<PAGE> 1
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-19711
THE SPECTRANETICS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 84-0997049
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
96 TALAMINE COURT
COLORADO SPRINGS, COLORADO 80907
(Address of principal executive offices and zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (719) 633-8333
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
[ X ] Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock of the Registrant, as of
March 10, 2000, computed by reference to the closing sale price of the voting
stock held by non-affiliates on such date, was approximately $175,784,144.
As of March 10, 2000, there were outstanding 23,205,779 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2000 Annual
Meeting of Shareholders, to be filed with the Securities and Exchange Commission
not later than April 28, 2000, are incorporated by reference into Part III as
specified.
- --------------------------------------------------------------------------------
Total Pages 60
Exhibit Index on Page 57
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART I .........................................................................................................3
ITEM 1. BUSINESS........................................................................................3
General ..................................................................................3
Strategy ..............................................................................3
Technology................................................................................4
CVX-300(R) ............................................................................4
Product Applications......................................................................5
Excimer Laser Coronary Angioplasty.....................................................5
Lead Extraction........................................................................6
Peripheral Vascular Disease............................................................7
Restenosed Stents......................................................................8
Sales and Marketing.......................................................................8
Domestic Operations....................................................................8
International Operations...............................................................9
Strategic Alliances......................................................................10
Intracoronary Stents..................................................................10
Transmyocardial Laser Revascularization/Percutaneous
Transluminal Myocardial Revascularization.............................................10
Sale of Polymicro Technologies, Inc......................................................10
Government Regulation....................................................................11
Competition..............................................................................13
Patents and Proprietary Rights...........................................................14
Research and Development.................................................................15
Manufacturing............................................................................15
Third-Party Reimbursement................................................................15
Product Liability and Insurance..........................................................16
Employees................................................................................16
ITEM 2 PROPERTIES.....................................................................................17
ITEM 3. LEGAL PROCEEDINGS..............................................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................18
PART II ........................................................................................................18
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.......................18
ITEM 6. SELECTED FINANCIAL DATA........................................................................19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................................20
Results of Operations....................................................................20
Conversion to the Euro...................................................................25
Accounting Pronouncements................................................................25
Risk Factors.............................................................................25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK......................................28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.....................................................................29
PART III ........................................................................................................29
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................29
ITEM 11. EXECUTIVE COMPENSATION.........................................................................29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................29
PART IV ........................................................................................................29
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...............................29
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......................................................................F-1
EXHIBIT INDEX ...............................................................................................57
</TABLE>
Page 2
<PAGE> 3
PART I
The information set forth below includes "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, and
is subject to the safe harbor created by that section. You are cautioned not to
place undue reliance on these forward-looking statements and to note that they
speak only as of the date hereof. Factors that could cause actual results to
differ materially from those set forth in the forward-looking statements are set
forth below and include, but are not limited to, the following:
o Market acceptance of excimer laser angioplasty technology;
o Market acceptance of excimer laser removal of pacemaker and
defibrillator leads;
o Technological changes resulting in product obsolescence;
o The inability to obtain patents with respect to new products;
o Adverse state or federal legislation and regulation;
o Availability of vendor-sourced component products at reasonable
prices; and
o The risk factors listed from time to time in our filings with the
Securities and Exchange Commission as well as those set forth in Item
7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors".
ITEM 1. BUSINESS
GENERAL
We develop, manufacture, market and distribute a proprietary excimer laser
system for the treatment of certain coronary and vascular conditions. Excimer
laser technology delivers cool ultraviolet light in short, controlled energy
pulses to ablate or remove tissue. Our excimer laser system includes the
CVX-300(R) laser unit and various fiber optic delivery devices, including
disposable catheters and sheaths. Our excimer laser system is the only excimer
laser system approved in the United States and Europe for use in minimally
invasive cardiovascular applications. Our excimer laser system is used in
angioplasty to open clogged or obstructed arteries. It is also used to remove
lead wires from patients with implanted pacemakers or implantable cardioverter
defibrillators, devices that regulate the heartbeat. We have also received
approval in Europe to market our products to treat artery blockages in the upper
and lower leg and to treat clogged stents. Stents are wire mesh tubes implanted
in arteries to provide support to hold the artery open and improve blood flow to
the heart. We are currently sponsoring clinical trials in the United States and
are seeking regulatory approval to market our products for these additional
treatments.
Spectranetics is a Delaware corporation formed in 1984. Our principal
executive offices are located at 96 Talamine Court, Colorado Springs, Colorado
80907. Our telephone number is (719) 633-8333.
STRATEGY
Our strategy includes the following key points:
o Leverage technical expertise in generation and delivery of ultraviolet
energy. We have designed our excimer laser platform to support
multiple existing and potential therapeutic applications for the
treatment of cardiovascular disease. We are exploring additional
applications of our core excimer laser technology for novel treatments
of coronary and vascular conditions. We currently have three clinical
trials underway testing additional applications for the excimer laser.
o Expand disposable device revenues from existing customer base. By
training additional cardiologists, surgeons and other specialists at
existing customer hospitals and introducing physicians already
familiar with our products to new products and applications, we intend
to increase our revenue stream from sales of current and future
disposable devices to existing customers. In 1999, we trained 309
physicians, an increase of 84% over the number of physicians trained
in 1998. Furthermore, in 1999 our disposable device revenues increased
to $14.9 million, an increase of 56% over 1998.
Page 3
<PAGE> 4
o Expand installed customer base. We intend to expand our customer base
by continuing to focus our sales efforts on cardiac centers that
perform the majority of interventional procedures. In July 1999, we
implemented a new laser placement program whereby a laser is placed at
a hospital for a small installation fee and monthly rental revenue is
invoiced on a sliding scale depending on the volume of catheters
purchased by the hospital. This new program, known as the Evergreen
program, contributed to an increase in laser placements in 1999 to a
total of 37, a 37% increase over 1998 laser placements. This brings
our total installed lasers at December 31, 1999 to 264 laser systems.
TECHNOLOGY
Excimer laser ablation removes plaque or tissue by delivering laser energy
to a blockage or lesion. This laser beam breaks down the molecular bonds of
plaque or tissue in a process known as photodynamic ablation, without
significant thermal damage to surrounding tissue.
Laser ablation involves the insertion of a laser catheter or sheath into an
artery or vein through a small incision. When the tip of the catheter or sheath
has been placed at the site of the blockage or lesion, the physician activates
the laser beam to ablate the plaque or tissue.
CVX-300
The proprietary CVX-300 excimer laser unit is designed for use in a variety
of cardiovascular applications. When coupled with our fiber optic laser devices,
the system generates and delivers 308 nanometer wavelength ultraviolet light
pulses to a lesion to remove plaque or tissue. The current list price of the
CVX-300 is $220,000. We offer various financing options, including leasing and
rental programs.
On February 19, 1993, the Food and Drug Administration approved the
Spectranetics CVX-300 excimer laser unit and 1.4 and 1.7 millimeter diameter
fiber optic catheters for the following six indications for use in the treatment
of coronary artery disease:
o saphenous vein grafts;
o total occlusions crossable by a guidewire;
o ostial lesions;
o moderate calcification;
o long lesions; and
o balloon failures.
In these indications, we offer an alternative or adjunct to traditional
balloon angioplasty and atherectomy (rotational cutters and burrs). Unlike
conventional balloons that merely compress arterial plaque against the vessel
wall, laser angioplasty actually dissolves the material, resulting in a larger
diameter opening.
In November 1994, we received ISO 9001 certification from the TUV Product
Service GmbH in Munich, Germany which allows us to market our products in the
European Community within compliance of the manufacturing quality regulations -
EN 29 001/ISO 9001 and EN 46 001. As of December 1999, we had received CE
(Communaute Europeene) mark registration for all of our products. The CE mark
indicates that a product is certified for sale throughout the European Union and
that the manufacturer of the product complies with applicable safety and quality
standards.
Clinical results from the first 2,000 coronary procedures using the excimer
laser system achieved approximately 90 percent clinical success rate. A clinical
success is defined as a reduction in the size of the lesion to less than 50
percent of the diameter of the artery without heart attack, death, or the need
for emergency bypass surgery during hospitalization. We believe that the CVX-300
unit offers the following characteristics:
o Reduced procedure time. Patient outcome audits, which compare excimer
laser procedures to balloon angioplasty and rotational atherectomy,
reveal the excimer laser method shortens procedure times and reduces
radiation exposure to the patient from fluoroscopic imaging used
during the procedure, thereby improving lab efficiency.
Page 4
<PAGE> 5
o Ease of use. During a laser procedure, it may be necessary to adjust
laser energy output. The CVX-300 laser unit is computer-controlled,
which allows the physician to change energy levels without
interrupting the treatment to remove the catheter from the patient for
recalibration. This feature also enables the physician to begin the
procedure with the minimum level of energy required and, if necessary,
to adjust the energy level easily during the procedure.
o Small size and easy set up. Space in cardiac catheterization labs is
usually limited. In addition, many hospitals have multiple
catheterization labs. As a result of a number of proprietary and
patented laser and catheter design features, the CVX-300 laser unit
typically requires five minutes for set up. This combination of
features allows the CVX-300 laser unit to be transported easily
between laboratories within the hospital as needed.
PRODUCT APPLICATIONS
EXCIMER LASER CORONARY ANGIOPLASTY
Background. Percutaneous transluminal coronary angioplasty, or PTCA, is a
minimally invasive medical procedure used to treat coronary artery disease, or
atherosclerosis, and is performed by interventional cardiologists. In 1999,
there were approximately one million PTCA procedures performed worldwide. We
estimate that approximately 20% - 30% of these patients could benefit from the
use of our products, including patients with total occlusions crossable by a
guidewire, occluded saphenous vein grafts and long lesions.
In these indications, we offer an alternative or adjunct to traditional
balloon angioplasty or the need for coronary bypass surgery. Unlike conventional
dilatation balloons that merely compress occlusive arterial plaque against the
vessel wall, laser angioplasty actually dissolves the material. We focus our
marketing efforts on six approved coronary indications:
o saphenous vein grafts;
o total occlusions crossable by a guidewire;
o ostial lesions;
o moderate calcification;
o long lesions; and
o balloon failures.
In Europe, we focus our marketing efforts on the approved coronary
indications shown above as well as laser treatment of in-stent restenosis and
blockages in the arteries of the upper and lower legs.
Disposable Laser Catheters. We have developed a broad selection of
proprietary laser devices designed to meet physician needs and multiple
indications for use, including excimer laser coronary angioplasty and laser
angioplasty in the upper and lower leg. Early laser catheters contained only a
few large optical fibers to transmit the laser energy. These early devices were
stiff, had difficulty accessing arterial anatomy and suffered from poor ablation
characteristics. Current innovative laser catheter designs contain hundreds of
very small diameter, flexible glass fibers that can access more difficult
coronary anatomy. The smaller fibers also produce a better laser energy
distribution at the tip of the catheter for improved ablation.
Laser catheters are designed to provide several advantages over other
atherectomy devices. These catheters, which we produce in sizes ranging from .9
to 2.5 millimeters in diameter, consist of concentric or eccentric bundles of
optical fibers mounted within a thin plastic extrusion. Fibers are coupled to
the laser using a patented intelligent connector design. This design requires no
adjustments by the physician. This connector provides information about the
device being used to the CVX-300 laser unit computer, which controls the
calibration cycle. In 1992, we acquired exclusive rights to a lubricious
coating, which in certain catheter lines reduces friction and enhances
trackability and control of the device. The catheter's combination of
trackability, flexibility and ablation characteristics enables the physician to
access difficult-to-treat lesions. Our line of disposable catheters include the
following:
Page 5
<PAGE> 6
o Extreme(R)Laser Catheter. In October 1993, the FDA approved the
Extreme(R)laser concentric catheter, which was our first high
performance coronary laser catheter. It is an over-the-wire
catheter with enhanced flexibility and ablation at lower energy
settings, resulting in improved performance. Other catheter
features include the patented metal rim tip designed for
visualization and alignment and a proprietary lubricious coating
for easier access. The Extreme(R)laser catheter is available in
2.0 millimeter tip diameter. Spectranetics has received the CE
Mark of approval for use of its angioplasty line of catheters in
Europe.
o Vitesse(R) C Laser Catheter. The Vitesse(R) C concentric laser
catheter, approved by the FDA in October 1994, is a
rapid-exchange catheter, which means that it can be threaded onto
and exchanged over a guidewire more conveniently than
over-the-wire models. It is also compatible with a wide range of
guidewires. Its patented design technology provides ease of use,
requiring only a single operator. This catheter is available in
1.4, 1.7, and 2.0 millimeter tip diameters. Spectranetics has
received the CE Mark of approval for use of its angioplasty line
of catheters in Europe.
o Vitesse(R) E Laser Catheter. The Vitesse(R) E eccentric laser
catheter is our first directional coronary laser catheter. The
1.7 millimeter diameter catheter was approved by the FDA in July
1995, and the 2.0 millimeter diameter catheter was approved by
the FDA in September 1997. This catheter utilizes an eccentric
fiber array at the tip that can be positioned by the operator to
create a larger channel through the blockage. Spectranetics has
received the CE Mark of approval for use of its angioplasty line
of catheters in Europe.
o Vitesse(R) Cos Catheter. The Vitesse(R) Cos laser catheter was
approved by the FDA in January 2000. In Europe, we have received
the CE Mark of approval for this laser catheter. This product
improves upon the Vitesse(R) C concentric laser catheter line.
