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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED
MARCH 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
______ TO ______
COMMISSION FILE NUMBER 0-19711
THE SPECTRANETICS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 84-0997049
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
96 TALAMINE COURT
COLORADO SPRINGS, COLORADO 80907
(719) 633-8333
(Address of principal executive offices and telephone number)
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 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
--- ---
As of May 5, 1997, there were 18,592,677 outstanding shares of Common
Stock.
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PART I---FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
March 31, December 31,
1997 1996
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<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 2,199 $ 2,860
Investment securities 3,837 4,290
Trade accounts receivable 3,401 3,651
Inventories (note 3) 1,756 1,628
Prepaid expenses and other current assets 588 396
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Total current assets 11,781 12,825
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Property and equipment, net 3,409 3,486
Goodwill and other intangible assets, net 5,983 6,346
Other assets 421 382
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$ 21,594 $ 23,039
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LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and accrued liabilities $ 3,385 $ 3,311
Deferred revenue (note 4) 600 569
Current portion of note payable 75 75
Current portion of capital lease obligations 75 83
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Total current liabilities 4,135 4,038
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Other Liabilities 21 26
Note payable, net of current portion 445 445
Capital lease obligations, net of current portion - 20
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Total long-term liabilities 466 491
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Total liabilities 4,601 4,529
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SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value. Authorized
5,000,000 shares; none issued - -
Common stock, $.001 par value. Authorized
25,000,000 shares; issued and outstanding
18,592,677 and 18,531,867, respectively 19 19
Additional paid-in capital 83,478 83,402
Cumulative foreign currency translation adjustment (120) (16)
Accumulated deficit (66,384) (64,895)
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Total shareholders' equity 16,993 18,510
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$ 21,594 $ 23,039
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ITEM 1. FINANCIAL STATEMENTS
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
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Three Months Ended March 31,
-------------------------------
1997 1996
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Revenues $ 4,571 $ 4,668
Cost of revenues 2,541 2,561
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Gross margin 2,030 2,107
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OPERATING EXPENSES:
Marketing and sales expense 1,774 1,531
General and administrative expense 1,275 1,033
Research and development expense 512 353
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Total operating expenses 3,561 2,917
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LOSS FROM OPERATIONS (1,531) (810)
OTHER INCOME (EXPENSE):
Interest income 81 88
Interest expense (10) (12)
Other, net (29) 5
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42 81
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NET LOSS $ (1,489) $ (729)
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LOSS PER SHARE (note 2) $ (0.08) $ (0.04)
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WEIGHTED AVERAGE COMMON SHARES 18,588,291 18,372,969
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ITEM 1. FINANCIAL STATEMENTS
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
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Three Months Ended
March 31,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,489) $ (729)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 659 722
Net change in operating assets and liabilities (163) (415)
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Net cash used by operating activities (993) (422)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (129) (110)
Decrease (increase) in short-term investments 453 (377)
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Net cash provided by (used in) investing activities 324 (487)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 76 34
Principal payments on obligations under
capital leases and note payable (28) (29)
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Net cash provided by financing activities 48 5
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Effect of exchange rate changes on cash (40) (19)
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Net decrease in cash and cash equivalents (661) (923)
Cash and cash equivalents at beginning of period 2,860 3,115
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Cash and cash equivalents at end of period $ 2,199 $2,192
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Supplemental disclosures of cash flow information --
cash paid for interest $ 3 $ 4
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Supplemental disclosure of non-cash investing
and financing activities:
Transfers from inventory to equipment held for rental
or loan $ 105 $ 22
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ITEM 1. FINANCIAL STATEMENTS
(1) GENERAL
The information included in the accompanying condensed consolidated interim
financial statements is unaudited and should be read in conjunction with the
audited financial statements and notes thereto contained in the Company's latest
Annual Report on Form 10-K. In the opinion of management, all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the results of operations for the interim periods presented have been reflected
herein. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the entire year.
(2) LOSS PER SHARE
The loss per common share does not reflect the assumed exercise of stock
options, since the effect of such inclusion would be antidilutive.
(3) INVENTORIES
Components of inventories are as follows (in thousands):
March 31, 1997 December 31, 1996
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Finished Goods $ 731 $ 643
Work in Process 547 516
Raw Materials 478 469
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$ 1,756 $ 1,628
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(4) DEFERRED REVENUE
The Company has various product maintenance contracts. Revenue from
product maintenance contracts is deferred and recognized ratably over the
contract period. Deferred revenue related to such contracts was approximately
$565,000 and $534,000 at March 31, 1997 and December 31, 1996, respectively.
Additional deferred revenue in the amount of $35,000 and $35,000 at
March 31, 1997 and December 31, 1996, respectively, relates to a sales
contract that requires the Company to buy back the product if the customer is
not satisfied. Revenue will be recognized when the buyback provisions expire
unexercised.
(5) ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE
(SFAS 128) was issued in February 1997 by the Financial Accounting Standards
Board. SFAS 128 simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, EARNINGS PER SHARE, and makes them
comparable to international EPS standards. It replaces the presentation of
basic and diluted with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to Opinion 15. SFAS 128 is required to be adopted for
fiscal years, including interim periods, ending after December 15, 1997. The
Company will adopt SFAS 128 during the fourth quarter of 1997. Its adoption is
not expected to have a material effect on the consolidated financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1996:
REVENUES
Revenue for the three months ended March 31, 1997 decreased $97,000 (2%) as
compared with the three months ended March 31, 1996. The decrease is primarily
due to a decline in laser revenues. Total unit placements of laser systems
during the three months ended March 31, 1997 were generally consistent with
total placements during the same period last year; however, a higher percentage
of the placements in the three months ended March 31, 1997 were rentals rather
than outright sales, which contributed to the decline in laser revenues.
Additionally, sales of laser systems consisted primarily of sales through
European distributors, where selling prices are typically lower.
Fluctuations in foreign currency exchange rates during the three months
ended March 31, 1997 compared to the same period in 1996 caused a decrease in
revenues of 4%.
GROSS MARGIN
Gross margin percentages for the three months ended March 31, 1997 were 44%
compared to gross margins of 45% for the three months ended March 31, 1996. The
slight decline in gross margins as a percentage of revenue is primarily due to
declined laser system gross margins. A higher percentage of laser system
revenues during the three months ended March 31, 1997 as compared to the same
period last year resulted from sales to the Company's European distributors,
where selling prices are typically less than those in the U.S. market.
OPERATING EXPENSES
Total operating expenses for the three months ended March 31, 1997 compared
to the three months ended March 31, 1996 increased $644,000, or 22%. The
increase is due to (1) increased marketing and sales costs associated with
additional staffing in the marketing and sales organization as well as an
increase in general marketing activities; (2) increased administrative costs
associated with the transition to a new Chief Executive Officer; and (3)
increased research and development expense, primarily related to costs
associated with a retrospective study which examines laser treatment of stent
restenosis. The Company intends to seek to use the data from this study to
support a submission to the FDA requesting a labeling change to add stent
restenosis as an indication for laser angioplasty. Increases in operating
expenses from current levels can be expected as the Company invests in programs
intended to provide increased utilization of the Company's current products, to
expand the application of excimer laser technology and to accelerate the
introduction of new products to the marketplace.
