA regulations, equipment costs generally are not reimbursed
separately, but rather are included in a single, fixed-rate, per-patient
reimbursement. 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, might 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.
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 its Coeur Laboratories, Inc. subsidiary. 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 $14 million per claim, with an annual aggregate policy limit of $15
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 91 employees as of December 31, 2000. Thirteen employees were
engaged in research and development (7 of which have Ph D's), 37 in
manufacturing and quality control, 19 in software, engineering and facilities, 8
in sales/marketing and 14 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,
-11-
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
currently occupies approximately 45,000 square feet of development, production
and administration space at this location. The Company is in the process of
moving all its development, production and administrative operations to a new
facility located at 9401 Globe Center Drive, Suite 140, Morrisville, North
Carolina 27560. This move is expected to be completed by the third quarter of
2001.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings as of the date of
this Form 10-K.
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, 2000.
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth information as of March 31, 2001 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.
John P. Funkhouser, age 47, 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 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.
James A. McGowan, age 57, was elected Chief Financial Officer of the Company in
May 2000. Since 1982, Mr. McGowan has been a principal of McGowan Associates, a
boutique venture capital and consulting firm. Venture capital activities have
included a partnership with First Chicago Corp (McGowan Leckinger) and a co-
investment with The Thomas Lee Company (Sterling Merchandise). Mr. McGowan's
consulting activities have ranged from interim executive positions at Filenes
Basement, The TAC Group and the TJX Companies to strategic consulting projects
for Arthur Andersen and a variety of small to mid-size growth companies. Prior
to founding McGowan Associates, Mr. McGowan was the chief financial officer and
a principal-selling stockholder of three retail chains that were acquired by
large public companies. Mr. McGowan is a Certified Public Accountant and holds
a B.S. from Boston University and an M.B.A from Suffolk University.
Dick D. Timmons II, age 55, 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 48, 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 52, 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.
-12-
Cynthia Pritchard, Ph.D., age 49, 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 34, 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 Company's common stock trades 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 the Company for the fiscal
years ended December 31, 2000 and 1999 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, 2000
First Quarter $ 18 $ 9
Second Quarter 19 7/8 11 7/8
Third Quarter 22 3/4 17 1/16
Fourth Quarter 19 9 5/8
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
(b) Approximate Number of Equity Security Holders
As of March 15, 2001, the number of record holders of the company's common stock
was approximately 100, and the Company believes that the number of beneficial
owners was approximately 2,600.
(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.
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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 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Net sales $ 4,269 $ 3,909 $ 4,141 $ 2,924 $ 1,830
Cost of goods sold 3,581 3,179 2,847 2,845 1,827
Gross profit 688 730 1,294 79 3
Operating expenses:
General and administrative 3,330 2,715 2,815 3,204 2,564
Sales and marketing 1,050 799 707 1,316 1,855
Research and development 3,697 2,777 2,509 2,440 2,229
Total operating expenses 8,075 6,291 6,031 6,960 6,648
Other income, net 1,053 147 514 1,421 851
Loss from continuing operations (6,334) (5,414) (4,223) (5,460) (5,794)
Discontinued operations:
Income from operations - 18 580 781 673
Loss on disposal - (826) - - -
-------- -------- -------- -------- --------
Net loss (6,334) (6,222) (3,643) (4,679) (5,121)
Beneficial conversion feature of Series A
Preferred Stock (3,004) - - - -
Preferred stock dividends (626) - - - -
-------- -------- -------- -------- --------
Net and comprehensive loss attributable to common
shareholders $ (9,964) $ (6,222) $ (3,643) $ (4,679) $ (5,121)
======== ======== ======== ======== ========
Basic and diluted loss per common share:
Net loss $ (0.83) $ (0.83) $ (0.52) $ (0.70) $ (0.78)
Net loss attributable to common shareholders $ (1.31) $ (0.83) $ (0.52) $ (0.70) $ (0.78)
Weighted average shares outstanding 7,626 7,469 7,007 6,722 6,566
Pro forma amounts assuming SAB 101 was retroactively
applied(1):
Net and comprehensive loss attributable to
common shareholders $ (9,964) $ (5,926) $ (3,475) $ (5,144) $ (5,121)
Basic and diluted loss attributable to common
shareholders per share $ (1.31) $ (0.79) $ (0.50) $ (0.77) $ (0.78)
As of December 31,
-----------------
FINANCIAL CONDITION 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Cash and cash equivalents $ 5,344 $ 3,661 $ 3,998 $ 5,885 $ 2,716
Short term investments 3,904 1,500 3,703 - 5,973
Total assets 18,314 11,647 18,693 17,685 18,351
Long term debt and capital lease obligations,
excluding current portion 36 862 1,626 2,351 67
Total liabilities 3,632 2,039 2,949 4,492 683
Accumulated deficit (40,448) (30,484) (24,262) (20,619) (15,940)
Series A Preferred stock 8,102 - - - -
Common shareholders' equity $ 6,580 $ 9,608 $ 15,744 $ 13,193 $ 17,668
(1) In fiscal 2000, the Company adopted SEC Staff Accounting Bulletin No. 101
("SAB 101"). Under this method of accounting, development payments are deferred
and recognized into income over the period of the related agreement. The amounts
disclosed assume that SAB 101 was retroactively applied to prior years.
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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 clinical 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, Inc. ("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.
