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, 2001
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.)
9401 GLOBE CENTER DRIVE, SUITE 140
MORRISVILLE, NORTH CAROLINA 27560
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
919-582-2600
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 $7.75 per share, the closing price of the Common
Stock on March 18, 2002, on the NASDAQ National Market System, was
approximately $57,503,000 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 18, 2002, the registrant had outstanding 9,534,494 shares of
Common Stock (no par value).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 2002 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"); Low Range
Heparin Management Test ("LHMT"); and Heparin Management Panel and Accent
system, a hardware accessory to the TAS analyzer which combines the TAS
technology and the currently marketed HMT with two other test cards, the
Heparin Titration test ("HTT") and Protamine Response test ("PRT") with the
Accent. The Company has sold three other tests, the Lysis Onset Time ("LOT),
Ecarin Clotting Time ("ECT") and a modified ecarin clotting time test "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. In addition, the Company is
currently researching and developing other test cards for use on the TAS system.
INDUSTRY OVERVIEW
Blood testing within the practice of laboratory medicine has been evolving
in response to the physician's demand for information. This demand for
information is particularly acute in blood testing, where access to timely and
accurate results is critical to effective patient care. Initially, hospital
blood analysis was performed in multiple small laboratories that typically used
time consuming manual techniques. The accuracy of tests performed under these
conditions varied considerably depending upon, among other factors, the skill
of the laboratory personnel. The advent of automated blood testing allowed for
centralization and standardization of laboratory tests. With improved access to
blood analysis, physicians began to use laboratory tests as a primary
diagnostic tool and consequently demanded more tests and faster results. In an
effort to meet this demand, some hospitals established decentralized stat
laboratories nearer the patient. These laboratories typically rely on
technology designed for efficiency in a high-volume centralized department.
CVDI believes that reliance on this technology makes stat laboratories
inadequate and expensive, creating a need for new technology suitable for use
at the point of patient care. As diagnostics move closer to the patient, the
centralized lab has had a reduced role in the purchasing decisions for
point-of-care systems. The physician is more likely to have influence over the
use of point-of-care technology given its ability to be a valuable tool for
managing therapy.
Recent advances in technology allow many routine blood tests to be
performed at the point of patient care, where the physician can most
effectively use test results. Portable, easy-to-use analyzers designed to
perform blood analysis rapidly and accurately are emerging as a solution to
these current healthcare demands. While speed is important in point-of-care
testing, accuracy is critical. Since point-of-care testing is often performed
by operators who lack special laboratory skills or training, the more
error-proof the testing system, from sample collection through archiving of the
test result, the more reliable the system will prove to be. By design, most
point-of-care tests require limited materials and minimum labor. Point-of-care
test systems must also comply with the Clinical Laboratory Improvement Act of
1988, 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.
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 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. The Company's distributor,
Bayer Diagnostics ("Bayer") currently markets this product as the Rapidpoint
Coag analyzer.
ACCENT
The Accent is a hardware accessory to the TAS analyzer. 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 several 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.
The HTT and PRT test cards are combined with the 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 management into routine practice.
The LHMT card 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 markets it ECT card under the FDA's Humanitarian Device
Exemption program. The ECT card is used in managing patients suffering from
heparin induced thrombocytopenia. The FDA's approval only allows the use of the
test for managing patients who receive Refludan while undergoing
cardiopulmonary bypass.
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 researching
and/or developing the following new tests:
Test Description
--- -----------
Enoxaparin Test Test to monitor the anticoagulant effect of the
low molecular weight heparin enoxaparin sodium
used for the treatment and prevention of
thrombotic diseases, This test is the subject of
a collaborative development agreement with
Aventis Pharmaceuticals, Inc. In October 2001,
the Company filed a 510k with the FDA for
clearance to market this test.
Protein C Test Test for monitoring and screening potential
treatments for patients with sepsis
Ecarin Clotting Time ("ECT") Test to monitor direct thrombin inhibitors for
use in patients treated for heart attack or
prevention of deep vein thrombosis
Modified Ecarin Clotting Time Test to allow the monitoring of oral antithrombin
drugs currently in FDA Phase III development for
treatment of DVT and atrial fibrillation
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 current marketing strategy for its PT, aPTT, HMT and LHMT test
cards relies on a distribution partner. In August 1998, CVDI signed a five-year
global distribution agreement, subject to minimum annual sales, with Chiron
Diagnostics Corp. to distribute these test cards (in November 1998, Bayer
Corporation acquired Chiron Diagnostics and it became a part of Bayer). At that
time, CVDI received an up-front investment of $6 million in exchange for
600,000 shares of common stock. Additionally, in April 2001, Bayer purchased
1,450,000 shares of common stock of the Company at $12 per share for $17.4
million. This investment increased Bayer's ownership percentage in the Company
from approximately 7% to 19.9%. In connection with the investment, the Company
and Bayer entered into an amended distribution agreement to replace the
previous distribution agreement.
Under the terms of the amended agreement, Bayer will purchase, at
pre-determined prices, CVDI's routine test cards identified in the agreement.
The companies also expanded their relationship to cover collaborative
distribution and supply of certain theranostic tests in the USA. Under the
provisions of the agreement, Bayer is responsible for taking the orders,
shipping and collecting receivables for theranostic tests sold by the Company's
sales team. In return, Bayer will receive a 10% commission. This arrangment
enables the customer to order all of the Company's products from a single
source. The initial term of this agreement is until December 31, 2003,
renewable for successive five-year terms. CVDI has the right to terminate the
Bayer agreement if (1) Bayer fails to make payments when due to the Company,
(2) Bayer fails to maintain sales to end users or (3) a distributor appointed
by Bayer 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 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 is CVDI's exclusive distributor in
these territories.
CVDI believes that Bayer 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's leading market position in blood gas
analysis. In addition, Bayer has the contingent right to distribute outside the
U.S. certain theranostic test cards currently under development and a right of
first refusal for distribution of these tests in the U.S.
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 development
agreements with major pharmaceutical companies such as Aventis Pharmaceuticals
and Knoll AG (now a part of Abbott Laboratories) pursuant to 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 the agreement with Aventis, the Company is developing the ENOX test,
the only point-of-care test designed to monitor the anticoagulant effect of the
low molecular weight heparin enoxaparin sodium, a drug developed and marketed
by Aventis Pharmaceuticals in the U.S. under the brand name Lovenox(R) and
outside the U.S. under the brand name Clexane(R). This test was submitted to
the FDA for marketing clearance in October 2001. It is anticipated that the
ENOX test may facilitate the use of Lovenox in some cardiology patients and in
certain special populations. PharmaNetics believes the ENOX test may provide
physicians with a tool to more confidently prescribe enoxaparin for all of
their patients, because they can assess the anticoagulant state of patients who
could be sent to the catheterization laboratory. Consequently, PharmaNetics
initiated the ELECT (EvaLuating Enox Clotting Times) study, a clinical trial
developed by leading interventional cardiologists, to assess the clinical
utility of the
ENOX test in patients undergoing interventional cardiac procedures and to
provide physicians with guidance in assessing anticoagulation at time-points
before, during, and after the course of the procedure. The study, currently
conducted in over 15 top interventional catheterization laboratories, will
collect data from 6oo patients. The data, when published, will be an integral
part of the Company's marketing strategy to the medical community. The Company
will then deploy a contract direct sales force that could include up to 10
specialists and 8 technical service representatives. The sales force intends to
launch the test at approximately 100 beta sites across the U.S. performing
cardiac intervention procedures and then seek to penetrate the top 1,000
cardiac centers in the U.S. when the results of ELECT are available.