The fibers in the Vitesse(R) Cos are "optimally spaced" and
laboratory tests resulted in greater debulking, or removing of
plaque, as compared to the Vitesse(R) C concentric catheter. The
Vitesse(R)Cos laser catheter is available in 1.4, 1.7 and 2.0
millimeter tip diameter.
o .9 Millimeter Catheter. In October 1999, we received CE Mark
approval for the .9 millimeter laser catheter. We are seeking
regulatory approval in the United States and have submitted a
PMA(S) application to the FDA. The .9 millimeter laser catheter
is our smallest diameter catheter and is designed for the
treatment of small, tortuous vessels within the coronary
vasculature.
o Spectranetics Support Catheter. In January 2000, we received
clearance from the FDA to market the Spectranetics Support
Catheter. We also received the CE Mark of approval in November
1997 to market this product in Europe. This is a non-laser based
accessory product designed for use in the cardiovascular system
for accessing and/or crossing lesions. The primary function is to
support an angioplasty guidewire.
LEAD EXTRACTION
Background. Approximately 500,000 patients are implanted with pacemakers
and implantable cardioverter defibrillators, or ICDs, annually worldwide.*
Pacemakers and ICDs are devices that regulate the heartbeat. We believe that
approximately 5% to 10% of these patients will eventually require pacemaker or
ICD lead removal. Primary methods available to remove implanted leads include
open-chest surgery and transvenous removal with plastic sheaths, each of which
has significant drawbacks. For example, open-chest surgery is costly and is
traumatic to the patient. The plastic sheath method sometimes results in damage
to the cardiovascular system and may cause the lead to disassemble during the
removal procedure.
Laser Sheath (SLS(TM)). We have designed a laser-assisted lead removal
device, the Spectranetics Laser Sheath (SLS(TM)), to be used with our CVX-300
laser unit to remove the implanted lead with minimal force. The SLS
Page 6
<PAGE> 7
uses excimer laser energy to cut through the scar tissue surrounding the lead to
facilitate removal. In addition to resulting in less trauma and lower morbidity,
procedure time can be reduced significantly. In a randomized clinical trial,
completed in October 1996, the Spectranetics Laser Sheath (SLS(TM)) increased
the complete lead removal success rate from 65% to 94%.
The SLS consists of optical fibers arranged in a circle between inner and
outer polymer tubing. The inner opening of the device is designed to allow a
lead wire to pass through it as the device slides over the lead wire and toward
the tip in the heart. Following the ablation of scar tissue with the SLS, the
lead wire is removed from the heart with counter-traction. We have been
marketing our 12 French (Fr) SLS since December 1997. In September 1998, we
received FDA market approval for our 14 Fr and 16 Fr Spectranetics Laser
Sheaths, which are designed to free larger diameter implanted pacemaker and ICD
leads. Spectranetics has received the CE Mark of approval for use of its laser
sheath devices in Europe.
Lead Locking Device (LLD(TM)). In October 1999, we received clearance from
the FDA to market the LLD under a 510(k) application. This product was the first
Spectranetics' product to go through the 510(k) regulatory process, which
typically takes less time than other regulatory approval processes, such as
pre-market approval or a pre-market approval supplement. We also received the CE
Mark of approval for this product in Europe in March 1999. The LLD product
complements our current SLS product line and, since it is not laser-based, can
also be used in connection with the mechanical removal of pacemaker or
defibrillator leads. The LLD uses a proprietary technology to lock onto the
entire length of the lead to be removed, which allows for a stable platform for
the lead removal procedure. This stable platform allows the doctor to use
traction and/or counter-traction when used with the SLS or mechanical lead
removal products.
PERIPHERAL VASCULAR DISEASE
Background. The prevalent treatment option for total blockages in the upper
leg is bypass surgery. Amputation may be required for critical limb ischemia
below the knee. We estimate that approximately 200,000 upper bypass surgeries
and 150,000 amputations are performed annually worldwide as a result of
peripheral vascular blockages. Laser catheters are being evaluated as an
alternative treatment to both bypass surgery and amputation. Our products are
approved in Europe for use in treating peripheral vascular disease.
Clinical Trials. We are currently conducting the PELA (Peripheral Excimer
Laser Angioplasty) trial, a United States randomized clinical trial, to evaluate
the use of laser technology in patients with occlusions greater than 10
centimeters in length in the upper leg. The primary endpoint for the PELA trial
is clinical patency, which is a measurement of the degree to which the artery is
open, after twelve months following the procedure. A total of 10 sites and 250
patients are approved for randomized treatment compared to balloon angioplasty.
Additionally, a third arm of the trial allows for medical treatment, other than
laser or balloon angioplasty, on 125 patients at 5 sites. Currently, all 10
randomized sites and 32 randomized patients have been enrolled in the trial. No
reference sites or reference patients have been enrolled in the trial to date.
We are also conducting a feasibility study, the LACI (Laser Angioplasty for
Critical Ischemia) study, with 25 patients at five medical centers to evaluate
laser treatment of patients with limb-threatening, peripheral vascular disease
in the lower limb. The primary endpoint is wound healing after 3 months. If
successful in the Phase I feasibility study, we will submit a request to the FDA
for Phase II of the clinical trial. Currently, four sites and 14 patients have
been enrolled in the Phase I LACI trial. We cannot assure that the clinical
trials using excimer laser catheters to unblock peripheral arteries will be
safe, will result in favorable success rates or, if the trials are successful,
that we will receive FDA approval for this device. We have received CE Mark of
approval for our line of peripheral catheters in Europe.
Page 7
<PAGE> 8
RESTENOSED STENTS
Background. Stents are thin, slotted tubes or coils that are implanted
through a percutaneous procedure to support the walls of coronary arteries. We
estimate that approximately 1,000,000 stents are implanted in patients annually.
Twenty to 30 percent of stents may develop blockages due to restenosis, or
plaque buildup, which can lead to partial or total occlusion of the arteries.
The Laser Angioplasty in Restenosed Stents trial is being conducted to study the
use of our laser catheters in debulking stents which have restenosed, or become
obstructed.
Clinical Trials. We received FDA approval to commence a randomized clinical
study involving 320 patients and up to 20 medical institutions to evaluate the
effectiveness of clearing restenosed stents using excimer laser-assisted balloon
angioplasty versus balloon angioplasty alone. Currently, 12 sites and 14
patients have been enrolled in the LARS trial We cannot assure, however, that
clinical trials using excimer laser catheters to debulk stents will be safe,
will result in favorable success rates or, if the trials are successful, that we
will receive a pre-market approval for this device. We received CE Mark approval
in Europe certifying the sale and use throughout Europe of our excimer laser
coronary angioplasty catheters for the treatment of restenosed stainless steel
coronary stents.
SALES AND MARKETING
Our sales goals are to increase the present installed base of excimer laser
units and to increase the use of disposable devices. We plan to introduce new
physicians and institutions to the efficacy, safety, ease of use and growing
indications of excimer laser technology through published studies of clinical
applications. By leveraging the success of existing product applications, we
hope to promote the use of our technology in different applications.
Providing customers with answers about cost of acquisition, use of the
laser and reimbursement codes is critical to the education process. Through the
following marketing and distribution strategy, both in the United States as well
as internationally, we believe that we will be positioned to capitalize not only
on the core competency of excimer laser technology in coronary angioplasty but
also in lead extraction and in other new areas of development for excimer laser
technology.
DOMESTIC OPERATIONS
We estimate that there are 1,000 interventional cardiac catheterization
laboratories in hospitals in the United States. Our United States sales efforts
focus on the major cardiac catheterization labs, including teaching institutions
which perform the majority of interventional procedures. Our United States sales
and marketing team consists of product managers, account managers, regional
sales managers and medical equipment service engineers.
We are focused on expanding our product line, improving product quality and
developing an appropriate infrastructure to support sales growth. Since the use
of excimer laser technology is highly specialized, we believe that our direct
sales team must have extensive knowledge about the products and the various
physician groups we serve. Our marketing activities are designed to support our
direct sales team and include advertising and product publicity in trade
journals, newsletters, continuing education programs, and attendance at trade
shows and professional association meetings. We increased our distribution
capabilities in 1999 through the addition of personnel to our sales team, which
is summarized below:
<TABLE>
<CAPTION>
DEC. 31, 1998 DEC. 31, 1999
------------- -------------
<S> <C> <C>
Regional Sales Managers 4 4
Account Managers 10 13
Equipment Sales Specialists -- 3
Clinical Advisors -- 3
Clinical Part-Time Registered Nurses -- 4
Total 14 27
</TABLE>
Page 8
<PAGE> 9
The roles of each member of the sales team are outlined below:
Regional Sales Managers are responsible for the overall management of a
region with an emphasis on supporting the laser equipment sales opportunities.
They are directly responsible for the performance of the Account Managers,
Equipment Sales Specialists and Clinical Advisors.
Account Managers focus on customer training and selling the laser
procedure(s). Their primary responsibility is selling our single-use products
for coronary and lead removal application.
Equipment Sales Specialists are responsible for growing the installed base
through placement of laser systems.
Clinical Advisors have experience working in a hospital catheter lab. Their
primary function is to support the account managers by standing in on cases and
ensure proper protocol use by clinicians.
Clinical Part-Time Registered Nurses (PRN's) have the same responsibilities
as the clinical advisors, but they work on a part-time basis, generally two to
three days per week.
Our sales team also includes six service engineers who are responsible for
installation of each laser and participate in the training program at each site.
We provide a one-year warranty, which includes parts, service and replacement
gas. We offer extended service to our customers under annual service contracts
or on a fee-for-service basis.
INTERNATIONAL OPERATIONS
In Europe, there are approximately 250,000 balloon angioplasty procedures
performed annually in approximately 450 interventional cardiac catheterization
laboratories.* In 1993, we began marketing and selling our products
internationally through Spectranetics International, B.V., a wholly-owned
subsidiary, as well as through distributors. In 1999, Spectranetics
International, B.V. revenues totaled $2,848,000, or 15 percent of our revenue.
Currently, we have distributors in the following regions: Europe, South America,
the Middle East, Australia and Asia.
We believe that in order to increase distribution of our products
internationally, we must establish a direct sales team in certain countries. Due
to the high level of experience required by the nature of our excimer laser
technology, we believe that establishing a direct sales team will provide better
customer service and technical and regulatory support. We have mobilized a
direct sales team in Germany, comprised of six direct sales representatives,
where 50% of our European laser units are installed. In the United Kingdom,
Spain, Turkey and Italy, we continue to use distributors for our products.
In addition to the operations of Spectranetics International, B.V., we
conduct international business in the Pacific Rim, South America and Australia
through distributors as well as in Canada through our United States direct sales
organization. In 1999, revenues from these foreign operations totaled
$1,003,000, or 4 percent of our revenues.
Page 9
<PAGE> 10
Foreign sales may be subject to certain risks, including export/import
licenses, tariffs, other trade regulations and foreign medical regulations.
Tariff and trade policies, domestic and foreign tax and economic policies,
exchange rate fluctuations and international monetary conditions have not
significantly affected our business to date. For more information, see "Risk
Factors--We Are Exposed To Problems That Come From Having International
Operations."
STRATEGIC ALLIANCES
INTRACORONARY STENTS
In May 1998, we entered into an agreement with Orbus Medical Technologies,
Inc. to distribute and market a next-generation coronary stent, the R Stent(TM).
Since the inception of the agreement, we have experienced numerous delays in
obtaining an appropriate balloon-mounted R Stent from Orbus. Balloon-mounted
stents comprise the vast majority of the European stent market. Sales of the
"bare" R Stent, which has the CE Mark of approval, totaled $71,000 in 1999. As a
result of this and other issues, disputes have arisen between Spectranetics and
Orbus concerning respective performance under the agreement. We have initiated
discussion with Orbus to discuss the future of this program.
TRANSMYOCARDIAL LASER REVASCULARIZATION/PERCUTANEOUS TRANSLUMINAL MYOCARDIAL
REVASCULARIZATION
Angina is chest pain due to insufficient blood flow and oxygen delivery to
the heart muscle. More than 300,000 patients worldwide suffer from chronic
angina who are not candidates for traditional balloon angioplasty or bypass
surgery. Transmyocardial laser revascularization, or TMLR, and percutaneous
transluminal myocardial revascularization, or PTMR, are emerging as viable
therapies for treating these patients. TMLR and PTMR create small holes in the
heart muscle that are intended to increase the blood supply. TMLR and PTMR have
been shown to reduce angina. In September 1997, we entered into a supply and
license agreement with United States Surgical Corporation (USSC), a division of
Tyco International, under which we supplied modified CVX-300 laser units and
disposable devices, on an exclusive basis, for the development of TMLR and PTMR
devices. No revenues were recorded in 1999 related to the agreement with USSC.
In 1999, we were notified that USSC sold its TMR products and transferred
certain other assets to Baxter Healthcare Corporation (BHC). Our agreement with
USSC contains a provision that requires our permission prior to the transfer of
any TMR assets to another entity. We did not grant permission for such a
transfer and are considering our alternatives to remedy this situation.
SALE OF POLYMICRO TECHNOLOGIES, INC.
In June 1999, we completed the sale of Polymicro Technologies, Inc., a
former subsidiary that manufactured and distributed drawn silica glass products,
for $15 million in cash. The transaction strengthened our balance sheet and has
enabled us to focus on our core medical business.
