SPECTRANETICS CORP
10-Q, 1997-08-14
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS
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<PAGE>

                       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
      
                                   JUNE 30, 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          (I.R.S. Employer Identification No.)
      of 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 August 6, 1997, there were 18,683,139 outstanding shares of Common
     Stock.



                                    Page 1
<PAGE>

                         PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

              THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
             CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
            (IN THOUSAND, EXCEPT SHARES AND PER SHARE AMOUNTS)

- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                              June 30,        December 31,
                                                               1997               1996
                                                           -------------     -------------
<S>                                                        <C>               <C>
ASSETS:
CURRENT ASSETS:
 Cash and cash equivalents                                 $         503     $       2,860
 Investment securities                                             3,674             4,290
 Trade accounts receivable                                         3,559             3,651
 Inventories (note 3)                                              2,016             1,628
 Prepaid expenses and other current assets                           551               396
                                                           -------------     -------------
     Total current assets                                         10,303            12,825
                                                           -------------     -------------
 Property and equipment, net                                       3,482             3,486
 Goodwill and other intangible assets, net                         5,621             6,346
 Other assets                                                        645               382
                                                           -------------     -------------
     Total assets                                          $      20,051     $      23,039
                                                           -------------     -------------
                                                           -------------     -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
 Accounts Payable and accrued liabilities                  $       2,781     $       3,311
 Deferred revenue (note 4)                                         1,121               569
 Current portion of note payable                                      79                75
 Current portion of capital lease obligations                         57                83
                                                           -------------     -------------
     Total current liabilities                                     4,038             4,038
                                                           -------------     -------------
 Other liabilities                                                    16                26
 Note payable, net of current portion                                366               445
 Capital lease obligations, net of current portion                    14                20
                                                           -------------     -------------
     Total long-term liabilities                                     396               491
                                                           -------------     -------------
     Total liabilities                                             4,434             4,529
                                                           -------------     -------------
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
  18,648,678 and 18,531,867, respectively                             19                19
 Additional paid-in capital                                       83,535            83,402
 Cumulative foreign currency translation adjustment                 (154)              (16)
 Accumulated deficit                                             (67,783)          (64,895)
                                                           -------------     -------------
     Total shareholders' equity                                   15,617            18,510
                                                           -------------     -------------
                                                           $      20,051     $      23,039
                                                           -------------     -------------
                                                           -------------     -------------

</TABLE>

                                                      Page 2
<PAGE>

ITEM 1. FINANCIAL STATEMENTS (cont'd)

              THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
         CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
            (IN THOUSAND, EXCEPT SHARES AND PER SHARE AMOUNTS)

- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                           Three Months Ended June 30,      Six Months Ended June 30,
                                           ---------------------------      -------------------------
                                               1997           1996            1997           1996
                                            ----------     ----------      ----------    -----------
<S>                                         <C>            <C>             <C>           <C>

Revenues                                    $    4,583     $    5,451      $    9,154    $    10,119

Cost of revenues                                 2,482          2,699           5,022          5,260
                                            ----------     ----------      ----------    -----------
Gross margin                                     2,101          2,752           4,132          4,859
                                            ----------     ----------      ----------    -----------

Gross margin %                                     46%            50%             45%            48%

OPERATING EXPENSES:
  Marketing and sales expense                    1,911          1,455           3,685          2,986
  General and administrative expense             1,057          1,149           2,332          2,182
  Research and development expense                 567            430           1,080            783
                                            ----------     ----------      ----------    -----------
    Total operating expenses                     3,535          3,034           7,097          5,951
                                            ----------     ----------      ----------    -----------
LOSS FROM OPERATIONS                            (1,434)          (282)         (2,965)        (1,092)

OTHER INCOME (EXPENSE):
  Interest income                                   53             65             133            153
  Interest expense                                  (8)           (11)            (17)           (23)
  Other, net                                       (10)           (10)            (39)            (5)
                                            ----------     ----------      ----------    -----------
                                                    35             44              77            125
                                            ----------     ----------      ----------    -----------
NET LOSS                                    $   (1,399)    $     (238)     $   (2,888)   $      (967)
                                            ----------     ----------      ----------    -----------
                                            ----------     ----------      ----------    -----------
LOSS PER SHARE (NOTE 2)                     $    (0.08)    $    (0.01)     $    (0.16)   $     (0.05)
                                            ----------     ----------      ----------    -----------
                                            ----------     ----------      ----------    -----------

WEIGHTED AVERAGE COMMON SHARES              18,625,909     18,382,290      18,588,291     18,377,629
                                            ----------     ----------      ----------    -----------
                                            ----------     ----------      ----------    -----------
</TABLE>

                                             Page 3

<PAGE>

ITEM 1. FINANCIAL STATEMENTS (cont'd)

              THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
         CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
            (IN THOUSAND, EXCEPT SHARES AND PER SHARE AMOUNTS)

- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                       Six Months Ended
                                                                           June 30,
                                                                ----------------------------
                                                                   1997              1996
                                                                ----------       -----------
<S>                                                             <C>              <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net Loss                                                      $  (2,888)       $     (967)
  Adjustments to reconcile net loss to net cash
    used in operating activities:
  Depreciation and amortization                                     1,278             1,405
  Net change in operating assets and liabilities                   (1,055)             (491)
                                                                ----------       -----------
    Net cash used by operating activities                          (2,665)              (53)
                                                                ----------       -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                               (310)             (186)
  Decrease (increase) in short-term investments                       617                91
                                                                ----------       -----------
    Net cash provided by (used in) investing activities               307               (95)
                                                                ----------       -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issuance of common stock                          133                68
  Principal payments on obligations under
    capital leases and note payable                                   (81)             (126)
                                                                ----------       -----------
    Net cash provided by financing activities                          52               (58)
                                                                ----------       -----------
Effect of exchange rate changes on cash                               (51)              (42)
                                                                ----------       -----------
Net decrease in cash and cash equivalents                          (2,357)             (248)
Cash and cash equivalents at beginning of period                    2,860             3,115
                                                                ----------       -----------
Cash and cash equivalents at end of period                      $     503        $    2,867
                                                                ----------       -----------
                                                                ----------       -----------
Supplemental disclosures of cash flow information -
  cash paid for interest                                        $      34        $       39
                                                                ----------       -----------
                                                                ----------       -----------
Supplemental disclosure of non-cash investing
  and financing activities:
  Transfers from inventory to equipment held for rental
    or loan                                                     $     259        $       28
                                                                ----------       -----------
                                                                ----------       -----------

</TABLE>

                                                 Page 4


<PAGE>

ITEM 1. FINANCIAL STATEMENTS (CONT'D)

                      NOTES TO CONDENSED CONSOLIDATED 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):

                                                  June 30,       December 31,
                                                    1997             1996
                                              ---------------- ---------------
       Finished Goods                              $  791           $  643
       Work in Process                                658              516
       Raw Materials                                  567              469
                                              ---------------- ---------------
                                                   $2,016           $1,628
                                              ---------------- ---------------
                                              ---------------- ---------------

(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 $546,000 and $534,000 at June 30, 1997 and December 31, 1996, 
respectively.

     Deferred revenue at June 30, 1997 includes $540,000 which represents 
cash received in advance of the shipment of a customer order.  Revenue will 
be recognized upon shipment of the order.  At June 30, 1997 and December 31, 
1996, additional deferred revenue of $35,000 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.

                                           Page 5

<PAGE>

ITEM 1. FINANCIAL STATEMENTS (CONT'D)

     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 of the Company.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
         AND FINANCIAL CONDITION
- -------------------------------------------------------------------------------

     The information set forth in "Management's Discussion and Analysis of 
Financial Condition and Results of Operations" below includes 
"forward-looking statements" within the meaning of Section 21E of the 
Securities and Exchange Act of 1934, as amended, and is subject to the safe 
harbor created by that section. Readers 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 realistically could cause actual results 
to differ materially from those set forth in the forward-looking statements 
are set forth below and include the following:  market acceptance of excimer 
laser angioplasty technology, technological changes resulting in product 
obsolescence, the inability to obtain patents with respect to new products, 
adverse state or federal legislation and regulation, availability of third 
party component products at reasonable prices, and the other risk factors 
listed from time to time in the Company's filings with the Securities and 
Exchange Commission as well as those set forth in "Risk Factors."

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 
COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 1996:

REVENUES

     Revenue for the three and six months ended June 30, 1997 decreased 
$868,000 (16%) and $965,000 (10%), respectively, as compared with the three 
and six months ended June 30, 1996.  The decrease is primarily due to a 
decline in laser revenues.  New unit placements of laser systems during the 
three and six months ended June 30, 1997 were consistent with total new 
placements during the same period last year; however, revenues for three and 
six months ended June 30, 1996 included sales of two lasers and four lasers, 
respectively, which were previously being rented, as compared to no such 
sales during the three and six months ended June 30, 1997.  

     Fluctuations in foreign currency exchange rates during the three and six 
months ended June 30, 1997 compared to the same periods in 1996 caused a 
decrease in revenues of 2% and 3% respectively.

GROSS MARGIN

     Gross margins as a percentage of revenues for the three months and six 
months ended June 30, 1997 were 46% and 45%, respectively, as compared to 
gross margins of 50% and 48% for the comparable periods in 1996. The decline 
in gross margins as a percentage of revenue is primarily due to the decrease 
in revenues as a result of the unfavorable fluctuation in foreign currency 
exchange rates. There was no corresponding fluctuation in cost of revenues 
since they are primarily denominated in U.S. dollars.

