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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-19711
THE SPECTRANETICS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 0-19711 84-0997049
(State or other jurisdiction of (Commission File No.) (I.R.S. Employer
incorporation or organization) Identification No.)
96 TALAMINE COURT
COLORADO SPRINGS, COLORADO 80907
(Address of principal executive offices and zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (719) 633-8333
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
---- ----
/X/ Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
The aggregate market value of the voting stock of the Registrant, as of
March 6, 1998, computed by reference to the closing sale price of the voting
stock held by non-affiliates on such date, was approximately $61,535,164.
As of March 6, 1998, there were outstanding 18,760,721 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1998
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission not later than April 30, 1998, are incorporated by reference into
Part III as specified.
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Total Pages 49
Exhibit Index on Page 47
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Interventional Cardiovascular Therapies . . . . . . . . . . . . . . . . . . . . . 3
Angioplasty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lead Extraction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Strategic Alliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Polymicro Technologies, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . .10
Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Patents and Proprietary Rights. . . . . . . . . . . . . . . . . . . . . . . . . .13
Research and Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Third-Party Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Facilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . . . . . . .16
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS . . . . . . .16
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Year 2000 Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . . . . . . . . . . . .26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . .26
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . .26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . .26
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K . . . . . . . . . . .26
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
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PART I
The information set forth in "Business" below includes "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995, and is subject to the safe harbor created by that section.
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,
market acceptance of excimer laser removal of pacemaker and defibrillator
leads, 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 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 Item 7 -"Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors".
ITEM 1. BUSINESS
GENERAL
The Spectranetics Corporation ("SPNC" or the "Company") develops,
manufactures, services and distributes a proprietary excimer laser system
(CVX-300-Registered Trademark- laser unit and fiber optic delivery devices)
for the treatment of certain coronary and vascular conditions. The Company
is a Delaware corporation formed in 1984, and is headquartered in Colorado
Springs, Colorado. The Company's wholly-owned subsidiary, Polymicro
Technologies, Inc. ("Polymicro"), manufactures and distributes drawn silica
glass products, which include capillary tubing and specialty fiber optics.
Polymicro is located in Phoenix, Arizona. Polymicro is more fully described
herein under the section titled "Polymicro Technologies, Inc." in this Item
1. For distinction purposes throughout the course of this Form 10-K, the
Company will be referred to as "SPNC" in connection with its interventional
cardiovascular business and will be referred to as "the Company" in
connection with the combined operations of SPNC and its subsidiaries.
SPNC's excimer laser technology has been designed to ablate, or remove,
tissue, and is utilized in several interventional cardiovascular
applications. The excimer laser system approved by the Food and Drug
Administration ("FDA") in February 1993 is currently used for the
recanalization of clogged blood vessels (angioplasty) and for removing lead
wires from patients with implanted pacemakers or implantable cardioverter
defibrillators ("ICDs"). Clinical trials are underway investigating the use
of excimer laser technology for the treatment of peripheral vascular disease,
restenosed stents, totally occluded arteries, and transmyocardial
revascularization/percutaneous transmyocardial revascularization. SPNC is
also pursuing the development of additional applications for the CVX-300
excimer laser unit, both through its own research and development efforts as
well as partnering with other companies to develop new applications. The SPNC
also is leveraging its specialized manufacturing capabilities to diversify
into other medical product fields such as electrophysiology.
INTERVENTIONAL CARDIOVASCULAR THERAPIES
ANGIOPLASTY
BACKGROUND
Atherosclerosis is the partial or total blockage of arteries due to
accumulated plaque (lesions) on the walls of arteries. Cardiovascular
disease is the leading cause of death in the United States, accounting for
approximately one million, or one-half, of all deaths annually. According to
the American Heart Association, 1,500,000 new cases of heart attacks or
angina (chest pain due to heart disease) are reported each year.
Interventional medical treatment for atherosclerosis includes bypass
surgery, a highly invasive procedure by which blood flow is redirected through a
grafted vein; and minimally invasive angioplasty procedures such as balloon
angioplasty, stent implantations, atherectomy and laser angioplasty, all of
which improve blood flow by
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reshaping or removing the obstructing plaque. The treatment selected is
based primarily on the number of lesions and lesion characteristics found in
the arteries, including length, configuration, degree of calcification, and
location in the arteries.
BYPASS SURGERY. Bypass surgery involves the grafting of a vein to
redirect blood flow around an occluded artery. Bypass surgery is typically
performed when physicians determine that other less invasive procedures are
not likely to be effective. Of all currently available invasive treatments,
bypass surgery is by far the most invasive and the most traumatic.
PTCA. Percutaneous transluminal coronary angioplasty ("PTCA") is a
non-invasive medical procedure used to treat coronary artery disease, or
atherosclerosis, and is performed by interventional cardiologists. PTCA
works by increasing the size of the lumen of the diseased coronary artery,
thus increasing blood flow to the heart. Balloon angioplasty dilatation
catheters and stents are the principal products used for PTCA.
PTA. Percutaneous transluminal angioplasty ("PTA") is also a
non-invasive medical used to treat peripheral (lower limb) artery diseases
procedure, and is performed by interventional radiologists. PTA also works
by increasing the lumen of the diseased artery. Balloon angioplasty
dilatation catheters and stents are the principal products used for PTA.
Interventional Cardiovascular Techniques. SPNC's market is divided into
two segments: coronary artery lesions and lower limb artery lesions.
Angioplasty procedures in both the coronary and lower limb segments have been
strongly dominated by balloon angioplasty. However, the continuing problem
of long term restenosis (re-occlusion of the arteries) after interventional
treatments of lesions has encouraged scientists and medical device companies
to attempt to develop supplementary or substitute techniques in addition to
conventional balloon angioplasty. The following angioplasty techniques
require that a guidewire cross the lesion for these procedures to be employed.
Balloon Angioplasty. Balloon angioplasty is the most common minimally
invasive procedure for treating atherosclerosis. During the last decade
balloon angioplasty became the most common cardiovascular intervention. In
1997, there were approximately 1,000,000 coronary balloon angioplasty
procedures performed worldwide.1 Balloon angioplasty involves threading a
balloon-tipped catheter over a guidewire and into an artery through a small
incision in the patient's arm or leg. When positioned at a lesion, hydraulic
pressure is used to inflate the balloon to a particular diameter. The
atherosclerosis plaque (atheroma) is pushed aside within the vessel and the
artery is widened, thereby improving blood flow.
STENTS. The first intracoronary stents were approved by the FDA in
1994. Growing at 20 percent annually, it is estimated that more than 500,000
stents were implanted in patients in 1997.(1) The stent is a thin, slotted
tube or coil which acts as scaffolding to hold the artery open. The stent
procedure involves mounting a stent on a balloon catheter, threading the
balloon and stent across the lesion, and expanding the stent against the
vessel wall by inflating the balloon. The stent differs from other
angioplasty techniques in that it is permanently implanted.
ATHERECTOMY AND ROTABLATION. Atherectomy is another technique used to
treat coronary artery disease. This procedure involves removing atheroma from
the coronary lesion to help widen the artery. Rotational cutters and
rotational burrs are the most common atherectomy methods. This procedure
involves threading the atherectomy catheter over a guidewire to the lesion,
cutting the atheroma from the lesion site, and completing the procedure with
a balloon or stent. One device cuts away plaque and deposits it into an
attached canister. This device has been approved for a limited set of
coronary indications. A second atherectomy device utilizes a spinning burr
to grind away plaque and has received approval in a broad set of indications.
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(1) Amounts were estimated by the Company based on extrapolation from available
industry data. Patient population estimates are inherently subject to
uncertainties, and the Company is unable to determine with any degree of
certainty the number of such procedures for any indication or the number of
patients who are suitable for treatment using the various procedures.
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EXCIMER LASER ABLATION. Excimer laser ablation removes plaque by
delivering excimer laser energy to the lesion through a laser catheter.
Laser ablation involves the insertion of a laser catheter into an artery
through a small incision in the patient's leg. The catheter is advanced over
a guidewire to the location of the lesion. When the tip of the catheter has
reached the lesion, the physician activates the laser beam in order to ablate
the plaque.
Excimer laser energy uses electrically excited xenon chloride molecules
to generate a pulsed 308 nanometer wavelength ultraviolet laser beam. This
laser beam breaks the molecular bonds of plaque in a process known as thermal
and photo dynamic ablation, without significant thermal damage to surrounding
tissue. In order to improve blood flow, the physician generally follows a
laser angioplasty treatment with adjunctive balloon angioplasty. The laser
catheter is designed for ease of use and utilizes all the same ancillary
equipment required for a balloon procedure. The laser catheter is typically
smaller in size than other atherectomy devices, which results in smoother,
less traumatic access to the lesion site.
STRATEGY
SPNC is focusing on the niche indications in interventional angioplasty
therapy that allow it to demonstrate the clinical benefits of excimer laser
ablation by fulfilling unmet needs that are not satisfactorily met by balloon
angioplasty or current atherectomy devices. Key to SPNC's marketing success
is convincing physicians of the clinical applications of its excimer laser
technology. SPNC continues to present data gathered from clinical studies
and conduct peer-to-peer training with physicians from leading cardiovascular
centers.
PRODUCTS
CVX-300-Registered Trademark- Laser Unit. The CVX-300-Registered
Trademark- laser unit is a proprietary excimer laser designed specifically
for use in cardiovascular applications. When coupled with SPNC's fiber optic
laser devices, the system generates and delivers 308 nanometer wavelength
ultraviolet light pulses to a lesion in order to ablate plaque. The current
list price of the CVX-300-Registered Trademark- is $196,000. SPNC also
offers various financing options which include leasing and rental programs.
On February 19, 1993, FDA approved the SPNC CVX-300 excimer laser unit
and the 1.4 and 1.7 millimeter diameter laser catheters for the following six
indications for use in the treatment of coronary artery disease: saphenous
vein graft lesions, ostial lesions, long lesions, moderately calcified
stenosis, total occlusions, and lesions previously failed by balloon
dilatations.
Clinical results from the first 2,000 coronary procedures using the
laser system achieved approximately 90 percent clinical success rate. A
clinical success is defined as a reduction in the size of the lesion to less
than 50 percent of the diameter of the artery without heart attack, death, or
the need for emergency bypass surgery during hospitalization. SPNC believes
that the CVX-300-Registered Trademark- unit offers the following
characteristics:
REDUCED PROCEDURE TIME. Patient outcome audits, which compared
excimer laser procedures to balloon angioplasty and rotational atherectomy,
reveal the excimer laser method shortens procedure times and reduces
radiation exposure to the patient from fluoroscopic imaging used during the
procedure, thereby improving lab efficiency.
EASE OF USE. During a laser procedure, it may be necessary to adjust
laser energy output. The CVX-300-Registered Trademark- laser unit is
computer-controlled, which allows the physician to change energy levels
without interrupting the treatment to remove the catheter from the patient
for recalibration. This feature also enables the physician to begin the
procedure with the minimum level of energy required and, if necessary, to
adjust the energy level easily during the procedure.
SMALL SIZE. Space in cardiac catheterization labs is usually limited.
In addition, many hospitals have multiple catheterization labs. As a
result of a number of proprietary and patented laser and catheter design
features, the CVX-300-Registered Trademark- laser unit typically requires
five minutes for set up. This combination of
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features allows the CVX-300-Registered Trademark- laser unit to be
transported easily between laboratories within the hospital as needed.
DISPOSABLE LASER DEVICES. As an integral part of the excimer laser
system, SPNC has developed a broad selection of proprietary laser devices,
designed to meet physician needs and multiple indications for use.
Early laser catheters contained only a few large optical fibers to
transmit the laser energy. These early devices were stiff, had difficulty
accessing arterial anatomy, and suffered from poor ablation characteristics.
Current innovative laser catheter designs contain hundreds of very
small-in-diameter and flexible fibers that can access more difficult coronary
anatomy. The smaller fiber also produces a better laser energy distribution
at the tip of the catheter for improved ablation.
Laser catheters are designed to provide several advantages over other
atherectomy devices. These catheters, which SPNC produces in sizes ranging
from 1.4 to 2.0 millimeters in diameter, consist of concentric or eccentric
bundles of optical fibers mounted within a thin plastic extrusion. Fibers
are coupled to the laser using a patented intelligent connector design. This
design requires no adjustments by the physician. This connector provides
information about the device being used to the CVX-300-Registered Trademark-
laser unit computer, which controls the calibration cycle. During 1992, SPNC
acquired exclusive rights to a lubricious coating, which in certain catheter
lines reduces friction and enhances trackability and control of the device.
The catheter's combination of trackability, flexibility and ablation
characteristics enables the physician to access difficult-to-treat lesions.
SPNC's laser catheter product line includes the Extreme-Registered
Trademark- concentric catheter, Vitesse-TM- C concentric catheter and the
Vitesse-TM- E eccentric catheter. The refined construction of these
catheters is designed to provide improved trackability, reachability and
improved tactile feedback. These improvements are aimed at providing uniform
and precise ablation of plaque and more accurate catheter placement.
EXTREME-Registered Trademark- LASER CATHETER. In October 1993, the FDA
approved the Extreme-Registered Trademark- laser concentric catheter, which
was SPNC's first high performance coronary laser catheter. It is an
over-the-wire ("OTW") catheter which has enhanced flexibility and ablation at
lower energy settings, resulting in improved performance. Other catheter
features include the patented metal rim tip designed for visualization and
alignment and a proprietary lubricious coating for easier access. The
Extreme-Registered Trademark- laser catheter is available in 2.0mm tip
diameters.
VITESSE-TM- C LASER CATHETER. The Vitesse-TM- C laser catheter,
approved by the FDA in October 1994, is a rapid-exchange, concentric
catheter. Utilizing patented design technology, the Vitesse-TM- C can be
threaded onto and exchanged over a guidewire more conveniently than other OTW
models. It is also compatible with a wide range of guidewires. The
performance features seek to provide quicker procedures, ease of use, less
radiation exposure to the patient and lab staff, and requires only a single
operator. This catheter is available in 1.4mm, 1.7mm, and 2.0mm tip
diameters.
VITESSE-TM- E LASER CATHETER. The Vitesse-TM- E eccentric laser
catheter is SPNC's first directional coronary laser catheter. The 1.7mm
diameter catheter was FDA approved in July 1995, and the 2.0mm diameter
catheter was FDA approved in September 1997. This catheter utilizes an
eccentric fiber array at the tip that can be positioned by the operator to
selectively ablate plaque with multiple passes. Many coronary lesions are
eccentric in nature, and this catheter tip design is particularly suited for
this indication. The Vitesse-TM-E eccentric catheter is available in 1.7mm
and 2.0mm tip diameter.
In November 1994, SPNC also received ISO 9001 certification from the T-V
Product Service GmbH in Munich, Germany (European equivalent to the FDA)
which allowed SPNC to market its products in the European Community within
compliance of the EN 29 001/ISO 9001 and EN 46 001. As of March 1997, SPNC
has received CE mark registration for all of its products. The CE
(Communaute Europeene) mark indicates that a product is certified for sale
throughout the European Union and that the manufacturer of the product
complies with applicable safety and quality standards.
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CLINICAL DEVELOPMENT
In the pursuit of developing new applications to grow its angioplasty
business, SPNC is investing in gathering and publishing hard clinical
evidence of the success of excimer laser technology. SPNC is participating
in clinical trials for the following applications:
PERIPHERAL VASCULAR DISEASE. The prevalent treatment option for total
occlusions in the upper leg is bypass surgery, with amputation being required
for critical limb ischemia (occluded arteries) below the knee. Approximately
100,000 upper bypass surgeries and 75,000 amputations were performed in
1997.2 Laser catheters are being evaluated as an alternative treatment to
both bypass surgery and amputation. A European randomized, multicenter trial
was commenced in November 1996, comparing excimer laser angioplasty with
conventional guidewire, a special "step-by-step" excimer laser angioplasty
technique, and balloon angioplasty. The study compares three different PTA
treatments of chronic total occlusions longer than 10 centimeters in the
superficial femoral arteries. FDA approval was received in August 1997 to
commence testing at up to 10 U.S. medical institutions, and a randomized
trial at U.S. centers is scheduled to commence in the second quarter of 1998.
There can be no assurances, however, that the clinical trials using excimer
laser catheters to unblock peripheral arteries will result in favorable
success rates or, if the trials are successful, that SPNC will receive a PMA
for this device.
RESTENOSED STENTS. Since Johnson & Johnson Interventional Systems began
general distribution of the Palmaz-Schatz stent in 1994, the acceptance of
stents as a valuable treatment option is clearly reflected in its widespread
use. It is estimated that more than 500,000 stents were implanted in patients
in 1997.(2) However, between 20 and 30 percent of the stents, particularly
long stents, may develop blockages due to restenosis or plaque buildup, which
can lead to partial or total occlusion of the arteries. SPNC laser catheters
are currently being studied for use in debulking stents which have
restenosed.
In January 1998, SPNC received CE Mark approval in Europe to extend
usage of its excimer laser coronary angioplasty catheters to the treatment of
obstructed stainless steel coronary stents. This CE Mark approval was based
on a study conducted in the U.S. through the Cardiology Research Foundation
of the Washington Hospital Center in Washington, D.C., which involved 157
procedures between January 1994 and May 1996. The study compared the outcome
of traditional balloon-treated stent restenosis with the excimer-laser
approach with results from excimer laser ablation yielding a high procedural
success rate of 98.9 percent with infrequent complications of 1.1 percent.
SPNC has submitted a protocol to the FDA to conduct a formal study in the
U.S. There can be no assurances, however, that the clinical trials using
excimer laser catheters to debulk stents will result in favorable success
rates or, if the trials are successful, that SPNC will receive a PMA for this
device.
CHRONIC TOTAL OCCLUSIONS. Total occlusion of one of the arteries is a
common finding in angiographical diagnosis and typically cannot be treated
with interventional techniques due to the difficulty in placing a wire across
the lesion. Historically, chronic total occlusions of coronary arteries
could only be treated with bypass surgery since there were no effective
angioplasty techniques suitable for treating chronic total occlusions. SPNC
has developed a laser guidewire, the Prima-Registered Trademark-, which
allows laser energy to be used to assist in crossing total occlusions which
have been resistant to traditional mechanical guidewires. The wire is
shaped, steered and advanced similarly to a conventional coronary guidewire
with an additional benefit of laser energy to assist in crossing the total
occlusion.
A prospective, randomized trial was completed in Europe in June 1997,
and clinical results were presented at the European Society of Cardiology
Conference held in Stockholm, Sweden in August 1997. P. W. Serruys, SPNC's
principal investigator in the trial, presented data that showed the Prima
laser guidewire, when compared with non-laser mechanical guidewires,
increased by 35 percent the success rate of treating chronic coronary total
occlusions. The study also showed that use of the Prima laser guidewire does
not increase the risk of complications for patients. In April 1997, the FDA
approved the modifications of the ongoing U.S. study from a randomized study
to a prospective, self-controlled study. The study will enroll up to 120
patients and will evaluate
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(2) Ibid, p. 4.
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the use of the Prima laser guidewire to restore blood flow through a total
occlusion where other devices have failed. There can be no assurances,
however, that the clinical trials of the Prima-Registered Trademark- laser
guidewire will result in favorable success rates or, if the trials are
successful, that SPNC will receive a PMA for this device.
LEAD EXTRACTION
BACKGROUND
There are approximately 500,000 heart pacemaker lead implants performed
annually worldwide.(3) SPNC estimates that between 5 and 10 percent of these
leads may require removal at some time. It is also estimated that
approximately 10 percent of all lead implants are replacements for previously
implanted leads. Due to the difficulty of removing old leads, physicians
typically do not remove old leads unless they are life-threatening. Primary
methods available to remove implanted leads at this time include open-chest
surgery and transvenous extraction with plastic sheaths. The surgery option
is costly and can be traumatic to the patient. The percutaneous sheath
method is less invasive but requires mechanical force to extract leads
heavily embedded in scar tissue. Using excessive mechanical force to extract
the lead may result in damage to the cardiovascular system and may result in
the lead disassembling during the extraction procedure.
SPNC has designed a laser-assisted lead extraction device, or laser
sheath, to extract the implanted lead with minimal force. The laser sheath
uses excimer laser energy to cut through the scar tissue surrounding the lead
to facilitate removal. The device is basically a large lumen, fiber-optic
catheter, sized to fit over the implanted lead. The laser sheath is threaded
over the lead, advanced down the lead, and the laser is activated to ablate
through scar tissue at binding sites until the lead is free. The device uses
100 micron fiber technology for efficient ablation, patented fiber stranding
design for durability and flexibility, and metal rim tip design.
STRATEGY
In 1998, SPNC will focus on training and educating physicians with
regard to the laser sheath, not only in the proper use of the product but
also in the alternatives it offers to patients who must have leads replaced.
SPNC's objective in providing training and education programs is to establish
criteria for opinion leaders to adopt a new standard of care in lead removal.
Similar to SPNC's angioplasty business, SPNC continues to focus on providing
physicians with clinical data that will support their recommendations to
patients to use SPNC's laser sheath.
PRODUCTS
SPECTRANETICS 12 FR LASER SHEATH (SLS-TM-). The SLS is an
intra-operative device used to free a chronically implanted pacing or
defibrillator lead. The laser sheath consists of optical fibers arranged in
a circle, sandwiched between inner and outer polymer tubing. The fibers
terminate at the distal end within a polished tip and at the proximal end
within the coupler that connects to the excimer laser unit. At the distal
tip, the fibers are protected by inner and outer stainless steel bands, which
form a radiopaque marker. The inner lumen of the device is designed to allow
a pacing lead to pass through it, as the device slides over the lead towards
the tip of the lead in the heart. In December 1997, SPNC received FDA
approval for its 12 Fr SLS. In March 1997, SPNC received an EC Design
Examination Certificate for its lead extraction products which will allow
SPNC to market these products in Europe with the CE Mark.
- ---------------
(3) Ibid, p. 4.
Page 8
<PAGE>
CLINICAL DEVELOPMENT
Data from the clinical trials conducted through SPNC's Investigational
Device Exemption ("IDE") on the remaining members of the SLS family, 14 Fr
and 16 Fr devices, was submitted to the FDA in March 1998. The 14 Fr and 16
Fr SLS are designed to free larger diameter, chronically implanted pacemaker
and ICD leads. SPNC is awaiting final market approval on these devices.
There can be no assurance that SPNC's PMA for these devices will be approved.
SALES AND MARKETING
The sales goals of SPNC are to increase the present installed base of
excimer laser units and to increase the use of disposable devices. New
physicians and institutions will be introduced to the efficacy, safety, ease
of use and growing indications of excimer laser technology through published
studies of clinical applications. By leveraging the success of a physician
in one product application, SPNC hopes to promote the applicability of the
technology to specialists in different applications.
SPNC is striving to better understand the needs of its customers through
a market research program. Providing customers with answers about cost of
acquisition, use of the laser, and reimbursement codes is critical to the
education process. Through the following marketing and distribution
strategy, both in the U.S. as well as internationally, SPNC believes that it
will be positioned to capitalize not only on the core competency of excimer
laser technology in coronary angioplasty but also in lead extraction and in
other new areas of development for excimer laser technology.
SPNC DOMESTIC. There are over 1,000 interventional cardiac
catheterization laboratories in hospitals in the United States.(4) SPNC's
United States sales efforts focus on the major cardiac catheterization labs,
including teaching institutions which perform the majority of interventional
procedures. SPNC's United States sales and marketing team consists of
product managers, account managers, clinical specialists and medical
equipment service engineers.
SPNC is focused on expanding its product line, improving product
quality, and developing an appropriate infrastructure to support sales
growth. Since the use of excimer laser technology is highly specialized,
SPNC believes that its direct sales team must have extensive knowledge about
the products and the various physician groups they serve. SPNC's marketing
activities are designed to support its direct sales team and include
advertising and product publicity in trade journals, newsletters, continuing
education programs, and attendance at trade shows and professional
association meetings.
SPNC has developed a customer training program which utilizes major
cardiology centers around the United States. After initial customer
training, SPNC's field clinical specialists provide routine on-site customer
support, including reviewing clinical results, training new hospital
personnel and updating customers on new catheters and techniques.
SPNC's service engineers are responsible for installation of each laser
and participate in the training program at each site. SPNC provides a
one-year warranty which includes parts, service and replacement gas. SPNC
offers extended service to its customers pursuant to an annual service
contract or on a fee-for-service basis.
SPNC INTERNATIONAL. In Europe in 1997, there were approximately 250,000
balloon angioplasty procedures performed in approximately 450 interventional
cardiac catheterization laboratories.4 In 1993, SPNC began marketing and
selling its products internationally through Spectranetics International,
B.V., a wholly-owned subsidiary ("Spectranetics International"), as well as
through distributors. In 1997, Spectranetics International's revenues
totaled $3,755,000, or 17 percent of the Company's revenues. Currently, SPNC
has distributors in the following regions: Europe, South America, the Middle
East and Asia.
- ----------------
(4) Ibid, p. 4.
Page 9
<PAGE>
SPNC believes that in order to increase distribution of its products
internationally, it must establish a direct sales team in certain countries.
Due to the high level of experience required by the nature of its excimer
laser technology, SPNC believes that establishing a direct sales team will
provide better customer service and technical and regulatory support.
