<PAGE> 1
================================================================================
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, 2000
[ ] 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)
<TABLE>
<S> <C>
DELAWARE 84-0997049
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
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 20, 2000, there were 23,426,178 outstanding shares of
Common Stock.
===============================================================================
<PAGE> 2
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, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 2,496 $ 4,900
Investment securities 9,755 3,468
Trade accounts receivable, net of allowance 6,364 5,461
Inventories 2,543 2,746
Other current assets 714 595
------- -------
Total current assets 21,872 17,170
Property and equipment, net 4,939 3,675
Other intangible assets, net 966 1,138
Other assets 570 298
Long-term investments 2,002 11,757
------- -------
Total Assets $30,349 $34,038
======= =======
Liabilities and Shareholders' Equity:
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities $ 7,780 $ 6,308
Deferred revenue 995 917
Current portion of notes payable 343 942
Current portion of capital lease obligations 14 46
------- -------
Total current liabilities 9,132 8,213
------- -------
Deferred revenue -- 2,028
Accrued liabilities 3,060 --
Notes payable, net of current portion 222 376
Capital lease obligations, net of current portion 22 35
------- -------
Total long-term liabilities 3,304 2,439
------- -------
Total liabilities 12,436 10,652
------- -------
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
23,425,880 and 23,037,188 shares, respectively 23 23
Additional paid-in capital 92,232 91,112
Accumulated other comprehensive loss (206) (128)
Accumulated deficit (74,136) (67,621)
------- -------
Total shareholders' equity 17,913 23,386
------- -------
Total Liabilities and Shareholders' Equity $30,349 $34,038
======= =======
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
Page 2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS (CONT'D)
THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS) (UNAUDITED)
(IN THOUSANDS, EXCEPT PERCENTAGES, SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 6,369 $ 6,644 $ 19,839 $ 15,651
Cost of revenue 1,850 2,258 6,210 5,362
------------ ------------ ------------ ------------
Gross margin 4,519 4,386 13,629 10,289
------------ ------------ ------------ ------------
Gross margin % 71% 66% 69% 66%
Operating Expenses:
Royalties expense 276 333 878 767
Research and development 799 841 2,485 2,644
Selling and administrative 4,632 3,934 13,782 10,237
Litigation settlement costs, net 3,654 -- 3,654 --
Reorganization costs and
litigation reserves -- -- -- 1,358
------------ ------------ ------------ ------------
Total operating expenses 9,361 5,108 20,799 15,006
------------ ------------ ------------ ------------
Operating Loss (4,842) (722) (7,170) (4,717)
Other Income (Expense):
Interest income 212 300 722 462
Interest expense (16) (37) (70) (126)
Other, net 2 134 3 141
------------ ------------ ------------ ------------
Total other income (expense) 198 397 655 477
------------ ------------ ------------ ------------
Loss from Continuing Operations (4,644) (325) (6,515) (4,240)
Discontinued Operations:
Gain from sale of discontinued industrial
subsidiary (net of $150 income taxes) -- -- -- 8,664
Income from operations of discontinued
industrial subsidiary -- -- -- 721
------------ ------------ ------------ ------------
Income from Discontinued Operations -- -- -- 9,385
------------ ------------ ------------ ------------
Net Income (Loss) (4,644) (325) (6,515) 5,145
Other Comprehensive Loss -
Foreign currency translation (38) 23 (78) (27)
------------ ------------ ------------ ------------
Comprehensive Income (Loss) $ (4,682) $ (302) $ (6,593) $ 5,118
============ ============ ============ ============
Loss from Continuing Operations per share -
basic and diluted $ (0.20) $ (0.01) $ (0.28) $ (0.19)
Income from Discontinued Operations
per share - basic and diluted -- -- -- 0.42
------------ ------------ ------------ ------------
Net Income (Loss) per share - basic and
diluted $ (0.20) $ (0.01) $ (0.28) $ 0.23
============ ============ ============ ============
Weighted Average Common Shares
Outstanding - basic and diluted 23,391,788 22,989,673 23,255,256 22,171,926
============ ============ ============ ============
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
Page 3
<PAGE> 4