The Company currently derives income from the following sources: TAS product
sales; interest income; and development income recognized in connection with
collaboration agreements. 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 these routine 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 the distribution
agreements which existed prior to such date. Bayer's strength is in critical
care areas of the hospital which the Company believes should facilitate the
placement of the TAS technology.
In addition, the Company's business strategy has evolved towards becoming more
focused on theranostics, the development of specialty tests for drugs, some with
narrow ranges between over- and under-dosage. Rapid diagnostic capabilities
might 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
YEAR ENDED DECEMBER 31, 2000 VS. YEAR ENDED DECEMBER 31, 1999. Sales for the
year ended December 31, 2000 increased 10% to $4.3 million compared to $3.9
million in 1999. This increase was largely attributable to increased analyzer
sales as total analyzer revenue in 2000 was $1,065,000 compared to $795,000 in
1999. 2000 revenue from test cards and controls sales totaled $2.8 million,
essentially unchanged compared to 1999. The gross profit margin in 2000 was 16%
compared to 19% in 1999, the reduction mainly due to increased costs in overhead
related to additional personnel.
Total operating expenses for 2000 totaled $8.1 million compared to $6.3 million
1999. General and administrative expenses increased compared to 1999 due to more
personnel and increased facility costs, some of which related to the Company's
planned move to new facilities, expected to be completed in the third quarter of
2001. Sales and marketing expenses increased due to new expenditures for
marketing research. Research and development expenses increased approximately
33% in 2000 compared to 1999. The change was mainly due to increased personnel
and increased clinical trial costs related to the Company's development
projects.
Interest expense for the year ended December 31, 2000 decreased to $200,000
compared to $313,000 in the prior year as the Company continued to pay down its
debt. Interest income increased in 2000 compared to 1999 due to increased
average investment balances during the year due to the preferred stock issuance
in February 2000.
-15-
Development income totaled $491,000 in 2000 compared to $100,000 in 1999. This
increase was due to revenues derived from collaboration agreements signed with
Bayer Diagnostics and Aventis during 2000.
In February 2000, the Company completed a private placement of 120,000 shares of
Series A convertible preferred stock for aggregate proceeds of $11,220,000. The
Series A has a dividend of 6% payable quarterly in cash or in shares of common
stock at the option of the Company. During the year ended December 31, 2000, the
Series A dividend was paid by issuing 40,065 shares of common stock totaling
$626,638. In addition, on the date of the Company's issuance of the Series A,
the effective conversion price of the preferred stock was at a discount to the
price of the common stock into which the Series A is convertible. In accordance
with accounting guidelines at the time of the preferred stock issuance, this
discount totaled $975,600. It was recorded as a preferred stock dividend and
amortized over the three-month period until conversion was possible. In
November 2000, further accounting guidance was issued which required the Company
to record an additional discount of $2,027,990 during the Company's fourth
quarter.
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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had cash and cash equivalents and short-term
investments of $9.2 million and working capital of $8.4 million, as compared to
$5.2 million and $6.5 million, respectively, at December 31, 1999. The Company's
cash position increased during the year due to the issuance of preferred stock
offset by capital expenditures, repayment of debt and the funding of operating
losses.
During 2000, the Company used cash in operating activities of $2.7 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 increased payables and
receipt of funds from collaborations that was recorded as deferred revenue.
Net cash used in investing activities was $6.2 million in 2000. The net cash
used resulted mainly from the net purchases of short-term investments and
expenditures for new equipment and leasehold improvements related to the
Company's planned move to new facilities, expected to be complete in the third
quarter of 2001. The Company expects to incur capital expenditures of
$1,500,000 to $2,500,000 during 2001.
Cash provided by financing activities was $10.6 million in 2000. This increase
principally resulted from the issuance of preferred stock in February 2000.
The Company expects to incur additional operating losses during 2001. 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 might 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 might 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 its distribution agreement with Bayer
Diagnostics, will be adequate to satisfy its planned capital requirements
through 2001. If
-16-
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 of common or preferred stock, 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 ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101, as amended by SAB 101A and SAB 101B, provided broad
conceptual discussions and industry-specific guidance concerning revenue
recognition. The Company adopted SAB 101 in January 2000 and, accordingly, is
amortizing collaborative revenue received over the anticipated development
period.
The Emerging Issues Task Force (the "EITF") issued No. 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" ("EITF 98-5"). EITF 98-5 provides guidance
concerning the accounting for issuances of convertible preferred stock and
warrants. On the date of the Company's issuance of the Series A Preferred
Stock, the effective conversion price of the preferred stock was at a discount
to the price of the common stock into which the Series A is convertible. In
accordance with EITF 98-5 guidance at the time of the preferred stock issuance,
this discount totaled $975,600. It was recorded as a preferred stock dividend
and amortized over the three-month period until conversion was possible. In
November 2000, the EITF issued further interpretations which required the
Company to record an additional discount of $2,027,990 during the Company's
2000 fourth quarter.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, ("FIN 44") "Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of APB 25". This interpretation clarifies: the
definition of employee for purposes of applying APB 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of previously fixed stock
options or awards, and the accounting for an exchange of stock compensation
awards in business combinations. FIN 44 was effective on July 1, 2000 and the
Company adopted its provisions. The adoption did not have a material impact on
the Company's consolidated results of operations.
