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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
June 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 July 26, 1999, there were 22,978,439 outstanding shares of Common Stock.
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<PAGE>
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>
June 30, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 17,873 $ 4,158
Investment securities 5,503 --
Trade accounts receivable, net of allowance 3,533 4,099
Inventories (note 5) 2,226 2,095
Other current assets 318 313
Net assets of discontinued operations (note 4) -- 803
----------------- -----------------
Total current assets 29,453 11,468
Property and equipment, net 3,066 3,129
Other intangible assets, net 1,253 1,368
Other assets 167 495
Net assets of discontinued operations (note 4) -- 4,925
----------------- -----------------
Total Assets $ 33,939 $ 21,385
================= =================
Liabilities and Shareholders'Equity:
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities (note 8) $ 5,813 $ 4,586
Deferred revenue (note 6) 840 1,002
Current portion of note payable 942 950
Current portion of capital lease obligations 70 118
----------------- -----------------
Total current liabilities 7,665 6,656
----------------- -----------------
Deferred revenue and other liabilities (note 6) 2,028 2,028
Notes payable, net of current portion 808 1,346
Capital lease obligations, net of current portion 44 87
----------------- -----------------
Total long-term liabilities 2,880 3,461
----------------- -----------------
Total liabilities 10,545 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
22,935,197 and 19,110,825 shares, respectively (note 3) 23 19
Additional paid-in capital 90,833 84,131
Accumulated other comprehensive loss (142) (92)
Accumulated deficit (67,320) (72,790)
----------------- -----------------
Total shareholders'equity 23,394 11,268
----------------- -----------------
Total Liabilities and Shareholders'Equity $ 33,939 $ 21,385
================= =================
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
Page 2
<PAGE>
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 June 30, Six Months Ended June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue - Core medical $ 4,937 $ 3,273 $ 9,007 $ 6,431
Revenue - USSC -- 1,245 -- 2,490
------------ ------------ ------------ ------------
Total revenue 4,937 4,518 9,007 8,921
------------ ------------ ------------ ------------
Cost of revenue -Core medical 1,744 1,299 3,104 2,427
Cost of revenue -USSC -- 449 -- 1,033
------------ ------------ ------------ ------------
Total cost of revenue 1,744 1,748 3,104 3,460
------------ ------------ ------------ ------------
Gross margin - Core medical 3,193 1,974 5,903 4,004
Gross margin - USSC -- 796 -- 1,457
------------ ------------ ------------ ------------
Total gross margin 3,193 2,770 5,903 5,461
------------ ------------ ------------ ------------
Gross margin % 65% 61% 66% 61%
Operating Expenses:
Marketing and sales 2,238 2,195 4,402 4,385
General and administrative 922 1,123 1,901 2,013
Royalties expense 239 44 434 364
Research and development 1,016 577 1,803 989
Reorganization costs and litigation
reserves (note 8 and 9) 1,358 -- 1,358 --
------------ ------------ ------------ ------------
Total operating expenses 5,773 3,939 9,898 7,751
------------ ------------ ------------ ------------
Operating Loss (2,580) (1,169) (3,995) (2,290)
Other Income (Expense):
Interest income 108 64 162 154
Interest expense (40) (54) (89) (89)
Other, net (5) (2) 7 10
------------ ------------ ------------ ------------
63 8 80 75
------------ ------------ ------------ ------------
Loss from Continuing Operations (2,517) (1,161) (3,915) (2,215)
Discontinued Operations:
Gain from sale of discontinued industrial
subsidiary, (net of $150 income taxes) 8,664 -- 8,664 --
Income from operations of discontinued
industrial subsidiary 248 176 721 436
------------ ------------ ------------ ------------
Income from Discontinued Operations 8,912 176 9,385 436
------------ ------------ ------------ ------------
Net Income (Loss) 6,395 (985) 5,470 (1,779)
Other Comprehensive Loss -
foreign currency translation (21) 10 (50) 6
------------ ------------ ------------ ------------
Comprehensive Loss $ 6,374 $ (975) $ 5,420 $ (1,773)
============ ============ ============ ============
Loss from Continuing Operations per share -
basic and diluted $ (0.11) $ (0.06) $ (0.18) $ (0.12)
Income from Discontinued Operations
per share - basic and diluted 0.39 0.01 0.43 0.02
------------ ------------ ------------ ------------
Net Income (Loss) per share -
basic and diluted $ 0.28 $ (0.05) $ 0.25 $ (0.09)
============ ============ ============ ============
Weighted Average Common Shares
Outstanding -basic and diluted 22,932,802 19,084,124 21,756,276 18,924,324
============ ============ ============ ============
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