Foreign sales may be subject to certain risks, including export/import
licenses, tariffs, other trade regulations and foreign medical regulations.
Tariff and trade policies, domestic and foreign tax and economic policies,
exchange rate fluctuations and international monetary conditions have not
significantly affected SPNC's business to date. See "Risk Factors - Exposure
from International Operations."
STRATEGIC ALLIANCE
Angina is chest pain due to insufficient blood flow and oxygen delivery
to the heart muscle. More than 300,000 patients worldwide suffer from
chronic angina who are not candidates for traditional balloon angioplasty or
bypass surgery.(5) Transmyocardial revascularization ("TMR") is emerging as a
viable therapy for treating these patients by creating holes in the heart
muscle that are intended to increase the blood supply. SPNC entered into a
$6.1 million supply and license agreement with United States Surgical
Corporation in September 1997 pursuant to which United States Surgical
Corporation will purchase a modified CVX-300-Registered Trademark- laser unit
and disposable probes for use in TMR. SPNC is the exclusive supplier of
disposable probes for use in TMR with an excimer laser.
POLYMICRO TECHNOLOGIES, INC.
Polymicro, a wholly-owned subsidiary of SPNC and located in Phoenix,
Arizona, is a manufacturer of drawn silica glass products. Polymicro
revenues in 1997 totaled $7,182,000, or 33 percent of the Company's revenues.
POLYMICRO'S BUSINESS. Polymicro is engaged in the manufacture and
distribution of silica glass capillary tubing, optical fibers, precision
fused silica pieces, assemblies, and cables. Polymicro's products are
marketed to a number of industries in the domestic and international markets,
including separations, medical, process control, defense, aerospace, and
other special applications. Many products are custom-designed to meet
specific user needs. The development of new products and processes are funded
internally as well as through joint efforts with government and commercial
sectors. SPNC acquires fiber optics for its laser catheters from Polymicro.
Competition in Polymicro's marketplace is based on service, quality and
price. There are many companies competing in this market, some of which have
greater financial resources than Polymicro. Competitors include SpecTran
Corporation, CeramOptec GmbH, Fiberguide Industries Inc., and Galileo
Electro-Optics Corp.
POLYMICRO'S PRODUCTS
CAPILLARY TUBING. Capillary tubings are made with high purity,
synthetic-fused silica coated with polyimide plastics. Key features of the
tubing are chemical inertness, high flexibility, high strength, and the
ability to withstand high temperatures and pressures. The tubing is
manufactured to tight dimensional tolerances. Polymicro supplies various
sizes and configurations of capillary tubing used in analytical instruments.
Tubing for gas chromatography columns is supplied with three internal
diameters: 250, 320, and 530 micrometers ("um"). Tubing sizes for fluid
extraction and capillary electrophoresis range from 50um to 200um inner
diameters. Tubing can also be used to form flow restrictors for liquid and
gas chromatography, sizes range from 10um to 50um inner diameters.
OPTICAL FIBER. Optical fibers are hair-thin strands, usually made of a
glass "core" to transmit light energy and a bonded cladding on the central
"core" made of either glass or plastic material. Polymicro manufactures both
glass and plastic clad step-index, multimode silica core optical fibers, that
are sold in non-telephone markets. The
- ---------------
(5) Ibid, p. 4.
Page 10
<PAGE>
core sizes range from 40um to 1000um in diameter. These fibers are further
coated with materials such as polyimide, acrylate, silicones or aluminum in
single or multiple layers to preserve surface quality and inherent strength
of the glass.
CABLES, ASSEMBLIES. Polymicro pursues value added applications in the
medical, process control, aerospace, and industrial markets. Each product is
designed and built to meet the customer's requirements and specifications.
The assemblies involve a variety of custom and standard terminations and
jacketing materials in conjunction with Polymicro fibers and precision pieces.
PRECISION PIECES. Precision pieces are products made from rigid
capillary tubing or rod which is cut and machined into useful configurations.
Precision pieces generally range from 1mm to 4mm in diameter and in length
from 1mm to 25mm. These rods and tubing are assembled into configurations
designed by the customer.
GOVERNMENT REGULATION
In the United States, all medical devices are subject to FDA regulation
under the Medical Device Amendments of the Federal Food, Drug and Cosmetics
Act ("FFDCA") and are classified into one of three categories. The
CVX-300-Registered Trademark- laser unit and related devices are designated
as Class III devices. Class III devices are devices that are represented to
be life-sustaining or life-supporting, or that present potential unreasonable
risk of illness or injury. Class III devices are subject to the most
rigorous FDA approval process.
Premarket approval of a Class III device generally requires the
completion of three major steps. The first step involves the granting of an
IDE by FDA which permits the proposed product to be used in controlled human
clinical trials. Upon completion of a sufficient number of clinical cases to
determine the safety and effectiveness of the proposed product for specific
indications, a PMA is then prepared and submitted to FDA for review. The PMA
application must contain the results of the clinical trials, the results of
all relevant bench tests, laboratory and animal studies, a complete
description of the device and its components, and a detailed description of
the methods, facilities, and controls used to manufacture the device. In
addition, the submission must include the proposed labeling and promotional
literature. If the FDA determines that the PMA application is sufficiently
complete to permit a substantive review, the FDA will accept the application
for filing.
Once the submission is accepted for filing, the FDA begins an in-depth
review of the PMA, which represents the third major step in premarket
approval of a Class III device. An FDA review of a PMA application generally
takes one to two years from the date the PMA application is accepted for
filing, but may take significantly longer. The review time is often
significantly extended by the FDA asking for more information or
clarification of information already provided in the submission. During the
review period, an advisory committee, typically a panel of clinicians, will
likely be convened to review and evaluate the application and provide
recommendations to the FDA as to whether the device should be approved. FDA
is not bound by the recommendations of the advisory panel. Toward the end of
the PMA review process, the FDA will generally conduct an inspection of the
manufacturer's facilities to ensure that the facilities are in compliance
with applicable Good Manufacturing Practice ("GMP") requirements, which are
outlined under FDA's Quality System regulation. If the FDA's evaluations of
both the PMA application and the manufacturing facilities are favorable, the
FDA will either issue an approval letter or an approvable letter, which
usually contains a number of conditions that must be met in order to secure
final approval of the PMA. When and if those conditions have been fulfilled
to the satisfaction of the FDA, the agency will issue a PMA approval letter,
authorizing commercial marketing of the device for certain indications. If
the FDA's evaluations of the PMA application or manufacturing facilities are
not favorable, the FDA will deny approval of the PMA application or issue a
"not approvable" letter. The FDA may also determine that additional clinical
trials are necessary, in which case PMA approval may be delayed for several
years while additional clinical trials are conducted and submitted in an
amendment to the PMA. The PMA process can be expensive, uncertain and
lengthy and a number of devices for which FDA approval has been sought by
other companies have never been approved for marketing.
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<PAGE>
Modifications to a device that is the subject of an approved PMA, its
labeling, or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission
of the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered in the original PMA.
SPNC received its initial IDE to perform excimer laser percutaneous
coronary angioplasty in May 1989. In February 1991, SPNC submitted its PMA
application, which was accepted for filing by FDA in June 1991. On November
26, 1991, the Company's PMA was reviewed by a public advisory panel, and SPNC
received a recommendation for approval of the CVX-300-Registered
Trademark-laser unit and two sizes of its soft-rim catheters. As part of the
approval process, SPNC was inspected in October 1991 by FDA to verify its
compliance with GMP requirements. The final step in the approval process, the
issuance of a letter by FDA approving the application, occurred on February
19, 1993.
In October 1993, SPNC received approval for a PMA supplement for its new
Extreme-Registered Trademark- catheters. In October 1994, the FDA approved
SPNC's PMA supplement for its Vitesse-TM--C family of catheters. In July
1995, SPNC received PMA(S) supplement approval for a new inner catheter
tubing, its Vitesse-TM- E catheter, an upgraded CVX-300-Registered Trademark-
system software, and the cross-coupling of SPNC catheters on former LAIS
Dymer-Registered Trademark- 200+ laser systems. In September 1997, the FDA
approved SPNC's PMA(S) supplement for its Vitesse E 2.0mm diameter catheter.
In December 1997, the FDA approved SPNC's PMA for the 12 Fr SLS, or laser
sheath. There can be no assurance that FDA will approve the Company's current
or future PMA supplements on a timely basis or at all. The absence of such
approvals could have a material adverse impact on SPNC's ability to generate
future revenues.
Any products manufactured or distributed by the Company pursuant to FDA
approvals are subject to pervasive and continuing regulation by the FDA.
Device manufacturers are required to register their establishments and list
their devices with the FDA, and are subject to periodic inspections by the
FDA and certain state agencies. The FFDCA requires devices to be
manufactured in accordance with GMP requirements, which impose certain
process, procedure and documentation requirements upon the Company with
respect to product development, manufacturing and quality assurance
activities. FDA recently revised its GMP requirements. The new GMP
requirements, which are outlined under the FDA's Quality System regulation,
are more extensive than previous requirements. There can be no assurance
that the Company will be able to attain or maintain compliance with GMP
requirements.
In addition, the Medical Device Reporting ("MDR") regulation obligates
the Company to inform the FDA whenever there is reasonable evidence to
suggest that one of its devices may have caused or contributed to death or
serious injury, or where one of its devices malfunctions and, if the
malfunction were to recur, the device would be likely to cause or contribute
to death or serious injury. There can be no assurance that the FDA would
agree with the Company's determinations as to whether particular incidents
meet the threshold for MDR reporting.
Labeling and promotional activities are also subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. The FDA
actively enforces regulations prohibiting marketing of products for
unapproved uses.
Noncompliance with requirements under the FFDCA or the regulations
thereunder can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket approval, withdrawal
of marketing approvals, and criminal prosecution. The FDA also has authority
to request repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.
International sales of SPNC's products are subject to foreign
regulation, including health and medical safety regulations. The regulatory
review process varies from country to country. Many countries also impose
product standards, packaging and labeling requirements, and import
restrictions on devices. Exports of products that have been approved by the
FDA do not require FDA authorization for export. However, foreign countries
often require an FDA Certificate to Foreign Government verifying that the
product complies with FFDCA
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<PAGE>
requirements. To obtain a Certificate to Foreign Government, the device
manufacturer must certify to the FDA that the product has been granted
approval in the United States and that the manufacturer and the exported
products are in substantial compliance with the FFDCA and all applicable or
pertinent regulations. The FDA may refuse to issue a Certificate to Foreign
Government if significant outstanding GMP violations exist.
SPNC is subject to certain federal, state and local regulations
regarding environmental protection and hazardous substance controls, among
others. To date, compliance with such environmental regulations has not had
a material effect on SPNC's capital expenditures or competitive position.
See Risk Factors - "Costs and Uncertainty of Regulatory Compliance."
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. Consequently, SPNC expects intense competition to
continue in the marketplace. Although market competition includes
manufacturers of balloon angioplasty devices and stents, direct competition
comes from manufacturers of atherectomy devices. As a result of its
agreement with United States Surgical Corporation in 1997 to license and
supply its CVX-300-Registered Trademark- excimer laser units and disposable
fiber optic probes, SPNC will also compete with manufacturers of devices that
treat cardiovascular disease through transmyocardial revascularization. SPNC
also believes that it will experience increased competition in the future
from companies that will develop lead extraction devices or removal methods.
Balloon angioplasty is currently the most common therapy for the
treatment of atherosclerosis. SCIMED (a subsidiary of Boston Scientific
Corporation), Cordis (a subsidiary of Johnson & Johnson Interventional
Systems), ACS (a subsidiary of Guidant Corporation), Bard, and Schneider (a
subsidiary of Pfizer) 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. Cordis, SCIMED, ACS, Arterial Vascular
Engineering, and Medtronic are the leading stent providers in the United
States at this time. Manufacturers of atherectomy devices include Devices
for Vascular Intervention (a subsidiary of Guidant Corporation) and Heart
Technology, Inc. (a subsidiary of Boston Scientific Corporation). In 1996,
United States Surgical Corporation acquired an 80 percent interest in
Medolas, an excimer laser company in Germany. The companies currently
participating in clinical trials for transmyocardial revascularization are
CardioGenesis, Eclipse Surgical, PLC Systems, Inc., and AccuLase.
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. See "Risk Factors
- -Intense Competition."
PATENTS AND PROPRIETARY RIGHTS
SPNC holds 34 issued United States patents and 9 European patents, and
has 4 United States patent applications pending and 9 foreign patent
applications pending. There can be no assurance that any patents currently
applied for by SPNC will be granted or that any patents held by SPNC will be
valid or sufficiently broad to protect SPNC's technology or to provide it
with any competitive advantage. SPNC also relies on trade secrets and
unpatented know-how to protect its proprietary technology, and SPNC may be
vulnerable to competitors who attempt to copy SPNC's products or to gain
access to its trade secrets and know-how.
It is SPNC's policy to require its employees and consultants to execute
a confidentiality agreement upon the commencement of an employment or
consulting relationship with SPNC. Each agreement provides that all
confidential information developed or made known to the individual during the
course of the relationship will be kept confidential and not disclosed to
third parties except in specified circumstances. In the case of employees,
the agreements provide that all inventions developed by the individual shall
be the exclusive property of SPNC, other than inventions unrelated to SPNC's
business and developed entirely on the employee's own time. There can be
Page 13
<PAGE>
no assurance that these agreements will provide meaningful protection for
SPNC's trade secrets in the event of unauthorized use or disclosure of such
information.
SPNC is aware of certain patents covering basic areas of laser
technology which may be infringed by SPNC's products. SPNC has signed two
non-exclusive, royalty-bearing license agreements for patents covering basic
areas of laser technology. In addition, SPNC acquired an exclusive,
royalty-bearing license for a proprietary catheter coating.
Additional licenses held by SPNC include an exclusive license to patents
covering laser-assisted lead removal and an exclusive license relating to
certain aspects of excimer laser technology used by SPNC in its products.
Litigation, which could result in substantial cost to and diversion of
effort by SPNC, may be necessary to enforce patents issued to SPNC, to
protect trade secrets or know-how owned by SPNC or to determine the scope and
validity of the proprietary rights of others.
Should it be determined that SPNC must obtain licenses to such patents,
certain patents or proprietary technology, there can be no assurance that any
such licenses would be available on favorable terms or at all, or that SPNC
would be able to develop or otherwise obtain alternative technology. The
failure of SPNC to obtain necessary licenses would have a material adverse
effect on SPNC's ability to manufacture and sell its products. In addition,
the costs associated with lawsuits and obtaining such licenses could have a
significant negative effect on SPNC's cash resources and working capital.
See "Risk Factors - Uncertainty Related to Patents and Proprietary Rights."
RESEARCH AND DEVELOPMENT
From inception through 1988, SPNC's primary emphasis in research and
development was on the CVX-300-Registered Trademark- laser unit. Since 1988,
SPNC's research and development efforts have focused on refinement of the
CVX-300-Registered Trademark- laser unit and laser device technology. SPNC
is also exploring additional applications for the CVX-300-Registered
Trademark-laser unit and is developing advanced laser devices designed to
facilitate greater use in existing applications.
Substantially all of SPNC's research and development activities are
performed by SPNC's team of research scientists, engineers and technicians.
Research and development expense totaled approximately $2,243,000,
$1,684,000, and $1,371,000 in 1997, 1996, and 1995, respectively.
MANUFACTURING
SPNC assembles and tests its entire product line and has vertically
integrated a number of processes in an effort to provide increased quality
and reliability of the components used in the production process. Many of
the processes are proprietary and were developed by SPNC. SPNC believes that
its level of manufacturing integration allows it to control costs, quality
and process advancements, to accelerate new product development cycle time
and to provide greater design flexibility. Raw materials, components and
subassemblies used in SPNC's products are purchased from outside suppliers
and are generally readily available from multiple sources
SPNC's manufacturing facilities are subject to periodic inspections by
regulatory authorities, including GMP compliance inspections by the FDA and
the T-V. SPNC has undergone four inspections by the FDA for GMP compliance
since 1991. Each inspection resulted in a limited number of noted
deficiencies, to which SPNC believes it has provided adequate responses.
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<PAGE>
THIRD-PARTY REIMBURSEMENT
SPNC's CVX-300-Registered Trademark- laser unit and related fiber-optic
laser devices are generally procured by hospitals, which then bill various
third-party payors for the health care services provided to their patients.
These payors include Medicare, Medicaid and private insurance payors. The
Medicare Program reimburses hospitals based on a predetermined amount per
discharge for inpatient hospital services identified by the diagnosis-related
group ("DRG") into which each case is classified.
At present, many of SPNC's customers using the CVX-300-Registered
Trademark- for laser angioplasty are obtaining reimbursement under the same
DRG as for complex balloon angioplasty. Lead removal procedures using the
SLS-TM-are reimbursed using the same DRG's for non-laser lead removal or lead
removal replacement. SPNC expects that its customers will continue to do so
in the near term. Medicare payments of physicians' surgical fees are based
on a fee schedule based on a resource-based relative value scale that rates
the value of physicians' work for a particular service in relation to the
value of work for other services. The basic excimer laser ablation procedure
third-party reimbursement for hospital and physician charges ranges from
approximately $6,000 to $14,000. This amount is generally adequate to cover
the cost of a laser ablation procedure. Actual charges may be significantly
higher and vary depending on the complexity of the procedure, age of the
patient, and geographical location.
Capital costs for medical equipment purchased or leased by hospitals are
currently reimbursed separately from DRG payments. SPNC expects lower
Medicare reimbursement rates in 1998 as compared to previous years. Such
reductions could have an adverse impact on reimbursements to hospitals for
the capital cost of the CVX-300-Registered Trademark- laser unit and,
consequently, the ability of SPNC to sell its laser unit. While SPNC
believes that a laser angioplasty procedure offers a less costly alternative
for the treatment of certain types of heart disease, there can be no
assurances that the procedure will be viewed as cost effective under changing
reimbursement guidelines or other health care payment systems. See "Risk
Factors - Limitations on Third-Party Reimbursement."
PRODUCT LIABILITY AND INSURANCE
The Company's business entails the risk of product liability claims.
The Company maintains product liability insurance in the amount of $5,000,000
per occurrence with an annual aggregate maximum of $5,000,000. There can be
no assurance, however, that product liability claims will not exceed such
insurance coverage limits or that such insurance coverage limits will
continue to be available on acceptable terms, or at all. See "Risk Factors -
Product Liability and Sufficiency of Insurance Coverage."
EMPLOYEES
As of March 1, 1998, the Company had 193 employees, including 8 in
research and development, 58 in manufacturing and 60 in marketing, sales and
administration, as well as 54 at Polymicro. The Company believes that the
success of its business will depend, in part, on its ability to attract and
retain qualified personnel. The Company believes that its relationship with
its employees is good.
ITEM 2. PROPERTIES
FACILITIES
SPNC leases a total of approximately 49,300 square feet in three
buildings in Colorado Springs, Colorado. These facilities contain
approximately 15,000 square feet of manufacturing space and approximately
22,000 square feet devoted to marketing, research and administrative
activities. SPNC has renewed the building lease through December 2000 and
believes that these facilities are adequate to meet its requirements through
1998.
Spectranetics International B.V. leases 4,890 square feet in Nieuwegein,
The Netherlands. The facility houses SPNC's operations for the marketing and
distribution of products in Europe.
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<PAGE>
Polymicro leases approximately 30,000 square feet in Phoenix, Arizona,
and has options for an additional 20,000 square feet at such location. The
facility is leased through 1998, with two five-year renewal options.
Management believes that the facility will be adequate to meet Polymicro's
current and reasonably foreseeable future requirements through the initial
five-year lease term.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is traded on the over-the-counter market
under The Nasdaq National Market symbol "SPNC". The table below sets forth
the high and low sales prices for the Company's Common Stock as reported on
The Nasdaq National Market for each calendar quarter in 1996 and 1997. These
over-the-counter quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not necessarily represent the
sales prices in actual transactions.
<TABLE>
HIGH LOW
---------- ---------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
1st Quarter . . . . . . . . . . $ 3.625 2.375
2nd Quarter . . . . . . . . . . 7.688 2.688
3rd Quarter . . . . . . . . . . 6.500 3.875
4th Quarter . . . . . . . . . . 5.813 3.375
YEAR ENDED DECEMBER 31, 1997
1st Quarter . . . . . . . . . . $ 5.563 2.563
2nd Quarter . . . . . . . . . . 3.313 1.375
3rd Quarter . . . . . . . . . . 5.938 2.313
4th Quarter . . . . . . . . . . 5.500 2.875
</TABLE>
The Company has not paid cash dividends on its Common Stock in the past
and does not expect to do so in the foreseeable future. The payment of
dividends in the future will be at the discretion of the Board of Directors
and will be dependent upon the Company's financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors deems relevant.
The closing sales price of the Company's Common Stock on March 6, 1998
was $3.28. On March 6, 1998, the Company had approximately 878 shareholders
of record.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data of the
Company as of and for each of the years in the five-year period ended
December 31, 1997, are derived from the Company's consolidated financial
statements. The information set forth below should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10-K and the
Consolidated Financial Statements and Notes thereto. The selected historical
consolidated financial data presented below as of December 31, 1997 and 1996
and for each of the years in the three-year period ended December 31, 1997,
has been derived from the Company's audited financial statements also
included elsewhere herein. The selected historical consolidated financial
data presented below as of December 31, 1995, 1994 and 1993 and for the
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years ended December 31, 1994 and 1993 are derived from, and are qualified by
reference to, audited financial statements of the Company not included herein.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
Years Ended December 31,
---------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (for the period):
Revenues . . . . . . . $ 21,878 $ 20,679 $ 17,282 $ 11,413 $ 8,074
Cost of revenue . . . . 11,263 10,418 9,502 7,756 7,878
Marketing and sales . . 7,926 6,291 5,338 5,697 5,558
General and
administrative . . . . 5,248 4,022 3,870 3,425 4,003
Research and development
. . . . . . . . . . . . 2,243 1,684 1,371 1,419 3,647
Purchased research and
development . . . . . . --- --- --- 4,391 ---
--------- --------- --------- --------- ---------
Operating loss . . . . (4,802) (1,736) (2,799) (11,275) (13,012)
Other income, net . . . 182 369 580 547 462
--------- --------- --------- --------- ---------
Net loss . . . . . . . $ (4,620) $ (1,367) $ (2,219) $(10,728) $(12,550)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Loss per share . . . . $ (.25) $ (.07) $ (0.12) $ (0.74) $ (1.28)
Weighted average common
shares outstanding . 18,654 18,430 18,331 14,564 9,837
December 31,
---------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (at
end of period):
Working capital . . . . $ 7,587 $ 8,787 $ 8,301 $ 8,433 $ 13,112
Cash, cash equivalents,
and securities . . . 8,590 7,150 7,047 8,165 11,644
Equipment, net . . . . 3,906 3,486 3,952 5,025 2,510
Total assets . . . . . 25,325 23,039 25,013 28,893 19,755
Long-term debt including
capital lease
obligations, net of
current portion . . . 1,387 465 725 1,729 760
Shareholders' equity . 14,063 18,510 19,747 21,870 15,944
Book value per common
share outstanding . . $ .75 $ 1.00 $ 1.08 $ 1.20 $ 1.61
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
SPNC develops, manufactures, services and distributes an excimer laser
unit and fiber optic delivery devices for the treatment of certain coronary
and vascular conditions. The Company's wholly-owned subsidiary, Polymicro
Technologies, Inc., manufactures and distributes drawn silica glass products
which include capillary tubing and specialty fiber optics sold to a variety
of companies in addition to Spectranetics.
SPNC's revenues are dependent on obtaining clinical data supporting
regulatory approvals and market acceptance. SPNC sells the only excimer
laser system that has been market approved by the FDA in the United States
for coronary applications. Its laser system competes primarily against
alternative technologies including balloon dilatation catheters,
cardiovascular stents and mechanical artherectomy devices.
SPNC's strategy is to develop additional procedures for its excimer
laser system. In 1997, SPNC secured FDA approval to use its excimer laser
system for removal of pacemaker and defibrillator leads and entered into a
supply and license agreement with United States Surgical Corporation for use
of its system for transmyocardial revascularization, an experimental coronary
procedure. In 1998, SPNC is sponsoring clinical trials evaluating the
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use of its excimer laser system to treat restenosed stents, occluded arteries
in the leg and totally occluded coronary arteries.
To fund its strategy, SPNC intends to continue to accelerate investment
in the development of new products and in clinical trials for additional
applications as well as sales and marketing resources. This investment can
be expected to result in operating losses through 1998.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997, COMPARED WITH YEAR ENDED DECEMBER 31,
1996. Revenues for the year ended December 31, 1997 totaled a record
$21,878,000, an increase of 6% over 1996 revenues of $20,679,000. Laser
revenues increased 13% over 1996, led by sales of laser systems to United
States Surgical Corporation, which represented 6% and 3% of consolidated
revenues for the years ended December 31, 1997 and 1996, respectively.