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,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,515) $ 5,145
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Income from discontinued industrial subsidiary -- (721)
Gain on sale of discontinued industrial subsidiary -- (8,664)
Depreciation and amortization 1,258
1,042
Net change in operating assets and liabilities (288) (109)
-------- --------
Net cash used by operating activities (5,545) (3,307)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (542) (234)
Net cash received from discontinued industrial subsidiary -- 1,140
Net proceeds from sale of discontinued industrial subsidiary -- 14,346
Decrease (increase) in gross investments 3,467 (15,110)
-------- --------
Net cash provided (used) by investing activities 2,925 142
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of common stock options 1,043 261
Proceeds from private placement of common stock, net -- 6,537
Principal payments on obligations under
capital leases and notes payable (772) (831)
-------- --------
Net cash provided by financing activities 271 5,967
-------- --------
Effect of exchange rate changes on cash (55) (20)
-------- --------
Net increase (decrease) in cash and cash equivalents (2,404) 2,782
Cash and cash equivalents at beginning of period 4,900 4,158
-------- --------
Cash and cash equivalents at end of period $ 2,496 $ 6,940
======== ========
Supplemental disclosures of cash flow information --
cash paid for interest $ 79 $ 139
======== ========
Supplemental disclosure of noncash investing
and financing activity -
Transfers from inventory to equipment held for rental or loan $ 1,715 $ 626
======== ========
Settlement of past and current-year royalty obligations $ 5,290 --
======== ========
Release of prior obligation to provide medical devices to third party $ 2,028 --
======== ========
</TABLE>
See accompanying unaudited notes to consolidated financial statements
Page 4
<PAGE> 5
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 assets, liabilities and 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.
Certain reclassifications have been made in the financial statements to
conform with the financial statements as presented at December 31, 1999.
(2) SUBSEQUENT EVENT
In October 2000, the Company entered into a settlement and release
agreement with Baxter Healthcare Corporation (and its spin-off company, Edwards
LifeSciences LLC) related to a patent infringement lawsuit filed by Baxter in
August 1999. The agreement provides that the Company and Baxter each release all
claims and counterclaims against each other, and Spectranetics enters into a
license agreement for use of certain patents until the expiration of the last
patent on November 15, 2005.
The Company is required to pay a royalty, which averages approximately
3.2 percent of specific product revenue, through the life of the patents. In
addition, the Company recorded a net charge of $3,654,000 during the three
months ended September 30, 2000, to reflect the cost of past and current-year
royalties through September 30, 2000, and legal fees related to this suit,
offset by the release of the Company's prior obligation to provide certain
medical devices to Baxter or United States Surgical Corporation, a division of
Tyco Int'l. In addition, Baxter is required to return to the Company 15 laser
systems for resale. The payments for past royalties will be made in three annual
installments beginning in November 2000.
(3) 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; however, inclusion of
potential common stock instruments in the calculation is anti-dilutive.
Therefore, diluted loss per share is the same as basic loss per share for the
three and nine months ended September 30, 2000 and 1999.
(4) 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, of $6,537,000.
Page 5
<PAGE> 6
ITEM 1. NOTES TO FINANCIAL STATEMENTS (CONT'D)
(5) 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.
(6) INVENTORIES
Components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Raw Materials $1,546 $1,105
Work in Process 128 788
Finished Goods 869 853
------ ------
$2,543 $2,746
====== ======
</TABLE>
(7) DEFERRED REVENUE
Other deferred revenue - current, in the amounts of $995,000 and
$917,000 at September 30, 2000, and December 31, 1999, respectively, relates
primarily to payments received in advance for various product maintenance
contracts. Under these contracts, revenue is initially deferred and amortized
over the life of the contract, which is generally one year.