Fluctuations in foreign currency exchange rates during the three months
ended March 31, 1997 compared to the same period in 1996 caused a decrease in
operating expenses of 4%.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had cash, cash equivalents and investment
securities of $6,036,000. The Company consumed $1,114,000 of cash and short-
term investments during the three months ended March 31, 1997, primarily due to
$993,000 consumed in connection with operating activities. The Company is,
among other things, using cash to improve the acceptance of the Company's
current product offerings and to train physicians in the use of its
investigational products, the Spectranetics Laser Sheath (SLS-TM-) and the
Prima-Registered Trademark- laser guidewire, which are intended to expand the
application of the Company's technology. Management believes that the Company's
liquidity and capitalization will be sufficient to sustain the Company through
the end of 1997. Revenue increases or additional financing will be necessary to
sustain the Company over the longer term. There
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (cont'd)
are no assurances that the revenue increases or the necessary financing can be
secured on terms favorable to the Company, if at all.
RISK FACTORS
The stockholders of the Company are, and will continue to be subject to a
number of risks, including the following:
CONTINUED LOSSES. The Company has incurred net losses since inception in
June 1984. The Company anticipates that net losses will continue in the
foreseeable future. There can be no assurance that the Company will be able to
achieve increased sales or profitability.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. Results of operations for the
Company have varied and may continue to fluctuate significantly from quarter to
quarter and will depend upon numerous factors, including timing of regulatory
approvals, market acceptance of products and new product introductions,
implementation of health care reforms, changes in product mix between laser
units and catheters, ability to manufacture products efficiently and competition
from other technologies.
LACK OF LIQUIDITY. While the Company believes that it has sufficient cash
liquidity to execute its plans through 1997, in order for cash flow from
operating activities to be sufficient to sustain the Company's operations over
the long term, the Company must achieve increases in sales and maintain control
over expenses. There can be no assurance that such increases in sales or
control in expenses will occur or that they will be sufficient to maintain
adequate cash to continue operations.
NO ASSURANCE THAT THE COMPANY WILL BE ABLE TO OBTAIN ADDITIONAL FINANCING.
The Company may require additional financing in the future. Such financing, if
required, may not be available on satisfactory terms, or at all. If the Company
is unable to obtain sufficient funding from other sources on terms and prices
acceptable to the Company, the Company's ability to make capital expenditures,
provide adequate physician training and clinical support, compete effectively
and withstand the effects of adverse market and economic conditions may be
significantly impaired. If the Company is able to obtain debt financing, there
can be no assurance that the Company will have sufficient cash flow from
operating activities to meet its debt service requirements. Therefore, the
Company may be required to meet its debt service requirements from other
sources, such as the sale of additional equity and debt securities and the sale
of selected assets. To the extent the Company finances its future operations
through the issuance of equity securities, existing stockholders may suffer
dilution in net tangible book value per share.
LIMITED OPERATING HISTORY; LIMITED MANUFACTURING EXPERIENCE. SPNC has a
limited history of operations. SPNC received PMA approval from the FDA for its
CVX-300-Registered Trademark- laser unit in 1993. Accordingly, SPNC does not
have substantial experience in manufacturing, marketing or selling its products
in commercial quantities. SPNC may encounter difficulties in scaling up
production of laser units and catheters and hiring and training additional
qualified manufacturing personnel. The occurrence of difficulties as SPNC
increases production volumes could lead to quarterly fluctuations in operating
results and have a material adverse effect on SPNC's business, financial
condition and results of operations.
UNCERTAIN MARKET ACCEPTANCE. Excimer laser angioplasty technology is a
relatively new procedure which competes with more established therapies,
including balloon angioplasty, stent implantation and bypass surgery, and other
evolving technologies, such as atherectomy and non-excimer laser technologies.
The cost of the CVX-300-Registered Trademark- laser system is significantly
greater than the cost of therapeutic capital equipment required with balloon
angioplasty, stent implantation and atherectomy procedures, and the cost of
SPNC's catheters is greater than the cost of balloon angioplasty catheters. In
addition, because excimer laser procedures are often followed by balloon
angioplasty, the cost of an excimer laser angioplasty can be significantly
greater than balloon angioplasty alone. Market acceptance of the laser
angioplasty system also will depend, in part, on SPNC's ability to establish
with the medical community the clinical efficacy of excimer laser angioplasty.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (cont'd)
As a result of such factors, there can be no assurance that the marketplace
will be receptive to SPNC's laser angioplasty systems or that excimer laser
angioplasty will be accepted over competing therapies. Failure of SPNC's
products to achieve market acceptance would have a material adverse effect on
SPNC's business, financial condition and results of operations.
DEPENDENCE ON SINGLE PRODUCT LINE. A significant percentage of SPNC's
revenues is derived from the sale or lease of the CVX-300-Registered Trademark-
laser unit and the sale of products used in conjunction with the CVX-300-
Registered Trademark- laser unit. Consequently, SPNC is dependent on the
successful development and commercialization of the CVX-300-Registered
Trademark- laser unit and such related products. Unfavorable clinical trial
results, failure to obtain regulatory approvals in a timely manner, or at
all, or failure to gain widespread market acceptance could have a material
adverse effect on SPNC's business and financial condition, and cessation of
business could occur.
INTENSE COMPETITION. Methods for the treatment of cardiovascular disease
are numerous and are expected to increase in number. Almost all of SPNC's
competitors have substantially greater financial, manufacturing, marketing and
technical resources than SPNC. SPNC expects intense competition to continue in
the marketplace. Market competition includes manufacturers of balloon
angioplasty devices and stents, and direct competition for SPNC comes from
manufacturers of atherectomy devices. Balloon angioplasty is currently the most
common therapy for the treatment of atherosclerosis. Guidant Corporation,
Boston Scientific Corporation and Johnson & Johnson Interventional Systems are
the leading balloon angioplasty manufacturers. With the approval of stents in
1994, SPNC anticipates that stent utilization will continue to grow as the
second most prevalent angioplasty treatment of choice for atherosclerosis.
Johnson & Johnson Interventional Systems is the leading stent provider in the
United States at this time. Manufacturers of atherectomy devices include
Devices for Vascular Intervention, Inc. (a subsidiary of Guidant Corporation),
Interventional Technologies, Inc. and Heart Technology, Inc. (a subsidiary of
Boston Scientific Corporation). There is an excimer laser company in Germany,
Medolas, which has performed excimer laser angioplasty in Europe. United States
Surgical Corporation recently acquired an 80 percent interest in Medolas.
SPNC believes that the primary competitive factors in the interventional
cardiovascular market are: the ability to treat safely and effectively a
variety of lesions; the impact of managed care practices and procedure costs;
ease of use; and research and development capabilities.
There can be no assurance that SPNC current and future competitors will not
develop technologies and products that are more effective in treating
cardiovascular disease than SPNC's current products or future products, and that
SPNC technologies and products would not be rendered obsolete by such
developments.
UNCERTAINTY OF IMPACT OF HEALTH CARE REFORM. The federal government and
certain states have already implemented or are considering legislation to effect
health care reforms. In addition, other legislative and industry groups are
studying various health care issues. The ultimate timing or effect of any such
health care reforms on SPNC cannot be predicted and no assurance can be given
that any such reforms will not have a material adverse effect on SPNC revenues
and earnings. Short-term cost containment initiatives may vary substantially
from long-term reforms and may impact SPNC differently.
