<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED
MARCH 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 0-19711
THE SPECTRANETICS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 84-0997049
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
96 TALAMINE COURT
COLORADO SPRINGS, COLORADO 80907
(719) 633-8333
(Address of principal executive offices and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
As of May 6, 1998, there were 19,084,846 outstanding shares of Common
Stock.
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Page 1
<PAGE>
PART I---FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS: March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $6,333 $6,532
Investment securities 1,285 2,058
Trade accounts receivable 3,561 4,505
Inventories (note 4) 3,058 2,315
Other current assets 494 295
-------------- -----------------
Total current assets 14,731 15,705
Property and equipment, net 4,429 3,906
Goodwill and other intangible assets, net 4,882 5,140
Other assets 443 574
-------------- -----------------
$24,485 $25,325
-------------- -----------------
-------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and accrued liabilities $ 4,592 $ 3,575
Deferred revenue (note 5) 2,874 4,081
Current portion of note payable 446 299
Current portion of capital lease
obligations 150 163
-------------- -----------------
Total current liabilities 8,062 8,118
-------------- -----------------
Deferred revenue and other liabilities
(note 5) 1,757 1,757
Note payable, net of current portion 1,099 1,246
Capital lease obligations, net of current
portion 70 141
-------------- -----------------
Total long-term liabilities 2,926 3,144
-------------- -----------------
Total liabilities 10,988 11,262
-------------- -----------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value.
Authorized 5,000,000 shares; none
issued -- --
Common stock, $.001 par value,
Authorized 25,000,000 shares;
issued and outstanding 19.082,723
and 18,734,142 respectively 19 19
Additional paid-in capital 83,943 83,711
Accumulated other comprehensive loss (156) (152)
Accumulated deficit (70,309) (69,515)
-------------- -----------------
Total shareholders' equity 13,497 14,063
-------------- -----------------
$ 24,485 $ 25,325
-------------- -----------------
-------------- -----------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
------------ -------------
<S> <C> <C>
Revenues $ 6,553 $ 4,571
Cost of revenues 3,093 2,541
------------ -------------
Gross margin 3,460 2,030
------------ -------------
Operating Expenses:
Marketing and sales expense 2,427 1,774
General and administrative expense 1,303 1,275
Research and development expense 588 512
------------ -------------
Total operating expenses 4,318 3,561
------------ -------------
Loss From Operations (858) (1,531)
Other Income (Expense):
Interest income 91 81
Interest expense (35) (10)
Other, net 8 (29)
------------ -------------
64 42
------------ -------------
Net Loss $(794) $(1,489)
Other Comprehensive Loss:
Foreign currency translation adjustment (4) (104)
------------ -------------
Comprehensive loss $(798) $(1,593)
------------ -------------
------------ -------------
Net Loss per Share - basic and diluted $(0.04) $(0.08)
------------ -------------
------------ -------------
Weighted Average Common Shares
Outstanding - basic and diluted 18,761,033 18,588,291
------------ -------------
------------ -------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (794) $ (1,489)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 514 659
Net change in operating assets and liabilities (209) (163)
------------ -------------
Net cash used by operating activities (489) (993)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (632) (129)
Decrease in short-term investments 773 453
------------ -------------
Net cash provided by investing activities 141 324
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 232 76
Principal payments on obligations under
capital leases and note payable (71) (28)
------------ -------------
Net cash provided by financing activities 161 48
------------ -------------
Effect of exchange rate changes on cash (12) (40)
------------ -------------
Net decrease in cash and cash equivalents (199) (661)
Cash and cash equivalents at beginning of period 6,532 2,860
------------ -------------
Cash and cash equivalents at end of period $ 6,333 $ 2,199
------------ -------------
------------ -------------
Supplemental disclosures of cash flow information --
cash paid for interest $ 35 $ 3
------------ -------------
------------ -------------
Supplemental disclosure of non-cash investing
and financing activities:
Transfers from inventory to equipment held for
rental or loan $ 157 $ 105
------------ -------------
------------ -------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 4
<PAGE>
ITEM 1. NOTES TO FINANCIAL STATEMENTS
(1) GENERAL
The information included in the accompanying condensed consolidated
interim financial statements is unaudited and should be read in conjunction
with the audited financial statements and notes thereto contained in the
Company's latest Annual Report on Form 10-K. In the opinion of management,
all adjustments, consisting of normal recurring accruals, necessary for a
fair presentation of the results of operations for the interim periods
presented have been reflected herein. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
entire year.