(8) 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 geographic 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.
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, 2000,
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, the Pacific Rim and Australia.
Page 6
<PAGE> 7
ITEM 1. NOTES TO FINANCIAL STATEMENTS (CONT'D)
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. For the periods ended
September 30, 2000 and 1999, cost allocations of these functions to Europe
Medical have not been performed. Allocations to income from operations of our
discontinued industrial subsidiary for general and administrative activities
totaled $145,000 and $190,000 for the three and nine months ended September 30,
1999, respectively.
Revenue associated with intersegment transfers to Europe Medical was
$342,000 and $268,000 for the three months ended September 30, 2000 and 1999,
respectively, and $1,269,000 and $1,236,000 for the nine months ended September
30, 2000 and 1999, 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, 2000 and 1999, intersegment
revenue and intercompany profits have been eliminated from 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 to U.S. Medical
products. 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 shown below. Intersegment transfers as well as intercompany assets
and liabilities are excluded from the information provided.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(in thousands) SEPTEMBER 30, SEPTEMBER 30,
REVENUE: 2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
U.S. Medical $ 5,805 $ 5,829 $17,556 $13,571
Europe Medical 564 815 2,283 2,080
------- ------- ------- -------
Total revenue $ 6,369 $ 6,644 $19,839 $15,651
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(in thousands) SEPTEMBER 30, SEPTEMBER 30,
SEGMENT NET LOSS: 2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
U.S. Medical $(4,330) $ (16) $(5,466) $(2,583)
Europe Medical (314) (309) 1,049 1,657
------- ------- ------- -------
Total net loss $(4,644) $ (325) $(6,515) $(4,240)
======= ======= ======= =======
</TABLE>
Page 7
<PAGE> 8
<TABLE>
<CAPTION>
(in thousands) SEPT 30, DEC 31,
SEGMENT ASSETS: 2000 1999
-------- -------
<S> <C> <C>
U.S. Medical $28,157 $32,299
Europe Medical 2,192 1,739
------- -------
Total assets $30,349 $34,038
======= =======
</TABLE>
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. In June 1999, we sold our wholly owned subsidiary,
Polymicro Technologies, Inc., a manufacturer and distributor of drawn silica
glass products, which include capillary tubing and specialty fiber optics. The
operations of Polymicro are reflected in our financial statements as a
discontinued operation, and our discussion and analysis contained herein focuses
solely on our continuing medical business only.
We sell the only excimer laser system that has been market
approved by the FDA in the United States for multiple cardiovascular
applications -- including coronary angioplasty and lead removal. 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 laser systems,
increase the utilization of our FDA-approved products, 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. We
are currently conducting three clinical trials evaluating the use of our excimer
laser system to treat restenosed stents and blocked arteries in the upper and
lower leg. We expect that each of these trials will continue another two to
three years.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Quarterly Report on Form 10-Q
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Shareholders are cautioned that all
forward-looking statements pertaining to the Company involve risks and
uncertainties, including, without limitation, the risks set forth below under
the caption "Risk Factors" and other risks detailed from time to time in the
Company's periodic reports and other information filed with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
In this section, we discuss revenue and net income (loss) from
continuing operations for the three and nine months ended September 30, 2000 and
1999.
On August 6, 1999, one of our competitors, Boston Scientific
Corporation, announced a product recall of its rotational atherectomy system. We
believe that a large part of the increase within our coronary angioplasty
product line during the last half of 1999 was directly related to the recall.
Boston Scientific responded to the recall by supplying its customers with the
earlier generation rotational atherectomy system, and has since received FDA
clearance to re-introduce the product that was recalled in August.
Page 8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
THREE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue decreased 4% to $6,369,000 for the three months ended September
30, 2000, as compared with $6,644,000 for the three months ended September 30,
1999. Decreased revenue included a 46% decrease in equipment revenue partially
offset by a 6% increase in disposables revenue and a 25% increase in service
revenue.