Page 3
<PAGE>
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>
Six Months Ended June 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,470 $ (1,779)
Adjustments to reconcile net loss to net cash
used by operating activities:
Income from discontinued industrial subsidiary (721) (436)
Gain on sale of discontinued industrial subsidiary (8,664) --
Depreciation and amortization 766 446
Net change in operating assets and liabilities 1,063 (2,539)
-------- --------
Net cash used by operating activities (2,086) (4,308)
-------- --------
Cash flows from investing activities:
Capital expenditures (149) (862)
Net cash received from discontinued industrial subsidiary 1,140 1,192
Net proceeds from sale of discontinued industrial subsidiary 14,346 --
(Increase) decrease in short-term investments (5,503) 1,461
-------- --------
Net cash provided by investing activities 9,834 1,791
-------- --------
Cash flows from financing activities:
Net proceeds from exercise of common stock options 55 356
Proceeds from line of credit -- 900
Proceeds from private placement of common stock, net 6,537 --
Principal payments on obligations under
capital leases and note payable (598) (158)
-------- --------
Net cash provided by financing activities 5,994 1,098
-------- --------
Effect of exchange rate changes on cash (27) (4)
-------- --------
Net increase (decrease) in cash and cash equivalents 13,715 (1,423)
Cash and cash equivalents at beginning of period 4,158 6,532
-------- --------
Cash and cash equivalents at end of period $ 17,873 $ 5,109
======== ========
Supplemental disclosures of cash flow information --
Cash paid for interest $ 105 $ 129
======== ========
Supplemental disclosure of noncash investing
and financing activities:
Transfers from inventory to equipment held for
rental or loan $ 384 $ 329
======== ========
</TABLE>
See accompanying unaudited 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.
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 June 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 six months ended June 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 consolidated
balance sheet at December 31, 1998.
Page 5
<PAGE>
Item 1. Notes to Financial Statements (cont'd)
(5) Inventories
Components of inventories are as follows (in thousands):
June 30, 1999 December 31, 1998
----------------- -----------------
Raw Materials $ 517 $ 420
Work in Process 710 544
Finished Goods 999 1,132
----------------- -----------------
$ 2,226 $ 2,095
================= =================
(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 six months ended
June 30, 1999. Revenue recognized related to the agreement during the three and
six months ended June 30, 1998 was $1,245,000 and $2,490,000, respectively. The
remaining deferred revenue balance of $2,028,000 is shown as non-current on the
balance sheet at June 30, 1999 and December 31, 1998 as we do not have firm
delivery dates from USSC for the remaining products to be shipped under the
supply agreement.
Other deferred revenue - current in the amounts of $840,000 and $1,002,000
at June 30, 1999 and December 31, 1998, respectively, relates 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 June
30, 1998 and December 31, 1998 have been reclassified to conform with the
segment reporting as presented at June 30, 1999.
Page 6
<PAGE>
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 June 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 June 30, 1999 and 1998, cost
allocations of these functions to Europe Medical have not been performed, except
for a $145,000 and $30,000 allocation to income from operations of discontinued
industrial subsidiary for general and administrative activities for the three
months ended June 30, 1999 and 1998, respectively and an allocation of $190,000
and $60,000 to income from operations of discontinued industrial subsidiary for
the six months ended June 30, 1999.
Revenue associated with intersegment transfers to Europe Medical were
$550,000 and $412,000 for the three months ended June 30, 1999 and 1998,
respectively, and $968,000 and $869,000 for the six months ended June 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 six months ended June 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 which 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
six months ended June 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).
Three Months Six Months
Ended June 30, Ended June 30,
Revenue: 1999 1998 1999 1998
------ ------ ------ ------
U.S. Medical $4,306 $3,863 $7,742 $7,755
Europe Medical 631 655 1,265 1,166
------ ------ ------ ------
Total revenues $4,937 $4,518 $9,007 $8,921
====== ====== ====== ======
Page 7
<PAGE>
Item 1. Notes to Financial Statements (cont'd)
For the three months ended June 30, 1998, revenue from one customer
from the U.S. Medical segment totaled $1,245,000, or 25% of total revenues. For
the six months ended June 30, 1998, revenue from one customer from the U.S.