Page 10
<PAGE> 11
GOVERNMENT REGULATION
In the United States, all medical devices are subject to FDA regulation
under the Medical Device Amendments of the Federal Food, Drug and Cosmetics Act,
or FFDCA, and are classified into one of three categories: Class I, Class II,
and Class III. The Vitesse(R)Cos Catheter and the LLD have been precleared by
FDA under the "510(k)" process. Section 510(k) of the FFDCA requires that before
introducing most Class II and some Class I devices into interstate commerce,
that the company introducing the product must first submit information to FDA
demonstrating that the device is substantially equivalent in terms of safety and
effectiveness to a legally marketed device. When FDA determines that the device
is substantially equivalent, the agency issues a "clearance" letter that
authorizes marketing of the product.
Subsequent to its initial introduction a manufacturer may make changes to
its previously cleared products. Under certain circumstances, a new 510(k) is
required when a manufacturer makes a change that could significantly affect the
device's safety or effectiveness or the manufacturer makes a major change to the
device's intended use. Before implementing the change, the manufacturer is
responsible for evaluating each change to determine whether to file a new
510(k). There is a risk that FDA will not agree with the manufacturer's decision
and will require the filing of a new 510(k).
The CVX-300 laser unit and related devices are designated as Class III
devices. Class III devices are devices that are represented to be
life-sustaining or life-supporting, or that present potential unreasonable risk
of illness or injury. Class III devices are subject to the most rigorous FDA
approval process.
Premarket approval of a Class III device generally requires the completion
of three major steps. The first step involves the granting of an investigational
device exemption, or IDE, by the FDA, which permits the proposed product to be
used in controlled human clinical trials. Upon completion of a sufficient number
of clinical cases to determine the safety and effectiveness of the proposed
product for specific indications, a pre-market approval application is then
prepared and submitted to the FDA for review. The pre-market approval
application must contain the results of the clinical trials, the results of all
relevant bench tests, laboratory and animal studies, a complete description of
the device and its components, and a detailed description of the methods,
facilities, and controls used to manufacture the device. In addition, the
submission must include the proposed labeling and promotional literature. If the
FDA determines that the pre-market approval application is sufficiently complete
to permit a substantive review, the FDA will accept the application for filing.
Once the submission is accepted for filing, the FDA begins an in-depth
review of the pre-market approval application, which represents the second major
step in pre-market approval of a Class III device. The FDA must complete its
initial review of a pre-market approval. An FDA review of a pre-market approval
application generally takes one to two years from the date the pre-market
approval application is accepted for filing, but may take significantly longer.
The review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee, typically a panel of
clinicians, will likely be convened to review and evaluate the application and
provide recommendations to the FDA at a public panel meeting as to whether the
device should be approved. Companies are typically requested to make a
presentation at the public panel meeting. The FDA is not bound by the
recommendations of the advisory panel. Toward the end of the pre-market approval
review process, the FDA will generally conduct an inspection of the
manufacturer's facilities to ensure that the facilities are in compliance with
applicable Good Manufacturing Practice requirements, which are outlined under
FDA's Quality System regulation. If the FDA's evaluations of both the pre-market
approval application and the manufacturing facilities are favorable, the FDA
will either issue an approval letter or an approvable letter, which usually
contains a number of conditions that must be met in order to secure final
approval of the pre-market approval application. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will complete the
third major step by
Page 11
<PAGE> 12
issuing a pre-market approval letter, authorizing commercial marketing of the
device for certain indications. If the FDA's evaluations of the pre-market
approval application or manufacturing facilities are not favorable, the FDA will
deny approval of the pre-market approval application or issue a "not approvable"
letter. The FDA may also determine that additional clinical trials are
necessary, in which case pre-market approval may be delayed for several years
while additional clinical trials are conducted and submitted in an amendment to
the pre-market approval application. The pre-market approval process can be
expensive, uncertain and lengthy and a number of devices for which FDA approval
has been sought by other companies have never been approved for marketing.
Modifications to a device that is the subject of a pre-market approval, its
labeling, or manufacturing process may require approval by the FDA of pre-market
approval supplements or new pre-market approval applications. Supplements to a
pre-market approval application often require the submission of the same type of
information required for an initial pre-market approval application, except that
the supplement is generally limited to that information needed to support the
proposed change from the product covered in the original pre-market approval
application.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRODUCT AND PROCEDURE FDA CE MARK
--------------------- ----- -------
<S> <C> <C>
CVX-300(R) 2/93 9/96
Coronary Angioplasty
Extreme(R) 10/93 12/96
Vitesse(R) C 10/94 12/96
Vitesse(R) E 9/97 2/97
Vitesse(R)C OS 11/98 1/00
Support Catheter 1/00 11/99
Pacing Lead and ICD Lead Extraction
SLS 12 Fr 12/97 2/97
SLS 14 Fr 9/98 2/97
SLS 16 Fr 9/98 2/97
LLD 10/99 3/99
Peripheral Angioplasty
Upper leg Trials 11/96
Lower leg Trials 11/96
Restenosed Stents Trials 1/98
</TABLE>
- --------------------------------------------------------------------------------
We received our initial investigational device exemption to perform excimer
laser percutaneous coronary angioplasty in May 1989. In February 1991, we
submitted our pre-market approval application, which was accepted for filing by
the FDA in June 1991. On November 26, 1991, our pre-market approval application
was reviewed by a public advisory panel, and we received a recommendation for
approval of the CVX-300 laser unit and two sizes of our soft-rim catheters. As
part of the approval process, we were inspected in October 1991 by the FDA to
verify our compliance with Good Manufacturing Practices requirements. The final
step in the approval process, the issuance of a letter by the FDA approving the
application, occurred on February 19, 1993.
In September 1993, we received pre-market approval for the Gen4-CVX300
laser. In March and December 1999, we received pre-market approval of
modifications to the operating software for the CVX-300. We cannot assure that
the FDA will approve our current or future pre-market approval applications or
supplements on a timely basis or at all. The absence of such approvals could
have a material adverse impact on our ability to generate future revenues. For
more information, see "Risk Factors--Failures in Clinical Trials May Hurt Our
Business and Our Stock Price."
Any products we manufacture or distribute pursuant to FDA approvals are
subject to pervasive and continuing regulation by the FDA. Device manufacturers
are required to register their establishments and list their devices with the
FDA, and are subject to periodic inspections by the FDA and certain state
agencies. The FFDCA requires devices to be manufactured in accordance with Good
Manufacturing Practice requirements, which impose
Page 12
<PAGE> 13
certain process, procedure and documentation requirements upon us with respect
to product development, manufacturing and quality assurance activities. We have
developed system and controls that we believe will enable us to comply with Good
Manufacturing Practice requirements; however, we cannot assure that we will be
able to maintain compliance with these requirements.
In addition, the Medical Device Reporting, or MDR, regulation obligates us
to inform the FDA whenever there is reasonable evidence to suggest that one of
our devices may have caused or contributed to death or serious injury, or where
one of our devices malfunctions and, if the malfunction were to recur, the
device would be likely to cause or contribute to death or serious injury. There
can be no assurance that the FDA will agree with our determinations as to
whether particular incidents meet the threshold for MDR reporting.
Labeling and promotional activities are also subject to scrutiny by the FDA
and, in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses.
Noncompliance with requirements under the FFDCA or accompanying regulations
can result in, among other things, fines, injunctions, civil penalties, recall
or seizure of products, total or partial suspension of production, failure of
the government to grant premarket approval, withdrawal of marketing approvals,
and criminal prosecution. The FDA also has authority to request repair,
replacement or refund of the cost of any device manufactured or distributed by
us.
International sales of our products are subject to foreign regulations,
including health and medical safety regulations. The regulatory review process
varies from country to country. Many countries also impose product standards,
packaging and labeling requirements, and import restrictions on devices. Exports
of products that have been approved by the FDA do not require FDA authorization
for export. However, foreign countries often require a FDA Certificate to
Foreign Government verifying that the product complies with FFDCA requirements.
To obtain a Certificate to Foreign Government, the device manufacturer must
certify to the FDA that the product has been granted approval in the United
States and that the manufacturer and the exported products are in substantial
compliance with the FFDCA and all applicable or pertinent regulations. The FDA
may refuse to issue a Certificate to Foreign Government if significant
outstanding Good Manufacturing Practice violations exist.
We are subject to certain federal, state and local regulations regarding
environmental protection and hazardous substance controls, among others. To
date, compliance with such environmental regulations has not had a material
effect on our capital expenditures or competitive position. See "Risk
Factors--Regulatory Compliance is Very Expensive and Can Often Be Denied or
Significantly Delayed."
COMPETITION
Methods for the treatment of cardiovascular disease are numerous and we
expect them to increase in number. Almost all of our competitors have
substantially greater financial, manufacturing, marketing and technical
resources than we do. Consequently, we expect intense competition to continue in
the marketplace. Although market competition includes manufacturers of balloon
angioplasty devices and stents, direct competition comes from manufacturers of
artherectomy devices. We also believe that we will experience increased
competition in the future from companies that will develop lead extraction
devices or removal methods. In the lead removal market, we compete with
mechanical lead removal devices manufactured by Cook Vascular Inc. and VascoMed.
Balloon angioplasty is currently the most common therapy for the treatment
of atherosclerosis. 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. With
the approval of stents in 1994, we anticipate that stent utilization will
continue to grow as the second most prevalent angioplasty treatment of choice
for coronary artery disease, or atherosclerosis. Cordis, SCIMED, Advanced
Cardiovascular Systems, Inc., and Medtronic, Inc. are the leading stent
providers in the United States at this time. Manufacturers of atherectomy
devices include Devices for Vascular Intervention, Inc. (a subsidiary of Guidant
Corporation) and SCIMED.
Page 13
<PAGE> 14
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.
See "Risk Factors--We May Be Unable To Compete Successfully In Our Highly
Competitive Industry In Which Many Other Competitors are Bigger Companies."
PATENTS AND PROPRIETARY RIGHTS
We hold 34 issued United States patents, four issued patents in each of
France, Germany, Italy and the Netherlands and one issued patent in Japan. Also,
we have one United States patent application pending and 7 foreign 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 provide us with 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 could be adversely affected if
any of our licensors terminate our licenses to use patented technology. We do
not have patents in any foreign countries other than those listed above.
It is our policy to require our employees and consultants to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with us. Each agreement provides that all confidential information
developed or made known to the individual during the course of the relationship
will be kept confidential and not disclosed to third parties except in specified
circumstances. In the case of employees, the agreements provide that all
inventions developed by the individual shall be our exclusive property, other
than inventions unrelated to our business and developed entirely on the
employee's own time. There can be no assurance that these agreements will
provide meaningful protection for our trade secrets in the event of unauthorized
use or disclosure of such information.
We also rely on trade secrets and unpatented know-how to protect our
proprietary technology and may be vulnerable to competitors who attempt to copy
our products or gain access to our trade secrets and know-how.
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 us. 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. A patent holder may file a lawsuit against us and may prevail. If we
decide that we need to license this technology, we may be unable to obtain these
licenses on favorable terms or at all. We may not be able to develop or
otherwise obtain alternative technology. See "Item 3. Legal Proceedings".
Litigation concerning patents and proprietary rights is time-consuming,
expensive, unpredictable and could divert the efforts of our management. An
adverse ruling could subject us to significant liability, require us to seek
licenses and restrict our ability to manufacture and sell our products.
We have signed two non-exclusive, royalty-bearing license agreements for
patents covering basic areas of laser technology. In addition, we acquired an
exclusive, royalty-bearing license for a proprietary catheter coating.
Additional licenses held by us include an exclusive license to patents covering
laser-assisted lead removal and an exclusive license relating to certain aspects
of excimer laser technology in our products.
Page 14
<PAGE> 15
RESEARCH AND DEVELOPMENT
From inception through 1988, our primary emphasis in research and
development was on the CVX-300 laser unit. Since 1988, our research and
development efforts have focused on refinement of the CVX-300 laser unit and
laser device technology. We are also exploring additional applications for the
CVX-300 laser unit and are developing advanced laser devices designed to
facilitate greater use in existing applications.
Our team of research scientists, engineers and technicians substantially
performs all of our research and development activities. Our research and
development expense totaled $3,201,000 in 1999, $2,195,000 in 1998 and
$1,787,000 in 1997.
MANUFACTURING
We assemble and test our entire product line and have vertically integrated
a number of processes in an effort to provide increased quality and reliability
of the components used in the production process. Many of the processes are
proprietary and were developed by us. We believe that our level of manufacturing
integration allows us to control costs, quality and process advancements, to
accelerate new product development cycle time and to provide greater design
flexibility. Raw materials, components and subassemblies used in our products
are purchased from outside suppliers and are generally readily available from
multiple sources.
Our manufacturing facilities are subject to periodic inspections by
regulatory authorities, including Good Manufacturing Practice compliance
inspections by the FDA and the TUV. We have undergone four inspections by the
FDA for Good Manufacturing Practice compliance since 1991, and the TUV has
conducted an inspection each year. Each inspection resulted in a limited number
of noted deficiencies, to which we believe we have provided adequate responses.
We purchase certain components of our CVX-300 laser unit from several sole
source suppliers. We do not have guaranteed commitments from these suppliers as
we order products through purchase orders placed with these suppliers from time
to time. While we believe we could obtain replacement components from
alternative suppliers, we may be unable to do so. In addition, we may encounter
difficulties in scaling up production of laser units and disposable devices and
hiring and training additional qualified manufacturing personnel. Any of these
difficulties could lead to quarterly fluctuations in operating results and
adversely affect us.
