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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the year ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________
Commission file number 0-19711
THE SPECTRANETICS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 84-0997049
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
96 Talamine Court
Colorado Springs, Colorado 80907
(Address of principal executive offices and zip code)
Registrant's Telephone Number, including Area Code: (719) 633-8333
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
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 |_|
|X| 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 of the Registrant, as of
March 12, 1999, computed by reference to the closing sale price of the voting
stock held by non-affiliates on such date, was approximately $80,750,989.
As of March 12, 1999, there were outstanding 22,932,568 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders, to be filed with the Securities and Exchange Commission
not later than April 30, 1999, are incorporated by reference into Part III as
specified.
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Total Pages 60
Exhibit Index on Page 58
Table of Contents
PART I ....................................................................................................3
ITEM 1. BUSINESS........................................................................................3
General ..................................................................................3
Strategy ..............................................................................3
Technology................................................................................4
CVX-300(R) ............................................................................4
Product Applications......................................................................5
Excimer Laser Coronary Angioplasty.....................................................5
Lead Extraction........................................................................6
Peripheral Vascular Disease............................................................6
Restenosed Stents......................................................................7
Sales and Marketing.......................................................................7
Domestic Operations....................................................................7
International Operations...............................................................8
Strategic Alliances.......................................................................8
Intracoronary Stents...................................................................8
Transmyocardial Laser Revascularization/Percutaneous Transluminal Myocardial
Revascularization.............................................................8
Polymicro Technologies, Inc...............................................................9
Polymicro's Business...................................................................9
Polymicro's Products...................................................................9
Government Regulation....................................................................10
Competition..............................................................................12
Patents and Proprietary Rights...........................................................13
Research and Development.................................................................13
Manufacturing............................................................................14
Third-Party Reimbursement................................................................14
Product Liability and Insurance..........................................................15
Employees................................................................................15
ITEM 2. PROPERTIES.....................................................................................16
ITEM 3. LEGAL PROCEEDINGS..............................................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................16
PART II ...................................................................................................17
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.......................17
ITEM 6. SELECTED FINANCIAL DATA........................................................................17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........18
Results of Operations....................................................................19
Conversion to the Euro...................................................................24
Accounting Pronouncements................................................................24
Year 2000................................................................................24
Risk Factors.............................................................................25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK......................................29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........29
PART III ...................................................................................................30
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................30
ITEM 11. EXECUTIVE COMPENSATION.........................................................................30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................30
PART IV ....................................................................................................30
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K ...............................30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................................................F-1
EXHIBIT INDEX ..........................................................................................58
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PART I
The information set forth below includes "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, and
is subject to the safe harbor created by that section. You are cautioned not to
place undue reliance on these forward-looking statements and to note that they
speak only as of the date hereof. Factors that could cause actual results to
differ materially from those set forth in the forward-looking statements are set
forth below and include, but are not limited to, the following:
o Market acceptance of excimer laser angioplasty technology;
o Market acceptance of excimer laser removal of pacemaker and
defibrillator leads;
o Technological changes resulting in product obsolescence;
o The inability to obtain patents with respect to new products;
o Adverse state or federal legislation and regulation
o Availability of third-party component products at reasonable prices;
and
o The risk factors listed from time to time in our filings with the
Securities and Exchange Commission as well as those set forth in Item
7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors".
ITEM 1. BUSINESS
GENERAL
We develop, manufacture, market and distribute a proprietary excimer laser
system for the treatment of certain coronary and vascular conditions. Excimer
laser technology delivers cool ultraviolet light in short, controlled energy
pulses to ablate, or remove, tissue. Our excimer laser system includes the
CVX-300(R) laser unit and various fiber optic delivery devices, including
disposable catheters and sheaths. Our excimer laser system is the only excimer
laser system approved in the United States and Europe for use in minimally
invasive cardiovascular applications. Our excimer laser system is used in
angioplasty to open clogged or obstructed arteries. It is also used to remove
lead wires from patients with implanted pacemakers or implantable cardioverter
defibrillators, devices that regulate the heartbeat. We have also received
approval in Europe to market our products to treat artery blockages in the upper
and lower leg and to treat clogged stents. Stents are wire mesh tubes implanted
in arteries to provide support to hold the artery open and improve blood flow to
the heart. We are seeking regulatory approval in the United States to market our
products for these treatments.
Our subsidiary, Polymicro Technologies, Inc., manufactures and distributes
drawn silica glass products consisting of fine glass tubing and glass fibers.
Polymicro's products are used primarily with analytical or testing equipment.
Spectranetics is a Delaware corporation formed in 1984. Our principal
executive offices are located at 96 Talamine Court, Colorado Springs, Colorado
80907. Our telephone number is (719) 633-8333.
Strategy
Our strategy includes the following key points:
o Leverage technical expertise in generation and delivery of ultraviolet
energy. We have designed our excimer laser platform to support
multiple existing and potential therapeutic applications for
cardiovascular disease. We and our partners are exploring additional
applications of our core excimer laser technology for novel treatments
of coronary and vascular conditions.
o Expand disposable device revenues from existing customer base. By
training additional cardiologists, surgeons and other specialists at
existing customer hospitals and introducing physicians already
familiar with our products to new products and applications, we intend
to increase our revenue stream from sales of current and future
disposable devices to existing customers.
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o Expand installed customer base. We intend to expand our customer base
by continuing to focus our sales efforts on major cardiac centers that
perform the majority of interventional procedures.
TECHNOLOGY
Excimer laser ablation removes plaque or tissue by delivering laser energy
to a blockage or lesion. This laser beam breaks down the molecular bonds of
plaque or tissue in a process known as photo-thermal ablation, without
significant thermal damage to surrounding tissue.
Laser ablation involves the insertion of a laser catheter or sheath into an
artery or vein through a small incision. When the tip of the catheter or sheath
has been placed at the site of the blockage or lesion, the physician activates
the laser beam to ablate the plaque or tissue.
CVX-300
The proprietary CVX-300 excimer laser unit is designed for use in a variety
of cardiovascular applications. When coupled with our fiber optic laser devices,
the system generates and delivers 308 nanometer wavelength ultraviolet light
pulses to a lesion to remove plaque or tissue. The current list price of the
CVX-300 is $196,000. We offer various financing options, including leasing and
rental programs.
On February 19, 1993, the FDA approved the Spectranetics CVX-300 excimer
laser unit and 1.4 and 1.7 millimeter diameter fiber optic catheters for the
following six indications for use in the treatment of coronary artery disease:
o saphenous vein grafts;
o total occlusions crossable by a guidewire;
o ostial lesions;
o moderate calcification;
o long lesions; and
o balloon failures.
In these indications, we offer an alternative or adjunct to traditional
balloon angioplasty and atherectomy (rotational cutters and burrs). Unlike
conventional balloons that merely compress arterial plaque against the vessel
wall, laser angioplasty actually removes the material, resulting in a larger
diameter opening.
In November 1994, we received ISO 9001 certification from the TUV Product
Service GmbH in Munich, Germany which allowed us to market our products in the
European Community within compliance of the manufacturing quality regulations -
EN 29 001/ISO 9001 and EN 46 001. As of December 1998, we had received CE
(Communaute Europeene) mark registration for all of our products. The CE mark
indicates that a product is certified for sale throughout the European Union and
that the manufacturer of the product complies with applicable safety and quality
standards.
Clinical results from the first 2,000 coronary procedures using the excimer
laser system achieved approximately 90 percent clinical success rate. A clinical
success is defined as a reduction in the size of the lesion to less than 50
percent of the diameter of the artery without heart attack, death, or the need
for emergency bypass surgery during hospitalization. We believe that the CVX-300
unit offers the following characteristics:
o Reduced procedure time. Patient outcome audits, which compared excimer
laser procedures to balloon angioplasty and rotational atherectomy,
reveal the excimer laser method shortens procedure times and reduces
radiation exposure to the patient from fluoroscopic imaging used
during the procedure, thereby improving lab efficiency.
o Ease of use. During a laser procedure, it may be necessary to adjust
laser energy output. The CVX-300 laser unit is computer-controlled,
which allows the physician to change energy levels without
interrupting the treatment to remove the catheter from the patient for
recalibration. This feature
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also enables the physician to begin the procedure with the minimum
level of energy required and, if necessary, to adjust the energy level
easily during the procedure.
o Small size and easy set up. Space in cardiac catheterization labs is
usually limited. In addition, many hospitals have multiple
catheterization labs. As a result of a number of proprietary and
patented laser and catheter design features, the CVX-300 laser unit
typically requires five minutes for set up. This combination of
features allows the CVX-300 laser unit to be transported easily
between laboratories within the hospital as needed.
PRODUCT APPLICATIONS
Excimer Laser Coronary Angioplasty
Background. Percutaneous transluminal coronary angioplasty, or PTCA, is a
minimally invasive medical procedure used to treat coronary artery disease, or
atherosclerosis, and is performed by interventional cardiologists. In 1998,
there were approximately one million PTCA procedures performed worldwide.* We
estimate that approximately 10% to 15% of these patients could benefit from the
use of our products, including patients with total occlusions crossable by a
guidewire, occluded saphenous vein grafts and long lesions.
In these indications, we offer an alternative or adjunct to traditional
balloon angioplasty or the need of coronary bypass surgery. Unlike conventional
dilatation balloons that merely compress occlusive arterial plaque against the
vessel wall, laser angioplasty actually removes the material. We focus our
marketing efforts on six approved coronary indications:
o saphenous vein grafts;
o total occlusions crossable by a guidewire;
o ostial lesions;
o moderate calcification;
o long lesions; and
o balloon failures.
Disposable Laser Devices. As an integral part of the excimer laser system,
we have developed a broad selection of proprietary laser devices, designed to
meet physician needs and multiple indications for use. Early laser catheters
contained only a few large optical fibers to transmit the laser energy. These
early devices were stiff, had difficulty accessing arterial anatomy and suffered
from poor ablation characteristics. Current innovative laser catheter designs
contain hundreds of very small diameter, flexible fibers that can access more
difficult coronary anatomy. The smaller fiber also produces a better laser
energy distribution at the tip of the catheter for improved ablation.
Laser catheters are designed to provide several advantages over other
atherectomy devices. These catheters, which we produce in sizes ranging from 1.4
to 2.5 millimeters in diameter, consist of concentric or eccentric bundles of
optical fibers mounted within a thin plastic extrusion. Fibers are coupled to
the laser using a patented intelligent connector design. This design requires no
adjustments by the physician. This connector provides information about the
device being used to the CVX-300 laser unit computer, which controls the
calibration cycle. In 1992, we acquired exclusive rights to a lubricious
coating, which in certain catheter lines reduces friction and enhances
trackability and control of the device. The catheter's combination of
trackability, flexibility and ablation characteristics enables the physician to
access difficult-to-treat lesions.
Our FDA-approved laser catheter product line includes the Extreme(R)
concentric catheter, Vitesse(R) C concentric catheter and the Vitesse(R) E
eccentric catheter. The refined construction of these catheters is designed to
provide improved trackability, reachability and improved tactile feedback in the
coronary artery. These improvements are aimed at providing more accurate
catheter placement, resulting in more uniform, precise removal of plaque.
Page 5
o Extreme(R) Laser Catheter. In October 1993, the FDA approved the
Extreme(R) laser concentric catheter, which was our first high
performance coronary laser catheter. It is an over-the-wire catheter
with enhanced flexibility and ablation at lower energy settings,
resulting in improved performance. Other catheter features include the
patented metal rim tip designed for visualization and alignment and a
proprietary lubricious coating for easier access. The Extreme(R) laser
catheter is available in 2.0 millimeter tip diameter. Spectranetics
has received CE Mark of approval for use of its angioplasty line of
catheters in Europe.
o Vitesse(R) C Laser Catheter. The Vitesse(R) C concentric laser
catheter, approved by the FDA in October 1994, is a rapid-exchange
catheter, which means that it can be threaded onto and exchanged over
a guidewire more conveniently than over-the-wire models. It is also
compatible with a wide range of guidewires. Its patented design
technology provides ease of use, requiring only a single operator.
This catheter is available in 1.4, 1.7, and 2.0 millimeter tip
diameters. Spectranetics has received CE Mark of approval for use of
its angioplasty line of catheters in Europe.
o Vitesse(R) E Laser Catheter. The Vitesse(R) E eccentric laser catheter
is our first directional coronary laser catheter. The 1.7 millimeter
diameter catheter was approved by the FDA in July 1995, and the 2.0
millimeter diameter catheter was approved by the FDA in September
1997. This catheter utilizes an eccentric fiber array at the tip that
can be positioned by the operator to create a larger channel through
the blockage. The Vitesse(R) E eccentric catheter is available in 1.7
and 2.0 millimeter tip diameter. Spectranetics has received CE Mark of
approval for use of its angioplasty line of catheters in Europe.
Lead Extraction
Background. Approximately 500,000 patients are implanted with pacemakers
and implantable cardioverter defibrillators, or ICDs, annually worldwide.*
Pacemakers and ICDs are devices that regulate the heartbeat. We believe that
approximately 5% to 10% of these patients will eventually require pacemaker or
ICD lead removal. Primary methods available to remove implanted leads include
open-chest surgery and transvenous removal with plastic sheaths, each of which
has significant drawbacks. For example, open-chest surgery is costly and can be
traumatic to the patient. The plastic sheath method sometimes results in damage
to the cardiovascular system and may cause the lead to disassemble during the
removal procedure.
Laser Sheath (SLS(TM)). We have designed a laser-assisted lead extraction
device, the Spectranetics Laser Sheath (SLS(TM)), to be used with our CVX-300
laser unit to remove the implanted lead with minimal force. The SLS uses excimer
laser energy to cut through the scar tissue surrounding the lead to facilitate
removal. In addition to resulting in less trauma and morbidity, procedure time
can be reduced significantly. In a randomized clinical trial, the Spectranetics
Laser Sheath (SLS(TM)) increased the complete lead removal success rate from 65%
to 94%.
The SLS consists of optical fibers arranged in a circle between inner and
outer polymer tubing. The inner opening of the device is designed to allow a
lead wire to pass through it as the device slides over the lead wire and toward
the tip in the heart. Following the ablation of scar tissue with the SLS, the
lead wire is removed from the heart with counter-traction. We have been
marketing our 12 French (Fr) SLS since December 1997. In September 1998, we
received FDA market approval for our 14 Fr and 16 Fr Spectranetics Laser
Sheaths, which are designed to free larger diameter implanted pacemaker and ICD
leads. Spectranetics has received CE Mark of approval for use of its laser
sheath devices in Europe.
Peripheral Vascular Disease
Background. The prevalent treatment option for total blockages in the upper
leg is bypass surgery. Amputation may be required for critical limb ischemia
below the knee. We estimate that approximately 100,000 upper bypass surgeries
and 80,000 amputations are performed annually as a result of peripheral vascular
blockages.* Laser catheters are being evaluated as an alternative treatment to
both bypass surgery and amputation. Our products are approved in Europe for use
in treating peripheral vascular disease.
Clinical Trials. We are currently conducting the PELA (peripheral excimer
laser angioplasty) trial, a United States randomized clinical trial, to evaluate
the use of its laser technology in patients with occlusions greater
Page 6
than 10 centimeters in length in the upper leg. We also received approval from
the FDA to commence a feasibility study, the LACI (laser angioplasty for
critical ischemia) study, with 25 patients at five medical centers to evaluate
laser treatment of patients with limb-threatening, peripheral vascular disease
in the lower limb. We cannot assure that the clinical trials using excimer laser
catheters to unblock peripheral arteries will result in favorable success rates
or, if the trials are successful, that we will receive a pre-market approval
(pre-market approval) for this device. We have received CE Mark of approval for
our line of peripheral catheters in Europe.