Equipment revenue decreased in 2000 primarily due to decreased unit
sales of our laser system, partially offset by a 124% increase in rental revenue
arising from our Evergreen rental program introduced in July 1999. The placement
of laser units was consistent at 16 units during the three months ended
September 30, 2000 and 1999.
Disposables revenue, which consists of single-use catheter products,
was up 6% over 1999 levels due to a 49% increase in sales of lead removal
devices, in turn primarily due to increased unit volumes of laser sheaths and
lead locking devices. Sales of coronary angioplasty catheters decreased 7%
compared with last year due primarily to decreased unit volumes resulting from a
heightened competitive environment for coronary angioplasty devices worldwide.
Additionally, sales of coronary angioplasty catheters in the United States were
unusually high during the three months ended September 30, 1999 due to the
product recall of a competitive atherectomy device announced in August 1999.
This competitive device, along with other competitive devices, has been
introduced during the course of 2000.
Service revenue increased as a result of the increase in our worldwide
installed base of laser systems totalling 304 laser units at September 30, 2000
compared with 250 at September 30, 1999.
Gross margin increased to 71% during the three months ended September
30, 2000, as compared with 66% for the three months ended September 30, 1999.
This increase is primarily the result of a shift in sales mix toward higher
margin disposable products during the three months ended September 30, 2000.
Selling and administrative expenses increased 18% to $4,632,000 for the
three months ended September 30, 2000 as compared with $3,934,000 during the
same period in the prior year. Marketing and sales expenses increased 18%, which
relates to personnel costs incurred primarily in the United States for the
hiring and training of sales personnel. The U.S. field sales organization has
increased to 38 employees as of September 30, 2000, as compared with 17 as of
September 30, 1999. General and administrative expenses grew 17%, primarily due
to increased administrative personnel costs as the company continues to
strengthen its management team, as well as a continued high level of legal
expenses.
Royalties expense represents costs paid on license agreements held by
third parties on our products. Royalties expense decreased 17% to $276,000 for
the three months ended September 30, 2000, compared with $333,000 in the prior
year period, as a result of decreased royalty-bearing revenue. Royalty expense
will increase in the future as a result of average royalties totalling
approximately 3.2% of most product revenues in connection with the recent
settlement of patent infringement litigation.
Research and development expenses of $799,000 for the three months
ended September 30, 2000, were down 5% from $841,000 for the three months ended
September 30, 1999.
Page 9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
Litigation settlement costs, net, of $3,654,000, represent a one-time
charge incurred during the three months ended September 30, 2000, as a result of
the settlement with Baxter Healthcare Corporation (and its spin-off company,
Edwards LifeSciences LLC). The charge reflects the cost of past and current-year
royalties through September 30, 2000, and legal fees related to the litigation
activity, offset by the release of the Company's prior obligation to provide
certain medical devices to Baxter or United States Surgical Corporation, a
division of Tyco Int'l. In addition, Baxter is required to return to the Company
15 laser systems for resale.
Interest income decreased due to lower cash and investment balances.
Interest expense decreased slightly from the prior year and relates primarily to
interest charges on our equipment loan.
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, 2000, as compared with the three months ended
September 30, 1999, caused a decrease in consolidated revenue and operating
expenses of 2%.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1999
Revenue increased 27% to $19,839,000 for the nine months ended
September 30, 2000, as compared with $15,651,000 for the nine months ended
September 30, 1999. The increase was due to a 35% increase in disposables
revenue and a 23% increase in service revenue. Placement of new laser units
increased to 40 units for the nine months ended September 30, 2000 as compared
with 24 during the same period in 1999. However, equipment revenue was flat as
compared with the prior year due to a shift toward rental and evaluation units
rather than outright sales of laser systems.