FACTORS THAT MIGHT AFFECT FUTURE RESULTS
A number of uncertainties exist that might 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; competition within the diagnostic testing industry 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 twelve 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.
-17-
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 2001 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
-18-
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
10.26 Lease Agreement dated July 27, 2000 relating to 9401
Globe Center Drive, as amended by the First Lease
Amendment dated September 25, 2000.
21.1(a) List of Subsidiaries.
23.1 Consent of Independent Accountants.
* Confidential treatment granted.
(a) Incorporated herein by reference to the identically-numbered exhibit 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.
-19-
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 March 28, 2001
---------------------------- and Chairman (Principal Executive Officer)
John P. Funkhouser
/s/ James A. McGowan Chief Financial Officer March 28, 2001
---------------------------- (Principal Financial Officer)
James A. McGowan
/s/ Paul T. Storey Treasurer and Director of Finance March 28, 2001
---------------------------- (Principal Accounting Officer)
Paul T. Storey
/s/ William A. Hawkins Director March 28, 2001
----------------------------
William A. Hawkins
/s/ John K. Pirotte Director March 28, 2001
----------------------------
John K. Pirotte
/s/ Stephen R. Puckett Director March 28, 2001
----------------------------
Stephen R. Puckett
/s/ Philip R. Tracy Director March 28, 2001
----------------------------
Philip R. Tracy
/s/ Frances L. Tuttle Director March 28, 2001
----------------------------
Frances L. Tuttle
/s/ James B. Farinholt, Jr. Director March 28, 2001
----------------------------
James B. Farinholt, Jr.
-20-
PHARMANETICS, INC.
AND SUBSIDIARIES
INDEX
Page(s)
Consolidated Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7 - F-16
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders of PharmaNetics, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of
PharmaNetics, Inc. and subsidiaries (the "Company") at December 31, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. 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 of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 14, 2001
F-2
PHARMANETICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
ASSETS 2000 1999
---- ----
Current assets:
Cash and cash equivalents $ 5,343,749 $ 3,660,906
Short term investments, held-to-maturity (estimated
market value of $3,902,489 and $1,498,590, respectively) 3,904,123 1,500,000
Receivables:
Trade, net of allowance for doubtful accounts of $4,339
and $29,556, respectively 244,772 823,338
Other 56,301 142,943
------------ ------------
Total receivables 301,073 966,281
Inventories 1,285,983 1,329,493
Other current assets 217,894 190,500
------------ ------------
Total current assets 11,052,822 7,647,180
Property and equipment, net 6,423,830 3,203,117
Patents and intellectual property, net 536,219 568,718
Other noncurrent assets 301,555 227,917
------------ ------------
Total assets $ 18,314,426 $ 11,646,932
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 958,104 209,724
Accrued expenses 648,766 171,849
Deferred revenue, current portion 232,143 -
Current portion of long-term debt 844,072 785,544
Current portion of capital lease obligations 16,617 9,396
------------ ------------
Total current liabilities 2,699,702 1,176,513
------------ ------------
Noncurrent liabilities:
Deferred revenue, less current portion 896,726 -
Long-term debt, less current portion 10,149 840,739
Capital lease obligations, less current portion 25,885 21,399
------------ ------------
Total noncurrent liabilities 932,760 862,138
------------ ------------
Total liabilities 3,632,462 2,038,651
------------ ------------
Commitments and contingencies (Note 10)
Series A convertible preferred stock, no par value; authorized 120,000 shares;
97,500 and 0 shares issued and outstanding at December 31, 2000 and 1999,
respectively (aggregate liquidation value at December 31, 2000 of $9,750,000) 8,102,168 -
Shareholders' equity:
Common stock, no par value; authorized 40,000,000 shares; 7,851,225 and
7,480,919 issued and outstanding at December 31, 2000 and 1999, respectively 47,027,959 40,092,693
Accumulated deficit (40,448,163) (30,484,412)
------------ ------------
Total shareholders' equity 6,579,796 9,608,281
------------ ------------
Total liabilities, redeemable preferred stock and shareholders' equity $ 18,314,426 $ 11,646,932
============ ============
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, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Net sales $ 4,269,234 $ 3,909,379 $ 4,140,763
----------- ----------- -----------
Cost of sales:
Materials and labor 1,422,152 1,226,004 1,076,173
Overhead 2,158,613 1,953,291 1,770,455
----------- ----------- -----------
Total cost of sales 3,580,765 3,179,295 2,846,628
----------- ----------- -----------
Gross profit 688,469 730,084 1,294,135
----------- ----------- -----------
Operating expenses:
General and administrative 3,330,411 2,715,272 2,814,506
Sales and marketing 1,050,733 798,792 707,143
Research and development 3,693,604 2,777,274 2,509,160
----------- ----------- -----------
Total operating expenses 8,074,748 6,291,338 6,030,809
----------- ----------- -----------
Loss from operations (7,386,279) (5,561,254) (4,736,674)
----------- ----------- -----------
Other income (expense):
Interest expense (200,391) (312,856) (377,966)
Interest income 702,572 270,304 225,806
Grant income -- -- 137,993
Development income 491,666 100,000 505,000
License fee and royalty income 58,909 89,507 22,399
----------- ----------- -----------
Other income, net 1,052,756 146,955 513,232
----------- ----------- -----------
Loss from continuing operations (6,333,523) (5,414,299) (4,223,442)
Discontinued operations:
Income from operations of Coeur Laboratories, Inc.