Disposable catheter revenues increased 5%, driven by revenues related to
SPNC's laser sheath. Other revenues, from Polymicro, service, and custom
products, increased 3% over 1996. Revenues from Spectranetics International,
B.V. represented 17% and 22% of consolidated revenues for the years ended
December 31, 1997 and December 31, 1996, respectively. The functional
currency of Spectranetics International, B.V. is the Dutch guilder. All
revenue and expense accounts are translated to U.S. dollars in the
consolidated statements of operations using weighted average exchange rates
during the year. Fluctuation in the Dutch guilder currency rate during the
year ended December 31, 1997 as compared to the year ended December 31, 1996
caused a decrease in revenues of $598,000, or 3%.
Gross margin was 49% for the year ended December 31, 1997, compared to
50% for the same period in 1996.
Marketing and sales expenses totaled $7,926,000 for the year ended
December 31, 1997, an increase of 26% over the 1996 expense level of
$6,291,000. The increase is attributed primarily to increased staffing costs
combined with increased marketing activities associated with conventions,
workshops, and marketing materials.
General and administrative expenses totaled $5,248,000 for the year
ended December 31, 1997, an increase of 30% over 1996 expenses of $4,022,000.
The increase is due primarily to increased staffing costs incurred as SPNC
builds the infrastructure necessary to support investor relations, finance,
and administrative activities.
Research and development expenses totaled $2,243,000 for the year ended
December 31, 1997, an increase of 33% over 1996 expenses of $1,684,000. The
increase is due primarily to increased clinical study costs associated with
the retrospective clinical study of the use of excimer lasers in restenosed
stents and the European clinical study of the use of excimer lasers for the
crossing of chronic total occlusions. There were also increases in staffing
as SPNC increases its research and development efforts as part of its
strategy to expand the application of its excimer laser technology.
Continued increases in operating expenses are expected as SPNC
aggressively pursues existing and potential markets for its technology.
Fluctuation in the Dutch guilder currency rate during the year ended December
31, 1997 as compared to the year ended December 31, 1996 caused a decrease in
expenses of $451,000, or 4%.
Other income decreased $187,000, or 51%, primarily due to a 1996
adjustment which reversed an estimate that was accrued in connection with the
merger with Advanced Inverventional Systems. No such adjustments were
recorded in other income for the year ended December 31, 1997. Additionally,
interest income decreased as a result of a decrease in the average balance of
investment securities held during the respective periods.
Net loss for 1997 was $4,620,000, or $0.25 per share, as compared to
$1,367,000, or $0.07 per share, during 1996.
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YEAR ENDED DECEMBER 31, 1996, COMPARED WITH YEAR ENDED DECEMBER 31,
1995. Revenue for the year ended December 31, 1996 was $20,679,000, an
increase of 20% over 1995 revenues of $17,282,000. The increase is primarily
due to sales of SPNC's laser sheath and total occlusion catheters for use in
ongoing clinical trials, combined with increased sales of FDA market-released
catheters. Sales from SPNC International B.V. represented 22% of total sales
in 1996 as compared to 25% in 1995. The functional currency of SPNC
International B.V. is the Dutch guilder. All revenue and expense accounts
are translated to U.S. Dollars in the consolidated financial statements using
average exchange rates during the year. Fluctuation in the Dutch guilder
currency rate during the year ended December 31, 1996 as compared to the year
ended December 31, 1995 caused a decrease in revenues of $302,000, or 2%.
Cost of revenue in 1996 was 50% of revenues in 1996 as compared to 55%
in 1995. The resulting improvements in gross margins is primarily due to
economies of scale achieved as a result of increased manufacturing volumes,
primarily in the area of catheter manufacturing.
Marketing and sales expense in 1996 of $6,291,000 was up 18% over
$5,338,000 in 1995. Increased expense was primarily due to commission on
product sales and personnel expenses associated with the Company's efforts to
further the market acceptance of its products. Research and development
expense increased by $313,000 to $1,684,000 in 1996 over $1,371,000 during
1995. This increase was due primarily to increased expense associated with
clinical trials for the laser sheath and total occlusion device.
General and administrative expense in 1996 increased 4% from $3,870,000
in 1995 to $4,022,000 in 1996. Increased administrative cost was due to
increased corporate activity. Fluctuation in the Dutch guilder currency rate
during the year ended December 31, 1996 as compared to the year ended
December 31, 1995 caused a decrease in total operating expenses of $167,000,
or 2%.
Interest income decreased $118,000, or 27%, from 1995 as a result of
lower investment yields combined with a decrease in the average balance of
investment securities held during the respective periods. Other income
decreased $114,000, or 54%, for 1995. Other income in 1995 of $212,000
consisted primarily of adjustments made to the estimated value of assets and
liabilities received in the merger with Advanced Interventional Systems
("LAIS"). An adjustment of this nature was recorded in 1996; however, the
amount was significantly lower.
Net loss for 1996 was $1,367,000, or $0.07 per share, compared with a
loss of $2,219,000, or $0.12 per share, in 1995.
INCOME TAXES. At December 31, 1997, the Company has net operating loss
carryforwards (NOL's) for federal income tax purposes of approximately
$87,300,000 which are available to offset future federal taxable income, if
any, and expire at varying dates through 2012. The losses generated by the
Company and a portion of the losses generated by LAIS prior to the merger
cannot be used to offset future taxable income of Polymicro due to the
separate limitation year (SRLY) rule. Additionally, the annual use of these
net operating loss and alternative minimum tax carryforwards is limited under
Section 382 of the Internal Revenue Code of 1986, due to a change in control
which resulted from the issuance of shares upon completion of the Company's
initial public offering on January 28, 1992. The losses generated by the
group subsequent to the merger are not subject to limitation by the SRLY
rules or Section 382. No benefit for the NOL's has been recognized by the
Company for the years ended December 31, 1997, 1996, and 1995, due to
uncertainty as to their recoverability.
The Company also has research and development tax credit carryforwards
at December 31, 1997 for federal income tax purposes of approximately
$3,200,000 which are available to reduce future federal income taxes, if any,
and expire at varying dates through 2012. The annual use of portions of the
research and development credit carryforwards is also limited under Section
382.
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LIQUIDITY AND CAPITAL RESOURCES. As of December 31, 1997, the Company
had cash, cash equivalents, and securities of $8,590,000 compared to
$7,150,000 at December 31, 1996. The increase of $1,440,000 is primarily due
to increased cash flow from operations of $1,182,000 combined with a
$1,094,000 increase associated with cash flow from financing activities
offset by cash used of $767,000 from capital expenditures. The increased
cash flow from operations is primarily attributable to total cash received
under the supply and license agreement with United States Surgical
Corporation amounting to $6,339,000. Revenue recognized related to the
agreement totaled $1,244,000 and the remaining balance of $5,095,000 has been
recorded within current and long-term deferred revenue based on the expected
timing of future shipments.
During 1997, the Company entered into an agreement with Silicon Valley
Bank for a credit line of $5,000,000. As of December 31, 1997, $1,100,000
was drawn on the line of credit and is included in cash and cash equivalents.
Of the $3,900,000 available for future financing needs, $900,000 may be used
for capital equipment purchases and $3,000,000 for general business purposes.
At December 31, 1997, 1996, and 1995, SPNC placed a number of systems on
rental, loan and fee per procedure programs. A total of $1,441,000,
$1,473,000, and $1,549,000 of laser units were capitalized for equipment held
for rental or loan for the years ended December 31, 1997, 1996, and 1995,
respectively, and are being depreciated over three to five years. This
equipment was transferred from SPNC's inventory at cost. SPNC 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 December 31, 1997 is sufficient to meet its operating
and capital requirements through 1998. Revenue increases from current levels
will be necessary to sustain the Company over the longer term.
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
("EPS") previously found in APB Opinion No. 15, EARNINGS PER SHARE, and makes
them comparable to international EPS standards. It replaces the presentation
of primary and fully diluted with a presentation of basic and diluted EPS.
See Note 1 to Consolidated Financial Statements.
YEAR 2000 COMPLIANCE
Currently, many computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such
"Year 2000" requirements. The Company and third parties with which the
Company does business rely on numerous computer programs in their day-to-day
operations. The Company is evaluating the Year 2000 issue as it relates to
the Company's internal computer systems and third party computer systems with
which the Company interacts. The Company expects to incur internal staff
costs as well as consulting and other expenses related to these issues; these
costs will be expensed as incurred. In addition, the appropriate course of
action may include replacement or an upgrade of certain systems or equipment
at a substantial cost to the Company. There can be no assurance that the
Year 2000 issues will be resolved in 1998 or 1999. The Company may incur
significant costs in resolving its Year 2000 issues. The Company does not
expect the Year 2000 issue to have a significant adverse impact on the
Company's business, operating results and financial condition.
RISK FACTORS
The Company's business, results of operations, and financial condition
are, and will continue to be, subject to the following risks:
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CONTINUED LOSSES. The Company has incurred net losses since inception
in June 1984. The Company anticipates that net losses will continue in the
foreseeable future. There can be no assurance that the Company will be able
to achieve increased sales or profitability.
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS. Results of operations for
the Company have varied and may continue to fluctuate significantly from
quarter to quarter and will depend upon numerous factors, including timing of
regulatory approvals, market acceptance of products and new product
introductions, implementation of health care reforms, changes in product mix
between laser units and catheters, ability to manufacture products
efficiently and competition from other technologies.
LACK OF LIQUIDITY. While the Company believes that it has sufficient
cash liquidity to execute its plans through 1998, in order for cash flow from
operating activities to be sufficient to sustain the Company operations over
the long term, the Company must achieve increases in sales and maintain
control over expenses. There can be no assurance that such increases in
sales or control in expenses will occur or that they will be sufficient to
maintain adequate cash to continue operations.
NO ASSURANCE THAT THE COMPANY WILL BE ABLE TO OBTAIN ADDITIONAL
FINANCING. The Company may require additional financing in the future. Such
financing, if required, may not be available on satisfactory terms, or at
all. If the Company is unable to obtain sufficient funding from other
sources on terms and prices acceptable to the Company, the Company's ability
to make capital expenditures, compete effectively and withstand the effects
of adverse market and economic conditions may be significantly impaired.
Furthermore, 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
shareholders may suffer dilution in net tangible book value per share.
LIMITED OPERATING HISTORY; LIMITED MANUFACTURING EXPERIENCE. The
Company has a limited history of operations. SPNC received PMA approval from
the FDA for its CVX-300-Registered Trademark- laser unit in 1993.
Accordingly, The Company does not have substantial experience in
manufacturing, marketing or selling its products in commercial quantities.
The Company may encounter difficulties in scaling up production of laser
units and catheters and hiring and training additional qualified
manufacturing personnel. The occurrence of difficulties as the Company
increases production volumes could lead to quarterly fluctuations in
operating results and have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAIN MARKET ACCEPTANCE. Excimer laser angioplasty technology is a
relatively new procedure which competes with more established therapies,
including balloon angioplasty, stent implantation and bypass surgery, and
other evolving technologies, such as atherectomy and non-excimer laser
technologies. The cost of the CVX-300-Registered Trademark- laser system is
significantly greater than the cost of therapeutic capital equipment required
with balloon angioplasty, stent implantation and atherectomy procedures, and
the cost of SPNC's catheters is greater than the cost of balloon angioplasty
catheters. In addition, because excimer laser procedures are often followed
by balloon angioplasty, the cost of an excimer laser angioplasty can be
significantly greater than balloon angioplasty alone. Market acceptance of
the laser angioplasty system also will depend, in part, on SPNC's ability to
establish with the medical community the clinical efficacy of excimer laser
angioplasty.
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 the Company's business, financial condition and results of
operations.
DEPENDENCE ON SINGLE PRODUCT LINE. A significant percentage of the
Company's revenue 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-. Consequently, the Company is dependent on the
successful development and commercialization of the CVX-300-Registered
Trademark-
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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 the Company'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 comes from manufacturers of atherectomy devices. As a result of
its agreement with United States Surgical Corporation in 1997 to license and
supply its CVX-300-Registered Trademark- excimer laser units and disposable
fiber optic probes, SPNC expects competition from manufacturers of devices
that treat transmyocardial revascularization. SPNC also believes that it will
experience increased competition in the future from companies that will
develop lead extraction devices or removal methods.
Balloon angioplasty is currently the most common therapy for the
treatment of atherosclerosis. SCIMED (a subsidiary of Boston Scientific
Corporation), Cordis (a subsidiary of Johnson & Johnson Interventional
Systems), ACS (a subsidiary of Guidant Corporation), Bard, and Schneider (a
subsidiary of Pfizer) 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. Cordis, SCIMED, ACS, Arterial Vascular
Engineering, and Medtronic are the leading stent providers in the United
States at this time. Manufacturers of atherectomy devices include Devices
for Vascular Intervention (a subsidiary of Guidant Corporation) and Heart
Technology, Inc. (a subsidiary of Boston Scientific Corporation). In 1996,
United States Surgical Corporation acquired an 80 percent interest in
Medolas, an excimer laser company in Germany. The companies currently
participating in clinical trials for transmyocardial revascularization are
CardioGenesis, Eclipse Surgical, PLC Systems, Inc., and AccuLase.
SPNC believes that the primary competitive factors in the interventional
cardiovascular market are: the ability to treat safely and effectively a
variety of lesions; the impact of managed care practices and procedure costs;
ease of use; and research and development capabilities.
There can be no assurance that SPNC current and future competitors will
not develop technologies and products that are more effective in treating
cardiovascular disease than SPNC's current products or future products, and
that SPNC technologies and products would not be rendered obsolete by such
developments.
UNCERTAINTY OF IMPACT OF HEALTH CARE REFORM. The federal government and
certain states have already implemented or are considering legislation to
effect health care reforms. In addition, other legislative and industry
groups are studying various health care issues. The ultimate timing or
effect of any such health care reforms on SPNC cannot be predicted and no
assurance can be given that any such reforms will not have a material adverse
effect on the Company's revenues and earnings. Short-term cost containment
initiatives may vary substantially from long-term reforms and may impact SPNC
differently.
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT. The CVX-300-Registered
Trademark- laser unit is generally purchased by hospitals, which then bill
various third-party payors, such as government programs and private insurance
plans, for the health care services provided to their patients. Unlike
balloon angioplasty and atherectomy, laser angioplasty requires the purchase
of expensive capital equipment. The FDA has required that the label for the
CVX-300-Registered Trademark- laser unit indicate that adjunctive balloon
angioplasty was performed in the majority of the procedures submitted to the
FDA in SPNC's application for PMA. This will require the purchase of both a
laser catheter and a balloon catheter. Payors may deny reimbursement for
procedures they believe to be duplicative. Payors may also deny
reimbursement if they determine that a device used in a procedure was
experimental, was used for a non-approved indication, or was not used in
accordance with established pay protocols regarding cost effective treatment
methods. There can be no assurance that laser angioplasty using the
CVX-300-Registered Trademark- laser unit will be considered cost effective by
third-party payors, that reimbursement will be available or, if available,
that payors' reimbursement policies will not adversely affect SPNC's ability
to sell its products on a profitable basis. There are increasing pressures
from many payor sources to control health care costs. In addition, there are
increasing pressures from
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public and private payors to limit increases in reimbursement rates for
medical devices. The market for SPNC's products and the levels of revenues
and profitability could also be adversely affected by changes in governmental
and private third-party payors' policies or by recent federal legislation
that reduces reimbursements under the capital cost pass-through system for
the Medicare program.
COSTS AND UNCERTAINTY OF REGULATORY COMPLIANCE. SPNC's products and
manufacturing activities are subject to vigorous regulation by the FDA and
comparable state and foreign agencies. The process of complying with these
regulations can be costly and time consuming. Failure to comply with
applicable regulatory requirements can result in, among other things, fines,
suspensions of approvals, seizures or recalls of products, operating
restrictions and criminal prosecutions. Furthermore, changes in existing
regulations or adoption of new regulations could prevent SPNC from obtaining,
or affect the timing of, future regulatory approval. SPNC has filed PMA
supplements. There can be no assurance that the FDA will approve SPNC's
current or future PMA supplements on a timely basis or at all. The absence
of such approvals could have a material adverse effect on SPNC's ability to
generate future revenues.
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain approval for sale internationally may be longer or
shorter than that required for FDA approval, and the requirements may differ.
As of March 1997, SPNC has received CE mark registration for all of its
products. There are no assurances that SPNC will be able to obtain CE mark
for its products in the future. In addition, significant costs and requests
for additional information may be encountered by SPNC in its efforts to
obtain regulatory approvals. Any such events could substantially delay or
preclude SPNC from marketing its products internationally.
TECHNOLOGICAL CHANGE RESULTING IN PRODUCT OBSOLESCENCE. Market
acceptance and sales of SPNC products also could be adversely affected by
technological changes. The health care industry is characterized by rapid
technological progress. New developments are expected to continue at an
accelerated pace in both industry and academia. Many companies, some of
which have substantially greater resources than SPNC, are engaged in research
and development with respect to methods of treatment and prevention of
coronary artery disease. These include pharmaceutical approaches as well as
development of new or improved angioplasty, atherectomy or other devices.
SPNC products could be rendered obsolete as a result of future innovations in
the treatment of coronary artery disease.
UNCERTAINTY RELATED TO PATENTS AND PROPRIETARY RIGHTS. The Company
holds patents, has licenses to use patents and has patent applications
pending. There can be no assurance that any patents currently applied for by
the Company will be granted or that any patents held by the Company will be
valid or sufficiently broad to protect the Company technology or to provide
it with any competitive advantage or will not be challenged or circumvented
by competitors. Termination of the licenses granted to the Company 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 the Company. The Company has received
notice from other parties regarding the existence of certain patents
involving the use of lasers in the body. Although the Company 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 the Company 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 the Company. Adverse findings
in any proceeding could subject the Company to significant liability to third
parties, require the Company to seek licenses from third parties and
adversely affect the ability of the Company to manufacture and sell its
products.
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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 to gain access to its trade secrets and
know-how.
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 joined the Company within the last
year. Moreover, certain members of such management team have limited or no
experience as a senior executive of a public corporation. There can be no
assurance that the management team will operate together effectively. To
compete successfully against current and future competitors, complete
clinical trials in progress, prepare additional products for clinical trials
and develop future products, the Company believes that it must continue to
expand its operations, particularly in the areas of research and development,
sales and marketing, training, and manufacturing. If the Company were to
experience significant growth in the future, such growth would likely result
in new and increased responsibilities for management personnel and place
significant strain upon the Company's management, operating and financial
systems and resources. To accommodate such growth and compete effectively,
the Company must continue to implement and improve information systems,
procedures and controls, and to expand, train, motivate and manage its
workforce. There can be no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support the Company's future
operations. Any failure to implement and improve the Company's operational,
financial and management systems or to expand, train, motivate or manage
employees could materially and adversely affect the Company's business,
financial condition and results of operations.
POTENTIAL ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS,
THE RIGHTS AGREEMENT AND THE DELAWARE GENERAL CORPORATION LAW. The Company's
Certificate of Incorporation and Bylaws, the Rights Agreement dated as of May
6, 1996, between the Company and Norwest Bank of Minnesota, N.A. (the "Rights
Agreement") and the Delaware General Corporation Law (the "DGCL") contain
certain provisions that could have the effect of delaying, deferring or
preventing an unsolicited change in the control of the Company, which may
adversely affect the market price of the Company's common stock or the
ability of shareholders to participate in a transaction in which they might
otherwise receive a premium for their shares over the then current market
price.
The Company has a Board of Directors in which directors are elected
for staggered three-year terms. This 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. The Company's Certificate of
Incorporation authorizes the Board of Directors to issue up to five million
shares of preferred stock of 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. Although no shares of
preferred stock are currently outstanding and the Company has no present
plans to issue any shares of preferred stock, the rights of the holders of
common stock will be subject to, and may be adversely affected by, the rights
of holders of preferred stock that may be issued in the future.
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The Company's Certificate of Incorporation and Bylaws provide that
special meetings of shareholders may be called only by the Board of Directors
or a committee of the Board of Directors or as may otherwise be specifically
provided in the Certificate of Incorporation. This provision may limit the
ability of the Company's shareholders to take actions not supported by the
Board of Directors. The Company's Bylaws may be adopted, amended or repealed
by the Board of Directors or by the affirmative vote of a majority of the
outstanding shares of the Company's common stock entitled to vote. The
ability of the Board of Directors to amend the Bylaws to increase the number
of directors may make it more difficult for the shareholders to change control
of the Board of Directors.
In connection with the Rights Agreement, rights have been issued (and
will be issued for any newly outstanding common stock) to holders of the
outstanding shares of common stock of the Company which, in certain
circumstances, give the shareholders of the Company the right to purchase
shares of preferred stock which will entitle the holder thereof to certain
dividend, voting and liquidation rights that 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. Section 203 of the DGCL prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested
shareholder for a period of three years after the date of the transaction in
which the person became an interested shareholder, unless certain conditions
are met, and may impact the ability of certain shareholders to effect
business combinations with the Company.
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 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 25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements and the Financial Statement
Schedule appearing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
the information set forth under the caption "Proposal 1 -- Election of
Director" and "Executive Officers of the Company" of the registrant's
definitive Proxy Statement to be used in connection with its 1998 Annual
Meeting of Shareholders, to be filed with the Securities and Exchange
Commission on or prior to April 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information set forth under the caption "Executive Compensation" of the
registrant's definitive Proxy Statement to be used in connection with its
1998 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission on or prior to April 30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the information set forth under the caption "Principal Security Holders" of
the registrant's definitive Proxy Statement to be used in connection with its
1998 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission on or prior to April 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information set forth under the caption "Certain Transactions" of the
registrant's definitive Proxy Statement to be used in connection with its
1998 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission on or prior April 30, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS
(1) The financial statements contained in the accompanying Index
to Consolidated Financial Statements covered by the Independent Auditor's
Report are filed as part of this Report (see page F-1).
(2) Financial Statement Schedule
The financial statement schedule contained in the accompanying
Index to Consolidated Financial Statements covered by the Independent
Auditors' Report are filed as part of this Report (see page F-1).
Page 26
<PAGE>
(3) Exhibits
The exhibits contained in the Index to Exhibits are filed as part
of this Report (see page 47).
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
Page 27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Colorado Springs, State of Colorado, on this 30th day of March, 1998.
THE SPECTRANETICS CORPORATION
By: /s/ Joseph A. Largey
------------------------------------------
Joseph A. Largey, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Joseph A. Largey President and Chief
----------------------------- Executive Officer, Director March 30, 1998
Joseph A. Largey (Principal Executive Officer)
/s/ James P. McCluskey Vice President, Finance
----------------------------- (Principal Financial and March 30, 1998
James P. McCluskey Accounting Officer)
/s/ Emile J. Geisenheimer Director and Chairman of the
----------------------------- Board of Directors March 30, 1998
Emile J. Geisenheimer
/s/ Cornelius C. Bond, Jr.
----------------------------- Director March 30, 1998
Cornelius C. Bond, Jr.