Restenosed Stents
Background. Stents are thin, slotted tubes or coils that are implanted
through a percutaneous procedure to support the walls of coronary arteries. We
estimate that more than 500,000 stents were implanted in patients in 1998.*
Twenty to 30 percent of stents may develop blockages due to restenosis, or
plaque buildup, which can lead to partial or total occlusion of the arteries.
Our laser catheters are currently being studied for use in debulking stents
which have restenosed, or become obstructed.
Clinical Trials. We received FDA approval to commence a randomized clinical
study involving 320 patients and up to 20 medical institutions to evaluate the
effectiveness of clearing restenosed stents using excimer laser-assisted balloon
angioplasty versus balloon angioplasty alone. We cannot assure, however, that
clinical trials using excimer laser catheters to debulk stents will result in
favorable success rates or, if the trials are successful, that we will receive a
pre-market approval for this device. We received CE Mark approval in Europe
certifying the sale and use throughout Europe of our excimer laser coronary
angioplasty catheters for the treatment of restenosed stainless steel coronary
stents.
SALES AND MARKETING
Our sales goals are to increase the present installed base of excimer laser
units and to increase the use of disposable devices. We plan to introduce new
physicians and institutions to the efficacy, safety, ease of use and growing
indications of excimer laser technology through published studies of clinical
applications. By leveraging the success of an existing product applications, we
hope to promote the use of the technology in different applications.
Providing customers with answers about cost of acquisition, use of the
laser and reimbursement codes is critical to the education process. Through the
following marketing and distribution strategy, both in the United States as well
as internationally, we believe that we will be positioned to capitalize not only
on the core competency of excimer laser technology in coronary angioplasty but
also in lead extraction and in other new areas of development for excimer laser
technology.
Domestic Operations
We estimate that there are 1,000 interventional cardiac catheterization
laboratories in hospitals in the United States.* Our United States sales efforts
focus on the major cardiac catheterization labs, including teaching institutions
which perform the majority of interventional procedures. Our United States sales
and marketing team consists of product managers, account managers, regional
account managers and medical equipment service engineers.
We are focused on expanding our product line, improving product quality and
developing an appropriate infrastructure to support sales growth. Since the use
of excimer laser technology is highly specialized, we believe that our direct
sales team must have extensive knowledge about the products and the various
physician groups we serve. Our marketing activities are designed to support our
direct sales team and include advertising and product publicity in trade
journals, newsletters, continuing education programs, and attendance at trade
shows and professional association meetings.
We have developed a customer training program in major cardiology centers
around the United States. After initial customer training, our account managers
provide routine on-site customer support, including reviewing clinical results,
training new hospital personnel and updating customers on new catheters and
techniques.
Page 7
Our service engineers are responsible for installation of each laser and
participate in the training program at each site. We provide a one-year
warranty, which includes parts, service and replacement gas. We offer extended
service to our customers under annual service contracts or on a fee-for-service
basis.
International Operations
In Europe in 1998, there were approximately 250,000 balloon angioplasty
procedures performed in approximately 450 interventional cardiac catheterization
laboratories.* In 1993, we began marketing and selling our products
internationally through Spectranetics International, B.V., a wholly-owned
subsidiary, as well as through distributors. In 1998, Spectranetics
International, B.V. revenues totaled $2,374,000, or 9 percent of our revenues.
Currently, we have distributors in the following regions: Europe, South America,
the Middle East and Asia.
We believe that in order to increase distribution of our products
internationally, we must establish a direct sales team in certain countries. Due
to the high level of experience required by the nature of our excimer laser
technology, we believe that establishing a direct sales team will provide better
customer service and technical and regulatory support. We have increased the
number of direct sales representatives in Europe and, more specifically, we have
mobilized a direct sales team in Germany where 50% of our European laser units
are installed.
In addition to the operations of Spectranetics International, B.V., we
conduct international business in the Pacific Rim and South America through
distributors as well as in Canada through its United States direct sales
organization. In 1998, revenues from these foreign operations totaled $474,000,
or 2 percent of our revenues.
In 1998, Polymicro's international revenues totaled $935,000, or 3 percent
of our revenues.
Foreign sales may be subject to certain risks, including export/import
licenses, tariffs, other trade regulations and foreign medical regulations.
Tariff and trade policies, domestic and foreign tax and economic policies,
exchange rate fluctuations and international monetary conditions have not
significantly affected our business to date. However, for more information, see
"Risk Factors--We Are Exposed To Problems That Come From Having International
Operations."
STRATEGIC ALLIANCES
Intracoronary Stents
In May 1998, we entered into an agreement with Orbus Medical Technologies,
Inc. to distribute and market a next-generation coronary stent, the R Stent(TM).
The R Stent, which is manufactured by Orbus, has a distinctive double helix
design that conforms to the natural anatomy of coronary arteries and is designed
to provide uninterrupted structural support, radial strength and flexibility. We
will market the product upon receipt of CE mark approval in Europe.
Transmyocardial Laser Revascularization/Percutaneous Transluminal Myocardial
Revascularization
Angina is chest pain due to insufficient blood flow and oxygen delivery to
the heart muscle. More than 300,000 patients worldwide suffer from chronic
angina who are not candidates for traditional balloon angioplasty or bypass
surgery.* Transmyocardial laser revascularization, or TMLR, and percutaneous
transluminal myocardial revascularization, or PTMR, are emerging as viable
therapies for treating these patients. TMLR and PTMR create small holes in the
heart muscle that are intended to increase the blood supply. TMLR and PTMR have
been shown to reduce angina. In September 1997, we entered into a supply and
license agreement with United States Surgical Corporation, a division of Tyco
International, under which we supplied modified CVX-300 laser units and
disposable devices, on an exclusive basis, for the development of TMLR and PTMR
devices.
Page 8
POLYMICRO TECHNOLOGIES, INC.
Polymicro Technologies, Inc., a wholly-owned subsidiary of Spectranetics,
is located in Phoenix, Arizona. Polymicro manufactures drawn silica glass
products. Polymicro's revenues were $9,219,000 in 1998, or 33% of our
consolidated revenues.
We recently announced that we are contemplating strategic alternatives for
Polymicro, which could include the sale of Polymicro. We anticipate that we
would use any capital raised from such a transaction to accelerate developmental
programs for our core medical business. However, at this time we have not
received an offer to purchase Polymicro, nor have we made a firm decision to
sell Polymicro. We have not set a fixed time frame for a decision. We may decide
not to sell Polymicro or we may fail to obtain offers to purchase Polymicro at a
price we deem satisfactory.
Polymicro's Business
Polymicro manufactures and distributes silica glass capillary tubing,
optical fibers, precision fused silica pieces, assemblies and cables. Polymicro
markets its products to domestic and international companies who use Polymicro's
products for separations, medical, process control, defense, aerospace, and
other special applications. Polymicro custom-designs many products to meet
specific user needs. Polymicro funds product and process development internally
as well as through joint efforts with entities in the government and commercial
sectors. We acquire fiber optics for our laser catheters from Polymicro.
Competition in Polymicro's marketplace is based on service, quality and
price. Many companies compete in this market, some of which have greater
financial resources than Polymicro. Competitors include SpecTran Corporation,
CeramOptec GmbH, Fiberguide Industries Inc. and 3M Specialty Optical Fibers.
Polymicro's Products
Capillary Tubing. Polymicro makes capillary tubing with high purity,
synthetic-fused silica coated with polyimide plastics. Key features of the
tubing are chemical inertness, high flexibility, high strength and the ability
to withstand high temperatures and pressures. Polymicro manufactures the tubing
to tight dimensional tolerances. Polymicro supplies various sizes and
configurations of capillary tubing used in analytical instruments. For example,
tubing for gas chromatography columns is supplied with three internal diameters
of 250, 320 or 530 micrometers ("um"). Tubing sizes for fluid extraction and
capillary electrophoresis range from 50um to 200um inner diameters. Tubing in
sizes ranging from 10um to 50um inner diameters can also be used to form flow
restrictors for liquid and gas chromatography.
Optical Fiber. Optical fiber is hair-thin strands, usually made of a glass
core to transmit light energy and a bonded cladding on the central core made of
either glass or plastic material. Polymicro manufactures both glass and plastic
clad step-index, multimode silica core optical fibers that are sold in
non-telephone markets. Core sizes range from 40um to 1000um in diameter.
Polymicro further coats its optical fiber with materials such as polyimide,
acrylate, silicones or aluminum in single or multiple layers to preserve surface
quality and the inherent strength of the glass.
Cables and Assemblies. Polymicro custom-designs and builds value added
product applications to meet the requirements and specifications of customers in
the medical, process control, aerospace and industrial markets. Polymicro's
assemblies involve a variety of custom and standard terminations and jacketing
materials in conjunction with Polymicro fibers and precision pieces.
Precision Pieces. Precision pieces are products made from rigid capillary
tubing or rod that is cut and machined into useful configurations. Precision
pieces generally range from one to four millimeters in diameter and in length
from one to 25 millimeters. Polymicro assembles these rods and tubing into
configurations designed by the customer or by Polymicro.
Page 9
GOVERNMENT REGULATION
In the United States, all medical devices are subject to FDA regulation
under the Medical Device Amendments of the Federal Food, Drug and Cosmetics Act,
or FFDCA, and are classified into one of three categories. The CVX-300 laser
unit and related devices are designated as Class III devices. Class III devices
are devices that are represented to be life-sustaining or life-supporting, or
that present potential unreasonable risk of illness or injury. Class III devices
are subject to the most rigorous FDA approval process.
Premarket approval of a Class III device generally requires the completion
of three major steps. The first step involves the granting of an investigational
device exemption, or IDE, by the FDA, which permits the proposed product to be
used in controlled human clinical trials. Upon completion of a sufficient number
of clinical cases to determine the safety and effectiveness of the proposed
product for specific indications, a pre-market approval application is then
prepared and submitted to the FDA for review. The pre-market approval
application must contain the results of the clinical trials, the results of all
relevant bench tests, laboratory and animal studies, a complete description of
the device and its components, and a detailed description of the methods,
facilities, and controls used to manufacture the device. In addition, the
submission must include the proposed labeling and promotional literature. If the
FDA determines that the pre-market approval application is sufficiently complete
to permit a substantive review, the FDA will accept the application for filing.
Once the submission is accepted for filing, the FDA begins an in-depth
review of the pre-market approval application, which represents the second major
step in pre-market approval of a Class III device. An FDA review of a pre-market
approval application generally takes one to two years from the date the
pre-market approval application is accepted for filing, but may take
significantly longer. The review time is often significantly extended by the FDA
asking for more information or clarification of information already provided in
the submission. During the review period, an advisory committee, typically a
panel of clinicians, will likely be convened to review and evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. The FDA is not bound by the recommendations of the advisory
panel. Toward the end of the pre-market approval review process, the FDA will
generally conduct an inspection of the manufacturer's facilities to ensure that
the facilities are in compliance with applicable Good Manufacturing Practice
requirements, which are outlined under FDA's Quality System regulation. If the
FDA's evaluations of both the pre-market approval application and the
manufacturing facilities are favorable, the FDA will either issue an approval
letter or an approvable letter, which usually contains a number of conditions
that must be met in order to secure final approval of the pre-market approval
application. When and if those conditions have been fulfilled to the
satisfaction of the FDA, the agency will complete the third major step by
issuing a pre-market approval letter, authorizing commercial marketing of the
device for certain indications. If the FDA's evaluations of the pre-market
approval application or manufacturing facilities are not favorable, the FDA will
deny approval of the pre-market approval application or issue a "not approvable"
letter. The FDA may also determine that additional clinical trials are
necessary, in which case pre-market approval may be delayed for several years
while additional clinical trials are conducted and submitted in an amendment to
the pre-market approval application. The pre-market approval process can be
expensive, uncertain and lengthy and a number of devices for which FDA approval
has been sought by other companies have never been approved for marketing.
Modifications to a device that is the subject of a pre-market approval, its
labeling, or manufacturing process may require approval by the FDA of pre-market
approval supplements or new pre-market approval applications. Supplements to a
pre-market approval application often require the submission of the same type of
information required for an initial pre-market approval application, except that
the supplement is generally limited to that information needed to support the
proposed change from the product covered in the original pre-market approval
application.
Page 10
------------------------------------------------------------------
Product and Procedure FDA CE Mark
--------------------- --- -------
CVX-300(R) 2/93 9/96
Coronary Angioplasty
Extreme(R) 10/93 12/96
Vitesse(R) C 10/94 12/96
Vitesse(R) E 9/97 2/97
Vitesse(R) C OS Trials 11/98
Pacing Lead and ICD Lead Extraction
SLS 12 Fr 12/97 2/97
SLS 14 Fr 9/98 2/97
SLS 16 Fr 9/98 2/97
Peripheral Angioplasty
Upper leg Trials 11/96
Lower leg Trials 11/96
Restenosed Stents Trials 1/98
------------------------------------------------------------------
We received our initial investigational device exemption to perform excimer
laser percutaneous coronary angioplasty in May 1989. In February 1991, we
submitted our pre-market approval application, which was accepted for filing by
the FDA in June 1991. On November 26, 1991, our pre-market approval application
was reviewed by a public advisory panel, and we received a recommendation for
approval of the CVX-300 laser unit and two sizes of our soft-rim catheters. As
part of the approval process, we were inspected in October 1991 by the FDA to
verify our compliance with Good Manufacturing Practices requirements. The final
step in the approval process, the issuance of a letter by the FDA approving the
application, occurred on February 19, 1993.
In October 1993, we received approval for a pre-market approval supplement
for our Extreme(R) catheters. In October 1994, the FDA approved our pre-market
approval supplement for our Vitesse(R) C family of catheters. In July 1995, we
received pre-market approval supplement for a new inner catheter tubing, our
Vitesse(R) E catheter, an upgraded CVX-300 system software, and the
cross-coupling of our catheters on former LAIS Dymer(R) 200+ laser systems. In
September 1997, the FDA approved our pre-market approval supplement for our
Vitesse(R) E 2.0 millimeter diameter catheter. In December 1997, the FDA
approved the pre-market approval for the 12 French diameter Spectranetics Laser
Sheath, or SLS(TM). In September 1998, we received FDA final market approval for
our Spectranetics 14 Fr and 16 Fr Laser Sheaths. We cannot assure that the FDA
will approve our current or future pre-market approval applications or
supplements on a timely basis or at all. The absence of such approvals could
have a material adverse impact on our ability to generate future revenues. For
more information, see "Risk Factors--May Hurt Our Business and Stock Price."
Any products we manufacture or distribute pursuant to FDA approvals are
subject to pervasive and continuing regulation by the FDA. Device manufacturers
are required to register their establishments and list their devices with the
FDA, and are subject to periodic inspections by the FDA and certain state
agencies. The FFDCA requires devices to be manufactured in accordance with Good
Manufacturing Practice requirements, which impose certain process, procedure and
documentation requirements upon us with respect to product development,
manufacturing and quality assurance activities. The FDA recently revised its
Good Manufacturing Practice requirements. The new Good Manufacturing Practice
requirements, which are outlined under the FDA's Quality System regulation, are
more extensive than previous requirements. We cannot assure that we will be able
to attain or maintain compliance with Good Manufacturing Practice requirements.
In addition, the Medical Device Reporting, or MDR, regulation obligates us
to inform the FDA whenever there is reasonable evidence to suggest that one of
its devices may have caused or contributed to death or serious injury, or where
one of its devices malfunctions and, if the malfunction were to recur, the
device would be likely to cause or contribute to death or serious injury. There
can be no assurance that the FDA will agree with our determinations as to
whether particular incidents meet the threshold for MDR reporting.
Page 11
Labeling and promotional activities are also 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.
Noncompliance with requirements under the FFDCA or accompanying regulations
can result in, among other things, fines, injunctions, civil penalties, recall
or seizure of products, total or partial suspension of production, failure of
the government to grant premarket approval, withdrawal of marketing approvals,
and criminal prosecution. The FDA also has authority to request repair,
replacement or refund of the cost of any device manufactured or distributed by
us.