Increased disposables revenue, which consists of single-use catheter
products, resulted from a 24% increase in sales of coronary angioplasty
catheters and a 75% increase in sales of lead removal devices over our 1999
levels. The increases are a result of increased unit volumes, which reflect
growth within previously existing customer accounts as well as continued growth
in our installed base of laser systems.
Service revenue increased as a result of the increase in our worldwide
installed base of laser systems totalling 304 laser units at September 30, 2000
compared with 250 at September 30, 1999.
Gross margin increased to 69% during the nine months ended September
30, 2000, as compared with 66% for the nine months ended September 30, 1999.
This increase is primarily the result of a shift in sales mix toward higher
margin disposables revenue.
Selling and administrative expenses increased 35% to $13,782,000 for
the three months ended September 30, 2000 as compared with $10,237,000 during
the same period in the prior year. Marketing and sales expenses increased 37%,
which relates to personnel costs incurred primarily in the United States for the
hiring and training of sales personnel. The U.S. field sales organization has
increased to 38 employees as of September 30, 2000, as compared with 17 as of
September 30, 1999. Administrative expenses grew 30%, which is primarily
attributable to increased administrative personnel costs as the company
continues to strengthen its management team, higher legal costs and the absence
of corporate administrative allocations to Polymicro, which were recorded in the
nine months ended September 30, 1999, but not in the nine months ended September
30, 2000, due to the sale of Polymicro in 1999.
Page 10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
Royalties expense represents costs paid on license agreements to third
parties. Royalties expense increased 14% to $878,000 for the nine months ended
September 30, 2000, compared with $767,000 for the nine months ended September
30, 1999 as a direct result of increased revenue. Royalty expense will increase
in the future as a result of average royalties totalling approximately 3.2% of
most product revenues payable to Baxter Healthcare Corporation in connection
with the recent settlement of patent infringement litigation.
Research and development expenses decreased 6% to $2,485,000 for the
nine months ended September 30, 2000, as compared with $2,644,000 for the nine
months ended September 30, 1999. This decrease is due primarily to final
closeout costs of $335,000 during the nine months ended September 30, 1999,
associated with certain clinical trials in Europe. Excluding these close-out
costs incurred in 1999, research and development costs increased 8%, due to
ongoing clinical trials studying the use of excimer laser technology to treat
in-stent restenosis and blockages in the upper and lower legs.
Litigation settlement costs, net, of $3,654,000 represent a one-time
charge incurred for the three months ended September 30, 2000, as a result of
the settlement with Baxter Healthcare Corporation.
Reorganization and litigation charges recorded during the nine months
ended September 30, 1999, represent one-time charges associated with termination
costs for a change in management within our European subsidiary, Spectranetics
International, B.V., and litigation costs related to the patent infringement
lawsuit filed by Baxter Healthcare Corporation. See further discussion of Baxter
litigation at Part II, Item 1.
Interest income increased due to higher cash and investment balances
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 relates primarily to interest charges on our
equipment loan.
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
nine months ended September 30, 2000, as compared with the nine months ended
September 30, 1999, caused a decrease in consolidated revenue and operating
expenses of 2%.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had cash, cash equivalents and investment
securities of $14,253,000, compared with $20,125,000 at December 31, 1999. In
February 1999, Spectranetics completed the private placement of 3,800,000 shares
of common stock and received cash proceeds, net of offering costs, of
$6,537,000. In June 1999, the Company completed the sale of PTI for $15,000,000
in cash.
Cash used in operations totaled $5,545,000 for the nine months ended
September 30, 2000, primarily due to the following: (1) net loss of $6,515,000,
(2) $960,000 of increased receivables balances, (3) $1,555,000 of increased
inventories and equipment held for rental or loan, and (4) decreased deferred
revenue from USSC of $1,936,000, partially offset by (5) $4,703,000 related to
increased accounts payable and accrued liabilities. The table below describes
relative size of accounts receivable and inventory, through the presentation 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.