Medical segment totaled $2,490,000, or 28% of total revenues.
Three Months Six Months
Ended June 30, Ended June 30,
Segment net loss: 1999 1998 1999 1998
------- ------- ------- -------
U.S. Medical (1) $(1,437) $ (646) $(2,567) $(1,116)
Europe Medical (1) (1,080) (515) (1,348) (1,099)
------- ------- ------- -------
Total net loss $(2,517) $(1,161) $(3,915) $(2,215)
======= ======= ======= =======
(1) Includes one-time charges totaling $1,358,000 related to reorganization
costs and litigation reserves for the three and six months ended June 30, 1999.
June 30, December 31,
Segment assets: 1999 1998
------- -------
U.S. Medical $32,200 $13,526
Europe Medical 1,739 2,131
------- -------
Subtotal - Medical 33,939 15,657
Total assets of discontinued operations -- 5,728
------- -------
Total assets $33,939 $21,385
======= =======
(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
During the three months ended June 30, 1999, a third party claiming patent
infringement notified the Company of a claim. On August 9, 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.
Page 8
<PAGE>
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 1997, we secured FDA approval to use
our excimer laser system for removal of pacemaker and defibrillator leads and
entered into a supply and license agreement with USSC for use of our system for
TMR, an experimental coronary procedure. USSC has since been purchased by Tyco
International, Ltd. In 1999, we will initiate clinical trials evaluating the use
of our excimer laser system to treat restenosed stents and blockages in the
legs. These trials will take from one to three years to complete depending on
the type and size of the trial, patient enrollment, and our ability to fund
these trials. To fund 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 six months ended June 30, 1999 and 1998. We begin with a general
overview, then discuss revenue and net income (loss) from our two operating
units.
Financial Overview
Revenue per Operating Unit
Three Months Six Months
Ended June 30, Ended June 30,
Revenue: 1999 1998 1999 1998
------ ------ ------ ------
U.S. Medical $4,306 $3,863 $7,742 $7,755
Europe Medical 631 655 1,265 1,166
------ ------ ------ ------
Total revenues $4,937 $4,518 $9,007 $8,921
====== ====== ====== ======
Page 9
<PAGE>
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition (cont'd)
Loss from Continuing Operations per Operating Unit
Three Months Six Months
Segment loss from Ended June 30, Ended June 30,
continuing operations: 1999 1998 1999 1998
------- ------- ------- -------
U.S. Medical (1) $(1,437) $ (646) $(2,567) $(1,116)
Europe Medical (1) (1,080) (515) (1,348) (1,099)
------- ------- ------- -------
Total net loss $(2,517) $(1,161) $(3,915) $(2,215)
======= ======= ======= =======
(1) Includes one-time charges totaling $1,358,000 related to reorganization
costs and litigation reserves for the three and six months ended June 30, 1999.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenue from the core medical business, which excludes 1998 revenue from
the shipment of equipment to USSC of $1,245,000, increased to $4,937,000, or
51%, for the three months ended June 30, 1999 as compared to $3,273,000 for the
three months ended June 30, 1998. Increased revenue included a 29% increase in
disposables sales, an 18% increase in service revenue, and a 247% 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. Revenues under this agreement were $1,245,000 for
the three months ended June 30, 1998. As such, there were no sales to USSC
during the three months ended June 30, 1999.
Increased disposables revenue, which consists of single-use catheter
products, resulted from an increase of 14% in sales of coronary angioplasty
catheters and a 34% 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 65% during the three months ended June 30, 1999
as compared to 61% for the three months ended June 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 disposables revenue in relation to total revenue, which generates
higher margins than equipment or service.
Operating expenses grew 47% during the three months ended June 30, 1999 to
$5,773,000 as compared to $3,939,000 for the three months ended June 30, 1998,
primarily due to one-time charges associated with reorganization costs in Europe
and litigation reserves for a third-party patent infringement claim.
Marketing and sales expenses increased by 2% to $2,238,000 for the three
months ended June 30, 1999, due primarily to increased personnel costs as
compared to the same period in 1998.
Page 10
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont'd)
General and administrative expense decreased by 18% to $922,000 for the
three months ended June 30, 1999, due primarily to decreased personnel costs as
compared to the three months ended June 30, 1998.