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT. The CVX-300-Registered
Trademark- laser unit is generally purchased by hospitals, which then bill
various third-party payors, such as government programs and private insurance
plans, for the health care services provided to their patients. Unlike
balloon angioplasty and atherectomy, laser angioplasty requires the purchase
of expensive capital equipment. The FDA has required that the label for the
CVX-300-Registered Trademark- laser unit indicate that adjunctive balloon
angioplasty was performed in the majority of the procedures submitted to the
FDA in SPNC's application for PMA. This will require the purchase of both a
laser catheter and a balloon catheter. Payors may deny reimbursement for
procedures they believe to be duplicative. Payors may also 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. There
can be no assurance that laser angioplasty using the CVX-300-Registered
Trademark- laser unit will be considered cost effective by third-party
payors, that reimbursement will be available or, if available, that payors'
reimbursement policies will not adversely affect SPNC's ability to sell its
products on a profitable basis. There are increasing pressures from
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (cont'd)
many payor sources to control health care costs. In addition, there are
increasing pressures from public and private payors to limit increases in
reimbursement rates for medical devices. The market for SPNC's products and
the levels of revenues and profitability could also be adversely affected by
changes in governmental and private third-party payors' policies or by recent
federal legislation that reduces reimbursements under the capital cost
pass-through system for the Medicare program.
COSTS AND UNCERTAINTY OF REGULATORY COMPLIANCE. SPNC's products and
manufacturing activities are subject to vigorous regulation by the FDA and
comparable state and foreign agencies. The process of complying with these
regulations can be costly and time consuming. Failure to comply with applicable
regulatory requirements can result in, among other things, fines, suspensions of
approvals, seizures or recalls of products, operating restrictions and criminal
prosecutions. Furthermore, changes in existing regulations or adoption of new
regulations could prevent SPNC from obtaining, or affect the timing of, future
regulatory approval. SPNC has filed PMA supplements. There can be no assurance
that the FDA will approve SPNC's current or future PMA supplements on a timely
basis or at all. The absence of such approvals could have a material adverse
effect on SPNC's ability to generate future revenues.
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain approval for sale internationally may be longer or
shorter than that required for FDA approval, and the requirements may differ.
As of March 1997, SPNC has received CE mark registration for all of its
products. There are no assurances that SPNC will be able to obtain CE mark for
its products in the future. In addition, significant costs and requests for
additional information may be encountered by SPNC in its efforts to obtain
regulatory approvals. Any such events could substantially delay or preclude
SPNC from marketing its products internationally.
TECHNOLOGICAL CHANGE RESULTING IN PRODUCT OBSOLESCENCE. Market acceptance
and sales of SPNC products also could be adversely affected by technological
changes. The health care industry is characterized by rapid technological
progress. New developments are expected to continue at an accelerated pace in
both industry and academia. Many companies, some of which have substantially
greater resources than SPNC, are engaged in research and development with
respect to methods of treatment and prevention of coronary artery disease.
These include pharmaceutical approaches as well as development of new or
improved angioplasty, atherectomy or other devices. SPNC products could be
rendered obsolete as a result of future innovations in the treatment of coronary
artery disease.
UNCERTAINTY RELATED TO PATENTS AND PROPRIETARY RIGHTS. SPNC holds patents,
has licenses to use patents and has patent applications pending. There can be
no assurance that any patents currently applied for by SPNC will be granted or
that any patents held by SPNC will be valid or sufficiently broad to protect
SPNC technology or to provide it with any competitive advantage or will not be
challenged or circumvented by competitors. Termination of the licenses granted
to SPNC would have a material adverse effect on its business, financial
condition and results of operations.
SPNC is aware of other patents issued to and patent applications filed by
individuals, partnerships, companies, universities and research institutions
relating to laser and fiber-optic technologies, which, if valid and enforceable,
may be infringed by SPNC. SPNC has received notice from other parties regarding
the existence of certain patents involving the use of lasers in the body.
Although SPNC has not been sued by these parties, there can be no assurance that
they will not be sued or that they would prevail in any such action. Should
SPNC determine that it is necessary to obtain a license to such patents or
proprietary technology, there can be no assurance that any such license would be
available on favorable terms, or at all, or that it would be able to develop or
otherwise obtain alternative technology.
Litigation concerning patents and proprietary rights could result in
substantial cost to and diversion of effort by SPNC. Adverse findings in any
proceeding could subject SPNC to significant liability to third parties, require
SPNC to seek licenses from third parties and adversely affect the ability of
SPNC to manufacture and sell its products.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (cont'd)
SPNC also relies on trade secrets and unpatented know-how to protect its
proprietary technology, and may be vulnerable to competitors who attempt to copy
its products or to gain access to its trade secrets and know-how.
DEPENDENCE ON SUPPLIERS AND DISTRIBUTORS. The glass rods used by SPNC in
the fabrication of optical fibers incorporated into catheters are currently
available from a single source which holds worldwide patent rights on this
material. Any interruption in the supply of such glass rods could have a
material adverse effect on SPNC's ability to manufacture catheters.
PRODUCT LIABILITY AND SUFFICIENCY OF INSURANCE COVERAGE. The manufacture
and sale of the Company's products entail the risk of product liability claims.
A successful claim brought against the Company could have a material adverse
effect on the Company. The Company maintains product liability insurance with
coverage of $5,000,000, and an aggregate maximum of $5,000,000. There can be no
assurance that the coverage limits of the Company's insurance policies will be
adequate or that such insurance will be available in the future on acceptable
terms, if at all.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon a limited
number of key management and technical personnel, and the future success of the
Company will depend in part upon its ability to attract and retain highly
qualified personnel. The Company will compete for such personnel with other
companies, academic institutions, government entities and other organizations.
There can be no assurance that the Company will be successful in hiring or
retaining qualified personnel. Loss of key personnel or inability to hire or
retain qualified personnel could have a material adverse effect on the Company's
business, financial condition and results of operations.
POTENTIAL DIFFICULTIES IN MANAGING BUSINESS UNDERGOING RAPID CHANGE. The
Company's future success will depend to a significant extent on the ability of
its management personnel to operate effectively, both independently and as a
group. In this regard, a number of members of the Company's senior management
team have only recently joined the Company. Moreover, certain members of such
management team have limited or no experience as a senior executive of a public
corporation. There can be no assurance that the management team will operate
together effectively. To compete successfully against current and future
competitors, complete clinical trials in progress, prepare additional products
for clinical trials and develop future products, the Company believes that it
must continue to expand its operations, particularly in the areas of research
and development, sales and marketing, training, and manufacturing. If the
Company were to experience significant growth in the future, such growth would
likely result in new and increased responsibilities for management personnel and
place significant strain upon the Company's management, operating and financial
systems and resources. To accommodate such growth and compete effectively, the
Company must continue to implement and improve information systems, procedures
and controls, and to expand, train, motivate and manage its workforce. There
can be no assurance that the Company's personnel, systems, procedures and
controls will be adequate to support the Company's future operations. Any
failure to implement and improve the Company's operational, financial and
management systems or to expand, train, motivate or manage employees could
materially and adversely affect the Company's business, financial condition and
results of operations.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS. Each of the following
charter provisions may have anti-takeover effects and may have a negative impact
on the rights of the Company's stockholders and the value of the Company's
Common Stock:
STAGGERED BOARD OF DIRECTORS. The Company has a staggered board of
directors in which directors are elected for staggered three-year terms.
This prevents stockholders from electing all directors at each annual
meeting and may have the effect of delaying or deferring a change in
control of the Company.
PREFERRED STOCK ISSUANCE. Up to five million shares of the Company's
preferred stock may be issued in the future by the Company without further
stockholder approval and upon such terms and conditions, and having such
rights, privileges and preferences, as the Board of Directors may
determine. The rights of the holders of the Company's Common Stock will be
subject to, and may be adversely
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (cont'd)
affected by, the rights of the holders of any preferred stock that may be
issued in the future. The issuance of preferred stock could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority of the outstanding
voting stock of the Company.
DELAWARE CORPORATION CODE SECTION 203. Section 203 of the Delaware
General Corporation Law prohibits a publicly held Delaware corporation from
engaging in a business combination with an interested stockholder for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless certain conditions are met.