Page 11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
<TABLE>
<CAPTION>
Sept 30, 2000 Dec 31, 1999
------------- ------------
<S> <C> <C>
Days Sales Outstanding 90 75
Inventory Turns 2.9 3.0
</TABLE>
The increase in days sales outstanding at September 30, 2000 as
compared to December 31, 1999 relates primarily to a higher level of extended
payment terms granted to international customers.
Net cash provided by investing activities was $2,925,000 for the nine
months ended September 30, 2000, primarily due to a $3,467,000 decrease in
investment balances. Capital expenditures were $541,000 for the nine months
ended September 30, 2000, compared with $234,000 for the nine months ended
September 30, 1999.
Net cash provided by financing activities was $271,000, consisting of
$1,043,000 from the issuance of common stock associated with stock option
exercises and the employee stock purchase plan, partially offset by $772,000 of
principal payments on debt and capital lease obligations.
We have secured a $2,000,000 credit line collateralized by equipment
which matures on December 23, 2000. This 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 9.25% at September 30, 2000). At September 30, 2000, the
equipment line had an outstanding balance of $200,000. As of September 30, 2000,
we are in compliance with the debt covenants and we expect to remain so.
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, 2000, the loan had an outstanding balance of $172,000.
At September 30, 2000 and December 31, 1999, we have a number of laser
systems on rental and evaluation programs. Totals for such systems of $4,674,000
and $3,331,000 were recorded as property and equipment as of September 30, 2000,
and December 31, 1999, 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 three laser placement programs. Since July 1999, most
units were placed under the Evergreen or evaluation programs. A description of
our placement programs follows:
(1) Rental programs - Straight rental programs with terms varying from 6
months to 3 years. Rental revenue in the amount of $3,000 to $5,000 is
invoiced on a monthly basis and revenue is recognized upon invoicing.
Catheter revenue is recognized when shipped and invoiced. The lasers
are transferred from inventory to property and equipment 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 revenue. 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
revenue equal to the net book value of the system is also recorded at
this time.
(2) Evergreen - The Evergreen rental program was introduced in July 1999,
and is similar to the straight rental program. However, rental revenue
under this program varies on a sliding scale depending on the
customer's catheter purchases each month. Rental revenue is invoiced on
a monthly basis and revenue is recognized upon invoicing.
Page 12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
(3) Evaluation programs - We "loan" a laser system to an institution for
use over a short period of time, usually three to nine 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. Depreciation for
evaluation units is expensed as cost of revenue based upon a three to
five year expected life of the unit. At the end of the evaluation
period, the customer typically rents or purchases the laser system.
We believe our liquidity and capitalization as of September 30, 2000,
is sufficient to meet our operating and capital requirements through December
31, 2001. Revenue increases from current levels and the attainment of
profitability will be necessary to sustain us over the long term.
CONVERSION TO THE EURO
On January 1, 1999, eleven countries in Europe adopted a common
currency, the "euro", and exchange rates between the currencies of the eleven
countries were fixed against the new euro. The former currencies of those eleven
countries will remain legal tender as denominations of the euro until January 1,
2002, and goods and services may be paid for using either the euro or the former
currency until that time.
Spectranetics International, B.V., currently intends to continue using
the Dutch guilder as its functional currency until its fiscal year beginning
January 1, 2002.
Due to the size of Spectranetics International, B.V., operations in
relation to our consolidated operations, the conversion to the Euro is not
expected to have a material effect on our consolidated financial statements.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133), which is effective for fiscal quarters beginning after June 15, 1999,
later extended to June 15, 2000. FAS 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Accounting for gains or losses resulting from changes in the values of
those derivatives would be based on the use of the derivative and whether it
qualifies under the standard for hedge accounting. The Company does not
anticipate a material impact on the results of operations as a result of
implementing this standard.