The Company has received $2 million in milestone payments under this
agreement and will receive a milestone payment of $1.5 million when 510(k)
clearance to market the ENOX test is obtained and another $1.5 million upon
market launch of the product.
In relation to the development of the ecarin clotting time cards to
monitor direct thrombin inhibitors, CVDI has a worldwide exclusive sublicense
from Knoll/Abbott to use the reagent within the test. During 2001, the Company
ended an Interim Agreement with AstraZeneca related to Astra's development of
an oral thrombin inhibitor and received a payment of $1.5 million as part of
the cessation of this agreement. The Company believes the medical community
will embrace the need for a test for managing therapeutic levels in patients
receiving oral and injectable direct thrombin inhibitors. To this end, the
Company is presently in the process of collecting its own data and conducting
clinical trials necessary to submit an FDA application for this test. The test
would be used with three FDA-approved thrombin inhibitors on the market.
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.
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, in the past
under this collaboration model, the pharmaceutical company with whom the
Company is collaborating has paid for the clinical trials and provided the
Company access to the regulatory data associated with the test to be used in
submitting a 510(k) notification. This approach has allowed the Company to
cost-effectively develop its tests.
The commercial success of the Company's products will depend upon their
acceptance by the medical community as being useful and cost-effective. Market
acceptance will depend upon several factors, including the establishment of the
utility and cost-effectiveness of the Company's tests and the receipt of
regulatory clearances in the United States and elsewhere. The availability of
point-of-care hemostasis test systems has been limited to date, so by selling
point-of-care hemostasis test products, the Company is targeting an essentially
new market. Diagnostic tests similar to those developed by the Company are
generally performed by a central laboratory at a hospital or clinic. The
approval of the purchase of diagnostic equipment by a hospital is generally
controlled by its central laboratory. The Company expects 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 as its principal
distributor for marketing and distribution of its routine test cards, the PT,
aPTT, HMT and LHMT and the related controls and analyzer. Bayer also
distributes the specialty cards HTT and PRT. There can be no assurance that
Bayer will be successful in marketing or selling these products in sufficient
volume to produce profitability for the Company. Also, there can be no
assurance that the Company could build a cost-effective and adequate sales and
marketing staff to replace Bayer in selling these routine products. The loss of
the Company's distributor 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 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. 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.
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 $24,000, $58,909
and $89,507 during the years ended December 31, 2001, 2000, and 1999,
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 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.
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 increase
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.
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
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 89 employees as of December 31, 2001. Twelve employees
were engaged in research and development (6 of which have Ph D's), 43 in
manufacturing and quality control, 18 in software, engineering and facilities,
7 in sales/marketing and 9 in finance/administration. Many of the Company's
executive and technical
personnel have had experience with biomedical diagnostics companies. None of
the Company's employees are covered by a collective bargaining agreement and
the Company believes that employee relations are good.
The Company's success depends to a significant extent upon management and
technical personnel, none of whom have employment agreements with the Company.
Although the Company maintains a $500,000 key man life insurance policy on its
chief executive officer, the loss of the service of this officer could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company also believes that its future success will
depend in large part upon its ability to attract and retain highly skilled
technical, management and sales and marketing personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. The Company's failure to
attract, hire and retain these personnel would have a material adverse effect
on the Company.
ITEM 2. PROPERTIES
During 2001, the Company relocated its executive offices to a new facility
located at 9401 Globe Center Drive, Suite 140, Morrisville, North Carolina
27560. The Company currently occupies approximately 55,000 square feet of
development, production and administration space at this location.
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, 2001.
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth information as of March 21, 2002 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 48, 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 58, 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.
Michael D. Riddle, age 49, 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).
Mark X. Triscott, age 48, joined the company in May 2001 as Vice
President of Research and Development. Prior to joining the company Dr.
Triscott was employed at Sigma Diagnostics for more than five years in various
positions including, Principal Scientist , Manager, Coagulation Research and
Development, and Manager responsible for all Diagnostics Research and
Development. Dr. Triscott has a Science degree with First Class Honours from
the University of Queensland (Australia), where he also completed a Doctorate
in Microbiology. He did a post-doctoral fellowship at Bowman Gray School of
Medicine, Winston-Salem North Carolina, where he held an adjunct faculty
position in Biochemistry. Dr Triscott is an inventor on several issued and
pending US and foreign patents, and has published more than 30 peer reviewed
articles, chapters and abstracts.
Paul T. Storey, age 35, 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, 2001 and 2000 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, 2001
First Quarter $ 12.813 $ 6.813
Second Quarter 11.15 7.75
Third Quarter 10.45 6.75
Fourth Quarter 8.00 6.16
Fiscal year ended December 31, 2000
First Quarter $ 18.00 $ 9.00
Second Quarter 19.875 11.875
Third Quarter 22.75 17.062
Fourth Quarter 19.00 9.625
(B) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
As of March 15, 2002, 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.
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 consolidated
financial statements of the Company and the notes thereto included elsewhere in
this Annual Report on Form 10-K along with said consolidated 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,
-----------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
RESULTS OF OPERATIONS
Net sales $ 4,539 $ 4,269 $ 3,909 $ 4,141 $ 2,924
Cost of goods sold 4,046 3,581 3,179 2,847 2,845
-------- -------- -------- -------- --------
Gross profit 493 688 730 1,294 79
Operating expenses:
General and administrative 4,525 3,330 2,715 2,815 3,204
Sales and marketing 1,208 1,050 799 707 1,316
Research and development 3,950 3,697 2,777 2,509 2,440
-------- -------- -------- -------- --------
Total operating expenses 9,683 8,075 6,291 6,031 6,960
Other income, net 589 1,053 147 514 1,421
-------- -------- -------- -------- --------
Loss from continuing operations (8,602) (6,334) (5,414) (4,223) (5,460)
Discontinued operations:
Income from operations -- -- 18 580 781
Loss on disposal -- -- (826) -- --
-------- -------- -------- -------- --------
Net loss (8,602) (6,334) (6,222) (3,643) (4,679)
Beneficial conversion feature of Series A
Preferred Stock -- (3,004) -- -- --
Preferred stock dividends (566) (626) -- -- --
-------- -------- -------- -------- --------
Net and comprehensive loss attributable
to common shareholders $(9,168) $(9,964) $(6,222) $(3,643) $(4,679)
======== ======== ======== ======== ========
Basic and diluted loss per common share:
Net loss $ (0.97) $ (0.83) $ (0.83) $ (0.52) $ (0.70)
Net loss attributable to common
shareholders $ (1.03) $ (1.31) $ (0.83) $ (0.52) $ (0.70)
Weighted average shares outstanding 8,877 7,626 7,469 7,007 6,722
Pro forma amounts assuming SAB 101
was retroactively applied/(1)/:
Net and comprehensive loss attributable to
common shareholders $(9,168) $(9,964) $(5,926) $(3,475) $(5,144)
Basic and diluted loss attributable to common
shareholders per share $ (1.03) $ (1.31) $ (0.79) $ (0.50) $ (0.77)
As of December 31,
------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
FINANCIAL CONDITION
Cash and cash equivalents $ 14,883 $ 5,344 $ 3,661 $ 3,998 $ 5,885
Short term investments -- 3,904 1,500 3,703 --
Total assets 27,014 18,314 11,647 18,693 17,685
Long term debt and capital Lease
Obligations, excluding 66 36 862 1,626 2,351
Current portion
Total liabilities 3,386 3,632 2,039 2,949 4,492
Accumulated deficit (49,616) (40,448) (30,484) (24,262) (20,619)
Series A Preferred stock 7,520 8,102 -- -- --
Contingently redeemable common
Stock 8,538 -- -- -- --
Common shareholders' equity $ 7,570 $ 6,580 $ 9,608 $ 15,744 $ 13,193
/(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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
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 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.