International sales of our products are subject to foreign regulation,
including health and medical safety regulations. The regulatory review process
varies from country to country. Many countries also impose product standards,
packaging and labeling requirements, and import restrictions on devices. Exports
of products that have been approved by the FDA do not require FDA authorization
for export. However, foreign countries often require an FDA Certificate to
Foreign Government verifying that the product complies with FFDCA requirements.
To obtain a Certificate to Foreign Government, the device manufacturer must
certify to the FDA that the product has been granted approval in the United
States and that the manufacturer and the exported products are in substantial
compliance with the FFDCA and all applicable or pertinent regulations. The FDA
may refuse to issue a Certificate to Foreign Government if significant
outstanding Good Manufacturing Practice violations exist.
We are subject to certain federal, state and local regulations regarding
environmental protection and hazardous substance controls, among others. To
date, compliance with such environmental regulations has not had a material
effect on our capital expenditures or competitive position. See "Risk
Factors--Regulatory Compliance is Very Expensive and Can Often Be Denied or
Significantly Delayed."
COMPETITION
Methods for the treatment of cardiovascular disease are numerous and we
expect them to increase in number. Almost all of our competitors have
substantially greater financial, manufacturing, marketing and technical
resources than we do. Consequently, we expect intense competition to continue in
the marketplace. Although market competition includes manufacturers of balloon
angioplasty devices and stents, direct competition comes from manufacturers of
atherectomy devices. As a result of our agreement with United States Surgical
Corporation in 1997 to license and supply our CVX-300 excimer laser units and
disposable fiber optic probes, we will also compete with manufacturers of
devices that treat cardiovascular disease through TMLR or PTMR. We also believe
that we will experience increased competition in the future from companies that
will develop lead extraction devices or removal methods.
Balloon angioplasty is currently the most common therapy for the treatment
of atherosclerosis. SCIMED Life Systems, Inc. (a subsidiary of Boston Scientific
Corporation), Cordis Corporation (a subsidiary of Johnson & Johnson
Interventional Systems), Advanced Cardiovascular Systems, Inc. (a subsidiary of
Guidant Corporation), Bard and Schneider (a subsidiary of Pfizer, Inc.) are the
leading balloon angioplasty manufacturers. With the approval of stents in 1994,
we anticipate that stent utilization will continue to grow as the second most
prevalent angioplasty treatment of choice for coronary artery disease, or
atherosclerosis. Cordis, SCIMED, ACS, Arterial Vascular Engineering, and
Medtronic, Inc. are the leading stent providers in the United States at this
time. Manufacturers of atherectomy devices include Devices for Vascular
Intervention, Inc. (a subsidiary of Guidant Corporation) and Heart Technology,
Inc. (a subsidiary of Boston Scientific Corporation). In 1996, United States
Surgical Corporation acquired an 80 percent interest in Medolas, an excimer
laser company in Germany. The companies currently participating in clinical
trials for TMLR are CardioGenesis, Eclipse Surgical Technologies, PLC Systems,
Inc. and AccuLase.
We believe that the primary competitive factors in the interventional
cardiovascular market are:
o the ability to treat a variety of lesions safely and effectively;
o the impact of managed care practices and procedure costs;
Page 12
o ease of use;
o size and effectiveness of sales forces; and
o research and development capabilities.
See "Risk Factors--We May Be Unable To Compete Successfully In Our Highly
Competitive Industry In Which Many Other Competitors are Bigger Companies."
PATENTS AND PROPRIETARY RIGHTS
We hold 32 issued United States patents, three issued patents in each of
France, Germany, Italy and the Netherlands and one issued patent in Japan. Also,
we have two United States patent applications pending and 11 foreign patent
applications pending. Any patents for which we have applied may not be granted.
In addition, our patents may not be sufficiently broad to protect our technology
or to provide us with any competitive advantage. Our patents could be challenged
as invalid or circumvented by competitors. In addition, the laws of certain
foreign countries do not protect our intellectual property rights to the same
extent as do the laws of the United States. We could be adversely affected if
any of its licensors terminate our licenses to use patented technology. We do
not have patents in any foreign countries other than those listed above.
It is our policy to require our employees and consultants to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with us. Each agreement provides that all confidential information
developed or made known to the individual during the course of the relationship
will be kept confidential and not disclosed to third parties except in specified
circumstances. In the case of employees, the agreements provide that all
inventions developed by the individual shall be our exclusive property, other
than inventions unrelated to our business and developed entirely on the
employee's own time. There can be no assurance that these agreements will
provide meaningful protection for our trade secrets in the event of unauthorized
use or disclosure of such information.
We also rely on trade secrets and unpatented know-how to protect our
proprietary technology and may be vulnerable to competitors who attempt to copy
our products or gain access to our trade secrets and know-how.
We are aware of patents and patent applications owned by others relating to
laser and fiber-optic technologies, which, if determined to be valid and
enforceable, may be infringed by us. Holders of certain patents, including
holders of patents involving the use of lasers in the body, have contacted us
and requested that we enter into license agreements for the underlying
technology. A patent holder may file a lawsuit against us and may prevail. If we
decide that we need to license this technology, we may be unable to obtain these
licenses on favorable terms or at all. We may not be able to develop or
otherwise obtain alternative technology.
Litigation concerning patents and proprietary rights is time-consuming,
expensive, unpredictable and could divert the efforts of our management. An
adverse ruling could subject us to significant liability, require us to seek
licenses and restrict our ability to manufacture and sell our products.
We have signed two non-exclusive, royalty-bearing license agreements for
patents covering basic areas of laser technology. In addition, we acquired an
exclusive, royalty-bearing license for a proprietary catheter coating.
Additional licenses held by us include an exclusive license to patents covering
laser-assisted lead removal and an exclusive license relating to certain aspects
of excimer laser technology in our products.
RESEARCH AND DEVELOPMENT
From inception through 1988, our primary emphasis in research and
development was on the CVX-300 laser unit. Since 1988, our research and
development efforts have focused on refinement of the CVX-300 laser unit and
laser device technology. We are also exploring additional applications for the
CVX-300 laser unit and are developing advanced laser devices designed to
facilitate greater use in existing applications.
Page 13
Our team of research scientists, engineers and technicians substantially
performs all of our research and development activities. Our research and
development expense totaled $2,899,000 in 1998, $2,243,000 in 1997 and
$1,684,000 in 1996.
MANUFACTURING
We assemble and test our entire product line and have vertically integrated
a number of processes in an effort to provide increased quality and reliability
of the components used in the production process. Many of the processes are
proprietary and were developed by us. We believe that our level of manufacturing
integration allows us to control costs, quality and process advancements, to
accelerate new product development cycle time and to provide greater design
flexibility. Raw materials, components and subassemblies used in our products
are purchased from outside suppliers and are generally readily available from
multiple sources
Our manufacturing facilities are subject to periodic inspections by
regulatory authorities, including Good Manufacturing Practice compliance
inspections by the FDA and the TUV. We have undergone four inspections by the
FDA for Good Manufacturing Practice compliance since 1991, and the TUV has
conducted an inspection each year. Each inspection resulted in a limited number
of noted deficiencies, to which we believe we have provided adequate responses.
We purchase certain components of our CVX-300 laser unit from several sole
source suppliers. We do not have guaranteed commitments from these suppliers and
order products through purchase orders placed with these suppliers from time to
time. While we believe we could obtain replacement components from alternative
suppliers, we may be unable to do so. In addition, we may encounter difficulties
in scaling up production of laser units and disposable devices and hiring and
training additional qualified manufacturing personnel. Any of these difficulties
could lead to quarterly fluctuations in operating results and adversely affect
us.
THIRD-PARTY REIMBURSEMENT
Our CVX-300 laser unit and related fiber-optic laser devices are generally
purchased by hospitals, which then bill various third party payors for the
health care services provided to their patients. These payors include Medicare,
Medicaid and private insurance payors. The Medicare Program reimburses hospitals
based on a predetermined amount per discharge for inpatient hospital services
identified by the diagnosis-related group ("DRG") into which each case is
classified.
At present, many of our customers using the CVX-300 for laser angioplasty
are obtaining reimbursement under the same DRG as for balloon angioplasty. Lead
removal procedures using the SLS are reimbursed using the same DRGs for
non-laser lead removal or lead removal and replacement. We expect that our
customers will continue to do so in the near term. Medicare payments of
physicians' surgical fees are based on a fee schedule based on a resource-based
relative value scale that rates the value of physicians' work for a particular
service in relation to the value of work for other services. The basic excimer
laser ablation procedure third party reimbursement for hospital and physician
charges ranges from approximately $6,000 to $14,000.* This amount is generally
adequate to cover the cost of a laser ablation procedure. Actual costs may be
significantly higher and vary depending on the complexity of the procedure, age
of the patient, and geographical location.
Capital costs for medical equipment purchased or leased by hospitals are
currently reimbursed separately from DRG payments. We expect lower Medicare
reimbursement rates in 1999 as compared to previous years. Such reductions could
have an adverse impact on reimbursements to hospitals for the capital cost of
the CVX-300 laser unit and, consequently, our ability to sell our laser unit.
While we believe that a laser angioplasty procedure offers a less costly
alternative for the treatment of certain types of heart disease, we cannot
assure that the procedure will be viewed as cost effective under changing
reimbursement guidelines or other health care payment systems. For more
information, see "Risk Factors--Failure Of Third Parties To Reimburse Medical
Providers For Our Products May Reduce Our Sales."
Page 14
PRODUCT LIABILITY AND INSURANCE
Our business entails the risk of product liability claims. We maintain
product liability insurance in the amount of $5,000,000 per occurrence with an
annual aggregate maximum of $5,000,000. We cannot assure, however, that product
liability claims will not exceed such insurance coverage limits or that such
insurance coverage limits will continue to be available on acceptable terms, or
at all. See "Risk Factors--Potential Product Liability Claims and Insufficient
Insurance Coverage May Hurt Our Business And Stock Price."
EMPLOYEES
As of March 12, 1999, we had 192 employees, including 10 in research and
development, 51 in manufacturing and 62 in marketing, sales and administration,
as well as 69 at Polymicro. We believe that the success of our business will
depend, in part, on our ability to attract and retain qualified personnel. We
believe that our relationship with our employees is good.
- ----------
* Amounts were estimated by Spectranetics based on extrapolation from
available industry data. Patient population estimates are subject to inherent
uncertainties. We are unable to determine with any degree of certainty the
number of procedures for any indication or the number of patients who are
suitable for treatment using these procedures.
Page 15
ITEM 2. PROPERTIES
We lease a total of approximately 49,300 square feet in three buildings in
Colorado Springs, Colorado. These facilities contain approximately 35,000 square
feet of manufacturing space and approximately 14,300 square feet devoted to
marketing, research and administrative activities. We have renewed the building
lease through December 2000 and believe that these facilities are adequate to
meet our requirements through 1999.
Spectranetics International B.V. leases 4,394 square feet in Leusden, The
Netherlands. The facility houses our operations for the marketing and
distribution of products in Europe.
Polymicro leases approximately 30,000 square feet in Phoenix, Arizona, and
has options for an additional 20,000 square feet at this location. The facility
is leased through 2003, with one five-year renewal option. Management believes
that the facility will be adequate to meet Polymicro's current and reasonably
foreseeable future requirements through the current five-year lease term.
ITEM 3. LEGAL PROCEEDINGS
In 1993, we entered into a license agreement with Pillco Limited
Partnership granting us a license regarding certain patents. In 1996, Pillco
Limited Partnership transferred all of its right, title and interest in the
patents and license agreement to Interlase LP. In July 1998, we were served a
Garnishment Summons instructing us to make royalty payments due under the
license to the ex-wife of one of the named inventors of the licensed patents,
who is also a partner of Interlase LP. The Garnishment Summons was issued by a
state court in Virginia where this divorce proceeding was pending. In September
1998, Interlase LP purported to assign all of its right, title and interest in
the patents to White Star Holdings, Ltd. ("White Star"), an offshore company.
White Star subsequently demanded payment of the royalties. In light of the
competing demands from White Star and a Receiver appointed by the Virginia court
to collect the assets of Interlase LP, we notified White Star and the Receiver
that the funds would be deposited into a segregated, interest-bearing account
until we could determine the rightful owner of the royalty payments. In October
1998, White Star filed suit against us in the U.S. District Court for the
District of Colorado, alleging that we breached the license agreement by failing
to remit the royalty payments. We responded to White Star's claim by following
well-established procedure and requesting that the court determine which of
White Star and the Interlase LP Receiver is entitled to receive the royalty
payments. We also requested and were granted permission to deposit all of the
disputed royalties into the registry of the Court. In January 1999, White Star
issued a notice to us purporting to terminate the license agreement. White Star
proceeded to distribute a press release describing the purported termination of
the license agreement. In January 1999, we sought and were granted a temporary
restraining order restraining White Star and its agents from taking any further
steps to terminate the license agreement, from issuing further press releases
concerning the litigation or the status of the license agreement, and from
contacting any of our customers regarding such matters. In March 1999, a
preliminary injunction was issued by the U.S. District Court of Colorado
restraining White Star from all actions described in the temporary restraining
order.
We believe that White Star's claims are baseless and will vigorously defend
against their allegations. We have also filed a motion with the U.S. District
Court of Colorado to assert additional claims against White Star.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our Common Stock is traded on the over-the-counter market under The Nasdaq
National Market symbol "SPNC". The table below sets forth the high and low sales
prices for the Company's Common Stock as reported on The Nasdaq National Market
for each calendar quarter in 1997 and 1998. These over-the-counter quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commissions,
and may not necessarily represent the sales prices in actual transactions.
---------------------------------------------------------------------
High Low
---- ---
Year Ended December 31, 1997
1st Quarter........................ $ 5.563 2.563
2nd Quarter........................ 3.313 1.375
3rd Quarter........................ 5.938 2.313
4th Quarter........................ 5.500 2.875
Year Ended December 31, 1998
1st Quarter........................ $ 4.125 2.750
2nd Quarter........................ 4.000 2.750
3rd Quarter........................ 3.688 1.688
4th Quarter........................ 3.125 1.438
---------------------------------------------------------------------
We have not paid cash dividends on our Common Stock in the past and do not
expect to do so in the foreseeable future. The payment of dividends in the
future will be at the discretion of the Board of Directors and will be dependent
upon our financial condition, results of operations, capital requirements and
such other factors as the Board of Directors deems relevant.
The closing sales price of our Common Stock on March 12, 1999 was $3.563.
On March 12, 1999, we had approximately 831 shareholders of record.
On December 22, 1998, we entered into purchase agreements with 11 investors
with respect to the issuance and sale of 3,800,000 shares of our common stock in
a private placement pursuant to Rule 506 of Regulation D under the Securities
Act of 1933. Each investor represented that it was an "accredited investor" as
defined in Regulation D. We completed the private placement of the shares on
February 25, 1999 for aggregate proceeds of $7,600,000, before expenses.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of as of and for each of
the years in the five-year period ended December 31, 1998, are derived from our
consolidated financial statements. The information set forth below should be
read in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Form 10-K and
the Consolidated Financial Statements and Notes thereto. The selected
consolidated financial data presented below as of December 31, 1998 and 1997 and
for each of the years in the three-year period ended December 31, 1998, have
been derived from our audited financial statements also included elsewhere
herein. The selected historical consolidated financial data presented below as
of December 31, 1996, 1995 and 1994 and for the years ended December 31, 1995
and 1994 are derived from, and are qualified by reference to, audited financial
statements of the Company not included herein.
