<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
______ TO ______
COMMISSION FILE NUMBER 0-19711
THE SPECTRANETICS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 84-0997049
(State or other jurisdiction of I.R.S. Employer Identification No.)
incorporation or organization)
96 TALAMINE COURT
COLORADO SPRINGS, COLORADO 80907
(719) 633-8333
(Address of principal executive offices and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
As of October 22, 1999, there were 23,034,886 outstanding shares of
Common Stock.
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Page 1
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PART I---FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 6,940 $ 4,158
Investment securities 15,110 --
Trade accounts receivable, net of allowance 4,744 4,099
Inventories (note 5) 1,778 2,095
Other current assets 445 313
Net assets of discontinued operations (note 4) -- 803
------------ ------------
Total current assets 29,017 11,468
Property and equipment, net 3,213 3,129
Other intangible assets, net 1,195 1,368
Other assets 315 495
Net assets of discontinued operations (note 4) -- 4,925
------------ ------------
Total Assets $ 33,740 $ 21,385
============ ============
Liabilities and Shareholders' Equity:
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities (note 8) $ 5,870 $ 4,586
Deferred revenue (note 6) 878 1,002
Current portion of notes payable 944 950
Current portion of capital lease obligations 57 118
------------ ------------
Total current liabilities 7,749 6,656
------------ ------------
Deferred revenue and other liabilities (note 6) 2,028 2,028
Notes payable, net of current portion 600 1,346
Capital lease obligations, net of current portion 39 87
------------ ------------
Total long-term liabilities 2,667 3,461
------------ ------------
Total liabilities 10,416 10,117
------------ ------------
Shareholders'Equity:
Preferred stock, $.001 par value
Authorized 5,000,000 shares; none issued -- --
Common stock, $.001 par value
Authorized 60,000,000 shares; issued and outstanding
23,034,004 and 19,110,825 shares, respectively (note 3) 23 19
Additional paid-in capital 91,065 84,131
Accumulated other comprehensive loss (119 (92
Accumulated deficit (67,645 (72,790
------------ ------------
Total shareholders' equity 23,324 11,268
------------ ------------
Total Liabilities and Shareholders'Equity $ 33,740 $ 21,385
============ ============
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
Page 2
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ITEM 1. FINANCIAL STATEMENTS (CONT'D)
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue - Core medical $ 6,644 $ 4,177 $ 15,651 $ 10,608
Revenue - USSC -- 460 -- 2,950
------------ ------------ ------------ ------------
Total revenue 6,644 4,637 15,651 13,558
------------ ------------ ------------ ------------
Cost of revenue - Core medical 2,258 1,714 5,362 4,142
Cost of revenue - USSC -- 181 -- 1,213
------------ ------------ ------------ ------------
Total cost of revenue 2,258 1,895 5,362 5,355
------------ ------------ ------------ ------------
Gross margin - Core medical 4,386 2,463 10,289 6,466
Gross margin - USSC -- 279 -- 1,737
------------ ------------ ------------ ------------
Total gross margin 4,386 2,742 10,289 8,203
------------ ------------ ------------ ------------
Gross margin % 66% 59% 66% 61%
Operating Expenses:
Marketing and sales 2,658 2,349 7,060 6,734
General and administrative 1,276 816 3,177 2,829
Royalties expense 333 145 767 509
Research and development 841 435 2,644 1,424
Reorganization costs and litigation
reserves (note 8 and 9) -- -- 1,358 --
------------ ------------ ------------ ------------
Total operating expenses 5,108 3,745 15,006 11,496
------------ ------------ ------------ ------------
Operating Loss (722) (1,003) (4,717) (3,293)
Other Income (Expense):
Interest income 300 32 462 186
Interest expense (37) (52) (126) (141)
Other, net 134 (2) 141 8
------------ ------------ ------------ ------------
Total other income (expense) 397 (22) 477 53
------------ ------------ ------------ ------------
Loss from Continuing Operations (325) (1,025) (4,240) (3,240)
Discontinued Operations:
Gain from sale of discontinued industrial
subsidiary, (net of $150 income taxes) -- -- 8,664 --
Income from operations of discontinued
industrial subsidiary -- 191 721 627
------------ ------------ ------------ ------------
Income from Discontinued Operations -- 191 9,385 627
------------ ------------ ------------ ------------
Net Income (Loss) (325) (834) 5,145 (2,613)
Other Comprehensive Loss -
foreign currency translation 23 44 (27) 51
------------ ------------ ------------ ------------
Comprehensive Loss $ (302) $ (790) $ 5,118 $ (2,562)
============ ============ ============ ============
Loss from Continuing Operations per share -
basic and diluted $ (0.01) $ (0.05) $ (0.19) $ (0.17)
Income from Discontinued Operations
per share - basic and diluted -- 0.01 0.42 0.03
------------ ------------ ------------ ------------
Net Income (Loss) per share -
basic and diluted $ (0.01) $ (0.04) $ 0.23 $ (0.14)
============ ============ ============ ============
Weighted Average Common Shares
Outstanding - basic and diluted 22,989,673 19,110,054 22,171,926 18,986,914
============ ============ ============ ============
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
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ITEM 1. FINANCIAL STATEMENTS (CONT'D)
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,145 $ (2,613)
Adjustments to reconcile net loss to net cash
used by operating activities:
Income from discontinued industrial subsidiary (721) (627)
Gain on sale of discontinued industrial subsidiary (8,664) --
Depreciation and amortization 1,042 741
Net change in operating assets and liabilities (109) (3,414)
---------- ----------
Net cash used by operating activities (3,307) (5,913)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (234) (1,018)
Net cash received from discontinued industrial subsidiary 1,140 1,418
Net proceeds from sale of discontinued industrial subsidiary 14,346 --
(Increase) decrease in short-term investments (15,110) 1,968
---------- ----------
Net cash provided by investing activities 142 2,368
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of common stock options 261 419
Proceeds from line of credit -- 900
Proceeds from private placement of common stock, net 6,537 --
Principal payments on obligations under
capital leases and notes payable (831) (332)
---------- ----------
Net cash provided by financing activities 5,967 987
---------- ----------
Effect of exchange rate changes on cash (20) 25
---------- ----------
Net increase (decrease) in cash and cash equivalents 2,782 (2,533)
Cash and cash equivalents at beginning of period 4,158 6,532
---------- ----------
Cash and cash equivalents at end of period $ 6,940 $ 3,999
========== ==========
Supplemental disclosures of cash flow information --
Cash paid for interest $ 139 $ 136
========== ==========
Supplemental disclosure of noncash investing
and financing activities:
Transfers from inventory to equipment held for
rental or loan $ 626 $ 795
========== ==========
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
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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.