The Company currently derives income from the following sources: TAS
product sales, interest income, and development income recognized in connection
with collaboration agreements. 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. Thus, CVDI has signed a global distribution agreement with
Bayer Diagnostics to distribute its products. 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 of new test cards.
The Company also believes that these trends should allow the Company to obtain
higher pricing of these specialty tests. As a result, the Company has exhibited
the flexibility of the TAS platform and the potential to expand its menu of
specialty tests by signing development agreements with major pharmaceutical
companies to monitor the effects of certain new drugs that are in clinical
trials or currently being marketed. Increased placement of specialty tests
might 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.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from the sale of products is recorded when an arrangement exists,
delivery has occurred or services have been rendered, the seller's price is
fixed and determinable and collectibility is reasonably assured. Substantially
all of the Company's product sales in 2001 were made to the Company's
distributor, Bayer. Income under license and development agreements is
recognized over the anticipated period of the agreements with the
collaborators, in accordance with SEC Staff Accounting Bulletin No. 101 (SAB
101). SAB 101 clarifies conditions to be met to recognize up-front
non-refundable payments. Such payments are recognized over the life of the
related agreement unless the payment relates to products delivered or services
performed that represent the completion of the earnings process. Payments
received but not recognized into income in the year of receipt are deferred and
recognized over the period of the respective agreements. The Company has
recognized revenue related to the development agreement with Aventis. The
Company is recognizing revenue related to the Aventis contract, which was
entered into in 2000, over the agreement period of five years.
EQUITY
In April 2001, the Company and Bayer entered into an amended distribution
agreement to replace the previous distribution agreement between the parties
entered into during 1998. The 2001 common stock purchase agreement with Bayer
contains a provision that, upon the occurrence of a "change in control", as
defined in the agreement, the Company may be required to compensate Bayer, in
cash or shares of common stock, for any difference between per share prices
originally paid by Bayer and the amount received by the Company's shareholders.
In accordance with the implementation requirements of recently issued and
adopted Emerging Issues Task Force Abstract No. 00-19, the Company has
transferred to temporary equity an amount equal to the "change in control"
payment called for by the purchase agreement. Under the new accounting
guidelines, this temporary transfer is required only for those reporting periods
in which the price per share paid by Bayer is in excess of the fair market value
of a common share, as measured by reference to the NASDAQ National Market.
STOCK-BASED COMPENSATION
The Company applies the provisions of 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
its related interpretations, including Interpretation No. 44, ("FIN 44")
"Accounting for Certain Transactions Involving Stock Compensation - An
Interpretation of APB 25", 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.
RESULTS OF OPERATIONS
Year Ended December 31, 2001 vs. Year Ended December 31, 2000. Sales for
the year ended December 31, 2001 increased to $4.5 million compared to $4.3
million in 2000. Specialty test card sales in 2001 were $1.6 million, of which
$1.5 million related to a payment from AstraZeneca for specialty test cards
previously purchased in 2000 that was required as part of the cessation of a
collaboration agreement in 2001. This sales level compares to specialty test
card revenue of approximately $600,000 recorded in 2000 when specialty test
cards were purchased by a collaborative partner for use in their clinical
trials. Routine test card sales increased 9% to $2.3 million in 2001 compared
to $2.1 million in 2000 as Bayer increased placements of the TAS system. These
increases were offset by decreases in analyzer sales and controls, as total
analyzer revenue in 2001 was $290,000 compared to $1.1 million in 2000, and
control revenue was $257,000 in 2001 compared to $385,000 in 2000. Analyzer
sales decreased in 2001 as Bayer reduced its inventory of analyzers that it had
purchased from the Company during 2000. The gross profit margin in 2001 was 11%
compared to 16% in 2000. Gross margin decreased mainly due to increased costs
in overhead related to increased production equipment and its related
depreciation, production costs associated with the Company's plant relocation
during 2001 and additional manufacturing and quality control personnel. The
2001 gross margin was aided by increased revenue from specialty test cards,
principally the $1.5 million received from AstraZeneca.
Total operating expenses for 2001 totaled $9.7 million compared to $8.1
million 2000. General and administrative expenses increased $1.2 million
compared to 2000 due to several factors. Higher personnel costs from salary and
benefit increases were incurred as well as from additional personnel hired into
administration. Increased facility and equipment costs were incurred related to
the Company's relocation to new facilities. In addition, the Company incurred
implementation costs in improving its management information systems during
2001. Sales and marketing expenses increased due to higher compensation costs
and expenditures related to marketing materials and training, mostly related to
the enoxaparin test. Research and development expenses increased approximately
7% in 2001 compared to 2000. The change was mainly due to increased personnel
and increased clinical trial costs related to the Company's enoxaparin test
project and the project to further optimize our PT test.
Interest expense for the year ended December 31, 2001 decreased compared
to 2000. In June 2001, the Company paid off debt to Transamerica Business
Credit Corp. that had been entered into in 1997 to fund working capital and
capital expenditures. Interest income decreased in 2001 compared to 2000 due to
significantly decreased interest rates which lowered returns during the year.
Development income totaled $264,000 in 2001 compared to $492,000 in 2000.
Development income in 2001 was derived from a five-year collaboration agreement
signed with Aventis Pharmaceuticals during 2000 related to the Company's
enoxaparin test. The milestone payments received, which total $2 million to
date, are being recognized into income over the life of this agreement.
Development income in 2000 was related to agreements signed previously with
Bayer Diagnostics and Aventis. The Bayer development agreement ended in 2000.
In February 2000, the Company completed a private placement of 120,000
shares of Series A convertible preferred stock. 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, 2001, the Series A dividend was
paid by issuing 69,604 shares of common stock totaling $566,210.
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 $1.1 million compared to $795,000
in 1999. Also, increases occurred in revenue from routine test cards and
controls which totaled $2.1 million and $385,000, respectively, an increase
over the $1.8 million and $345,000, respectively, recorded in 1999. These
increases were offset by lower specialty test card revenues of $637,000 in 2000
compared to $974,000 in 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 approximately
$615,000 compared to 1999 due to more personnel and increased facility costs,
some of which was related to the Company's planned move to new facilities that
occurred early in 2001. Sales and marketing expenses increased approximately
$252,000, principally due to new expenditures for marketing research related to
test cards then in development. 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, the Company had cash and cash equivalents and
short-term investments of $14.9 million and working capital of $15.8 million,
as compared to $9.2 million and $8.4 million, respectively, at December 31,
2000. During 2001, the Company used cash in operating activities of $7.6
million. The use of cash was principally due to funding the net operating loss
of the Company and increased inventories to support expected product sale
increases. The operating uses of cash were partially offset by funding provided
through the collaboration with Aventis that was recorded as deferred revenue.