Section 203 has a negative impact on the ability of certain stockholders to
effect business combinations with the Company.
INABILITY OF STOCKHOLDERS TO CALL SPECIAL MEETING. The Company's
Certificate and Bylaws provide that special meetings of stockholders may be
called only by the Board of Directors or a committee of the Board of
Directors duly designated and authorized to call special meetings in a
resolution of the Board of Directors or as may otherwise be specifically
provided in the Company's Certificate. This provision may limit the
ability of the Company's stockholders to take actions not supported by the
Board of Directors.
AMENDMENT OR REPEAL OF BYLAWS. The Company's Bylaws may be adopted,
amended or repealed by the Board of Directors or by the affirmative vote of
a majority of the outstanding shares of the Company's Common Stock entitled
to vote. The ability of the Board of Directors to amend the Bylaws to
increase the number of directors may make it more difficult for the
stockholders to change control of the Board of Directors.
POTENTIAL VOLATILITY OF STOCK PRICE. The stock market has from time to
time experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. In addition, the market
price of the shares of the Company's Common Stock, similar to other health care
companies, has been, and is likely to continue to be, highly volatile. Factors
such as fluctuations in operating results, announcements of technological
innovations or new products by the Company or its competitors, governmental
regulation, developments with respect to patents or proprietary rights, public
concern as to the safety of products developed by the Company or others and
general market conditions may have a significant effect on the market price of
the Company's Common Stock.
EXPOSURE FROM INTERNATIONAL OPERATIONS. Changes in overseas economic
conditions, currency exchange rates, foreign tax laws or tariffs or other trade
regulations could have a material adverse effect on the Company's ability to
market its products internationally and therefore on its business, financial
condition and results of operations. The Company's business is also expected to
subject it and its representatives, agents and distributors to laws and
regulations of the foreign jurisdictions in which they operate or the Company's
products are sold. The Company may depend on foreign distributors and agents
for compliance and adherence to foreign laws and regulations. The regulation of
medical devices in a number of such jurisdictions, particularly in the European
Union, continues to develop and there can be no assurance that new laws or
regulations will not have an adverse effect on the Company's business, financial
condition and results of operations. In addition, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the same
extent as do the laws of the United States.
As the Company expands its international operations, its sales and expenses
denominated in foreign currencies will expand and that trend is expected to
continue. Thus, certain sales and expenses have been, and are expected to be,
subject to the effect of foreign currency fluctuations. As the Company expands
its international operations, its net foreign currency denominated sales and
expenses will be subject to the effect of foreign currency fluctuations.
Further, any significant changes in the political, regulatory or economic
environment where the Company conducts international operations may have a
material impact on revenues and profits.
Page 11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (cont'd)
LACK OF DIVIDENDS. The Company has not declared or paid any dividends with
respect to the Company's Common Stock. It is not anticipated that the Company
will pay any dividends in the foreseeable future. In addition, there may be
restrictions under state law on the ability of the Company to declare dividends.
Page 12
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PART II.---OTHER INFORMATION
- ------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDING
None
ITEMS 2-5. NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following documents are filed herewith and
made a part of this report on Form 10-Q:
Exhibit 10.14 - License Agreement between The
Spectranetics Corporation and Medtronic, Inc. dated
February 28, 1997 (Certain portions of this document
have been omitted pursuant to a request for
confidential treatment and filed separately with the
Commission).
Exhibit 27.1 - Financial Data Schedule for 1997 First
Quarter Form 10-Q.
(b) REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SPECTRANETICS CORPORATION
(Registrant)
May 14, 1997 By: /s/ James P. McCluskey
------------------------------------
James P. McCluskey
Vice President, Finance
Secretary/Treasurer and
Principal Financial Officer
Page 13
<PAGE>
THE SPECTRANETICS CORPORATION
FORM 10Q FOR PERIOD ENDED MARCH 31, 1997
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER
- ------------------------------------------------------------------------------
10.14 License Agreement between The Spectranetics Corporation and
Medtronic, Inc. dated February 28, 1997 (Certain portions of
this document have been omitted pursuant to a request for
confidential treatment and filed separately with the Commission).
27.1 Financial Data Schedule for 1997 First Quarter Form 10-Q.
Page 14
<PAGE>
LICENSE AGREEMENT
This Agreement, effective the 28th day of February, 1997, is by and between THE
SPECTRANETICS CORPORATION, 96 Talamine Court, Colorado Springs, Colorado 80907
("Spectranetics") and MEDTRONIC, INC. 7000 Central Ave. N.E., Minneapolis,
Minnesota 55432 ("Medtronic").
RECITALS
A. Medtronic has developed technology relating to laser lead extraction and
owns intellectual property related thereto.
B. Medtronic wishes to grant and Spectranetics wishes to obtain an exclusive
license to commercialize products using the Medtronic technology.
Now, therefore, the parties agree as follows:
ARTICLE 1
DEFINITIONS
The following definitions and terms shall have the designated meanings:
"Lead Extractor" means a device for aiding in removal of medical devices such as
pacing and defibrillation leads or catheters.
"Licensed Intellectual Property" means (1) All U.S. patents and patent
applications owned by or licensed to, with the right to sublicense, Medtronic
which are now or during the term of this Agreement developed for use in the
laser extraction of leads or catheters, including U.S. Patent 5,423,806
entitled "Laser Extractor for an Implanted Object" and U.S. Patent Application
08/153,715 entitled "Heart Synchronized Extractor for an Implanted Object"; (2)
all patent rights derived from such patents and patent applications, including
but not limited to foreign rights, divisionals, continuations, continuations in
part, re-issues, and reexaminations; and (3) any confidential information
provided to Spectranetics by Medtronic (a) under the terms of the Agreement for
Mutual Exchange of Confidential Information between Spectranetics and Medtronic
dated May 21, 1991 (the "Confidentiality Agreement"), (b) in written form and
marked as "proprietary", "confidential" or the like, before and during the
development of Spectranetics products, including but not limited to the original
concept drawings and information disclosures (collectively the "Medtronic
Confidential Information"). Medtronic Confidential Information shall not,
however, include information which:
(i) is or was known to Spectranetics prior to receipt thereof under this
Agreement or the Confidentiality Agreement, as evidenced by written
records;
(ii) is disclosed without restriction to Spectranetics in good faith by a
third party who is in lawful possession thereof and who has the right
to make such disclosure;
(iii) is or shall have become public knowledge, by publication or
otherwise, through no fault of Spectranetics;
<PAGE>
(iv) is discovered by Spectranetics completely without reference to
Medtronic Confidential Information; or
(v) is transmitted to Spectranetics by Medtronic after Medtronic received
notification in writing from Spectranetics that Spectranetics did not
desire to receive any further Medtronic Confidential information.
"Net Sales" means the amounts received by Spectranetics from any third party
(not including any transactions with Medtronic) for sales of Royalty Products,
excluding sales taxes, use taxes, occupation taxes, excise taxes, freight, duty
or insurance, returns, discounts, credits, or repayments for returns. If Royalty
Products are sold packaged with products which are not Royalty Products, the Net
Sales of such products would be the number of such units multiplied by the
average net selling price for similar Royalty Products individually packaged
during the period for which the royalties are computed.
"Quarter" means each quarter of the Spectranetics fiscal year.
"Royalty Product" means any Lead Extractor covered by a claim of an unexpired
patent in the Licensed Intellectual Property or employing Medtronic Confidential
Information in the Licensed Intellectual Property; provided that the laser
generators and other capital equipment of Spectranetics will not be considered
Royalty Product. Lead Extractors sold for the purpose of clinical trials
required for obtaining government approval to market in any country shall not be
deemed Royalty Product.