/s/ Gary R. Bang Director March 30, 1998
-----------------------------
Gary R. Bang
/s/ James A. Lent Director March 30, 1998
-----------------------------
James A. Lent
/s/ Joseph M. Ruggio, MD Director March 30, 1998
-----------------------------
Joseph M. Ruggio, MD
/s/ John G. Schulte Director March 30, 1998
-----------------------------
John G. Schulte
Page 28
<PAGE>
THE SPECTRANETICS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
INDEX TO FINANCIAL STATEMENTS: PAGE
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets, December 31, 1997 and 1996................... F-3
Consolidated Statements of Operations, Years Ended December 31,
1997, 1996, and 1995..................................................... F-4
Consolidated Statements of Shareholders' Equity, Years Ended
December 31, 1997, 1996, and 1995........................................ F-5
Consolidated Statements of Cash Flows, Years Ended December 31,
1997, 1996, and 1995..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
FINANCIAL STATEMENT SCHEDULE:
Independent Auditors' Report on Financial Statement Schedule............. F-17
Schedule II--Valuation and Qualifying Accounts, Years Ended
December 31, 1997, 1996, and 1995........................................ F-18
</TABLE>
All other schedules are omitted because they are not applicable or because
the required information is included in the consolidated financial statements
or the notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
The Spectranetics Corporation:
We have audited the accompanying consolidated balance sheets of The
Spectranetics Corporation and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Spectranetics
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Denver, Colorado
January 28, 1998
F-2
<PAGE>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, 1997 and 1996
- ----------------------------------------------------------------------------------------------------------------------------
Assets 1997 1996
- ------ --------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,532 $ 2,860
Securities, available for sale, at market value (note 2) 2,058 4,290
Trade accounts receivable, less allowance for doubtful accounts of $232 and $49 4,505 3,651
Inventories (note 3) 2,315 1,628
Prepaid expenses and other 295 396
--------- ---------
Total current assets 15,705 12,825
Equipment and leasehold improvements, at cost:
Manufacturing equipment and computers 6,513 5,687
Leasehold improvements 2,535 2,306
Equipment held for rental or loan 1,441 1,473
Furniture and fixtures 291 158
--------- ---------
10,078 9,624
Less accumulated depreciation and amortization (6,874) (6,138)
--------- ---------
Net equipment and leasehold improvements 3,906 3,486
Goodwill and other intangible assets, net 5,140 6,346
Other assets 574 382
--------- ---------
Total assets $ 25,325 $ 23,039
--------- ---------
--------- ---------
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 995 $ 1,110
Accrued liabilities (note 5) 2,580 2,201
Deferred revenue (note 6) 4,081 569
Current portion of long-term debt (note 7) 299 75
Current portion of capital lease obligations (note 9) 163 83
--------- ---------
Total current liabilities 8,118 4,038
Deferred revenue and other liabilities (note 6) 1,757 26
Long-term debt, net of current portion (note 7) 1,246 445
Capital lease obligations, net of current portion (note 9) 141 20
--------- ---------
Total liabilities 11,262 4,529
Shareholders' equity (note 8):
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 18,734,142 shares in 1997 and 18,531,867 shares in 1996 19 19
Additional paid-in capital 83,711 83,402
Cumulative foreign currency translation adjustment (152) (16)
Accumulated deficit (69,515) (64,895)
--------- ---------
Total shareholders' equity 14,063 18,510
Commitments and contingencies (notes 9 and 13)
--------- ---------
Total liabilities and stockholders' equity $ 25,325 23,039
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Trade $ 20,217 $ 19,062 $ 15,544
Service 1,661 1,617 1,738
----------- ----------- -----------
21,878 20,679 17,282
----------- ----------- -----------
Costs and operating expenses:
Cost of revenue:
Trade 10,214 9,288 8,300
Service 1,049 1,130 1,202
----------- ----------- -----------
11,263 10,418 9,502
----------- ----------- -----------
Gross margin 10,615 10,261 7,780
----------- ----------- -----------
Operating expenses:
Marketing and sales 7,926 6,291 5,338
General and administrative 5,248 4,022 3,870
Research and development 2,243 1,684 1,371
----------- ----------- -----------
Total operating expenses 15,417 11,997 10,579
----------- ----------- -----------
Operating loss (4,802) (1,736) (2,799)
Other income (expense):
Interest income 278 315 433
Interest expense (44) (44) (65)
Other, net (52) 98 212
----------- ----------- -----------
182 369 580
----------- ----------- -----------
Net loss $ (4,620) (1,367) (2,219)
----------- ----------- -----------
----------- ----------- -----------
Loss per share - basic and diluted $ (.25) (.07) (.12)
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding
- basic and diluted 18,653,939 18,430,276 18,330,537
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Common stock
-------------------------------------- Foreign
Additional currency Accu- Total
paid-in trans- mulated shareholders'
Shares Amount capital lation deficit equity
---------- --------- ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at
January 1, 1995 18,281,779 $ 18 83,088 73 (61,309) 21,870
Exercise of stock options 14,029 -- 21 -- -- 21
Shares purchased under
employee stock purchase plan 60,956 -- 30 -- -- 30
Foreign currency
translation adjustment -- -- -- 45 -- 45
Net loss -- -- -- -- (2,219) (2,219)
---------- --------- ---------- ---------- --------- -------------
Balances at
December 31, 1995 18,356,764 18 83,139 118 (63,528) 19,747
Exercise of stock options 147,852 1 206 -- -- 207
Shares purchased under
employee stock purchase plan 27,251 -- 57 -- -- 57
Foreign currency
translation adjustment -- -- -- (134) -- (134)
Net loss -- -- -- -- (1,367) (1,367)
---------- --------- ---------- ---------- --------- -------------
Balances at
December 31, 1996 18,531,867 19 83,402 (16) (64,895) 18,510
Exercise of stock options 179,384 -- 239 -- -- 239
Shares purchased under
employee stock purchase plan 22,891 -- 70 -- -- 70
Foreign currency
translation adjustment -- -- -- (136) -- (136)
Net loss -- -- -- -- (4,620) (4,620)
---------- --------- ---------- ---------- --------- -------------
Balances at
December 31, 1997 18,734,142 $ 19 83,711 (152) (69,515) 14,063
---------- --------- ---------- ---------- --------- -------------
---------- --------- ---------- ---------- --------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,620) (1,367) (2,219)
Adjustments to reconcile net loss to
net cash provided (used) by operating activities:
Depreciation and amortization 2,285 2,728 2,956
Changes in operating assets and liabilities:
Trade accounts receivable (1,029) (880) (437)
Inventories (1,045) (124) 86
Prepaid expenses and other 85 611 (59)
Other assets (80) 34 448
Accounts payable and accrued liabilities 330 (390) (1,498)
Deferred revenue 5,256 (86) (158)
----------- ----------- -----------
Net cash provided (used) by operating activities 1,182 526 (881)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (767) (458) (78)
Sales (purchases) of securities available for sale, net 2,232 (358) 561
----------- ----------- -----------
Net cash provided (used) by investing activities 1,465 (816) 483
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 309 264 51
Proceeds from borrowings 1,100 --
Principal payments on long-term debt
and on obligations under
capital leases (315) (179) (226)
----------- ----------- -----------
Net cash provided (used) by financing activities 1,094 85 (175)
----------- ----------- -----------
Effect of exchange rate changes on cash (69) (50) 16
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 3,672 (255) (557)
Cash and cash equivalents at beginning of year 2,860 3,115 3,672
Cash and cash equivalents at end of year $ 6,532 2,860 3,115
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosures of cash flow
information - cash paid during the year for interest $ 47 46 69
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of noncash investing and financing activities:
Net transfer from inventory to equipment held for
rental or loan $ 424 382 353
----------- ----------- -----------
----------- ----------- -----------
Equipment acquired through capital leases $ 376 -- --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
ORGANIZATION, NATURE OF BUSINESS AND BASIS OF PRESENTATION: The
accompanying consolidated financial statements include the accounts of The
Spectranetics Corporation, a Delaware corporation, and its wholly owned
subsidiaries (collectively the "Company"), including Spectranetics
International, B.V. and Polymicro Technologies, Inc. ("Polymicro"). All
intercompany balances and transactions have been eliminated in
consolidation. The Company designs, manufactures and markets laser
interventional cardiology products for the medical industry and drawn
silica glass products primarily for the medical device, gas chromatography
and separations markets.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH EQUIVALENTS: The Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents. Cash
equivalents of approximately $1,276,000 and $677,000 at December 31, 1997
and 1996, respectively, consist primarily of certificates of deposit,
government-backed securities, money market accounts, commercial paper and
repurchase agreements stated at cost, which approximates market.
SECURITIES: Securities at December 31, 1997 and 1996 consist of U.S.
Treasury notes and mortgage-backed securities, and are accounted for under
the provisions of Statement of Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. The
Company's debt securities are classified as available for sale securities
and are available to support current operations or for other investment
opportunities. Securities available for sale are recorded at market value,
which approximates amortized cost. Substantially all securities have
maturities of one year or less.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out method.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Equipment and leasehold improvements
are recorded at cost. Equipment owned under capital leases is recorded at
the present value of minimum lease payments at the inception of the lease.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets of three to seven years for
manufacturing equipment and computers and furniture and fixtures.
Equipment held for rental or loan is being depreciated using the
straight-line method over three to five years. Equipment owned under
capital leases and leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or estimated
useful life of the asset.
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill and other intangible assets
are being amortized using the straight-line method over periods ranging
from three to ten years.
IMPAIRMENT OF ASSETS: The Company accounts for long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121,
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS
121). Under SFAS 121, the carrying value of goodwill and other long-lived
assets is reviewed annually for impairment. Events that may indicate a
need to assess recoverability include significant changes in business
conditions, continuing losses or a forecasted inability to achieve at
least break-even operating results over an extended period. The Company
evaluates the recoverability of goodwill and other long-lived assets based
upon undiscounted cash flow projections. Should an impairment in value be
indicated, the carrying value of the asset is adjusted to its estimated
fair value. No adjustments for impairment of assets were recorded during
1997.
FINANCIAL INSTRUMENTS: At December 31, 1997 and 1996, the carrying value
of financial instruments approximates the fair market value of the
instruments based on terms and related interest rates.
F-7
<PAGE>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) Summary of Significant Accounting Policies (continued)
REVENUE RECOGNITION: Revenue from the sale of the Company's products is
recognized when the products are shipped to the customer. Revenue from
product maintenance contracts and equipment rentals is deferred and
recognized ratably over the contract period. Revenue associated with
license and supply agreements is deferred and recognized upon shipment of
products to customer.
WARRANTIES: The Company provides for the cost of estimated future warranty
repairs when the products are shipped to the customer.
STOCK-BASED COMPENSATION PLAN: The Company accounts for its stock-based
compensation plans in accordance with the provisions of ACCOUNTING
PRINCIPLES BOARD OPINION NO. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES
(APB 25), and related interpretations. As such, compensation expense is
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. Under Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
(SFAS 123), entities are permitted to recognize as expense the fair value
of all stock-based awards on the date of grant over the vesting period.
Alternatively, SFAS 123 also allows entities to continue to apply the
provisions of APB 25 and provide pro forma earnings (loss) and pro forma
earnings (loss) per share disclosures for employee stock option grants as
if the fair-value-based method defined in SFAS 123 had been applied. The
Company has elected to continue to apply the provisions of APB 25 and
provide the pro forma disclosures required by SFAS 123.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed as
incurred.
LOSS PER SHARE: During 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE
(SFAS 128), which is effective for financial statements issued for periods
ending after December 15, 1997. Under SFAS 128, basic loss per share is
computed on the basis of weighted-average common shares outstanding.
Diluted loss per share considers potential common stock instruments in the
calculation, and is the same as basic loss per share for the years ended
at December 31, 1997, 1996 and 1995, as all common stock equivalents were
anti-dilutive.
FOREIGN CURRENCY TRANSLATION: The Company's primary functional currency is
the U.S. dollar. Certain transactions of the Company and its subsidiaries
are consummated in currencies other than the U.S. dollar. Gains and
losses from these transactions are included in the consolidated statements
of operations as they occur.
Spectranetics International, B.V. uses its local currency (Dutch guilder)
as its functional currency. Accordingly, net assets are translated at
year-end exchange rates while income and expense accounts are translated
at average exchange rates during the year. Adjustments resulting from
these translations are reflected in shareholders' equity as cumulative
foreign currency translation adjustment.
INCOME TAXES: The Company accounts for income taxes pursuant to Statement
of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES,
which requires the use of the asset and liability method of accounting for
deferred income taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. A valuation allowance is required to the
extent it is more likely than not that a deferred tax asset will not be
realized. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in operations in the period that includes the enactment date.
F-8
<PAGE>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
(2) Securities
The Company invests only in high quality, short-term investments, which are
classified as available-for-sale and recorded at market value. At December
31, 1997 and 1996 market value approximated amortized cost.
Securities as of December 31 are comprised of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
Market value Market value
and amortized and amortized
cost cost
------------- -------------
<S> <C> <C>
U.S. Treasury and Agency Securities $ 1,510 3,208
Certificates of Deposit 548 1,082
----------- ----------
Total $ 2,058 4,290
----------- ----------
----------- ----------
</TABLE>
(3) Inventories
Inventories consist of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Raw materials $ 755 469
Works in process 882 516
Finished goods 678 643
--------- --------
Total $ 2,315 1,628
--------- --------
--------- --------
</TABLE>
(4) Goodwill and Other Intangible Assets
Goodwill and other intangible assets and related amortization periods are as
follows as of December 31 (in thousands):
<TABLE>
<CAPTION>
Amortization period 1997 1996
---- ----
<S> <C> <C> <C>
Goodwill 8 years $ 6,417 6,417
Patents 10 years 2,488 2,488
Customer list 3 years 908 908
Sales and clinical staffs 3 years 346 346
10,159 10,159
Less accumulated amortization (5,019) (3,813)
--------- --------
Total $ 5,140 6,346
--------- --------
--------- --------
</TABLE>
(5) Accrued Liabilities
Accrued liabilities consist of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accrued payroll and related expenses $ 932 831
Accrued warranty expense 336 241
Accrued royalty expense 181 116
Other accrued expenses 1,131 1,013
--------- ------
Total $ 2,580 2,201
--------- ------
--------- ------
</TABLE>
F-9
<PAGE>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) Deferred Revenue
In 1997, the Company entered into a license agreement with United States
Surgical Corporation (USSC), whereby USSC paid a license fee in addition to
advance payment for products to be supplied by the Company. The payments
received were recorded as deferred revenue and are being amortized as product
is shipped under the agreement. During 1997 cash received under the agreement
totaled $6,339,000. Revenue recognized related to the agreement during the
year ended December 31, 1997 totaled $1,244,000. The remaining balance of
$5,095,000 of deferred revenue has been recorded as current and long term
based on the expected timing of future shipments.
Other deferred revenue-current, in the amounts of $738,000 and $569,000 at
December 31, 1997 and 1996, respectively, relates to payments in advance for
various product maintenance contracts, whereby revenues are initially
deferred and then amortized over the life of the contract, which is generally
one year.
(7) Debt
During 1993, the Company issued a note payable in the amount of $1,050,000 to
obtain certain patent rights. The note is for a ten-year period with annual
payments of $105,000 due on May 1st. The note was non-interest bearing and
was discounted to $827,000, using a discount rate of 5.75%. At December 31,
1997 the note had a remaining balance of $445,000.
During 1997, the Company entered into a $5,000,000 loan and security
agreement, consisting of a $2,000,000 credit line collateralized by equipment
(equipment line) and a $3,000,000 revolving credit line (revolving line)
collateralized by inventory, receivables and various other assets of the
Company. The equipment and revolving lines bear interest, which is accrued
monthly, at a rate equal to three quarters of a percentage point above the
prime rate (9.25% at December 31, 1997). The equipment line and revolving
line have maturity dates of December 23, 2001 and December 23, 1998,
respectively. At December 31, 1997, the equipment line had an outstanding
balance of $1,100,000. The revolving line had no borrowings outstanding at
December 31, 1997.
Annual maturities for each of the next five years related to the note
payable, equipment and revolving lines are as follows (in thousands) :
<TABLE>
<S> <C> <C>
1998 $ 299
1999 524
2000 529
2001 94
2002 99
----------
$ 1,545
----------
----------
</TABLE>
(8) Shareholders' Equity and Employee Benefit Plans
At December 31, 1997 and 1996, the Company had two stock-based compensation
plans which are described below.
STOCK OPTION PLANS: The Company maintains stock option plans which provide
for the grant of incentive stock options, nonqualified stock options and
stock appreciation rights. The Board of Directors determines the option price
and term. The plans provide that incentive stock options be granted with
exercise prices not less than the fair market value at the date of grant.
Options granted through December 31, 1997 vest over one to five years and
expire after six to ten years from the date of grant. Options granted to the
Board of Directors vest immediately or over three years from date of grant.
At December 31, 1997, there were 4,808,591 shares available for future
issuance under the plans.
F-10
<PAGE>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) Shareholders' Equity and Employee Benefit Plans (continued)
The following is a summary of option activity during the three-year period
ended December 31, 1997:
<TABLE>
<CAPTION>
Shares Weighted average
under option exercise price
------------ -----------------
<S> <C> <C>
Options outstanding at January 1, 1995 1,065,933 $ 1.88
Granted 647,000 1.97
Exercised (14,029) 1.43
Canceled (40,489) 2.51
-----------
Options outstanding at December 31, 1995 1,658,415 $ 1.90
Granted 575,450 4.73
Exercised (147,852) 1.42
Canceled (132,749) 2.52
-----------
Options outstanding at December 31, 1996 1,953,264 $ 2.73
Granted 874,500 3.39
Exercised (179,384) 1.34
Canceled (112,439) 3.58
-----------
Options outstanding at December 31, 1997 2,535,941 $ 3.02
-----------
-----------
</TABLE>
At December 31, 1997, the weighted-average remaining contractual life of
outstanding options was 7.9 years and 1,228,966 options were exercisable at a
weighted-average exercise price of $2.41 per share.
The per share weighted-average fair value of stock options granted during
1997 and 1996 was $2.72 and $4.02 per share, respectively, on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1997 - expected dividend yield of 0.0%,
risk-free interest rate of 5.58%, expected volatility of 109%, and an
expected life of 4.96 years; 1996 -expected dividend yield of 0.0%, risk-free
interest rate of 6.21%, expected volatility of 114%, and an expected life of
6.75 years.
The Black Sholes option valuation model was developed for the use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate in management's option, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
As discussed in note 1, the Company applies APB 25 in accounting for its
plans and, accordingly, because the Company grants options at or above base
fair value at the date of grant, no compensation cost has been recognized for
stock option grants in the accompanying consolidated financial statements.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options and stock purchase plan shares, as discussed
below, under SFAS 123, the Company's net loss and loss per share would have
been increased to the pro forma amounts shown below (in thousands, except per
share):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss:
As reported $ (4,620) (1,367) (2,219)
Pro forma (6,370) (2,497) (2,660)
Loss per share:
As reported (0.25) (0.07) (0.12)
Pro forma (0.34) (0.14) (0.15)
</TABLE>
F-11
<PAGE>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) Shareholders' Equity and Employee Benefit Plans (continued)
Pro forma net loss reflects only options and stock purchase rights granted in
1997, 1996 and 1995. Therefore, the full impact of calculating compensation
cost for stock options and stock purchase rights under SFAS 123 is not
reflected in the pro forma net loss amounts presented above because
compensation cost is reflected over the option or purchase rights vesting
period and compensation cost for options and stock purchase rights granted
prior to January 1, 1995 is not considered.
STOCK PURCHASE PLAN: In September 1992, the Company adopted an employee stock
purchase plan which currently provides for the sale of up to 350,000 shares
of common stock. The plan provides eligible employees of the Company the
opportunity to acquire the common stock of the Company in accordance with
Section 423 of the Internal Revenue Code of 1986. Stock can be purchased each
six month period (twice per year). The purchase price is equal to 85% of the
lower of the price at the beginning of the six month period or the price at
the end of this period. Shares issued under the plan totaled 22,891, 27,251
and 60,956 in 1997, 1996 and 1995, respectively.
Under SFAS No. 123, compensation cost is recognized for the fair value of the
employees' purchase rights, which was estimated using the Black-Scholes model
with the following assumptions: 1997 - expected dividend yield of 0.0%,
risk-free interest rate 5.41%, expected volatility of 88%, and an expected
life of six months; 1996 - expected dividend yield of 0.0%, risk-free
interest rate 5.48%, expected volatility of 92%, and an expected life of six
months. The weighted average fair value of purchase rights granted in 1997,
1996 and 1995 was $2.67, $2.85 and $1.53, respectively.
401(K) PLAN: The Company maintains a salary reduction savings plan under
section 401(k) of the Internal Revenue Code which the Company administers for
participating employees' contributions. All full-time employees are covered
under the plan after meeting minimum service requirements. The Company has
made no contributions to the plan.
SHAREHOLDERS' RIGHTS AGREEMENT: In 1996, the Company's Board of Directors
adopted a Shareholder Rights Agreement declaring a dividend of one right (a
"Right") for each share of common stock of the Company's outstanding common
shares at the close of business on May 24, 1996. The Company will issue one
Right with each new common share so that all shares will have attached
Rights. When exercisable, each Right will entitle the registered holder to
purchase one hundredth of a share of series A Junior Participating Preferred
Stock (Preferred Stock Shares) at a price of $25.00 per one-hundredth of a
share of series A Junior Participating Preferred Stock (prepared stock
shares) at a price of $25.00 per one-hundredth of a preferred stock share.
The Rights may be exercised only after the earlier of 10 days after a person
becomes (or the directors have knowledge of someone becoming) an Acquiring
Person and 10 days after commencement of a public announcement of a tender or
exchange offer if, upon its consummation, the offeror would beneficially own
15% or more of the common stock.
An "Acquiring Person" is defined as a person who holds at least 15% of the
shares of common stock without the prior approval of a majority of the
outside directors of the Board. The Rights, which do not have voting rights,
expire in May 2006 and may be redeemed by the Company at a price of $.001 per
Right prior to a specified period of time after the occurrence of certain
events. The Company may also exchange all of the outstanding Rights for
shares of common stock at a ratio of one share of common stock per Right (as
adjusted), any time after the first time someone becomes an Acquiring Person.
If, following an acquisition of 15% or more of the share of common stock, the
Company is acquired in a merger or other business combination or sells 50% of
its assets or earnings power, each Right (other than Rights voided as above)
will entitle its holder to purchase a number of shares specified by formula
of the acquiring company with a value of twice the then current exercise
price. As of December 31, 1997, 18,734,142 Rights have been issued but none
were exercised. Although the Board of Directors has authorized the creation
of the Preferred Stock and reserved 250,000 preferred stock shares for the
Shareholders' Rights Agreement, such series has not been authorized for
issuance.
F-12
<PAGE>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) Leases
The Company leases certain manufacturing equipment under capital leases, and
office space, furniture and manufacturing equipment under noncancelable
operating leases with initial terms that expire at various dates through 2000.
Included in manufacturing equipment and computers are the following amounts
relating to assets held under capital leases as of December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Manufacturing equipment and computers $ 1,460 1,084
Less accumulated amortization (992) (918)
--------- ---------
$ 468 166
--------- ---------
--------- ---------
</TABLE>
Amortization of assets held under capital leases is included in depreciation
expense.
The present value of future minimum capital lease payments, and future
minimum lease payments under noncancelable operating leases as of December
31, 1997 are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
------- ---------
(In thousands)
<S> <C>
Years ending December 31:
1998 $ 191 566
1999 97 499
2000 40 357
2001 2 152
Thereafter -- 141
--------- --------
Total minimum lease payments 330 1,715
--------
--------
Less amounts representing interest (26)
---------
Present value of net minimum lease payments 304
Less current portion of capital lease obligations (163)
----------
Capital lease obligations, noncurrent $ 141
----------
----------
</TABLE>
Rent expense under operating leases totaled approximately $712,000, $591,000
and $571,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
F-13
<PAGE>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10) Income Taxes
At December 31, 1997, the Company has net operating loss carry-forwards for
federal income tax purposes of approximately $87.3 million which are
available to offset future federal taxable income, if any, and expire at
varying dates through 2012. The annual use of the net operating loss
carry-forwards is limited under Section 382 of the Internal Revenue Code of
1986. The cumulative annual Section 382 limitation was approximately $53.4
million at December 31, 1997. The minimum amount of net operating loss
carry-forwards that will expire as a result of being limited under Section
382 is estimated to be $24 million.
The Company also has research and development tax credit carry-forwards at
December 31, 1997 for federal income tax purposes of approximately $3.2
million which are available to offset future federal taxable income, if any,
and expire at varying dates through 2012. The annual use of portions of the
research and development credit carry-forwards is also limited under Section
382.The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carry-forwards - U.S. $ 32,420 33,062
Net operating loss carry-forwards - foreign 4,576 --
Research and development tax credit and other
carry-forwards 3,246 3,145
Royalty reserve, due to accrual for financial
reporting purposes 67 43
Warranty reserve, due to accrual for financial
reporting purposes 76 46
Inventories, principally due to accrual for obsolescence
for financial reporting purposes, net of additional
costs inventoried for tax purposes 684 659
Equipment, primarily due to differences
in cost basis and depreciation methods 513 563
Deferred revenue, due to deferral for financial
reporting purposes 988 176
Other 67 13
------- --------
Total gross deferred tax assets 42,637 37,707
Less valuation allowance (42,637) (37,707)
------- --------
Net deferred tax assets $ -- --
------- --------
------- --------
</TABLE>
The Company has recorded a valuation allowance equal to the gross deferred
tax asset at December 31, 1997 and 1996 due to the uncertainty of
realization. The net change in the valuation allowance includes the effect of
state income taxes, permanent differences expensed for book purposes but not
deductible for tax purposes, and the increase in the allowance relating to
the increase in the Company's net operating loss and other carry-forwards.
(11) Concentrations of Credit Risk
Financial instruments which potentially expose the Company to concentrations
of credit risk, as defined by Financial Accounting Standards Board's
Statement No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT
RISK, consist primarily of cash equivalents, securities and accounts
receivable with the Company's various customers.
The Company's cash equivalents and securities consist of financial
instruments issued by various institutions and government entities. The
Company's investment policy is designed to limit the Company's exposure to
concentrations of credit risk.
F-14
<PAGE>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's accounts receivable are due from a variety of health care
organizations and distributors throughout the United States and Europe. No
single customer represented more than 10% of sales or accounts receivable for
any period. The Company provides for uncollectible amounts upon recognition
of revenue and when specific credit problems arise. Management's estimates
for uncollectible amounts have been adequate during historical periods, and
management believes that all significant credit risks have been identified at
December 31, 1997.
The Company has not entered into any hedging transactions nor any
transactions involving financial derivatives.
(12) Segment and Geographic Reporting
The Company operates in two industry segments: (1) development,
manufacturing, marketing and service of excimer laser angioplasty systems,
and (2) development, manufacturing and marketing of drawn silica glass
products for the medical device and gas chromatography and separations
markets. Operations related to the excimer laser angioplasty systems
represents the sale and service of laser units and a disposable fiber optic
catheter that are used in the treatment of atherosclerosis in the coronary
arteries. Operations related to the drawn silica glass products represents
the sale of silica glass capillary tubing, optic fibers, precision fused
silica pieces and assemblies and cables. The following table presents
financial information by segment (in thousands).