(2) LOSS PER SHARE
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 three months ended March 31, 1998 and
the year ended December 31, 1997, as all common stock equivalents were
anti-dilutive.
(3) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, REPORTING
COMPREHENSIVE INCOME (SFAS 130) establishes standards for the presentation of
comprehensive income in the financial statements. Comprehensive income
includes income and loss components which are otherwise recorded directly to
shareholders' equity under generally accepted accounting principles. The
Company adopted SFAS 130 effective January 1, 1998 and has reported
accumulated other comprehensive loss in the accompanying condensed
consolidated balance sheets and the components of other comprehensive income
in the accompanying condensed consolidated statements of operations.
(4) INVENTORIES
Components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Finished Goods $1,033 $678
Work in Process 1,101 882
Raw Materials 924 755
-------------- -----------------
$3,058 $2,315
-------------- -----------------
-------------- -----------------
</TABLE>
Page 5
<PAGE>
ITEM 1. NOTES TO FINANCIAL STATEMENTS
(5) DEFERRED REVENUE
In 1997, the Company entered into a license agreement with United States
Surgical Corporation ("USSC"), pursuant to which USSC paid a license fee in
addition to advance payment for products to be supplied by the Company. The
payments received were recorded as deferred revenue and are being amortized
as product is shipped. During 1997, cash received under the agreement
totaled $6,339,000. Revenue totaling $1,245,000 was recognized related to
the agreement during the three months ended March 31. No such revenue was
recorded during the comparable period in 1997. The remaining deferred
revenue balance is $3,850,000 and $5,095,000 at March 31, 1998 and December
31, 1997, respectively, of which $2,098,000 and $3,343,000 has been recorded
as a current liability at March 31, 1998 and December 31, 1997, respectively.
Other deferred revenue - current, in the amounts of $776,000 and
$738,000 at March 31, 1998 and December 31, 1997, respectively, relates
primarily to payments in advance for various product maintenance contracts,
pursuant to which revenues are initially deferred and then amortized over the
life of the contract, which is generally one year.
Page 6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1997:
REVENUES
Revenue for the three months ended March 31, 1998 totaled $6,553,000, an
increase of $1,982,000 (43%) as compared with revenue of $4,571,000 for the
three months ended March 31, 1997. Laser revenues increased 195% for the
three months ended March 31, 1998, as compared to the same period in 1997,
primarily due to the shipment of lasers to United States Surgical Corporation
under an agreement entered into during 1997. Revenues recorded related to
the agreement were $1,245,000 for the three months ended March 31, 1998. No
such revenue was recorded in the comparable period in 1997. Disposable
catheter revenues increased 21% primarily as a result of revenues related to
the laser sheath product. Other revenues, from Polymicro Technologies, Inc.
(PTI), service, and custom products, increased 21% over the same period last
year, due primarily to increased unit volumes at PTI.
The functional currency of Spectranetics International, B.V. is the
Dutch guilder. Fluctuations in foreign currency exchange rates during the
three months ended March 31, 1998, compared to the same period in 1997,
caused a decrease in revenues of 1%.
GROSS MARGIN
Gross margin percentages for the three months ended March 31, 1998 were
53% compared to gross margins of 44% for the three months ended March 31,
1997. The increase in gross margins as a percentage of revenue is primarily
due to higher selling prices per unit realized for lasers and catheters
combined with manufacturing efficiencies realized as a result of higher
volumes.
OPERATING EXPENSES
Overall, operating expenses totaled $4,318,000 for the three months
ended March 31, 1998, an increase of 21% over the 1997 expense level of
$3,561,000 for the same period.
Marketing and sales expenses totaled $2,427,000 for the three months
ended March 31, 1998, an increase of 37% over the 1997 expense level of
$1,774,000 for the same period in 1997. The increase is attributed primarily
to increased staffing costs, primarily in sales and clinical staffing,
combined with increased marketing activities associated with conventions,
workshops, and marketing materials.