(net of income taxes of $0, $13,685 and $67,250, respectively) - 17,922 580,289
Loss on disposal of Coeur Laboratories, Inc.
(including income taxes of $14,000) - (826,093) -
----------- ----------- -----------
Net and comprehensive loss (6,333,523) (6,222,470) (3,643,153)
Amortization of beneficial conversion feature of
Series A convertible preferred stock (3,003,590) - -
Preferred stock dividends (626,638) - -
----------- ----------- -----------
Net and comprehensive loss attributable to common shareholders $(9,963,751) $(6,222,470) $(3,643,153)
=========== =========== ===========
Basic and diluted net loss per common share:
From continuing operations $ (0.83) $ (0.72) $ (0.60)
=========== =========== ===========
From discontinued operations $ - $ (0.11) $ 0.08
=========== =========== ===========
Net and comprehensive loss $ (0.83) $ (0.83) $ (0.52)
=========== =========== ===========
Net loss attributable to common shareholders $ (1.31) $ (0.83) $ (0.52)
=========== =========== ===========
Weighted average number of outstanding common shares 7,626,473 7,469,461 7,007,390
=========== =========== ===========
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, 2000, 1999 and 1998
Common Stock Total
Number of Accumulated Unearned Shareholders'
Shares Amount Deficit Compensation Equity
------ ------ ----------- ------------ ------
Balances at December 31, 1997 6,750,518 $33,833,497 $(20,618,789) $(22,000) $13,192,708
Issuance of 600,000 shares of common stock to
Chiron Diagnostics 600,000 6,000,000 -- -- 6,000,000
Stock options exercised 90,263 107,049 -- -- 107,049
Stock-based compensation 12,000 76,500 -- -- 76,500
Amortization of unearned compensation -- -- -- 11,000 11,000
Net loss for the year ended December 31, 1998 -- -- (3,643,153) -- (3,643,153)
--------- ----------- ------------ --------- -----------
Balances at December 31, 1998 7,452,781 40,017,046 (24,261,942) (11,000) 15,744,104
Stock options exercised 16,138 24,647 -- -- 24,647
Stock-based compensation 12,000 51,000 -- -- 51,000
Amortization of unearned compensation -- -- -- 11,000 11,000
Net loss for the year ended December 31, 1999 -- -- (6,222,470) -- (6,222,470)
--------- ----------- ------------ --------- -----------
Balances at December 31, 1999 7,480,919 40,092,693 (30,484,412) -- 9,608,281
Issuance of warrants -- 1,106,403 -- -- 1,106,403
Conversions of preferred stock to common stock 225,000 2,011,050 -- -- 2,011,050
Stock options exercised 104,241 177,585 -- -- 177,585
Warrants exercised 1,000 10,000 -- -- 10,000
Issuance of stock dividends 40,065 626,638 (626,638) -- --
Amortization of beneficial conversion feature -- 3,003,590 (3,003,590) -- --
Net loss for the year ended December 31, 2000 -- -- (6,333,523) -- (6,333,523)
--------- ----------- ------------ --------- -----------
Balances at December 31, 2000 7,851,225 $47,027,959 $(40,448,163) $ -- $ 6,579,796
========= =========== ============ ========= ===========
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, 2000, 1999 and 1998
2000 1999 1998
------------ ----------- -----------
Cash flows from operating activities:
Net loss $ (6,333,523) $(6,222,470) $(3,643,153)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock based compensation -- 51,000 76,500
Depreciation and amortization 971,781 890,424 906,311
Amortization of intangible assets 159,421 222,850 250,043
Loss on disposal of Coeur Laboratories, Inc. -- 826,093 --
Amortization of discount on investments (371,043) (46,881) (43,610)
Amortization of unearned compensation -- 11,000 11,000
Provision for doubtful accounts 3,574 -- 11,228
Provision for inventory obsolescence 109,460 95,462 147,000
Gain on disposal of fixed assets (9,782) -- --
Change in operating assets and liabilities:
Receivables 661,634 1,066,777 (192,091)
Inventories (65,950) 261,365 306,172
Other assets (190,731) (91,621) (28,330)
Accounts payable and accrued expenses 1,225,297 (145,880) (1,003,629)
Deferred revenue 1,128,869 -- --
------------ ----------- -----------
Net cash used in operating activities (2,710,993) (3,081,881) (3,202,559)
------------ ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (4,146,849) (404,452) (511,110)
Costs incurred to obtain patents and other intangibles (37,223) (52,849) (81,458)
Purchases of short-term investments, held to maturity (10,533,080) (3,250,000) (3,659,469)
Proceeds from maturities of investments 8,500,000 5,500,000 --
Proceeds from sale of segment -- 1,661,150 --
------------ ----------- -----------
Net cash (used in) provided by investing activities (6,217,152) 3,453,849 (4,252,037)
------------ ----------- -----------
Cash flows from financing activities:
Principal payments on long-term debt and capital
lease obligations (796,218) (733,625) (539,059)
Proceeds from exercise of stock options and warrants 187,585 24,647 107,049
Proceeds from issuance of stock to Chiron Diagnostics -- -- 6,000,000
Proceeds from issuance of Series A preferred stock 11,219,621 -- --
------------ ----------- -----------
Net cash provided by (used in) financing activities 10,610,988 (708,978) 5,567,990
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,682,843 (337,010) (1,886,606)
Cash and cash equivalents at beginning of year 3,660,906 3,997,916 5,884,522
------------ ----------- -----------
Cash and cash equivalents at end of year $ 5,343,749 $ 3,660,906 $ 3,997,916
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest expense $ 200,391 $ 334,467 $ 368,234
============ =========== ===========
Cash paid during the year for income taxes $ 0 $ 13,685 $ 67,250
============ =========== ===========
See Note 1 for supplemental disclosures of non-cash financing and investing
activities.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
PHARMANETICS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. ORGANIZATION AND 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 sold and manufactured disposable power
injection syringes, is a wholly-owned subsidiary of Cardiovascular Diagnostics,
Inc. 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 a maturity of three
months or less at the date of purchase to be cash equivalents.