THIRD-PARTY REIMBURSEMENT
Our CVX-300 laser unit and related fiber-optic laser devices are generally
purchased by hospitals, which then bill various third party payors for the
health care services provided to their patients. These payors include Medicare,
Medicaid and private insurance payors. The Medicare Program reimburses hospitals
based on a predetermined amount per discharge for inpatient hospital services
identified by the diagnosis-related group ("DRG") into which each case is
classified.
At present, many of our customers using the CVX-300 for laser angioplasty
are obtaining reimbursement under the same DRG as for balloon angioplasty. Lead
removal procedures using the SLS are reimbursed using the same DRGs for
non-laser lead removal or lead removal and replacement. We expect that our
customers will continue to do so in the near term. Medicare payments of
physicians' surgical fees are based on a fee schedule that rates the value of
physicians' work for a particular service in relation to the value of work for
other services. The excimer laser ablation procedure third party reimbursement
for hospital and physician charges is generally done in connection with other
approved reimbursement codes. The reimbursement amount is generally adequate to
cover the cost of a laser ablation procedure. Actual costs may be significantly
higher and vary depending on the complexity of the procedure, age of the
patient, and geographical location.
Capital costs for medical equipment purchased or leased by hospitals are
currently partially reimbursed separately from DRG payments. Such reductions
could have an adverse impact on reimbursements to hospitals for the capital cost
of the CVX-300 laser unit and, consequently, our ability to sell our laser unit.
While we believe that a laser angioplasty procedure offers a less costly
alternative for the treatment of certain types of heart disease, we
Page 15
<PAGE> 16
cannot assure that the procedure will be viewed as cost effective under changing
reimbursement guidelines or other health care payment systems. For more
information, see "Risk Factors--Failure Of Third Parties To Reimburse Medical
Providers For Our Products May Reduce Our Sales."
PRODUCT LIABILITY AND INSURANCE
Our business entails the risk of product liability claims. We maintain
product liability insurance in the amount of $5,000,000 per occurrence with an
annual aggregate maximum of $5,000,000. We cannot assure, however, that product
liability claims will not exceed such insurance coverage limits or that such
insurance coverage limits will continue to be available on acceptable terms, or
at all. See "Risk Factors--Potential Product Liability Claims and Insufficient
Insurance Coverage May Hurt Our Business and Stock Price."
EMPLOYEES
As of March 10, 2000, we had 153 employees, including 13 in research and
development, 76 in manufacturing and 47 in marketing, sales and administration
in the United States and 17 in marketing, sales and administration in Europe.
None of our employees are covered by collective bargaining agreements. We
believe that the success of our business will depend, in part, on our ability to
attract and retain qualified personnel. We believe that our relationship with
our employees is good.
- ---------------------
* Amounts were estimated by Spectranetics based on extrapolation from available
industry data. Patient population estimates are subject to inherent
uncertainties. We are unable to determine with any degree of certainty the
number of procedures for any indication or the number of patients who are
suitable for treatment using these procedures.
Page 16
<PAGE> 17
ITEM 2. PROPERTIES
We lease a total of approximately 49,300 square feet in three buildings in
Colorado Springs, Colorado. These facilities contain approximately 35,000 square
feet of manufacturing space and approximately 14,300 square feet devoted to
marketing, research and administrative activities. We have renewed the building
lease through December 2000 and believe that these facilities are adequate to
meet our requirements through 2000.
Spectranetics International B.V. leases 4,394 square feet in Leusden, The
Netherlands. The facility houses our operations for the marketing and
distribution of products in Europe. The lease terminates in June 2001.
ITEM 3. 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 was 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. White Star
subsequently filed a lawsuit seeking past and future royalty payments from
Spectranetics. 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. 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, the U.S. District Court granted
summary judgement in favor of Spectranetics, dismissing White Star's lawsuit in
its entirety. The court also determined that Spectranetics is entitled to a
permanent injunction preventing White Star from, among other things, making
false statements to Spectranetics' customers. The Court is presently considering
the precise terms of the permanent injunction.
On October 1, 1999 Baxter Healthcare Corporation, an affiliate of Baxter
International, Inc., served notice of a complaint against us claiming that all
of our products infringe on three patents licensed by Baxter. We feel our
position is meritorious and intend to vigorously defend our patent position and
we have asserted several counterclaims against Baxter.
On October 15, 1999 Cook Vascular, Inc. filed a complaint against us
claiming misappropriation of trade secrets and requesting correction of
inventorship on two of our patents to add/substitute Cook Vascular employees as
inventors. We feel our position is meritorious and intend to vigorously defend
our position.
Page 17
<PAGE> 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
Our Common Stock is traded on the over-the-counter market under The Nasdaq
National Market symbol "SPNC". The table below sets forth the high and low sales
prices for the Company's Common Stock as reported on The Nasdaq National Market
for each calendar quarter in 1998 and 1999. These over-the-counter quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commissions,
and may not necessarily represent the sales prices in actual transactions.
<TABLE>
<CAPTION>
- -------------------------------------------------- -------------- --------------
HIGH LOW
-------------- --------------
YEAR ENDED DECEMBER 31, 1998
<S> <C> <C>
1st Quarter............................ $ 4.125 2.750
2nd Quarter............................ 4.000 2.750
3rd Quarter............................ 3.688 1.688
4th Quarter............................ 3.125 1.438
YEAR ENDED DECEMBER 31, 1999
1st Quarter............................ $ 4.310 2.750
2nd Quarter............................ 3.813 2.250
3rd Quarter............................ 5.250 2.531
4th Quarter............................ 5.000 3.594
- -------------------------------------------------- -------------- --------------
</TABLE>
We have not paid cash dividends on our Common Stock in the past and do not
expect to do so in the foreseeable future. The payment of dividends in the
future will be at the discretion of the Board of Directors and will be dependent
upon our financial condition, results of operations, capital requirements and
such other factors as the Board of Directors deems relevant.
The closing sales price of our Common Stock on March 10, 2000 was $7.688.
On March 10, 2000, we had approximately 780 shareholders of record.
On December 22, 1998, we entered into purchase agreements with 11 investors
with respect to the issuance and sale of 3,800,000 shares of our common stock in
a private placement pursuant to Rule 506 of Regulation D under the Securities
Act of 1933. Each investor represented that it was an "accredited investor" as
defined in Regulation D. We completed the private placement of the shares on
February 25, 1999 for aggregate proceeds of $7,600,000, before expenses.
Page 18
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of as of and for each of
the years in the five-year period ended December 31, 1999, are derived from our
consolidated financial statements. The information set forth below should be
read in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Form 10-K and
the Consolidated Financial Statements and Notes thereto. The selected
consolidated financial data presented below as of December 31, 1999 and 1998 and
for each of the years in the three-year period ended December 31, 1999, have
been derived from our audited financial statements also included elsewhere
herein. The selected historical consolidated financial data presented below as
of December 31, 1997, 1996 and 1995 and for the years ended December 31, 1996
and 1995 are derived from, and are qualified by reference to, audited financial
statements of the Company not included herein. All data has been adjusted to
exclude the operations of Polymicro Technologies, Inc., the company's
wholly-owned subsidiary that was sold in June 1999.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue ............................ $ 22,305 $ 18,565 $ 14,696 $ 13,661 $ 10,384
Cost of revenue .................... 7,397 7,347 6,787 6,172 5,270
Marketing and sales ................ 9,894 8,971 7,216 5,182 4,261
General and administrative ......... 4,385 3,634 3,333 2,635 2,485
Royalties expense .................. 1,044 649 621 645 481
Research and development ........... 3,201 2,195 1,787 1,305 1,027
Reorganization costs and
Litigation reserves .............. 1,358 -- -- -- --
-------- -------- -------- -------- --------
Operating loss ..................... $ (4,974) $ (4,231) $ (5,048) (2,278) (3,140)
Other income, net .................. 758 95 202 380 596
-------- -------- -------- -------- --------
Net loss other continuing
agreements........................ $ (4,216) $ (4,136) $ (4,846) $ (1,898) $ (2,544)
======== ======== ======== ======== ========
Loss per share - basic and
diluted .......................... $ (0.19) $ (0.22) $ (0.26) $ (0.10) $ (0.14)
Weighted average common shares
outstanding ...................... 22,407 19,018 18,654 18,430 18,331
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ...................... $ 8,957 $ 4,536 $ 7,587 $ 8,787 $ 8,301
Cash, cash equivalents, and
securities.......................... 20,125 4,158 8,590 7,150 7,047
Equipment, net ....................... 3,675 3,129 1,628 2,190 1,570
Total assets ......................... 34,038 21,385 24,778 22,316 24,343
Long-term debt including capital
lease obligations, net of current
portion............................. 411 1,433 1,376 451 521
Shareholders' equity ................. 23,386 11,268 14,063 18,510 19,747
Book value per common share
outstanding ........................ $ 1.02 $ 0.59 $ 0.75 $ 1.00 $ 1.08
</TABLE>
Page 19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 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 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.
These trials will continue another 2 to 3 years.
RESULTS OF OPERATIONS
In this section we will discuss 1999 and 1998 core medical revenue and net
income (loss) results from continuing operations. Core medical revenue excludes
shipments to USSC under a license and supply agreement entered into in 1997.
Laser systems shipped under the supply agreement were completed in 1998. The
supply agreement also included shipment for single-use probes. We do not expect
significant revenues under the agreements in the future due to our dispute with
USSC over the transfer of certain TMR assets to Baxter Healthcare Corporation
without our permission, which was required by contract.
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.
We believe that we can retain the majority of the business gained since the
product recall was announced, but our ability to do so depends on, among other
things, the acceptance of the excimer laser angioplasty as a viable alternative
to rotational atherectomy.
Page 20
<PAGE> 21
<TABLE>
<CAPTION>
OVERVIEW
REVENUE PER OPERATING UNIT
------------------------------------------------ ----------------- ---------------- -----------------
1999 1998 1997
------------------------------------------------ ----------------- ---------------- -----------------
<S> <C> <C> <C>
Core Medical - United States $ 19,457 $ 13,124 $ 9,615
Core Medical - Europe 2,848 2,374 3,755
----------------- ---------------- -----------------
Subtotal - Core Medical 22,305 15,498 13,370
USSC - 3,067 1,326
----------------- ---------------- -----------------
TOTAL $ 22,305 $ 18,565 $ 14,696
------------------------------------------------ ----------------- ---------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
NET INCOME (LOSS) PER OPERATING UNIT
------------------------------------------------ ----------------- ---------------- -----------------
1999 1998 1997
----------------- ---------------- -----------------
<S> <C> <C> <C>
Core Medical - United States $ (2,317) $ (3,468) $ (4,262)
Core Medical - Europe (1,599) (2,465) (1,385)
----------------- ---------------- -----------------
Subtotal - Core Medical (4,216) (5,933) (5,647)
USSC - 1,797 801
----------------- ---------------- -----------------
TOTAL $ (4,216) $ (4,136) $ (4,846)
------------------------------------------------ ----------------- ---------------- -----------------
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Core medical revenue in 1999 grew to $22,305,000, an increase of
$6,807,000, or 44%, over 1998. Increased revenue includes a 56% increase in
disposable sales, a 34% increase in equipment revenue and a 20% increase in
service revenues.
Increased disposable revenue, which consists of single-use catheter
products, came from a 78% increase in angioplasty catheters, 22% increase in
lead removal devices and a 154% increase in peripheral catheters.
Equipment revenues increased in 1999 primarily due to increased unit sales
of our CVX-300(R) laser systems. Additionally, rental revenues contributed to
the increase in connection with the introduction of the Evergreen program in
July 1999.
Service revenues increased in 1999 due to the increased installed base of
the Company's excimer laser systems.
Gross margins in 1999 increased to 67% from 60% in 1998. This improvement
was due to a combination of improved manufacturing efficiencies, price increases
averaging 5% on all catheter products effective in December 1998 and a higher
proportion of disposables revenue in relation to total revenue. Disposable
products generate higher margins than equipment or service.
Operating expenses grew 28% in 1999 to $19,822,000 as compared to
$15,449,000 for 1998.
Marketing and sales expenses increased by 10% to $9,894,000 in 1999 as
compared to $8,971,000 in 1998. This increase related to costs incurred
primarily in the United States for additional sales personnel and increased
commissions relative to the increase in revenue.
General and administrative expenses grew 21% to $4,385,000 in 1999 as
compared to $3,634,000 in 1998. This increase is primarily attributable to
increased legal fees. See additional discussion of legal matters in "Item 3.
Legal Proceedings."
Royalties expense represent costs paid on license agreements held by third
parties on our products. Royalties expense increased by 61% to $1,044,000 in
1999 as a direct result of increased revenue as compared to 1998.
Page 21
<PAGE> 22
Research and development expenses increased by 46% to $3,201,000 in 1999.
This increase is due to increased product development costs and clinical trial
costs associated with peripheral angioplasty to clear blockages in the upper and
lower leg and the debulking of blockages within restenosed, or blocked, stents.
Reorganization costs and litigation reserves totaling $1,358,000 were
recorded in 1999 as one-time charges. These costs include costs related to the
restructuring at Spectranetics International B.V. as well as litigation reserves
for the ongoing legal proceedings with Baxter Healthcare Corporation.
Interest income increased due to higher cash and investment 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 Polymicro in June 1999. Interest
expense decreased slightly from the prior year and related primarily to interest
charges on our equipment loan.
Loss from continuing operations in 1999 increased by 2% to a loss of
$4,216,000 from a loss of $4,136,000 in 1998 primarily due to increases in
revenue and gross margins offset by increases in expenses discussed above.