Page 17
(In thousands, except per share data)
Years Ended December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS
DATA:
Revenue ........................................ $ 27,784 $ 21,878 $ 20,679 $ 17,282 $ 11,413
Cost of revenue ................................ 12,872 11,263 10,418 9,502 7,756
Marketing and sales ............................ 9,984 7,752 5,873 4,920 5,453
General and administrative ..................... 4,584 4,446 3,220 3,068 2,939
Research and development ....................... 2,899 2,243 1,684 1,371 1,419
Amortization expense ........................... 802 976 1,220 1,220 730
Purchased research and development ............. -- -- -- -- 4,391
-------- -------- -------- -------- --------
Operating loss ................................. $ (3,357) $ (4,802) $ (1,736) (2,799) (11,275)
Other income, net .............................. 82 182 369 580 547
-------- -------- -------- -------- --------
Net loss ....................................... $ (3,275) $ (4,620) $ (1,367) $ (2,219) $(10,728)
======== ======== ======== ======== ========
Loss per share - basic and diluted ............. $ (0.17) $ (0.25) $ (.07) $ (0.12) $ (0.74)
Weighted average common shares
outstanding .................................. 19,018 18,654 18,430 18,331 14,564
As of December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital ................................ $ 4,536 $ 7,587 $ 8,787 $ 8,301 $ 8,433
Cash, cash equivalents, and securities ......... 4,158 8,590 7,150 7,047 8,165
Equipment, net ................................. 5,323 3,906 3,486 3,952 5,025
Total assets ................................... 22,239 25,325 23,039 25,013 28,893
Long-term debt including capital
lease obligations, net of current ........ 1,439 1,387 465 725 1,729
portion
Shareholders' equity ........................... 11,268 14,063 18,510 19,747 21,870
Book value per common share
outstanding .................................. $ 0.59 $ 0.75 $ 1.00 $ 1.08 $ 1.20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We develop, manufacture, service and distribute an excimer laser unit and
fiber optic delivery system for the treatment of certain coronary and vascular
conditions. Our wholly owned subsidiary, Polymicro Technologies, Inc.,
manufactures and distributes drawn silica glass products which include capillary
tubing and specialty fiber optics sold to a variety of companies in addition to
Spectranetics.
Our revenues are dependent on obtaining clinical data supporting regulatory
approvals and market acceptance. We sell the only excimer laser system that has
been market approved by the FDA in the United States for coronary applications.
Our laser system competes primarily against alternative technologies including
balloon catheters, cardiovascular stents and mechanical artherectomy devices.
Our strategy is to develop additional procedures for our excimer laser
system. In 1997, we secured FDA approval to use our excimer laser system for
removal of pacemaker and defibrillator leads and entered into a supply and
license agreement with United States Surgical Corporation for use of our system
for TMLR, an experimental coronary procedure. In 1998, we sponsored clinical
trials evaluating the use of our excimer laser system to treat restenosed
stents, blocked arteries in the leg and totally blocked coronary arteries. These
trials will continue at least until the end of 1999 and may extend into the year
2000 depending on patient enrollment and our ability to fund these trials.
Page 18
To fund our strategy, we intend to continue to accelerate investment in the
development of new products and in clinical trials for additional applications
as well as sales and marketing resources. This investment can be expected to
result in operating losses through 1999.
RESULTS OF OPERATIONS
In this section we will discuss 1998 and 1997 revenue and net income
results. We will begin with a general overview, then discuss revenue and net
income from our three operating units.
Overview
Revenue per Operating Unit
- --------------------------------------------------------------------------------
1998 1997 1996
----------------------------
Medical - United States $16,191 $10,941 $ 9,099
Medical - Europe 2,374 3,755 4,563
Industrial - Polymicro Technologies, Inc. 9,219 7,182 7,017
----------------------------
Total $27,784 $21,878 $20,679
- --------------------------------------------------------------------------------
Net income (loss) per Operating Unit
- --------------------------------------------------------------------------------
1998 1997 1996
----------------------------
Medical - United States $(1,671) $(3,461) $(1,525)
Medical - Europe (2,465) (1,385) (373)
Industrial - Polymicro Technologies, Inc. 861 226 531
----------------------------
Total $(3,275) $(4,620) $(1,367)
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenue in 1998 grew to $27,784,000, an increase of $5,906,000, or 27%,
over 1997. Increased revenue includes a 32% increase in disposable sales, a 28%
increase in revenues from Polymicro, a 19% increase in equipment revenue and a
44% increase in service revenues.
Increased disposable revenue, which consist of single-use catheter
products, came from our newest application - lead removal, which was up 93% over
1997 levels, and a 41% increase in angioplasty catheters in the United States.
These gains were offset by a 35% decline in disposable revenue from Europe.
Polymicro revenues were up as a result of sales of precision silica glass
capillary tubing and assemblies into new capillary electropherisis applications
such as DNA sequencing and increased sales to existing gas chromatography
customers.
Equipment revenues increased in 1998, primarily due to sales to United
States Surgical Corporation in accordance with our supply agreement to provide
lasers for their transmyocardial revascularization project. During 1998 we
completed delivery of all lasers ordered under this contract. Equipment revenues
from United States Surgical Corporation totaled $2,905,000 in 1998 compared to
$1,244,000 in 1997. The contract requires us to deliver an additional $2,028,000
in fiber optic disposables to support this program.
Service revenues increased in 1998 due to the increasing installed base of
the Company's excimer laser systems.
Gross margins in 1998 increased to 54% from 49% in 1997. This improvement
was due to a combination of improved manufacturing efficiencies for both our
medical and industrial groups, price increases on our catheter products and
increases in sales of our catheter products, which generate higher margins than
equipment, service or our industrial products.
Page 19
Operating expenses grew 18% in 1998 to $18,269,000. Marketing and sales
grew 29% to $9,984,000 in 1998. Of the $2,232,000 increase, $1,400,000 relates
to investments we are making in additional field personnel to allow us to
increase customer support. These additional employees have allowed us to
introduce our lead extraction devices, which is a primary factor in growing our
disposable revenue. Additional marketing costs of $500,000 related primarily to
marketing materials and marketing agency fees associated with the launch of the
lead removal products, combined with increased convention cost resulting for
attending more conventions as compared to last year. The remaining $300,000
increase relates to increased staffing and marketing activities at Polymicro.
General and administrative expenses increased by 3% to $4,584,000. Research and
development increased by 29% to $2,899,000. Research and development expenses
reflect our efforts to improve our catheter designs and to develop additional
applications for the excimer laser. Approximately 75% of the increase is
staffing, materials and outside consulting costs associated with the medical
business. The remaining increase relates to similar costs for our industrial
group, Polymicro.
Other income is primarily interest income on cash and investments. Interest
income is down due to lower cash balances and lower yields from short term
investments. Other expense includes interest expense, which increased in 1998
due to interest charges on our loan from Silicon Valley Bank.
Net loss for 1998 has been reduced by 29% to $3,275,000 from $4,620,000 in
1997. Net loss decreased due to a 52% reduction in loss from our United States
medical unit and a 281% increase in net income from our industrial group,
Polymicro Technologies, Inc. These improvements were offset by an increase in
net loss of 78% from our European medical unit.
Medical - United States
Revenue from our medical business in the United States increased to
$16,191,000, up 48% from 1997. These increases were generated from sales of lead
extraction devices, up 98%, angioplasty catheters, up 41%, service revenues, up
44%, and sales of laser systems to United States Surgical Corporation, up 134%.
Net loss from this unit decreased 52% from 1997. While revenues increased
48%, operating expense growth increased 23%. Most of the operating expense
growth was in the area of marketing and sales.
Medical - Europe
Revenue from our medical business in Europe decreased 37% from 1997.
Declines in our equipment and disposable product lines were 56% and 35%,
respectively. This was offset by a 38% increase in service revenues. Sales in
Germany accounted for 64% of the reduced revenues. Early in 1998, we notified
our German distributor that we were not going to renew our distribution
agreement with them. Revenues from Germany had already begun to fall, and
without our commitment to continue our distribution agreement, sales through our
distributor continued to decline. In late 1998, we initiated efforts to
implement a direct sales effort in Germany. Effective January 1, 1999, we are
selling directly in Germany in an effort to reestablish our presence in Germany.
Lead extraction catheters have had limited success in Europe, providing
only limited revenues. With the establishment of direct selling capability, we
will initiate a selling strategy for lead extraction devices that will be
similar to the strategy we utilize in the United States.
Net loss from European operations increased 78%. This increase in net loss
is attributed to reduced sales from Germany and a 27% reduction in revenue from
other parts of Europe, along with a 9% increase in operating expenses associated
with establishing our own direct sales capability.
The functional currency of Spectranetics International, B.V. is the Dutch
guilder. All revenue and expense accounts are translated to United States
dollars in the consolidated statements of operations using weighed average
exchange rates during the year. Fluctuation in the Dutch guilder currency rate
during the year ended December 31, 1998 as compared to December 31, 1997 caused
a decrease in revenues and operating expenses of less than 1% of consolidated
revenues and operating expenses, respectively.
Page 20
Industrial - Polymicro Technologies, Inc.
Polymicro revenues were up 28% to $9,219,000, due to sales of precision
silica glass capillary tubing and assemblies into new capillary electrophoresis
applications such as DNA sequencing and increased sales to existing gas
chromatography customers.
Operating expense for Polymicro increased 13% to $3,469,000. These
increases reflect staffing increases in our engineering group to support
customer needs and to develop additional configurations of our products. We have
also added sales personnel in an effort to broaden our customer base.
Polymicro's net income increased 281% to $861,000. This improvement was due
to higher revenues and the efficiencies achieved from operations.
We recently announced that we are contemplating strategic alternatives for
Polymicro, which could include the sale of Polymicro. We anticipate that we
would use any capital raised from such a transaction to accelerate developmental
programs for our core medical business. However, at this time we have not
received an offer to purchase Polymicro, nor have we made a firm decision to
sell Polymicro. We have not set a fixed time frame for a decision. We may decide
not to sell Polymicro or we may fail to obtain offers to purchase Polymicro at a
price we deem satisfactory.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenue in 1997 grew to $21,878,000, up $1,199,000 or 6% over 1996.
Increased revenues include a 5% increase in catheter sales, 2% increase in
revenues from Polymicro and sales of laser systems to United States Surgical
Corporation to support the development of the excimer laser for transmyocardial
revascularization.
Increased disposable revenue came from lead removal, our newest
application, which was up 160% over 1996 levels. A 23% decline in disposable
revenue from Europe offset these gains.
We sold our products to United States Surgical Corporation in accordance
with our supply agreement to provide lasers and fiber optic probes for their
transmyocardial revascularization project. Equipment revenues from United States
Surgical Corporation totaled $1,244,000 in 1997 compared to $610,000 in 1996.
Gross margin was 49% in 1997 compared to 50% in 1996.
Operating expenses grew 29% to $15,417,000. Marketing and sales grew 32% to
$7,752,000 in 1997. This increase is attributable primarily to increased
staffing costs of $700,000, combined with $900,000 of increased marketing
activities associated with conventions, workshops and marketing materials.
General and administrative expenses increased by 38% to $4,446,000. This
increase was due primarily to increased staffing costs incurred as we built the
infrastructure necessary to support investor relations, finance and
administrative activities. Research and development increased by 33% to
$2,243,000. Research and development expenses reflect incremental costs
associated with the retrospective clinical study of the use of the excimer laser
in restenosed stents and the European clinical study of the use of excimer
lasers in crossing chronic total occlusions. There were also increases in
staffing to support the development of additional applications for the excimer
laser.
Other income is primarily interest income on cash and investments. The
decrease in other income of $187,000 is due primarily to a write-off in 1996 of
a liability accrued in connection with the merger with Advanced Interventional
Systems, Inc. No such adjustments were recorded in 1997. Interest income
decreased in 1997 compared to 1996 due to lower cash and securities balances.
Net loss for 1997 increased by 238% to $4,620,000 from $1,367,000 in 1996.
Net loss was impacted by a 127% increase in loss from our United States medical
unit, a 271% increase in loss from our European medical unit and a 57% reduction
of Polymicro Technologies, Inc. net income.
Page 21
Medical - United States
Revenues from our medical business in the United States increased 20% in
1997. This increase resulted from a 159% increase in sales of lead extraction
devices and sales of laser systems to United States Surgical Corporation.
Net loss from this unit increased by 127% from 1996. This growth is
attributed to growth in sales and marketing expenses as well as general and
administrative expenses as previously discussed.
Medical - Europe
Revenues from our medical business in Europe decreased 18% from 1996,
primarily due to decreased unit volumes of disposable catheters.
Net loss from European operations increased 271%. This increase in net loss
is attributed to reduced sales from Germany and a 12% reduction in revenues from
other parts of Europe along with increased expenses in Europe.
All revenue and expense accounts are translated to U.S. dollars in the
consolidated statements of operations using weighted average rates during the
year. Fluctuations in the Dutch guilder currency rate during the year ended
December 31, 1997 as compared to the year ended December 31, 1996 caused a
decrease in revenues and operating expenses equal to 3% and 4% respectively, of
consolidated revenues and operating expenses.
Industrial - Polymicro Technologies, Inc.
Polymicro revenues were up 2% in 1997 to $7,182,000.
Operating expense for Polymicro increased 7% in 1997 to $3,077,000. This
increase reflects an increase in our engineering expenses to support customer
needs and to develop variations to our products.
Polymicro's net income decreased 57% to $226,000 in 1997. This decline
reflects our effort to increase the growth opportunities for Polymicro.
Income Taxes
At December 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $87,600,000 which are available to
offset future federal taxable income, if any, and expire at varying dates
through 2018. The annual use of the net operating loss carryforwards is limited
under Section 382 of the Internal Revenue Code of 1986.
The Company also has research and development tax credit carryforwards at
December 31, 1998 for federal income tax purposes of approximately $3,300,000
which are available to reduce future federal income taxes, if any, and expire at
varying dates through 2018. The annual use of portions of the research and
development credit carryforwards is also limited under Section 382.
Liquidity and Capital Resources
As of December 31, 1998, we had cash and cash equivalents of $4,158,000
compared to $8,590,000 at December 31, 1997.
Cash used in operations totaled $3,967,0000, primarily due to the
following: (1) $2,809,000 related to the net decrease in deferred revenue. This
relates primarily to amortization of deferred revenue recorded in 1997
associated with the agreement with United States Surgical Corporation whereby
$6,339,000 was paid in advance in 1997 and amounts were amortized to revenue as
products were shipped in 1998, (2) $1,486,000 related to increased inventories,
and (3) $616,000 related to increased receivables balances. These uses of cash
were offset by cash provided by growth in accounts payable and accrued
liabilities of $1,829,000 related to increased operating expenses
Page 22
and inventory levels in 1998. The table below describes the growth in
receivables and inventory in relative terms, through the calculation of
financial ratios. Days sales outstanding is calculated by dividing the ending
accounts receivable balance by the average daily sales from the fourth quarter.
Inventory turns is calculated by dividing annualized cost of sales for the
fourth quarter by ending inventory.
-----------------------------------------
1998 1997
---- ----
Days Sales Outstanding 62 62
Inventory Turns 5.2 5.1
-----------------------------------------
Receivables considered to be overdue were not material as of December 31,
1998 or 1997.
Cash used in investing activities was due to capital expenditures totaling
$1,543,000 in 1998 compared to $767,000 in 1997. We upgraded computer systems
and phone systems in 1998 at our headquarters and at Polymicro, which accounted
for approximately two thirds of the total capital expenditure. The remainder
relates primarily to manufacturing equipment purchased in 1998.
Net cash provided by financing activities was $1,082,000 consisting of
$420,000 from the sales of common stock associated with stock option exercises
and $1,230,000 from borrowings, offset by $568,000 from principal payments on
debt and capital lease obligations. The borrowing consisted of a $900,000 draw
on our credit line collateralized by equipment and a $330,000 loan to
Spectranetics International B.V. secured by equipment held for rental or loan. A
$3,000,000 revolving credit line, which had not been drawn upon, expired in
December 1998.