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Revenue:
Excimer laser angioplasty systems $ 14,696 13,662 10,384
Drawn silica glass products 7,182 7,017 6,898
---------- --------- --------
Total revenues $ 21,878 20,679 17,282
---------- --------- --------
---------- --------- --------
Operating income (loss):
Excimer laser angioplasty systems $ (5,054) (2,247) (3,140)
Drawn silica glass products 252 511 341
---------- --------- --------
Total operating loss $ (4,802) (1,736) (2,799)
---------- --------- --------
---------- --------- --------
Depreciation and amortization:
Excimer laser angioplasty systems $ 1,090 1,470 1,647
Drawn silica glass products 1,195 1,258 1,309
---------- --------- --------
Total depreciation and amortization $ 2,285 2,728 2,956
---------- --------- --------
---------- --------- --------
Identifiable assets:
Excimer laser angioplasty systems $ 12,817 10,580 13,413
Drawn silica glass products 12,508 12,459 11,600
---------- --------- --------
Total identifiable assets $ 25,325 23,039 25,013
---------- --------- --------
---------- --------- --------
Capital expenditures:
Excimer laser angioplasty systems $ 287 225 50
Drawn silica glass products 480 233 28
---------- --------- --------
Total capital expenditures $ 767 458 78
---------- --------- --------
---------- --------- --------
</TABLE>
F-15
<PAGE>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) Segment and Geographic Reporting (continued)
Revenue by geographic areas is as follows:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Domestic $ 19,002 16,871 15,080
Foreign 5,074 6,198 5,227
Eliminations (2,218) (2,390) (3,025)
---------- --------- ---------
Total $ 21,878 20,679 17,282
---------- --------- ---------
---------- --------- ---------
</TABLE>
Operating loss by geographic areas is as follows:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Domestic $ (2,423) (351) (1,382)
Foreign (2,502) (1,411) (1,423)
Eliminations 123 26 6
---------- --------- ---------
Total $ (4,802) (1,736) (2,799)
---------- --------- ---------
---------- --------- ---------
</TABLE>
Identifiable assets by geographic areas are as follows:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Domestic $ 22,961 20,599 22,485
Foreign 2,462 2,660 2,792
Eliminations (98) (220) (264)
---------- --------- ---------
Total $ 25,325 23,039 25,013
---------- --------- ---------
---------- --------- ---------
</TABLE>
(13) Commitments and Contingencies
The Company is obligated under various licensing and royalty agreements which
require the Company to pay royalties based on a percentage of net sales of
certain products, subject to minimum and maximum amounts for certain
agreements. The agreements generally expire at various dates concurrent with
the expiration dates of the respective patents. Royalty expense under these
agreements amounted to $624,000, $645,000 and $481,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
F-16
<PAGE>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Shareholders
The Spectranetics Corporation:
Under date of January 28, 1998, we reported on the consolidated balance
sheets of The Spectranetics Corporation and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997, as contained in the Company's annual report
on Form 10-K for the year 1997. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement Schedule II (Valuation and Qualifying
Accounts). This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Denver, Colorado
January 28, 1998
F-17
<PAGE>
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
Years Ended December 31, 1997, 1996 and 1995
(In Thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balance at Additions Additions Deductions Balance at
beginning charged to charged to from end
Description of year expense other accounts allowance of year
---------- ---------- -------------- --------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Accrued warranty liability $304 141 -- 297 148
Accrued royalty liability 648 481 -- 1,032 97
Allowance for bad debts
and sales returns 181 21 233(1) 317 118
Year ended December 31, 1996:
Accrued warranty liability 148 438 -- 345 241
Accrued royalty liability 97 242 -- 223 116
Allowance for bad debts
and sales returns 118 50 169(1) 288 49
Year ended December 31, 1997:
Accrued warranty liability 241 485 -- 390 336
Accrued royalty liability 116 624 -- 559 181
Allowance for bad debts
and sales returns 49 229 168(1) 214 232
</TABLE>
(1) Represents a provision for sales returns recorded as a reduction of
revenue.
See accompanying independent auditors' report.
F-18
<PAGE>
THE SPECTRANETICS CORPORATION
EXHIBIT INDEX
<TABLE>
EXHIBIT DESCRIPTION SEQUENTIALLY
NUMBER NUMBERED PAGE
- --------------------------------------------------------------------------------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization between The
Spectranetics Corporation and Advanced
Interventional Systems, Inc., dated January 24,
1994.(1)
2.1(a) Amendment to Agreement and Plan of Reorganization
between The Spectranetics Corporation and Advanced
Interventional Systems, Inc., dated May 17, 1994.(2)
2.2 Certificate of Ownership and Merger of Advanced
Interventional Systems, Inc. Into The Spectranetics
Corporation, dated December 27, 1995.(13)
3.1 Restated Certificate of Incorporation.(1)
3.1(a) Certificate of Amendment to Restated Certificate of
Incorporation.(12)
3.2 Bylaws of the Company.(3)
4.1 Form of Common Stock Certificate of the Company.(4)
4.2 Rights Agreement, dated as of May 6, 1996, between
the Company and Norwest Bank Minnesota, N.A.(14)
10.1 Lease covering a portion of the Company's facilities
between the Company and Dwane and Donna Basse dated
November 10, 1994.(12)
10.1(a) Lease covering a portion of the Company's facilities
between the Company and Dwane and Donna Basse dated
September 1, 1997.(14)
10.2 Lease covering a portion of the Company's facilities
between the Company and American Investment
Management dated February 17, 1995.(12)
10.2(a) Lease covering a portion of the Company's facilities
between the Company and John or Sharon Sanders dated
December 23, 1997.
10.3 Lease covering a portion of the Company's facilities
between the Company and Full Circle Partnership III
dated September 11, 1985.(3)
10.3(a) Amendment to lease covering a portion of the
Company's facilities between the Company and Full
Circle Partnership III July 24, 1997.
10.4(a) Amendment to lease covering a portion of the
Company's facilities between the Company and
Talamine Properties dated February 15, 1992.(7)
10.4(b) Amendment to lease covering a portion of the
Company's facilities between the Company and
Talamine Properties dated February 16, 1993.(1)
10.4(c) Amendment to lease covering a portion of the
Company's facilities between the Company and
Talamine Properties dated October 3, 1994.(12)
10.5 1991 Stock Option Plan, as amended.(11)
10.5(a) 1991 Stock Option Plan, as amended.(17)
10.6 1990 Incentive Stock Option Plan.(6)
Page 47
<PAGE>
EXHIBIT DESCRIPTION SEQUENTIALLY
NUMBER NUMBERED PAGE
- --------------------------------------------------------------------------------
<S> <C> <C>
10.7 1989 Incentive Stock Option Plan and First Amendment
thereto.(6)
10.8 Nonemployee Director Stock Option Plan.(8)
10.8(a) Stock Option Plan for Outside Directors.(10)
10.9 Employee Stock Purchase Plan (as amended).(9)
10.10 License Agreement with Patlex Corporation, dated
January 1, 1992 (confidential treatment has been
granted for portions of this agreement).(7)
10.11 License Agreement with Pillco Limited Partnership,
dated February 1, 1993 (confidential treatment has
been granted for portions of this agreement).(7)
10.12 Vascular Laser Angioplasty Catheter License
Agreement with Bio-Metric Systems, Inc., dated
April 7, 1992 (confidential treatment has been
granted for portions of this agreement).(6)
10.13 Exclusive License Agreement between the United
States of America and James B. Laudenslager and
Thomas J. Pacala dated March 25, 1985; and Exclusive
License Agreement between the United States of
America and LAIS dated April 29, 1990.(5)
10.14 License Agreement between Medtronic, Inc. and the
Company, dated February 28, 1997 (confidential
treatment has been granted for portions of this
agreement).(15)
10.15 License Agreement between United States Surgical
Corporation and the Company, dated September 25,
1997 (confidential treatment has been granted for
portions of this agreement).(16)
10.16 Supply Agreement between United States Surgical
Corporation and the Company, dated September 25,
1997 (confidential treatment has been granted for
portions of this agreement).(16)
10.17 Loan and Security Agreement between Silicon Valley
Bank and the Company, dated December 24, 1997.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule.
</TABLE>
(1) Incorporated by reference to the Company's 1993 Annual Report on Form
10-K filed on March 31, 1994.
(2) Incorporated by reference to exhibits previously filed by the Company
with its Registration Statement on Form S-4 filed May 18, 1994 (File
No. 33-79106).
(3) Incorporated by reference to exhibits previously filed by the Company
with its Registration Statement on Form S-1, filed December 5, 1991
(File No. 33-44367).
(4) Incorporated by reference to exhibits previously filed by the Company
with its Amendment No. 2 to the Registration Statement, filed January
24, 1992 (File No. 33-44367).
(5) Incorporated by reference to exhibits previously filed by LAIS with
its Registration Statement on Form S-1 filed August 30, 1991 (File No.
33-42457).
(6) Incorporated by reference to exhibits previously filed by the Company
with its Amendment No. 1 to the Registration Statement on Form S-1,
filed January 10, 1992 (File No. 33-44367).
(7) Incorporated by reference to exhibits previously filed by the Company
with its Annual Report for 1992 on Form 10-K filed March 31, 1993.
(8) Incorporated by reference to exhibits previously filed by the Company
with its Registration Statement on Form S-8 filed April 1, 1992 (File
No. 33-46725).
Page 48
<PAGE>
(9) Incorporated by reference to exhibits previously filed by the Company
with its Registration Statement on Form S-8 filed December 30, 1994
(File No. 33-88088).
(10) Incorporated by reference to exhibits previously filed by the Company
with its Registration Statement on Form S-8 filed November 16, 1995
(File No. 33-99406).
(11) Incorporated by reference to exhibits previously filed by the Company
with its Registration Statement on Form S-8 filed October 6, 1994
(File No. 33-85198).
(12) Incorporated by reference to exhibits previously filed by the Company
with its 1994 Annual Report on Form 10-K filed on March 31, 1995.
(13) Incorporated by reference to the Company's 1995 Annual Report on Form
10-K filed on April 29, 1996.
(14) Incorporated by reference to exhibits previously filed by the Company
with its Current Report on Form 8-K filed on May 6, 1996.
(15) Incorporated by reference to exhibits previously filed by the Company
with its Form 10-Q for the quarter ended on March 31, 1997.
(16) Incorporated by reference to exhibits previously filed by the Company
with its Form 10-Q for the quarter ended on September 30, 1997.
(17) Incorporated by reference to exhibits previously filed by the Company
with its Registration Statement on Form S-8 filed July 19, 1996.
Page 49
<PAGE>
COMMERCIAL LEASE
THIS LEASE AGREEMENT made this 23 day of December, 1997, by and between
John or Sharon Sanders, hereinafter called "Landlord," and Spectranetics, Inc.,
hereinafter called "Tenant".
1. LEASE PROMISES: Landlord hereby: leases to Tenant. and Tenant hereby leases
from Landlord, the premises known as 148 Talamine Court containing 2500 square
feet.
2. TERM: To have and to hold the leased premises unto Tenant for a term of 24
months commencing on the 1st day of January 1998. and ending on the, 31st day of
December, 2000. unless sooner terminated as hereinafter provided.
3. RENT: Tenant agrees to pay total sum of $27,083.40 in U.S. dollars. This is
a modified gross lease and Landlord is responsible for the exterior of the
building, taxes, land maintenance, exterior utilities and fire insurance on the
structure only. All other utilities, additional tenant finish, garbage and other
services are the responsibility of the Tenant.
(a) The rent shall be paid in equal monthly installments of $1100.95, IN
ADVANCE, on or before the 1st day of each monthly period of this lease to the
Landlord at the address of 154 Talamine Court, Colorado Springs, Colorado
80907. One monthly installment of the rent shall be due and payable on or before
the first day of the execution of the lease by the Tenant for the first month's
rent. Rents for the last 12 months period will be paid in equal monthly
installments of $1156.00.
(b) This lease is expressly contingent upon Tenant providing to Landlord a
certificate of fire and liability insurance.
(c) All rents, as provided in this lease, are secured by the furniture,
fixtures and equipment of the Tenant.
(d) All expenses incurred by the Tenant, are the sole responsibility of the
Tenant. If, however, the Tenant creates a situation whereby the Landlord incurs
expenses brought on by the Tenant's neglect or the Tenant causes the property to
be encumbered in any way, the Landlord shall have the right to call these
expenses as rents and in the event of nonpayment, landlord shall have all the
rights and remedies as herein provided for failure to pay rent.
(e) The Tenant is responsible for ALL Tenant finish, and cannot encumber or
cause to encumber the premises or any adjoining premises or any other premises
not owned by the Tenant.
(f) There is a ten (10) days "grace" period after the first of the month to
pay rents.
(g) LATE CHARGES: In the event the rent provided for herein not received by
Landlord on the first day of each monthly period and extends beyond the "grace
period", a late charge equal to one quarter percent (1/4%) of the monthly rental
amount shall be due and payable to Landlord for each day of delinquency up to 25
days and one percent (1%) for each day over 25 days. If rent is mailed, Tenant
is responsible for loss or mail delay. Nothing contained herein shall obligate
the Landlord to accept the rent after the "grace period", nor does the Landlord
waive any of its legal rights which may be available for default of Tenant by
inclusion of this provision in this Commercial lease. In
<PAGE>
the event Tenant pays rent by check and the check is not honored by the
Landlords bank, there will be a charge of thirty ($30) dollars for each
returned check, in addition, Tenant remains responsible for current rents and
any additional charges incurred by the Landlord for late rents.
1. USAGE: Tenant warrants and represents to Landlord that premises shall be
used and occupied only for the purposes of Light Manufacturing and/or Office
use. Use of toxic chemicals is not permitted. Tenant shall not create any
nuisance or otherwise interfere with, annoy or disturb any other Tenant. Tenant
shall not commit, or suffer to be committed, any waste on the premises, nor
shall Tenant permit the premises to be used in any unlawful activity or way
which would, in the opinion of the Landlord, be extra hazardous or illegal.
Tenant accepts the Premises subject to all matters of record and to all
applicable laws.
5. SERVICES: Tenant shall pay all charges for gas, electricity, and other
utilities used by the Tenant on Premises during the term of this lease. If
possible, all such utilities shall be separately metered and billed in Tenant's
name. In the event that a separate itemization is not available, Tenant shall
pay its pro rata portion based on square footage or other pro rata method deemed
equitable by the Landlord. Tenant shall be responsible for all telephone and
telecommunication charges.
(a) Landlord's failure to any extent to furnish these defined services. or any
cessation thereof, shall neither render Landlord liable in any respect for
damages either person or property, be constructed as an eviction or partial
eviction of Tenant, work as an abatement of rent, nor relieve Tenant from
fulfillment of any covenant in this lease.
6. REPAIRS AND MAINTENANCE: Unless otherwise expressly provided, Landlord
shall maintain only the roof, foundation, Common parking area, common landscaped
area, heating and air conditioning and soundness of the exterior walls
(excluding all exterior glass and exterior or overhead doors) of the building in
good repair and condition except for reasonable wear and tear. Tenant shall pay
for the repair of any damage caused by the negligence or default of Tenant or
Tenant's agents, invites and employees. Landlord shall not be liable to Tenants
except as expressly provided in this lease, for any damage or inconvenience, and
Tenant shall not be entitled to any abatement or reduction of rent be reason of
any repairs, alterations or additions made by Landlord under this lease.
(a) Tenant shall forthwith at its expense replace any cracked or broken
glass used in the leased premises.
(b) Tenant, at its own expense, shall maintain all bathroom fixtures, door
hardware, lighting fixtures, floor coverings, interior paint decorating in a
good clean, safe, and wholesome condition at all times during the term of this
lease.
(c) Tenant is to return the premises to the Landlord at the termination of
this lease in as good of condition as existed at the "commencement date" of this
lease, ordinary wear and tear expected as defined by the Landlord. The cost for
any repairs or maintenance work to bring the premises to such condition shall be
borne by the Tenant and full or partial remedy may come from Tenants "deposit".
(d) Landlord shall not have any liability for loss or damage to Tenant's
work or to fixtures, equipment or other property of Tenant installed or placed
by Tenant in the leased premises. Any occupancy by Tenant prior to beginning the
term, even though rent
<PAGE>
free, shall in all other respects be the same as that of a Tenant under this
lease and by such occupancy, Tenant shall be bound by all terms of this
lease. By occupying the leased premises, as a Tenant, or to complete Tenant's
work install fixtures, facilities or equipment, or to perform finishing work,
Tenant shall be deemed to have accepted the same and acknowledged that the
leased premises are in the condition required by the Landlord's covenants.
Occupancy by the Tenant, before the term will be prorated to the number of
days of occupancy, unless rent free.
(e) While the Landlord will provide snow removal of the parking lot when the
snow exceeds 2 inches, it is subject to snow removal contractor availability.
7. COMMON AREAS: The term "common areas" shall mean all that portion of
building improvements, grounds, parking, and landscaping which is constructed
for lease to Tenants or hereafter leased to Tenants. Tenant shall not at any
time interfere with the rights of Landlord and other tenants, and their
employees, customers and invites, to use any part of the common areas. The
Landlord has the right to erect "for rent", "for lease" or "for sale" signs on
the common area as well as add any improvements as required by the Landlord.
8. ALTERATIONS AND IMPROVEMENTS: Written approval by the Landlord for any and
all alterations and improvements is required. Landlord may at its option,
require Tenants, at the expense of the Tenant, to remove any physical additions
and/or repair and alteration in order to restore the Premises to the condition
existing at the time Tenant took possession.
9. LIENS ON PREMISES: Tenants shall not permit any lien to be placed and
remain on the premises, building or common areas as a result of its conduct for
any reason. Tenant shall also post notice pursuant to Colorado Revised Statutes,
1997, as amended, 38-22-101, et Seq. Negating Landlord's liability for any
mechanic's liens resulting from any work, request for incorporation into the
premises.
10. CONDEMNATION: If, during the term of this lease, all or a substantial part
of the premises are taken for any public or quasi-public use under any
governmental law, ordinance or regulation, or by right of eminent domain or by
purchase in lieu thereof, and the taking would prevent or materially interfere
with the use of the premises by the Tenant for the purpose for which they are
then being used, this lease shall be terminated and all rents shall be abated
during the unexpired portion of the lease effective on the date physical
possession is taken by the condemning authority. Tenant agrees that it shall
have no claim to the condemnation award.
11. INSURANCE: The Landlord shall at all times during the Term of the lease,
maintain a policy or policies of insurance as landlord deems appropriate.
Landlord shall not be obligated in any way or manner to insure any personal
property of the Tenant. Tenant shall, at Tenant's expense, maintain such other
liability insurance in the amount of $1,000,000 or more as Tenant deems
appropriate to protect Tenant and landlord from liability loss and/or the loss
of the entire or portion of Landlords building due to neglect
<PAGE>
and/or caused by Tenant. A current copy of the Tenant's insurance policy is
to be maintained by the Landlord.
12. WAIVER OF SUBROGATION: Anything in this lease to the contrary
notwithstanding, Landlord and Tenant hereby waive and release each other of and
from any and all rights of recovery, claim, action or cause of action against
each other, their agents, officers and employees, for any loss or damage that
may occur to the premises. Improvements to the common areas or building of
which the premises are a part, or personal property (building contents) within
the building, by reason of fire or the elements regardless of cause or origin,
where such loss or damage is insured against and subject to an insurance policy
in force at the time of such loss or damage. Because this paragraph will
preclude the assignment of any claim mentioned herein by way of subrogation or
otherwise to an insurance company or any other person, each party to this lease
agrees immediately to give each insurance company which has issued to its
policies of insurance covering all risk of direct physical loss, written notice
of Terms of the mutual waivers contained in this paragraph, and to have the
insurance policies properly endorsed, if necessary, to prevent the invalidation
of the insurance coverages by reason of the mutual waivers contained in this
paragraph.
13. INDEMNITY: Tenant shall indemnify and hold harmless landlord from and
against any and all claims arising from Tenant's use of the premises, or from
the conduct of Tenant's business or from activity, work or things done,
permitted or suffered by Tenant, in or about the premises or elsewhere. In case
any action or proceeding be brought against landlord by reason of such claim,
Tenant shall defend the same at Tenant's expense by counsel satisfactory to
Landlord. Tenant hereby assumes all risk of damage to property or injury to
persons in, upon or about the premises arising from the cause and Tenant hereby
waives all claims in respect thereof against landlord. Tenant hereby agrees
that Landlord shall not be liable for injury to Tenant's business or any loss of
income therefrom or damage to the goods, ware, merchandise or other property of
Tenant, Tenant's employees, invites customers, or any other person in or about
the premises; nor shall landlord be liable for injury to the person of Tenant,
Tenant's employees, agents, or contractors, whether such damage or injury is
caused by or results from fire, explosion, stream, electricity, gas, water,
rain, or form breakage, leakage, obstruction, other damage or injury results
from conditions arising upon the premises or upon other portions of the new
building of which the premises are a part, or from other sources or places, and
regardless of whether the cause of such damage or injury or the means of
repairing the same is inaccessible to Tenant.
14. FIRE OR OTHER CASUALTY: In the case the building shall be partially or
totally destroyed by the fire or other casualty insurable under standard fire
insurance so as to become partially or totally untenable, the same shall be
repaired as speedily as possible at the expense of the Landlord, unless Landlord
shall elect not to rebuild, as hereinafter provided, and an equitable part of
the rent shall be abated until so repaired based upon the time and to the extent
the leased premises are untenable. If the Landlord determines not to rebuild or
repair premises of the Tenant, the Landlord will notify the Tenant of those
intentions in writing within 60 days of the casualty loss. In no event in the
case of any
<PAGE>
such destruction shall Landlord be required to repair or replace Tenant's
stock in trade, lease hold improvements, fixtures, equipment furnishings, or
floor coverings. Tenant covenants to make such repairs and replacements and
to furnish Landlord on demand evidence of insurance assuring its ability to
do so.
I5. LANDLORD'S RIGHT OF ENTRY: Landlord shall during the term hereof, have the
right to enter and inspect the premises, with or without the Tenants approval at
any time. The Landlord will attempt, but not limited to, to enter when Tenant is
present.
16. ASSIGNMENT OR SUBLEASE: Tenant shall not assign or in any manner transfer
this lease or any interest therein, nor sublet said leased premises or any part
or parts hereof, nor permit occupancy by anyone without the prior written
consent of the Landlord. Landlord shall not unreasonably withhold consent. In
the event of any subletting, the Tenant shall nevertheless at all times, remain
fully responsible and liable for rent payments and for compliance of with all
its other obligations under the terms, provisions and covenants of this lease.
In the event of any assignment of this lease, the Tenant shall be liable only
for the first thirty (30) days of rent of the pre-approved assignee. Any
collection directly by Landlord from the assignee or subtenant shall not be
construed to constitute a release of Tenant from the further performance of its
obligations under the lease.
17. TENANT DEFAULT: The following events shall be deemed to be events of default
by Tenant under this lease:
(a) Tenant shall fail to pay any installment of the rent hereby reserved and
such failure shall continue for a period of ten (10) days.
(b) Tenant fails to comply with any term, provision or covenant of this lease,
other than the payment of rent, and shall not cure such failure within thirty
(30) days after written notice thereof to Tenant.
(c) Tenant shall become insolvent, or shall make a transfer in fraud of
creditors, or shall make an assignment for the benefit of creditors.
(d) Tenant shall file a petition under any section or chapter of the National
Bankruptcy Act, as amended or under any similar law or statute of the United
States or any State thereof; or Tenant shall be adjudged bankrupt or insolvent
in proceedings filed against Tenant thereunder.
(e) A receiver or Trustee shall be appointed for all or substantially all of the
assets of Tenant.
(f) Tenant shall desert or vacate any substantial portion of the premises. Upon
the occurrence of any notice of demand whatsoever:
(i) Terminate this lease, in which event Tenant shall immediately surrender
the premises to Landlord, and if Tenant fails so to do, Landlord may,
without prejudice to any other remedy which it may have for possession or
arrearages in rent, enter upon and take possession of the leased premises
and expel or remove Tenant and any other person who may be occupying said
premises or any part thereof, by force if necessary, without being liable
for prosecution or any claim of damages therefor; and Tenant agrees to pay
to Landlord on demand the amount of all loss and damage which Landlord may
suffer by reason of such termination, whether through inability to relet
the premises on satisfactory terms or otherwise, including any damages
Landlord may incur because of special sums expended for fixing up premises
for Tenant.
<PAGE>
(ii) Enter upon and take possession of the leased premises and expel or
remove Tenant and any other person who may be occupying said premises or
any part thereof, by force if necessary, without being liable for
prosecution or any claim for damages therefor, and relet the premises and
receive the rent therefor, and Tenant agrees to pay the Landlord on
demand and deficiency that may arise by reason of such reletting.
(iii) Enter upon the leased premises, by force if necessary, without be
liable for prosecution or any claim for damages thereof and do whatever
Tenant is obligated to do under the terms of this lease: and Tenant agrees
to reimburse Landlord on demand for any expenses which Landlord may incur
in thus effecting compliance with Tenant's obligations under this lease,
and Tenant further agrees that Landlord shall not be liable for any
damages, resulting to the Tenant from such action whether cause by
negligence of Landlord or otherwise.
