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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
September 30, 1998
|_| 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 October 23, 1998, there were 19,110,822 outstanding shares of Common
Stock.
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Page 1
<PAGE>
Part I---FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(In Thousands, Except Shares and Per Share Amounts)
Assets: September 30, December 31,
1998 1997
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,999 $ 6,532
Investment securities 90 2,058
Trade accounts receivable 4,039 4,505
Inventories (note 5) 3,629 2,315
Other current assets 415 295
----------- -----------
Total current assets 12,172 15,705
Property and equipment, net 5,140 3,906
Goodwill and other intangible assets, net 4,368 5,140
Other assets 442 574
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Total Assets $ 22,122 $ 25,325
=========== ===========
Liabilities and Shareholders' Equity:
Liabilities:
Accounts payable and accrued liabilities $ 4,639 $ 3,575
Deferred revenue (note 6) 1,406 4,081
Current portion of note payable 884 299
Current portion of capital lease obligations 121 163
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Total current liabilities 7,050 8,118
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Deferred revenue and other liabilities (note 6) 1,757 1,757
Note payable, net of current portion 1,282 1,246
Capital lease obligations, net of current portion 113 141
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Total long-term liabilities 3,152 3,144
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Total liabilities 10,202 11,262
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Shareholders' Equity:
Preferred stock, $.001 par value
Authorized 5,000,000 shares; none issued -- --
Common stock, $.001 par value
Authorized 60,000,000 shares; issued and outstanding
19,110,822 and 18,734,142 shares, respectively 19 19
Additional paid-in capital 84,130 83,711
Accumulated other comprehensive loss (101) (152)
Accumulated deficit (72,128) (69,515)
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Total shareholders' equity 11,920 14,063
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Total Liabilities and Shareholders' Equity $ 22,122 $ 25,325
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</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 2
<PAGE>
Item 1. Financial Statements (cont'd)
<TABLE>
<CAPTION>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(In Thousands, Except Shares and Per Share Amounts)
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 6,968 $ 6,233 $ 20,285 $ 15,387
Cost of revenues 3,338 3,285 9,471 8,307
------------ ------------ ------------ ------------
Gross margin 3,630 2,948 10,814 7,080
------------ ------------ ------------ ------------
Gross margin % 52% 47% 53% 46%
Operating Expenses:
Marketing and sales expense 2,605 1,667 7,460 5,352
General and administrative expense 1,262 1,467 4,071 3,799
Research and development expense 572 489 1,940 1,569
------------ ------------ ------------ ------------
Total operating expenses 4,439 3,623 13,471 10,720
------------ ------------ ------------ ------------
Loss From Operations (809) (675) (2,657) (3,640)
Other Income (Expense):
Interest income 32 69 187 202
Interest expense (52) (8) (141) (25)
Other, net (5) 5 (2) (34)
------------ ------------ ------------ ------------
(25) 66 44 143
------------ ------------ ------------ ------------
Net Loss (834) (609) (2,613) (3,497)
Other Comprehensive Loss:
Foreign currency translation adjustment 44 (11) 51 (149)
------------ ------------ ------------ ------------
Comprehensive loss $ (790) $ (620) $ (2,562) $ (3,646)
============ ============ ============ ============
Net Loss per Share - basic and diluted $ (0.04) $ (0.03) $ (0.14) $ (0.19)
============ ============ ============ ============
Weighted Average Common Shares
Outstanding - basic and diluted 19,110,054 18,675,012 18,986,914 18,630,055
============ ============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 3
<PAGE>
Item 1. Financial Statements (cont'd)
<TABLE>
<CAPTION>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands, Except Shares and Per Share Amounts)
Nine Months Ended September 30,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,613) $ (3,497)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,704 1,499
Net change in operating assets and liabilities (3,228) 1,367
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Net cash used by operating activities (4,137) (631)
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Cash flows from investing activities:
Capital expenditures (1,359) (486)
Decrease in short-term investment, securities, net 1,968 2,743
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Net cash provided by investing activities 609 2,257
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Cash flows from financing activities:
Net proceeds from issuance of common stock 419 254
Proceeds from line of credit 900 --
Principal payments on obligations under
capital leases and note payable (349) (210)
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Net cash provided by financing activities 970 44
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Effect of exchange rate changes on cash 25 (63)
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Net decrease in cash and cash equivalents (2,533) 1,607
Cash and cash equivalents at beginning of period 6,532 2,860
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Cash and cash equivalents at end of period $ 3,999 $ 4,467
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Supplemental disclosures of cash flow information --
cash paid for interest $ 137 $ 41
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Supplemental disclosure of non-cash investing
and financing activities:
Transfers from inventory to equipment held for
rental or loan $ 795 $ 202
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Assets acquired through capital leases -- $ 347
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</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 4
<PAGE>
Item 1. Notes to 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
Loss per share is determined under the provisions of Statement of Financial
Accounting Standards No. 128, Earnings per Share (SFAS 128). Under SFAS 128,
basic loss per share is computed on the basis of weighted-average common shares
outstanding. Diluted loss per share considers potential common stock instruments
in the calculation, and is the same as basic loss per share for the three and
nine months ended September 30, 1998 and the year ended December 31, 1997, as
all potential common stock instruments were anti-dilutive.
(3) New Pronouncements
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS 130) establishes standards for the presentation of
comprehensive income in the financial statements. Comprehensive income includes
income and loss components which are otherwise recorded directly to
shareholders' equity under generally accepted accounting principles. The Company
adopted SFAS 130 effective January 1, 1998 and has reported accumulated other
comprehensive loss in the accompanying condensed consolidated balance sheets,
and the components of other comprehensive income in the accompanying condensed
consolidated statements of operations.
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS 131) establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. Statement of Financial Accounting
Standards No. 132, Employers' Disclosures About Pensions and Other
Postretirement Benefits (SFAS 132) revises employers' disclosures about pension
and other post-retirement benefit plans. Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS 133) establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities and is effective for fiscal years beginning
after June 15, 1999. SFAS 131 and SFAS 132 have been adopted as of January 1,
1998. The Company will present the disclosures required by SFAS 131 in its
annual 1998 consolidated financial statements, as applicable. The adoption of
these statements is not expected to have a significant impact on the Company's
consolidated financial statements.
Page 5
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(4) Inventories
Components of inventories are as follows (in thousands):
September 30, 1998 December 31, 1997
------------------ -----------------
Raw Materials $ 815 $ 755
Work in Process 980 882
Finished Goods 1,834 678
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$3,629 $2,315
====== ======
(5) Deferred Revenue
In 1997, the Company entered into a license agreement with United States
Surgical Corporation ("USSC"), pursuant to which USSC paid a license fee in
addition to advance payment for products to be supplied by the Company. The
payments received were recorded as deferred revenue and are being amortized as
product is shipped. During 1997, cash received under the agreement totaled
$6,339,000. The remaining deferred revenue balance was $2,149,000 and $5,100,000
at September 30, 1998 and December 31, 1997, respectively, of which $392,000 and
$3,343,000 has been recorded as a current liability at September 30, 1998 and
December 31, 1997, respectively.