We completed a private placement of common stock in February 1999, which
provided approximately $6,818,000 net of estimated expenses.
At December 31, 1998, 1997, and 1996, we placed a number of systems on
rental, loan and fee per procedure programs. A total of $2,350,000, $1,441,000,
and $1,473,000 were recorded as equipment held for rental or loan for the years
ended December 31, 1998, 1997, and 1996, respectively, and are being depreciated
over three to five years. This equipment was transferred from inventory at cost.
We will continue to offer these programs as we execute our strategy of
increasing our presence in major cardiac centers.
We currently use three placement programs:
(1) Rental programs - Straight rental program with terms varying from 6
months to 3 years. Rental revenues in the amount of $3,000 to $5,000
are invoiced on a monthly basis and revenue is recognized upon
invoicing. Catheter revenues are recognized when shipped and invoiced.
The lasers are transferred from inventory to the equipment held for
rental or loan account upon shipment of the laser to the customer. The
laser is then depreciated over three to five years, depending on the
type of laser. Depreciation on these lasers is included in cost of
revenues. At the end of the rental term, if the customer elects to
purchase the unit, revenue is recognized upon invoicing the customer
after receiving a valid purchase order. Cost of sales equal to the net
book value of the system is also recorded at this time.
(2) Loan programs - The Company "loans" a laser system to an institution
for use over a short period of time, usually three to six months. The
loan of the equipment is to create awareness of the product and no
revenue is earned or recognized in connection with the placement of
this laser. The units are transferred to the equipment held for rental
or loan account upon shipment of the laser system. The laser systems
are depreciated over a three to five year period and expensed to cost
of revenues.
(3) Fee for procedure - This program is similar to the rental program
except that revenues are derived from a premium attached to the sale
of each single use laser catheter. Revenue equal to the premium
charged above list price for each catheter sold is recognized as
rental revenues. This rental income is immaterial to the financial
statements, representing less than 1% of consolidated
Page 23
revenue. All other accounting treatment is consistent with that noted
above in the "rental programs".
We recently announced that we are contemplating strategic alternatives for
Polymicro, which could include the sale of Polymicro. We anticipate that we
would use any capital raised from such a transaction to accelerate developmental
programs for our core medical business. However, at this time we have not
received an offer to purchase Polymicro, nor have we made a firm decision to
sell Polymicro. We have not set a fixed time frame for a decision. We may decide
not to sell Polymicro or we may fail to obtain offers to purchase Polymicro at a
price we deem satisfactory.
We believe our liquidity and capitalization as of December 31, 1998,
combined with the proceeds from the private placement of common stock completed
in February 1999, are sufficient to meet our operating and capital requirements
through December 31, 2000. Revenue increases from current levels will be
necessary to sustain our business over the long-term.
CONVERSION TO THE EURO
On January 1, 1999, eleven countries in Europe adopted a common currency,
the "euro," and exchange rates between the currencies of the eleven countries
were fixed against the new euro. The former currencies of those eleven countries
will remain legal tender as denominations of the euro until January 1, 2002 and
goods and services may be paid for using either the euro or the former currency
until that time.
Spectranetics International, B.V., currently intends to continue using the
Dutch guilder as its functional currency until its fiscal year beginning January
1, 2002.
Due to the size of the Spectranetics International, B.V. operations in
relation to the consolidated results, the conversion to the Euro is not expected
to have a material adverse effect on the consolidated financial results of
operations.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133),
which is effective for fiscal quarters beginning after June 15, 1999. FAS No.
133 requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies under the standard for hedge accounting.
The Company does not anticipate a material impact on the results of operations
as a result of implementing this standard.
YEAR 2000
The year 2000 ("Y2K") issue arose because many computer programs existing
today utilize only two characters to recognize a year. Therefore, when the year
2000 arrives, these programs may not properly recognize a year beginning with
"20" instead of "19". The Y2K issue may result in the improper processing of
dates and date-sensitive calculations by computers and other
microprocessor-controlled equipment as the year 2000 is approached and reached.
State of Readiness
We have divided our Y2K exposure into three major areas:
o internal systems;
o products; and
o potential Y2K problems associated with outside vendors.
Page 24
Because we believe that our primary Y2K issues could arise in the area of
internal systems, we have focused on this area and have almost completed this
phase of our Y2K project. New computer systems, which are designed to be Y2K
compliant, were installed and implemented during the first half of 1998 at our
facilities in Colorado Springs, Colorado and Phoenix, Arizona. We are currently
evaluating our computer systems at our European subsidiary, Spectranetics
International B.V., for Y2K compliance. These computer systems are the
foundation for our business operations and include, but are not limited to,
business functions such as order entry, shipping, purchasing, inventory control,
manufacturing, accounts receivable, accounts payable, and general ledger. We are
also in the process of reviewing other equipment that contains date-sensitive
information. We have implemented a Y2K compliant phone system at our
headquarters and are reviewing other equipment for potential Y2K issues. We
expect to complete our review of internal systems by June 30, 1999 and do not
expect a material adverse effect on our operations as a result of this review.
We have reviewed our products and determined that there are no
date-sensitive fields contained in any of the software within our products;
therefore, we do not believe that our products will be affected by Y2K issues.
We are in the process of identifying any risks associated with the Y2K
problem as it relates to outside vendors with systems that interface with our
systems. We expect to complete this review by June 30, 1999. Based on a
preliminary review of the Y2K impact associated with outside vendors, we do not
expect this issue to have a material adverse effect on our operations. However,
since third party year 2000 compliance is not within our control, we cannot
assure that Y2K issues affecting the systems of other companies on which our
systems rely will not have a material adverse effect on our operations.
Costs to Address the Y2K Issue
Costs to address the Y2K issue include hardware, software, and
implementation costs paid to outside consultants. These costs totaled $999,000
in 1998 and were capitalized and will be depreciated over a three to five year
period. The costs were financed primarily through financing activities, which
include capital leases and a draw on our line of credit. Depreciation costs for
the twelve months ended December 31, 1998 and December 31, 1997 totaled $181,000
and $2,000, respectively. Interest costs associated with the capital leases used
to finance hardware and software totaled $16,000 and $7,000, respectively, for
twelve months ended December 31, 1998 and December 31, 1997. We do not expect to
incur material future costs associated with the Y2K issue as it relates to
internal systems. Other expenses, which include non-capitalized equipment and
consulting costs, were $10,000 and $52,000, respectively, for the twelve months
ended December 31, 1998 and December 31, 1997.
Risks Presented By The Year 2000 Issue
To date, we have not identified any Y2K issues that we believe could
materially adversely affect us or for which a suitable solution cannot be
implemented. However, as the review of our internal systems and interfaces with
outside vendors progresses, it is possible that Y2K issues may be identified
that could result in a material adverse effect on our operations. For more
information, see "Risk Factors - Year 2000 Issues Could Hurt Our Business."
Contingency Plans
Although we have not prepared a formal contingency plan to date, we intend
to continue to assess our Y2K risks and develop contingency plans as
appropriate.
RISK FACTORS
We Have Continued to Suffer Losses. We have incurred net losses since our
inception in June 1984. At December 31, 1998, we had accumulated $72.8 million
in net losses since inception. We anticipate that our net losses will continue
in the foreseeable future. We may be unable to increase sales or achieve
profitability.
Limited Cash on Hand, Additional Financing May Be Needed and We May Not Be
Able to Obtain It. We believe that our existing cash, cash from operations and
the proceeds from our private placement to the selling stockholders should be
sufficient to support our plans through at least the next 24 months. However, we
may need to
Page 25
raise additional cash prior to that time. We may be unable to obtain additional
financing, if needed, on satisfactory terms or at all. If financing is not
available on acceptable terms, we may be unable to make capital expenditures,
compete effectively or withstand the effects of adverse market and economic
conditions. Cash flow from operating activities may not be sufficient to sustain
our long-term operations unless we are able to increase sales and control
expenses. If we finance future operations through additional issuances of equity
securities, you may suffer dilution and the price of the common stock may fall.
Our Small Sales and Marketing Team May be Unable to Compete with our Larger
Competitors or Reach All Potential Customers. Many of our competitors have
larger sales and marketing operations than ours. This allows those competitors
to spend more time with customers, which gives them a significant advantage over
our team in making sales.
Our European Operations Have Not Been Successful and Our Recently
Established Direct Sales Force in Europe May Not Be Successful. In January 1999,
we established a direct sales force for our principal European markets. We may
be unable to develop an effective European sales force, and our sales and
marketing efforts in Europe could be unsuccessful.
We Are Exposed to the Problems that Come from Having International
Operations. For the year ended December 31, 1998, our revenues from
international operations represented 14% of consolidated revenues. Of these
revenues, 31% were derived from sales in Germany. Changes in overseas economic
conditions, currency exchange rates, foreign tax laws or tariffs or other trade
regulations could adversely affect our ability to market our products in these
and other countries. As we expand our international operations, we expect our
sales and expenses denominated in foreign currencies to expand.
Our Products are Still New and May Not Be Accepted in Their Markets.
Excimer laser technology is a relatively new procedure that competes with more
established therapies for restoring circulation to clogged or obstructed
arteries. Market acceptance of the excimer laser system depends on our ability
to provide adequate clinical and economic data that shows the clinical efficacy
of and patient need for excimer laser angioplasty and lead removal.
We May Be Unable to Compete Successfully in our Highly Competitive Industry
in Which Many Other Competitors are Bigger Companies. Our primary competitors
are manufacturers of products used in competing therapies, such as:
o balloon angioplasty, which uses a balloon to push obstructions out of
the way;
o stent implantation;
o open chest bypass surgery; and
o atherectomy, a mechanical method for removing arterial blockages.
We also compete with companies that develop lead extraction devices or
removal methods, such as mechanical sheaths. Almost all of our competitors have
substantially greater financial, manufacturing, marketing and technical
resources than we do. We expect competition to intensify.
We believe that the primary competitive factors in the interventional
cardiovascular market are:
o the ability to treat a variety of lesions safely and effectively;
o the impact of managed care practices and procedure costs;
o ease of use;
o size and effectiveness of sales forces; and
o research and development capabilities.
SCIMED Life Systems, Inc. (a subsidiary of Boston Scientific Corporation),
Cordis Corporation (a subsidiary of Johnson & Johnson Interventional Systems),
Advanced Cardiovascular Systems, Inc. (a subsidiary of Guidant Corporation),
Bard and Schneider (a subsidiary of Pfizer Inc.) are the leading balloon
angioplasty
Page 26
manufacturers. SCIMED, Cordis, Advanced Cardiovascular Systems and Medtronic,
Inc. are the leading stent providers in the United States. Manufacturers of
atherectomy devices include Devices for Vascular Intervention, Inc. (a
subsidiary of Guidant Corporation) and Heart Technology, Inc. (a subsidiary of
Boston Scientific Corporation).
Failure of Third Parties to Reimburse Medical Providers for our Products
May Reduce Our Sales. We sell our CVX-300 laser unit primarily to hospitals,
which then bill third-party payors such as government programs and private
insurance plans, for the services the hospitals provide using the CVX-300 laser
unit. Unlike balloon angioplasty and atherectomy, laser angioplasty requires the
purchase of expensive capital equipment. In some circumstances, the amount
reimbursed to hospitals for procedures involving our products may not be
adequate to cover a hospital's costs. We do not believe that reimbursement has
materially adversely affected our business to date, but continued cost
containment measures could hurt our business in the future.
In addition, the FDA has required that the label for the CVX-300 laser unit
state that adjunctive balloon angioplasty was performed together with laser
angioplasty in most of the procedures we submitted to the FDA for pre-market
approval. Adjunctive balloon angioplasty requires the purchase of a balloon
catheter in addition to the laser catheter. While all approved procedures using
the excimer laser system are reimbursable, some third-party payors attempt to
deny reimbursement for procedures they believe are duplicative, such as
adjunctive balloon angioplasty performed together with laser angioplasty.
Third-party payors may also attempt to deny reimbursement if they determine that
a device used in a procedure was experimental, was used for a non-approved
indication or was not used in accordance with established pay protocols
regarding cost effective treatment methods. Hospitals that have experienced
reimbursement problems or expect to experience reimbursement problems may not
purchase our excimer laser systems in the future.
Regulatory Compliance is Very Expensive and Can Often Be Denied or
Significantly Delayed. The industry in which we compete is subject to extensive
regulation by the FDA and comparable state and foreign agencies. Complying with
these regulations is costly and time consuming. International regulatory
approval processes may take longer than the FDA approval process. If we fail to
comply with applicable regulatory requirements, we may be subject to, among
other things, fines, suspensions of approvals, seizures or recalls of products,
operating restrictions and criminal prosecutions. We may be unable to obtain
future regulatory approval in a timely manner or at all if existing regulations
are changed or new regulations are adopted. For example, the FDA approval
process for the use of excimer laser technology in clearing blocked arteries in
the lower leg has taken longer than we anticipated, due to requests for
additional clinical data and changes in regulatory requirements.
Failures in Clinical Trials May Hurt Our Business and Our Stock Price. All
of Spectranetics' potential products are subject to extensive regulation and
will require approval from the Food and Drug Administration and other regulatory
agencies prior to commercial sale. The results from pre-clinical testing and
early clinical trials may not be predictive of results obtained in large
clinical trials. Companies in the medical device industry have suffered
significant setbacks in various stages of clinical trials, even in advanced
clinical trials after promising results had been obtained in earlier trials.
The development of safe and effective products is highly uncertain and
subject to numerous risks. The product development process may take several
years, depending on the type, complexity, novelty and intended use of the
product. Product candidates that may appear to be promising in development may
not reach the market for a number of reasons. Product candidates may:
o be found ineffective;
o take longer to progress through clinical trials than had been
anticipated; or
o require additional clinical data and testing.
In particular, our Prima(R) laser guidewire, which allows excimer laser
energy to assist in crossing totally blocked arteries, has not been as effective
as we expected. Also, during the course of review of the Prima guidewire by the
FDA, alternative technologies have surfaced which may limit market acceptance of
the Prima guidewire. We cannot guarantee that the clinical trials relating to
any of our products will be successful.
Page 27
We Have Important Sole Source Suppliers and May Be Unable to Replace Them
if They Stop Supplying Us. We purchase certain components of our CVX-300 laser
unit from several sole source suppliers. We do not have guaranteed commitments
from these suppliers and order products through purchase orders placed with
these suppliers from time to time. While we believe that we could obtain
replacement components from alternative suppliers, we may be unable to do so.
Potential Product Liability Claims and Insufficient Insurance Coverage May
Hurt Our Business and Stock Price. We are subject to risk of product liability
claims. We maintain product liability insurance with coverage and aggregate
maximum amounts of $5 million. The coverage limits of our insurance policies may
be inadequate, and insurance coverage with acceptable terms could be unavailable
in the future.
Technological Change May Result in Our Products Being Obsolete. We derive
approximately two-thirds of our revenues from the sale or lease of the CVX-300
laser unit and the sale of disposable devices. Technological progress or new
developments in our industry could adversely affect sales of our products. Many
companies, some of which have substantially greater resources than we do, are
engaged in research and development for the treatment and prevention of coronary
artery disease. These include pharmaceutical approaches as well as development
of new or improved angioplasty, atherectomy or other devices. Our products could
be rendered obsolete as a result of future innovations in the treatment of
vascular disease.
Our Patents and Proprietary Rights May be Proved Invalid so Competitors Can
Copy Our Products; We May Infringe Other Companies' Rights. We hold patents and
licenses to use patented technology, and have patent applications pending. Any
patents for which we have applied may not be granted. In addition, our patents
may not be sufficiently broad to protect our technology or to give us any
competitive advantage. Our patents could be challenged as invalid or
circumvented by competitors. In addition, the laws of certain foreign countries
do not protect our intellectual property rights to the same extent as do the
laws of the United States. We do not have patents in many foreign countries. We
could be adversely affected if any of our licensors terminate our licenses to
use patented technology.