Revenue consists of revenue from our core medical business and revenue
from United States Surgical Corporation (USSC). Revenue from the core medical
business consists of sales of equipment, disposables, and service to customers,
excluding USSC. The revenue from USSC was the result of a license and supply
agreement defined in more detail below (see note 6).
Certain reclassifications have been made in the financial statements to
conform with financial statements as presented at September 30, 1999.
(2) LOSS PER SHARE
The Company calculates earnings (loss) per share under the provisions
of Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS
128). Under SFAS 128, basic loss per share is computed on the basis of
weighted-average common shares outstanding. Diluted loss per share considers
potential common stock instruments in the calculation, and is the same as basic
loss per share for the three and nine months ended September 30, 1999 and 1998,
as all potential common stock instruments were anti-dilutive.
(3) SHAREHOLDERS' EQUITY AND PRIVATE PLACEMENT OF COMMON STOCK
In February 1999, the Company completed the private placement of
3,800,000 shares of its common stock and received cash proceeds, net of offering
costs, therefrom of $6,537,000.
(4) DISCONTINUED OPERATIONS
In June 1999, the Company completed the sale of its industrial
subsidiary, Polymicro Technologies, Inc. (PTI) for $15,000,000 in cash. PTI
manufactures drawn silica glass products for industrial, aerospace and medical
uses with an emphasis on the analytical instrument market.
The income from PTI up to the date of disposal is shown as "income from
operations of discontinued industrial subsidiary" on the consolidated statement
of operations. The net assets of PTI have been disclosed as the "net assets
(current and non-current) of discontinued operations" on the condensed
consolidated balance sheet at December 31, 1998.
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ITEM 1. NOTES TO FINANCIAL STATEMENTS (CONT'D)
(5) INVENTORIES
Components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Raw Materials $ 595 $ 420
Work in Process 607 544
Finished Goods 576 1,132
---------- ----------
$ 1,778 $ 2,095
========== ==========
</TABLE>
(6) DEFERRED REVENUE
In 1997, the Company entered into a license and supply agreement with
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. No
revenue related to these agreements was realized during the three and nine
months ended September 30, 1999. Revenue recognized related to the agreement
during the three and nine months ended September 30, 1999 was $460,000 and
$2,950,000, respectively. The remaining deferred revenue balance of $2,028,000
is shown as non-current on the balance sheet at September 30, 1999 and December
31, 1998 as delivery dates are unknown due to the Baxter Healthcare litigation
(see note 9).
Other deferred revenue - current in the amounts of $878,000 and
$1,002,000 at September 30, 1999 and December 31, 1998, respectively, relates
primarily to payments in advance for various product maintenance contracts,
whereby revenue is initially deferred and amortized over the life of the
contract, which is generally one year.
(7) SEGMENT AND GEOGRAPHIC REPORTING
An operating segment is a component of an enterprise whose operating
results are regularly reviewed by the enterprise's chief operating decision
maker to make decisions about resources to be allocated to the segment and
assess its performance. The primary performance measure used by management is
net earnings or loss. As a result of the sale of PTI in June 1999, the Company
operates in one distinct line of business consisting of the development,
manufacturing, marketing and distribution of a proprietary excimer laser system
for the treatment of certain coronary and vascular conditions. The Company has
identified two reportable segments within this line of business: (1) U.S.
Medical and (2) Europe Medical. U.S. Medical and Europe Medical offer similar
products and services but operate in different geographic regions and have
different distribution networks. Additional information regarding each
reportable segment is shown below.
Certain elements within the segment reporting financial information at
September 30, 1998 and December 31, 1998 have been reclassified to conform with
the segment reporting as presented at September 30, 1999.
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ITEM 1. NOTES TO FINANCIAL STATEMENTS (CONT'D)
U. S. MEDICAL
Products offered by this reportable segment include an excimer laser
unit ("equipment"), fiber-optic delivery devices ("disposables"), and the
service of the excimer laser unit ("service"). The Company is subject to product
approvals from the Food and Drug Administration ("FDA"). At September 30, 1999,
FDA-approved products were used in conjunction with coronary angioplasty as well
as the removal of non-functioning pacing leads from pacemakers and cardiac
defibrillators. This segment's customers are primarily located in the United
States; however, the geographic area served by this segment also includes
Canada, Mexico, South America and Asia.
U.S. Medical is also corporate headquarters for the Company.
Accordingly, research and development as well as corporate administrative
functions are performed within this reportable segment. As of September 30, 1999
and 1998, cost allocations of these functions to Europe Medical have not been
performed, except for a $30,000 allocation to income from operations of
discontinued industrial subsidiary for general and administrative activities for
the three months ended September 30, 1998, and an allocation of $190,000 and
$90,000 to income from operations of discontinued industrial subsidiary for the
nine months ended September 30, 1999 and 1998, respectively.
Revenue associated with intersegment transfers to Europe Medical were
$268,000 and $352,000 for the three months ended September 30, 1999 and 1998,
respectively, and $1,236,000 and $1,221,000 for the nine months ended September
30, 1999 and 1998, respectively. Revenue is based upon transfer prices, which
provide for intersegment profit that is eliminated upon consolidation. For each
of the three and nine months ended September 30, 1999 and 1998, intersegment
revenue and intercompany profits have been eliminated in the segment information
in the table shown below.
EUROPE MEDICAL
The Europe Medical segment is a marketing and sales subsidiary located
in the Netherlands that serves all of Europe as well as the Middle East.
Products offered by this reportable segment are similar in nature to U.S.
Medical products and were distributed primarily through third-party distributors
for the nine months ended September 30, 1998. Beginning in January 1999, the
Company established a direct sales force in Germany, which accounts for the
majority of the revenues within this segment. The Company has received CE mark
approval for products that relate to three applications of excimer laser
technology - coronary angioplasty, lead removal, and peripheral angioplasty to
clear blockages in leg arteries.
Summary financial information relating to reportable continuing segment
operations is as follows. Intersegment transfers as well as intercompany assets
and liabilities are excluded from the information provided (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
REVENUE: 1999 1998 1999 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
U.S. Medical $ 5,829 $ 4,094 $ 13,571 $ 11,849
Europe Medical 815 543 2,080 1,709
---------- ---------- ---------- ----------
Total revenues $ 6,644 $ 4,637 $ 15,651 $ 13,558
========== ========== ========== ==========
</TABLE>
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ITEM 1. NOTES TO FINANCIAL STATEMENTS (CONT'D)
For the three months ended September 30, 1998, revenue from one
customer from the U.S. Medical segment totaled $460,000, or 10% of total
revenues. For the nine months ended September 30, 1998, revenue from one
customer from the U.S. Medical segment totaled $2,950,000, or 22% of total
revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
SEGMENT NET LOSS: 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Medical (1) $ (16) $ (190) $ (2,583) $ (1,306)
Europe Medical (1) (309) (835) (1,657) (1,934)
---------- ---------- ---------- ----------
Total net loss $ (325) $ (1,025) $ (4,240) $ (3,240)
========== ========== ========== ==========
</TABLE>
(1) Includes one-time charges totaling $1,358,000 related to
reorganization costs and litigation reserves for the nine months ended September
30, 1999.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
SEGMENT ASSETS: 1999 1998
------------- ------------
<S> <C> <C>
U.S. Medical $ 32,061 $ 13,526
Europe Medical 1,679 2,131
------------ ------------
Subtotal - Medical 33,740 15,657
Total assets of discontinued operations -- 5,728
------------ ------------
Total assets $ 33,740 $ 21,385
============ ============
</TABLE>
(8) REORGANIZATION COSTS
During the three months ended June 30, 1999, the Company initiated a
reorganization of its subsidiary in Europe consisting primarily of a change in
management. Costs associated with the reorganization relate primarily to
termination and severance costs.