Net cash provided by investing activities was $440,000 in 2001. The net
cash provided resulted mainly from maturities of short-term investments offset
by expenditures for new equipment and leasehold improvements related to the
Company's relocation to new facilities. The Company expects capital
expenditures in 2002 to be much lower than in 2001 and to range from $500,000
to $1,000,000.
Cash provided by financing activities was $16.7 million in 2001 as
compared to $10.6 million in 2000. This increase principally resulted from the
issuance of common stock to Bayer in April 2001 when Bayer purchased 1,450,000
shares of common stock of the Company at $12 per share for $17.4 million. This
investment increased Bayer's ownership percentage in the Company from
approximately 7% to 19.9%. This increase in cash provided by financing
activities was reduced by the pay off of the Company's debt with Transamerica
Business Credit Corp.
In 2001, the Company and Bayer entered into an amended distribution
agreement to replace the previous distribution agreement between the parties
entered into during 1998. The 2001 common stock purchase agreement with Bayer
contains a provision that, upon the occurrence of a "change in control", as
defined in the agreement, the Company may be required to compensate Bayer, in
cash or shares of common stock, for any difference between per share prices
originally paid by Bayer and the amount received by the Company's shareholders
in the change of control transaction. In accordance with the implementation
requirements of recently issued and adopted Emerging Issues Task Force Abstract
No. 00-19, the Company has transferred to temporary equity an amount equal to
the "change in control" payment called for by the purchase agreement. Under the
new accounting guidelines, this temporary transfer is required only for those
reporting periods in which the price per share paid by Bayer is in excess of
the fair market value of a common share, as measured by reference to the NASDAQ
National Market.
The Company has sustained continuing operating losses in 2001 and had an
accumulated deficit of $49.6 million as of December 31, 2001. The Company
expects to incur operating losses until product revenues reach a sufficient
level to support ongoing operations. In addition, in the year ended December
31, 2001, the Company had negative cash flows from operations of approximately
$7.6 million. In addition to the capital expenditures noted above, the Company
expects to incur additional operating losses during 2002. The Company's working
capital requirements will depend on many factors, primarily the volume of
subsequent orders of TAS products from distributors, primarily Bayer, and from
sales of specialty test cards such as the Enoxaparin test. 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, will be adequate to satisfy its planned
liquidity and cash requirements through 2002.
If additional liquidity becomes necessary in the future, the Company will
consider external sources of financing as needed. These financings may take the
form of equity financings such as a private placement of common or preferred
stock, a follow-on public offering of common stock or additional equity
infusions from collaborative partners. Given the Company's low amount of debt
at December 31, 2001, the Company would also consider debt financings such as a
working capital line of credit.
CONTRACTUAL OBLIGATIONS
The Company has contractual obligations under notes payable, capital and
operating lease agreements for years subsequent to 2001. Future payments as of
December 31, 2001 are as follows:
Year ending December 31,
Notes Capital Operating
Payable Leases Leases Total
------- ------ ------ -----
2002 $ 3,705 $ 27,379 $ 362,720 $ 393,804
2003 4,119 26,724 370,469 401,312
2004 2,325 19,521 373,618 395,464
2005 - 19,521 370,917 390,438
2006 - 6,512 347,865 354,377
Thereafter - - 1,498,995 1,498,995
-------- --------- ----------- -----------
Total payments $ 10,149 $ 99,657 $ 3,324,584 $ 3,434,390
======== ========= =========== ===========
RECENT ACCOUNTING PRONOUNCEMENTS
In 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS Nos.
141 and 142 change the accounting for business combinations and goodwill in two
significant ways. First, SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Second, SFAS No. 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Thus, amortization of goodwill,
including goodwill recorded in past business transactions, will cease upon
adoption of SFAS No. 142 which will be January 1, 2002. These standards have
not had any material impact on the Company's financial condition, results of
operations or cash flows.
In 2001, the FASB issued Statement of Financial Accounting Standards No.
143 ("FAS 143"), "Accounting for Asset Retirement Obligations", and in July
2001 the FASB issued Statement of Financial Accounting Standards No. 144 ("FAS
144"), "Accounting for the Impairment of Disposal of Long-Lived Assets". FAS
143 requires that obligations associated with the retirement of tangible
long-lived assets be recorded as a liability when those obligations are
incurred, with the amount of the liability initially measured at fair value.
FAS 143 will be effective for financial statements beginning after June 15,
2002, though early adoption is encouraged. The application of this statement is
not expected to have a material impact on the Company's financial statements.
FAS 144 supersedes FAS 121, amends Accounting Principles Board Opinion No.
30 ("APB 30") "Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
and applies to all long-lived assets, including discontinued operations. FAS
144 requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book or fair value less costs to sell. FAS 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and its provisions are generally expected to be applied
prospectively. The Company does not expect the application of this statement to
have a material impact on the Company's financial statements.
FACTORS THAT MIGHT AFFECT FUTURE RESULTS
A number of uncertainties exist that might affect the Company's future
operating results and stock price. There can be no assurance that new tests,
particularly specialty tests, can be developed, receive regulatory approval,
and be commercialized and accepted in the market. Other risks include: 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 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 any investments the Company may hold at various times and also
related to its small amount of long-term debt. When investing, the Company's
purchases consist of highly liquid investments with maturities at the date of
purchase between three and twelve months, thus, due to the short-term nature of
such investments and the Company's usual 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 a
small amount of long-term debt obligations at a fixed interest rate. Given the
fixed rate nature of this debt, the impact of interest rate changes also would
not have a material impact on the Company's results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
Certain information required by Part III is omitted from this report
because the Registrant intends to file a definitive proxy statement for its
2002 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.
PART IV
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) The exhibits filed as part of this Report are listed in Item
14(c) below.
(b) The Company did not file any Current Reports on Form 8-K during the
quarter ended December 31, 2001.
(c) Exhibits
Exhibit
Number Description
------ -----------
3.3(a) Bylaws.
3.4(f) Amended and Restated Articles of Incorporation filed with
the North Carolina Secretary of State on February 24, 2000
4.1(a) Form of Common Stock certificate.
10.2(a)* License Agreement with Tokuyama Soda Company, Ltd., dated
October 6, 1988.
10.3(a) Form of International Distributor Agreement.
10.4(a)* Purchasing Agreement with VHA Inc., dated April 1,1995
10.8(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.
10.20(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(g) Lease Agreement dated July 27, 2000 relating to 9401 Globe
Center Drive, as amended by the First Lease Amendment dated
September 25, 2000.
10.27(h) Common Stock Purchase Agreement between the Registrant and Bayer
Corporation dated April 23, 2001
10.28(h) Amended and Restated Distribution Agreement between Registrant
and Bayer Corporation dated April 23, 2001
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) Not used
(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.
(g) Incorporated by reference to the identically-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2000.
(h) Incorporated by reference to the identically-numbered exhibit to the
Registrant's Current Report on Form 8-K filed April 27, 2001.
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 21, 2002
----------------------------------
John P. Funkhouser and Chairman (Principal Executive Officer)
/s/ James A. McGowan Chief Financial Officer March 21, 2002
----------------------------------
James A. McGowan (Principal Financial Officer)
/s/ Paul T. Storey Treasurer and Director of Finance March 21, 2002
----------------------------------
Paul T. Storey (Principal Accounting Officer)
/s/ John K. Pirotte Director March 21, 2002
----------------------------------
John K. Pirotte
/s/ Stephen R. Puckett Director March 21, 2002
----------------------------------
Stephen R. Puckett
/s/ Philip R. Tracy Director March 21, 2002
----------------------------------
Philip R. Tracy
/s/ Frances L. Tuttle Director March 21, 2002
----------------------------------
Frances L. Tuttle
/s/ James B. Farinholt, Jr. Director March 21, 2002
----------------------------------
James B. Farinholt, Jr.
