-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EjY+hbCcERxuWTX1l1dUrw+mZznMsQ79YaKh71RdiUmlRxxWaEdTKFV5i4FY+Rxi ACRg4J4L1y56EWxEMdcx+A== 0000891554-99-000874.txt : 19990506 0000891554-99-000874.hdr.sgml : 19990506 ACCESSION NUMBER: 0000891554-99-000874 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPECTRANETICS CORP CENTRAL INDEX KEY: 0000789132 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 840997049 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19711 FILM NUMBER: 99611050 BUSINESS ADDRESS: STREET 1: 96 TALAMINE COURT CITY: COLORADO SPRING STATE: CO ZIP: 80907 BUSINESS PHONE: 7196338333 MAIL ADDRESS: STREET 1: 96 TALAMINE COURT CITY: COLORADO SPRINGS STATE: CO ZIP: 80907 10-Q 1 QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 1999 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______ Commission file number 0-19711 The Spectranetics Corporation (Exact name of Registrant as specified in its charter) Delaware 84-0997049 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 96 Talamine Court Colorado Springs, Colorado 80907 (719) 633-8333 (Address of principal executive offices and telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ As of April 19, 1999, there were 22,932,568 outstanding shares of Common Stock. ================================================================================ Page 1 Part I---FINANCIAL INFORMATION Item 1. Financial Statements THE SPECTRANETICS CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) (In Thousands, Except Share and Per Share Amounts) March 31, December 31, 1999 1998 -------- ------------ Assets: Current assets: Cash and cash equivalents $ 9,313 $ 4,158 Investment securities 477 -- Trade accounts receivable, net of allowance 4,668 5,182 Inventories (note 4) 3,072 2,610 Other current assets 370 361 -------- -------- Total current assets 17,900 12,311 Property and equipment, net 5,348 5,323 Goodwill and other intangible assets, net 3,852 4,110 Other assets 157 495 -------- -------- Total Assets $ 27,257 $ 22,239 ======== ======== Liabilities and Shareholders'Equity: Liabilities: Current liabilities: Accounts payable and accrued liabilities $ 4,756 $ 5,425 Deferred revenue (note 5) 1,258 1,278 Current portion of note payable 938 950 Current portion of capital lease obligations 75 122 -------- -------- Total current liabilities 7,027 7,775 -------- -------- Deferred revenue and other liabilities (note 5) 1,757 1,757 Notes payable, net of current portion 1,118 1,346 Capital lease obligations, net of current portion 65 93 -------- -------- Total long-term liabilities 2,940 3,196 -------- -------- Total liabilities 9,967 10,971 -------- -------- Shareholders'Equity: Preferred stock, $.001 par value Authorized 5,000,000 shares; none issued -- -- Common stock, $.001 par value Authorized 60,000,000 shares; issued and outstanding 22,932,568 and 19,110,825 shares, respectively 23 19 Additional paid-in capital 91,103 84,131 Accumulated other comprehensive loss (121) (92) Accumulated deficit (73,715) (72,790) -------- -------- Total shareholders'equity 17,290 11,268 -------- -------- Total Liabilities and Shareholders'Equity $ 27,257 $ 22,239 ======== ======== See accompanying unaudited notes to consolidated financial statements. Page 2 Item 1. Financial Statements (cont'd) THE SPECTRANETICS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (In Thousands, Except Share and Per Share Amounts) Three Months Ended March 31, 1999 1998 ------------ ------------ Revenues $ 7,077 $ 6,553 Cost of revenue 2,981 3,093 ------------ ------------ Gross margin 4,096 3,460 ------------ ------------ Gross margin % 58% 53% Operating Expenses: Marketing and sales 2,491 2,427 General and administrative 1,296 1,103 Research and development 1,048 588 Amortization of intangibles 200 200 ------------ ------------ Total operating expenses 5,035 4,318 ------------ ------------ Operating Loss (939) (858) Other Income (Expense): Interest income 54 91 Interest expense (49) (35) Other, net 9 8 ------------ ------------ 14 64 ------------ ------------ Net Loss $ (925) $ (794) Other Comprehensive Loss: Foreign currency translation (29) (4) ------------ ------------ Comprehensive Loss $ (954) $ (798) ============ ============ Net Loss per Share -basic and diluted $ (0.04) $ (0.04) ============ ============ Weighted Average Common Shares Outstanding -basic and diluted 20,566,667 18,761,033 ============ ============ See accompanying unaudited notes to consolidated financial statements. Page 3 Item 1. Financial Statements (cont'd) THE SPECTRANETICS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In Thousands, Except Share and Per Share Amounts) Three Months Ended March 31, 1999 1998 ------- ------- Cash flows from operating activities: Net loss $ (925) $ (794) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 691 514 Net change in operating assets and liabilities (462) (209) ------- ------- Net cash used by operating activities (696) (489) ------- ------- Cash flows from investing activities: Capital expenditures (266) (632) (Increase) decrease in short-term investments (477) 773 ------- ------- Net cash (used) provided by investing activities (743) 141 ------- ------- Cash flows from financing activities: Net proceeds from exercise of common stock options 52 232 Proceeds from private placement of common stock, net 6,856 -- Principal payments on obligations under capital leases and note payable (288) (71) ------- ------- Net cash provided by financing activities 6,620 161 ------- ------- Effect of exchange rate changes on cash (26) (12) ------- ------- Net increase (decrease) in cash and cash equivalents 5,155 (199) Cash and cash equivalents at beginning of period 4,158 6,532 ------- ------- Cash and cash equivalents at end of period $ 9,313 $ 6,333 ======= ======= Supplemental disclosures of cash flow information -- Cash paid for interest $ 45 $ 35 ======= ======= Supplemental disclosure of noncash investing and financing activities: Transfers from inventory to equipment held for rental or loan $ 340 $ 157 ======= ======= See accompanying unaudited notes to consolidated financial statements. Page 4 Item 1. Notes to Financial Statements (1) General The information included in the accompanying condensed consolidated interim financial statements is unaudited and should be read in conjunction with the audited financial statements and notes thereto contained in the Company's latest Annual Report on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. (2) Loss Per Share The Company calculates earnings (loss) per share under the provisions of Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). Under SFAS 128, basic loss per share is computed on the basis of weighted-average common shares outstanding. Diluted loss per share considers potential common stock instruments in the calculation, and is the same as basic loss per share for the three months ended March 31, 1999 and 1998, as all potential common stock instruments were anti-dilutive. (3) Shareholders' Equity and Private Placement of Common Stock In February 1999, the Company completed the private placement of 3,800,000 shares of its common stock and received cash proceeds, net of offering costs, therefrom of $6,856,000. (4) Inventories Components of inventories are as follows (in thousands): March 31, 1999 December 31, 1998 -------------- ----------------- Raw Materials $ 735 $ 693 Work in Process 936 575 Finished Goods 1,401 1,342 ------ ------ $3,072 $2,610 ====== ====== (5) 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 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, 1998 and 1997 totaled $3,067,000 and $1,244,000, respectively. Of the remaining balance of $2,028,000, $271,000 has been recorded as current and $1,757,000 as non-current on the balance sheet at March 31, 1999 and December 31, 1998. Page 5 Item 1. Notes to Financial Statements (cont'd) (5) Deferred Revenue (continued) Other deferred revenue - current in the amounts of $987,000 and $1,007,000 at March 31, 1999 and December 31, 1998, respectively, relates to payments in advance for various product maintenance contracts, whereby revenue is initially deferred and amortized over the life of the contract, which is generally one year. (6) 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. The Company operates in two distinct lines of business: (1) medical business consisting of the development, manufacturing, marketing and distribution of a proprietary excimer laser system for the treatment of certain coronary and vascular conditions, and (2) industrial business consisting of the development, manufacturing, marketing and distribution of drawn silica glass products including capillary tubing and specialty fiber optics. The Company has identified three reportable segments within these lines of business: (1) U.S. Medical (2) Europe Medical and (3) Industrial. U.S. Medical and Europe Medical offer similar products and services but operate in different geographic regions and have different distribution networks. The Industrial segment is operated entirely by the Company's wholly owned subsidiary, Polymicro. Additional information regarding each reportable segment is shown below. Certain elements within the segment reporting financial information at December 31, 1998 have been reclassified to conform with the segment reporting as presented at March 31, 1999. 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 March 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; however, the geographic area served by this segment also includes Canada, Mexico, South America and the Pacific Rim. 