(9) COMMITMENTS AND CONTINGENCIES
On August 6, 1999, the Company was notified of a lawsuit claiming
patent infringement which was filed in Delaware by Baxter Healthcare
Corporation. The lawsuit seeks an injunction against further alleged
infringement of the patents as well as unspecified damages. The Company is aware
of these patents and does not believe any patent infringement has occurred. The
Company has accrued for costs incurred and expected to be incurred as a result
of this claim. We have assessed the range of costs to be incurred and have
accrued costs at the lower end of the range, as there is no better estimate
within that range. However, it is difficult to assess the costs involved related
to the defense and resolution of this claim. As such, the possibility exists
that the costs to resolve this matter may exceed the amount accrued.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CORPORATE OVERVIEW
We develop, manufacture, service and distribute an excimer laser
unit and fiber optic delivery system for the treatment of certain coronary and
vascular conditions.
Our revenues are dependent on market acceptance of current
FDA-approved products and obtaining clinical data supporting regulatory
approvals for new products. We sell the only excimer laser system that has been
market approved by the FDA in the United States for multiple applications -
coronary angioplasty and pacemaker and defibrillator lead removal. The Company
has received CE Mark approval in Europe to market its excimer laser system for
three applications coronary angioplasty, lead removal and peripheral angioplasty
to clear blockages in leg arteries. Our laser system competes primarily against
alternative technologies including balloon catheters, cardiovascular stents and
mechanical artherectomy devices.
Our strategy is to expand our installed base of excimer laser
systems, increase catheter utilization of existing customers, and develop
additional procedures for our excimer laser system. In 1999, we initiated
clinical trials evaluating the use of our excimer laser system to treat
restenosed stents and blockages in the legs. These trials will take
approximately three years to complete depending on the type and size of the
trial, patient enrollment, and our ability to fund these trials. To implement
our strategy, we intend to continue to accelerate investment in the development
of new products, clinical trials for additional applications, as well as
additional sales and marketing resources. This investment may result in
operating losses in the current and future years.
RESULTS OF OPERATIONS
In this section, we discuss revenue and net income (loss) results
for the three and nine months ended September 30, 1999 and 1998. We begin with a
general overview, then discuss revenue and net income (loss) from our two
operating units.
On August 6, 1999, one of the our competitors, Boston Scientific
Corporation, announced a product recall of their rotational atherectomy system.
We believe that a large part of the increase within our coronary angioplasty
product line was directly related to the recall. They are working with the Food
and Drug Administration seeking approval to market the recalled rotational
atherectomy system once the safety issues with the products have been addressed.
To date, this approval has not been granted. Boston Scientific has begun
introducting their first generation rotational atherectomy system which was not
affected by the recall and expects to be able to supply approximately
$15,000,000 of their pre-recall quarterly run rate of $30,000,000 in the fourth
quarter of 1999.
We believe that we can retain the majority of the business gained
since the product recall was announced but our ability to do so depends on,
among other things, the acceptance of excimer laser angioplasty as a viable
alternative to rotational atherectomy, the ability of Boston Scientific
Corporation to supply the first generation rotational atherectomy system to its
customers and the timing of the reintroduction of the recalled rotational
atherectomy to Boston Scientific's customers.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
FINANCIAL OVERVIEW
REVENUE PER OPERATING UNIT
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
REVENUE: 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Medical $ 5,829 $ 4,094 $ 13,571 $ 11,849
Europe Medical 815 543 2,080 1,709
---------- ---------- ---------- ----------
Total revenues $ 6,644 $ 4,637 $ 15,651 $ 13,558
========== ========== ========== ==========
</TABLE>
LOSS FROM CONTINUING OPERATIONS PER OPERATING UNIT
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEGMENT LOSS FROM SEPTEMBER 30, SEPTEMBER 30,
CONTINUING OPERATIONS: 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Medical (1) $ (16) $ (190) $ (2,583) $ (1,306)
Europe Medical (1) (309) (835) (1,657) (1,934)
---------- ---------- ---------- ----------
Total net loss $ (325) $ (1,025) $ (4,240) $ (3,240)
========== ========== ========== ==========
</TABLE>
(1) Includes one-time charges totaling $1,358,000 related to
reorganization costs and litigation reserves for the nine months ended September
30, 1999.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Revenue from the core medical business, which excludes 1998 revenue
from the shipment of equipment to USSC of $460,000, increased by 59% to
$6,644,000, or 59%, for the three months ended September 30, 1999 as compared to
$4,177,000 for the three months ended September 30, 1998. Increased revenue
included an 83% increase in disposables sales, a 9% increase in service revenue,
and a 36% increase in equipment revenue, excluding USSC shipments in 1998. The
Company's contractual obligation for shipment of laser systems under a supply
agreement with USSC was fulfilled in September 1998. As such, there were no
sales to USSC during the three months ended September 30, 1999. Revenues under
this agreement were $460,000 for the three months ended September 30, 1998.
Increased disposables revenue, which consists of single-use catheter
products, resulted from an increase of 168% in sales of coronary angioplasty
catheters and a 5% increase in sales of lead removal devices over our 1998
levels. These increases were primarily a result of unit volume increases
combined with increased average selling prices across each product line in the
United States and Europe.
Gross margins increased to 66% during the three months ended September
30, 1999 as compared to 59% for the three months ended September 30, 1998. This
improvement was due to a combination of improved manufacturing efficiencies,
price increases averaging 5% on our catheter products effective in
Page 10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
December 1998, and a higher proportion of disposables revenue in relation to
total revenue, which generates higher margins than equipment or service.
Operating expenses grew 36% during the three months ended September 30,
1999 to $5,108,000 as compared to $3,745,000 for the three months ended
September 30, 1998.
Marketing and sales expenses increased by 13% to $2,658,000 for the
three months ended September 30, 1999 as compared to $2,349,000 for the same
period for 1998. This increase relates to costs incurred primarily in the United
States for additional sales personnel and increased commissions relative to the
increase in revenue.