/s/ William A. Hawkins Director March 21, 2002
----------------------------------
William A. Hawkins
PHARMANETICS, INC.
AND SUBSIDIARIES
INDEX
Page(s)
Consolidated Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December F-3
31, 2001 and 2000
Consolidated Statements of Operations for the
Years Ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7 - F-15
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, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, 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
February 15, 2002
F-2
PHARMANETICS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
ASSETS 2001 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 14,882,589 $ 5,343,749
Short term investments, held-to-maturity
(estimated market value of $3,902,489 in 2000) -- 3,904,123
Receivables:
Trade, net of allowance for doubtful accounts of
$1,995 and $4,339, respectively 305,970 244,772
Other 156,425 56,301
------------ ------------
Total receivables 462,395 301,073
Inventories 2,223,240 1,285,983
Other current assets 241,574 217,894
------------ ------------
Total current assets 17,809,798 11,052,822
Property and equipment, net 8,502,558 6,423,830
Patents and intellectual property, net 550,663 536,219
Other noncurrent assets 150,586 301,555
------------ ------------
Total assets $ 27,013,605 $ 18,314,426
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
CONTINGENTLY REDEEMABLE COMMON STOCK AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 740,785 $ 958,104
Accrued expenses 723,249 648,766
Deferred revenue, current portion 487,462 232,143
Current portion of long-term debt 3,705 844,072
Current portion of capital lease obligations 18,904 16,617
------------ ------------
Total current liabilities 1,974,105 2,699,702
------------ ------------
Deferred revenue, less current portion 1,345,434 896,726
Long-term debt, less current portion 6,444 10,149
Capital lease obligations, less current portion 59,652 25,885
------------ ------------
Total noncurrent liabilities 1,411,530 932,760
------------ ------------
Total liabilities 3,385,635 3,632,462
------------ ------------
Commitments and contingencies (Note 8)
Series A convertible preferred stock, no par
value; authorized 120,000 shares; 90,500 and
97,500 shares issued and outstanding at December
31, 2001 and 2000, respectively (aggregate
liquidation value at December 31, 2001 of $9,050,000) 7,520,446 8,102,168
Contingently redeemable common stock 8,537,500 --
Shareholders' equity:
Common stock, no par value; authorized 40,000,000
shares; 9,485,294 and 7,851,225 issued and
outstanding at December 31, 2001 and
2000, respectively 57,185,936 47,027,959
Accumulated deficit (49,615,912) (40,448,163)
------------ ------------
Total shareholders' equity 7,570,024 6,579,796
------------ ------------
Total liabilities, redeemable preferred stock,
contingently redeemable common stock and
shareholders' equity $ 27,013,605 $ 18,314,426
============ ============
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, 2001, 2000 and 1999
2001 2000 1999
----------- ----------- -----------
Net sales $ 4,538,842 $ 4,269,236 $ 3,909,379
----------- ----------- -----------
Cost of sales:
Materials and labor 1,222,774 1,422,187 1,226,004
Overhead 2,823,555 2,167,645 1,953,291
----------- ----------- -----------
Total cost of sales 4,046,329 3,589,832 3,179,295
----------- ----------- -----------
Gross profit 492,513 679,404 730,084
----------- ----------- -----------
Operating expenses:
General and administrative 4,524,361 3,330,377 2,715,272
Sales and marketing 1,207,939 1,050,733 798,792
Research and development 3,950,289 3,684,573 2,777,274
----------- ----------- -----------
Total operating expenses 9,682,589 8,065,683 6,291,338
----------- ----------- -----------
Loss from operations (9,190,076) (7,386,279) (5,561,254)
----------- ----------- -----------
Other income (expense):
Interest expense (72,194) (200,391) (312,856)
Interest income 421,486 702,572 270,304
Development income 263,833 491,666 100,000
License fee and royalty income 24,000 46,095 90,026
Other income (expense) (48,588) 12,814 (519)
----------- ----------- -----------
Other income, net 588,537 1,052,756 146,955
----------- ----------- -----------
Loss from continuing operations (8,601,539) (6,333,523) (5,414,299)
Discontinued operations:
Income from operations of Coeur Laboratories, Inc.
(net of income taxes of $13,685) -- -- 17,922
Loss on disposal of Coeur Laboratories, Inc.
(including income taxes of $14,000) -- -- (826,093)
----------- ----------- -----------
Net and comprehensive loss (8,601,539) (6,333,523) (6,222,470)
Amortization of beneficial conversion feature of
Series A convertible preferred stock -- (3,003,590) --
Preferred stock dividends (566,210) (626,638) --
----------- ----------- -----------
Net and comprehensive loss attributable to common shareholders $(9,167,749) $(9,963,751) $(6,222,470)
=========== =========== ===========
Basic and diluted net loss per common share:
Net and comprehensive loss $ (0.97) $ (0.83) $ (0.83)
=========== =========== ===========
Basic and diluted net loss attributable to common shareholders $ (1.03) $ (1.31) $ (0.83)
=========== =========== ===========
Weighted average number of outstanding common shares 8,877,270 7,626,473 7,469,461
=========== =========== ===========
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, 2001, 2000 and 1999
Common Stock
------------ Total
Number of Accumulated Unearned Shareholders'
Shares Amount Deficit Compensation Equity
------ ------ ------- ------------ ------
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
Conversions of preferred stock to common stock 70,000 581,722 -- -- 581,722
Stock options exercised 79,965 314,441 -- -- 314,441
Common stock issued 1,450,000 17,359,464 -- -- 17,359,464
Issuance of stock dividends 69,604 566,210 (566,210) -- --
Common stock repurchases (35,500) (126,360) -- -- (126,360)
Reclassification to contingently redeemable common stock -- (8,537,500) -- -- (8,537,500)
Net loss for the year ended December 31, 2001 -- -- (8,601,539) -- (8,601,539)
------------ ------------ ------------ ------------ ------------
Balances at December 31, 2001 9,485,294 $ 57,185,936 $(49,615,912) $ -- $ 7,570,024
============ ============ ============ ============ ============
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, 2001, 2000 and 1999
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (8,601,539) $ (6,333,523) $ (6,222,470)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock based compensation -- -- 51,000
Depreciation and amortization of property and equipment 1,301,912 971,781 890,424
Amortization of intangible assets 203,951 159,421 222,850
Loss on disposal of Coeur Laboratories, Inc. -- -- 826,093
Amortization of discount on investments, net (30,877) (371,042) (46,881)
Loss on trading investments 8,120 -- --
Amortization of unearned compensation -- -- 11,000
Provision for doubtful accounts -- 3,574 --
Provision for inventory obsolescence 84,574 109,460 95,462
Loss on disposal of fixed assets 61,121 (9,782) --
Change in operating assets and liabilities:
Receivables (161,322) 661,634 1,066,777
Inventories (1,021,832) (65,950) 261,365
Other assets 81,173 (190,731) (91,621)
Accounts payable and accrued expenses (198,586) 1,225,297 (145,880)
Deferred revenue 704,027 1,128,869 --
------------ ------------ ------------
Net cash used in operating activities (7,569,278) (2,710,993) (3,081,881)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (3,314,221) (4,146,849) (404,452)
Costs incurred to obtain patents and other intangibles (87,398) (37,223) (52,849)
Purchases of short-term investments, held to maturity -- (10,533,081) (3,250,000)
Purchases of trading investments (93,000) -- --
Proceeds from maturities of investments 3,935,000 8,500,000 5,500,000
Proceeds from sale of segment -- -- 1,661,150
------------ ------------ ------------
Net cash provided by (used in) investing activities 440,381 (6,217,152) 3,453,849
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on long-term debt and capital
lease obligations (879,808) (796,218) (733,625)
Proceeds from exercise of stock options and warrants 314,441 187,585 24,647
Proceeds from issuance of common stock, net 17,359,464 -- --
Repurchase of common stock (126,360)
Proceeds from issuance of Series A preferred stock -- 11,219,621 --
------------ ------------ ------------
Net cash provided by (used in) financing activities 16,667,737 10,610,988 (708,978)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 9,538,840 1,682,843 (337,010)
Cash and cash equivalents at beginning of year 5,343,749 3,660,906 3,997,916
------------ ------------ ------------
Cash and cash equivalents at end of year $ 14,882,589 $ 5,343,749 $ 3,660,906
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest expense $ 72,194 $ 200,391 $ 334,467
============ ============ ============
Cash paid during the year for income taxes $ 0 $ 0 $ 13,685
============ ============ ============
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 formally sold and manufactured disposable
power injection syringes, is a wholly-owned subsidiary of Cardiovascular
Diagnostics, Inc., however, in June 1999, substantially all of the operating
assets and liabilities of Coeur were sold. Cardiovascular Diagnostics Europe,
BV ("CDE") is a wholly-owned Dutch company that distributed the Company's
products in Europe until March 1997 when it ceased operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, including Coeur through June 15, 1999. All
intercompany balances and transactions have been eliminated in consolidation.