Royalties expense represent costs paid for license agreements on our
products. Royalties expense increased by 443% to $239,000 for the three months
ended June 30, 1999. This increase is due to $130,000 of royalties expense
accrued in the first quarter of 1998 which were reversed during the three months
ended June 30, 1998. The $130,000 accrued during the first quarter of 1998 were
for new products that were subsequently determined to be non-royalty bearing.
Research and development expense increased by 76% to $1,016,000. 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.
Reorganization costs and litigation reserves totaling $1,358,000 were
recorded for the three months ended June 30, 1999 and are explained within the
notes to the financial statements (note 8 and 9).
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 was virtually
unchanged from the prior year and related primarily to interest charges on our
equipment loan.
Loss from continuing operations for the three months ended June 30, 1999
increased by 117% to a loss of $2,517,000 from a loss of $1,161,000 for the
three months ended June 30, 1998 primarily due to one-time charges of $1,358,000
for reorganization costs and litigation reserves.
U.S. Medical
Revenue from our core medical business in the United States increased 64%
to $4,306,000 for the three months ended June 30, 1999 as compared to revenue of
$2,618,000 for the three months ended June 30, 1998, excluding the equipment
revenue of $1,245,000 from USSC during the three months ended June 30, 1998.
Equipment revenue, excluding shipments to USSC in 1998, increased by 408%.
Disposables revenue increased 37%, led by a 33% increase in coronary angioplasty
revenue and a 24% increase in lead removal device sales. Service revenue
increased 19%.
Loss from continuing operations increased 122% to a loss of $1,437,000 for
the three months ended June 30, 1999 as compared to a loss of $646,000 for the
three months ended June 30, 1998. The increased net loss was primarily due to
increased operating expenses led by one-time charges associated with litigation
reserves.
Page 11
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont'd)
Europe Medical
Revenue from our medical business in Europe decreased 4% to $631,000 for
the three months ended June 30, 1999 as compared to revenue of $655,000 for the
three months ended June 30, 1998. This decrease was primarily due to a decrease
in equipment sales.
Loss from continuing operations from European operations increased 110% to
a loss of $1,080,000 for the three months ended June 30, 1999 as compared to a
loss of $515,000 for the three months ended June 30, 1999. This increase is
primarily attributed to a 15% increase in operating expenses associated with the
closeout of certain European clinical trials and one-time charges associated
with reorganization costs.
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 June 30, 1999 as compared to the three months ended June 30, 1998
caused a decrease in revenues and operating expenses of less than 1% of
consolidated revenues and operating expenses.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenue from the core medical business, which excludes 1998 revenue from
the shipment of equipment to USSC of $2,490,000, increased to $9,007,000, or
40%, for the six months ended June 30, 1999 as compared to $6,431,000 for the
six months ended June 30, 1998. Increased revenue included a 35% increase in
disposables sales, a 30% increase in service revenue, and a 99% 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. Revenues under this agreement were $2,490,000 for
the three months ended June 30, 1998. As such, there were no sales to USSC
during the six months ended June 30, 1999.
Increased disposables revenue, which consists of single-use catheter
products, resulted from an increase of 21% in sales of coronary angioplasty
catheters and a 35% 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 six months ended June 30, 1999 as
compared to 61% for the six months ended June 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.
Operating expenses grew 28% during the six months ended June 30, 1999 to
$9,898,000 as compared to $7,751,000 for the six months ended June 30, 1998 due
primarily one-time reorganization and litigation charges combined with increased
research and development cost.
Page 12
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont'd)
Marketing and sales expenses remained stable at $4,402,000 for the six
months ended June 30, 1999.
General and administrative expense decreased by 6% to $1,901,000 for the
six months ended June 30, 1999. This decrease is attributable primarily to
reduced personnel costs as compared to the six months ended June 30, 1998.
Royalties expense represent costs paid on license agreements held by third
parties on our products. Royalties expense increased by 19% to $434,000 for the
six months ended June 30, 1999. This increase is attributable to increased
revenue.
Research and development expense increased by 82% to $1,803,000. 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.
Reorganization costs and litigation reserves totaling $1,358,000 were
recorded during the six months ended June 30, 1999 and are explained in more
detail within the notes to the financial statements (note 8 and 9).
Interest income increased slightly for the six months ended June 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 related primarily to interest charges on
our equipment loan was unchanged as compared to last year.