General and administrative expenses grew 56% to $1,276,000 for the
three months ended September 30, 1999 as compared to $816,000 for the three
months ended September 30, 1998. This increase is primarily attributable to two
factors: (1) accrued costs associated with incentive pay which will be paid only
if certain predetermined financial targets are met for the twelve months ended
December 31, 1999 and (2) increased legal fees primarily due to the White Star
matter discussed within Legal Proceedings on page 23.
Royalties expense represent costs paid on license agreements held by
third parties on our products. Royalties expense increase by 130% to $333,000
for the three months ended September 30, 1999 as a direct result of increased
revenue as compared to the three months ended September 30, 1998.
Research and development increased by 93% to $841,000 for the three
months ended September 30, 1999. This increase is due to increased product
development costs and clinical trial costs associated with peripheral
angioplasty to clear blockages in the upper and lower leg and the debulking of
blockages with restenosed, or blocked, stents.
Interest income increased due to higher cash averages as a result of
cash received from the private placement of common stock in February 1999 and
the cash received from the sale of PTI in June 1999. Interest expense decreased
slightly from the prior year and related primarily to interest charges on our
equipment loan.
Loss from continuing operations for the three months ended September
30, 1999 decreased by 68% to a loss of $325,000 from a loss of $1,025,000 for
the three months ended September 30, 1998 primarily due to increases in revenue
and gross margin offset by increases in expenses discussed above.
U.S. MEDICAL
Revenue from our core medical business in the United States increased
60% to $5,829,000 for the three months ended September 30, 1999 as compared to
revenue of $3,634,000 for the three months ended September 30, 1998, excluding
the equipment revenue of $460,000 from USSC during the three months ended
September 30, 1998. Equipment revenue, excluding shipments to USSC in 1998,
increased by 44%. Disposables revenue increased 81%, led by a 171% increase in
coronary angioplasty revenue and offset by a 6% decrease in lead removal
products. Service revenue increased 15%.
Page 11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
Loss from continuing operations decreased 92% to a loss of $16,000 for
the three months ended September 30, 1999 as compared to a loss of $190,000 for
the three months ended September 30, 1998. The decreased net loss was primarily
due to increased revenue and gross margin offset by increased operating
expenses.
EUROPE MEDICAL
Revenue from our medical business in Europe increased 50% to $815,000
for the three months ended September 30, 1999 as compared to revenue of $543,000
for the three months ended September 30, 1998. This increase was primarily due
to an increase in disposables revenue.
Loss from continuing operations from European operations decreased 63%
to a loss of $309,000 for the three months ended September 30, 1999 as compared
to a loss of $835,000 for the three months ended September 30, 1998. This
decrease is primarily attributed to increased revenues and gross margin,
combined with a 20% decrease in operating expenses associated with the closeout
of certain European clinical trials.
The functional currency of Spectranetics International, B.V. is the
Dutch guilder. All revenue and expenses are translated to United States dollars
in the consolidated statements of operations using weighted average exchange
rates during the period. Fluctuation in Dutch guilder currency rates during the
three months ended September 30, 1999 as compared to the three months ended
September 30, 1998 caused a decrease in revenues and operating expenses of 1% of
consolidated revenues and operating expenses.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Revenue from the core medical business, which excludes 1998 revenue
from the shipment of equipment to USSC of $2,950,000, increased by 48% to
$15,651,000, or 48%, for the nine months ended September 30, 1999 as compared to
$10,608,000 for the nine months ended September 30, 1998. Increased revenue
included a 52% increase in disposables sales, a 22% increase in service revenue,
and a 64% increase in equipment revenue. The Company's contractual obligation
for shipment of laser systems under a supply agreement with USSC was fulfilled
in September 1998. As such, there were no sales to USSC during the nine months
ended September 30, 1999. Revenues under this agreement were $2,950,000 for the
nine months ended September 30, 1998.
Increased disposables revenue, which consists of single-use catheter
products, resulted from an increase of 72% in sales of coronary angioplasty
catheters and a 23% increase in sales of lead removal devices over our 1998
levels. These increases were primarily a result of unit volume increases
combined with increased average selling prices across each product line in the
United States and Europe.
Gross margins increased to 66% during the nine months ended September
30, 1999 as compared to 61% for the nine months ended September 30, 1998. This
improvement was due to a combination of improved manufacturing efficiencies,
price increases averaging 5% on our catheter products effective in December
1998, and a higher proportion of disposable revenue in relation to total
revenue, which generates higher margins than equipment or service.
Page 12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
Operating expenses grew 31% during the nine months ended September 30,
1999 to $15,006,000 as compared to $11,496,000 for the nine months ended
September 30, 1998 due primarily to one-time reorganization and litigation
charges combined with increased research and development cost.
Marketing and sales expenses increased by 5% to $7,060,000 for the nine
months ended September 30, 1999. This increase relates to costs incurred in the
United States for additional sales personnel and increased commissions relative
to the increase in revenue, which total approximately $900,000. This increase in
the United States is offset by a decrease in Europe of approximately $600,000
due to the completion of certain European clinical trials in 1998.
General and administrative expense increased by 12% to $3,177,000 for
the nine months ended September 30, 1999. This increase is primarily
attributable to increased legal fees associated primarily with the White Star
matter discussed further within Legal Proceedings on page 23.
Royalties expense represent costs paid on license agreements held by
third parties on our products. Royalties expense increased by 51% to $767,000
for the nine months ended September 30, 1999. This increase is attributable to
increased revenue.
Research and development expense increased by 86% to $2,644,000 for the
nine months ended September 30, 1999. This increase was due to increased product
development costs and clinical trial costs associated with peripheral
angioplasty to clear blockages in the upper and lower leg and the debulking of
blockages within restenosed, or blocked, stents.
Reorganization costs and litigation reserves totaling $1,358,000 were
recorded during the nine months ended September 30, 1999 and are explained in
more detail within the notes to the financial statements (note 8 and 9).
Interest income increased 148% to $462,000 for the nine months ended
September 30, 1999 due to higher cash averages as a result of cash received from
the private placement of common stock in February 1999 and the cash received
from the sale of PTI in June 1999. Interest expense decreased slightly from the
prior year and related primarily to interest charges on our equipment loan.
Loss from continuing operations for the nine months ended September 30,
1999 increased by 31% to a loss of $4,240,000 from a loss of $3,240,000 for the
nine months ended September 30, 1998 primarily due to reorganization costs and
litigation reserves of $1,358,000.