Pursuit of any of the foregoing remedies shall not preclude pursuit of any
of the other remedies herein provided or any other remedies provided by
law, nor shall pursuit of any remedy herein provided constitute a
forfeiture or waiver of any waiver of any rent due to Landlord hereunder
or of any damages accruing to Landlord by reason of the violation of any
of the terms, provisions and covenants herein contained. No waiver by
Landlord or any violation or breach of any of the terms, provisions,
and covenants herein contained, shall be deemed or construed to constitute
a waiver of any other violation or breach of any of the terms, provisions,
and covenants herein contained. Forbearance by Landlord to enforce one or
more of the remedies herein provided upon an event of default shall not be
deemed or construed to constitute a waiver of such default.
18. LANDLORDS LIEN AND UNIFORM COMMERCIAL CODE: As security for Landlord;
payment of rent, damages and all other payments required to be made by this
lease, Tenant hereby grants the Landlord a lien, secondary to Silicon Valley
Bank, upon all property of Tenant now or subsequently located upon the Leased
Premises. If Tenant abandons or vacates any substantial portion of the Leased
Premises or is in default of the payment of any rentals, damage or other
payments required to be made by this Lease, Landlord may enter upon the
Leased Premises, by force if necessary, and take possession of all or any
part of the personal property, and may sell all or any part of the personal
property at a public or private sale, in one or successive sales, with or
without notice, to the highest bidder for cash and on behalf of Tenant, sell
and convey all or part of the personal property of the bidder, delivering to
the bidder all of the Tenant's title and interest in the personal property
sold to him/her. The proceeds of the sale of the personal property shall be
applied by the Landlord toward the cost of the sale and then toward the
payment of all sums then due by Tenant to Landlord under the terms of this
Lease. The statutory lien for rent is not hereby waived, the express
contractual lien herein granted being in addition and supplementary thereto.
To the extent, if any, this Lease grants Landlord, or recognizes in Landlord,
any lien or lien rights greater than provided by the laws of the state in
which the Leased Premises are located pertaining to Landlord's liens, this
Lease is intended as and constitutes a security agreement within the meaning
of the Uniform Commercial Code of such state and, Landlord, in addition
<PAGE>
to the rights prescribed in this Lease, shall have all of the rights, titles,
liens and interests in and to Tenant's property now or hereafter located upon
the Leased Premises which are granted a secured party as that term is
defined, under such state's Uniform Commercial Code to secure the payment to
Landlord of the various amounts provided in this Lease and in compliance with
the Uniform Commercial Code.
19. ACTS OF GODS: Landlord shall not be required to perform any covenant or
obligation in this Lease, or be liable in damages to Tenant, so long as the
performance or non-performance of the covenant or obligation is delayed,
caused by or prevented by an act of God or force majeure. Act of God and
Force Majeure shall mean strikes, lockouts, sit-downs, material or labor
restriction, delays by any municipal, governmental and/or quasi-governmental
authority, unusual transportation delays, material or supply shortages or
back order, riots, floods. freezing, washouts, explosions, earthquakes, fire,
storms, acts of the public enemy, acts of vandals, wars, insurrections,
delays by utility suppliers, and any other cause not reasonably within the
control of the Landlord and which by the exercise of due diligence Landlord
is unable, wholly or in part, to prevent or overcome.
20. ATTORNEY'S FEES: In the event Tenant defaults in the performance of any
of the terms, covenants, agreements or conditions contained in this Lease,
the collection of any rent due or to become due or the recovery of the
possession of the premises, Tenant agrees to pay Landlord's attorney fees. In
the event, suit is brought against the Landlord and Landlord is found to be
"at fault". Landlord shall pay the Tenant's Attorney's Fees.
21. HOLDING OVER: In the event of holding over by the Tenant after the
expiration or termination of this extension, the holdover shall be as a
Tenant at will and all of the terms, provisions and covenants of this lease
shall continue if force except that rents will be an amount equal to 1-1/2
times the rent which would have been payable by Tenant had the hold over
period been apart of the original term of this lease.
22. RIGHTS OF FIRST MORTGAGEE OR SUBSEQUENT TRANSFEREES: Tenant accepts this
lease subject and subordinate to any recorded deed conveying title, first or
other mortgage deed of trust lien presently existing or hereafter created
upon the premises, building and/or common areas. Tenant agrees upon demand
and in a reasonable time period to execute additional instruments
subordinating this lease as Landlord may require.
23. ESTOPPEL CERTIFICATES AND ATTORNMENT: Tenant agrees to furnish promptly,
from time to time. upon request of Landlord or Landlord's mortgagee a
statement certifying that the Tenant is in possession of the premises: the
premises are acceptable: the lease is in full force and effect: the lease is
unmodified: Tenant claims no present charge, lien, or claim of offset against
rent: the rent is paid for the month, but is not prepaid for more than one
month in advance: there is no existing default by reason of some act or
omission by Landlord: and such other matters as may be reasonably required
for foreclosure, or in the event of exercise of the power of sale under any
mortgage or deed of trust made by the Landlord under this lease. No mortgagee
shall be liable for any act or omission of Landlord, be bound by any payment
of rent, additional rent or any other charge made more than thirty (30) days
in advance of the due date thereof, or be bound by any assignment, surrender,
termination, cancellation amendment or modification of the lease without the
express written consent of
<PAGE>
the mortgagee.
24. GOVERNING LAW: This lease is made and delivered in the State of Colorado
and shall be interpreted, construed, and enforced in accordance with the laws
thereof.
25. SUCCESSORS: This lease shall be binding upon and inure to the benefit of
Landlord and Tenant and their respective heirs, personal representatives,
successors and assigns.
26. TIME OF ESSENCE: Time is of the essence in this lease.
27. MISCELLANEOUS: The captions appearing in this lease are inserted only as
a matter of convenience and in no way define, limit, construe or describe the
scope or intent of such paragraph. If any provision of this lease shall ever
be held to be invalid or unenforceable, such invalidity or unenforceability
shall not affect any other provision of this lease, and all other provisions
shall continue in full force and effect.
28. NON WAIVER: The receipt by Landlord of rent with knowledge of the breach
on any covenant of this lease shall not be deemed a waiver of such breach and
no provision of this lease shall be deemed to have been waived by the
Landlord unless such waiver be in writing signed by the Landlord.
29. Notice: All written notices, rent and other payments required to be made
by Tenant shall be payable to Landlord at the address set forth below, or at
such other address as Landlord may specify from time to time by written
notice.
Landlord: John or Sharon Sanders
154 Talamine Court
Colorado Springs, Colorado 80907
<PAGE>
Any notices will be mailed to the address set forth below, or at such other
address as Tenant may specify from time to time by written notice.
Tenant: Spectranetics, Inc.
148 Talamine Court
Colorado Springs, Colorado 80907
30. ENTIRE AGREEMENT AND LIMITATION OF WARRANTES: It is expressly agreed by
Tenant, as a material consideration for the execution of this lease: that
this lease, with the specific references to written extrinsic documents, is
the entire agreement of the parties; that there are. and were no verbal
representations, warranties, understandings, stipulations, agreements or
promises pertaining to this lease or the expressly mentioned written
extrinsic documents not incorporated in writing in this lease. Landlord and
Tenant expressly agree that there are and shall be no implied warranties
which extend beyond those expressly set forth in this lease. It is likewise
agreed that this lease may not be altered, waived, amended or extended except
by an instrument in writing signed by both Landlord and Tenant. There are a
total of seven (7) pages in this lease.
Signed in County of El Paso, City of Colorado Springs, State of Colorado on this
______ of ________, 1997.
Landlord: Tenant:
By: (signed) John Sanders By: (signed) James P. McCluskey
- -------------------------------------------------------------------------------
Landlord VP Finance
<PAGE>
EIGHTH AMENDMENT TO COMMERCIAL LEASE
THIS EIGHTH AMENDMENT TO COMMERCIAL LEASE ("EIGHTH AMENDMENT") is made this
24th day of July, 1997, between Full Circle Partnership III Ltd. (hereinafter
referred to as "Landlord") and Spectranetics Corporation, (hereinafter referred
to as "Tenant").
1. TERM: The termination date of the lease shall be extended to
December 31, 2000.
2. RENT: Monthly base rental to be - 1998 - $12,189.00
1999 - $12,798.10
2000 - $13,438.00
3. OPTION: Tenant shall have the right to extend this lease for an
additional Two (2) year period ending December 31, 2002. Option shall be
exercised by Tenant giving written notice to Landlord no later than September
30, 2000. Monthly base rent for the option period shall be: 2001 - $14,310.00,
and 2002 - $14,816.00.
4. HVAC: Landlord agrees that Tenant will not be responsible for the
repair or replacement of HVAC units, except as included in NNN charges, during
the term of this lease.
5. LEASE PROVISIONS: All terms, conditions and assignments of the lease and
amendments one through seven shall remain the same except for the above items
one, two, three, and four.
LANDLORD
Full Circle Partnership III
By: (signed) J. Braxton Carter
--------------------------
Its: General Partner
Date: 12/3/97
TENANT
Spectranetics Corporation
By: (signed) Lawrence E. Martel
--------------------------
Its: Vice President
Date 7/28/97
<PAGE>
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is entered into as of December 24,
1997, by and between SILICON VALLEY BANK, a California-chartered bank
("Bank"), with its principal place of business at 3003 Tasman Drive, Santa
Clara, CA 95054 and with a loan production office located at 4430 Arapahoe
Avenue, Suite 225, Boulder, Colorado 80303 and The Spectranetics
Corporation, a Delaware corporation with its principal place of business at
96 Talamine Court, Colorado Springs, Colorado 80907 ("Spectranetics"), and
Polymicro Technologies, Inc., a California corporation with its principal
place of business at 18019 North 25 Avenue, Phoenix, Arizona ("Polymicro").
RECITALS
Borrowers wish to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrowers. This Agreement sets forth the terms
on which Bank will advance credit to Borrowers, and Borrowers will repay the
amounts owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to either
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering
of services by such Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by such Borrower and Borrower's
Books relating to any of the foregoing.
"Advance" or "Advances" means a loan advance under the
Committed Revolving Line.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls
or is controlled by or is under common control with such Person, and each of
such Person's senior executive officers, directors, partners and, for any
Person that is a limited liability company, such Persons, managers and
members.
"Bank Expenses" means all reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection
with the preparation, negotiation, administration, and enforcement of the
Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred
in amending, enforcing or defending the Loan Documents, (including fees and
expenses of appeal or review, or those incurred in any Insolvency Proceeding)
whether or not suit is brought.
<PAGE>
"Borrower" means Spectranetics or Polymicro and "Borrowers"
means Spectranetics and Polymicro, collectively.
"Borrower's Books" means all of either Borrower's books and
records including, without limitation: ledgers; records concerning either
Borrower's assets or liabilities, the Collateral, business operations or
financial condition; and all computer programs, or tape files, and the
equipment, containing such information.
"Borrowing Base" means an amount equal to eighty percent (80%)
of Eligible Accounts, as determined by Bank with reference to the most recent
Borrowing Base Certificate delivered by Borrowers.
"Business Day" means any day that is not a Saturday, Sunday,
or other day on which banks in the State of California are authorized or
required to close.
"Change in Control" means, with respect to a Borrower, (a) all
or substantially all of the assets of such Borrower are sold, in one or in a
series of transactions, to any "Person" or "Group" (as such terms are used in
Sections 14(d)(2) and 13(d)(3), respectively of the Exchange Act); or (b) an
event or series of events (whether a stock purchase, merger, consolidation or
other business combination or otherwise) by which any Person or Group is or
becomes the "beneficial owner" (as defined under Rule 13d-3 under the
Exchange Act) directly or indirectly of fifty percent (50%) or more of the
combined voting power of the then outstanding securities of such Borrower
ordinarily having the right to vote in the election of directors.
"Closing Date" means the date of this Agreement.
"Code" means the Colorado Uniform Commercial Code.
"Collateral" means the property described on EXHIBIT A
attached hereto.
"Committed Revolving Line" means a credit extension of up to
Three Million Dollars ($3,000,000).
Committed Equipment Line means a credit extension of up to Two
Million Dollars ($2,000,000).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold
with recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
provided, however, that the term "Contingent Obligation" shall not include
endorsements for collection or deposit in the ordinary course of business.
The amount of any Contingent Obligation shall be deemed to be an amount equal
to the stated or determined amount of
2
<PAGE>
the primary obligation in respect of which such Contingent Obligation is made
or, if not stated or determinable, the maximum reasonably anticipated
liability in respect thereof as determined by such Person in good faith;
provided, however, that such amount shall not in any event exceed the maximum
amount of the obligations under the guarantee or other support arrangement.
"Copyrights" means any and all copyright rights, copyright applications,
copyright registrations and like protections in each work or authorship and
derivative work thereof, whether published or unpublished and whether or not
the same also constitutes a trade secret, now or hereafter existing, created,
acquired or held.
"Credit Extension" means each Advance, Equipment Advance,
Letter of Credit, Term Loan, Exchange Contract or any other extension of
credit by Bank for the benefit of Borrowers hereunder.
"Current Assets" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Spectranetics and its Subsidiaries as at such
date.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Spectranetics and its
Subsidiaries, as at such date, including all Indebtedness that is payable
upon demand or within one year from the date of determination thereof unless
such Indebtedness is renewable or extendable at the option of either Borrower
or Subsidiary to a date more than one year from the date of determination,
but excluding Subordinated Debt and excluding deferred license revenues.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of either Borrower's business that comply with all of
Borrower's representations and warranties to Bank set forth in Section 5.4;
PROVIDED, that standards of eligibility may be fixed and revised from time to
time by Bank in Bank's reasonable judgment and upon notification thereof to
Borrowers in accordance with the provisions hereof. Unless otherwise agreed
to by Bank in writing, Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, fifty percent
(50%) of whose Accounts the account debtor has failed to pay within ninety
(90) days of invoice date;
(c) Accounts with respect to an account debtor, including
Affiliates, whose total obligations to either Borrower, individually, or to
Borrowers, collectively, exceed twenty-five percent (25%) of all Accounts, to
the extent such obligations exceed the aforementioned percentage, except as
approved in writing by Bank;
(d) Accounts with respect to which the account debtor does
not have its principal place of business in the United States except for
Eligible Foreign Accounts;
(e) Accounts with respect to which the account debtor is a
federal, state, or local governmental entity or any department, agency, or
instrumentality
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thereof, except for those Accounts of the United States or any department,
agency or instrumentality thereof as to which the payee has assigned its
rights to payment thereof to Bank and the assignment has been acknowledged,
pursuant to the Assignment of Claims Act of 1940, as amended (31 U.S.C.
3727);
(f) Accounts with respect to which either Borrower is liable
to the account debtor, but only to the extent of any amounts owing to the
account debtor (sometimes referred to as "contra" accounts, e.g. accounts
payable, customer deposits, credit accounts etc.);
(g) Accounts generated by demonstration or promotional
equipment, or with respect to which goods are placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, or other
terms by reason of which the payment by the account debtor may be conditional;
(h) Accounts with respect to which the account debtor is an
Affiliate, officer, employee, or agent of either Borrower;
(i) Accounts with respect to which the account debtor
disputes liability or makes any claim with respect thereto as to which Bank
believes, in its sole discretion, that there may be a basis for dispute (but
only to the extent of the amount subject to such dispute or claim), or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business; and
(j) Accounts the collection of which Bank reasonably
determines to be doubtful.
"Eligible Foreign Accounts" means Accounts with respect to
which the account debtor does not have its principal place of business in the
United States and that are: (1) covered by credit insurance in form and
amount, and by an insurer satisfactory to Bank less the amount of any
deductible(s) which may be or become owing thereon; or (2) supported by one
or more letters of credit either advised or negotiated through Bank or in
favor of Bank as beneficiary, in an amount and of a tenor, and issued by a
financial institution, acceptable to Bank; or (3) that Bank approves on a
case-by-case basis.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which either Borrower has any interest.
"Equipment Advance" has the meaning set forth in Section 2.1.2.
"Equipment Availability Date" has the meaning set forth in
Section 2.1.2.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, together with all rules, regulations, and interpretations thereunder.
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"GAAP" means generally accepted accounting principles as in
effect in the United States from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money
or the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds
and letters of credit, (b) all obligations evidenced by notes, bonds,
debentures or similar instruments, (c) all capital lease obligations and (d)
all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States
Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
"Intellectual Property Collateral" means
(a) Copyrights, Trademarks, and Patents;
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to
either Borrower now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present
and future infringement of any of the rights included above, with the right,
but not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the
Copyrights, Patents, or Trademarks, and all license fees and royalties
arising from such use to the extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks, or Patents; and
(g) All proceeds and products of the foregoing, including
without limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
"Inventory" means all present and future inventory in which
either Borrower has any interest, including merchandise, raw materials,
parts, supplies, packing and shipping materials, work in process and finished
products intended for sale or lease or to be furnished under a contract of
service, of every kind and description now or at any time hereafter owned by
or in the custody or possession, actual or constructive, of either Borrower,
including such inventory as is temporarily out of its custody or possession
or in transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above.
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"Investment" means any beneficial ownership of (including
stock, partnership interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.
"Intellectual Property Security Agreement" means the
Intellectual Property Security Agreement of even date herewith by and among
Bank, Spectranetics and Polymicro.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge,
pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note
or notes executed by either Borrower, the Intellectual Property Security
Agreement, all financing statements filed by Bank pursuant to the Code in
order to perfect the security interests granted to Bank by either Borrower,
any other present or future agreement entered into between either Borrower
and/or for the benefit of Bank in connection with this Agreement, all as
amended, extended or restated from time to time.
"Material Adverse Effect" means a material adverse effect on
(i) the business operations or condition (financial or otherwise) of either
Borrower and its Subsidiaries taken as a whole or (ii) the ability of either
Borrower to repay the Obligations or otherwise perform its obligations under
the Loan Documents.
"Maturity Date" means the Term Maturity Date.
"Negotiable Collateral" means all of either Borrower's present
and future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper which comprise
a part of the Collateral.
"Obligations" means all debt, principal, interest, Bank
Expenses and other amounts owed to Bank by either Borrower pursuant to this
Agreement or any other agreement, whether absolute or contingent, due or to
become due, now existing or hereafter arising, including any interest that
accrues after the commencement of an Insolvency Proceeding and including any
debt, liability, or obligation owing from either Borrower to others that Bank
may have obtained by assignment or otherwise.
"Patents" means all patents, patent applications and like
protections including without limitation improvements, divisions,
continuations, renewals, reissues, extensions and continuations-in-part of
the same.
"Payment Date" means the first calendar day of each month
commencing on the first such date after the Closing Date and ending on the
Term Maturity Date.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrowers in favor of Bank arising under
this Agreement or any other Loan Document;
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(b) Indebtedness existing on the Closing Date and disclosed
in the Schedule, and any Indebtedness related to the extension of the term of
leases for real property provided that such extensions are on the same terms
and conditions of such leases existing on the Closing Date;
(c) Subordinated Debt;
(d) Indebtedness under capital leases; and
(e) Indebtedness to trade creditors incurred in the ordinary
course of business.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule; and
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or
any State thereof maturing within one (1) year from the date of acquisition
thereof, (ii) commercial paper maturing no more than one (1) year from the
date of creation thereof and currently having the highest rating obtainable
from either Standard & Poor's Corporation or Moody's Investors Service, Inc.,
and (iii) certificates of deposit maturing no more than one (1) year from the
date of investment therein issued by Bank.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in
the Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies which are not yet due or, if due, are being contested in
good faith by appropriate proceedings; provided, that, (i) such contest shall
have the effect of preventing the sale or forfeiture of any of the Collateral
or any interest of either Borrower therein, (ii) the Borrower against which
the tax or other governmental charge is assessed establishes adequate
reserves therefor on such Borrower's Books in accordance with GAAP, and (iii)
such Borrower promptly furnishes to Bank such additional security
satisfactory to Bank as Bank may request, and (iv) such Borrower promptly
pays such tax or other governmental charge in the event of a final ruling or
adjudication adverse to such Borrower;
(c) Liens (i) upon or in any Equipment acquired or held by
either Borrower or any of its Subsidiaries after the date hereof to secure
the purchase price of such Equipment or indebtedness incurred solely for the
purpose of financing the acquisition of such Equipment, or (ii) existing on
such Equipment at the time of its acquisition, PROVIDED that the Lien is
confined solely to the property so acquired and improvements thereon, and the
proceeds of such Equipment; and
(d) Liens incurred in connection with the extension, renewal
or refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, PROVIDED that any extension, renewal or
replacement Lien shall be
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limited to the property encumbered by the existing Lien and the principal
amount of the indebtedness being extended, renewed or refinanced does not
increase.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum,
most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Quick Assets" means, as of any applicable date, the
consolidated cash, cash equivalents, accounts receivable and investments with
maturities of less than 1 year of Borrowers determined in accordance with
GAAP, and any governmental securities described in Subsection (b)(i) of the
definition of Permitted Investments set forth above.
"Responsible Officer" means each of the Chief Executive
Officer, the President and the Chief Financial Officer of either Borrower.
"Revolving Maturity Date" means December 23, 1998.
"Schedule" means the schedule of exceptions attached hereto,
if any.
"Subordinated Debt" means any debt incurred by either Borrower
that is subordinated to the debt owing by such Borrower to Bank on terms
acceptable to Bank (and identified as being subordinated by such Borrower and
Bank).
"Subsidiary" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business entity
of which more than fifty percent (50%) of the voting stock or other equity
interests is owned or controlled, directly or indirectly, by such Person or
one or more Affiliates of such Person.
"Tangible Net Worth" means as of any applicable date, the
consolidated total assets of Spectranetics and its Subsidiaries MINUS,
without duplication, (i) the sum of any amounts attributable to (a) goodwill,
(b) intangible items such as unamortized debt discount and expense, patents,
trade and service marks and names, copyrights and research and development
expenses except prepaid expenses, and (c) all reserves not already deducted
from assets, AND (ii) Total Liabilities.
"Term Maturity Date" means December 23, 2000.
"Total Liabilities" means as of any applicable date, any date
as of which the amount thereof shall be determined, all obligations that
should, in accordance with GAAP be classified as liabilities on the
consolidated balance sheet of Borrowers, including in any event all
Indebtedness, but specifically excluding Subordinated Debt.
"Trademarks" means any trademark and servicemark rights,
whether registered or not, applications to register and registrations of the
same and like protections, and the entire goodwill of the businesses of
Borrowers connected with and symbolized by such trademarks.
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1.2 ACCOUNTING AND OTHER TERMS. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP and
all calculations and determinations made hereunder shall be made in
accordance with GAAP. When used herein, the term "financial statements"
shall include the notes and schedules thereto. The terms "including"/
"includes" shall always be read as meaning "including (or includes) without
limitation", when used herein or in any other Loan Document.
2. LOAN AND TERMS OF PAYMENT
2.1 CREDIT EXTENSIONS. Borrowers promise, jointly and severally,
to pay to the order of Bank, in lawful money of the United States of America,
the aggregate unpaid principal amount of all Credit Extensions made by Bank
to Borrowers hereunder. Borrowers shall also pay interest on the unpaid
principal amount of such Credit Extensions at rates in accordance with the
terms hereof.
2.1.1(a) Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Advances to Borrowers in an aggregate
outstanding amount not to exceed the Committed Revolving Line or the
Borrowing Base, whichever is less. Subject to the terms and conditions of
this Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid
and reborrowed at any time during the term of this Agreement.
(b) Whenever Borrowers desire an Advance, Borrowers will
notify Bank by facsimile transmission or telephone no later than 3:00 p.m.
Pacific Time, on the Business Day that the Advance is to be made. Each such
notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of EXHIBIT B hereto. Bank is authorized to make
Advances under this Agreement, based upon instructions received from a
Responsible Officer or a designee of a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled
to rely on any telephonic notice given by a person who Bank reasonably
believes to be a Responsible Officer or a designee thereof, and Borrowers,
jointly and severally, shall indemnify and hold Bank harmless for any damages
or loss suffered by Bank as a result of such reliance. Bank will credit the
amount of Advances made under this Section 2.1 to such Borrower's deposit
account with Bank, as identified in the Payment/Advance Form.
(c) The Committed Revolving Line shall terminate on the
Revolving Maturity Date, at which time all Advances under this Section 2.1
and other amounts due under this Agreement (except as otherwise expressly
specified herein) shall be immediately due and payable.
2.1.2 EQUIPMENT ADVANCES.
(a) Subject to and upon the terms and conditions of this
Agreement, at any time from the date hereof through May 24, 1998 (the
"Equipment Availability End Date"), Bank agrees to make advances (each an
"Equipment Advance" and collectively, the "Equipment Advances") to Borrowers
in an aggregate outstanding amount not to exceed the Committed Equipment
Line. The Equipment Advances shall be used only to purchase or refinance
Equipment or manufacture excimer laser systems held for lease by
Spectranetics to third parties ("Laser Inventory"). The initial Equipment
Advance shall equal $1,100,000. To evidence subsequent Equipment Advances,
Borrowers shall deliver to Bank, at the time of each such subsequent
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Equipment Advance request, an invoice for the Equipment to be purchased or,
in the case of Laser Inventory, sufficient and adequate evidence of the cost
of such Laser Inventory. The request for such subsequent Equipment Advances
shall not exceed One Hundred Percent (100%) of the invoice amount of such
Equipment or cost of such Laser Inventory, in each case excluding taxes,
shipping, warranty charges, freight discounts and installation expense. At
no time may Equipment Advances attributable to Laser Inventory exceed 50% of
the aggregate outstanding amount of Equipment Advances made to Borrowers.