Loss from continuing operations for the six months ended June 30, 1999
increased by 77% to a loss of $3,915,000 from a loss of $2,215,000 for the six
months ended June 30, 1998 primarily due to reorganization costs and litigation
reserves of $1,358,000, and increased research and development expenses.
U.S. Medical
Revenue from our core medical business in the United States increased 47%
to $7,742,000 for the six months ended June 30, 1999 as compared to revenue of
$5,265,000 for the six months ended June 30, 1998, excluding the equipment
revenue of $2,490,000 from USSC during the six months ended June 30, 1998.
Equipment revenue, excluding shipments to USSC in 1998, increased by 121%.
Disposables revenue increased 42%, led by a 40% increase in coronary angioplasty
revenue and a 28% increase in lead removal device sales. Service revenue
increased 32%.
Loss from continuing operations from this unit increased 130% to a loss of
$2,567,000 for the six months ended June 30, 1999 as compared to a loss of
$1,116,000 for the six months ended June 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.
Page 13
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont'd)
Europe Medical
Revenue from our medical business in Europe increased 8% to $1,265,000 for
the six months ended June 30, 1999 as compared to revenue of $1,166,000 for the
six months ended June 30, 1998. This increase was primarily due to an increase
in disposables revenue.
Loss from continuing operations from European operations increased 23% to a
loss of $1,348,000 for the six months ended June 30, 1999 as compared to a loss
of $1,099,000 for the six months ended June 30, 1999. This increased loss is
primarily attributed to one-time charges associated with reorganization costs.
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 six
months ended June 30, 1999 as compared to the six months ended June 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 June 30, 1999, we had cash, cash equivalents and investment
securities of $23,376,000 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 $2,086,000 for the six months
ended June 30, 1999, primarily due to uses of cash for the net loss from
continuing operations of $3,915,000 and other uses of cash totaling $564,000
related to increased inventories and $151,000 related to decreased deferred
revenue. These uses of cash were offset by cash provided of $460,000 due to
decreases in accounts receivable, $299,000 of decreases in other assets and
$1,032,000 of increases in accounts payable and accrued liabilities. 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 sales for the quarter. Inventory turns is calculated by dividing
annualized cost of sales for the quarter by ending inventory.
June 30, 1999 December 31, 1998
------------- -----------------
Days Sales Outstanding 64 74
Inventory Turns 3.1 4.1
Receivables considered to be overdue were not material as of June 30, 1999
or December 31, 1998. The decline in inventory turns is primarily due to
increased equipment inventory at June 30, 1999 as compared to December 31, 1998.
Page 14
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont'd)
Net cash provided by investing activities was $9,834,000 for the six months
ended June 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 $5,503,000
increase in short-term investments. Capital expenditures were $149,000 for the
six months ended June 30, 1999 as compared to $862,000 for six months ended June
30, 1998. Most of the capital expenditures incurred during the six months ended
June 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 six months ended June 30, 1999.
Net cash provided by financing activities was $5,994,000. This cash was
comprised of net proceeds from the private stock placement which totaled
$6,537,000, and $55,000 from the sales of common stock associated with stock
option exercises, which were offset by $598,000 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 June 30, 1999), and matures on December 23, 2000. At
June 30, 1999, the equipment line had an outstanding balance of $1,200,000. As
of December 31, 1998, we were in breach of certain covenants under this
agreement, for which we obtained a waiver from the lender. As of June 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 June 30,
1999, the loan had an outstanding balance of $268,000.
At June 30, 1999 and December 31, 1998, we placed a number of systems on
rental, loan and fee per procedure programs. A total of $2,677,000 and
$2,350,000 were recorded as equipment held for rental or loan as of June 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.
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<PAGE>
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 June 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.
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 are currently evaluating our
computer systems at our European subsidiary, Spectranetics International B.V.,
for Y2K compliance. 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
Page 16
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont'd)
payable, and general ledger. We are also in the process of reviewing 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 expect to complete our review of internal systems by
September 30, 1999 and do not expect a material adverse effect on our operations
as a result of this review.
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 expect to complete this review by September 30, 1999. Based on a
preliminary review of the Y2K impact associated with outside vendors, 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
six months ended June 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 six months ended June
30, 1999 and 1998 totaled $109,000 and $33,000, respectively. Interest costs
associated with the capital leases used to finance hardware and software totaled
$5,000 and $9,000, respectively, for the six months ended June 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 June 30, 1999 and 1998.