                                       Page 6

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONT'D)

OPERATING EXPENSES

     Research and development expenses increased $137,000 (32%) and $297,000 
(38%), respectively, during the three and six months ended June 30, 1997 as 
compared to the same periods in 1996.  The increase is primarily due to costs 
associated with the Company's retrospective clinical study examining laser 
treatment of stent restenosis as well as the European trial of the 
Prima-TM- total occlusion device.  The Company expects these costs to increase 
as it continues its efforts to broaden the application of its excimer laser 
technology.

     Marketing and sales expenses increased $456,000 (31%) and $699,000 
(23%), respectively, for the three and six months ended June 30, 1997 as 
compared to the three and six months ended June 30, 1996.  The increase is 
due to additional staffing in the marketing and sales organization as well as 
an increase in general marketing activities designed to highlight and promote 
the benefits of the Company's excimer laser technology.
     
     General and administrative expenses decreased $92,000 (8%) during the 
three months ended June 30, 1997 as compared to the same period last year.  
During the three months ended June 30, 1996, the Company incurred costs 
associated with the adoption of a shareholder rights plan and the filing of a 
shelf registration statement.  No costs of this nature were incurred during 
the three months ended June 30, 1997.  During the six months ended June 30, 
1997 as compared to the same period in 1996, general and administrative 
expenses increased $150,000 (7%), primarily due to costs associated with the 
transition to a new Chief Executive Officer in the early part of 1997.
     
     Fluctuations in foreign currency exchange rates during the three and six 
months ended June 30, 1997 compared to the same period in 1996 caused a 
decrease in operating expenses of 2% and 5%, respectively.

LIQUIDITY AND CAPITAL RESOURCES

     As of June 30, 1997, the Company had cash, cash equivalents and 
investment securities of $4,177,000.  The Company consumed $2,973,000 of cash 
and short-term investments during the six months ended June 30, 1997, 
primarily due to $2,665,000 consumed in connection with operating activities. 
 The Company is investing its cash for its marketing and sales efforts 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-TM- laser guidewire, which 
are intended to expand the application of the Company's excimer laser 
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 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:

                                         Page 7

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
         AND FINANCIAL CONDITION (CONT'D)

     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.   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 near 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 pre-market approval (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 
devices 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 unit 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 
higher 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.
     
                                     Page 8

<PAGE>

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's 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, 

                                     Page 9

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
         AND FINANCIAL CONDITION (CONT'D)

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 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 Class III medical device 
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 and standards 
could prevent SPNC from obtaining, or affect the timing of, future regulatory 
approval.  SPNC products require the filing of original PMAs or PMA 
supplements.  There can be no assurance that the FDA will approve SPNC's 
current or future PMAs or 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

                                    Page 10

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
         AND FINANCIAL CONDITION (CONT'D)

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.

     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 

                                    Page 11

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
         AND FINANCIAL CONDITION (CONT'D)

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 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 

                                            Page 12

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
         AND FINANCIAL CONDITION (CONT'D)


     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.

     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 13

<PAGE>

                              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 27.1 - Financial Data Schedule for 1997 Second 
                    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)

August 14, 1997              By:     /s/ James P. McCluskey
                                ---------------------------------------
                                     James P. McCluskey
                                     Vice President, Finance
                                     Secretary/Treasurer and
                                     Principal Financial Officer

                                    Page 14

<PAGE>

                             THE SPECTRANETICS CORPORATION
                        FORM 10Q FOR PERIOD ENDED JUNE 30, 1997

                                    EXHIBIT INDEX



  EXHIBIT 
  NUMBER                           DESCRIPTION
- ----------------------------------------------------------------------------
   27.1     Financial Data Schedule for 1997 First Quarter Form 10-Q.
 


                                    Page 15


<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SPECTRANETICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
AND STATEMENTS OF OPERATIONS AS FOUND ON PAGES 2 AND 3 OF THE COMPANY'S FORM
10-Q FOR THE PERIODS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               JUN-30-1997
<CASH>                                             503
<SECURITIES>                                     3,674
<RECEIVABLES>                                    3,559
<ALLOWANCES>                                         0
<INVENTORY>                                      2,016
<CURRENT-ASSETS>                                10,303
<PP&E>                                           3,482<F1>
<DEPRECIATION>                                       0
<TOTAL-ASSETS>                                  20,051
<CURRENT-LIABILITIES>                            4,038
<BONDS>                                              0
                                0
                                          0
<COMMON>                                            19
<OTHER-SE>                                      15,598
<TOTAL-LIABILITY-AND-EQUITY>                    20,051
<SALES>                                          9,154
<TOTAL-REVENUES>                                 9,154
<CGS>                                            5,022
<TOTAL-COSTS>                                    5,022
<OTHER-EXPENSES>                                 7,097
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                  17
<INCOME-PRETAX>                                (2,888)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                            (2,888)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                   (2,888)
<EPS-PRIMARY>                                    (.16)
<EPS-DILUTED>                                        0
<FN>
<F1>P.P.&E. IS SHOWN NET OF ACCUMULATED DEPRECIATION.
</FN>
        

</TABLE>


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