ARTICLE 2
LICENSE GRANT
2.1 License
Medtronic grants to Spectranetics a worldwide, exclusive license to make, have
made, use and sell Royalty Products.
2.2 Term
Unless otherwise terminated under provisions of this Agreement, the license
granted under this Agreement shall continue until the expiration of the last
patent in the Licensed Intellectual Property in any country.
2.3 Spectranetics Intellectual Property
Except as provided in Article 6 below, no license is granted hereunder to
Medtronic in any Spectranetics intellectual property.
2
<PAGE>
ARTICLE 3
ROYALTIES AND REPORTS
3.1 License Fee
Spectranetics shall issue to Medtronic warrants for Two Hundred Thousand
(200,000) shares of its common stock. Any warrants issued under this Agreement
shall be exercisable for the longer of five years after the effective date of
this Agreement or three years after FDA permission to market Royalty Products.
The exercise price on the warrants shall be fixed at the stock closing price on
the date of execution of this Agreement.
3.2 Royalties
Spectranetics shall pay Medtronic a royalty of * of Net Sales of Royalty
Products (except for Royalty Products sold through an independent distributor,
for which the royalty shall be set at *) until the last U.S. patent expires.
After the last U.S. patent expires then the * royalty will be payable only on
sales into countries in which there are valid patents, in such country, relating
to the Royalty Products. No royalties shall be paid by Spectranetics for
Royalty Products sold to Medtronic under this Agreement.
3.3 Reports and Payments
Spectranetics shall provide Medtronic, within sixty (60) days of the end of each
Quarter, a written report indicating the amount of Net Sales, the number of
units sold and the amount of royalties due for the Quarter. At the time of the
report, Spectranetics shall pay Medtronic the reported due royalties by check or
wire transfer.
3.4 Records
Spectranetics agrees to keep accurate written records in sufficient detail to
allow Medtronic to verify Spectranetics' determinations of unit sales, Net Sales
and royalties due. These records shall be kept for at least five years following
the end of the Quarter to which they apply.
3.5 Audit of Records
Medtronic may audit the records referred to in Section 3.4, at reasonable times
and upon reasonable notice, not more than once per year. Such audit shall be at
Medtronic's expense.
* THIS PORTION MARKED WITH AN ASTERISK HAS BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT AND FILED SEPARATELY WITH THE COMMISSION.
3
<PAGE>
ARTICLE 4
REGULATORY
Spectranetics shall be responsible for obtaining all regulatory approvals needed
to market Royalty Products. Spectranetics agrees to use reasonable efforts and
diligence to obtain such approvals from the FDA. All regulatory expenses shall
be the responsibility of Spectranetics. Spectranetics shall own all such
regulatory approvals, except as specified in Article 6. Medtronic shall have the
right to access and utilize such regulatory approvals, including any supplements
thereto, in connection with any distribution of Royalty Products pursuant to
Article 6 below.
ARTICLE 5
INTELLECTUAL PROPERTY
5.1 Enforcement
During the term of this license Spectranetics shall notify Medtronic of
information received by Spectranetics indicating that a third party has
infringed any patent rights or has improperly obtained or disclosed any
confidential information in the Licensed Intellectual Property. Medtronic shall
have the first opportunity to enforce rights in the Licensed Intellectual
Property. Should Spectranetics wish to enforce the Licensed Intellectual
Property it shall notify Medtronic. Medtronic shall have 120 days in which to
elect whether to enforce on its own, enforce together with Spectranetics, or
allow Spectranetics to act alone in enforcement. Should Medtronic elect not to
enforce, Spectranetics may enforce the Licensed Intellectual Property at its
sole expense and retain any award of damages, royalties or any other monetary
award to Spectranetics. If the parties agree to jointly enforce rights in the
Licensed Intellectual Property, then each party shall share in any award of
damages, royalties or any other monetary award on a prorated basis determined by
the direct expense paid by each party in enforcing such rights.
5.2 Patent Protection
Should any inventions be made jointly between personnel of the parties, the
parties shall meet to agree on whether to seek patent protection. If agreement
is reached, the parties shall divide equally the cost of filing and prosecution.
If no agreement is reached and one party wishes to proceed, the
non-participating party agrees to assign its rights to the filing party, but
shall retain a paid up nonexclusive license in any resulting patent, without
the right to sublicense.
5.3 Marking
At Medtronic's request, Spectranetics shall mark all Royalty Product with
numbers of Medtronic patents covering the Lead Extractor and a legend indicating
that the device is manufactured under license from Medtronic.
4
<PAGE>
ARTICLE 6
MARKETING
6.1 Cessation of production
If Spectranetics ceases producing lead extraction devices for more than one
hundred eighty (180) days for any reason, including but not limited to
bankruptcy or voluntary cessation of manufacture, Medtronic may notify
Spectranetics of its intent to terminate this license. Spectranetics shall have
30 days to cure by restarting manufacture or by making a credible argument of
its rights claiming that its performance was prevented by force majeure under
Section 10.13 of this Agreement, coupled with its plan for restarting
manufacture as soon as the force majeure is removed. If Spectranetics does not
cure within the 30 day period, Medtronic may terminate this license Agreement
and Spectranetics shall grant to Medtronic a nonexclusive, paid up license under
any Spectranetics patents or other intellectual property needed for Medtronic to
make, use or sell Lead Extractor catheters, but not laser generators. Medtronic
is granted access to any drawings, specifications or other information required
to continue the manufacture of Lead Extractor catheters. Medtronic is granted
the right to use any government approvals, such as FDA pre-market approval for
the Lead Extractor. This includes as many rights as needed to effect Medtronic
use of such approvals, including assignment of the approvals if that is legally
required. Medtronic is granted a license under such FDA, CE or other applicable
approvals sufficient to manufacture and distribute said Royalty Products,
contingent upon bankruptcy of Spectranetics. Spectranetics will assist Medtronic
in the transfer of any government approvals for the Lead Extractor.
6.2 Minimum Sales
Spectranetics shall be targeted to sell a minimum of 500 units per year
beginning one year after the grant of pre-market approval by the FDA. In each
successive year Spectranetics shall be targeted to sell a minimum of 1000 units
per year. Should Spectranetics fail to sell the targeted units in any year,
Medtronic may elect to purchase units from Spectranetics for its own
distribution at * of the average selling price in accordance with the provisions
of Sections 6.4 and 6.5 below but failure to sell targeted amounts shall not be
a breach of this Agreement for purposes of Article 9.
6.3 Worldwide Marketing
Following the initial grant of marketing rights by the FDA, for any country of
the world in which (a) Spectranetics has not submitted an application for
regulatory approval in such country within 12 months, or (b) after obtaining
that country's regulatory approvals, Spectranetics is not marketing the Lead
Extractor or has not sold 100 units in the preceding 12 months, Medtronic may
notify Spectranetics of its intent to seek such marketing rights. Unless
Spectranetics submits for the applicable regulatory approvals or begins actively
marketing within 90 days after Medtronic has so requested marketing rights for a
country, Medtronic shall have the right to
* THIS PORTION MARKED WITH AN ASTERISK HAS BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT AND FILED SEPARATELY WITH THE COMMISSION.
5
<PAGE>
market in that country. The transfer price from Spectranetics to Medtronic
shall be * for lead extraction devices in that country. Medtronic shall be
responsible for obtaining regulatory approval in any country in which it
sells Lead Extractors, at Medtronic's expense. Medtronic shall own any such
approval.