INVESTMENTS
Investments consist primarily of United States government agency obligations,
notes and corporate bonds. The Company invests in high-credit quality
investments in accordance with its investment policy which minimizes the
possibility of loss. Investments with maturities at date of purchase beyond
three months and which mature at or less than twelve months from the balance
sheet date are classified as current. Investments are considered to be held-to-
maturity and are accounted for in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Realized gains and losses are determined using the specific
identification method and transactions are recorded on a settlement date basis.
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 of 17 years. Periods
of amortization are evaluated periodically to determine whether later events and
circumstances warrant revised estimates of useful lives.
F-7
1. ORGANIZATION AND 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, 2000, 1999 and 1998.
REVENUE AND INCOME RECOGNITION POLICIES
Revenue from the sale of products is recorded when all risks of ownership have
passed to the buyer. Income under license and development agreements, including
up-front development payments, is recognized over the anticipated period of
research or license with the collaborators. 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, 2000 or 1999.
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.
NET LOSS PER COMMON SHARE
Basic net loss per common share attributable to common shareholders excludes
dilution and is computed by dividing net loss attributable to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted net loss attributable to common shareholders is computed using
the weighted average number of shares of common and dilutive potential common
shares outstanding during the period. The Company's basic and diluted net loss
attributable to common shareholders for the years ended December 31, 2000, 1999
and 1998 is the same because, for loss periods, potential common shares would
be antidilutive. Options currently outstanding that could be dilutive in the
future are summarized in Note 12.
STOCK-BASED COMPENSATION
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 12 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.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, ("FIN 44") "Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of APB 25". This interpretation clarifies:
the definition of employee for purposes of applying APB 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of previously fixed stock
options or awards, and the accounting for an exchange of stock compensation
awards in business combinations. FIN 44 was effective on July 1, 2000 and the
Company adopted its provisions. The adoption did not have a material impact on
the Company's consolidated results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses 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 debt is
provided in Note 9.
F-8
1. ORGANIZATION AND 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.
COMPREHENSIVE INCOME (LOSS)
The Company calculates and discloses comprehensive income in accordance with
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. There
were no items of other comprehensive income (loss) for 2000, 1999 or 1998.
CASH FLOW INFORMATION
A supplemental schedule of non-cash financing activities follows:
Year Ended December 31
----------------------
2000 1999 1998
------- ------- ------
Acquisition of assets through capital leases $ 20,863 $39,528 $ -
Amortization of beneficial conversion feature of Series A Preferred Stock 3,003,590 - -
Dividends on convertible preferred stock 626,638 - -
Conversion of Series A Preferred Stock into common stock 2,011,050 - -
Issuance of warrants in conjunction with preferred stock financing 62,400 - -
Purchases of property, plant and equipment in accounts payable at year end $ 734,162 $ 596 $17,269
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101, as amended by SAB 101A and SAB 101B, provided broad
conceptual discussions and industry-specific guidance concerning revenue
recognition. The four major criteria that must be met in recognizing revenue
under SAB 101 are: (1) persuasive evidence of an arrangement exists; (2)
delivery has occurred or services have been rendered; (3) the seller's price to
the buyer is fixed or determinable; and (4) collectibility is reasonably
assured. The Company adopted SAB 101 in January 2000 and, accordingly, is
amortizing collaborative revenue received over the anticipated development
period. No cumulative effect adjustment was required as a result of the
adoption as work under these arrangements was completed prior to 2000. Had the
Company applied SAB 101 retroactively to 1999, the Company's net and
comprehensive loss and the loss per share attributable to common shareholders
would have been $5,926,220 and $0.79 respectively, compared to the actual loss
and loss per share of $6,222,470 and $0.83 respectively. Had the Company
applied SAB 101 retroactively to 1998, the Company's net and comprehensive loss
and the loss per share attributable to common shareholders would have been
$3,474,820 and $0.50, respectively, compared to the actual loss and loss per
share of $3,643,153 and $0.52 respectively.
The Emerging Issues Task Force (the "EITF") has issued No. 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" ("EITF 98-5"). EITF 98-5 provides guidance
concerning the accounting for issuances of convertible preferred stock and
warrants. On the date of the Company's issuance of the Series A Preferred
Stock, the effective conversion price of the preferred stock was at a discount
to the price of the common stock into which the Series A is convertible. In
accordance with EITF 98-5 guidance at the time of the preferred stock issuance,
this discount totaled $975,600. It was recorded as a preferred stock dividend
and amortized over the three-month period until conversion was possible. In
November 2000, the EITF issued further interpretations of EITF 98-5 which
required the Company to record an additional discount of $2,027,990 during the
Company's fourth quarter.