We are aware of patents and patent applications owned by others relating to
laser and fiber-optic technologies, which, if determined to be valid and
enforceable, may be infringed by Spectranetics. Holders of certain patents,
including holders of patents involving the use of lasers in the body, have
contacted us and requested that we enter into license agreements for the
underlying technology. We cannot guarantee you that a patent holder will not
file a lawsuit against us and may prevail. If we decide that we need to license
this technology, we may be unable to obtain these licenses on favorable terms or
at all. We may not be able to develop or otherwise obtain alternative
technology.
Litigation concerning patents and proprietary rights is time-consuming,
expensive, unpredictable and could divert the efforts of our management. An
adverse ruling could subject us to significant liability, require us to seek
licenses and restrict our ability to manufacture and sell our products.
Protections Against Unsolicited Takeovers in Our Rights Plan, Charter and
Bylaws May Reduce or Eliminate our Stockholders' Ability to Resell Their Shares
at a Premium Over Market Price. We have a stockholder rights plan that may
prevent an unsolicited change of control of Spectranetics. The rights plan may
adversely affect the market price of our common stock or the ability of
stockholders to participate in a transaction in which they might otherwise
receive a premium for their shares. Under the rights plan, rights to purchase
preferred stock in certain circumstances have been issued to holders of
outstanding shares of common stock, and rights will be issued in the future for
any newly issued common stock. Holders of the preferred stock are entitled to
certain dividend, voting and liquidation rights that could make it more
difficult for a third party to acquire Spectranetics.
Our charter and bylaws contain provisions relating to issuance of preferred
stock, special meetings of stockholders and amendments of the bylaws that could
have the effect of delaying, deferring or preventing an unsolicited change in
the control of Spectranetics. Our Board of Directors are elected for staggered
three-year terms, which prevents stockholders from electing all directors at
each annual meeting and may have the effect of delaying or deferring a change in
control.
Page 28
Potential Volatility of Stock Price. The market price of our common stock,
similar to other health care companies, has been, and is likely to continue to
be, highly volatile. The following factors may significantly affect the market
price of our common stock:
o fluctuations in operating results;
o announcements of technological innovations or new products by
Spectranetics or our competitors;
o governmental regulation;
o developments with respect to patents or proprietary rights;
o public concern regarding the safety of products developed by
Spectranetics or others;
o general market conditions; and
o financing future operations through additional issuances of equity
securities, which may result in dilution to existing stockholders and
falling stock prices.
Year 2000 Issues Could Hurt Our Business. We installed and implemented new
computer systems at our Colorado and Arizona facilities in the first half of
1998. Although our new software is designed to be year 2000 compliant, we cannot
assure that this software contains all necessary data code changes. We are
currently evaluating our other computer systems for year 2000 compliance.
Although we expect all of our critical systems to be year 2000 compliant by June
30, 1999, there is a risk that some or all of our systems will not be year 2000
compliant by 2000.
Upon review of our product offerings, we have determined that the software
within our products does not contain date-sensitive fields. As a result, we do
not believe that our products will be affected by year 2000 issues. We cannot
assure, however, that all of our products are year 2000 compliant.
We are in the process of obtaining information from outside vendors
regarding systems that interface with our systems. Based on currently available
information, we do not believe that year 2000 issues relating to these systems
will adversely affect our business. However, since third party year 2000
compliance is not within our control, we cannot assure that any year 2000 issues
affecting our outside vendors will not adversely affect our business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our primary market risks include changes in foreign currency exchange rates
and interest rates. Market risk is the potential loss arising from adverse
changes in market rates and prices, such as foreign currency exchange and
interest rates. We do not use financial instruments to any degree to manage
these risks. The Company does not use financial instruments to manage changes in
commodity prices and does not hold or issue financial instruments for trading
purposes. Our debt consists of obligations with a fixed interest rate ranging
from 5.75% to 6.51% as well as an obligation with a variable interest rate equal
to the prime rate plus 1%. An increase or decrease in the prime rate of 1% would
cause interest expense to increase or decrease by approximately $16,000 over a
twelve month period.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements appearing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Page 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
information set forth under the caption "Proposal 1 -- Election of Directors"
and "Executive Officers of the Company" of the registrant's definitive Proxy
Statement to be used in connection with its 1999 Annual Meeting of Shareholders,
to be filed with the Securities and Exchange Commission on or prior to April 30,
1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information set forth under the caption "Executive Compensation" of the
registrant's definitive Proxy Statement to be used in connection with its 1999
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission on or prior to April 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information set forth under the caption "Principal Security Holders" of the
registrant's definitive Proxy Statement to be used in connection with its 1999
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission on or prior to April 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information set forth under the caption "Certain Transactions" of the
registrant's definitive Proxy Statement to be used in connection with its 1999
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission on or prior April 30, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) Documents Filed as a Part of The Report
(1) Financial Statements
(2) The financial statements listed in the accompanying Index to
Consolidated Financial Statements covered by the Independent
Auditor's Report are filed as part of this Report (see page F-1).
(3) Financial Statement Schedule
The financial statement schedule listed in the accompanying Index to
Consolidated Financial Statements covered by the Independent Auditors'
Report is filed as part of this Report (see page F-1).
(4) Exhibits
The exhibits listed in the Index to Exhibits are filed as part of this
Report (see page 58).
(b) Reports on Form 8-K
Spectranetics Enters Into Agreements for $7.6 million in Private
Placement of its Common Stock Filed on December 30, 1998
Page 30
SIGNATURES
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, in the City of
Colorado Springs, State of Colorado, on this 30th day of March, 1999.
THE SPECTRANETICS CORPORATION
By: /s/ Joseph A. Largey
-------------------------------
Joseph A. Largey, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant in the
capacities and on the date indicated.
Signature Title Date
--------- ----- ----
President and Chief
/s/ Joseph A. Largey Executive Officer, Director March 30, 1999
- --------------------------- (Principal Executive Officer)
Joseph A. Largey
Vice President, Finance
/s/ James P. McCluskey (Principal Financial and March 30, 1999
- --------------------------- Accounting Officer)
James P. McCluskey
Director and Chairman of the
/s/ Emile J. Geisenheimer Board of Directors March 30, 1999
- ---------------------------
Emile J. Geisenheimer
/s/ Cornelius C. Bond, Jr. Director March 30, 1999
- ---------------------------
Cornelius C. Bond, Jr.
/s/ Gary R. Bang Director March 30, 1999
- ---------------------------
Gary R. Bang
/s/ James A. Lent Director March 30, 1999
- ---------------------------
James A. Lent
/s/ Joseph M. Ruggio, MD Director March 30, 1999
- ---------------------------
Joseph M. Ruggio, MD
/s/ John G. Schulte Director March 30, 1999
- ---------------------------
John G. Schulte
Page 31
THE SPECTRANETICS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Index to Financial Statements: Page
Independent Auditors' Report....................................................................... F-2
Consolidated Balance Sheets, December 31, 1998 and 1997............................................ F-3
Consolidated Statements of Operations, Years Ended December 31, 1998, 1997, and 1996............... F-4
Consolidated Statements of Shareholders' Equity, Years Ended December 31, 1998, 1997,
and 1996...................................................................................... F-5
Consolidated Statements of Cash Flows, Years Ended December 31, 1998, 1997, and 1996............... F-6
Notes to Consolidated Financial Statements......................................................... F-7
Financial Statement Schedule:
Independent Auditors' Report on Financial Statement Schedule....................................... F-25
Schedule II -- Valuation and Qualifying Accounts, Years Ended December 31, 1998, 1997, and 1996.... F-26
All other schedules are omitted because they are not applicable or because the
required Information is included in the consolidated financial statements or the
notes thereto.
F-1
Independent Auditors' Report
The Board of Directors and Shareholders
The Spectranetics Corporation:
We have audited the accompanying consolidated balance sheets of The
Spectranetics Corporation and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Spectranetics
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Denver, Colorado
January 29, 1999, except as to
Note 14, which is as of February 25, 1999
F-2
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31, 1998 and 1997
Assets (Note 7) 1998 1997
-------- --------
Current assets:
Cash and cash equivalents $ 4,158 6,532
Securities, available for sale, at market value (note 2) -- 2,058
Trade accounts receivable, less allowance for doubtful
accounts of $247 and $232 5,182 4,505
Inventories (note 3) 2,610 2,315
Prepaid expenses and other 361 295
-------- --------
Total current assets 12,311 15,705
Equipment and leasehold improvements, at cost:
Manufacturing equipment and computers 7,481 6,513
Leasehold improvements 2,662 2,535
Equipment held for rental or loan 2,350 1,441
Furniture and fixtures 319 291
-------- --------
12,812 10,780
Less accumulated depreciation and amortization (7,489) (6,874)
-------- --------
Net equipment and leasehold improvements 5,323 3,906
Goodwill and other intangible assets, net (note 4) 4,110 5,140
Other assets 495 574
-------- --------
Total assets $ 22,239 25,325
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,459 995
Accrued liabilities (note 5) 3,966 2,580
Deferred revenue (note 6) 1,278 4,081
Current portion of long-term debt (note 7) 950 299
Current portion of capital lease obligations (note 9) 122 163
-------- --------
Total current liabilities 7,775 8,118
Deferred revenue and other liabilities (note 6) 1,757 1,757
Long-term debt, net of current portion (note 7) 1,346 1,246
Capital lease obligations, net of current portion (note 9) 93 141
-------- --------
Total liabilities 10,971 11,262
Shareholders' equity (note 8):
Preferred stock, $.001 par value. Authorized 5,000,000
shares; none issued -- --
Common stock, $.001 par value. Authorized 60,000,000
shares; issued and outstanding 19,110,825 shares in 1998
and 18,734,142 shares in 1997 19 19
Additional paid-in capital 84,131 83,711
Accumulated other comprehensive loss (92) (152)
Accumulated deficit (72,790) (69,515)
-------- --------
Total shareholders' equity 11,268 14,063
Commitments and contingencies (notes 9 and 13)
-------- --------
Total liabilities and stockholders' equity $ 22,239 25,325
======== ========
See accompanying notes to consolidated financial statements.
F-3
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Revenue $ 27,784 21,878 20,679
Cost of revenue 12,872 11,263 10,418
------------ ------------ ------------
Gross margin 14,912 10,615 10,261
------------ ------------ ------------
Operating expenses:
Marketing and sales 9,984 7,752 5,873
General and administrative 4,584 4,446 3,220
Research and development 2,899 2,243 1,684
Amortization of intangibles 802 976 1,220
------------ ------------ ------------
Total operating expenses 18,269 15,417 11,997
------------ ------------ ------------
Operating loss (3,357) (4,802) (1,736)
Other income (expense):
Interest income 213 278 315
Interest expense (190) (44) (44)
Other, net 59 (52) 98
------------ ------------ ------------
82 182 369
------------ ------------ ------------
Net loss $ (3,275) (4,620) (1,367)
============ ============ ============
Other comprehensive income (loss):
Foreign currency translation 60 (136) (134)
------------ ------------ ------------
Comprehensive loss $ (3,215) (4,756) (1,501)
============ ============ ============
Net loss per share - basic and diluted $ (0.17) (0.25) (0.07)
============ ============ ============
Weighted average common shares
outstanding - basic and diluted 19,018,147 18,653,939 18,430,276
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In thousands, except share amounts)
Years ended December 31, 1998, 1997 and 1996
Other
Additional comprehensive Total
paid-in income Accumulated shareholders'
Shares Amount capital (loss) deficit equity
---------- ---------- ---------- ------------- ----------- -------------
Balances at December 31, 1995 18,356,764 $ 18 83,139 118 (63,528) 19,747
Exercise of stock options 147,852 1 206 -- -- 207
Shares purchased under employee
stock purchase plan 27,251 -- 57 -- -- 57
Foreign currency translation
adjustment -- -- -- (134) -- (134)
Net loss -- -- -- -- (1,367) (1,367)
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1996 18,531,867 19 83,402 (16) (64,895) 18,510
Exercise of stock options 179,384 -- 239 -- -- 239
Shares purchased under employee
stock purchase plan 22,891 -- 70 -- -- 70
Foreign currency translation
adjustment -- -- -- (136) -- (136)
Net loss -- -- -- -- (4,620) (4,620)
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1997 18,734,142 19 83,711 (152) (69,515) 14,063
Exercise of stock options 343,981 -- 334 -- -- 334
Shares purchased under employee
stock purchase plan 32,702 -- 86 -- -- 86
Foreign currency translation
adjustment -- -- -- 60 -- 60
Net loss -- -- -- -- (3,275) (3,275)
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1998 19,110,825 $ 19 84,131 (92) (72,790) 11,268
========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------- ------- -------
Cash flows from operating activities:
Net loss $(3,275) (4,620) (1,367)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 2,354 2,285 2,728
Changes in operating assets and liabilities:
Trade accounts receivable, net (616) (1,029) (880)
Inventories (1,486) (1,045) (124)
Prepaid expenses and other (64) 85 611
Other assets 100 (80) 34
Accounts payable and accrued liabilities 1,829 330 (390)
Deferred revenue (2,809) 5,256 (86)
------- ------- -------
Net cash provided (used) by operating activities (3,967) 1,182 526
------- ------- -------
Cash flows from investing activities:
Capital expenditures (1,543) (767) (458)
Sale (purchases) of securities available for sale, net 2,058 2,232 (358)
------- ------- -------
Net cash provided (used) by investing activities 515 1,465 (816)
------- ------- -------
Cash flows from financing activities:
Proceeds from sale of common stock 420 309 264
Proceeds from borrowings 1,230 1,100 --
Principal payments on long-term debt and
capital leases obligations (568) (315) (179)
------- ------- -------
Net cash provided by financing activities 1,082 1,094 85
------- ------- -------
Effect of exchange rate changes on cash (4) (69) (50)
------- ------- -------
Net increase (decrease) in cash
and cash equivalents (2,374) 3,672 (255)
Cash and cash equivalents at beginning of year 6,532 2,860 3,115
------- ------- -------
Cash and cash equivalents at end of year $ 4,158 6,532 2,860
======= ======= =======
Supplemental disclosures of cash flow
information - cash paid during the year for interest $ 180 47 46
======= ======= =======
Supplemental disclosure of noncash investing
and financing activities:
Net transfer from inventory to equipment
held for rental or loan $ 1,220 424 382
======= ======= =======
Equipment acquired through capital leases $ -- 376 --
======= ======= =======
See accompanying notes to consolidated financial statements.
F-6
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) Summary of Significant Accounting Policies
(a) Organization, Nature of Business and Basis of Presentation
The accompanying consolidated financial statements include the
accounts of The Spectranetics Corporation, a Delaware corporation, and
its wholly owned subsidiaries (collectively the "Company"), including
Spectranetics International B.V. and Polymicro Technologies, Inc.
("Polymicro"). All intercompany balances and transactions have been
eliminated in consolidation. The Company designs, manufactures and
markets laser interventional cardiology products for the medical
industry and drawn silica glass products primarily for the medical
device and gas chromatography and separations markets.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(b) Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash
equivalents of approximately $3,235,000 and $1,276,000 at December 31,
1998 and 1997, respectively, consist primarily of certificates of
deposit, government-backed securities, money market accounts,
commercial paper and repurchase agreements stated at cost, which
approximates market. Restricted cash totaled $209,000 and $110,000 at
December 31, 1998 and 1997, respectively.
(c) Securities
Securities at December 31, 1997, consisted of U.S. Treasury notes and
mortgage-backed securities, and are accounted for under the provisions
of Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities. The Company's debt
securities were classified as available for sale securities, as they
were available to support current operations or for other investment
opportunities. Securities available for sale were recorded at market
value, which approximates amortized cost, and had maturities of one
year or less.