6.4 Parallel Distribution
Medtronic may elect to market Lead Extractors in parallel to the distribution of
Spectranetics. This right to distribute Lead Extractors may not be exercised
until three years after approval of such Lead Extractors by the FDA. In case of
exercising its rights under this Section 6.4, Medtronic shall surrender any
unexercised warrants which have been granted under this Agreement and except as
otherwise provided pursuant to Section 6.1 above, Medtronic shall continue to
purchase catheters exclusively from Spectranetics in accordance with the
provisions of Sections 6.5, 6.6 and 6.7 below.
6.5 Transfer Price
In cases where Medtronic is to distribute Lead Extractors in parallel under
Section 6.4, the transfer price from Spectranetics shall be based on the
Spectranetics United States sales volume in the preceding twelve calendar months
as follows:
Less than * units * of Spectranetics' avg. U.S. selling price
Between * and * units * of Spectranetics' avg. U.S. selling price
Between * and * units * of Spectranetics' avg. U.S. selling price
Over * units * of Spectranetics' avg. U.S. selling price
In no event will Spectranetics be required to sell Medtronic Lead Extractors
below Spectranetics' manufacturing cost, which cost shall include, but shall not
be limited to, all material included in the product and the packaging of the
Lead Extractor product, all direct labor expended in the manufacturing and
assembly of the product, manufacturing burden which includes appropriately
allocated manufacturing supervision, manufacturing engineering support, quality,
material handling, depreciation of equipment, material procurement and
facilities, which are specific to the Lead Extractor product. These costs are
reflected in the standard cost used for inventory valuation and are audited by
independent auditors. In addition to standard cost, any direct royalty expense
associated with such Lead Extractor products will be added to standard cost in
the determination of total manufacturing cost for the purpose of determining the
minimum price of Lead Extractors to Medtronic. If Spectranetics applies
manufacturing cost to the determination of transfer price, Medtronic shall have
the right, at its expense, to have the manufacturing costs audited by an
independent auditor.
Any time before acquiring distribution rights in the United States, Medtronic
may purchase Lead Extractors from Spectranetics for * of the Spectranetics
average selling price. Medtronic may not
* THIS PORTION MARKED WITH AN ASTERISK HAS BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT AND FILED SEPARATELY WITH THE COMMISSION.
6
<PAGE>
in any calendar year purchase more than * of the number of Lead Extractor units
that Spectranetics sells in that calendar year in which Medtronic purchases such
units, but Medtronic may purchase at least * Lead Extractor units per year.
6.6 Supply of Product
Spectranetics expressly agrees to supply Lead Extractors to Medtronic as
indicated in the various sections of this Agreement giving Medtronic rights to
distribute. Such supply shall be based on an initial twelve month forecast upon
exercise of distribution rights. Lead time for orders shall be ninety (90) days.
The minimum order shall be 100 units of Lead Extractors. The maximum order will
be twice the forecast for the prior ninety (90) day period. Any order greater
than twice than this maximum shall be subject to Spectranetics' acceptance and
shall have delivery time set by Spectranetics in its discretion at time of
acceptance of the order.
For sales to Medtronic not under distribution rights under the terms specified
in the last paragraph of Article 6.5, the lead time for orders is sixty days.
The minimum order shall be ten (10) units. The maximum order accepted under
these terms shall be twice the amount ordered in the previous ninety (90) days.
Any demand greater than this maximum shall have the lead time confirmed by
Spectranetics at the time of order.
All payment terms are net 30 days from date of shipment to Medtronic. Sterility
dating if these devices shall be at least one year from the date of shipment to
Medtronic. The package shall be standard Spectranetics packaging for its normal
customers. Spectranetics agrees to package to Medtronic specifications under
Medtronic's label at Medtronic's request if Medtronic is distributing under this
Agreement. Any cost of such Medtronic package, beyond the usual cost of
Spectranetics' packaging, shall be borne by Medtronic.
6.7 Supply of Lasers
Spectranetics agrees to sell (subject to availability), install and maintain,
under its normal contracts, laser generators, at its prevailing prices, to
customers buying Lead Extractors from Medtronic.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES
7.1 Representations of Spectranetics
Spectranetics represents, warrants and covenants to Medtronic that:
* THIS PORTION MARKED WITH AN ASTERISK HAS BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT AND FILED SEPARATELY WITH THE COMMISSION.
7
<PAGE>
(a) Spectranetics is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Delaware and has full corporate
power to conduct the business in which it is presently engaged and to enter into
and perform its obligations under this Agreement.
(b) Spectranetics has taken all necessary corporate action under the laws
of the state of its incorporation and its certificate of incorporation and
by-laws to authorize the execution and consummation of this Agreement and, when
executed and delivered by Spectranetics, this Agreement shall constitute the
valid and legally binding agreement of enforceable against Spectranetics in
accordance with the terms hereof, to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
(c) Neither the execution and delivery of this Agreement nor the consummation
the transactions contemplated herein will violate any provision of the
certificate of incorporation or bylaws of Spectranetics or any law, rule,
regulation, writ, judgment, injunction, decree, determination, award or other
order of any court or governmental agency or instrumentality, domestic or
foreign, or conflict with or result in any breach of any of the terms of or
constitute a default under or result in termination of or the creation or
imposition of any mortgage, deed of trust, pledge, lien, security interest or
other charge or encumbrance of any nature pursuant to the terms of any contract
or agreement to which Spectranetics is a party or by which Spectranetics or any
of its assets is bound.
7.2 Representations of Medtronic
Medtronic represents, warrants and covenants to Spectranetics that:
(a) Medtronic, Inc. is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Minnesota and has full corporate
power to conduct the business in which it is presently engaged and to enter into
and perform its obligations under this Agreement.
(b) Medtronic has taken all necessary corporate action under the laws of
the state of its incorporation and its articles of incorporation and bylaws to
authorize the execution and consummation of this Agreement and, when executed
and delivered by Medtronic, this Agreement shall constitute the valid and
legally binding agreement of Medtronic enforceable against Medtronic in
accordance with the terms hereof, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
(c) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated herein will violate any provision
of the articles and bylaws of Medtronic or any law, rule, regulation, writ,
judgment, injunction, decree, determination, award or other order of any court
or governmental agency or instrumentality, domestic or foreign, or conflict with
or result in any breach of any of the terms of or constitute a default under or
result in
8
<PAGE>
termination of or the creation or imposition of any mortgage, deed of trust,
pledge, lien, security interest or other charge or encumbrance of any nature
pursuant to the terms of any contract or agreement to which Medtronic is a
party or by which Medtronic or any of its assets is bound.
(d) Medtronic warrants that, to the best of its knowledge, it knows of no
prior art or other prior art basis upon which it can be reasonably asserted
which would render any patents in the Medtronic Intellectual Property invalid.
ARTICLE 8
INDEMNIFICATION
8.1 Indemnification by Spectranetics
Spectranetics shall indemnify, defend and hold harmless Medtronic and each of
its subsidiaries, officers, directors, shareholder, employees, agents and
affiliates (collectively, all such indemnities are referred to in this
Section as "Medtronic") against and in respect of any and all claims,
demands, losses, obligations, liabilities, damages, deficiencies, actions,
settlements, judgments, costs and expenses which Medtronic may incur or
suffer or with which it may be faced (including reasonable costs and legal
fees incident thereto or in seeking indemnification therefor), (referred to
as "Costs") arising out of or based upon the breach by Spectranetics of any
of its representations, warranties, covenants or agreements contained or
incorporated in this Agreement, and any costs arising out of a claim of
patent infringement against Spectranetics arising out of Royalty Products or
Costs arising out of injury to person or property arising out of use or sale
of Royalty Products. An amount for which Medtronic is entitled to
indemnification pursuant hereto is referred to as an "Indemnified Amount."