U.S. MEDICAL
Revenue from our core medical business in the United States increased
53% to $13,571,000 for the nine months ended September 30, 1999 as compared to
revenue of $8,899,000 for the nine months ended September 30, 1998, excluding
the equipment revenue of $2,950,000 from USSC during the nine months ended
September 30, 1998. Equipment revenue, excluding shipments to USSC in 1998,
increased by 77%. Disposables revenue increased 57%, led by a 88% increase in
coronary angioplasty revenue and a 16% increase in lead removal device sales.
Service revenue increased 26%.
Page 13
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
Loss from continuing operations from this unit increased 98% to a loss
of $2,583,000 for the nine months ended September 30, 1999 as compared to a loss
of $1,306,000 for the nine months ended September 30, 1998. The increased net
loss was primarily due to increased operating expenses led by one-time charges
associated with litigation reserves and increased research and development
expenses.
EUROPE MEDICAL
Revenue from our medical business in Europe increased 22% to $2,080,000
for the nine months ended September 30, 1999 as compared to revenue of
$1,709,000 for the nine months ended September 30, 1998. This increase was
primarily due to an increase in disposables revenue.
Loss from continuing operations from European operations decreased 14%
to a loss of $1,657,000 for the nine months ended September 30, 1999 as compared
to a loss of $1,934,000 for the nine months ended September 30, 1998. This
decrease is primarily attributed to increased revenues and an increase in gross
margin.
The functional currency of Spectranetics International, B.V. is the
Dutch guilder. All revenue and expenses are translated to United States dollars
in the consolidated statements of operations using weighted average exchange
rates during the year. Fluctuations in Dutch guilder currency rates during the
nine months ended September 30, 1999 as compared to the nine months ended
September 30, 1998 caused a decrease in revenues and operating expenses of less
than 1% of consolidated revenues and operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had cash, cash equivalents and investment
securities of $22,050,000 compared to $4,158,000 at December 31, 1998. In
February 1999, Spectranetics completed the private placement of 3,800,000 shares
of its common stock and received cash proceeds, net of offering costs, therefrom
of $6,537,000. In June 1999, the Company completed the sale of PTI for cash of
$15,000,000.
Cash used by operating activities totaled $3,307,000 for the nine
months ended September 30, 1999, primarily due to operating loss from continuing
operations of $4,240,000 offset by non-cash depreciation and amortization of
$1,042,000. The table below describes the growth in receivables and inventory in
relative terms, through the calculation of financial ratios. Days sales
outstanding is calculated by dividing the ending accounts receivable balance by
the average daily core medical sales for the quarter. Inventory turns is
calculated by dividing annualized cost of sales for the quarter by ending
inventory.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Sept 30, 1999 Dec 31, 1998 Sept 30, 1998
------------- ------------ -------------
<S> <C> <C> <C>
Days Sales Outstanding 64 74 66
Inventory Turns 5.1 4.1 4.4
-------------------------------------------------------------------------------
</TABLE>
Receivables considered to be overdue were not material as of September
30, 1999 or December 31, 1998. The increase in inventory turns is primarily due
to increased sales activity during the three months ended September 30, 1999.
Page 14
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
Net cash provided by investing activities was $142,000 for the nine
months ended September 30, 1999 primarily due to $14,346,000 of net proceeds
from the sale of PTI and $1,140,000 of net cash received from PTI offset by a
$15,110,000 increase in short-term investments. Capital expenditures were
$234,000 for the nine months ended September 30, 1999 as compared to $1,018,000
for nine months ended September 30, 1998. Most of the capital expenditures
incurred during the nine months ended September 30, 1998 related to
implementation costs associated with a new computer system. Since the
implementation was completed in 1998, no such costs have been incurred in during
the nine months ended September 30, 1999.
Net cash provided by financing activities was $5,967,000. This cash was
comprised of net proceeds from the private stock placement which totaled
$6,537,000, and $261,000 from the sales of common stock associated with stock
option exercises, which were offset by $831,000 from principal payments on debt
and capital lease obligations.
During 1997, we secured a $2,000,000 credit line collateralized by
equipment (equipment line). The equipment line bears interest, which is accrued
monthly, at a rate equal to one-quarter of a percent above the prime rate
(interest rate of 8.25% at September 30, 1999), and matures on December 23,
2000. At September 30, 1999, the equipment line had an outstanding balance of
$1,000,000. As of September 30, 1999 we are in compliance with the debt
covenants and we expect to remain compliant with these covenants for the
remainder of 1999.
During 1998, we entered into a $330,000 loan agreement collateralized
by equipment held for rental or loan owned by Spectranetics International, B.V.
The loan bears interest at 6.51% per annum and matures in December 2003. At
September 30, 1999, the loan had an outstanding balance of $262,000.
At September 30, 1999 and December 31, 1998, we placed a number of
systems on rental, loan and fee per procedure programs. A total of $2,847,000
and $2,350,000 were recorded as equipment held for rental or loan as of
September 30, 1999 and December 31, 1998, respectively, and are being
depreciated over three to five years. This equipment was transferred from
inventory at cost. We will continue to offer these programs as we execute our
strategy of increasing our installed base of laser systems in major cardiac
centers.
We currently use four placement programs:
(1) Rental programs - Straight rental program with terms varying
from 6 months to 3 years. Rental revenues in the amount of
$3,000 to $5,000 are invoiced on a monthly basis and revenue
is recognized upon invoicing. Catheter revenues are recognized
when shipped and invoiced. The lasers are transferred from
inventory to the equipment held for rental or loan account
upon shipment of the laser to the customer. The laser is then
depreciated over three to five years, depending on the type of
laser. Depreciation on these lasers is included in cost of
revenues. At the end of the rental term, if the customer
elects to purchase the unit, revenue is recognized upon
invoicing the customer after receiving a valid purchase order.
Cost of sales equal to the net book value of the system is
also recorded at this time.
Page 15
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
(2) Sliding scale rental programs - This rental program was
introduced in June 1999 and is similar to the straight rental
program. However, rental revenues under this program vary on a
sliding scale depending on the customer's catheter purchases
each month. Rental revenues are invoiced on a monthly basis
and revenue is recognized upon invoicing.
(3) Loan programs - We "loan" a laser system to an institution for
use over a short period of time, usually three to six months.
The loan of the equipment is made to create awareness of the
product and no revenue is earned or recognized in connection
with the placement of this laser. The units are transferred to
the equipment held for rental or loan account upon shipment of
the laser system. The laser systems are depreciated over a
three to five year period that is expensed to cost of revenue.
(4) Fee per procedure programs - This program is similar to the
rental program except that revenues are derived from a premium
attached to the sale of each single-use laser catheter.
Revenue equal to the premium charged above list price for each
catheter sold is recognized as rental revenues. This rental
income is immaterial to the financial statements, representing
less than 1% of consolidated revenue. All other accounting
treatment is consistent with that noted above in the "rental
programs".