MEDICAL - UNITED STATES
Core medical revenue in the United States increased to $19,457,000, up 48%
from 1998. These increases were generated from sales of angioplasty catheters,
up 96%, lead extraction devices, up 16%, and service revenues, up 23%.
Core medical net loss from this unit decreased to $2,317,000, or 33% from
1998. The decreased net loss is due to the revenue and gross margin increase
offset partially by operating expense growth.
MEDICAL - EUROPE
Revenue from our medical business in Europe increased 20% from 1998. This
reflects a 31% increase in disposable revenue offset by a 13% decrease in
equipment revenue.
Core medical net loss from European operations decreased 35% to $1,599,000.
This decrease in net loss is primarily attributed to increased revenue and gross
margin.
The functional currency of Spectranetics International, B.V. is the Dutch
guilder. All revenue and expense accounts are translated to United States
dollars in the consolidated statements of operations using weighted average
exchange rates during the year. Fluctuation in the Dutch guilder currency rate
during the year ended December 31, 1999, as compared to December 31, 1998,
caused a decrease in revenues and operating expenses of approximately 1% of
consolidated revenues and operating expenses, respectively.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Core medical revenue in 1998 grew to $15,498,000, up $2,128,000 or 16% over
1997. Increased revenues include a 32% increase in catheter sales, 44% increase
in service revenues and a 17% decrease in sales of laser systems.
Increased disposable revenue came from lead removal, our newest
application, which was up 93% over 1997 levels and a 41% increase in angioplasty
catheters in the United States. These gains were offset by a 35% decline in
disposable revenue from Europe.
Equipment revenues decreased in 1998, primarily due to slightly lower unit
sales of our CVX-300(R) laser system.
Gross margin in 1998 increased to 60% from 54% in 1997. This improvement
was due to a combination of improved manufacturing efficiencies, price increases
on our catheter products and increases in sales of our catheter products, which
generate higher margins than equipment or service.
Page 22
<PAGE> 23
Operating expenses grew 19% in 1998 to $15,449,000 as compared to
$12,957,000 in 1997 due primarily to increased marketing and sales costs.
Marketing and sales expenses increased by 24% to $8,971,000 in 1998. This
increase relates to costs incurred in the United States for additional sales
personnel to increase customer support.
General and administrative expense increased by 9% to $3,634,000 in 1998.
Royalties expense represent costs paid on license agreements held by third
parties on our products. Royalties expense increased by 5% to $649,000 in 1998.
This increase is attributable to increased revenue.
Research and development expense increased by 23% to $2,195,000 in 1998.
This increase is due to increased product development costs and expenditures to
improve our catheter designs and to develop additional applications for excimer
laser.
Interest income decreased 23% to $213,000 in 1998 due to lower cash
balances and lower yields from short term investments. Interest expense
increased primarily due to interest charges on our equipment loan, which was
obtained in December 1997.
Core medical net loss from continuing operations in 1998 increased by 5% to
a loss of $5,933,000 from a loss of $5,647,000 in 1997 primarily due to
operating expense increases offset partially by revenue and gross margin
increases.
MEDICAL - UNITED STATES
Core medical revenues in the United States increased 36% in 1998. This
increase resulted from a 98% increase in sales of lead extraction devices , a
41% increase in coronary angioplasty catheters, and a 44% increase in service
revenues. Revenue from equipment sales decreased 1% from 1998.
Core medical net loss from this unit decreased by 19% from 1997. This
decrease is attributed to increases in revenue and gross margin.
MEDICAL - EUROPE
Core medical revenue in Europe decreased 37% from 1997. Declines in our
equipment and disposable product lines were 56% and 35% respectively. This was
offset by a 38% increase in service revenues. Sales in Germany accounted for 64%
of the reduced revenues. Early in 1998, we notified our German distributor that
we were not going to renew our distribution agreement with them. Revenues from
Germany had already begun to fall, and without our commitment to continue our
distribution agreement, sales through our distributor continued to decline. In
late 1998, we initiated efforts to implement a direct sales effort in Germany.
Effective January 1, 1999, we were selling directly in Germany in an effort to
reestablish our presence in Germany.
Core medical net loss from European operations increased 78%. This increase in
net loss is attributed to reduced sales from Germany and a 27% reduction in
revenues from other parts of Europe, along with a 9% increase in operating
expenses associated with establishing our own direct sales capability.
Page 23
<PAGE> 24
INCOME TAXES
At December 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $76.8 million, which are available
to offset future federal taxable income, if any, and expire at varying dates
through 2019. The annual use of the net operating loss carryforwards is limited
under Section 382 of the Internal Revenue Code of 1986.
The Company also had research and development tax credit carryforwards at
December 31, 1999 for federal income tax purposes of approximately $3.4 million
which are available to reduce future federal income taxes, if any, and expire at
varying dates through 2018. The annual use of portions of the research and
development credit carryforwards is also limited under Section 382 of the
Internal Revenue Code of 1986.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had cash and cash equivalents of $4,900,000
compared to $4,158,000 at December 31, 1998.
Cash used in operations in 1999 totaled $4,613,0000, primarily due to the
following: (1) $4,216,000 loss from continuing operations, and (2) $1,871,000
related to increased inventories, and (3) $1,578,000 related to increased
receivables balances. These uses of cash were offset by cash provided by growth
in accounts payable and accrued liabilities of $1,532,000 related to increased
operating expenses and inventory levels in 1999. 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 from the fourth quarter.
Inventory turns is calculated by dividing annualized cost of sales for the
fourth quarter by ending inventory.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Days Sales Outstanding 75 74
Inventory Turns 3.0 3.8
</TABLE>
Receivables considered to be overdue were not significant as of December
31, 1999 or 1998.
Cash used in investing activities was due primarily to the purchase of
securities totaling $15,414,000 and capital expenditures of $431,000. This was
offset by net proceeds of cash from the sale of Polymicro of $14,346,000
completed in June 1999. We also received cash from the operations of Polymicro
totaling $1,140,000 through June 1999.
Net cash provided by financing activities was $5,751,000. This cash was
comprised of net proceeds from the private stock placement in February 1999
which totaled $6,537,000 and $272,000 from the sales of common stock, which were
offset by $1,058,000 of principal payments on debt and capital lease
obligations.
At December 31, 1999, 1998, and 1997, we had placed a number of systems on
rental, loan and fee per procedure programs. A total of $3,331,000, $2,350,000,
and $1,441,000 were recorded as equipment held for rental or loan for the years
ended December 31, 1999, 1998, and 1997, 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 presence in major cardiac centers.
We currently use two placement programs in addition to the sale of a laser
system:
1. Evergreen rental program -- 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.
Page 24
<PAGE> 25
2. Evaluation 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 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.
We believe our liquidity and capitalization as of December 31, 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.
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 the Spectranetics International, B.V. operations in
relation to the consolidated results, the conversion to the Euro is not expected
to have a material adverse effect on the consolidated financial results of
operations.
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 No. 133 requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending 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. At December 31, 1999, we had accumulated $67.6 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.
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 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 year ended December 31, 1999, our revenues from
international operations represented 15% of consolidated revenues. Of these
revenues, 30% were derived from sales in Germany. 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.
Page 25
<PAGE> 26
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:
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),
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.
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.
Page 26
<PAGE> 27
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 revenues 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.
Page 27
<PAGE> 28
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. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our primary market risks include changes in foreign currency exchange rates
and interest rates. Market risk is the risk of 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. The Company does not use financial instruments to manage changes in
commodity prices and does 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 .75%. An increase or decrease in the prime rate of 1%
would cause interest expense to increase or decrease by approximately $16,000
over a twelve month period.
Page 28
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements appearing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
information set forth under the caption "Proposal 1 -- Election of Directors"
and "Executive Officers of the Company" of the registrant's definitive Proxy
Statement to be used in connection with its 2000 Annual Meeting of Shareholders,
to be filed with the Securities and Exchange Commission on or prior to April 28,
2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information set forth under the caption "Executive Compensation" of the
registrant's definitive Proxy Statement to be used in connection with its 2000
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission on or prior to April 28, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information set forth under the caption "Principal Security Holders" of the
registrant's definitive Proxy Statement to be used in connection with its 2000
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission on or prior to April 28, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information set forth under the caption "Certain Transactions" of the
registrant's definitive Proxy Statement to be used in connection with its 2000
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission on or prior April 28, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THE REPORT
(1) Financial Statements
(2) Financial Statement Schedule
The financial statement schedule listed in the accompanying Index to
Consolidated Financial Statements covered by the Independent Auditors' Report is
filed as part of this Report (see page F-1).
Page 29
<PAGE> 30
(3) Exhibits
The exhibits listed in the Index to Exhibits are filed as part of this
Report (see page 57).
(b) REPORTS ON FORM 8-K
Not applicable.
Page 30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Colorado Springs, State of Colorado, on this 30th day of March, 2000.
THE SPECTRANETICS CORPORATION
By: /s/ Joseph A. Largey
-------------------------------------
Joseph A. Largey, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ------- -----
<S> <C> <C>
/s/ Joseph A. Largey President and Chief
- ----------------------------------------------- Executive Officer, Director March 30, 2000
Joseph A. Largey (Principal Executive Officer)
/s/ Paul C. Samek Vice President, Finance
- ----------------------------------------------- (Principal Financial and March 30, 2000
Paul C. Samek Accounting Officer)
/s/ Emile J. Geisenheimer Director and Chairman of the
- ----------------------------------------------- Board of Directors March 30, 2000
Emile J. Geisenheimer
/s/ Cornelius C. Bond, Jr. Director March 30, 2000
- -----------------------------------------------
Cornelius C. Bond, Jr.
/s/ Gary R. Bang Director March 30, 2000
- -----------------------------------------------
Gary R. Bang
/s/ James A. Lent Director March 30, 2000
- -----------------------------------------------
James A. Lent
/s/ Joseph M. Ruggio, MD Director March 30, 2000
- -----------------------------------------------
Joseph M. Ruggio, MD
/s/ John G. Schulte Director March 30, 2000
- -----------------------------------------------
John G. Schulte
</TABLE>
Page 31
<PAGE> 32
THE SPECTRANETICS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS: PAGE
<S> <C>
Independent Auditors' Report....................................................................... F-2
Consolidated Balance Sheets, December 31, 1999 and 1998............................................ F-3
Consolidated Statements of Operations, Years Ended December 31, 1999, 1998, and 1997............... F-4
Consolidated Statements of Shareholders' Equity, Years Ended December 31, 1999, 1998, F-5
and 1997......................................................................................
Consolidated Statements of Cash Flows, Years Ended December 31, 1999, 1998, and 1997............... F-6
Notes to Consolidated Financial Statements......................................................... F-7
FINANCIAL STATEMENT SCHEDULE:
Independent Auditors' Report on Financial Statement Schedule....................................... F-24
Schedule II -- Valuation and Qualifying Accounts, Years Ended December 31, 1999, 1998, and 1997.... F-25
</TABLE>
All other schedules are omitted because they are not applicable or because the
required information is included in the consolidated financial statements or the
notes thereto.