Each Equipment Advance must be in a minimum amount of Two Hundred Thousand
Dollars ($200,000).
(b) Interest shall accrue from the date of each Equipment
Advance at a per annum rate equal to three quarters (.75) of a percentage
point above the Prime Rate, and shall be payable monthly for each month
through the month in which the Equipment Availability End Date falls. Any
Equipment Advances that are outstanding on the Equipment Availability End
Date will be payable in thirty (30) equal monthly installments of principal,
plus all accrued interest, beginning on the Payment Date of each month
following the Equipment Availability End Date and ending on the Maturity
Date. Equipment Advances, once repaid, may not be reborrowed.
(c) When Borrowers desire to obtain an Equipment Advance,
Borrowers shall notify Bank (which notice shall be irrevocable) by facsimile
transmission to be received no later than 3:00 p.m. Pacific time one (1)
Business Day before the day on which the Equipment Advance is to be made.
Such notice shall be substantially in the form of Exhibit B. The notice
shall be signed by a Responsible Officer or its designee and include a copy
of the invoice for the Equipment to be financed.
2.2 OVERADVANCES. If, at any time or for any reason, the amount
of Obligations owed by Borrowers to Bank pursuant to Section 2.1.1 of this
Agreement is greater than the lesser of (i) the Committed Revolving Line or
(ii) the Borrowing Base, Borrowers shall immediately pay to Bank, in cash,
the amount of such excess.
2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS
(a) INTEREST RATE. Except as set forth in Section 2.3(b),
any Advances shall bear interest, on the average daily balance thereof, at a
per annum rate equal to one quarter (.25) of a percentage point above the
Prime Rate.
(b) DEFAULT RATE. All Obligations shall bear interest, from
and after the occurrence of an Event of Default, at a rate equal to five (5)
percentage points above the interest rate applicable immediately prior to the
occurrence of the Event of Default (the "Default Rate").
(c) PAYMENTS. Interest hereunder shall be due and payable on
each Payment Date. Borrowers will regularly deposit funds received from their
business activities in accounts maintained by Borrowers at Bank. Borrowers
hereby request and authorize Bank to debit any of their respective accounts
with Bank, including, without limitation, Account Number 3300051777 for
payments of principal and interest due on the Obligations and any other
amounts owing by Borrowers to Bank. Bank will notify Borrowers of all debits
which Bank has made against their respective accounts. Any such debits
against Borrowers' accounts in no way shall be deemed a set-off. Any
interest not paid when due shall be compounded by becoming a part of the
Obligations, and such interest shall thereafter accrue interest at the rate
then applicable hereunder.
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(d) COMPUTATION. In the event the Prime Rate is changed from
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate
is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the basis
of a three hundred sixty (360) day year for the actual number of days elapsed.
2.4 CREDITING PAYMENTS. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrowers specify. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment, whether directed to either Borrower's
deposit account with Bank or to the Obligations or otherwise, shall be
immediately applied to conditionally reduce the Obligations, but shall not be
considered a payment in respect of the Obligations unless such payment is of
immediately available federal funds or unless and until such check or other item
of payment is honored when presented for payment. Notwithstanding anything to
the contrary contained herein, any wire transfer or payment received by Bank
after 12:00 noon Pacific time shall be deemed to have been received by Bank as
of the opening of business on the immediately following Business Day. Whenever
any payment to Bank under the Loan Documents would otherwise be due (except by
reason of acceleration) on a date that is not a Business Day, such payment shall
instead be due on the next Business Day, and additional fees or interest, as the
case may be, shall accrue and be payable for the period of such extension.
2.5 FEES. Borrowers shall pay to Bank the following:
(a) FACILITY FEE. A Facility Fee equal to Twenty Five
Thousand Five Hundred Dollars ($25,500), which fee shall be due on the
Closing Date and shall be fully earned and non-refundable;
(b) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrowers'
Accounts, and for each appraisal of Collateral and financial analysis and
examination of either Borrower performed from time to time by Bank or its
agents;
(c) BANK EXPENSES. Upon demand from Bank, including, without
limitation, upon the date hereof, all Bank Expenses incurred through the date
hereof, including reasonable attorneys' fees and expenses, and, after the
date hereof, all Bank Expenses, including reasonable attorneys' fees and
expenses, as and when they become due.
2.6 ADDITIONAL COSTS. In case any law, regulation, treaty or
official directive or the interpretation or application thereof by any court
or any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrowers or
otherwise with respect to the transactions contemplated hereby (except for
taxes on the overall net income of Bank imposed by the United States of
America or any political subdivision thereof);
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(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets
held by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement, and the result of any of the foregoing is
to increase the cost to Bank, reduce the income receivable by Bank or impose
any expense upon Bank with respect to any loans, Bank shall notify Borrowers
thereof. Borrowers agree to pay to Bank the amount of such increase in cost,
reduction in income or additional expense as and when such cost, reduction or
expense is incurred or determined, upon presentation by Bank of a statement
of the amount and setting forth Bank's calculation thereof, all in reasonable
detail, which statement shall be deemed true and correct absent manifest
error.
2.7 TERM. Except as otherwise set forth herein, this Agreement
shall become effective on the Closing Date and, subject to Section 12.7,
shall continue in full force and effect for a term ending on the later of (a)
the Maturity Date or (b) the date on which Bank has received payment in full
of all Obligations. Notwithstanding the foregoing, Bank shall have the right
to terminate its obligation to make Credit Extensions under this Agreement
immediately and without notice upon the occurrence and during the continuance
of an Event of Default. Notwithstanding termination of Bank's obligation to
make Credit Extensions under this Agreement, Bank's lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. The obligation
of Bank to make the initial Credit Extension is subject to the condition
precedent that Bank shall have received, in form and substance satisfactory to
Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of each Borrower with
respect to such Borrower's articles, bylaws, incumbency and resolutions
authorizing the execution and delivery of this Agreement;
(c) the Intellectual Property Security Agreement;
(d) an opinion of counsel to Spectranetics and Polymicro;
(e) financing statements (Forms UCC-1) naming Spectranetics,
as debtor, and Bank as secured party to be filed in Colorado, and executed by
Spectranetics;
(f) financing statement (Forms UCC-1) naming Polymicro, as
debtor, and Bank as secured party to be filed in Arizona, executed by
Polymicro;
(g) insurance certificates showing that all insurance
coverage required to be maintained by Borrowers under the Loan Documents has
been obtained and is in effect;
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(h) payment of the fees and Bank Expenses then due specified
in Section 2.5 hereof;
(i) searches of appropriate filing offices showing that (i)
no state or federal tax liens have been filed which remain in effect against
either Borrower, and (ii) no financing statements have been filed by any
Person other than Bank, which remain in effect against either Borrower or any
of their respective assets;
(j) Certificate of Foreign Qualification (if applicable);
(k) evidence that Spectranetics has established its principal
depository and operating accounts with Bank;
(l) the satisfactory completion of an audit of the Accounts
of each Borrower by Bank; and
(l) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. The obligation
of Bank to make each Credit Extension, including the initial Credit
Extension, is further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of
such Payment/Advance Form and on the effective date of each Credit Extension
as though made at and as of each such date, and no Event of Default shall
have occurred and be continuing, or would result from such Credit Extension.
The making of each Credit Extension shall be deemed to be a representation
and warranty by each Borrower on the date of such Credit Extension as to the
accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST. Each Borrower grants and
pledges to Bank a continuing security interest in all presently existing and
hereafter acquired or arising Collateral in order to secure prompt payment of
any and all Obligations and in order to secure prompt performance by
Borrowers of each of their respective covenants and duties under the Loan
Documents. Except as set forth in the Schedule regarding Permitted Liens,
such security interest constitutes a valid, first priority security interest
in the presently existing Collateral, and will constitute a valid, first
priority security interest in Collateral acquired after the date hereof.
Borrowers acknowledge that Bank may place a "hold" on any deposit account
pledged as Collateral to secure the Obligations. Notwithstanding termination
of Bank's obligation to make Credit Extensions under this Agreement, Bank's
Lien on the Collateral shall remain in effect for so long as any Obligations
are outstanding.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrowers
shall from time to time execute and deliver to Bank, at the request of Bank,
all Negotiable Collateral, all financing statements and other documents that
Bank may reasonably request, in form satisfactory to Bank, to perfect and
continue perfected Bank's security interests in the
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Collateral and in order to fully consummate all of the transactions
contemplated under the Loan Documents.
4.3 RIGHT TO INSPECT. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice,
from time to time during Borrowers' usual business hours, to inspect
Borrower's Books and to make copies thereof and to check, test, and appraise
the Collateral in order to verify Borrowers' financial condition or the
amount, condition of, or any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES. Each Borrower represents
and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Each Borrower and its
Subsidiaries is a corporation duly existing and in good standing under the
laws of its state of incorporation and qualified and licensed to do business
in, and is in good standing in, any state in which the conduct of its
business or its ownership of property requires that it be so qualified.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution and delivery,
and the performance of each Borrower of its obligations under the Loan
Documents, are within each Borrower's powers, have been duly authorized, and
are not in conflict with nor constitute a breach of any provision contained
in its Articles/Certificate of Incorporation or Bylaws, nor will they
constitute an event of default under any material agreement to which such
Borrower is a party or by which such Borrower is bound. Neither Borrower is
in default under any agreement to which it is a party or by which it is
bound, which default could have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Each Borrower has good and
indefeasible title to the Collateral granted and pledged to Bank by such
Borrower hereunder, free and clear of Liens, except for Permitted Liens.
5.4 BONA FIDE ELIGIBLE ACCOUNTS. The Eligible Accounts are bona
fide existing obligations. The service or property giving rise to such
Eligible Accounts has been performed or delivered to the account debtor or to
the account debtor's agent for immediate shipment to and unconditional
acceptance by the account debtor. No Borrower has received notice of actual
or imminent Insolvency Proceeding of any account debtor whose accounts are
included in any Borrowing Base Certificate as an Eligible Account. The amount
of each Eligible Account represented by either Borrower as owing to such
Borrower is the correct amount actually and unconditionally owing except for
cash discounts granted by such Borrower in the ordinary course of such
Borrower's business and is not subject to any setoffs, credits, defenses or
countercharges.
5.5 MERCHANTABLE INVENTORY. All Inventory is in all material
respects of good and marketable quality, free from all material defects.
5.6 INTELLECTUAL PROPERTY. Each Borrower is the sole owner of the
Intellectual Property Collateral granted and pledged to bank by such Borrower
hereunder, except for non-exclusive licenses granted by such Borrower to its
customers in the ordinary course of business. Each of the Patents is valid
and enforceable, and no part of the Intellectual Property Collateral has been
judged invalid or unenforceable, in whole or in
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part, and no claim has been made that any part of the Intellectual Property
Collateral violates the rights of any third party. Except for and upon the
filing with the United States Patent and Trademark Office with respect to the
Patents and Trademarks and the Register of Copyrights with respect to the
Copyrights necessary to perfect the security interests created hereunder, and
except as has been already made or obtained, no authorization, approval or
other action by, and no notice to or filing with, any United States
governmental authority or United States regulatory body is required either
(i) for the grant by Borrowers of the security interest granted hereby or for
the execution, delivery or performance of the Loan Documents by Borrowers in
the United States or (ii) for the perfection in the United States or the
exercise by Bank of its rights and remedies hereunder.
5.7 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE AND COLLATERAL.
Except as disclosed in the Schedule, no Borrower has done business and will
not, without at least thirty (30) days prior written notice to Bank and
provision to Bank of all documents reasonably requested by Bank in order to
maintain and continue its perfected security interest in the Collateral, do
business under any name other than that specified on the signature page
hereof. The chief executive office of each Borrower is located at the
address indicated in Section 10 hereof. The locations of all Collateral and
a description of the types of Collateral at each such location are set forth
on the Schedule.
5.8 LITIGATION. Except as set forth in the Schedule, there are no
actions or proceedings pending, or, to either Borrower's knowledge,
threatened by or against either Borrower or any Subsidiary before any court
or administrative agency in which an adverse decision could have a Material
Adverse Effect or a material adverse effect on either Borrower's interest or
Bank's security interest in the Collateral
5.9 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements related to Borrowers and any Subsidiary
that have been delivered by Borrowers to Bank fairly present in all material
respects Borrowers' consolidated financial condition as of the date thereof
and Borrowers' consolidated results of operations for the period then ended.
There has not been a material adverse change in the consolidated financial
condition of Borrowers since the date of the most recent of such financial
statements submitted to Bank on or about the Closing Date.
5.10 SOLVENCY. The fair saleable value of each Borrower's assets
(including goodwill minus disposition costs) exceeds the fair value of its
liabilities; neither Borrower is left with unreasonably small capital after
the transactions contemplated by this Agreement; and each Borrower is able to
pay its debts (including trade debts) as they mature.
5.11 REGULATORY COMPLIANCE. Each Borrower and Subsidiary has met
the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. No event has occurred resulting from either
Borrower's failure to comply with ERISA that is reasonably likely to result
in such Borrower incurring any liability that could have a Material Adverse
Effect. Neither Borrower is an "investment company" or a company "controlled"
by an "investment company" within the meaning of the Investment Company Act
of 1940. Neither Borrower is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing
or carrying margin stock (within the meaning of Regulations G, T and U of the
Board of Governors of the Federal Reserve System). Each Borrower has
complied with all the provisions of the Federal Fair Labor Standards Act. No
Borrower has violated any
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statutes, laws, ordinances or rules applicable to it, violation of which
could have a Material Adverse Effect.
5.12 ENVIRONMENTAL CONDITION. None of Borrowers' or any
Subsidiary's properties or assets has ever been used by either Borrower or
any Subsidiary or, to the best of each Borrower's knowledge, by previous
owners or operators, in the disposal of, or to produce, store, handle, treat,
release, or transport, any hazardous waste or hazardous substance other than
in accordance with applicable law; to the best of each Borrower's knowledge,
none of Borrowers' properties or assets has ever been designated or
identified in any manner pursuant to any environmental protection statute as
a hazardous waste or hazardous substance disposal site, or a candidate for
closure pursuant to any environmental protection statute; no lien arising
under any environmental protection statute has attached to any revenues or to
any real or personal property owned by either Borrower or any Subsidiary; and
none of Borrowers or any Subsidiary has received a summons, citation, notice,
or directive from the Environmental Protection Agency or any other federal,
state or other governmental agency concerning any action or omission by any
Borrower or Subsidiary resulting in the release, or other disposition of
hazardous waste or hazardous substances into the environment.
5.13 TAXES. Each Borrower and Subsidiary has filed or caused to be
filed all tax returns required to be filed on a timely basis, and has paid,
or has made adequate provision for the payment of, all taxes reflected
therein.
5.14 SUBSIDIARIES. Neither Borrower owns any stock, partnership
interest or other equity securities of any Person, except for those entities
listed on Schedule 5.14 attached hereto and Permitted Investments.
5.15 GOVERNMENT CONSENTS. Each Borrower and Subsidiary has
obtained all licenses, consents, approvals and authorizations of, made all
declarations or filings with, and given all notices to, all governmental
authorities that are necessary for the continued operation of such Borrower's
business as currently conducted or for the execution, delivery and
performance of Borrowers' obligations under the Loan Documents.
5.16 FULL DISCLOSURE. No representation, warranty or other
statement made by either Borrower in any certificate or written statement
furnished to Bank contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements contained
in such certificates or statements not misleading.
6. AFFIRMATIVE COVENANTS
Each Borrower covenants and agrees that, until payment in full of
all outstanding Obligations, and for so long as Bank may have any commitment
to make a Credit Extension hereunder, Borrowers shall do all of the following:
6.1 GOOD STANDING. Each Borrower shall maintain its and each of
its Subsidiaries' corporate existence and good standing in its jurisdiction
of incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Each Borrower
shall maintain, and shall cause each of its Subsidiaries to maintain, to the
extent consistent with prudent management of such Borrower's business, in
force all licenses, approvals and agreements, the loss of which could have a
Material Adverse Effect.
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6.2 GOVERNMENT COMPLIANCE. Each Borrower shall meet, and shall
cause each Subsidiary to meet, the minimum funding requirements of ERISA with
respect to any employee benefit plans subject to ERISA. Each Borrower shall
comply, and shall cause each Subsidiary to comply, with all statutes, laws,
ordinances and government rules and regulations to which it is subject,
noncompliance with which could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Spectranetics
shall deliver to Bank: (a) as soon as available, but in any event within
forty-five (45) days after the end of each month, a company prepared
consolidated balance sheet and income statement covering Spectranetics'
consolidated operations during such period, in a form and certified by an
officer of Spectranetics reasonably acceptable to Bank; (b) as soon as
available, but in any event within ninety (90) days after the end of
Spectranetics' fiscal year, audited consolidated financial statements of
Spectranetics prepared in accordance with GAAP, consistently applied,
together with an unqualified opinion on such financial statements of an
independent certified public accounting firm reasonably acceptable to Bank;
(c) within five (5) days of filing, copies of all statements, reports and
notices sent or made available generally by Borrowers to their respective
security holders or to any holders of Subordinated Debt and all reports on
Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission;
(d) promptly upon receipt of notice thereof, a report of any legal actions
pending or threatened against either Borrower or Subsidiary that could
reasonably be expected to result in damages or costs to either Borrower or
any Subsidiary of One Hundred Thousand Dollars ($100,000) or more; (e) prompt
notice of any material change in the composition of the Intellectual Property
Collateral, including, but not limited to, any subsequent ownership right of
either Borrower in or to any Copyright, Patent or Trademark not specified in
any intellectual property security agreement among any of Borrowers and Bank
or knowledge of an event that materially adversely effects the value of the
Intellectual Property Collateral; and (f) such budgets, sales projections,
operating plans or other financial information as Bank may reasonably request
from time to time.
Within twenty (20) days after the last day of each month, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer
in substantially the form of EXHIBIT C hereto, together with aged listings of
accounts receivable and accounts payable.
Within forty-five (45) days after the last day of each month, Borrowers
shall deliver to Bank with the monthly financial statements a Compliance
Certificate signed by a Responsible Officer in substantially the form of
EXHIBIT D hereto.
Bank shall have a right from time to time hereafter to audit Borrowers'
Accounts at Borrowers' expense, provided that such audits will be conducted
no more often than every six (6) months unless an Event of Default has
occurred and is continuing.
6.4 INVENTORY; RETURNS. Each Borrower shall keep all Inventory in
good and marketable condition, free from all material defects. Returns and
allowances, if any, as between each Borrower and its account debtors shall be
on the same basis and in accordance with the usual customary practices of
such Borrower, as they exist at the time of the execution and delivery of
this Agreement. Each Borrower shall promptly notify Bank of all returns and
recoveries and of all disputes and claims, where the return, recovery,
dispute or claim involves more than Fifty Thousand Dollars ($50,000).
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6.5 TAXES. Each Borrower shall make, and shall cause each
Subsidiary to make, due and timely payment or deposit of all material
federal, state, and local taxes, assessments, or contributions required of it
by law, and will execute and deliver to Bank, on demand, appropriate
certificates attesting to the payment or deposit thereof; and each Borrower
will make, and will cause each Subsidiary to make, timely payment or deposit
of all material tax payments and withholding taxes required of it by
applicable laws, including, but not limited to, those laws concerning
F.I.C.A., F.U.T.A., state disability, and local, state, and federal income
taxes, and will, upon request, furnish Bank with proof satisfactory to Bank
indicating that such Borrower or a Subsidiary has made such payments or
deposits; provided that no Borrower or a Subsidiary need make any payment if
the amount or validity of such payment is (i) contested in good faith by
appropriate proceedings, (ii) is reserved against (to the extent required by
GAAP) by such Borrower and (iii) no lien other than a Permitted Lien results.
6.6 INSURANCE.
(a) Borrowers, at their own expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion,
sprinklers, and all other hazards and risks, and in such amounts, as
ordinarily insured against by other owners in similar businesses conducted in
the locations where Borrowers' businesses are conducted on the date hereof.
Borrowers shall also maintain insurance relating to Borrowers' ownership and
use of the Collateral in amounts and of a type that are customary to
businesses similar to Borrowers'.
(b) All such policies of insurance shall be in such form,
with such companies, and in such amounts as are reasonably satisfactory to
Bank. All such policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to Bank, showing Bank as an
additional loss payee thereof and all liability insurance policies shall show
the Bank as an additional insured, and shall specify that the insurer must
give at least twenty (20) days notice to Bank before canceling its policy for
any reason. At Bank's request, Borrowers shall deliver to Bank certified
copies of such policies of insurance and evidence of the payments of all
premiums therefor. All proceeds payable under any such policy shall, at the
option of Bank, be payable to Bank to be applied on account of the
Obligations.
6.7 PRINCIPAL DEPOSITORY. Spectranetics shall maintain its
principal depository and operating accounts with Bank.
6.8 QUICK RATIO. Borrowers, on a consolidated basis, shall
maintain, as of the last day of each calendar month, a ratio of Quick Assets
to Current Liabilities of at least 1.5 to 1.0.
6.9 DEBT-NET WORTH RATIO. Borrowers, on a consolidated basis,
shall maintain, as of the last day of each calendar month, a ratio of Total
Liabilities less Subordinated Debt to Tangible Net Worth plus Subordinated
Debt of not more than 1.25 to 1.0.
6.10 TANGIBLE NET WORTH PLUS SUBORDINATED DEBT. Borrowers, on a
consolidated basis, shall maintain, as of the last day of each calendar
month, a Tangible Net Worth plus Subordinated Debt of not less than Seven
Million Dollars ($7,000,000) plus Fifty Percent (50%) of net income, as
determined in accordance with GAAP, plus the
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aggregate amount of any additions to capital related to the issuance, sale or
recapitalization of Borrowers' securities by either Borrower or any
Subsidiary.
6.11 LIQUIDITY/DEBT SERVICE COVERAGE. Borrowers, on a consolidated
basis, shall maintain, (a) as of the last day of each calendar month from the
Closing Date through the end of the month in which Borrowers satisfy the Debt
Service Coverage ratio set forth in subsection 6.11(b) below for two
consecutive quarters, a ratio of unrestricted cash (and cash equivalents)
plus the net availabilities under the Committed Revolving Line to the
outstanding principal balance of the Equipment Advances, as determined in
accordance with GAAP, of not less than 2.0 to 1.0 and (b) as of the last day
of each month, a ratio of net income plus depreciation and amortization
(annualized based on the immediately preceding three-month period) to the
current portion of long-term debt and capitalized leases, as determined in
accordance with GAAP, of not less than 2.0 to 1.0 (the "Debt Service Coverage
Ratio"); provided, however, that Borrowers shall not be required to maintain
the Debt Service Coverage Ratio until Borrowers satisfy such ratio for two
consecutive quarters or March 30, 1999, whichever is later.
6.12 REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS.
(a) Each Borrower shall register or cause to be registered
(to the extent not already registered) with the United States Patent and
Trademark Office or the United States Copyright Office, as applicable, those
intellectual property rights listed on Exhibits A, B and C to the
Intellectual Property Security Agreement delivered to Bank by such Borrower
in connection with this Agreement within thirty (30) days of the date of this
Agreement. Each Borrower shall register or cause to be registered with the
United States Patent and Trademark Office or the United States Copyright
Office, as applicable, those additional intellectual property rights
developed or acquired by such Borrower from time to time in connection with
any product prior to the sale or licensing of such product to any third
party, including without limitation revisions or additions to the
intellectual property rights listed on such Exhibits A, B and C.
(b) Each Borrower shall execute and deliver such additional
instruments and documents from time to time as Bank shall reasonably request
to perfect Bank's security interest in the Intellectual Property Collateral.
(c) Each Borrower shall (i) protect, defend and maintain the
validity and enforceability of the Trademarks, Patents, and Copyrights, (ii)
use its best efforts to detect infringements of the Trademarks, Patents, and
Copyrights and promptly advise Bank in writing of material infringements
detected and (iii) not allow any Trademarks, Patents, or Copyrights to be
abandoned, forfeited or dedicated to the public without the written consent
of Bank, which shall not be unreasonably withheld, unless Bank determines
that reasonable business practices suggest that abandonment is appropriate.
(d) Bank shall have the right, but not the obligation, to take, at
Borrowers' sole expense, any actions that any Borrower is required under this
Section 6.12 to take but which such Borrower fails to take, after fifteen
(15) days' notice to such Borrower. Borrowers shall reimburse and indemnify
Bank for all reasonable costs and reasonable expenses incurred in the
reasonable exercise of its rights under this Section 6.12.
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6.13 FURTHER ASSURANCES. At any time and from time to time
Borrowers shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes
of this Agreement.
7. NEGATIVE COVENANTS
Each Borrower covenants and agrees that, so long as any Credit
Extension hereunder shall be available and until payment in full of the
outstanding Obligations or for so long as Bank may have any commitment to
make any Advances, neither Borrower will not do any of the following:
7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than Transfers:
(i) of inventory in the ordinary course of business, (ii) of non-exclusive
licenses and similar arrangements for the use of the property of either
Borrower or its Subsidiaries in the ordinary course of business; (iii) that
constitute payment of normal and usual operating expenses in the ordinary
course of business; or (iii) of worn-out or obsolete Equipment.