F-9
2. SHORT-TERM INVESTMENTS
Investment securities at December 31, 2000 and 1999 are all classified as held-
to-maturity and are summarized as follows:
Gross Unrealized
----------------
Amortized Estimated
Cost Gains Losses Market Value
---------- -------- ------ ------------
2000
Held-to-maturity:
Corporate bonds $ 934,364 $147 $ 253 $ 934,259
U.S. Agency obligations 2,969,759 -- 1,529 2,968,230
---------- -------- ------ ----------
$3,904,123 $147 $1,782 $3,902,489
========== ======== ====== ==========
1999
Held-to-maturity:
U.S. Agency obligations $1,500,000 $ -- $1,410 $1,498,590
========== ======== ====== ==========
3. INVENTORIES
Inventories at December 31, 2000 and 1999 consisted of the following:
2000 1999
---------- ----------
Raw materials $1,132,168 $1,100,794
Finished goods 153,815 228,699
---------- ----------
$1,285,983 $1,329,493
========== ==========
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2000 and 1999 consisted of the following:
2000 1999
----------- ----------
Molds and equipment $ 8,243,771 $4,288,174
Furniture, fixtures and IT equipment 1,267,857 1,088,875
Leasehold improvements 1,315,891 1,302,856
Equipment under capital leases 305,587 284,724
----------- ----------
11,133,106 6,964,629
Less accumulated depreciation and amortization 4,709,276 3,761,512
----------- ----------
$ 6,423,830 $3,203,117
=========== ==========
The Company leases certain equipment under capital lease arrangements. The cost
of equipment under capital leases at December 31, 2000 and 1999 was $305,587 and
284,724, respectively, and the accumulated amortization was $265,539 and
$255,078, respectively.
5. PATENTS AND INTELLECTUAL PROPERTY
Patents, intellectual property and intangible assets at December 31, 2000 and
1999 consisted of the following:
2000 1999
-------- --------
Patents $619,952 $582,729
Intangible assets 197,446 197,446
-------- --------
817,398 780,175
Less accumulated amortization 281,179 211,457
-------- --------
$536,219 $568,718
======== ========
F-10
6. RESEARCH AND DEVELOPMENT GRANTS
The Company has recognized $137,993 as other income during 1998 related to a
grant award from the National Institutes of Health Small Business Innovation
Research.
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
2000 1999
-------- --------
Accrued clinical liabilities $502,750 $ 11,107
Accrued compensation and benefits 31,804 51,041
Accrued professional fees 38,195 17,665
Other 76,017 92,036
-------- --------
$648,766 $171,849
======== ========
8. DEVELOPMENT INCOME AND DEFERRED REVENUE
In 2000, the Company began recognizing development income in accordance with SEC
Staff Accounting Bulletin No. 101. During 2000, 1999 and 1998, the Company
received payments as part of collaboration agreements with other entities and
recognized $491,666, $100,000 and $505,000, respectively, of development income
related to these agreements. Under SAB 101, payments received under
collaboration agreements are deferred and recognized as income over the period
of the respective agreements. Total payments received in 2000 but deferred to
future periods totaled $1,128,869. No cumulative effect adjustment was required
as a result of the adoption of SAB 101.
9. DEBT
Debt obligations as of December 31, 2000 and 1999 consisted of the following:
2000 1999
---- ----
Notes payable $854,221 $1,626,283
Current portion of notes payable 844,072 785,544
-------- ----------
Long-term notes payable,
excluding current portion $ 10,149 $ 840,739
======== ==========
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, 2000. This loan, with a remaining balance of $840,739
at December 31, 2000, matures in 2001. Other notes payable mature as follows:
2001 - $3,333; 2002 - $3,705; 2003 - $4,119; and 2004 - $2,325.
The fair value of the 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, 2000 and 1999 were
approximately $868,000 and $1,652,000, respectively.
10. LEASES
As of December 31, 2000, the Company leases its current facility under a month-
to-month operating lease agreement. The Company has entered into a lease
agreement for a new facility that begins in April 2001 and extends until 2011.
In addition, the Company leases certain equipment under various capital and
operating lease agreements. Rent expense related to operating leases totaled
$435,386, $413,010 and $427,811 for the years ended December 31, 2000, 1999 and
1998, respectively. Future minimum lease payments as of December 31, 2000 are as
follows:
Year ending December 31,
Capital Operating
Leases Leases
------ ------
2001 $19,438 $ 450,086
F-11
10. LEASES (continued)
Capital Operating
Leases Leases
------- ------
2002 19,438 331,464
2003 8,168 333,640
2004 - 327,896
2005 - 337,733
Thereafter - 1,846,860
------- ----------
Total minimum lease payments 47,044 $3,627,679
==========
Imputed interest (8% to 8.5%) (4,542)
-------
Present value of minimum lease payments 42,502
Less current maturities 16,617
-------
Long-term capital lease obligations $25,885
=======
The historical carrying value of the Company's capital lease obligations
approximates their fair value because the interest rates on these obligations
approximate rates currently available to the Company.