RECLASSIFICATIONS
Certain reclassifications were made to the prior year financial statements to
conform them to the current presentation.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity
of three months or less at the date of purchase to be cash equivalents.
INVESTMENTS
Investments 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 original 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
either trading or 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 and capital
leases are amortized over the shorter of the estimated useful lives of the
asset, or the term of the 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.
F-7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PATENTS AND INTELLECTUAL PROPERTY
Patents and intellectual property costs are capitalized and are amortized using
the straight-line method over their estimated useful lives, generally 17 years.
Periods of amortization are evaluated periodically to determine whether later
events and circumstances warrant revised estimates of useful lives.
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, 2001, 2000 and 1999. SFAS No. 121 will be superceded by SFAS
No. 144 as of January 1, 2002. The Company has determined that the adoption of
SFAS No. 144 will not have a material effect.
REVENUE AND INCOME RECOGNITION POLICIES
Revenue from the sale of products is recorded when an arrangement exists,
delivery has occurred or services have been rendered, the seller's price is
fixed and determinable and collectibility is reasonably assured. Income under
license and development agreements is recognized over the anticipated period of
the agreements with the collaborators. 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, 2001 or 2000.
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
deferred tax 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 income 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,
2001, 2000 and 1999 is the same because, for loss periods, potential common
shares would be antidilutive. Warrants and preferred stock outstanding that
could be dilutive in the future are summarized in Note 9. Options currently
outstanding that could be dilutive in the future are summarized in Note 11.
STOCK-BASED COMPENSATION
The Company applies the provisions of 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 11 summarizes the pro forma
compensation cost for the 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.
F-8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 7.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of consolidated 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
consolidated 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 all reporting periods in
the financial statements. Comprehensive income (loss) must be displayed with
the same prominence as other financial statements. There were no items of other
comprehensive income (loss) for the years ended December 31, 2001, 2000 or 1999.
CASH FLOW INFORMATION
A supplemental schedule of non-cash investing and financing activities during
the three years ended December 31, 2001 is as follows:
2001 2000 1999
---- ---- ----
Acquisition of assets through capital leases $71,790 $ 20,863 $39,528
Dividends on convertible preferred stock 566,210 626,638 -
Conversion of Series A Preferred Stock into common stock 581,722 2,011,050 -
Purchases of property, plant and equipment in accounts payable
at year end 55,750 734,162 596
Amortization of beneficial conversion feature of Series A
Preferred Stock - 3,003,590 -
Issuance of warrants in conjunction with preferred stock financing - 62,400 -
RECENT ACCOUNTING PRONOUNCEMENTS
In 2001, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS Nos. 141 and 142
change the accounting for business combinations and goodwill in two significant
ways. First, SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Second, SFAS
No. 142 changes the accounting for goodwill from an amortization method to an
impairment-only approach. Thus, amortization of goodwill, including goodwill
recorded in past business transactions, will cease upon adoption of SFAS No.
142 which will be January 1, 2002. These standards are not expected to have a
material impact on the Company's financial condition, results of operations or
cash flows.
In 2001, the FASB issued Statement of Financial Accounting Standards No. 143
("FAS 143"), "Accounting for Asset Retirement Obligations", and in July, 2001
the FASB issued Statement of Financial Accounting Standards No. 144 ("FAS
144"), "Accounting for the Impairment of Disposal of Long-Lived Assets". FAS
143 requires that obligations associated with the retirement of tangible
long-lived assets be recorded as a liability when those obligations are
incurred, with the amount of the liability initially measured at fair value.
FAS 143 will be effective for financial statements beginning after June 15,
2002, though early adoption is encouraged. The application of this statement is
not expected to have a material impact on the Company's financial statements.
FAS 144 supersedes FAS 121, amends Accounting Principles Board Opinion No. 30
("APB 30") "Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" and
applies
F-9
RECENT ACCOUNTING PRONOUNCEMENTS (continued)
to all long-lived assets, including discontinued operations. FAS 144 requires
that long-lived assets that are to be disposed of by sale be measured at the
lower of book or fair value less costs to sell. FAS 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and its provisions are generally expected to be applied prospectively. The
application of this statement is not expected to have a material impact on the
Company's financial statements.
2. SHORT-TERM INVESTMENTS
Short-term investments held-to-maturity at December 31, 2000 consisted of
United States government agency obligations and corporate bonds as follows:
Gross Unrealized
----------------
Amortized Estimated
Cost Gains Losses Market Value
---- ----- ------ ------------
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
========== ==== ====== ==========
Included in other current assets at December 31, 2001 are trading investments
consisting of marketable equity securities related to the Company's
Supplemental Executive Retirement Plan.
3. INVENTORIES
Inventories at December 31, 2001 and 2000 consisted of the following:
2001 2000
------ ------
Raw materials, net of allowance $1,819,702 $1,132,168
Finished goods 403,538 153,815
---------- ----------
Total $2,223,240 $1,285,983
========== ==========
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2001 and 2000 consisted of the following:
2001 2000
------ ------
Machinery and equipment $7,652,295 $6,588,786
Leasehold improvements, furniture and fixtures 3,377,585 3,281,669
IT equipment 1,402,229 957,064
Equipment under capital leases 92,653 305,587
---------- ----------
12,524,762 11,133,106
Less accumulated depreciation and amortization (4,022,204) (4,709,276)
---------- ----------
Total $8,502,558 $6,423,830
========== ==========
The accumulated amortization of equipment under capital leases at December 31,
2001 and 2000 was $17,106 and $265,539 respectively.