RISK FACTORS
We Have Continued to Suffer Losses. We have incurred net losses since
our inception in June 1984, and have accumulated $74 million in net losses
through September 30, 2000. We anticipate that our net losses will continue in
the foreseeable future. We may be unable to increase sales or achieve
profitability.
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.
Page 13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
Our European Operations Have Not Been Successful and 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, 2000, our revenue from
international operations represented 12% of consolidated revenues. Changes in
international 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.
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
balloon angioplasty, stent implantation, open chest bypass surgery, and
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.
SCIMED Life Systems, Inc. (a subsidiary of Boston Scientific
Corporation), Cordis Corporation (a subsidiary of Johnson & Johnson
Interventional Systems), and Advanced Cardiovascular Systems, Inc. (a subsidiary
of Guidant Corporation), are the leading balloon angioplasty manufacturers.
Manufacturers of atherectomy devices include Devices for Vascular Intervention,
Inc. (a subsidiary of Guidant Corporation), SCIMED, and Interventional
Technologies. Cook Vascular, Inc. competes with us in the lead removal market
with its mechanical lead removal products.
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.
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 or rental 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 reimbursement driven cost-containment measures could hurt our business
in the future.
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
Page 14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
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
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.
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 $5,000,000. 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 Becoming Obsolete. We
derive more than 80% of our revenue from the sale or lease of the CVX-300 laser
unit and related 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
Page 15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
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 terminates 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. See Part
II, Item 1, "Legal Proceedings."
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;
Page 16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONT'D)
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.
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 fixed interest rates ranging from 5.75% to
6.51%, as well as an obligation with a variable interest rate equal to the prime
rate plus one-quarter 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.
Page 17
<PAGE> 18
PART II.--- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 1999, Cook Vascular, Inc., filed a lawsuit in the U.S.
federal court in Indiana claiming co-ownership of two patents issued to
Spectranetics. Cook alleges that the patents were issued improperly by listing
only Spectranetics employees as inventors. Cook also alleges breach of contract,
misappropriation of trade secrets, and conspiracy. The technology at issue is
catheters utilizing electrical energy to remove implanted pacemaker leads. On
June 5, 2000, Cook amended its original complaint, alleging infringement by
Spectranetics of a Cook patent directed to a mechanical device for removing
implanted pacemaker leads. The Company intends to defend itself vigorously and
views all of Cook's claims as without merit and completely lacking factual
support.
On August 6, 1999, Baxter Healthcare Corporation, an affiliate of
Baxter International, Inc., served notice of a complaint against us in the U.S.
District Court for the District of Delaware claiming that all of our laser-based
products infringe on three patents licensed by Baxter. In October 2000, we
entered into a settlement and release agreement with Baxter Healthcare
Corporation. The agreement provides that the Company and Baxter each release all
claims and counterclaims against each other, and Spectranetics enters into a
license agreement for use of certain patents until the expiration of the last
patent on November 15, 2005.
The Company is required to pay a royalty, which averages approximately
3.2 percent of specific product revenue, through the life of the patents. In
addition, the Company recorded a net charge of $3,654,000 during the three
months ended September 30, 2000, to reflect the cost of past and current-year
royalties through September 30, 2000, and legal fees related to this suit,
offset by the release of the Company's prior obligation to provide certain
medical devices to Baxter or United States Surgical Corporation, a division of
Tyco Int'l. In addition, Baxter is required to return to the Company 15 laser
systems for resale. The payments for past royalties will be made in three annual
installments beginning in November 2000.
The Company is involved in other legal proceedings in the normal course
of business and does not expect them to have a material adverse effect on our
business.
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 2000 Third Quarter
Form 10-Q.
Page 18
<PAGE> 19
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 14, 2000 By: /s/ Paul C. Samek
--------------------------------------
Paul C. Samek
Vice President Finance, Chief Financial
Officer
<PAGE> 20
THE SPECTRANETICS CORPORATION
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2000
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
27.1 Financial Data Schedule for 2000 Third Quarter 10-Q.
</TABLE>