Other deferred revenue - current, in the amounts of $1,014,000 and $738,000
at September 30, 1998 and December 31, 1997, respectively, relates primarily to
advance payments for various product maintenance contracts, pursuant to which
revenues are initially deferred and then amortized over the life of the
contract, which is generally one year.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
- --------------------------------------------------------------------------------
Results of Operations for the Three and Nine Months Ended September 30, 1998
Compared to the Three and Nine Months Ended September 30, 1997:
Revenues
Revenue for the three and nine months ended September 30, 1998 totaled
$6,968,000 and $20,285,000, respectively, an increase of $735,000 (12%) and
$4,898,000 (32%) as compared with revenue of $6,233,000 and $15,387,000 for the
three and nine months ended September 30, 1997, respectively. While laser
revenues decreased 28% for the three months ended September 30, 1998 due to a
larger percentage of laser placements shipped under rental or evaluation
programs during the period, laser revenues increased 42% for the nine months
ended September 30, 1998 due to the shipment of lasers to USSC under an
agreement entered into in 1997. Laser revenues related to the agreement were
$415,000 and $2,905,000 for the three and nine months ended September 30, 1998,
as compared to $495,000 and $615,000 for the three and nine months ended
September 30, 1997. Disposable catheter revenues increased 24% and 30% during
the three and nine months ended September 30, 1998, respectively, primarily as a
result of increased sales of the laser sheath product. Other revenues, which
include revenues from
Page 6
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont'd)
Polymicro Technologies, Inc. (PTI) and equipment service, increased 37% and 28%
during the three and nine months ended September 30, 1998, respectively, over
the same periods last year, due primarily to increased sales volumes at PTI and
increased service revenues. PTI revenues represented 33% of consolidated
revenues for the three and nine months ended September 30, 1998 as compared to
27% and 33% for the three and nine months ended September 30, 1997,
respectively.
The functional currency of Spectranetics International, B.V. is the Dutch
guilder. Fluctuations in foreign currency exchange rates during 1998, compared
to the same period in 1997, caused an increase in revenues of less than 1% for
the three months ended September 30, 1998 and a decrease in revenues of less
than 1% for the nine months ended September 30, 1998.
Gross Margin
Gross margin percentages for the three and nine months ended September 30,
1998 were 52% and 53%, respectively, as compared to gross margins of 47% and 46%
for the comparable periods in 1997. The increase in gross margins as a
percentage of revenue is due to higher selling prices per unit realized for
lasers shipped to USSC and catheters, both higher margin products, combined with
efficiencies realized as a result of higher volumes.
Operating Expenses
Overall, operating expenses totaled $4,439,000 and $13,471,000 for the
three and nine months ended September 30, 1998, respectively, and increased 23%
and 26%, respectively, over the 1997 expense levels of $3,623,000 and
$10,720,000 for the same periods. Fluctuations in foreign currency exchange
rates during 1998, compared to the same period in 1997, caused an increase of 2%
for the three months ended September 30, 1998 and a decrease of less than 1% for
the nine months ended September 30, 1998.
Marketing and sales expenses totaled $2,605,000 and $7,460,000 for the
three and nine months ended September 30, 1998 respectively, increases of 56%
and 39% over the 1997 expense levels of $1,667,000 and $5,352,000 for the same
periods in 1997, respectively. The increases are attributable to increased
staffing costs, primarily in sales staffing, combined with increased marketing
activities associated with conventions, workshops, and marketing materials,
primarily for laser sheath products.
General and administrative expenses were $1,262,000 and $4,071,000 for the
three and nine months ended September 30, 1998, respectively, a decrease of 14%
and increase of 7% over the 1997 expense levels of $1,467,000 and $3,799,000 for
the same periods. The decrease for the three month period is primarily due to
lower outside consulting costs in 1998 as compared to those incurred during the
same period in 1997. The increase for the nine month period is attributable
primarily to increases in investor relations activities and increased
depreciation associated with the implementation of a new computer system, which
was necessary to become year 2000 compliant.
Research and development expenses totaled $572,000 and $1,940,000 for the
three and nine months ended September 30, 1998, respectively, increases of 17%
and 24% over the 1997 expense levels of $489,000 and $1,569,000 for the same
periods. The increases are due primarily to increased staffing and
project-related costs as part of the Company's ongoing effort to expand the
applications for excimer laser technology.