11. PREFERRED STOCK
During 2000, the Company completed a private placement of 120,000 shares of
Series A convertible preferred stock ("Series A"), resulting in net proceeds of
$11,219,621. The Company also issued five-year warrants to acquire 240,000
shares of common stock at $10.00 per share. Approximately $1,275,000 of the net
proceeds was allocated to the warrants based on their relative fair value. The
Series A has a dividend of 6% payable quarterly in cash or in shares of common
stock at the option of the Company. For the year ended December 31, 2000, the
Series A dividend was paid by issuing 40,065 shares of common stock.
Each share of the Series A is convertible into ten shares of common stock at
$10.00 per share. The Series A is convertible after May 28, 2000 at the option
of the holder or may be redeemed at the option of the Company upon the
occurrence of any of the following events: (a) the common stock closes at or
above $20.00 per share for 20 consecutive trading days, (b) a completion by the
Company of a follow-on public offering of at least $10 million at a per share
price of at least $15.00, (c) the acquisition of the Company by another entity
by means of a transaction that results in the transfer of 50% or more of the
outstanding voting power of the Company, (d) a sale of all or substantially all
of the Company's assets, or (e) at any time after February 28, 2004.
The holders of the Series A have a liquidation preference of $100 per share plus
any accrued but unpaid dividends then held, such amounts subject to certain
adjustments. The liquidation preference is payable upon a change in control of
the Company, thus the Series A is carried in the mezzanine section of the
balance sheet. The holders also have the right to vote together with the common
stock on an as-if-converted basis.
On the date of issuance of the Series A, the effective conversion price of the
Series A was at a discount to the price of the common stock into which the
Series A is convertible. In accordance with EITF 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios", this discount totaled $3,003,590 and was recorded
as a preferred stock dividend.
12. 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-12
12. STOCK OPTIONS (continued)
A summary of the status of the Company's Plans as of December 31, 2000, 1999 and
1998, and changes during the years ending on those dates is presented below:
2000 1999 1998
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- ------- --------
Outstanding at beginning of year 1,211,887 $ 4.09 841,066 $3.19 878,190 $2.88
Granted 228,000 $12.73 453,500 $5.80 67,634 $5.01
Exercised (113,987) $ 3.14 (16,138) $1.53 (90,263) $1.19
Forfeited (14,002) $ 6.07 (66,541) $5.03 (14,495) $4.75
--------- ------ --------- ----- ------- -----
Outstanding at end of year 1,311,898 $ 5.63 1,211,887 $4.09 841,066 $3.19
========= ====== ========= ===== ======= =====
Options exercisable at year-end 787,273 623,261 527,161
========= ========= =======
The weighted average fair value of options granted during the years ended
December 31, 2000, 1999 and 1998 was $8.97, $3.90 and $2.83, respectively.
The following table summarizes information about the Plan's stock options at
December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------------- -------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/00 Life Price at 12/31/00 Prices
--------------- ----------- ----------- -------- ----------- --------
$0.79 289,791 3.5 years $ 0.79 289,791 $ 0.79
$3.75-$ 4.50 139,482 5.1 years $ 4.39 129,482 $ 4.44
$5.00-$ 6.38 655,625 8.1 years $ 5.59 339,000 $ 5.54
$9.63-$15.06 227,000 9.5 years $12.68 29,000 $14.02
--------- -------
1,311,898 787,273
========= =======
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
2000, 1999 and 1998:
2000 1999 1998
---- ---- ----
Dividend yield 0% 0% 0%
Volatility 75% 69% 51%
Risk free interest rate 5%-6.5% 6.1% 5.4%
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 (loss) in future
years.
2000 1999 1998
---- ---- ----
Net loss attributable to common shareholders As reported $ (9,963,751) $(6,222,470) $(3,643,153)
Pro forma $(11,136,256) $(7,051,334) $(4,022,591)
Net loss attributable to common shareholders
per common share As reported $ (1.31) $ (0.83) $ (0.52)
Pro forma $ (1.46) $ (0.94) $ (0.57)
F-13
13. SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
Prior to the sale of substantially all the operating assets and liabilities of
Coeur in 1999, the Company organized and managed its business primarily on the
basis of its operating divisions, CVDI and Coeur. Each of these segments earned
revenue, incurred expenses and has discrete financial information available to
it. Segment expenses include allocations of certain expenses to each segment.
Management evaluated 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 for 1999 and 1998:
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
During the years ended December 31, 2000, 1999 and 1998 there were sales to CVDI
customers that exceeded 10% of net consolidated sales. Sales to these customers
were:
2000 1999 1998
---- ---- ----
Customer A $ 257,561 $ 991,345 $1,311,611
Customer B 3,335,775 1,857,353 3,690
Customer C - 431,380 1,755,820
Customer D 600,000 320,000 -
As of December 31, 2000 and 1999, 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: 2000 -
customer B, 92%; 1999 - customer A, 19%; customer B, 37%; customer D, 40%.
CVDI generated revenue from sales to different geographic areas for 2000, 1999
and 1998 as follows:
2000 1999 1998
---- ---- ----
United States $3,669,234 $3,007,657 $1,459,339
United Kingdom - 83,157 246,138
Germany - 440,042 2,028,111
Sweden 600,000 327,750 247,495
Other foreign sales - 50,773 159,680
---------- ---------- ----------
Total sales $4,269,234 $3,909,379 $4,140,763
========== ========== ==========
14. 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, 2000, 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.
15. 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 $58,909, $89,507 and $22,399 during the years ended December 31
2000, 1999 and 1998, respectively.