8.2 Indemnification by Medtronic.
Medtronic shall indemnify, defend and hold harmless Spectranetics and each of
its subsidiaries, officers, directors, shareholder, employees, agents and
affiliates (collectively, all such indemnities are referred to in this Section
as "Spectranetics") against and in respect of any and all claims, demands,
losses, obligations, liabilities, damages, deficiencies, actions, settlements,
judgments, costs and expenses which Spectranetics may incur or suffer or with
which it may be faced (including reasonable costs and legal fees incident
thereto or in seeking indemnification therefor), (referred to as "Costs")
arising out of or based upon the breach by Medtronic of any of its
representations, warranties, covenants or agreements contained or incorporated
in this Agreement or any agreement, certificate or document executed and
delivered to Spectranetics by Medtronic in connection with the transactions
hereunder. An amount for which Spectranetics is entitled to indemnification
pursuant hereto is referred to as an "Indemnified Amount."
8.3 Third Party Claims.
If a claim by a third party is made against any indemnified party, and if the
indemnified party intends to seek indemnity with respect thereto under this
Article 8, such indemnified party shall promptly notify the indemnifying party
of such claim; provided, however, that failure to give timely notice shall not
affect the rights of the indemnified party except to the extent, if any, that
9
<PAGE>
the failure to give timely notice adversely affects the indemnifying party's
ability to defend such claim against a third party. The indemnifying party shall
be entitled to settle or assume the defense of such claim, including the
employment of counsel reasonably satisfactory to the indemnified party. If the
indemnifying party elects to settle or defend such claim, the indemnifying party
shall notify the indemnified party within thirty (30) days (but in no event less
than twenty (20) days before any pleading, filing or response on behalf of the
indemnified party is due) of the indemnifying party's intent to do so. If the
indemnifying party elects not to settle or defend such claim or fails to notify
the indemnified party of the election within thirty (30) days (or such shorter
period provided above) after receipt of the indemnified party's notice of a
claim of indemnity hereunder, the indemnified party shall have the right to
contest, settle or compromise the claim without prejudice to any rights to
indemnification hereunder. Regardless of which party is controlling the
settlement or defense of any claim, (a) both the indemnified party and
indemnifying party shall act in good faith, (b) the indemnifying party shall not
thereby permit to exist any lien, encumbrance or other adverse charge upon any
asset of any indemnified party or of its subsidiaries, (c) the indemnifying
party shall permit the indemnified party to participate in such settlement or
defense through counsel chosen by the indemnified party, provided that all fees,
costs and expenses of such counsel in an action controlled by the indemnifying
party shall be borne by the indemnified party, unless the indemnifying party and
indemnified party have different available defenses to such third party claim,
in which case such fees, costs and expenses shall be borne by the indemnifying
party, (d) no entry of judgment or settlement of a claim may be agreed to
without the written consent of the indemnified party, which consent shall not be
unreasonably withheld, and (e) the indemnifying party shall promptly reimburse
the indemnified party for the full amount of such claim and the related expenses
as incurred by the indemnified party pursuant to this Article 8. So long as the
indemnifying party is reasonably contesting any such third party claim in good
faith and the foregoing clause (b) is being complied with, the indemnified party
shall not pay or settle any such claim. The controlling party shall upon request
deliver, or cause to be delivered, to the other party copies of all
correspondence, pleadings, motions, briefs, appeals or other written statements
relating to or submitted in connection with the settlement or defense of any
such claim, and timely notices of any hearing or other court proceeding relating
to such claim.
ARTICLE 9
TERMINATION
9.1 Termination
(a) If either party breaches any of the material terms, conditions or
agreements of this Agreement, then the other party may terminate this Agreement,
at its option and without prejudice to any of its other legal and equitable
rights and remedies, by giving the breaching party ninety (90) days notice in
writing, particularly specifying the breach. Such notice of termination shall
not be effective if the other party cures the specified breach within such
ninety (90) day period, or, in the case of breaches not reasonably curable
within such ninety (90) days, if such party commences the cure thereof within
such ninety (90) days and diligently thereafter prosecutes such cure.
(b) Medtronic may, by written notice to Spectranetics, terminate this
Agreement, including the license granted pursuant to Section 2.1, at any time,
in the event of a material failure
10
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by Spectranetics to pay timely any payments that are required to be made to
Medtronic hereunder within 30 days of notice by Medtronic to Spectranetics of
such failure. If such payments are contested by Spectranetics, Medtronic's
right to terminate may not be executed until the right to collect has been
determined by the competent court or arbitrator and Spectranetics has failed
to pay such amount within 30 days after such determination.
(c) Either party may, by written notice to the other party (which
notice shall be effective upon dispatch), terminate this Agreement in the
event that such other party becomes insolvent, makes an assignment for the
benefit of creditors, goes into liquidation or receivership or otherwise
loses legal control of its business.
(d) Either party may, by written notice to the other party terminate
this Agreement if such other party's performance has been suspended by an
event of Force Majeure, as defined in Article 10 below, for more than one
hundred eighty (180) days in any consecutive twelve (12) month period.
(e) If any part of the Licensed Intellectual Property has been finally
found to be invalid by a court of competent jurisdiction, then Spectranetics
shall have no further obligations under this Agreement as to Royalty Products,
where the obligation arose because of that part of the Licensed Intellectual
Property, in the country of that court.
9.2 Effect of Termination
(a) The rights and obligations of the parties as to confidentiality
and shall survive any termination of this Agreement.
(b) Except as otherwise provided herein regarding Joint Inventions,
upon termination of this Agreement, each party will, within thirty (30) days,
return to the other party all tangible "Confidential Information" of the
other party (as defined in the agreements between the parties relating to
confidentiality)(except one copy which may be retained by party's legal
counsel solely for evidentiary purposes in the event of a dispute), and each
party will deliver to the other a copy of any documentation in its possession
or control specifically relating to the Joint Inventions.
ARTICLE 10
MISCELLANEOUS
10.1 Non-Disclosure
Each party agrees not to disclose or use any Confidential Information of the
other party during the during the term of this Agreement until the expiration of
three (3) after the termination or expiration of this Agreement. Each party
further agrees to take appropriate measures to prevent any such prohibited
disclosure by its present and future employees, officers, agents, subsidiaries,
or consultants during the term of this and for a period of three (3) years
thereafter.
10.2 Assignment
11
<PAGE>
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and the or assigns of the parties hereto provided:
(a) The rights and obligations of Spectranetics herein may not be
assigned except to person or entity who succeeds to substantially all of
Spectranetics' business to which this Agreement relates.
(b) Notwithstanding the provisions of subparagraph (a) to the contrary,
in the event any successor to the Spectranetics business is a competitor of
Medtronic in the "cardiac rhythm management or monitoring" business (as
defined on the attached Exhibit A), Medtronic shall have the right to
immediately exercise its rights under Sections 6.3 or 6.4 above, and elect to
(i) receive a non-exclusive license from Spectranetics to manufacture Lead
Extractors utilizing all applicable Spectranetics patents and associated
know-how, with royalty payment equal to * of Medtronic's Net Sales of Lead
Extractors covered by claims of the applicable Spectranetics patents; or
(ii) continue to purchase Lead Extractors from Spectranetics, provided that the
transfer price for lead Extractors purchased from Spectranetics shall be
equal to * of Spectranetics average U.S. selling price for purposes of
Sections 6.3 or 6.5. In no event will Spectranetics be required to sell
Medtronic Lead Extractors below Spectranetics' manufacturing cost as
defined in Article 6.5.