Page 7
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont'd)
Net loss for the three and nine months ended September 30, 1998 was
$834,000, or $0.04 per share, and $2,613,000, or $0.14 per share, respectively,
as compared to net losses of $609,000, or $0.03 per share, and $3,497,000, or
$0.19 per share, for the same periods in 1997.
Liquidity and Capital Resources
As of September 30, 1998, the Company had cash, cash equivalents and
investment securities of $4,089,000 compared to $8,590,000 at December 31, 1997,
a decrease of $4,501,000. Cash usage from operating activities was $4,137,000
for the nine months ended September 30, 1998 as compared to cash used of
$631,000 from operating activities during the first nine months of 1997. The
increase in cash used was primarily due to increased inventory levels and
recognition of deferred revenue associated with the United States Surgical
agreement. Cash used for capital expenditures increased to $1,359,000 in 1998
from $486,000 in 1997 as the Company invested in infrastructure improvements
with the purchase of a new computer system, a new phone system, a state-of-the
art marketing booth for use at conventions and trade shows, and manufacturing
equipment purchased by PTI. Cash provided by financing activities was $970,000
in 1998 and $44,000 in 1997. The increase is due to proceeds from advances on
the equipment line of credit and a larger number of stock options exercised
during the nine months ended September 30, 1998.
During 1997, the Company entered into an agreement with Silicon Valley Bank
for a credit line of $5,000,000 (the "Credit Agreement"). As of December 31,
1997, $1,100,000 was drawn on the line of credit. During the nine months ended
September 30, 1998, an additional advance of $900,000 was drawn on the line of
credit, and principal payments of $267,000 were made during the same period,
resulting in a balance of $1,733,000 due as of September 30, 1998. Subject to
compliance with debt covenants, the remaining $3,000,000 line of credit is
available for future financing for general business purposes.
At September 30, 1998 and December 31, 1997, the Company had placed a
number of systems at customers under rental, loan and fee-per-procedure
programs. Laser units capitalized as equipment held for rental or loan totaled
$2,067,000 and $1,441,000 as of September 30, 1998 and December 31, 1997,
respectively, and are being depreciated over three to five years. This equipment
was transferred from the Company's inventory at cost. The Company expects that
it will continue to offer rental, loan and fee-per-procedure programs for the
foreseeable future.
Management believes that the Company's liquidity and capitalization as of
September 30, 1998 is sufficient to meet its operating and capital requirements
through at least the next six months. Revenue increases from current levels or
additional financing will be necessary to sustain the Company over the longer
term.
Year 2000 Issues
The year 2000 issue ("Y2K") arose because many computer programs existing
today utilize only two characters to recognize a year. Therefore, when the year
2000 arrives, these programs may not properly recognize a year beginning with
"20" instead of "19". The Y2K issue may result in the improper processing of
dates and date-sensitive calculations by computers and other
microprocessor-controlled equipment as the year 2000 is approached and reached.
Page 8
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont'd)
State of Readiness
The Company has divided its Y2K exposure into three major areas: (1)
internal systems, (2) Company products, and (3) potential Y2K problems
associated with outside vendors.
Because the Company believes that its primary Y2K issues could arise in the
area of internal systems, the Company has focused on this area and has almost
completed this phase of its Y2K project. New computer systems, which are
designed to be Y2K compliant, were installed and implemented during the first
half of 1998 at the Company's facilities in Colorado Springs, Colorado and
Phoenix, Arizona. The Company is currently evaluating its computer systems at
its European subsidiary, Spectranetics Int'l. B.V., for Y2K compliance. These
computer systems are the foundation for the business operations of the Company
and include, but are not limited to, business functions such as order entry,
shipping, purchasing, inventory control, manufacturing, accounts receivable,
accounts payable, and general ledger. The Company is also in the process of
reviewing other equipment that contains date-sensitive information. The Company
has implemented a Y2K compliant phone system at its headquarters and is
reviewing other equipment for potential Y2K issues. The Company expects to
complete its review of internal systems by June 30, 1999 and does not expect a
material adverse effect on its operations as a result of this review.