F-14
16. INCOME TAXES
Income tax expense consisted entirely of current state taxes of $0, $27,753 and
$67,250 for the years ended December 31, 2000, 1999 and 1998, 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, 2000, 1999 and
1998 is as follows:
2000 1999 1998
---- ---- ----
Expected income tax benefit at federal statutory rate $(2,148,144) $(2,115,640) $(1,215,508)
State tax provision (benefit) (194,935) (210,074) 7,351
Goodwill amortization -- 303,681 62,830
Compensation paid with incentive stock options -- 3,740 3,740
Other 91,694 35,775 5,361
Distribution premium -- -- 850,000
Research and development credit (60,849) (166,625) --
Change in valuation allowance 2,312,234 2,176,896 353,476
----------- ----------- -----------
Net income tax provision $ -- $ 27,753 $ 67,250
=========== =========== ===========
The components of the net deferred tax assets and net deferred tax liabilities
as of December 31, 2000 and 1999 are as follows:
2000 1999
---- ----
Deferred tax assets:
Accrued expenses $ 5,000 $ 2,000
Alternative minimum tax credits 9,000 9,000
Net operating loss carryforward 12,989,000 11,014,000
Research and development credits 456,000 395,000
Foreign tax credits 35,000 35,000
Other 180,000 84,000
------------ ------------
Total gross deferred tax assets 13,674,000 11,539,000
Valuation allowance (12,927,000) (10,615,000)
------------ ------------
Net deferred tax assets 747,000 924,000
------------ ------------
Deferred tax liabilities:
Patents 163,000 176,000
Investment adjustment 488,000 490,000
Fixed assets 96,000 258,000
------------ ------------
Total gross deferred tax liabilities 747,000 924,000
------------ ------------
Net deferred taxes $ -- $ --
============ ============
At December 31, 2000 and 1999, the Company has approximately $34,000,000 and
$28,773,000, respectively, of combined federal net operating losses. These
losses expire in varying amounts beginning in 2004 if not utilized. At December
31, 2000 and 1999 for state income tax purposes, Cardiovascular Diagnostics,
Inc. had net operating loss carryforwards of approximately $30,935,000 and
$25,725,000, 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, 2000) are
utilized in the future, the benefit will reduce the excess cost over fair value
of net assets acquired. The 2000 and 1999 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, 2000 and 1999.
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.
F-15
17. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents a summary of operations for the quarters of 2000 and
1999:
2000 1999
------------------------------------------------------ -------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Net sales $ 1,489,000 1,377,000 743,000 660,000 1,011,000 1,126,000 745,000 1,027,000
Gross profit 581,000 404,000 (45,000) (252,000) 317,000 226,000 (19,000) 206,000
Net loss before
preferred stock
charges (1,031,000) (1,270,000) (1,749,000) (2,284,000) (1,032,000)(d) (2,338,000)(e) (1,399,000) (1,453,000)
Net loss
attributable to
common
shareholders (1,479,000)(a) (2,047,000)(b) (1,917,000) (4,521,000)(c) (1,032,000)(d) (2,338,000)(e) (1,399,000) (1,453,000)
Net loss before
preferred stock
charges per
common share (0.14) (0.17) (0.23) (0.29) (0.14) (0.31) (0.19) (0.19)
Net loss
attributable to
common
shareholders per
common share $ (0.20) $ (0.27) $ (0.25) $ (0.58) $ (0.14) $ (0.31) $ (0.19) $ (0.19)
(a) Includes $377,000 of amortization of beneficial conversion feature of the
Series A Preferred Stock
(b) Includes $598,000 of amortization of beneficial conversion feature of the
Series A Preferred Stock
(c) Includes $2,028,000 of amortization of beneficial conversion feature of the
Series A Preferred Stock. This amount resulted from a change in accounting
principle retroactively applied to the Series A Preferred Stock transaction.
(d) Includes $175,000 of income from operations of a discontinued segment
(e) Includes $983,000 of loss from operations and disposal of a discontinued
segment
F-16
PHARMANETICS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2000, 1999 and 1998
Balance at Charge to Balance at
Beginning Costs and End
of Period Expenses Deductions of Period
---------- --------- ------------ ----------
YEAR ENDED DECEMBER 31, 2000
Deducted from asset accounts:
Accounts Receivable Reserve (a) $ 29,556 $ 3,574 $ 28,791 (f) $ 4,339
======== ========= =========== ========
Inventory Reserves (b) $100,000 $109,460 $ 84,460 (e) $125,000
======== ========= =========== ========
Added liability accounts:
Warranty Reserves (c) $ 5,942 -- $ 1,899 (g) $ 4,043
======== ========= =========== ========
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 Reserves (a) $ 3,792 $ 11,228 $ 794 (f) $ 14,226
======== ========= =========== ========
Inventory Reserves (b) $231,339 $147,000 $293,339 (e) $ 85,000
======== ========= =========== ========
Added to liability accounts:
Warranty Reserves (c) $ 38,571 $ -- $ 28,571 (d) $ 10,000
======== ========= =========== ========
(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 ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of PharmaNetics, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 14, 2001 appearing in this Form 10-K of PharmaNetics, Inc., also
included an audit of the financial statement schedules listed in Item 14(a)(2)
of this Form 10-K. In our opinion, these financial statement schedules present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 14, 2001