(c) The rights and obligations of Medtronic herein may not be assigned
except to a person or entity who succeeds to all or a substantial portion of
Medtronic's business to which this Agreement relates.
(d) Except as expressly modified herein, the remaining rights and
obligations of the parties under this Agreement would remain in full force and
effect in the event of any such assignment. Any attempted assignment of this
Agreement in violation of this Section 10.2 shall be null and void.
10.3 Entire Agreement
This Agreement constitutes the entire agreement of the parties with respect to
the subject matter of such agreement and supersedes all previous proposals or
agreements, oral or written, and all negotiations, conversations or discussions
heretofore had between the parties related to the subject matter of such
agreements. This Agreements supersedes agreements between Medtronic and
Spectranetics dated May 2, 1991, May 21, 1991, August 12, 1994, and March 10,
1995, except that any confidentiality obligation under such agreements shall
survive according to the terms of those agreements.
* THIS PORTION MARKED WITH AN ASTERISK HAS BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT AND FILED SEPARATELY WITH THE COMMISSION.
12
<PAGE>
10.4 Survival
All of the representations, warranties, and indemnifications made in this
Agreement, and all terms and provisions hereof intended to be observed and
performed by the parties after termination hereof (to the extent specified
herein), shall survive such termination and continue thereafter in full force
and effect, subject to applicable statutes of limitations.
10.5 Amendment, Waiver, Discharge, etc.
This Agreement may not be amended, released, discharged, abandoned, changed or
modified in any manner, except by an instrument in writing signed on behalf of
each of the parties to this Agreement by their duly authorized representatives.
The failure of either party to enforce at any time any of the provisions of this
Agreement shall in no way be construed to be a waiver of any such provision, nor
in any way to affect the validity of this Agreement or any part of it or the
right of either party after any such failure to enforce each and every such
provision. No waiver of any breach of this Agreement shall be held to be a
waiver of any other or subsequent breach.
10.6 Execution in Counterparts
This Agreement may be executed in one or more counterparts, all of which shall
be considered one and the same agreement, and shall become a binding agreement
when one or more counterparts have been signed by each party and delivered to
the other party.
10.7 Titles and Headings; Construction
The titles and headings to Sections and Articles herein are inserted for the
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement. This Agreement shall be
construed without regard to any presumption or other rule requiring construction
hereof against the party causing this Agreement to be drafted.
10.8 Benefit
Nothing in this Agreement, expressed or implied, is intended to confer on any
person other than the parties to this Agreement or their respective successors
or permitted assigns, or sublicense any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
10.9 Notices
All notices or other communications to a party required or permitted hereunder
shall be in writing and shall be delivered personally or by telecopy (receipt
confirmed) to such party or shall be sent by a reputable express delivery
service or by certified mail, postage prepaid with return receipt requested,
addressed as follows:
if to Medtronic to:
Medtronic, Inc.
13
<PAGE>
7000 Central Avenue N.E.
Minneapolis, Minnesota 55432
Attention: General Manager Brady Leads
FAX (612) 572-5480
and to:
Medtronic, Inc.
7000 Central Avenue N.E.
Minneapolis, Minnesota 55432
Attention: Law Department
FAX (612) 572-5404
if to Spectranetics to:
The Spectranetics Corporation
96 Talamine Court
Colorado Springs, CO 80907
Attention: President/CEO
FAX (719) 633-4207
Spectranetics or Medtronic may change their respective above-specified
recipient and/or mailing address by notice to the other party given in the
manner herein prescribed. All notices shall be deemed given on the day when
actually delivered as provided above (if delivered personally or by telecopy)
or on the day shown on the return receipt (if delivered by express delivery
service or by mail).
10.10 Severability
If any provision of this Agreement is held invalid by a court of competent
jurisdiction, such provision shall be enforced to the maximum extent permissible
and the remaining provisions shall nonetheless be enforceable according to their
terms.
10.11 Execution of Further Documents
Each party agrees to execute and deliver without further consideration any
further applications, licenses, assignments or other documents, and to perform
such other lawful acts as the other party may reasonably request to fully secure
and/or evidence the rights or interests herein.
10.12 Relationship
The relationship of Medtronic and Spectranetics with respect to this Agreement
will be that of independent contractors. Neither party has, and will not,
represent, without the prior written consent of the other party, that it has any
power, right or authority to bind or to incur any charges or expenses on behalf
of the other party or in the other party's name. Nothing stated in this
14
<PAGE>
Agreement will be construed as constituting Medtronic and Spectranetics, or
their Affiliates, as partners or as creating the relationships of
employer/employee, franchisor/franchisee, or principal/agent between them.
Neither party nor its Affiliates nor its or their employees or agents are, or
will act, as employees of the other party within the meaning or application of
any unemployment insurance laws, social security laws, workers' compensation or
industrial accident laws, social security laws, workers' compensation or
industrial accident laws, or under any other laws or regulations which may
impute any obligations or liability to the other by reason of an employment
relationship. The parties will indemnify and reimburse each other for and hold
the other harmless from any liabilities or obligations imposed or attempted to
be imposed upon a party by virtue of any such law in performance by a party of
this Agreement.
10.13 Force Majeure
Neither party shall be in default because of any failure to perform such party's
obligations under this Agreement if such failure arises from causes beyond the
reasonable control of such party ("the first party") and without the fault or
negligence of such first party, including without limitation, Acts of God or of
the public enemy, acts of the Government in either its sovereign or contractual
capacity, fires, floods, earthquakes, epidemics, quarantine restrictions,
strikes, or freight embargoes. In each instance, the failure to perform must be
beyond the reasonable control and without the fault or negligence of the first
party. If it appears that performance under this Agreement may be delayed by an
event of Force Majeure, the first party will immediately notify the other party
as soon as practicable in writing at the address specified in this Agreement.
During the period that the performance by one of the parties of its obligations
under this Agreement has been suspended by reason of an event of Force Majeure,
the other party may likewise suspend the performance of all or part of its
obligations hereunder to the extent that such suspension is commercially
reasonable.
10.15 Compliance with Laws
The parties, and any permitted sublicense of the parties, will comply with all
applicable international, national, state, regional and local laws and
regulations, including all applicable import and export control laws, in
exercising their rights or performing their duties under this Agreement.
10.16 Governing Law
This Agreement shall be governed by, and interpreted and constructed in
accordance with, the laws of the State of Minnesota.
15
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this License and Development
Agreement to be executed in the manner appropriate to each.
THE SPECTRANETICS CORPORATION
By: /s/ James P. McCluskey
------------------------------------
Its: Chief Financial Officer
-------------------------------
MEDTRONIC, INC.
By: /s/ Warren S. Watson
------------------------------------
Its: Vice President
-----------------------------------
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AS FOUND ON
PAGES 2 AND 3 OF THE COMPANY'S FORM 10-Q FOR THE PERIODS ENDED MARCH 31, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,199
<SECURITIES> 3,837
<RECEIVABLES> 3,401
<ALLOWANCES> 0
<INVENTORY> 1,756
<CURRENT-ASSETS> 11,781
<PP&E> 3,409<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,594
<CURRENT-LIABILITIES> 4,135
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 83,358
<TOTAL-LIABILITY-AND-EQUITY> 21,594
<SALES> 4,571
<TOTAL-REVENUES> 4,571
<CGS> 2,541
<TOTAL-COSTS> 2,541
<OTHER-EXPENSES> 3,590
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> (1,489)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,489)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,489)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
<FN>
<F1>PP&E is presented net of accumulated depreciation.
</FN>
</TABLE>