The Company has reviewed its products and determined that there are no
date-sensitive fields contained in any of the software within the Company's
products; therefore, the Company does not believe that its products will be
affected by Y2K issues.
The Company is in the process of identifying any risks associated with the
Y2K problem as it relates to outside vendors with systems that interface with
the Company's systems. The Company expects to complete this review by June 30,
1999. Based on a preliminary review of the Y2K impact associated with outside
vendors, the Company does not expect this issue to have a material adverse
effect on its operations. However, since third party year 2000 compliance is not
within the Company's control, the Company cannot assure that Y2K issues
affecting the systems of other companies on which the Company's systems rely
will not have a material adverse effect on the Company's operations.
Costs to Address the Y2K Issue
Costs to address the Y2K issue include hardware, software, and
implementation costs paid to outside consultants. These costs totaled $900,000
and were capitalized and will be depreciated over a three to five year period.
The costs were financed primarily through financing activities, which include
capital leases and a draw on its line of credit. Depreciation costs for the
three and nine months ended September 30, 1998 totaled $103,000 and $121,000,
respectively, as compared to zero dollars and $2,000 for the three and nine
months ended September 30, 1997, respectively. Interest costs associated with
the capital leases used to finance hardware totaled $4,000 and $13,000,
respectively, for the three and nine months ended September 30, 1998. This
compares to interest costs of $3,000 for the three and nine months ended
September 30, 1997. The Company does not expect to incur material future costs
associated with the Y2K issue as it relates to internal systems. Other expenses,
which include non-capitalized equipment and consulting costs, were $22,000 and
$52,000, respectively, for the three and nine months ended September 30, 1997.
No such costs were incurred during 1998.
Page 9
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont'd)
Risks Presented by the Year 2000 Issue
To date, the Company has not identified any Y2K issues that it believes
could materially adversely affect the Company or for which a suitable solution
cannot be implemented. However, as the review of its internal systems and
interfaces with outside vendors progresses, it is possible that Y2K issues may
be identified that could result in a material adverse effect on its operations.
Contingency Plans
Although the Company has not formulated a contingency plan to date, the
Company intends to continue to assess its Y2K risks to determine whether it
needs to do so. The Company will develop a contingency plan if its ongoing
review of internal systems and interfaces with outside vendors identify a Y2K
problem that poses a risk to its business operations.
Risk Factors
The Company's business, results of operations, and financial condition are,
and will continue to be, subject to the following risks:
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. The Company may not be able to achieve increased sales or
profitability.
Quarterly Fluctuations in Operating Results. The Company's results of
operations have varied in the past based on the timing of capital equipment
sales, investment in clinical trials, product development, and sales and
marketing activities. The Company expects that its results of operations will
continue to fluctuate from quarter to quarter based on these factors, as well
as:
o the timing of regulatory approvals;
o market acceptance of products and new product introductions;
o implementation of health care reforms;
o changes in product mix between laser units and disposable devices;
o the Company's ability to manufacture products efficiently; and
o competition from other technologies.
Lack of Liquidity. The Company believes that its existing cash and cash
from operations should be sufficient to execute its plans through the next six
months. However, the Company may need additional funds prior to that time.
Additional financing, if required, may not be available on satisfactory terms,
or at all. If financing is not available on acceptable terms, the Company may be
unable to make capital expenditures, compete effectively or withstand the
effects of adverse market and economic conditions. Cash flow from operating
activities may not be sufficient to sustain the Company's long-term operations
unless the Company is able to increase sales and control expenses. To the extent
the Company finances future operations through the issuance of equity
securities, existing shareholders may suffer dilution.
Limited Marketing Capability. The Company has limited sales and marketing
capabilities. Many of the Company's competitors have extensive and well-funded
sales and marketing operations. Competition for sales and marketing personnel is
intense, and the Company has had and may continue to have difficulty attracting
and retaining qualified sales and marketing personnel. The Company is in the
Page 10
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont'd)
process of establishing a direct sales force for its principal European markets.