F-1
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
The Spectranetics Corporation:
We have audited the accompanying consolidated balance sheets of The
Spectranetics Corporation and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations and other comprehensive
income, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Spectranetics
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Denver, Colorado
February 2, 2000
F-2
<PAGE> 34
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,900 4,158
Securities held to maturity 3,468 --
Trade accounts receivable, less allowance for
doubtful accounts of $120 and $228 5,564 4,099
Inventories 2,746 2,095
Prepaid expenses and other 492 313
Net assets of discontinued operations -- 803
-------- --------
Total current assets 17,170 11,468
Equipment and leasehold improvements, at cost:
Manufacturing equipment and computers 5,773 5,514
Leasehold improvements 751 719
Equipment held for rental or loan 3,331 2,350
Furniture and fixtures 178 160
-------- --------
10,033 8,743
Less accumulated depreciation and amortization (6,358) (5,614)
-------- --------
Net equipment and leasehold improvements 3,675 3,129
Other intangible assets, net 1,138 1,368
Other assets 298 495
Net assets of discontinued operations -- 4,925
Long-term investments, held to maturity 11,757 --
-------- --------
Total assets $ 34,038 21,385
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,127 1,147
Accrued liabilities 5,181 3,439
Deferred revenue 917 1,278
Current portion of long-term debt 942 950
Current portion of capital lease obligations 46 118
-------- --------
Total current liabilities 8,213 6,932
Deferred revenue and other liabilities 2,028 1,752
Long-term debt, net of current portion 376 1,346
Capital lease obligations, net of current portion 35 87
-------- --------
Total liabilities 10,652 10,117
Shareholders' equity:
Preferred stock, $.001 par value. Authorized 5,000,000 shares; none issued
Common stock, $.001 par value. Authorized 60,000,000 shares; issued
and outstanding 23,037,188 shares in 1999 and 19,110,825 shares in 1998 23 19
Additional paid-in capital 91,112 84,131
Accumulated other comprehensive loss (128) (92)
Accumulated deficit (67,621) (72,790)
-------- --------
Total shareholders' equity 23,386 11,268
Commitments and contingencies (notes 6, 7, 8, 10 and 15)
-------- --------
Total liabilities and stockholders' equity $ 34,038 21,385
======== ========
See accompanying notes to consolidated financial statements
</TABLE>
F-3
<PAGE> 35
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations and Other Comprehensive Income
(In thousands, except share and per share amounts)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue - Core Medical $ 22,305 15,498 13,370
Revenue - USSC -- 3,067 1,326
------------ ------------ ------------
Total 22,305 18,565 14,696
------------ ------------ ------------
Cost of revenue - Core Medical 7,397 6,077 6,262
Cost of revenue - USSC -- 1,270 525
------------ ------------ ------------
7,397 7,347 6,787
------------ ------------ ------------
Gross margin - Core Medical 14,908 9,421 7,108
Gross margin - USSC -- 1,797 801
------------ ------------ ------------
Gross margin 14,908 11,218 7,909
------------ ------------ ------------
Operating expenses:
Marketing and sales 9,894 8,971 7,216
General and administrative 4,385 3,634 3,333
Royalties expense 1,044 649 621
Research and development 3,201 2,195 1,787
Reorganization costs and litigation reserves 1,358 -- --
------------ ------------ ------------
Total operating expenses 19,882 15,449 12,957
------------ ------------ ------------
Operating loss (4,974) (4,231) (5,048)
Other income (expense):
Interest income 771 213 278
Interest expense (156) (190) (42)
Other, net 143 72 (34)
------------ ------------ ------------
758 95 202
------------ ------------ ------------
Net loss from continuing operations (4,216) (4,136) (4,846)
Discontinued operations:
Gain on sale of discontinued industrial subsidiary, Polymicro
Technologies, Inc. (net of $150 income taxes) 8,664 -- --
Income from operations of discontinued industrial
subsidiary, Polymicro Technologies, Inc. 721 861 226
------------ ------------ ------------
Gain/income from discontinued operations 9,385 861 226
------------ ------------ ------------
Net income (loss) 5,169 (3,275) (4,620)
Other comprehensive income (loss) -
foreign currency translation (36) 60 (136)
------------ ------------ ------------
Comprehensive income (loss) $ 5,133 (3,215) (4,756)
============ ============ ============
Loss from continuing operations per share -
basic and diluted $ (0.19) (0.22) (0.26)
Gain/income from discontinued operations
per share - basic and diluted 0.42 0.05 0.01
------------ ------------ ------------
Net income (loss) per share - basic and diluted $ 0.23 (0.17) (0.25)
============ ============ ============
Weighted average common shares
outstanding - basic and diluted 22,406,606 19,018,147 18,653,939
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 36
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In thousands, except share amounts)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
OTHER
ADDITIONAL COMPREHENSIVE TOTAL
PAID-IN INCOME ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL (LOSS) DEFICIT EQUITY
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 18,531,867 $ 19 83,402 (16) (64,895) 18,510
Exercise of stock options 179,384 -- 239 -- -- 239
Shares purchased under employee
stock purchase plan 22,891 -- 70 -- -- 70
Foreign currency translation
adjustment -- -- -- (136) -- (136)
Net loss -- -- -- -- (4,620) (4,620)
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1997 18,734,142 19 83,711 (152) (69,515) 14,063
Exercise of stock options 343,981 -- 334 -- -- 334
Shares purchased under employee
stock purchase plan 32,702 -- 86 -- -- 86
Foreign currency translation
adjustment -- -- -- 60 -- 60
Net loss -- -- -- -- (3,275) (3,275)
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1998 19,110,825 19 84,131 (92) (72,790) 11,268
Sale of common stock in a private
placement 3,800,000 4 6,533 -- -- 6,537
Exercise of stock options 82,068 -- 343 -- -- 343
Shares purchased under employee
stock purchase plan 44,295 -- 105 -- -- 105
Foreign currency translation
adjustment -- -- -- (36) -- (36)
Net income -- -- -- -- 5,169 5,169
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1999 23,037,188 $ 23 91,112 (128) (67,621) 23,386
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 37
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,169 (3,275) (4,620)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Income from discontinued operations (721) (861) (226)
Gain on sale of Polymicro Technologies, Inc. (8,664) -- --
Depreciation and amortization 1,397 1,065 1,090
Changes in operating assets and liabilities:
Trade accounts receivable, net (1,578) (581) (957)
Inventories (1,871) (1,462) (985)
Prepaid expenses and other 3 (32) 64
Other assets 190 16 (80)
Accounts payable and accrued liabilities 1,532 1,504 483
Deferred revenue (70) (2,809) 5,277
-------- -------- --------
Net cash provided (used) by operating activities (4,613) (6,435) 46
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (431) (1,140) (287)
Net cash received from discontinued operations 1,140 2,047 653
Net proceeds from sale of Polymicro Technologies, Inc. 14,346 -- --
Sale (purchases) of securities, net (15,414) 2,058 2,232
-------- -------- --------
Net cash provided (used) by investing activities (359) 2,965 2,598
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale of common stock 272 420 309
Proceeds from sale of common stock in a private placement,
net of issue costs 6,537 -- --
Proceeds from borrowings -- 1,230 1,100
Principal payments on long-term debt and
capital leases obligations (1,058) (550) (312)
-------- -------- --------
Net cash provided by financing activities 5,751 1,100 1,097
-------- -------- --------
Effect of exchange rate changes on cash (37) (4) (69)
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 742 (2,374) 3,672
Cash and cash equivalents at beginning of year 4,158 6,532 2,860
-------- -------- --------
Cash and cash equivalents at end of year $ 4,900 4,158 6,532
======== ======== ========
Supplemental disclosures of cash flow
information - cash paid during the year for interest $ 166 179 43
======== ======== ========
Supplemental disclosure of noncash investing
and financing activities:
Net transfer from inventory to equipment
held for rental or loan $ 1,164 1,220 424
======== ======== ========
Equipment acquired through capital leases $ -- -- 376
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 38
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION, NATURE OF BUSINESS AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of The Spectranetics Corporation, a Delaware corporation, and
its wholly owned subsidiary Spectranetics International B.V.
(collectively the Company). All significant intercompany balances and
transactions have been eliminated in consolidation. The Company
designs, manufactures and markets laser interventional cardiology
products for the medical industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
significantly from those estimates.
Certain reclassifications have been made in the 1998 financial
statements to conform with the financial statements presentation for
December 31, 1999.
(b) CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash
equivalents of approximately $4,693,000 and $3,235,000 at December 31,
1999 and 1998, respectively, consist primarily of certificates of
deposit, government-backed securities, money market accounts,
commercial paper and repurchase agreements stated at cost, which
approximates market. Restricted cash totaled $335,000 and $209,000 at
December 31, 1999 and 1998, respectively.
(c) SECURITIES
Securities at December 31, 1999, consisted of U.S. Treasury notes and
mortgage-backed securities, and are accounted for under the provisions
of Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities. The Company's debt
securities were classified as held to maturity securities. Securities
were recorded at amortized cost which approximates fair value and
those securities with maturities of one year or less are classified as
current assets.
(d) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
F-7 (Continued)
<PAGE> 39
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(e) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost. Equipment
owned under capital leases is recorded at the present value of minimum
lease payments at the inception of the lease.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets of 3 to 7 years for manufacturing
equipment and computers and furniture and fixtures. Equipment held for
rental or loan is depreciated using the straight-line method over 2 to
5 years. Equipment owned under capital leases and leasehold
improvements are amortized using the straight-line method over the
shorter of the lease term or estimated useful life of the asset.
(f) OTHER INTANGIBLE ASSETS
Other intangible assets are amortized using the straight-line method
over periods ranging from 10 to 13 years.
(g) LONG-LIVED ASSETS
The Company accounts for long-lived assets under the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of (SFAS No. 121). Under SFAS No. 121, the carrying value of
goodwill and other long-lived assets is reviewed annually for
impairment. Events that may indicate a need to assess recoverability
include significant changes in business conditions, continuing losses,
or a forecasted inability to achieve at least break-even operating
results over an extended period. The Company evaluates the
recoverability of goodwill and other long-lived assets based upon
undiscounted cash flow projections. Should an impairment in value be
indicated, the carrying value of the asset is adjusted to its
estimated fair value. No adjustments for impairment of assets have
been recognized.
(h) FINANCIAL INSTRUMENTS
At December 31, 1999 and 1998, the carrying value of financial
instruments approximates the fair value of the instruments based on
terms and related interest rates.
(i) REVENUE RECOGNITION
Revenue from the sale of the Company's products is recognized when
products are shipped to the customer. Revenue from product maintenance
contracts and equipment rentals are deferred and recognized ratably
over the contract period. Revenue associated with license and supply
agreements is deferred and recognized upon shipment of products to the
customer.
F-8 (Continued)
<PAGE> 40
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(j) WARRANTIES
The Company provides for the cost of estimated future warranty repairs
based primarily on historical experience when the products are shipped
to the customer.
(k) STOCK-BASED COMPENSATION PLAN
The Company accounts for its stock-based compensation plans in
accordance with the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations. As such, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock
exceeded the exercise price. Under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No.
123), entities are permitted to recognize as expense the fair value of
all stock-based awards on the date of grant over the vesting period.
Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB 25 and provide pro forma earnings (loss) and pro
forma earnings (loss) per share disclosures for employee stock option
grants as if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the
provisions of APB 25 and provide the pro forma disclosures required by
SFAS No. 123.
(l) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
(m) 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 No. 128). Under SFAS No. 128, basic loss per share is
computed on the basis of weighted-average common shares outstanding.
Diluted loss per share considers potential common stock instruments in
the calculation, and is the same as basic loss per share for the years
ended December 31, 1999, 1998 and 1997, as all potential common stock
instruments were anti-dilutive.
(n) FOREIGN CURRENCY TRANSLATION
The Company's primary functional currency is the U.S. dollar. Certain
transactions of the Company and its subsidiaries are consummated in
currencies other than the U.S. dollar. Gains and losses from these
transactions are included in the consolidated statements of operations
as they occur.
F-9 (Continued)
<PAGE> 41
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Spectranetics International B.V. uses its local currency (Dutch
guilder) as its functional currency. Accordingly, net assets are
translated at year-end exchange rates while income and expense
accounts are translated at average exchange rates during the year.
Adjustments resulting from these translations are reflected in
shareholders' equity as accumulated other comprehensive income (loss).
(o) INCOME TAXES
The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes,
which requires the use of the asset and liability method of accounting
for deferred income taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. A valuation allowance
is required to the extent it is more likely than not that a deferred
tax asset will not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in operations in
the period that includes the enactment date.
(p) 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.
(q) 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" in the
consolidated statements of operations. The net assets of PTI have been
disclosed as "net assets (current and non-current) of discontinued
operations" in the consolidated balance sheet at December 31, 1998.
(2) SECURITIES
The Company's investment securities are classified as held to maturity and
recorded at amortized cost. At December 31, 1999, fair value approximated
amortized cost. Securities as of December 31, 1999 are comprised of U.S.
Treasury and Agency Securities.
(Continued)
F-10
<PAGE> 42
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(3) INVENTORIES
Inventories consist of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
(In thousands)
<S> <C> <C>
Raw materials $ 1,105 418
Work in process 788 544
Finished goods 853 1,133
---------------- ----------------
$ 2,746 2,095
================ ================
</TABLE>
(4) OTHER INTANGIBLE ASSETS
Other intangible assets as of December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- -----------
(In thousands)
<S> <C> <C>
Patents $ 3,743 3,743
Less accumulated
amortization 2,605 2,375
----------- -----------
$ 1,138 1,368
=========== ===========
</TABLE>
(5) ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
(In thousands)
<S> <C> <C>
Accrued payroll and related expenses $ 1,764 1,016
Accrued litigation and reorganization 1,288 --
Accrued warranty expense 410 435
Accrued royalty expense 279 384
Other accrued expenses 1,440 1,604
----------------- ----------------
$ 5,181 3,439
================= ================
</TABLE>
F-11 (Continued)
<PAGE> 43
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(6) DEFERRED REVENUE
In 1997, the Company entered into a license agreement with United States
Surgical Corporation (USSC), whereby USSC paid a license fee in addition to
an advance payment for products to be supplied by the Company. The payments
received were recorded as deferred revenue and are being amortized as
product is shipped under the agreement. During 1997, cash received under
the agreement totaled $6,339,000. Revenue recognized related to the
agreement during the years ended December 31, 1999 and 1998 totaled $0 and
$3,067,000, respectively. The remaining deferred revenue balance of
$2,028,000 is shown as non-current on the balance sheet at December 31,
1999.
Other deferred revenue-current in the amounts of $917,000 and $1,278,000 at
December 31, 1999 and 1998, respectively, relates to payments in advance
for various product maintenance contracts, where revenue is initially
deferred and amortized over the life of the contract, which is generally
one year.
(7) DEBT
During 1993, the Company issued a note payable in the amount of $1,050,000
to obtain certain patent rights. The note is for a ten-year period with
annual payments of $105,000 due on May 1st. The note was non-interest
bearing and was discounted to $827,000, using a discount rate of 5.75%. At
December 31, 1999, the note had a remaining balance of $282,000.
During 1997, the Company entered into a $2,000,000 credit line
collaterialized by equipment. The line bears interest, which is accrued
monthly, at a rate equal to three quarters of a percent above the prime
rate (9.25% at December 31, 1999), and is due December 23, 2001. At
December 31, 1999, the equipment line had an outstanding balance of
$800,000.
During 1998, the Company 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 December 31, 1999, the amount outstanding on this loan
was $236,000.
Annual maturities of debt for each of the next four years are as follows
(in thousands):
<TABLE>
<S> <C>
2000 $ 942
2001 151
2002 160
2003 65
--------------------
$ 1,318
====================
</TABLE>
F-12 (Continued)
<PAGE> 44
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(8) STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS
At December 31, 1999 and 1998, the Company had two stock-based compensation
plans which are described below.