F-10
5. PATENTS AND INTELLECTUAL PROPERTY
Patents and intellectual property at December 31, 2001 and 2000 consisted of
the following:
2001 2000
--------- ---------
Patents 707,351 619,952
Intellectual property 197,446 197,446
--------- ---------
904,797 817,398
Less accumulated amortization (354,134) (281,179)
--------- ---------
Total $ 550,663 $ 536,219
========= =========
During 2001, 2000 and 1999, the Company recognized $73,802, $69,722, and
$68,900, respectively, of amortization related to these assets.
6. DEVELOPMENT INCOME AND DEFERRED REVENUE
The Company recognizes development income in accordance with SEC Staff
Accounting Bulletin No. 101. During 2001, 2000 and 1999, the Company received
payments as part of collaboration agreements with other entities and recognized
$263,833, $491,666, and $100,000, respectively, of development income related
to these agreements. Payments received but not recognized into income in the
year of receipt are deferred and recognized over the period of the respective
agreements. At December 31, 2001, total payments received but deferred to
future periods aggregate $1,832,896.
7. LONG-TERM DEBT
Long-term debt as of December 31, 2001 and 2000 consisted of the following:
2001 2000
-------- --------
Notes payable $ 10,149 $854,221
Current portion of notes payable 3,705 844,072
-------- --------
Notes payable, excluding current portion $ 6,444 $ 10,149
======== ========
Notes payable mature as follows: 2002 - $3,705; 2003 - $4,119; and 2003 -
$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, 2001 and 2000 were
approximately $10,149 and $868,000, respectively.
8. LEASES
As of December 31, 2001, the Company leases its current facility under an
operating lease agreement that extends until 2011. In addition, the Company
leases certain equipment under various capital and operating lease agreements.
Rent expense related to operating leases totaled $511,541, $435,386, and
$413,010 for the years ended December 31, 2001, 2000 and 1999, respectively.
Future minimum lease payments as of December 31, 2001 are as follows:
Year ending December 31,
Capital Operating
Leases Leases
---------- ----------
2002 $ 27,379 $ 362,720
2003 26,724 370,469
2004 19,521 373,618
2005 19,521 370,917
2006 6,512 347,865
Thereafter -- 1,498,995
---------- ----------
F-11
8. LEASES (continued)
Capital Operating
Leases Leases
-------- ------
Total minimum lease payments 99,657 $3,324,584
==========
Imputed interest (21,101)
--------
Present value of minimum lease payments 78,556
Less current maturities 18,904
--------
Long-term capital lease obligations $ 59,652
========
9. 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
approximately $11,219,621, together with 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. At
December 31, 2001 and 2000, there were 251,000 warrants outstanding that could
be converted into common stock at the exercise price of $10.00 per share. 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, 2001,
the Series A dividend was paid by issuing 69,604 shares of common stock.
Each share of the Series A is convertible into ten shares of common stock at
$10.00 per share. The number of common shares currently reserved for conversion
of preferred stock and warrants, including related dividends, is 1,370,000. The
Series A is convertible at any time at the option of the holder or may be
redeemed by 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 holders also have the right to vote together with the
common stock on an as-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.
10. COMMON STOCK
In April 2001, Bayer Diagnostics, the Company's distributor, purchased
1,450,000 shares of common stock of the Company at $12 per share for $17.4
million. This investment increased Bayer's ownership percentage in the Company
from approximately 7% to 19.9%. At that time, the Company and Bayer entered
into an amended distribution agreement to replace the previous distribution
agreement between the parties entered into during 1998.
The 2001 common stock purchase agreement with Bayer contains a provision that,
upon the occurrence of a "change in control", as defined in the agreement, the
Company may be required to compensate Bayer, in cash or shares of common stock,
for any difference between per share prices originally paid by Bayer and the
amount received by the Company's shareholders in such a change of control
transaction. In accordance with the implementation requirements of recently
issued and adopted Emerging Issues Task Force Abstract No. 00-19, the Company
has transferred to temporary equity an amount equal to the "change in control"
payment called for by the purchase agreement. Under the new accounting
guidelines, this temporary transfer is required only for those reporting
periods in which the price per share paid by Bayer is in excess of the fair
market value of a common share, as measured by reference to the NASDAQ National
Market.
F-12
11. 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. Shares reserved for issuance under the 1995 Stock
Plan total 1,188,150.
A summary of the status of the Company's Plans as of December 31, 2001, 2000
and 1999, and changes during the years ending on those dates, including the
weighted average exercise price (WAEP) is presented below:
2001 2000 1999
---- ---- ----
Shares WAEP Shares WAEP Shares WAEP
------ ---- ------ ---- ------ ----
Outstanding at beginning of year 1,311,898 $5.63 1,211,887 $ 4.09 841,066 $3.19
Granted at fair value 236,992 $8.46 228,000 $12.73 453,500 $5.80
Exercised (82,223) $5.36 (113,987) $ 3.14 (16,138) $1.53
Forfeited (79,500) $5.83 (14,002) $ 6.07 (66,541) $5.03
--------- ----- --------- ------ --------- -----
Outstanding at end of year 1,387,167 $6.12 1,311,898 $ 5.63 1,211,887 $4.09
========= ===== ========= ====== ========= =====
Options exerciseable at year-end 854,300 787,273 623,261
========= ========= =========
The weighted average fair value of options granted during the years ended
December 31, 2001, 2000 and 1999 was $7.71, $8.97 and $3.90, respectively.
The following table summarizes information about the Plan's stock options,
including the weighted average remaining contractual life (Life), at December
31, 2001:
Options Outstanding Options Exercisable
------------------- -------------------
Range of
Exercise Prices Number Life WAEP Number WAEP
--------------- ------ ---- ---- ------ ----
$ 0.79 289,791 2.4 years $ .79 289,791 $ .79
$ 3.75-$4.50 132,759 4.1 years $ 4.41 132,759 $ 4.41
$ 5.00-$6.38 505,625 7.1 years $ 5.60 329,500 $ 5.51
$ 7.10-$9.87 279,992 9.5 years $ 8.56 44,500 $ 9.67
$10.00-$15.06 179,000 8.5 years $13.64 57,750 $14.28
--------- -------
1,387,167 854,300
========= =======
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 2001, 2000 and 1999:
2001 2000 1999
----- ------ -----
Dividend yield 0% 0% 0%
Volatility 133% 75% 69%
Risk free interest rate 4.5%-5% 5%-6.5% 6.1%
Expected life of options 6 years 6 years 6 years
For purposes of the proforma disclosures required by SFAS No. 123, the
estimated fair value of equity instruments is amortized to expense over their
respective vesting periods. Had compensation cost for the Company's stock-based
compensation plans, as described above, been determined consistent with SFAS
No. 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below. The compensation costs
disclosed here may not be representative of the effects on pro forma net income
in future years.
2001 2000 1999
---- ---- ----
Net loss attributable to common shareholders As reported $ (9,167,749) $ (9,963,751) $(6,222,470)
Pro forma $(10,361,598) $ (11,136,256) $(7,051,334)
Net loss attributable to common shareholders
per common share As reported $(1.03) $(1.31) $(0.83)
Pro forma $(1.17) $(1.46) $(0.94)
F-13
12. RELATED PARTY
The Company has identified Bayer as a related party due to its approximately
19.9 % ownership of the Company's outstanding stock. During the years ended
December 31, 2001, 2000 and 1999 sales to Bayer totaled $2,859,130, $3,335,775
and $1,857,353. At December 31, 2001 and 2000, outstanding receivables from
Bayer totaled $296,751 and $224,468, respectively.