The Company has limited experience in managing an international sales force. The
Company may be unable to develop a European sales force, and its sales and
marketing efforts in Europe could be unsuccessful.
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. 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. The Company's personnel,
systems, procedures and controls may not be adequate to support the Company's
future operations.
Exposure from International Operations. Changes in overseas economic
conditions, currency exchange rates, foreign tax laws or tariffs or other trade
regulations could adversely affect the Company's ability to market its products
internationally. Certain of the Company's 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, it expects its sales and expenses
denominated in foreign currencies to expand. Further, any significant changes in
the political, regulatory or economic environments in which the Company conducts
international operations may have a material impact on revenues and profits.
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. The Company
could be adversely affected if it loses key personnel or is unable to hire or
retain qualified personnel in the future.
Uncertain Market Acceptance. Excimer laser technology is a relatively new
procedure that competes with more established therapies, including balloon
angioplasty, stent implantation and open chest surgery, as well as other
evolving technologies, such as atherectomy. Market acceptance of the excimer
laser system will depend on the perceived clinical efficacy of and patient need
for excimer laser angioplasty and lead removal. Cost is another significant
factor affecting market acceptance of the Company's products. The Company's
products are expensive, and the marketplace may not be receptive to the
Company's excimer laser systems. See "Limitations on Third Party Reimbursement."
Intense Competition. Competitors include manufacturers of balloon
angioplasty devices, stents, products used in transmyocardial revascularization
("TMR") and percutaneous transmyocardial revascularization ("PTMR"), and
atherectomy devices. The Company also experiences competition from companies
that develop lead extraction devices or removal methods. Almost all of the
Company's competitors have substantially greater financial, manufacturing,
marketing and technical resources than the Company. Spectranetics expects
competition to intensify. The Company believes that the primary competitive
factors in the interventional cardiovascular market are:
o the ability to treat a variety of lesions safely and effectively;
Page 11
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont'd)
o the impactof managed care practices and procedure costs;
o ease of use;
o size and effectiveness of sales forces; and
o research and development capabilities.
Dependence on Single Product Line. The Company derives approximately
two-thirds of its revenues from the sale or lease of the CVX-300 laser unit and
the sale of disposable devices. The Company's results of operations could be
adversely affected if the Company's disposable devices fail to generate
favorable clinical results or do not receive regulatory approvals in a timely
manner or at all.
Uncertain Impact of Health Care Reform. The federal government and certain
states have already implemented or are considering legislation to effect health
care reform. In addition, other legislative and industry groups are studying
various health care issues. The Company cannot predict the timing of any such
health care reform or its ultimate effect on the Company.
Limitations on Third-Party Reimbursement. Hospitals generally purchase the
CVX-300 laser unit. Hospitals 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 Food and
Drug Administration ("FDA") has required that the label for the CVX-300 laser
unit indicate that adjunctive balloon angioplasty was performed in the majority
of the procedures submitted to the FDA in the Company's application for PMA.
Adjunctive balloon angioplasty requires the purchase of a balloon catheter in
addition to the laser catheter. Third-party 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. In the future, laser angioplasty using the CVX-300 laser unit
could be considered too costly by third-party payors, reimbursement could be
unavailable for procedures using the Company's laser unit or, if available,
payors' reimbursement policies could affect the Company's ability to sell its
products profitably.
Hospitals face 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 the Company's products and the Company's 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. The Company is subject to
extensive regulation by the FDA and comparable state and foreign agencies.
Complying with these regulations can be costly and time consuming. Failure to
comply with applicable regulatory requirements may result in, among other
things, fines, suspensions of approvals, seizures or recalls of products,
operating restrictions and criminal prosecutions. The Company may be unable to
obtain future regulatory approval in a timely manner or at all if existing
regulations are changed or new regulations are adopted.