We believe our liquidity and capitalization as of September 30, 1999 is
sufficient to meet our operating and capital requirements through December 31,
2000. Revenue increases from current levels and attaining profitability will be
necessary to sustain us over the long-term.
YEAR 2000
The year 2000 ("Y2K") issue arose because many computer programs
existing today utilize only two characters to recognize a year. Therefore, when
the year 2000 arrives, these programs may not properly recognize a year
beginning with "20" instead of "19". The Y2K issue may result in the improper
processing of dates and date-sensitive calculations by computers and other
microprocessor-controlled equipment as the year 2000 is approached and reached.
STATE OF READINESS
We have divided our Y2K exposure into three major areas:
o internal systems;
o products; and
o potential Y2K problems associated with outside vendors.
Page 16
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
Because we believe that our primary Y2K issues could arise in the area
of internal systems, we have focused on this area and have almost completed this
phase of our Y2K project. New computer systems, which are designed to be Y2K
compliant, were installed and implemented during the first half of 1998 at our
facilities in Colorado Springs, Colorado. We have received written assurance
that the computer system used in Europe is also Y2K compliant. These computer
systems are the foundation for our business operations and include, but are not
limited to, business functions such as order entry, shipping, purchasing,
inventory control, manufacturing, accounts receivable, accounts payable, and
general ledger. We have reviewed other equipment that contains date-sensitive
information. We have implemented a Y2K compliant phone system at our
headquarters and are reviewing other equipment for potential Y2K issues. We have
completed our review of internal systems as of September 30, 1999 and do not
expect a material adverse effect on our operations as a result of Y2K, however
we can provide no assurances that adverse effects resulting to Y2K will not
happen.
We have reviewed our products and determined that there are no
date-sensitive fields contained in any of the software within our products;
therefore, we do not believe that our products will be affected by Y2K issues.
We are in the process of identifying any risks associated with the Y2K
problem as it relates to outside vendors with systems that interface with our
systems. We have substantially completed this review as of September 30, 1999,
and we do not expect this issue to have a material adverse effect on our
operations. However, since third party year 2000 compliance is not within our
control, we cannot assure that Y2K issues affecting the systems of other
companies on which our systems rely will not have a material adverse effect on
our operations.
COSTS TO ADDRESS THE Y2K ISSUE
Costs from continuing operations to address the Y2K issue include
hardware, software, and implementation costs paid to outside consultants
associated primarily with the implementation of a new computer system. These
costs were directly related to the purchase and implementation of the new
computer system, not for the remediation of current systems to make them y2k
compliant. For the nine months ended September 30, 1999 no costs of this type
were incurred. Such costs totaled $791,000 for the year ended December 31, 1998
and were capitalized and will be depreciated over a three to five year period.
The costs were financed primarily through financing activities, which include
capital leases and a draw on our line of credit. Related depreciation costs for
the nine months ended September 30, 1999 and 1998 totaled $163,000 and $78,000,
respectively. Interest costs associated with the capital leases used to finance
hardware and software totaled $7,000 and $13,000, respectively, for the nine
months ended September 30, 1999 and 1998. We do not expect to incur material
future costs associated with the Y2K issue as it relates to internal systems.
No other expenses, which include non-capitalized equipment and consulting costs,
were incurred for the three months ended September 30, 1999 and 1998.
Page 17
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
RISKS PRESENTED BY THE YEAR 2000 ISSUE
To date, we have not identified any Y2K issues that we believe could
materially adversely affect us or for which a suitable solution cannot be
implemented. However, as the review of our internal systems and interfaces with
outside vendors progresses, it is possible that Y2K issues may be identified
that could result in a material adverse effect on our operations. For more
information, see "Risk Factors - Year 2000 Issues Could Hurt Our Business."
CONTINGENCY PLANS
Our contingency plans consist primarily of backup equipment and systems
in areas that we are dependent upon to continue the operations of the Company
(computer system, phone communications). We believe that the combination of our
Y2K compliance effort and contingency plans in place will prevent material
adverse events from occuring, but can provide no assurances to that effect.
RISK FACTORS
We Have Continued to Suffer Losses. We have incurred net losses since
our inception in June 1984. At September 30, 1999, we had accumulated $67.7
million in net losses since inception. We anticipate that our net losses will
continue in the foreseeable future. We may be unable to increase sales or
achieve profitability.
Additional Financing May Be Needed and We May Not Be Able to Obtain It.
Cash flows from operating activities may not be sufficient to sustain our
long-term operations unless we are able to increase sales and control expenses.
If we finance future operations through additional issuances of equity
securities, you may suffer dilution and the price of the common stock may fall.
Our Small Sales and Marketing Team May be Unable to Compete with our
Larger Competitors or Reach All Potential Customers. Many of our competitors
have larger sales and marketing operations than ours. This allows those
competitors to spend more time with customers, which gives them a significant
advantage over our team in making sales.
Our Recently Established Direct Sales Force in Europe May Not Be
Successful. In January 1999, we established a direct sales force for our
principal European markets. We may be unable to develop an effective European
sales force, and our sales and marketing efforts in Europe could be
unsuccessful.
We Are Exposed to the Problems that Come from Having International
Operations. For the nine months ended September 30, 1999, our revenues from
international operations represented 15% of consolidated revenues. Changes in
overseas economic conditions, currency exchange rates, foreign tax laws or
tariffs or other trade regulations could adversely affect our ability to market
our products in these and other countries. As we expand our international
operations, we expect our sales and expenses denominated in foreign currencies
to expand.
Our Products are Still New and May Not Be Accepted in Their Markets.
Excimer laser technology is a relatively new procedure that competes with more
established therapies for restoring circulation to clogged or obstructed
arteries. Market acceptance of the excimer laser system depends on our ability
to provide adequate clinical and economic data that shows the clinical efficacy
of and patient need for excimer laser angioplasty and lead removal.
Page 18
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
We May Be Unable to Compete Successfully in our Highly Competitive
Industry in Which Many Other Competitors are Bigger Companies. Our primary
competitors are manufacturers of products used in competing therapies, such as:
o balloon angioplasty, which uses a balloon to push obstructions
out of the way;
o stent implantation;
o open chest bypass surgery; and
o atherectomy, a mechanical method for removing arterial
blockages.
We also compete with companies that develop lead extraction devices or
removal methods, such as mechanical sheaths. Almost all of our competitors have
substantially greater financial, manufacturing, marketing and technical
resources than we do. We expect competition to intensify.
We believe that the primary competitive factors in the interventional
cardiovascular market are:
o the ability to treat a variety of lesions safely and
effectively;
o the impact of managed care practices and procedure costs;
o ease of use;
o size and effectiveness of sales forces; and
o research and development capabilities.