F-7 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
(e) Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Equipment
owned under capital leases is recorded at the present value of minimum
lease payments at the inception of the lease.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets of 3 to 7 years for manufacturing
equipment and computers and furniture and fixtures. Equipment held for
rental or loan is being depreciated using the straight-line method
over 2 to 5 years. Equipment owned under capital leases and leasehold
improvements are amortized using the straight-line method over the
shorter of the lease term or estimated useful life of the asset.
(f) Goodwill and Other Intangible Assets
Goodwill and other intangible assets are being amortized using the
straight-line method over periods ranging from 3 to 10 years.
(g) Long-Lived Assets
The Company accounts for long-lived assets under the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of (SFAS 121). Under SFAS 121, the carrying value of goodwill
and other long-lived assets is reviewed annually for impairment.
Events that may indicate a need to assess recoverability include
significant changes in business conditions, continuing losses, or a
forecasted inability to achieve at least break-even operating results
over an extended period. The Company evaluates the recoverability of
goodwill and other long-lived assets based upon undiscounted cash flow
projections. Should an impairment in value be indicated, the carrying
value of the asset is adjusted to its estimated fair value. No
adjustments for impairment of assets were recorded during 1998 or
1997.
(h) Financial Instruments
At December 31, 1998 and 1997, the carrying value of financial
instruments approximates the fair market value of the instruments
based on terms and related interest rates.
F-8 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(i) Revenue Recognition
Revenue from the sale of the Company's products is recognized when the
products are shipped to the customer. Revenue from product maintenance
contracts and equipment rentals are deferred and recognized ratably
over the contract period. Revenue associated with license and supply
agreements is deferred and recognized upon shipment of products to the
customer.
(j) Warranties
The Company provides for the cost of estimated future warranty repairs
when the products are shipped to the customer.
(k) Stock-Based Compensation Plan
The Company accounts for its stock-based compensation plans in
accordance with the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations. As such, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock
exceeded the exercise price. Under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123),
entities are permitted to recognize as expense the fair value of all
stock-based awards on the date of grant over the vesting period.
Alternatively, SFAS 123 also allows entities to continue to apply the
provisions of APB 25 and provide pro forma earnings (loss) and pro
forma earnings (loss) per share disclosures for employee stock option
grants as if the fair-value-based method defined in SFAS 123 had been
applied. The Company has elected to continue to apply the provisions
of APB 25 and provide the pro forma disclosures required by SFAS 123.
(l) Research and Development
Research and development costs are expensed as incurred.
(m) Loss Per Share
The Company calculates earnings (loss) per share under the provisions
of Statement of Financial Accounting Standards No. 128, Earnings Per
Share (SFAS 128). Under SFAS 128, basic loss per share is computed on
the basis of weighted-average common shares outstanding. Diluted loss
per share considers potential common stock instruments in the
calculation, and is the same as basic loss per share for the years
ended at December 31, 1998, 1997 and 1996, as all potential common
stock instruments were anti-dilutive.
F-9 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(n) Foreign Currency Translation
The Company's primary functional currency is the U.S. dollar. Certain
transactions of the Company and its subsidiaries are consummated in
currencies other than the U.S. dollar. Gains and losses from these
transactions are included in the consolidated statements of operations
as they occur.
Spectranetics International B.V. uses its local currency (Dutch
guilder) as its functional currency. Accordingly, net assets are
translated at year-end exchange rates while income and expense
accounts are translated at average exchange rates during the year.
Adjustments resulting from these translations are reflected in
shareholders' equity as other comprehensive income (loss).
(o) Income Taxes
The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes,
which requires the use of the asset and liability method of accounting
for deferred income taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. A valuation allowance
is required to the extent it is more likely than not that a deferred
tax asset will not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in operations in
the period that includes the enactment date.
(2) Securities
The Company invests only in high quality, short-term investments, which are
classified as available-for-sale and recorded at market value. At December
31, 1997, market value approximated amortized cost.
Securities as of December 31, 1997 are comprised of the following (in
thousands):
Market value and
amortized cost
----------------
1997
----------------
U.S. Treasury and Agency Securities $1,510
Certificates of Deposit 548
----------------
Total $2,058
================
F-10 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(3) Inventories
Inventories consist of the following as of December 31:
1998 1997
------ ------
(In thousands)
Raw materials $ 693 755
Work in process 575 882
Finished goods 1,342 678
------ ------
$2,610 2,315
====== ======
(4) Goodwill and Other Intangible Assets
Goodwill and other intangible assets and related amortization periods as of
December 31 are as follows:
Amortization
1998 1997 period
-------- -------- ------------
(In thousands)
Goodwill $ 6,417 6,417 8 years
Patents 2,488 2,488 10 years
Customer list 908 908 3 years
Sales and clinical staffs 346 346 3 years
-------- --------
10,159 10,159
Less accumulated amortization (6,049) (5,019)
-------- --------
$ 4,110 5,140
======== ========
F-11 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(5) Accrued Liabilities
Accrued liabilities consist of the following as of December 31:
1998 1997
------ ------
(In thousands)
Accrued payroll and related expenses $1,498 932
Accrued warranty expense 435 336
Accrued royalty expense 384 181
Other accrued expenses 1,649 1,131
------ ------
$3,966 2,580
====== ======
(6) Deferred Revenue
In 1997, the Company entered into a license agreement with United States
Surgical Corporation (USSC), whereby USSC paid a license fee in addition to
an advance payment for products to be supplied by the Company. The payments
received were recorded as deferred revenue and are being amortized as
product is shipped under the agreement. During 1997, cash received under
the agreement totaled $6,339,000. Revenue recognized related to the
agreement during the year ended December 31, 1998 and 1997 totaled
$3,067,000 and $1,244,000, respectively. Of the remaining balance of
$2,028,000, $271,000 has been recorded as current and $1,757,000 as
non-current on the balance sheet at December 31, 1998.
Other deferred revenue-current in the amounts of $1,007,000 and $738,000 at
December 31, 1998 and 1997, respectively, relates to payments in advance
for various product maintenance contracts, whereby revenue is initially
deferred and amortized over the life of the contract, which is generally
one year.
(7) Debt
During 1993, the Company issued a note payable in the amount of $1,050,000
to obtain certain patent rights. The note is for a ten-year period with
annual payments of $105,000 due on May 1st. The note was non-interest
bearing and was discounted to $827,000, using a discount rate of 5.75%. At
December 31, 1998, the note had a remaining balance of $366,000.
F-12 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
During 1997, the Company entered into a $5,000,000 loan and security
agreement, consisting of a $2,000,000 credit line collaterialized by
equipment (equipment line) and a $3,000,000 revolving credit line
(revolving line) collateralized by inventory, receivables, and various
other assets of the Company. The equipment and revolving lines bear
interest, which is accrued monthly, at a rate equal to three quarters of a
percent above the prime rate (8.5% at December 31, 1998), and have maturity
dates of December 23, 2001 and December 23, 1998, respectively. At December
31, 1998, the equipment line had an outstanding balance of $1,600,000. As
of December 31, 1998, the Company was in breach of certain covenants under
this agreement for which the Company obtained a waiver from the lender. As
a result of the private placement discussed in note 14, the Company expects
to remain compliant with its covenants for fiscal 1999. The revolving line
was not renewed in 1998 and, accordingly, no borrowings were outstanding at
December 31, 1998.
During 1998, the Company entered into a $330,000 loan agreement
collateralized by equipment held for rental or loan owned by Spectranetics
International, B.V. The loan bears interest at 6.51% per annum and matures
in December 2003. At December 31, 1998, the full amount of the loan was
outstanding.
Annual maturities of debt for each of the next five years are as follows
(in thousands):
1999 $ 950
2000 942
2001 160
2002 169
2003 75
------
$2,296
======
(8) Stock-based Compensation and Employee Benefit Plans
At December 31, 1998 and 1997, the Company had two stock-based compensation
plans which are described below.
(a) Stock Option Plans
The Company maintains stock option plans which provide for the grant
of incentive stock options, nonqualified stock options and stock
appreciation rights. The Board of Directors determines the option
price and term. The plans provide that incentive stock options be
granted with exercise prices not less than the fair market value at
the date of grant. Options
F-13 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
granted through December 31, 1998 vest over one to five years and
expire after six to ten years from the date of grant. Options granted
to the Board of Directors vest immediately or over three years from
date of grant. At December 31, 1998, there were 4,414,373 shares
available for future issuance under the plans.
The following is a summary of option activity during the three-year
period ended December 31, 1998:
Shares Weighted average
under option exercise price
------------ ----------------
Options outstanding at December 31, 1995 1,658,415 $1.90
Granted 575,450 4.73
Exercised (147,852) 1.42
Canceled (132,749) 2.52
---------
Options outstanding at December 31, 1996 1,953,264 $2.73
Granted 874,500 3.39
Exercised (179,384) 1.34
Canceled (112,439) 3.58
---------
Options outstanding at December 31, 1997 2,535,941 $3.02
Granted 1,125,385 2.98
Exercised (337,170) .99
Canceled (109,573) 3.76
---------
Options outstanding at December 31, 1998 3,214,583 $3.19
=========
At December 31, 1998, the weighted-average remaining contractual life
of outstanding options was 7.9 years and 1,537,716 options were
exercisable at a weighted-average exercise price of $3.13 per share.
The per share weighted-average fair value of stock options granted
during 1998, 1997 and 1996 was $2.52, $2.72 and $4.02 per share,
respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
1998 - expected dividend yield of 0.0%, risk-free interest rate of
4.52%, expected volatility of 103%, and an expected life of 6.94
years; 1997 - expected dividend yield of 0.0%, risk-free interest rate
of 5.58%, expected volatility of 109%, and an expected life of 4.96
years; 1996 - expected dividend yield of 0.0%; risk-free interest rate
of 6.21%, expected volatility of 114%, and an expected life of 6.75
years.
F-14 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The Black Scholes option valuation model was developed for the use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
As discussed in note 1, the Company applies APB 25 in accounting for
its plans and, accordingly, because the Company grants options at or
above base fair value at the date of grant, no compensation cost has
been recognized for stock option grants in the accompanying
consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options and stock purchase plan shares, as discussed below,
under SFAS 123, the Company's net loss and loss per share would have
been increased to the pro forma amounts shown below:
1998 1997 1996
------ ------ ------
Net loss (in thousands):
As reported $ (3,275) (4,620) (1,367)
Pro forma (4,985) (6,370) (2,497)
Loss per share:
As reported (.17) (0.25) (0.07)
Pro forma (.26) (0.34) (0.14)
Pro forma net loss reflects only options and stock purchase rights
granted in 1995 and thereafter. Therefore, the full impact of
calculating compensation cost for stock options and stock purchase
rights under SFAS 123 is not reflected in the pro forma net loss
amounts presented above because compensation is recognized over the
option or purchase right vesting period and compensation cost for
options and stock purchase rights granted prior to January 1, 1995 is
not considered.
(b) Stock Purchase Plan
In September 1992, the Company adopted an employee stock purchase plan
which currently provides for the sale of up to 350,000 shares of
common stock. The plan provides eligible employees of the Company the
opportunity to acquire common stock of the Company in accordance with
Section 423 of the Internal Revenue Code of 1986. Stock can be
purchased each six-month period per year (twice per year). The
purchase price is equal to 85% of the
F-15 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
lower of the price at the beginning or the end of the six-month
period. Shares issued under the plan totaled 32,702, 22,891 and 27,251
in 1998, 1997 and 1996, respectively.
Under SFAS No. 123, compensation cost is recognized for the fair value
of the employees' purchase rights, which was estimated using the
Black-Scholes model with the following assumptions: 1998 expected
dividend yield of 0.0%; risk-free interest rate of 4.35%, expected
volatility of 81%, and an expected life of 6 months; 1997 - expected
dividend yield of 0.0%; risk-free interest rate of 5.41%, expected
volatility of 88%, and an expected life of 6 months; 1996 - expected
dividend yield of 0.0%, risk-free interest rate of 5.48%, expected
volatility of 92%, and an expected life of 6 months. The weighted
average fair value of purchase rights granted in 1998, 1997 and 1996
was $.89, $2.67, and $2.85, respectively.
(c) 401(k) Plan
The Company maintains a salary reduction savings plan under section
401(k) of the Internal Revenue Code which the Company administers for
participating employees' contributions. All full-time employees are
covered under the plan after meeting minimum service requirements. The
Company has made no contributions to the plan.
(9) Leases
The Company leases certain equipment under capital leases, and office
space, furniture and equipment under noncancelable operating leases with
initial terms that expire at various dates through 2000.
Included in manufacturing equipment and computers are the following amounts
relating to assets held under capital leases as of December 31 (in
thousands):
1998 1997
------- -------
Manufacturing equipment and computers $ 1,171 1,460
Less accumulated amortization (820) (992)
------- -------
$ 351 468
======= =======
Amortization of assets held under capital leases is included in
depreciation expense.
F-16 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The present value of future minimum capital lease payments, and future
minimum lease payments under noncancelable operating leases as of December
31, 1998 are as follows:
Capital Operating
leases leases
------- ---------
(In thousands)
Years ending December 31:
1999 $ 139 602
2000 57 581
2001 19 269
2002 16 3
Thereafter 3 --
----- -----
Total minimum lease payments 234 1,455
=====
Less amounts representing interest (19)
-----
Present value of net minimum lease payments 215
Less current portion of capital lease obligations (122)
-----
Capital lease obligations, noncurrent $ 93
=====
Rent expense under operating leases totaled approximately $692,000,
$712,000 and $591,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
(10) Income Taxes
At December 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $87.6 million which are
available to offset future federal taxable income, if any, and expire at
varying dates through 2018. The annual use of the net operating loss
carryforwards is limited under Section 382 of the Internal Revenue Code of
1986.
The Company also has research and development tax credit carryforwards at
December 31, 1998 for federal income tax purposes of approximately $3.3
million which are available to reduce future federal income taxes, if any,
and expire at varying dates through 2018. The annual use of portions of the
research and development credit carryforwards is also limited under Section
382.
F-17 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31 are as follows:
1998 1997
-------- --------
(In thousands)
Deferred tax assets:
Net operating loss carryforwards - U.S. $ 32,503 32,420
Foreign net operating loss carryforward 5,740 4,576
Research and development tax credit and other
carryforwards 3,312 3,246
Royalty reserve, due to accrual for financial reporting
purposes 142 67
Warranty reserve, due to accrual for financial reporting
purposes 116 76
Accrued liabilities, not deducted until paid for tax
purposes 307 --
Inventories, principally due to accrual for obsolescence
for financial reporting purposes, net of additional
costs inventoried for tax purposes 169 684
Equipment, primarily due to differences
in cost basis and depreciation methods 464 513
Deferred revenue, due to deferral for financial
reporting purposes 376 988
Other 150 67
-------- --------
Total gross deferred tax assets 43,279 42,637
Less valuation allowance (43,279) (42,637)
-------- --------
Net deferred tax assets $ -- --
======== ========
The Company has recorded a valuation allowance equal to the gross deferred
tax asset at December 31, 1998 and 1997, due to the uncertainty of
realization. The net change in the valuation allowance includes the effect
of state income taxes, temporary differences for financial statement and
tax purposes, and the increase in the Company's net operating loss and
other carryforwards.
F-18 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(11) Concentrations of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Financial Accounting Standards
Board's Statement No. 105, Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentration of Credit Risk, consist primarily of cash equivalents,
securities and accounts receivable with the Company's various customers.
The Company's cash equivalents and securities consist of financial
instruments issued by various institutions and government entities. The
Company's investment policy is designed to limit the Company's exposure to
concentrations of credit risk.
The Company's accounts receivable are due from a variety of health care
organizations and distributors throughout the United States and Europe. No
single customer represented more than 10% of accounts receivable for any
period. The Company provides for uncollectible amounts upon recognition of
revenue and when specific credit problems arise. Management's estimates for
uncollectible amounts have been adequate during historical periods, and
management believes that all significant credit risks have been identified
at December 31, 1998.