(a) STOCK OPTION PLANS
The Company maintains stock option plans which provide for the grant
of incentive stock options, nonqualified stock options and stock
appreciation rights. The Board of Directors determines the option
price and term. The plans provide that incentive stock options be
granted with exercise prices not less than the fair market value at
the date of grant. Options granted through December 31, 1999 vest over
one to five years and expire after six to ten years from the date of
grant. Options granted to the Board of Directors vest immediately or
over three years from date of grant. At December 31, 1999, there were
346,413 shares available for future issuance under the plans.
The following is a summary of option activity during the three-year
period ended December 31, 1999:
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE
UNDER OPTION EXERCISE PRICE
--------------- ------------------
<S> <C> <C>
Options outstanding at December 31, 1996 1,953,264 $ 2.73
Granted 874,500 3.39
Exercised (179,384) 1.34
Canceled (112,439) 3.58
------------
Options outstanding at December 31, 1997 2,535,941 $ 3.02
Granted 1,125,385 2.98
Exercised (337,170) .99
Canceled (109,573) 3.76
------------
Options outstanding at December 31, 1998 3,214,583 $ 3.19
Granted 971,528 3.31
Exercised (79,890) 1.95
Canceled (226,025) 3.85
------------
Options outstanding at December 31, 1999 3,880,196 $ 3.21
============
</TABLE>
At December 31, 1999, the weighted-average remaining contractual life
of outstanding options was 7.6 years and 2,200,739 options were
exercisable at a weighted-average exercise price of $3.18 per share.
F-13 (Continued)
<PAGE> 45
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The per share weighted-average fair value of stock options granted
during 1999, 1998 and 1997 was $3.30, $2.52 and $2.72 per share,
respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
1999 - expected dividend yield of 0%, risk-free interest rate of 6.2%,
expected volatility of 99%, and an expected life of 5.87 years; 1998 -
expected dividend yield of 0%, risk-free interest rate of 4.52%,
expected volatility of 103%, and an expected life of 6.94 years; 1997
- expected dividend yield of 0%; risk-free interest rate of 5.58%,
expected volatility of 109%, and an expected life of 4.96 years.
<TABLE>
<CAPTION>
OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1999
--------------------------------------------------------------------------------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF AS OF REMAINING AVERAGE AS OF AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1999 LIFE PRICE 1999 PRICE
--------------------------- --------------- ------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.84 1.75 453,155 $ 5.10 1.29 447,154 $ 1.28
1.81 2.63 414,264 8.28 2.37 241,732 2.23
2.66 3.00 532,533 8.11 2.88 181,179 2.96
3.03 3.03 506,375 8.92 3.03 196,378 3.03
3.06 3.13 191,523 7.31 3.16 115,898 3.11
3.19 3.32 585,000 7.21 3.31 403,130 3.31
3.34 3.59 437,490 8.30 3.43 156,013 3.40
3.72 4.66 398,779 8.13 4.43 148,308 4.45
4.72 9.75 358,669 6.26 5.34 308,539 5.30
21.80 21.80 2,408 2.01 21.80 2,408 21.80
------------ -------------
0.84 21.80 3,880,196 7.57 3.21 2,200,739 3.18
============ =============
</TABLE>
As discussed in note 1, the Company applies APB 25 in accounting for
its plans and, accordingly, because the Company grants options at or
above fair value at the date of grant, no compensation cost has been
recognized for stock option grants in the accompanying consolidated
financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options and
stock purchase plan shares, as discussed below, under SFAS No. 123,
the Company's net income (loss) and income (loss) per share would have
been increased to the pro forma amounts shown below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Net income (loss) (in thousands):
As reported $ 5,169 (3,275) (4,620)
Pro forma 2,751 (4,985) (6,370)
Income (loss) per share:
As reported $ .23 (0.17) (0.25)
Pro forma .12 (0.26) (0.34)
</TABLE>
F-14 (Continued)
<PAGE> 46
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Pro forma net loss reflects only options and stock purchase rights
granted in 1995 and thereafter. Therefore, the full impact of
calculating compensation cost for stock options and stock purchase
rights under SFAS No. 123 is not reflected in the pro forma net income
(loss) amounts presented above because compensation is recognized over
the option or purchase right vesting period and compensation cost for
options and stock purchase rights granted prior to January 1, 1995 is
not considered.
(b) STOCK PURCHASE PLAN
In September 1992, the Company adopted an employee stock purchase plan
which currently provides for the sale of up to 350,000 shares of
common stock. The plan provides eligible employees of the Company the
opportunity to acquire common stock of the Company in accordance with
Section 423 of the Internal Revenue Code of 1986. Stock can be
purchased each six-month period per year (twice per year). The
purchase price is equal to 85% of the lower of the price at the
beginning or the end of the six-month period. Shares issued under the
plan totaled 47,017, 32,702 and 22,891 in 1999, 1998 and 1997,
respectively.
Under SFAS No. 123, compensation cost is recognized for the fair value
of the employees' purchase rights, which was estimated using the
Black-Scholes model with the following assumptions: 1999 - expected
dividend yield of 0%; risk-free interest rate of 5.68%, expected
volatility of 79%, and an expected life of 6 months; 1998 - expected
dividend yield of 0%; risk-free interest rate of 4.35%, expected
volatility of 81%, and an expected life of 6 months; 1997 - expected
dividend yield of 0%; risk-free interest rate of 5.41%, expected
volatility of 88%, and an expected life of 6 months. The weighted
average fair value of purchase rights granted in 1999, 1998 and 1997
was $1.25, $.89, and $2.67, respectively.
(c) 401(k) PLAN
The Company maintains a salary reduction savings plan under section
401(k) of the Internal Revenue Code which the Company administers for
participating employees' contributions. All full-time employees are
covered under the plan after meeting minimum service requirements. The
Company has made no contributions to the plan.
F-15 (Continued)
<PAGE> 47
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(9) EARNINGS PER SHARE
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
Loss from continuing operations $ (4,216) (4,136) (4,846)
Gain/income from discontinued operations 9,385 861 226
Net income (loss) 5,169 (3,275) (4,620)
Common shares outstanding:
Historical common shares outstanding
at beginning of period 19,110 18,734 18,532
Weighted average common shares issued 3,297 284 122
Weighted average common shares
outstanding - basic and diluted 22,407 19,018 18,654
Earnings (loss) per share - basic and diluted:
Loss from continuing operations per share $ (0.19) (0.22) (0.26)
Gain/loss from discontinued operations
per share 0.42 0.05 0.01
Net income (loss) per share 0.23 (0.17) (0.25)
</TABLE>
(10) LEASES
The Company leases certain equipment under capital leases, and office
space, furniture and equipment under noncancelable operating leases with
initial terms that expire at various dates through 2000.
Included in manufacturing equipment and computers are the following amounts
relating to assets held under capital leases as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Manufacturing equipment and computers $ 1,154 1,154
Less accumulated amortization (938) (815)
--------- ----------
$ 216 339
========= ==========
</TABLE>
Amortization of assets held under capital leases is included in
depreciation expense.
F-16 (Continued)
<PAGE> 48
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The present value of future minimum capital lease payments, and future
minimum lease payments under noncancelable operating leases as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------------- ----------------
(In thousands)
<S> <C> <C>
Years ending December 31:
2000 $ 51 575
2001 17 224
2002 17 70
2003 3 3
----------- ---------
Total minimum lease payments 88 872
=========
Less amounts representing interest (7)
-----------
Present value of net minimum lease payments 81
Less current portion of capital lease obligations 46
-----------
Capital lease obligations, noncurrent $ 35
===========
</TABLE>
Rent expense under operating leases totaled approximately $491,000,
$507,000 and $544,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
(11) INCOME TAXES
At December 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $76.8 million which are
available to offset future federal taxable income, if any, and expire at
varying dates through 2019. The annual use of the net operating loss
carryforwards is limited under Section 382 of the Internal Revenue Code of
1986.
The Company also has research and development tax credit carryforwards at
December 31, 1999 for federal income tax purposes of approximately $3.4
million which are available to reduce future federal income taxes, if any,
and expire at varying dates through 2018. The annual use of portions of the
research and development credit carryforwards is also limited under Section
382.
F-17 (Continued)
<PAGE> 49
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- --------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards - U.S. $ 28,743 32,503
Foreign net operating loss carryforwards 7,378 5,740
Research and development tax credit and other
carryforwards 3,360 3,312
Royalty reserve, due to accrual for financial reporting
purposes 104 142
Warranty reserve, due to accrual for financial reporting
purposes 128 116
Accrued liabilities, not deducted until paid for tax purposes 559 307
Inventories, principally due to accrual for obsolescence for
financial reporting purposes, net of additional costs
inventoried for tax purposes 187 169
Equipment, primarily due to differences in cost basis and
depreciation methods 32 464
Deferred revenue, due to deferral for financial
reporting purposes 570 376
Alternative minimum tax credit 200 --
Other 100 150
------------- -----------
Total gross deferred tax assets 41,361 43,279
Less valuation allowance (41,361) (43,279)
------------- -----------
Net deferred tax assets $ -- --
============= ===========
</TABLE>
The Company has recorded a valuation allowance equal to the gross deferred
tax asset at December 31, 1999 and 1998, due to the uncertainty of
realization. The net change in the valuation allowance includes the effect
of state income taxes, temporary differences for financial statement and
tax purposes, and the utilization of the Company's net operating loss and
other carryforwards.
(12) CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Financial Accounting Standards
Board's Statement No. 105, Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
F-18 (Continued)
<PAGE> 50
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Concentration of Credit Risk, consist primarily of cash equivalents,
securities and accounts receivable with the Company's various customers.
The Company's cash equivalents and securities consist of financial
instruments issued by various institutions and government entities. The
Company's investment policy is designed to limit the Company's exposure to
concentrations of credit risk.
The Company's accounts receivable are due from a variety of health care
organizations and distributors throughout the United States and Europe. No
single customer represented more than 10% of accounts receivable for any
period. The Company provides for uncollectible amounts upon recognition of
revenue and when specific credit problems arise. Management's estimates for
uncollectible amounts have been adequate during historical periods, and
management believes that all significant credit risks have been identified
at December 31, 1999.
The Company has not entered into any hedging transactions nor any
transactions involving financial derivatives.
(13) 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
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
December 31, 1998 and 1997 have been reclassified to conform with the
segment reporting as presented at December 31, 1999.
(a) 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 December 31,
1999, FDA-approved products are used in conjunction with coronary
angioplasty as well as in the removal of non-functioning pacing leads from
pacemakers and cardiac defibrillators. This segment's customers are
primarily located in the United States;
F-19 (Continued)
<PAGE> 51
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
however, the geographic areas served by this segment also include Canada,
Mexico, South America, the Pacific Rim and Australia.
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 December 31, 1999, 1998 and
1997, cost allocations of these functions to Europe Medical have not been
performed. Allocations to income from operations of discontinued industrial
subsidiary for general and administrative activities totaled $190,000,
$120,000 and $120,000 for each of the years ended December 31, 1999, 1998
and 1997, respectively.
Revenue associated with intersegment transfers to Europe Medical were
$1,372,000, $1,339,000 and $2,218,000 for the years ended December 31,
1999, 1998 and 1997, respectively. Revenue is based upon transfer prices
which provide for intersegment profit that is eliminated upon
consolidation. For each of the years ended December 31, 1999, 1998 and
1997, intersegment revenue and intercompany profits are not included in the
segment information in the table shown below.
(b) EUROPE MEDICAL
The Europe Medical segment is a marketing and sales subsidiary located in
the Netherlands that serves 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 year ended December 31, 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.
F-20 (Continued)
<PAGE> 52
================================================================================
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Summary financial information relating to reportable continuing segment
operations is as follows. Intersegment transfers as well as intercompany
assets and liabilities are excluded from the information provided (in
thousands).
<TABLE>
<CAPTION>
REVENUE: 1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Equipment $ 3,870 5,618 3,997
Disposables 12,856 8,144 4,930
Service 2,541 2,073 1,436
Other 190 356 578
------------ ------------ -----------
Subtotal - U.S. Medical 19,457 16,191 10,941
Equipment 436 504 1,142
Disposables 2,094 1,559 2,388
Service 318 311 225
------------ ------------ -----------
Subtotal - Europe Medical 2,848 2,374 3,755
------------ ------------ -----------
Total revenues $ 22,305 18,565 14,696
============ ============ ===========
</TABLE>
In 1999 and 1997, no individual customers represented 10% or more of
consolidated revenue. In 1998, revenue from one customer totaled $3,286
consisting of equipment - $2,905, disposables - $162 and service - $219.
<TABLE>
<CAPTION>
INTEREST INCOME: 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
U.S. Medical $ 768 213 276
Europe Medical 3 -- 2
---------- ---------- ----------
Total interest income $ 771 213 278
========== ========== ==========
INTEREST EXPENSE: 1999 1998 1997
---------- ---------- ----------
U.S. Medical $ 137 190 42
Europe Medical 19 -- --
---------- ---------- ----------
Total interest expense $ 156 190 42
========== ========== ==========
DEPRECIATION EXPENSE: 1999 1998 1997
---------- ---------- ----------
U.S. Medical $ 845 734 612
Europe Medical 165 102 74
---------- ---------- ----------
Total depreciation $ 1,010 836 686
========== ========== ==========
</TABLE>
F-21 (Continued)
<PAGE> 53
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
AMORTIZATION EXPENSE: 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
U.S. Medical* $ 387 229 404
-------- ------- -------
Total amortization $ 387 229 404
======== ======= ======
</TABLE>
* A portion of this expense is recorded within cost of revenue as
follows: 1999 - $203; 1998 - $229; 1997 - $230.