SCIMED Life Systems, Inc. (a subsidiary of Boston Scientific
Corporation), Cordis Corporation (a subsidiary of Johnson & Johnson
Interventional Systems), Advanced Cardiovascular Systems, Inc. (a subsidiary of
Guidant Corporation), and Bard and Schneider (a subsidiary of Pfizer Inc.) are
the leading balloon angioplasty manufacturers. SCIMED, Cordis, Advanced
Cardiovascular Systems and Medtronic, Inc. are the leading stent providers in
the United States. 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).
Failure of Third Parties to Reimburse Medical Providers for our
Products May Reduce Our Sales. We sell our CVX-300 laser unit primarily to
hospitals, which then bill third-party payors such as government programs and
private insurance plans, for the services the hospitals provide using the
CVX-300 laser unit. Unlike balloon angioplasty and atherectomy, laser
angioplasty requires the purchase of expensive capital equipment. In some
circumstances, the amount reimbursed to hospitals for procedures involving our
products may not be adequate to cover a hospital's costs. We do not believe that
reimbursement has materially adversely affected our business to date, but
continued cost containment measures could hurt our business in the future.
Page 19
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
In addition, the FDA has required that the label for the CVX-300 laser
unit state that adjunctive balloon angioplasty was performed together with laser
angioplasty in most of the procedures we submitted to the FDA for pre-market
approval. Adjunctive balloon angioplasty requires the purchase of a balloon
catheter in addition to the laser catheter. While all approved procedures using
the excimer laser system are reimbursable, some third-party payers attempt to
deny reimbursement for procedures they believe are duplicative, such as
adjunctive balloon angioplasty performed together with laser angioplasty.
Third-party payers may also attempt to 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. Hospitals that have experienced
reimbursement problems or expect to experience reimbursement problems may not
purchase our excimer laser systems in the future.
Regulatory Compliance is Very Expensive and Can Often Be Denied or
Significantly Delayed. The industry in which we compete is subject to extensive
regulation by the FDA and comparable state and foreign agencies. Complying with
these regulations is costly and time consuming. International regulatory
approval processes may take longer than the FDA approval process. If we fail to
comply with applicable regulatory requirements, we may be subject to, among
other things, fines, suspensions of approvals, seizures or recalls of products,
operating restrictions and criminal prosecutions. We may be unable to obtain
future regulatory approval in a timely manner or at all if existing regulations
are changed or new regulations are adopted. For example, the FDA approval
process for the use of excimer laser technology in clearing blocked arteries in
the lower leg has taken longer than we anticipated, due to requests for
additional clinical data and changes in regulatory requirements.
Failures in Clinical Trials May Hurt Our Business and Our Stock Price.
All of Spectranetics' potential products are subject to extensive regulation and
will require approval from the Food and Drug Administration and other regulatory
agencies prior to commercial sale. The results from pre-clinical testing and
early clinical trials may not be predictive of results obtained in large
clinical trials. Companies in the medical device industry have suffered
significant setbacks in various stages of clinical trials, even in advanced
clinical trials after promising results had been obtained in earlier trials.
The development of safe and effective products is highly uncertain and
subject to numerous risks. The product development process may take several
years, depending on the type, complexity, novelty and intended use of the
product. Product candidates that may appear to be promising in development may
not reach the market for a number of reasons. Product candidates may:
o be found ineffective;
o take longer to progress through clinical trials than had been
anticipated; or
o require additional clinical data and testing.
In particular, our Prima(R) laser guidewire, which allows excimer laser
energy to assist in crossing totally blocked arteries, has not been as effective
as we expected. Also, during the course of review of the Prima guidewire by the
FDA, alternative technologies have surfaced which may limit market acceptance of
the Prima guidewire. We cannot guarantee that the clinical trials relating to
any of our products will be successful.
Page 20
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
We Have Important Sole Source Suppliers and May Be Unable to Replace
Them if They Stop Supplying Us. We purchase certain components of our CVX-300
laser unit from several sole source suppliers. We do not have guaranteed
commitments from these suppliers and order products through purchase orders
placed with these suppliers from time to time. While we believe that we could
obtain replacement components from alternative suppliers, we may be unable to do
so.
Potential Product Liability Claims and Insufficient Insurance Coverage
May Hurt Our Business and Stock Price. We are subject to risk of product
liability claims. We maintain product liability insurance with coverage and
aggregate maximum amounts of $5 million. The coverage limits of our insurance
policies may be inadequate, and insurance coverage with acceptable terms could
be unavailable in the future.
Technological Change May Result in Our Products Being Obsolete. With
the sale of PTI, substantially all of our revenues are derived from the sale or
lease of the CVX-300 laser unit and the sale of disposable devices.
Technological progress or new developments in our industry could adversely
affect sales of our products. Many companies, some of which have substantially
greater resources than we do, are engaged in research and development for the
treatment and prevention of coronary artery disease. These include
pharmaceutical approaches as well as development of new or improved angioplasty,
atherectomy or other devices. Our products could be rendered obsolete as a
result of future innovations in the treatment of vascular disease.
Our Patents and Proprietary Rights May be Proved Invalid so Competitors
Can Copy Our Products; We May Infringe Other Companies' Rights. We hold patents
and licenses to use patented technology, and have patent applications pending.
Any patents for which we have applied may not be granted. In addition, our
patents may not be sufficiently broad to protect our technology or to give us
any competitive advantage. Our patents could be challenged as invalid or
circumvented by competitors. In addition, the laws of certain foreign countries
do not protect our intellectual property rights to the same extent as do the
laws of the United States. We do not have patents in many foreign countries. We
could be adversely affected if any of our licensors terminate our licenses to
use patented technology.
We are aware of patents and patent applications owned by others
relating to laser and fiber-optic technologies, which, if determined to be valid
and enforceable, may be infringed by Spectranetics. Holders of certain patents,
including holders of patents involving the use of lasers in the body, have
contacted us and requested that we enter into license agreements for the
underlying technology. We cannot guarantee you that a patent holder will not
file a lawsuit against us and may prevail. If we decide that we need to license
this technology, we may be unable to obtain these licenses on favorable terms or
at all. We may not be able to develop or otherwise obtain alternative
technology. See "Legal Proceedings".
Litigation concerning patents and proprietary rights is time-consuming,
expensive, unpredictable and could divert the efforts of our management. An
adverse ruling could subject us to significant liability, require us to seek
licenses and restrict our ability to manufacture and sell our products.
Page 21
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
Protections Against Unsolicited Takeovers in Our Rights Plan, Charter
and Bylaws May Reduce or Eliminate our Stockholders' Ability to Resell Their
Shares at a Premium Over Market Price. We have a stockholder rights plan that
may prevent an unsolicited change of control of Spectranetics. The rights plan
may adversely affect the market price of our common stock or the ability of
stockholders to participate in a transaction in which they might otherwise
receive a premium for their shares. Under the rights plan, rights to purchase
preferred stock in certain circumstances have been issued to holders of
outstanding shares of common stock, and rights will be issued in the future for
any newly issued common stock. Holders of the preferred stock are entitled to
certain dividend, voting and liquidation rights that could make it more
difficult for a third party to acquire Spectranetics.