13. SIGNIFICANT CUSTOMERS
During the years ended December 31, 2001, 2000 and 1999, there were sales to
individual customers that exceeded 10% of net consolidated sales. Sales to
these customers were:
2001 2000 1999
---- ---- ----
Customer A $ -- $ 257,561 $ 991,345
Customer B 2,859,130 3,335,775 1,857,353
Customer C -- -- 431,380
Customer D 1,500,000 600,000 320,000
As of December 31, 2001 and 2000, there were outstanding receivables from a
customer that exceeded 10% of total trade receivables. Receivables from this
customer as a percentage of total trade receivables were as follows: 2001-
customer B, 96%; 2000 - customer B, 92%.
The Company generated revenue from sales to different geographic areas for
2001, 2000 and 1999 as follows:
2001 2000 1999
---- ---- ----
United States $3,038,842 $3,669,236 $3,007,657
United Kingdom - - 83,157
Germany - - 440,042
Sweden 1,500,000 600,000 327,750
Other foreign sales - - 50,773
---------- ---------- ----------
Total sales $4,538,842 $4,269,236 $3,909,379
========== ========== ==========
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 (up to $100,000). At December 31, 2001 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 $24,000, $58,909, and $89,507 during the years ended December 31
2001, 2000 and 1999, respectively.
16. INCOME TAXES
Income tax expense consisted entirely of current state taxes of $0, $0 and
$27,753 for the years ended December 31, 2001, 2000 and 1999, 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, 2001, 2000 and
1999 is as follows:
2001 2000 1999
---- ---- ----
Expected income tax benefit at federal statutory rate $(2,923,015) $(2,148,144) $(2,115,640)
State tax provision (benefit) (397,096) (194,935) (210,074)
Goodwill amortization -- -- 303,681
Other 669 91,694 39,515
Research and development credit (47,057) (60,849) (166,625)
Change in valuation allowance 3,366,499 2,312,234 2,176,896
----------- ----------- -----------
Net income tax provision $ -- $ -- $ 27,753
=========== =========== ===========
F-14
16. INCOME TAXES (continued)
The components of the net deferred tax assets and net deferred tax liabilities
as of December 31, 2001 and 2000 were as follows:
2001 2000
---- ----
Deferred tax assets:
Net operating loss carryforward $ 15,581,000 $ 12,989,000
Research and development credits 503,000 456,000
Foreign tax credits 35,000 35,000
Other 872,000 194,000
------------ ------------
Total gross deferred tax assets 16,991,000 13,674,000
Valuation allowance (16,294,000) (12,927,000)
------------ ------------
Net deferred tax assets 697,000 747,000
------------ ------------
Deferred tax liabilities:
Patents 168,000 163,000
Investment adjustment 488,000 488,000
Fixed assets 41,000 96,000
------------ ------------
Total gross deferred tax liabilities 697,000 747,000
------------ ------------
Net deferred taxes $ - $ -
============ ============
At December 31, 2001 and 2000, the Company had approximately $40,712,000 and
$34,000,000, respectively, of combined federal net operating losses. These
losses expire in varying amounts beginning in 2004 if not utilized. At December
31, 2001 and 2000 for state income tax purposes, Cardiovascular Diagnostics,
Inc. had net operating loss carryforwards of approximately $37,647,000 and
$30,935,000, 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, 2001)
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, 2001 and 2000.
As a result of changes in ownership in prior years, as defined by Internal
Revenue Code Section 382, the utilization of Coeur's loss carryforwards
generated through December 31, 1993 and the Company's consolidated loss
carryforwards generated through January 1994 will be subject to an annual
limitation of $175,000 and $482,000, respectively.
An additional change in ownership occurred in 1995 in connection with the
Company's initial public offering which subjects the loss carryforwards
generated during the period from January 1994 to December 1995 to an
incremental annual limitation of $1,954,000 per year.
17. SUMMARY QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents a summary of operations for the quarters of 2001 and
2000:
2001 2000
------------------------------------------------ --------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
---------- ------------ ----------- --------- ----------- ---------- -------- --------
Net sales $ 802,000 $1,322,000 $1,235,000 $1,180,000 $1,489,000 $1,377,000 $ 743,000 $ 660,000
Gross profit 56,000 210,000 231,000 (4,000) 581,000 404,000 (45,000) (261,000)
Net loss before
preferred stock
charges (1,761,000) (2,333,000) (2,026,000) (2,482,000) (1,031,000) (1,270,000) (1,749,000) (2,284,000)
Net loss
attributable to
common
shareholders (1,908,000) (2,477,000) (2,160,000) (2,623,000) (1,479,000)(a) (2,047,000)(b) (1,917,000) (4,521,000)(c)
Net loss before
preferred stock
charges per
common share (0.22) (0.26) (0.22) (0.26) (0.14) (0.17) (0.23) (0.29)
F-15
Net loss
attributable
to common
shareholders per
common share $ (0.24) $ (0.28) $ (0.23) $ (0.28) $ (0.20) $ (0.27) $ (0.25) $ (0.58)
17. SUMMARY QUARTERLY FINANCIAL DATA (UNAUDITED)(continued)
(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.
F-16
PHARMANETICS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2001, 2000 and 1999
Balance at Charge to Balance at
Beginning Costs and End
of Period Expenses Deductions of Period
---------- --------- ---------- -----------
YEAR ENDED DECEMBER 31, 2001
Deducted from asset accounts:
Accounts Receivable Reserve (a) $ 4,339 $ -- $ 2,344 (e) $ 1,995
=========== =========== ============ ===========
Inventory Reserves (b) $ 125,000 $ 84,574 $134,574 (d) $ 75,000
=========== =========== ============ ===========
Deferred Tax Valuation Allowance (c) $12,927,000 $ 3,367,000 $ -- $16,294,000
=========== =========== ============ ===========
YEAR ENDED DECEMBER 31, 2000
Deducted from asset accounts:
Accounts Receivable Reserve (a) $ 29,556 $ 3,574 $ 28,791 (e) $ 4,339
=========== =========== ============ ===========
Inventory Reserves (b) $ 100,000 $ 109,460 $ 84,460 (d) $ 125,000
=========== =========== ============ ===========
Deferred Tax Valuation Allowance (c) $10,615,000 $ 2,312,000 $ -- $12,927,000
=========== =========== ============ ===========
YEAR ENDED DECEMBER 31, 1999
Deducted from asset accounts:
Accounts Receivable Reserves (a) $ 14,226 $ 40,000 $ 24,670 (e) $ 29,556
=========== =========== ============ ===========
Inventory Reserves (b) $ 85,000 $ 95,462 $ 80,462 (d) $ 100,000
=========== =========== ============ ===========
Deferred Tax Valuation Allowance (c) $ 8,417,000 $ 2,198,000 $ -- $10,615,000
=========== =========== ============ ===========
(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 deferred tax assets
(d) Represents inventory items written down to lower of cost or market.
(e) Represents uncollectible accounts written off.
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 15, 2002 appearing in this Form 10-K of PharmaNetics, Inc., also
included an audit of the financial statement schedule listed in Item 14(a)(2)
of this Form 10-K. In our opinion, this financial statement schedule presents
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 15, 2002