General and administrative expenses were $1,303,000 for the three months
ended March 31, 1998, an increase of 2% over the 1997 expense level of
$1,275,000 for the same period.
Research and development expenses totaled $588,000 for the three months
ended March 31, 1998, an increase of 15% over the 1997 expense level of
$512,000 for the same period. The increase is due primarily to increased
staffing and project-related costs as part of the Company's ongoing effort to
expand the applications for excimer laser technology.
Fluctuation in the Dutch guilder currency rate during the three months
ended March 31, 1998, as compared to the same period in 1997, caused a
decrease in operating expenses of 2%.
Net loss for the three months ended March 31, 1998 was $794,000, or
$0.04 per share, as compared to $1,489,000 loss, or $0.08 per share, for the
same period in 1997.
Page 7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONT'D)
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had cash, cash equivalents and
investment securities of $7,618,000 compared to $8,590,000 at December 31,
1997, a decrease of $972,000. Cash usage from operating activities was
$489,000 for the three months ended March 31, 1998 compared to $993,000 for
the three months ended March 31, 1997. The decrease in cash used is
primarily due to the decreased net loss. Cash used for capital expenditures
increased to $632,000 in 1998 from $129,000 in 1997 as the Company invests in
infrastructure improvements in the form of costs associated with a new
computer system, a new phone system, the purchase of a state-of-the art
marketing booth for use at conventions and trade shows, and manufacturing
equipment purchased by PTI. Cash provided by financing activities was
$161,000 in 1998 and $48,000 in 1997. The increase is due to a larger number
of stock options exercised during the three months ended March 31, 1998.
During 1997, the Company entered into an agreement with Silicon Valley
Bank for a credit line of $5,000,000. As of March 31, 1998 and December 31,
1997, $1,100,000 was drawn on the line of credit. 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 March 31, 1998 and December 31, 1997, the Company had placed a number
of systems at customers under rental, loan and fee per procedure programs.
Laser units capitalized as equipment held for rental or loan totaled
$1,344,000 and $1,441,000 as of March 31, 1998 and December 31, 1997,
respectively, and are being depreciated over three to five years. This
equipment was transferred from the Company's inventory at cost. The Company
expects that it will continue to offer rental, loan and fee-per-procedure
programs for the foreseeable future.
Management believes that the Company's liquidity and capitalization as
of March 31, 1998 is sufficient to meet its operating and capital
requirements through 1998. Revenue increases from current levels or
additional financing will be necessary to sustain the Company over the longer
term.
RISK FACTORS
The Company's business, results of operations, and financial condition
are, and will continue to be, subject to the following risks:
CONTINUED LOSSES. The Company has incurred net losses since inception
in June 1984. The Company anticipates that net losses will continue in the
foreseeable future. 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's operations
over the long term, the Company must achieve increases in sales and maintain
control over expenses. There can be no assurance that such increases in
sales or control in expenses will occur or that they will be sufficient to
maintain adequate cash to continue operations.
Page 8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONT'D)
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
stockholders 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 the Company'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 the Company'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 the Company'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 revenues is derived from the sale or lease of the
CVX-300-Registered Trademark- laser unit and the sale of products used in
conjunction with the CVX-300-Registered Trademark-. Consequently, the
Company is dependent on the successful development and commercialization of
the CVX-300-Registered Trademark- laser unit and such related products.
Unfavorable clinical trial results, failure to obtain regulatory approvals in
a timely manner, or at all, or failure to gain widespread market acceptance
could have a material adverse effect on 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. The Company expects intense
competition to continue in the marketplace. Market competition includes
manufacturers of balloon angioplasty devices
Page 9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONT'D)
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, the Company expects
competition from manufacturers of devices that treat transmyocardial
revascularization. The Company 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. SCIMED, Cordis, 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, Inc. (a subsidiary of Guidant Corporation) and
Heart Technology, Inc. (a subsidiary of Boston Scientific Corporation). In
1996, United States Surgical Corporation acquired an 80 percent interest in
Medolas, an excimer laser company in Germany. The companies currently
participating in clinical trials for 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 SPNC revenues and earnings. Short-term cost containment
initiatives may vary substantially from long-term reforms and may impact SPNC
differently.