7.2 CHANGES IN BUSINESS, OWNERSHIP, OR MANAGEMENT, BUSINESS
LOCATIONS. Engage in any business, or permit any of its Subsidiaries to
engage in any business, other than the businesses currently engaged in by
Borrowers and any business substantially similar or related thereto (or
incidental thereto), or suffer a Change in Control of Spectranetic's
ownership, suffer a change in Polymicro's ownership, or if Joseph A. Largey
ceases to be President and Chief Executive Officer or if James P. McCluskey
ceases to be Vice President, Finance (Principal Financial and Accounting
Officer) of Spectranetics; or, without at least thirty (30) days prior
written notification to Bank and provision to Bank of all documents
reasonably requested by Bank in order to maintain and continue its perfected
security interest in the Collateral, relocate its chief executive office or
add any new offices or business locations.
7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any
of its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all
or substantially all of the capital stock or property of another Person.
7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable
with respect to any Indebtedness, or permit any Subsidiary so to do, other
than Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any
Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens.
7.6 DISTRIBUTIONS. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or
purchase of any capital stock.
7.7 INVESTMENTS. Directly or indirectly acquire or own, or make
any Investment in or to any Person, or permit any of its Subsidiaries so to
do, other than Permitted Investments.
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7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of either
Borrower except for transactions that are in the ordinary course of Borrowers
respective businesses, upon fair and reasonable terms that are no less
favorable to such Borrower than would be obtained in an arm's length
transaction with a nonaffiliated Person.
7.9 INTELLECTUAL PROPERTY AGREEMENTS. Neither Borrower shall
permit the inclusion in any material contract to which it becomes a party of
any provisions that could or might in any way prevent the creation of a
security interest in such Borrower's rights and interests in any property
included within the definition of the Intellectual Property Collateral
acquired under such contracts.
7.10 SUBORDINATED DEBT. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such
payment, except in compliance with the terms of such Subordinated Debt, or
amend any provision contained in any documentation relating to the
Subordinated Debt without Bank's prior written consent.
7.11 INVENTORY. Store the Inventory with a bailee, warehouseman,
or similar party unless Bank has received a pledge of any warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrowers shall keep the Inventory only at the location set forth in Section
10 hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrowers sign and Bank files a financing statement
where needed to perfect or maintain or continue the perfection of Bank's
security interest in such Inventory.
7.12 COMPLIANCE. Become an "investment company" or a company
controlled by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Advance for
such purpose; fail to meet the minimum funding requirements of ERISA; permit
a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur;
fail to comply with the Federal Fair Labor Standards Act or violate any other
law or regulation, which violation could have a Material Adverse Effect or a
material adverse effect on the Collateral or the priority of Bank's Lien on
the Collateral; or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event
of Default by Borrowers under this Agreement:
8.1 PAYMENT DEFAULT. If Borrowers fail to pay, when due, any of
the Obligations.
8.2 COVENANT DEFAULT.
(a) If either Borrower fails to perform any obligation under
Sections 6.3, 6.6, 6.7, 6.8, 6.9, 6.10, 6.11 or 6.12 or violates any of the
covenants contained in Article 7 of this Agreement, or
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(b) If either Borrower fails or neglects to perform, keep, or
observe any other term, provision, condition, covenant, or agreement
contained in this Agreement, in any of the Loan Documents, or in any other
present or future agreement between such Borrower and Bank and as to any
default under such other term, provision, condition, covenant or agreement
that can be cured, has failed to cure such default within ten (10) days after
the occurrence thereof; provided, however, that if the default cannot by its
nature be cured within the ten (10) day period or cannot after diligent
attempts by such Borrower be cured within such ten (10) day period, and such
default is likely to be cured within a reasonable time, then such Borrower
shall have an additional reasonable period (which shall not in any case
exceed thirty (30) days) to attempt to cure such default, and within such
reasonable time period the failure to have cured such default shall not be
deemed an Event of Default (provided that no Advances will be required to be
made during such cure period);
8.3 MATERIAL ADVERSE CHANGE. If there (i) occurs a material
adverse change in the business, operations, or condition (financial or
otherwise) of either Borrower, or (ii) is a material impairment of the
prospect of repayment of any portion of the Obligations or (iii) is a
material impairment of the value or priority of Bank's security interests in
the Collateral;
8.4 ATTACHMENT. If any material portion of either Borrowers'
assets is attached, seized, subjected to a writ or distress warrant, or is
levied upon, or comes into the possession of any trustee, receiver or person
acting in a similar capacity and such attachment, seizure, writ or distress
warrant or levy has not been removed, discharged or rescinded within ten (10)
days, or if either Borrower is enjoined, restrained, or in any way prevented
by court order from continuing to conduct all or any material part of its
business affairs, or if a judgment or other claim becomes a lien or
encumbrance upon any material portion of either Borrowers' assets, or if a
notice of lien, levy, or assessment is filed of record with respect to any of
Borrowers' assets by the United States government, or any department, agency,
or instrumentality thereof, or by any state, county, municipal, or
governmental agency, and the same is not paid within ten (10) days after such
Borrower receives notice thereof, provided that none of the foregoing shall
constitute an Event of Default where such action or event is stayed or a bond
in an amount satisfactory to Bank has been posted pending a good faith
contest by such Borrower (provided that no Credit Extensions will be required
to be made during such cure period);
8.5 INSOLVENCY. If either Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by either Borrower, or if an Insolvency
Proceeding is commenced against either Borrower and is not dismissed or
stayed within 30 days (provided that no Advances will be made prior to the
dismissal of such Insolvency Proceeding);
8.6 OTHER AGREEMENTS. If there is a default in any agreement to
which either Borrower is a party with a third party or parties resulting in a
right by such third party or parties, whether or not exercised, to accelerate
the maturity of any Indebtedness in an amount in excess of One Hundred
Thousand Dollars ($100,000) or that could have a Material Adverse Effect;
8.7 SUBORDINATED DEBT. If either Borrower makes any payment on
account of Subordinated Debt, except to the extent such payment is allowed
under any subordination agreement entered into with Bank;
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8.8 JUDGMENTS. If a judgment or judgments for the payment of money
in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) shall be rendered against either Borrower or against
Borrowers, in the aggregate, and shall remain unsatisfied and unstayed for a
period of ten (10) days (provided that no Credit Extensions will be made prior
to the satisfaction or stay of such judgment); or
8.9 MISREPRESENTATIONS. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate or writing delivered to Bank by either
Borrower or any Person acting on Borrowers' behalf pursuant to this Agreement or
to induce Bank to enter into this Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrowers:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrowers under this Agreement or under any other agreement among
Borrowers and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) Without notice to or demand upon Borrowers, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrowers agree to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank at
a place to be designated by Bank which is reasonably convenient to both parties.
Borrowers authorize Bank to enter the premises where the Collateral is located,
to take and maintain possession of the Collateral, or any part of it, and to
pay, purchase, contest, or compromise any encumbrance, charge, or lien which in
Bank's determination appears to be prior or superior to its security interest
and to pay all expenses incurred in connection therewith, including without
limitation all reasonable attorneys' fees and legal expenses incurred by Bank.
With respect to any of Borrowers' premises, Borrowers hereby grant Bank a
license to enter such premises and to occupy the same, without charge in order
to exercise any of Bank's rights or remedies provided herein, at law, in equity,
or otherwise;
(e) Without notice to Borrowers, set off and apply to the
Obligations any and all (i) balances and deposits of Borrowers held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrowers held by Bank;
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(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a non-exclusive, royalty-free
license or other right, solely pursuant to the provisions of this Section 9.1,
to use, without charge, Borrowers' labels, patents, copyrights, rights of use of
any name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale, and selling any Collateral
and, in connection with Bank's exercise of its rights under this Section 9.1,
Borrowers' rights under all licenses and all franchise agreements shall inure to
Bank's benefit;
(g) Upon taking possession of the Collateral, Bank may, from
time to time, make all repairs, replacements, alterations, additions, and
improvements to and of the Collateral that Bank deems proper. Borrowers agree
to reimburse Bank on demand for any expenses incurred by Bank pursuant to the
foregoing authorization and any unreimbursed amounts shall constitute amounts
owing under the Obligations for all purposes under this Agreement. In any such
case, subject to and to the extent permitted by the provisions of the Code or
other applicable law, Bank shall have the right to operate, manage and control
the Collateral and to carry on Borrowers' respective businesses and to exercise
all rights and powers of Borrowers in respect to the Collateral as Bank shall
deem best, including the right to enter into any agreements with respect to the
Collateral or any part thereof, that Bank sees fit; and Bank shall be entitled
to collect and receive all rents, issues, profits, fees, revenues, and other
income of the Collateral and every part thereof. Such rents, issues, profits,
fees, revenues, and other income shall be applied to pay the expenses of holding
and operating the Collateral and of conducting the business thereof and of all
maintenance, repairs, replacements, alterations, additions, and improvements,
and to make all payments which Bank may be required or may elect to make, if
any, for taxes, assessments, insurance, and other charges upon the Collateral or
any part thereof, and all other payments which Bank may be required or
authorized to make under any provision of this Agreement (including reasonable
attorneys' fees and expenses). The remainder of such rents, issues, profits,
fees, revenues, and other income shall be applied to the payment of the
Obligations in such order of priority as Bank shall determine. Without limiting
the generality of the foregoing, Bank shall have the right to apply for and have
a receiver appointed ex-parte by a court of competent jurisdiction in any action
taken by Bank to enforce its rights and remedies hereunder in order to manage,
protect, and preserve the Collateral and continue the operation of the
businesses of Borrowers and to collect all revenues and profits thereof and
apply them to the payment of all expenses and other charges of such
receivership, including the compensation of the receiver, and to the payment of
the Obligations as described above until a sale or other disposition of the
Collateral shall be finally made and consummated.
(h) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrowers' premises) as Bank
determines is commercially reasonable, and apply the proceeds thereof to the
Obligations in whatever manner or order it deems appropriate;
(i) Bank may bid and purchase at any public sale, or at any
private sale as permitted by law and apply the Obligations, in whole or part, to
such bid; and
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrowers.
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(k) Bank shall have a non-exclusive, royalty-free license to use
the Intellectual Property Collateral to the extent reasonably necessary to
permit Bank to exercise its rights and remedies upon the occurrence of an Event
of Default.
9.2 POWER OF ATTORNEY. Effective only upon the occurrence and during
the continuance of an Event of Default, each Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
Borrower's true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Bank's security interest in the Accounts;
(b) endorse such Borrower's name on any checks or other forms of payment or
security that may come into Bank's possession; (c) sign such Borrower's name on
any invoice or bill of lading relating to any Account, drafts against account
debtors, schedules and assignments of Accounts, verifications of Accounts, and
notices to account debtors; (d) make, settle, and adjust all claims under and
decisions with respect to such Borrower's policies of insurance; and (e) settle
and adjust disputes and claims respecting the accounts directly with account
debtors, for amounts and upon terms which Bank determines to be reasonable; (f)
modify, in its sole discretion, any intellectual property security agreement
entered into between such Borrowers and Bank without first obtaining such
Borrower's approval of or signature to such modification by amending Exhibit A,
Exhibit B, and Exhibit C, thereof, as appropriate, to include reference to any
right, title or interest in any Copyrights, Patents, or Trademarks acquired by
such Borrowers after the execution hereof or to delete any reference to any
right, title or interest in any Copyrights, Patents, or Trademarks in which such
Borrowers no longer have or claim any right, title or interest; and (g) transfer
the Intellectual Property Collateral into the name of Bank or a third party.
Each Borrower hereby irrevocably appoints Bank (and any of Bank's designated
officers, or employees) as Borrower's true and lawful attorney to, at any time,
file, in its sole discretion, one or more financing or continuation statements
and amendments thereto, relative to any of the Collateral without the signature
of Borrower where permitted by law and to sign the name of Borrower on any of
the documents described in Section 4.2. The appointment of Bank as Borrowers'
attorney in fact, and each and every one of Bank's rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have been
fully repaid and performed and Bank's obligation to provide Credit Extensions
hereunder is terminated.
9.3 ACCOUNTS COLLECTION. Upon the occurrence and during the
continuance of an Event of Default, Bank may notify any Person owing funds to
Borrowers of Bank's security interest in such funds and verify the amount of
such Account. Borrowers shall collect all amounts owing to Borrowers for Bank,
receive in trust all payments as Bank's trustee, and if requested or required by
Bank, immediately deliver such payments to Bank in their original form as
received from the account debtor, with proper endorsements for deposit. The
application by Bank to the Obligations of any such payments received by Bank
shall not be deemed to constitute retention in satisfaction of the Obligations
under Section 4-9-505 of the Code.
9.4 BANK EXPENSES. If any Borrower fails to pay any amounts or
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Bank may do any or all of the
following: (a) make payment of the same or any part thereof; (b) set up such
reserves under the Committed Revolving Line as Bank deems necessary to protect
Bank from the exposure created by such failure; or (c) obtain and maintain
insurance policies of the type discussed in Section 6.6 of this Agreement, and
take any action with respect to such policies as Bank deems prudent. Any such
payments made by Bank shall not constitute an agreement by Bank to make similar
25
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payments in the future or a waiver by Bank of any Event of Default under this
Agreement. Any of the foregoing amounts so paid or deposited by Bank and all
expenses of collection, retaking, storage, preparing for sale or lease, selling,
leasing or other disposition and delivery of any of the Collateral incurred by
Bank (including Bank's reasonable attorneys' fees and legal expenses) incurred
in connection therewith, shall constitute Bank Expenses, shall be immediately
due and payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be and secured by the Collateral. If the proceeds of any
sale or other disposition of the Collateral under this Agreement are
insufficient to pay all of the Obligations in full, Borrowers will be liable,
jointly and severally, for the deficiency and the costs and expenses of
collection of such deficiency, including reasonable attorneys' fees, expenses
and disbursements.
9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk
of loss, damage or destruction of the Collateral shall be borne by Borrowers.
9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not expressly set forth herein as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrowers' part shall be deemed a continuing waiver. No delay by
Bank shall constitute a waiver, election, or acquiescence by it. No waiver by
Bank shall be effective unless made in a written document signed on behalf of
Bank and then shall be effective only in the specific instance and for the
specific purpose for which it was given.
9.7 DEMAND; PROTEST. Borrowers waive demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrowers may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or shall be sent by a recognized
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to each Borrower or to Bank, as the case may be,
at the address for such party set forth below:
If to The Spectranetics Corporation
Borrowers:
96 Talamine Court
Colorado Springs, Colorado 80907
Attn: James P. McCluskey
26
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FAX: (719) 633-2248
and to,
Polymicro Technologies, Inc.
96 Talamine Court
Colorado Springs, CO 80907
Attn: James P. McCluskey
FAX: (719) 633-2248
If to Bank Silicon Valley Bank
4430 Arapahoe Avenue, Suite 225
Boulder, Colorado 80303
Attn: Andrew Enroth
FAX: (303) 938-0486
Any such notices or demands shall be deemed to be received, (a) if sent by
personal delivery, immediately upon delivery; (b) if sent by telefacsimile, upon
confirmation of receipt by the receiving equipment; (c) if sent by recognized
overnight delivery service, one Business Day after sending, and (d) if sent by
certified mail, postage prepaid, return receipt requested, on the third day
after the same was deposited in the United States mail. The parties hereto may
change the address at which they are to receive notices hereunder, by notice in
writing in the foregoing manner given to the other.
11. CHOICE OF LAW AND VENUE
The Loan Documents shall be governed by, and construed in accordance
with, the internal laws of the State of Colorado, without regard to principles
of conflicts of law. Each of Borrowers and Bank hereby submits to the exclusive
jurisdiction of the courts of the State of Colorado located in Boulder County
and the United States District Court for the District of Colorado. BORROWERS
AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM
OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY
OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT
CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.
EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A
MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS
AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; PROVIDED, HOWEVER, that neither this Agreement nor any rights hereunder
may be assigned by Borrowers without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrowers to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
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12.2 INDEMNIFICATION. Borrowers shall indemnify, defend, protect and
hold harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrowers whether under the Loan Documents, or
otherwise (including without limitation reasonable attorneys' fees and
expenses), except for losses caused by Bank's gross negligence or willful
misconduct.
12.3 TIME OF ESSENCE. Time is of the essence for the performance of
all obligations set forth in this Agreement.
12.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
amended or terminated except by a writing signed by Borrowers and Bank. All
prior agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement,
if any, are merged into this Agreement and the Loan Documents.
12.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 SURVIVAL. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding and so long as Bank has any obligation or
commitment to make an Advance or Credit Extension under the Loan Documents. The
obligations of Borrowers to indemnify Bank with respect to the expenses,
damages, losses, costs and liabilities described in Section 12.2 shall survive
until all applicable statute of limitations periods with respect to actions that
may be brought against Bank have run; provided that so long as the obligations
referred to in the first sentence of this Section 12.7 have been satisfied, and
Bank has no commitment to make any Credit Extensions or to make any other loans
to Borrowers, Bank shall release all security interests granted hereunder and
redeliver all Collateral held by it in accordance with applicable law.
* * * * *
[The remaining portion of this page left intentionally blank]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
THE SPECTRANETICS CORPORATION
By: /s/ James P. McCluskey
-----------------------------------
Title: Chief Financial Officer
--------------------------------
POLYMICRO TECHNOLOGY, INC.
By: /s/ Gary W. Nelson
-----------------------------------
Title: Vice President, General Manager
--------------------------------
SILICON VALLEY BANK
By: /s/ Andrew J. Enroth
-----------------------------------
Title: AVP
--------------------------------
29
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TABLE OF CONTENTS
1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting and Other Terms . . . . . . . . . . . . . . . . . . . . 8
2. LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . 8
2.1 Credit Extensions . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2 Overadvances . . . . . . . . . . . . . . . . . . . . . . . . . . .10
2.3 Interest Rates, Payments, and Calculations . . . . . . . . . . . .10
2.4 Crediting Payments . . . . . . . . . . . . . . . . . . . . . . . .10
2.5 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
2.6 Additional Costs . . . . . . . . . . . . . . . . . . . . . . . . .11
2.7 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
3. CONDITIONS OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . .11
3.1 Conditions Precedent to Initial Credit Extension . . . . . . . . .12
3.2 Conditions Precedent to all Credit Extensions . . . . . . . . . . .12
4. CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . .13
4.1 Grant of Security Interest . . . . . . . . . . . . . . . . . . . .13
4.2 Delivery of Additional Documentation Required . . . . . . . . . . .13
4.3 Right to Inspect . . . . . . . . . . . . . . . . . . . . . . . . .13
5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . .13
5.1 Due Organization and Qualification . . . . . . . . . . . . . . . .13
5.2 Due Authorization; No Conflict . . . . . . . . . . . . . . . . . .13
5.3 No Prior Encumbrances . . . . . . . . . . . . . . . . . . . . . . .13
5.4 Bona Fide Eligible Accounts . . . . . . . . . . . . . . . . . . . .14
5.5 Merchantable Inventory . . . . . . . . . . . . . . . . . . . . . .14
5.6 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . .14
<PAGE>
5.7 Name; Location of Chief Executive Office and Collateral . . . . . .14
5.8 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
5.9 No Material Adverse Change in Financial Statements . . . . . . . .14
5.10 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
5.11 Regulatory Compliance . . . . . . . . . . . . . . . . . . . . . .15
5.12 Environmental Condition . . . . . . . . . . . . . . . . . . . . .15
5.13 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
5.14 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . .15
5.15 Government Consents . . . . . . . . . . . . . . . . . . . . . . .15
5.16 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . .15
6. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . .16
6.1 Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . .16
6.2 Government Compliance . . . . . . . . . . . . . . . . . . . . . . .16
6.3 Financial Statements, Reports, Certificates . . . . . . . . . . . .16
6.4 Inventory; Returns . . . . . . . . . . . . . . . . . . . . . . . .17
6.5 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
6.6 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
6.7 Principal Depository . . . . . . . . . . . . . . . . . . . . . . .17
6.8 Quick Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
6.9 Debt-Net Worth Ratio . . . . . . . . . . . . . . . . . . . . . . .18
6.10 Tangible Net Worth Plus Subordinated Debt . . . . . . . . . . . .18
6.11 Liquidity/Debt Service Coverage . . . . . . . . . . . . . . . . .18
6.12 Registration of Intellectual Property Rights . . . . . . . . . . .18
6.13 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . .19
7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . .19
7.1 Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . .19
7.2 Changes in Business, Ownership, or Management, Business Locations .19
<PAGE>
7.3 Mergers or Acquisitions . . . . . . . . . . . . . . . . . . . . . .19
7.4 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . .19
7.5 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . .19
7.6 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . .19
7.7 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
7.8 Transactions with Affiliates . . . . . . . . . . . . . . . . . . .20
7.9 Intellectual Property Agreements . . . . . . . . . . . . . . . . .20
7.10 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . .20
7.11 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
7.12 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
8. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
8.1 Payment Default . . . . . . . . . . . . . . . . . . . . . . . . . .20
8.2 Covenant Default . . . . . . . . . . . . . . . . . . . . . . . . .20
8.3 Material Adverse Change . . . . . . . . . . . . . . . . . . . . . .21
8.4 Attachment . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
8.5 Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
8.6 Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . .21
8.7 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . .21
8.8 Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
8.9 Misrepresentations . . . . . . . . . . . . . . . . . . . . . . . .21
9. BANK'S RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . .22
9.1 Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . .22
9.2 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . .23
9.3 Accounts Collection . . . . . . . . . . . . . . . . . . . . . . . .24
9.4 Bank Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .24
9.5 Bank's Liability for Collateral . . . . . . . . . . . . . . . . . .24
9.6 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . .24
<PAGE>
9.7 Demand; Protest . . . . . . . . . . . . . . . . . . . . . . . . . .25
10. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
11. CHOICE OF LAW AND VENUE . . . . . . . . . . . . . . . . . . . . . . . .25
12. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .26
12.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . .26
12.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . .26
12.3 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . .26
12.4 Severability of Provisions . . . . . . . . . . . . . . . . . . . .26
12.5 Amendments in Writing, Integration . . . . . . . . . . . . . . . .26
12.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . .26
12.7 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of Borrowers
in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of a Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
(c) All contract rights, other than rights in the Commercial Lease
Agreement between Spectranetics Corporation and Talamine Properties, Ltd., dated
September 11, 1985, as restated and amended, and the Commercial Lease between
American Investment Management and Spectranetics Corporation, dated February 7,
1995, and any extensions, amendments or restatements of such leases (the
"Excluded Leases"), and general intangibles now owned or hereafter acquired,
including, without limitation, goodwill, trademarks, servicemarks, trade styles,
trade names, patents, patent applications, leases, license agreements, franchise
agreements, blueprints, drawings, purchase orders, customer lists, route lists,
infringements, claims, computer programs, computer discs, computer tapes,
literature, reports, catalogs, design rights, income tax refunds, payments of
insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights
(other than rights in Excluded Leases), royalties, license rights and all other
forms of obligations owing to either Borrower arising out of the sale or lease
of goods, the licensing of technology or the rendering of services by such
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by such Borrower;
(e) All documents, cash, deposit accounts, securities, investment
property, letters of credit, certificates of deposit, instruments and chattel
paper now owned or hereafter acquired and Borrower's Books relating to the
foregoing;
(f) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any of
the foregoing; and
(g) All Borrower's Books relating to the foregoing and any and all claims,
rights and interests in any of the above and all substitutions for, additions
and accessions to and proceeds thereof.
<PAGE>
THE SPECTRANETICS CORPORATION
SUBSIDIARIES
SPECTRANETICS INTERNATIONAL B.V.
Established January 1993
Incorporated June 1993 in
Nieuwegein, The Netherlands
POLYMICRO TECHNOLOGIES, INC.
California Corporation
Acquired in Merger Acquisition June 10, 1994
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
THE SPECTRANETICS CORPORATION:
We consent to incorporation by reference in the registration statements Nos.
33-46725, 33-52718, 33-88088, 33-85198, 33-99406 and 333-08489 on Form S-8
and 333-06971 on Form S-3 of The Spectranetics Corporation of our reports
dated January 28, 1998, relating to the consolidated balance sheets of The
Spectranetics Corporation and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1997, and the related consolidated financial statement schedule, which
reports appear in the December 31, 1997 annual report on Form 10-K of The
Spectranetics Corporation.
s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Denver, Colorado
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SPECTRANETICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AND STATEMENTS OF OPERATIONS AS FOUND ON PAGES F-2 AND F-3 OF THE COMPANY'S
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,532
<SECURITIES> 2,058
<RECEIVABLES> 4,737
<ALLOWANCES> (232)
<INVENTORY> 2,315
<CURRENT-ASSETS> 15,705
<PP&E> 10,078
<DEPRECIATION> (6,874)
<TOTAL-ASSETS> 25,325
<CURRENT-LIABILITIES> 8,118
<BONDS> 1,387
0
0
<COMMON> 19
<OTHER-SE> 14,044
<TOTAL-LIABILITY-AND-EQUITY> 25,325
<SALES> 20,217
<TOTAL-REVENUES> 21,878
<CGS> 10,214
<TOTAL-COSTS> 11,263
<OTHER-EXPENSES> 15,417
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> (4,620)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,620)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,620)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