The Company is subject to international regulatory requirements that vary
from country to country. International regulatory approval processes may take
longer than the FDA approval process. In addition, the Company could encounter
significant costs and requests for additional information in its efforts to
Page 12
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont'd)
obtain regulatory approvals. The Company may not be able to obtain or maintain
international regulatory approvals for its products in the future. Any of these
events could substantially delay or preclude the Company from marketing its
products internationally.
Uncertainties Related to Clinical Trials. All of the Company's potential
products are subject to extensive regulation and will require approval from the
FDA and other regulatory agencies prior to commercial sale. The results from
pre-clinical testing and early clinical trials may not be predictive of results
obtained in large clinical trials. Companies in the medical device industry have
suffered significant setbacks in various stages of clinical trials, even in
advanced clinical trials after promising results had been obtained in earlier
trials.
The development of safe and effective products is highly uncertain and
subject to numerous risks. Product candidates that may appear to be promising in
development may not reach the market for a number of reasons. Product candidates
may:
o be found ineffective;
o take longer to progress through clinical trials than had been
anticipated;
o fail to receive necessary regulatory approval; or
o prove impracticable to manufacture in commercial quantities at
reasonable cost and with acceptable quality.
The product development process may take several years, depending on the type,
complexity, novelty and intended use of the product.
Sole Source Suppliers and Other Manufacturing Risks. The Company purchases
certain components of its CVX-300 laser unit from several sole source suppliers.
The Company does not have guaranteed commitments from these suppliers and orders
products through purchase orders placed with these suppliers from time to time.
While the Company believes that it could obtain replacement components from
alternative suppliers, it may be unable to do so. In addition, the Company may
encounter difficulties in scaling up production of laser units and disposable
devices and hiring and training additional qualified manufacturing personnel.
Any of these difficulties could lead to quarterly fluctuations in operating
results and adversely affect the Company.
Product Liability and Sufficiency of Insurance Coverage. The Company is
subject to risk of product liability claims. The Company maintains product
liability insurance with coverage and aggregate maximum amounts of $5 million.
The coverage limits of the Company's insurance policies may be inadequate, and
insurance coverage with acceptable terms could be unavailable in the future.
Technological Change Resulting in Product Obsolescence. 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. Sales
of the Company's products could be adversely affected by technological changes.
Many companies, some of which have substantially greater resources than the
Company, are engaged in research and development for the treatment and
prevention of coronary artery disease. These include pharmaceutical approaches
as well as development of new or improved angioplasty, atherectomy or other
devices. The Company's products could be rendered obsolete as a result of future
innovations in the treatment of vascular disease.
Page 13
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont'd)
Uncertainty Related to Patents and Proprietary Rights. The Company holds
patents and licenses to use patented technology, and has patent applications
pending. Any patents currently applied for by the Company may not be granted. In
addition, the Company's patents may not be sufficiently broad to protect the
Company's technology or to provide it with any competitive advantage. The
Company's patents could be challenged as invalid or circumvented by competitors.
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. The Company could be adversely affected if any of its licensors
terminate the Company's licenses to use patented technology.
The Company is aware of patents and patent applications owned by others
relating to laser and fiber-optic technologies, which, if determined to be valid
and enforceable, may be infringed by the Company. Holders of certain patents,
including holders of patents involving the use of lasers in the body, have
contacted the Company and requested that the Company enter into license
agreements for the underlying technology. While the Company does not believe
that it infringes upon any valid claim of these patents, a patent holder may
file a lawsuit against the Company and may prevail. If the Company decides that
it needs to license this technology, the Company may be unable to obtain these
licenses on favorable terms or at all. The Company may not be able to develop or
otherwise obtain alternative technology.
Litigation concerning patents and proprietary rights is time-consuming,
expensive, unpredictable and could divert the efforts of the Company's
management. An adverse ruling could subject the Company to significant
liability, require the Company to seek licenses and restrict the Company's
ability to manufacture and sell its products.