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT. The CVX-300-Registered
Trademark- laser unit is generally purchased by hospitals, which then bill
various third-party payors, such as government programs and private insurance
plans, for the health care services provided to their patients. Unlike
balloon angioplasty and atherectomy, laser angioplasty requires the purchase
of expensive capital equipment. The FDA has required that the label for the
CVX-300-Registered Trademark- laser unit indicate that adjunctive balloon
angioplasty was performed in the majority of the procedures submitted to the
FDA in SPNC's application for PMA. This will require the purchase of both a
laser catheter and a balloon catheter. Payors may deny reimbursement for
procedures they believe to be duplicative. Payors may also deny
reimbursement if they determine that a device used in a procedure was
experimental, was used for a non-approved indication or was not used in
accordance with established pay protocols regarding cost effective treatment
methods. There can be no assurance that laser angioplasty using the
CVX-300-Registered Trademark- laser unit will be considered cost effective by
third-party payors, that reimbursement will be available or, if available,
that payors' reimbursement policies will not adversely affect SPNC's ability
to sell its products on a profitable basis. There are increasing pressures
from many
Page 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONT'D)
payor sources to control health care costs. In addition, there are
increasing pressures from public and private payors to limit increases in
reimbursement rates for medical devices. The market for SPNC's products and
the levels of revenues and profitability could also be adversely affected by
changes in governmental and private third-party payors' policies or by recent
federal legislation that reduces reimbursements under the capital cost
pass-through system for the Medicare program.
COSTS AND UNCERTAINTY OF REGULATORY COMPLIANCE. The Company'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 the Company from
obtaining, or affect the timing of, future regulatory approval. The Company
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 the
Company'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 1998, SPNC has received CE mark registration for all of its
products. There are no assurances that the Company will be able to obtain CE
mark for its products in the future. In addition, the Company may encounter
significant costs and requests for additional information in its efforts to
obtain regulatory approvals. Any such events could substantially delay or
preclude SPNC from marketing its products internationally.
TECHNOLOGICAL CHANGE RESULTING IN PRODUCT OBSOLESCENCE. Market
acceptance and sales of SPNC products also could be adversely affected by
technological changes. The health care industry is characterized by rapid
technological progress. New developments are expected to continue at an
accelerated pace in both industry and academia. Many companies, some of
which have substantially greater resources than SPNC, are engaged in research
and development with respect to methods of treatment and prevention of
coronary artery disease. These include pharmaceutical approaches as well as
development of new or improved angioplasty, atherectomy or other devices.
SPNC products could be rendered obsolete as a result of future innovations in
the treatment of coronary artery disease.
UNCERTAINTY RELATED TO PATENTS AND PROPRIETARY RIGHTS. SPNC holds
patents, has licenses to use patents and has patent applications pending.
There can be no assurance that any patents currently applied for by 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.
The Company 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 these parties have not
sued the Company, 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
Page 11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONT'D)
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.
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.
DEPENDENCE ON SUPPLIERS AND DISTRIBUTORS. The glass rods used by SPNC
in the fabrication of optical fibers incorporated into catheters are
currently available from a single source that holds worldwide patent rights
on this material. Any interruption in the supply of such glass rods could
have a material adverse effect on SPNC's ability to manufacture catheters.
PRODUCT LIABILITY AND SUFFICIENCY OF INSURANCE COVERAGE. The
manufacture and sale of the Company's products entail the risk of product
liability claims. A successful claim brought against the Company could have a
material adverse effect on the Company. The Company maintains product
liability insurance with coverage of $5,000,000, and an aggregate maximum of
$5,000,000. There can be no assurance that the coverage limits of the
Company's insurance policies will be adequate or that such insurance will be
available in the future on acceptable terms, if at all.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon a limited
number of key management and technical personnel, and the future success of
the Company will depend in part upon its ability to attract and retain highly
qualified personnel. The Company will compete for such personnel with other
companies, academic institutions, government entities and other
organizations. There can be no assurance that the Company will be successful
in hiring or retaining qualified personnel. Loss of key personnel or
inability to hire or retain qualified personnel could have a material adverse
effect on the Company's business, financial condition and results of
operations.