The Company has not entered into any hedging transactions nor any
transactions involving financial derivatives.
(12) Segment and Geographic Reporting
An operating segment is a component of an enterprise whose operating
results are regularly reviewed by the enterprise's chief operating decision
maker to make decisions about resources to be allocated to the segment and
assess its performance. The primary performance measure used by management
is net earnings or loss. The Company operates in two distinct lines of
business: (1) medical business consisting of the development,
manufacturing, marketing and distribution of a proprietary excimer laser
system for the treatment of certain coronary and vascular conditions, and;
(2) industrial business consisting of the development, manufacturing,
marketing and distribution of drawn silica glass products including
capillary tubing and specialty fiber optics. The Company has identified
three reportable segments within these lines of business: (1) U.S. Medical
(2) Europe Medical and (3) Industrial. U.S. Medical and Europe Medical
offer similar products and services but operate in different geographic
regions and have different distribution networks. The Industrial segment is
operated entirely by the Company's wholly-owned subsidiary, Polymicro.
Additional information regarding each reportable segment is shown below.
F-19 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(a) U.S. Medical
Products offered by this reportable segment include an excimer laser
unit ("equipment"), fiber-optic delivery devices ("disposables"), and
the service of the excimer laser unit ("service"). The Company is
subject to product approvals from the Food and Drug Administration
("FDA"). At December 31, 1998, FDA-approved products are used in
conjunction with coronary angioplasty as well as in the removal of
non-functioning pacing leads from pacemakers and cardiac
defibrillators. This segment's customers are primarily located in the
United States, however, the geographic area served by this segment
also includes Canada, Mexico, South America and the Pacific Rim.
U.S. Medical is also corporate headquarters for the Company.
Accordingly, research and development as well as corporate
administrative functions are performed within this reportable segment.
As of December 31, 1998, 1997 and 1996, cost allocations of these
functions to other reportable segments have not been performed, except
for a $120,000 allocation to the Industrial segment for general and
administrative activities for each of the years ended December 31,
1998, 1997 and 1996.
Revenue associated with intersegment transfers to Europe Medical were
$1,339,000, $2,218,000 and $2,390,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Revenue is based upon transfer
prices which provide for intersegment profit that is eliminated upon
consolidation. For each of the years ended December 31, 1998, 1997 and
1996, intersegment revenue and intercompany profits are not included
in the segment information in the table shown below.
(b) Europe Medical
The Europe Medical segment is a marketing and sales subsidiary serving
all of Europe as well as the Middle East. Products offered by this
reportable segment are identical to those of U.S. Medical and are
distributed primarily through third-party distributors for each of the
years ended December 31, 1998, 1997 and 1996. An application in
addition to coronary angioplasty and lead removal is peripheral
angioplasty; all of these applications have been approved by the
European regulatory agency, TUV, with the CE mark.
F-20 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(c) Industrial
The Industrial segment operates in markets unrelated to the medical
segments, although it supplies certain fiber-optic components to the
U.S. Medical segments. Revenue, associated with intersegment
transfers, which are transferred at cost, for each of the years ended
December 31, 1998, 1997 and 1996 totaled $205,000, $273,000 and
$223,000, respectively. Intersegment transfers are not included in the
reportable segment information presented below.
Summary financial information relating to reportable segment
operations is as follows. Intersegment transfers as well as
intercompany assets and liabilities are excluded from the information
provided (in thousands).
Revenue: 1998 1997 1996
------- ------- -------
Equipment (1) $ 5,618 3,997 3,355
Disposables (1) 8,144 4,930 3,862
Service (1) 2,073 1,436 1,464
Other 356 578 418
------- ------- -------
Subtotal - U.S. Medical 16,191 10,941 9,099
Equipment 504 1,142 1,178
Disposables 1,559 2,388 3,084
Service 311 225 301
------- ------- -------
Subtotal - Europe Medical 2,374 3,755 4,563
Industrial 9,219 7,182 7,017
------- ------- -------
Total revenues $27,784 21,878 20,679
======= ======= =======
(1) Includes revenue to one customer totaling $3,286 in 1998
consisting of: Equipment -$2,905 Disposables - $162 and Service -
$219. In 1997 and 1996, no individual customers represented 10%
or more of consolidated revenue.
Interest income: 1998 1997 1996
------- ------- -------
U.S. Medical $ 213 276 311
Europe Medical -- 2 5
------- ------- -------
Subtotal - Medical 213 278 316
Industrial -- -- --
------- ------- -------
Total interest income $ 213 278 316
======= ======= =======
F-21 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Interest Expense 1998 1997 1996
-------- -------- --------
U.S. Medical $ 190 40 33
Industrial -- 4 11
-------- -------- --------
Total interest expense $ 190 44 44
======== ======== ========
Depreciation expense: 1998 1997 1996
-------- -------- --------
U.S. Medical $ 734 612 690
Europe Medical 102 75 164
-------- -------- --------
Subtotal - Medical 836 687 854
Industrial 487 392 425
-------- -------- --------
Total depreciation $ 1,323 1,079 1,279
======== ======== ========
Amortization expense: 1998 1997 1996
-------- -------- --------
U.S. Medical* $ 229 404 647
Industrial 802 802 802
-------- -------- --------
Total amortization $ 1,031 1,206 1,449
======== ======== ========
* A portion of this expense is recorded within cost of revenue as
follows: 1998 - $229; 1997 - $230; 1996 - $229
Segment net earnings (loss): 1998 1997 1996
-------- -------- --------
U.S. Medical $ (1,671) (3,461) (1,525)
Europe Medical (2,465) (1,385) (373)
-------- -------- --------
Subtotal - Medical (4,136) (4,846) (1,898)
Industrial 861 226 531
-------- -------- --------
Total net earnings (loss) $ (3,275) (4,620) (1,367)
======== ======== ========
Segment assets: 1998 1997 1996
-------- -------- --------
U.S. Medical $ 13,512 17,842 15,742
Europe Medical 2,131 2,364 2,440
-------- -------- --------
Subtotal - Medical 15,643 20,206 18,182
Industrial 6,596 5,119 4,857
-------- -------- --------
Total assets $ 22,239 25,325 23,039
======== ======== ========
F-22 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Capital expenditures: 1998 1997 1996
------ ------ ------
U.S. Medical $1,107 236 117
Europe Medical 33 51 108
------ ------ ------
Subtotal - Medical 1,140 287 225
Industrial 403 480 233
------ ------ ------
Total capital expenditures $1,543 767 458
====== ====== ======
In determining the foregoing segments, the Company has included
goodwill amortization and the underlying asset in the industrial
segment. Additionally, all investments of excess cash were made by the
U.S. Medical segment and, accordingly, the amounts invested and the
related interest income has been included within the U.S. Medical
segment.
The Company operates in several countries outside of the United
States. Revenue from foreign operations by segment is summarized as
follows:
1998 1997 1996
------ ------ ------
U.S. Medical $ 474 578 1,077
Europe Medical 2,374 3,755 4,563
------ ------ ------
Subtotal - Medical 2,848 4,333 5,640
Industrial 935 741 558
------ ------ ------
Total foreign revenue $3,783 5,074 6,198
====== ====== ======
There were no individual countries that represented at least 10% of
consolidated revenue in 1998, 1997 or 1996. Long-lived assets located
in foreign countries are concentrated in Europe and totaled $252 and
$186 as of December 31, 1998 and 1997, respectively.
(13) Commitments and Contingencies
The Company is obligated under various licensing and royalty agreements
which require the Company to pay royalties based on a percentage of net
sales of certain products, subject to minimum and maximum amounts for
certain agreements. The agreements generally expire at various dates
concurrent with the expiration dates of the respective patents. Royalty
expense under these agreements amounted to $650,000, $624,000 and $645,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
F-23 (Continued)
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(14) Subsequent Event - Private Stock Placement
Subsequent to year end, the Company completed the private placement of
3,800,000 shares of its common stock and received net cash proceeds,
including offering costs, therefrom of approximately $6,818,000.
F-24 (Continued)
Independent Auditors' Report
on Consolidated Financial Statement Schedule
The Board of Directors and Shareholders
The Spectranetics Corporation:
Under date of January 29, 1999, we reported on the consolidated balance sheets
of the Spectranetics Corporation and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998, as contained in the Company's annual report on Form 10-K for
the year 1998. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement Schedule II (Valuation and Qualifying Accounts). This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Denver, Colorado
January 29, 1999
F-25
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997 and 1996
(In thousands)
Balance at Additions Additions Deductions Balance
beginning charged charged to from at end
Description of year to expense other accounts allowance of year
---------- ---------- -------------- ---------- -------
Year ended December 31, 1996:
Accrued warranty liability $148 438 -- 345 241
Accrued royalty liability 97 645 -- 626 116
Allowance for doubtful accounts
and sales returns 118 50 169(1) 288 49
Year ended December 31, 1997:
Accrued warranty liability 241 485 -- 390 336
Accrued royalty liability 116 624 -- 559 181
Allowance for doubtful accounts
and sales returns 49 229 168(1) 214 232
Year ended December 31, 1998:
Accrued warranty liability 336 402 -- 303 435
Accrued royalty liability 181 650 -- 447 384
Allowance for doubtful accounts
and sales returns 232 74 203(1) 262 247
(1) Represents a provision for sales returns recorded as a reduction of
revenue.
See accompanying independent auditors' report.
F-26 (Continued)
THE SPECTRANETICS CORPORATION
EXHIBIT INDEX
Exhibit Description Sequentially
Number Numbered Page
- --------------------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization between The
Spectranetics Corporation and Advanced
Interventional Systems, Inc., dated January 24,
1994.(1)
2.1(a) Amendment to Agreement and Plan of Reorganization
between The Spectranetics Corporation and Advanced
Interventional Systems, Inc., dated May 17,
1994.(2)
2.2 Certificate of Ownership and Merger of Advanced
Interventional Systems, Inc. Into The
Spectranetics Corporation, dated December 27,
1995.(13)
3.1 Restated Certificate of Incorporation.(1)
3.1(a) Certificate of Amendment to Restated Certificate
of Incorporation.(12)
3.1(b) Certificate of Amendment to Restated Certificate
of Incorporation. (18)
3.2 Bylaws of the Company.(3)
4.1 Form of Common Stock Certificate of the
Company.(4)
4.2 Rights Agreement, dated as of May 6, 1996, between
the Company and Norwest Bank Minnesota, N.A.(14)
10.1 Lease covering a portion of the Company's
facilities between the Company and Dwane and Donna
Basse dated November 10, 1994.(12)
10.1(a) Lease covering a portion of the Company's
facilities between the Company and Dwane and Donna
Basse dated September 1, 1997.(14)
10.2 Lease covering a portion of the Company's
facilities between the Company and American
Investment Management dated February 17, 1995.(12)
10.2(a) Lease covering a portion of the Company's
facilities between the Company and John or Sharon
Sanders dated December 23, 1997.(19)
10.3 Lease covering a portion of the Company's
facilities between the Company and Full Circle
Partnership III dated September 11, 1985.(3)
10.3(a) Amendment to lease covering a portion of the
Company's facilities between the Company and Full
Circle Partnership III July 24, 1997.(19)
10.4(a) Amendment to lease covering a portion of the
Company's facilities between the Company and
Talamine Properties dated February 15, 1992.(7)
10.4(b) Amendment to lease covering a portion of the
Company's facilities between the Company and
Talamine Properties dated February 16, 1993.(1)
10.4(c) Amendment to lease covering a portion of the
Company's facilities between the Company and
Talamine Properties dated October 3, 1994.(12)
10.5 1991 Stock Option Plan, as amended.(11)
10.5(a) 1991 Stock Option Plan, as amended.(17)
Page 58
Exhibit Description Sequentially
Number Numbered Page
- --------------------------------------------------------------------------------
10.6 1990 Incentive Stock Option Plan.(6)
10.7 1989 Incentive Stock Option Plan and First
Amendment thereto.(6)
10.8 Nonemployee Director Stock Option Plan.(8)
10.8(a) Stock Option Plan for Outside Directors.(10)
10.9 Employee Stock Purchase Plan (as amended).(9)
10.10 License Agreement with Patlex Corporation, dated
January 1, 1992 (confidential treatment has been
granted for portions of this agreement).(7)
10.11 License Agreement with Pillco Limited Partnership,
dated February 1, 1993 (confidential treatment has
been granted for portions of this agreement).(7)
10.12 Vascular Laser Angioplasty Catheter License
Agreement with Bio-Metric Systems, Inc., dated
April 7, 1992 (confidential treatment has been
granted for portions of this agreement).(6)
10.13 Exclusive License Agreement between the United
States of America and James B. Laudenslager and
Thomas J. Pacala dated March 25, 1985; and
Exclusive License Agreement between the United
States of America and LAIS dated April 29,
1990.(5)
10.14 License Agreement between Medtronic, Inc. and the
Company, dated February 28, 1997 (confidential
treatment has been granted for portions of this
agreement).(15)
10.15 License Agreement between United States Surgical
Corporation and the Company, dated September 25,
1997 (confidential treatment has been granted for
portions of this agreement). (16)
10.16 Supply Agreement between United States Surgical
Corporation and the Company, dated September 25,
1997 (confidential treatment has been granted for
portions of this agreement). (16)
10.17 Loan and Security Agreement between Silicon Valley
Bank and the Company, dated December 24, 1997.(19)
10.18 Exclusive Purchase and Distribution Agreement
between The Spectranetics Corporation and Orbus
Medical Technologies, Inc. dated March 12, 1998
(confidential treatment has been granted for
portions of this agreement).(18)
21.1 Subsidiaries of the Company.(19)
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule.
Page 59
(1) Incorporated by reference to the Company's 1993 Annual Report on Form 10-K
filed on March 31, 1994.
(2) Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-4 filed May 18, 1994 (File No.
33-79106).
(3) Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-1, filed December 5, 1991 (File No.
33-44367).
(4) Incorporated by reference to exhibits previously filed by the Company with
its Amendment No. 2 to the Registration Statement, filed January 24, 1992
(File No. 33-44367).
(5) Incorporated by reference to exhibits previously filed by LAIS with its
Registration Statement on Form S-1 filed August 30, 1991 (File No.
33-42457).
(6) Incorporated by reference to exhibits previously filed by the Company with
its Amendment No. 1 to the Registration Statement on Form S-1, filed
January 10, 1992 (File No. 33-44367).
(7) Incorporated by reference to exhibits previously filed by the Company with
its Annual Report for 1992 on Form 10-K filed March 31, 1993.
(8) Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-8 filed April 1, 1992 (File No.
33-46725).
(9) Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-8 filed December 30, 1994 (File No.
33-88088).
(10) Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-8 filed November 16, 1995 (File No.
33-99406).
(11) Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-8 filed October 6, 1994 (File No.
33-85198).
(12) Incorporated by reference to exhibits previously filed by the Company with
its 1994 Annual Report on Form 10-K filed on March 31, 1995.
(13) Incorporated by reference to the Company's 1995 Annual Report on Form 10-K
filed on April 29, 1996.
(14) Incorporated by reference to exhibits previously filed by the Company with
its Current Report on Form 8-K filed on May 6, 1996.
(15) Incorporated by reference to exhibits previously filed by the Company with
its Form 10-Q for the quarter ended on March 31, 1997.
(16) Incorporated by reference to exhibits previously filed by the Company with
its Form 10-Q for the quarter ended on September 30, 1997.
(17) Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-8 filed July 19, 1996.
(18) Incorporated by reference to exhibits previously filed by the Company with
its Form 10-Q for the quarter ended on June 30, 1998.
(19) Incorporated by reference to exhibits previously filed by the Company with
its 1997 Annual Report on Form 10-K filed on March 30, 1998.
Page 60