<TABLE>
<CAPTION>
SEGMENT NET LOSS: 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
U.S. Medical $ (2,317) (1,671) (3,461)
Europe Medical (1,899) (2,465) (1,385)
-------- -------- --------
Total net loss $ (4,216) (4,136) (4,846)
======== ======== ========
SEGMENT ASSETS: 1999 1998 1997
-------- -------- --------
U.S. Medical $ 32,298 13,526 17,842
Europe Medical 1,740 2,131 2,364
-------- -------- --------
Subtotal - Medical 34,038 15,657 20,206
Discontinued operations -- 5,728 5,119
-------- -------- --------
Total assets $ 34,038 21,385 25,325
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
CAPITAL EXPENDITURES: 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
U.S. Medical $ 395 1,107 236
Europe Medical 36 33 51
-------- -------- --------
Total capital expenditures $ 431 1,140 287
======== ======== ========
</TABLE>
The Company operates in several countries outside of the United
States. Revenue from foreign operations by segment is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
U.S. Medical $ 983 474 578
Europe Medical 2,848 2,374 3,755
-------- -------- --------
Total foreign revenue $ 3,831 2,848 4,333
======== ======== ========
</TABLE>
F-22 (Continued)
<PAGE> 54
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
There were no individual countries, other than the United States, that
represented at least 10% of consolidated revenue in 1999, 1998 or
1997. Long-lived assets located in foreign countries are concentrated
in Europe and totaled $327 and $252 as of December 31, 1999 and 1998,
respectively.
(14) REORGANIZATION COSTS
During the year ended December 31, 1999, the Company initiated a
reorganization of its subsidiary in Europe consisting primarily of a
change in management. Costs associated with the reorganization related
primarily to termination and severance costs.
(15) COMMITMENTS AND CONTINGENCIES
The Company is obligated under various licensing and royalty agreements
which require the Company to pay royalties based on a percentage of net
sales of certain products, subject to minimum and maximum amounts for
certain agreements. The agreements generally expire at various dates
concurrent with the expiration dates of the respective patents. Royalty
expense under these agreements amounted to $1,044,000, $649,000 and
$621,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
On August 6, 1999, the Company was notified of a lawsuit claiming patent
infringement which was filed in Delaware by Baxter Healthcare
Corporation. The lawsuit seeks an injunction against further alleged
infringement of the patents as well as unspecified damages. The Company
is aware of these patents and does not believe any patent infringement
has occurred. The Company has accrued for costs incurred and expected to
be incurred as a result of this claim. The Company has assessed the range
of costs to be incurred and has accrued an amount 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.
F-23
<PAGE> 55
INDEPENDENT AUDITORS' REPORT
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Shareholders
The Spectranetics Corporation:
Under date of February 2, 2000, we reported on the consolidated balance sheets
of the Spectranetics Corporation and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1999, as contained in the Company's annual report on Form 10-K for
the year 1999. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement Schedule II (Valuation and Qualifying Accounts). This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Denver, Colorado
February 2, 2000
F-24
<PAGE> 56
SCHEDULE II
THE SPECTRANETICS CORPORATION
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS DEDUCTIONS BALANCE
BEGINNING CHARGED FROM AT END
DESCRIPTION OF YEAR TO EXPENSE ALLOWANCE OF YEAR
------------ ------------ ---------------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Accrued warranty liability $ 241 485 390 336
Accrued royalty liability 116 621 556 181
Allowance for doubtful accounts
and sales returns 39 188 29 198
Year ended December 31, 1998:
Accrued warranty liability 336 402 303 435
Accrued royalty liability 181 649 446 384
Allowance for doubtful accounts
and sales returns 198 74 44 228
Year ended December 31, 1999:
Accrued warranty liability 435 332 357 410
Accrued royalty liability 384 1,044 1,149 279
Allowance for doubtful accounts
and sales returns 228 49 157 120
Accrued litigation and reorganization
reserves -- 1,358 70 1,288
</TABLE>
See accompanying independent auditors' report.
F-25
<PAGE> 57
THE SPECTRANETICS CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
2.1 Agreement and Plan of Reorganization between The Spectranetics Corporation and Advanced
Interventional Systems, Inc., dated January 24, 1994.(1)
2.1(a) Amendment to Agreement and Plan of Reorganization between The Spectranetics Corporation and
Advanced Interventional Systems, Inc., dated May 17, 1994.(2)
2.2 Certificate of Ownership and Merger of Advanced Interventional Systems, Inc. Into The
Spectranetics Corporation, dated December 27, 1995.(13)
2.3 Merger Agreement dated as of May 24, 1999 among the Company, Polymicro Technologies, Inc., PMT
Holdings, LLC, and Polymicro Technologies, LLC.(20)
3.1 Restated Certificate of Incorporation.(1)
3.1(a) Certificate of Amendment to Restated Certificate of Incorporation.(12)
3.1(b) Certificate of Amendment to Restated Certificate of Incorporation.(18)
3.2 Bylaws of the Company.(3)
4.1 Form of Common Stock Certificate of the Company.(4)
4.2 Rights Agreement, dated as of May 6, 1996, between the Company and Norwest Bank Minnesota, N.A. (14)
10.1 Lease covering a portion of the Company's facilities between the Company and Dwane and Donna
Basse dated November 10, 1994.(12)
10.1(a) Lease covering a portion of the Company's facilities between the Company and Dwane and Donna
Basse dated September 1, 1997.(14)
10.2 Lease covering a portion of the Company's facilities between the Company and American Investment
Management dated February 17, 1995.(12)
10.2(a) Lease covering a portion of the Company's facilities between the Company and John or Sharon
Sanders dated December 23, 1997.(19)
10.3 Lease covering a portion of the Company's facilities between the Company and Full Circle
Partnership III dated September 11, 1985.(3)
10.3(a) Amendment to lease covering a portion of the Company's facilities between the Company and Full
Circle Partnership III July 24, 1997.(19)
10.4(a) Amendment to lease covering a portion of the Company's facilities between the Company and
Talamine Properties dated February 15, 1992.(7)
</TABLE>
Page 57
<PAGE> 58
<TABLE>
<S> <C>
10.4(b) Amendment to lease covering a portion of the Company's facilities between the Company and
Talamine Properties dated February 16, 1993.(1)
10.4(c) Amendment to lease covering a portion of the Company's facilities between the Company and
Talamine Properties dated October 3, 1994.(12)
10.5 1991 Stock Option Plan, as amended.(11)
10.5(a) 1991 Stock Option Plan, as amended.(17)
10.6 1990 Incentive Stock Option Plan.(6)
10.7 1989 Incentive Stock Option Plan and First Amendment thereto.(6)
10.8 Nonemployee Director Stock Option Plan.(8)
10.8(a) Stock Option Plan for Outside Directors.(10)
10.9 Employee Stock Purchase Plan (as amended).(9)
10.10 The 1997 Equity Participation Plan of The Spectranetics Corporation.(21)
10.10(a) NonQualified Stock Option Agreement dated as of April 17, 1996, between the Company and Emile J.
Geisenheimer.(21)
10.10(b) NonQualified Stock Option Agreement dated as of March 3, 1997, between the Company and Joseph A.
Largey.(21)
10.10(c) Form of NonQualified Stock Option Agreement for Officers.(21)
10.10(d) Form of NonQualified Stock Option Agreement for Employees.(21)
10.10(e) Form of NonQualified Stock Option Agreement for Independent Directors.(21)
10.10(f) Form of Incentive Stock Option Agreement for Officers.(21)
10.10(g) Form of Incentive Stock Option Agreement for Employees.(21)
10.11 License Agreement with Patlex Corporation, dated January 1, 1992 (confidential treatment has been
granted for portions of this agreement).(7)
10.12 License Agreement with Pillco Limited Partnership, dated February 1, 1993 (confidential treatment
has been granted for portions of this agreement).(7)
10.13 Vascular Laser Angioplasty Catheter License Agreement with Bio-Metric Systems, Inc., dated
April 7, 1992 (confidential treatment has been granted for portions of this agreement).(6)
10.14 Exclusive License Agreement between the United States of America and James B. Laudenslager and
Thomas J. Pacala dated March 25, 1985; and Exclusive License Agreement between the United States
of America and LAIS dated April 29, 1990.(5)
10.15 License Agreement between Medtronic, Inc. and the Company, dated February 28, 1997 (confidential
treatment has been granted for portions of this agreement).(15)
</TABLE>
Page 58
<PAGE> 59
<TABLE>
<S> <C>
10.16 License Agreement between United States Surgical Corporation and the Company, dated September 25,
1997 (confidential treatment has been granted for portions of this agreement).(16)
10.17 Supply Agreement between United States Surgical Corporation and the Company, dated September 25,
1997 (confidential treatment has been granted for portions of this agreement).(16)
10.18 Loan and Security Agreement between Silicon Valley Bank and the Company, dated December 24,
1997.(19)
10.19 Exclusive Purchase and Distribution Agreement between The Spectranetics Corporation and Orbus
Medical Technologies, Inc. dated March 12, 1998 (confidential treatment has been granted for
portions of this agreement).(18)
10.20 Form of Stock Purchase Agreement, dated as of December 22,
1998 among the Company and the stockholders named in the
Company's Registration Statement on Form S-3 (File No.
333-69829).(22)
10.21 Employment Agreement between the Company anad Henk Kos dated January 1, 1997.(22)
21.1 Subsidiaries of the Company.(19)
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule.
</TABLE>
1 Incorporated by reference to the Company's 1993 Annual Report on Form 10-K
filed on March 31, 1994.
2 Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-4 filed May 18, 1994 (File No.
33-79106).
3 Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-1, filed December 5, 1991 (File No.
33-44367).
4 Incorporated by reference to exhibits previously filed by the Company with
its Amendment No. 2 to the Registration Statement, filed January 24, 1992
(File No. 33-44367).
5 Incorporated by reference to exhibits previously filed by LAIS with its
Registration Statement on Form S-1 filed August 30, 1991 (File No.
33-42457).
6 Incorporated by reference to exhibits previously filed by the Company with
its Amendment No. 1 to the Registration Statement on Form S-1, filed
January 10, 1992 (File No. 33-44367).
7 Incorporated by reference to exhibits previously filed by the Company with
its Annual Report for 1992 on Form 10-K filed March 31, 1993.
Page 59
<PAGE> 60
8 Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-8 filed April 1, 1992 (File No.
33-46725).
9 Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-8 filed December 30, 1994 (File No.
33-88088).
10 Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-8 filed November 16, 1995 (File No.
33-99406).
11 Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-8 filed October 6, 1994 (File No.
33-85198).
12 Incorporated by reference to exhibits previously filed by the Company with
its 1994 Annual Report on Form 10-K filed on March 31, 1995.
13 Incorporated by reference to the Company's 1995 Annual Report on Form 10-K
filed on April 29, 1996.
14 Incorporated by reference to exhibits previously filed by the Company with
its Current Report on Form 8-K filed on May 6, 1996.
15 Incorporated by reference to exhibits previously filed by the Company with
its Form 10-Q for the quarter ended on March 31, 1997.
16 Incorporated by reference to exhibits previously filed by the Company with
its Form 10-Q for the quarter ended on September 30, 1997.
17 Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-8 filed July 19, 1996.
18 Incorporated by reference to exhibits previously filed by the Company with
its Form 10-Q for the quarter ended on June 30, 1998.
19 Incorporated by reference to exhibits previously filed by the Company with
its 1997 Annual Report on Form 10-K filed on March 30, 1998.
20 Incorporated by reference to exhibits previously filed by the Company with
its Current Report on Form 8-K filed on June 8, 1999.
21 Incorporated by reference to exhibits previously filed by the Company with
its Registration Statement on Form S-8 filed June 17, 1998 (File No.
333-57015).
22 Incorporated by reference to exhibits previously filed by the Company with
its Form 10-Q for the quarter ended March 31, 1999.
Page 60
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
The Spectranetics Corporation:
We consent to incorporation by reference in the registration statements (Nos.
33-46725, 33-52718, 33-88088, 33-85198, 33-99406, 333-08489 and 333-57015) on
Form S-8 and on Form S-3 (Nos. 333-06971 and 333-69829) of The Spectranetics
Corporation of our report dated February 2, 2000 relating to the consolidated
balance sheets of The Spectranetics Corporation and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999, and the related consolidated financial statement
schedule, which report appears in the December 31, 1999, annual report on Form
10-K of The Spectranetics Corporation.
KPMG LLP
Denver, Colorado
March 23, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AS FOUND ON PAGES F-3 AND
F-4 OF THE COMPANY'S 10K FOR THE YEAR ENDED DECEMBER 31, 1999.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,900
<SECURITIES> 3,468
<RECEIVABLES> 5,564
<ALLOWANCES> 0
<INVENTORY> 2,746
<CURRENT-ASSETS> 17,170
<PP&E> 10,033
<DEPRECIATION> 6,358
<TOTAL-ASSETS> 34,038
<CURRENT-LIABILITIES> 8,213
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 23,363
<TOTAL-LIABILITY-AND-EQUITY> 34,038
<SALES> 22,305
<TOTAL-REVENUES> 22,305
<CGS> 7,397
<TOTAL-COSTS> 7,397
<OTHER-EXPENSES> 19,882
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156
<INCOME-PRETAX> (4,216)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,216)
<DISCONTINUED> 9,385
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,169
<EPS-BASIC> .23
<EPS-DILUTED> .23
</TABLE>