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."
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<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont'd)
Contingency Plans
Although we have not prepared a formal contingency plan to date, we intend
to continue to assess our Y2K risks and develop contingency plans as
appropriate.
Risk Factors
We Have Continued to Suffer Losses. We have incurred net losses since our
inception in June 1984. At June 30, 1999, we had accumulated $67.3 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.
Limited Cash on Hand, Additional Financing May Be Needed and We May Not Be
Able to Obtain It. We believe that our existing cash, cash from operations and
financing activities and the proceeds from our private placement to the selling
stockholders should be sufficient to support our plans through at least December
31, 2000. However, we may need to raise additional cash prior to that time. We
may be unable to obtain additional financing, if needed, on satisfactory terms
or at all. If financing is not available on acceptable terms, we may be unable
to make capital expenditures, compete effectively or withstand the effects of
adverse market and economic conditions. 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 three months ended June 30, 1999, our revenues from
international operations represented 13% 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.
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<PAGE>
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.
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<PAGE>
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 payors attempt to
deny reimbursement for procedures they believe are duplicative, such as
adjunctive balloon angioplasty performed together with laser angioplasty.
Third-party payors 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
<PAGE>
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.
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.
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.
Page 21
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont'd)
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.
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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) eximer laser system.
We have filed a motion with the U.S. District Court of Colorado to assert
additional claims against White Star.
Items 2-3. Not applicable.
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Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on June 8, 1999 for the
following purposes:
1) Proposal One: The election of the following members of the Board of
Directors was approved as follows:
Emile J. Geisenheimer received 18,085,521 affirmative votes and
463,827 votes were withheld.
John G. Schulte received 18,085,521 affirmative votes and 463,827
votes were withheld.
2) Proposal Two: The ratification of KPMG Peat Marwick LLP as the
Company's independent auditors for the year ended December 31, 1999
was approved as follows:
18,468,155 shares voted in favor of this proposal, 40,253 shares
voted against this proposal, and 40,940 shares abstained from
voting.
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 2.1 - Merger Agreement dated as of May 24, 1999 between
the Company and affiliates of Keystone.
Exhibit 27.1 - Financial Data Schedule for 1999 Second Quarter
Form 10-Q.
(b) Reports on Form 8-K
Spectranetics announced on May 24, 1999 the sale of its
industrial subsidiary, Polymicro Technologies, Inc. for
$15,000,000 in cash.
Filed on June 4, 1999
Spectranetics announced the completion of the sale of Polymicro
Technologies, Inc. on June 17, 1999 and filed pro forma financial
statements for March 31, 1999 and December 31, 1998.
Filed on July 6, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Spectranetics Corporation
(Registrant)
August 13, 1999 By: /s/ Guy A. Childs
-----------------------------------
Guy A. Childs
Vice President, Finance
Secretary/Treasurer and
Chief Financial Officer (Acting)
Page 24
<PAGE>
THE SPECTRANETICS CORPORATION
Form 10-Q for the Period Ended June 30, 1999
EXHIBIT INDEX
Exhibit
Number Description
- --------------------------------------------------------------------------------
2.1 Merger Agreement dated as of May 24, 1999 between the Company and
affiliates of Keystone.(1)
27.1 Financial Data Schedule for 1999 Second Quarter Form 10-Q.
(1) Incorporated by reference to exhibit previously filed by the Company on
Form 8-K, filed on June 4, 1999
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 COMAPNY'S FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 17,873
<SECURITIES> 5,503
<RECEIVABLES> 3,533
<ALLOWANCES> 0
<INVENTORY> 2,226
<CURRENT-ASSETS> 29,453
<PP&E> 3,066<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,939
<CURRENT-LIABILITIES> 7,665
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 23,371
<TOTAL-LIABILITY-AND-EQUITY> 33,939
<SALES> 9,007
<TOTAL-REVENUES> 9,007
<CGS> 3,104
<TOTAL-COSTS> 3,104
<OTHER-EXPENSES> 9,898
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89
<INCOME-PRETAX> (3,915)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,915)
<DISCONTINUED> 9,385
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,470
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.25
<FN>
<F1>
PP&E is presented net of accumulated depreciation.
</FN>
</TABLE>