POTENTIAL DIFFICULTIES IN MANAGING BUSINESS UNDERGOING RAPID CHANGE.
The Company's future success will depend to a significant extent on the
ability of its management personnel to operate effectively, both
independently and as a group. In this regard, a number of members of the
Company's senior management team have 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,
Page 12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONT'D)
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 of 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 shareholder 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.
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.
Page 13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONT'D)
POTENTIAL VOLATILITY OF STOCK PRICE. The stock market has from time to
time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. In addition, the
market price of the shares of the Company's Common Stock, similar to other
health care companies, has been, and is likely to continue to be, highly
volatile. Factors such as fluctuations in operating results, announcements
of technological innovations or new products by the Company or its
competitors, governmental regulation, developments with respect to patents or
proprietary rights, public concern as to the safety of products developed by
the Company or others and general market conditions may have a significant
effect on the market price of the Company's Common Stock.
EXPOSURE FROM INTERNATIONAL OPERATIONS. Changes in overseas economic
conditions, currency exchange rates, foreign tax laws or tariffs or other
trade regulations could have a material adverse effect on the Company's
ability to market its products internationally and therefore on its business,
financial condition and results of operations. The Company's business is
also expected to subject it and its representatives, agents and distributors
to laws and regulations of the foreign jurisdictions in which they operate or
the Company's products are sold. The Company may depend on foreign
distributors and agents for compliance and adherence to foreign laws and
regulations. The regulation of medical devices in a number of such
jurisdictions, particularly in the European Union, continues to develop and
there can be no assurance that new laws or regulations will not have an
adverse effect on the Company's business, financial condition and results of
operations. In addition, the laws of certain foreign countries do not
protect the Company's intellectual property rights to the same extent as do
the laws of the United States.
As the Company expands its international operations, its sales and
expenses denominated in foreign currencies will expand and that trend is
expected to continue. Thus, certain sales and expenses have been, and are
expected to be, subject to the effect of foreign currency fluctuations. As
the Company expands its international operations, its net foreign currency
denominated sales and expenses will be subject to the effect of foreign
currency fluctuations. Further, any significant changes in the political,
regulatory or economic environment where the Company conducts international
operations may have a material impact on revenues and profits.
LACK OF DIVIDENDS. The Company has not declared or paid any dividends
with respect to the Company's Common Stock. It is not anticipated that the
Company will pay any dividends in the foreseeable future. In addition, there
may be restrictions under state law on the ability of the Company to declare
dividends.
Page 14
<PAGE>
PART II.---OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEMS 2-5. NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following documents are filed herewith and
made a part of this report on Form 10-Q:
Exhibit 27.1 - Financial Data Schedule for 1998 First
Quarter Form 10-Q.
(B) REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SPECTRANETICS CORPORATION
(Registrant)
May 14, 1998 By: /s/ James P. McCluskey
-------------------------------------
James P. McCluskey
Vice President, Finance
Secretary/Treasurer and
Principal Financial Officer
Page 15
<PAGE>
THE SPECTRANETICS CORPORATION
FORM 10Q FOR PERIOD ENDED MARCH 31, 1998
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
<S> <C>
27.1 Financial Data Schedule for 1998 First Quarter Form 10-Q.
</TABLE>
Page 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AS FOUND ON
PAGES 2 AND 3 OF THE COMPANY'S FORM 10-Q FOR THE PERIODS ENDED MARCH 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,333
<SECURITIES> 1,285
<RECEIVABLES> 3,561
<ALLOWANCES> 0
<INVENTORY> 3,058
<CURRENT-ASSETS> 14,731<F1>
<PP&E> 4,429
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,485
<CURRENT-LIABILITIES> 8,062
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 13,478
<TOTAL-LIABILITY-AND-EQUITY> 24,485
<SALES> 6,553
<TOTAL-REVENUES> 6,553
<CGS> 3,093
<TOTAL-COSTS> 3,093
<OTHER-EXPENSES> 4,318
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> (794)
<INCOME-TAX> 0
<INCOME-CONTINUING> (794)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (794)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
<FN>
<F1>P.P. & E. is presented net of accumulated depreciation.
</FN>
</TABLE>