The Company 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 gain access to its trade secrets and know-how.
Potential Anti-Takeover Effects of Rights Plan, Charter and Bylaws. The
Company has a shareholder rights plan that may prevent an unsolicited change of
control of the Company. The rights plan may adversely affect the market price of
the Common Stock or the ability of shareholders to participate in a transaction
in which they might otherwise receive a premium for their shares. Under the
rights plan, rights to purchase preferred stock in certain circumstances have
been issued (and will be issued for any newly outstanding common stock) to
holders of outstanding shares of Common Stock. Holders of the preferred stock
are entitled to certain dividend, voting and liquidation rights that could make
it more difficult for a third party to acquire the Company.
The Company's Charter and Bylaws contain provisions relating to issuance of
preferred stock, special meetings of shareholders and amendment of Bylaws that
could have the effect of delaying, deferring or preventing an unsolicited change
in the control of the Company. The Company's Board of Directors are elected for
staggered three-year terms, which prevents shareholders from electing all
directors at each annual meeting and may have the effect of delaying or
deferring a change in control of the Company.
Potential Volatility of Stock Price. The market price of the shares of the
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 regarding 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 Common Stock.
Page 14
<PAGE>
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 its Common Stock. The Company does not anticipate paying any
dividends in the foreseeable future.
Year 2000 Issues. The Company installed and implemented new computer
systems at its Colorado and Arizona facilities in the first half of 1998.
Although the Company's new software is designed to be year 2000 compliant, the
Company cannot assure that this software contains all necessary data code
changes. The Company is currently evaluating its other computer systems for year
2000 compliance. Although the Company expects all of its critical systems to be
year 2000 compliant by June 30, 1999, there is a risk that some or all of the
Company's systems will not be year 2000 compliant by 2000.
Upon review of its product offerings, the Company has determined that the
software within its products does not contain date-sensitive fields. As a
result, the Company does not believe that its products will be affected by year
2000 issues. The Company cannot assure, however, that all of its products are
year 2000 compliant.
The Company is in the process of obtaining information from outside vendors
regarding systems that interface with the Company's systems. Based on currently
available information, the Company does not believe that year 2000 issues
relating to these systems will adversely affect the Company. However, since
third party year 2000 compliance is not within the Company's control, the
Company cannot assure that any year 2000 issues affecting its outside vendors
will not adversely affect the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Part II.---OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings
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 1998 Third
Quarter Form 10-Q.
(b) Reports on Form 8-K
None
Page 15
<PAGE>
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)
November 9, 1998 By: /s/ James P. McCluskey
-------------------------------
James P. McCluskey
Vice President, Finance
Secretary/Treasurer and
Principal Financial Office
Page 16
<PAGE>
THE SPECTRANETICS CORPORATION
Form 10Q for Period Ended September 30, 1998
EXHIBIT INDEX
Exhibit Number Description
- ---------------- ------------------------------------------------------------
27.1 Financial Data Schedule for 1998 Third Quarter Form 10-Q.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDESNED CONSOLDIATED BALANCE SHEET AND STATEMENT OF OPERATIONS AS FOUND ON
PAGES 2 AND 3 OF THE COMPANY'S FORM 10Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,039
<ALLOWANCES> 3,629
<INVENTORY> 12,172
<CURRENT-ASSETS> 12,172
<PP&E> 5,140<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 22,122
<CURRENT-LIABILITIES> 7,050
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 11,901
<TOTAL-LIABILITY-AND-EQUITY> 22,122
<SALES> 20,285
<TOTAL-REVENUES> 20,285
<CGS> 9,471
<TOTAL-COSTS> 9,471
<OTHER-EXPENSES> 13,471
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141
<INCOME-PRETAX> (2,613)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,613)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,613)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
<FN>
<F1>
PP&E is presented net of accumulated depreciation.
</FN>
</TABLE>