Our charter and bylaws contain provisions relating to issuance of
preferred stock, special meetings of stockholders and amendments of the bylaws
that could have the effect of delaying, deferring or preventing an unsolicited
change in the control of Spectranetics. Our Board of Directors are elected for
staggered three-year terms, which prevents stockholders from electing all
directors at each annual meeting and may have the effect of delaying or
deferring a change in control.
Potential Volatility of Stock Price. The market price of our common
stock, similar to other health care companies, has been, and is likely to
continue to be, highly volatile. The following factors may significantly affect
the market price of our common stock:
o fluctuations in operating results;
o announcements of technological innovations or new products by
Spectranetics or our competitors;
o governmental regulation;
o developments with respect to patents or proprietary rights;
o public concern regarding the safety of products developed by
Spectranetics or others;
o general market conditions; and
o financing future operations through additional issuances of
equity securities, which may result in dilution to existing
stockholders and falling stock prices.
Year 2000 Issues Could Hurt Our Business. We installed and implemented
new computer systems at our Colorado facilities in the first half of 1998.
Although our new software is designed to be year 2000 compliant, we cannot
assure that this software contains all necessary date code changes. We are
currently evaluating our other computer systems for year 2000 compliance.
Although we expect all of our critical systems to be year 2000 compliant by
September 30, 1999, there is a risk that some or all of our systems will not be
year 2000 compliant by 2000.
Upon review of our product offerings, we have determined that the
software within our products does not contain date-sensitive fields. As a
result, we do not believe that our products will be affected by year 2000
issues. We cannot assure, however, that all of our products are year 2000
compliant.
We are in the process of obtaining information from outside vendors
regarding systems that interface with our systems. Based on currently available
information, we do not believe that year 2000 issues relating to these systems
will adversely affect our business. However, since third party year 2000
compliance is not within our control, we cannot assure that any year 2000 issues
affecting our outside vendors will not adversely affect our business.
Page 22
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risks include changes in foreign currency exchange
rates and interest rates. Market risk is the potential loss arising from adverse
changes in market rates and prices, such as foreign currency exchange and
interest rates. We do not use financial instruments to any degree to manage
these risks. We do not use financial instruments to manage changes in commodity
prices and do not hold or issue financial instruments for trading purposes. Our
debt consists of obligations with a fixed interest rate ranging from 5.75% to
6.51% as well as an obligation with a variable interest rate equal to the prime
rate plus three-quarters of a percent. An increase or decrease of 1% in the
prime rate would cause interest expense to increase or decrease by approximately
$16,000 over a twelve-month period.
PART II.---OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1993, we entered into a license agreement with Pillco Limited
Partnership granting us a license regarding certain patents. In 1996, Pillco
Limited Partnership transferred all of its right, title and interest in the
patents and license agreement to Interlase LP. In July 1998, we were served a
Garnishment Summons instructing us to make royalty payments due under the
license to the ex-wife of one of the named inventors of the licensed patents,
who is also a partner of Interlase LP. The Garnishment Summons was issued by a
state court in Virginia where this divorce proceeding was pending. In September
1998, Interlase LP purported to assign all of its right, title and interest in
the patents to White Star Holdings, Ltd. ("White Star"), an offshore company.
White Star subsequently demanded payment of the royalties. In light of the
competing demands from White Star and a Receiver appointed by the Virginia court
to collect the assets of Interlase LP, we notified White Star and the Receiver
that the funds would be deposited into a segregated, interest-bearing account
until we could determine the rightful owner of the royalty payments. In October
1998, White Star filed suit against us in the U.S. District Court for the
District of Colorado, alleging that we breached the license agreement by failing
to remit the royalty payments. We responded to White Star's claim by following
well-established procedure and requesting that the court determine which of
White Star and the Interlase LP Receiver is entitled to receive the royalty
payments. We also requested and were granted permission to deposit all of the
disputed royalties into the registry of the Court. In January 1999, White Star
issued a notice to us purporting to terminate the license agreement. White Star
proceeded to distribute a press release describing the purported termination of
the license agreement. In January 1999, we sought and were granted a temporary
restraining order restraining White Star and its agents from taking any further
steps to terminate the license agreement, from issuing further press releases
concerning the litigation or the status of the license agreement, and from
contacting any of our customers regarding such matters. In March 1999, a
preliminary injunction was issued by the U.S. District Court of Colorado
restraining White Star from all actions described in the temporary restraining
order. In July 1999, two Virginia courts ruled that Spectranetics is a valid
holder of a patent license entitling the Company to develop, manufacture,
market, and distribute its CVX-300(R) excimer laser system.
We have filed a motion with the U.S. District Court of Colorado to
assert additional claims against White Star.
Page 23
<PAGE> 24
ITEM 1. LEGAL PROCEEDINGS (CONT'D)
On October 1, 1999 Baxter Healthcare Corporation, an affiliate of Baxter
International, Inc., served notice of a complaint against us claiming that all
of our products infringe on three patents licensed by Baxter. We feel our
position is meritorious and intend to vigorously defend our patent position. On
October 29, 1999, we filed a motion to dismiss the lawsuit.
ITEMS 2-3. NOT APPLICABLE.
ITEM 4. NOT APPLICABLE.
ITEM 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 1999 Third
Quarter Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
THE SPECTRANETICS CORPORATION
(Registrant)
November 12, 1999 By: /s/ Guy A. Childs
-----------------------------------
Guy A. Childs
Vice President, Finance
Secretary/Treasurer and
Chief Financial Officer (Acting)
Page 24
<PAGE> 25
THE SPECTRANETICS CORPORATION
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule for 1999 Third Quarter Form 10-Q.
</TABLE>
Page 25
<TABLE> <S> <C>
<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 PERIOD ENDED SEPTEMBER 30,
1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,940
<SECURITIES> 15,110
<RECEIVABLES> 4,744
<ALLOWANCES> 0
<INVENTORY> 1,778
<CURRENT-ASSETS> 29,017
<PP&E> 3,213<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,740
<CURRENT-LIABILITIES> 7,749
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 23,301
<TOTAL-LIABILITY-AND-EQUITY> 33,740
<SALES> 15,651
<TOTAL-REVENUES> 15,651
<CGS> 5,362
<TOTAL-COSTS> 5,362
<OTHER-EXPENSES> 15,006
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126
<INCOME-PRETAX> (4,240)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,240)
<DISCONTINUED> 9,385
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,145
<EPS-BASIC> .23
<EPS-DILUTED> .23
<FN>
<F1>PP&E is presented net of accumulated depreciation.
</FN>
</TABLE>