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 March 31, 1999 and 1998, cost allocations of these functions to other reportable segments have not been performed, except for a $45,000 and $30,000 allocation to the Industrial segment for general and administrative activities for three months ended March 31, 1999 and 1998, respectively. Revenue associated with intersegment transfers to Europe Medical were $418,000 and $457,000 for the three months ended March 31, 1999 and 1998, respectively. Revenue is based upon transfer prices which provide for intersegment profit that is eliminated upon consolidation. For each of the three months ended March 31, 1999 and 1998, intersegment revenue and intercompany profits are not included in the segment information in the table shown below. Page 6 Item 1. Notes to Financial Statements (cont'd) Europe Medical The Europe Medical segment is a marketing and sales subsidiary serving all of Europe as well as the Middle East. Products offered by this reportable segment are identical to those of U.S. Medical and were distributed primarily through third-party distributors for the three months ended March 31, 1998. Beginning in January 1999, we established a direct sales force in Germany, which accounts for the majority of the revenues within this segment. Europe has 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. Industrial The Industrial segment operates in markets unrelated to the medical segments, although it supplies certain fiber-optic components to the U.S. Medical segments. Revenue associated with intersegment transfers, which are transferred at cost, for the three months ended March 31, 1999 and 1998 totaled $36,000 and $101,000, respectively. Intersegment transfers are not included in the reportable segment information presented below. Summary financial information relating to reportable segment operations is as follows. Intersegment transfers as well as intercompany assets and liabilities are excluded from the information provided (in thousands). Three Months Ended March 31, Revenue: 1999 1998 ------ ------ U.S. Medical $3,436 $3,892 Europe Medical 634 511 Industrial 3,007 2,150 ------ ------ Total revenues $7,077 $6,553 ====== ====== Revenue within the industrial segment includes revenue from one customer totaling $914,000, or 13% of total revenues, for the three months ended March 31, 1999. For the three months ended March 31, 1998, revenue from one customer from the U.S. medical segment totaled $1,245,000, or 19% of total revenues. Three Months Ended March 31, Segment net earnings (loss): 1999 1998 ------- ------- U.S. Medical $(1,130) $ (470) Europe Medical (268) (584) ------- ------- Subtotal - Medical (1,398) (1,054) Industrial 473 260 ------- ------- Total net earnings (loss) $ (925) $ (794) ======= ======= Page 7 Item 1. Notes to Financial Statements (cont'd) March 31, December 31, Segment assets: 1999 1998 ------- ------- U.S. Medical $18,272 $12,926 Europe Medical 2,096 2,131 ------- ------- Subtotal - Medical 20,368 15,057 Industrial 6,889 7,182 ------- ------- Total assets $27,257 $22,239 ======= ======= Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition - -------------------------------------------------------------------------------- Corporate Overview We develop, manufacture, service and distribute an excimer laser unit and fiber optic delivery system for the treatment of certain coronary and vascular conditions. Our wholly owned subsidiary, Polymicro Technologies, Inc., manufactures and distributes drawn silica glass products which include capillary tubing and specialty fiber optics sold to a variety of companies in addition to Spectranetics. Our revenues are dependent on obtaining clinical data supporting regulatory approvals and market acceptance. We sell the only excimer laser system that has been market approved by the FDA in the United States for coronary applications. Our laser system competes primarily against alternative technologies including balloon catheters, cardiovascular stents and mechanical artherectomy devices. Our strategy is to expand our installed base of excimer laser systems, increase catheter utilization of existing customers, and develop additional procedures for our excimer laser system. In 1997, we secured FDA approval to use our excimer laser system for removal of pacemaker and defibrillator leads and entered into a supply and license agreement with United States Surgical Corporation for use of our system for TMLR, an experimental coronary procedure. In 1999, we will initiate clinical trials evaluating the use of our excimer laser system to treat restenosed stents and blockages in the legs. These trials will take from one to three years to complete depending on the type and size of the trial, patient enrollment, and our ability to fund these trials. To fund our strategy, we intend to continue to accelerate investment in the development of new products, clinical trials for additional applications, as well as additional sales and marketing resources. This investment may result in operating losses through 1999. Results of Operations In this section, we will discuss revenue and net income results for the three months ended March 31, 1999 and 1998. We will begin with a general overview, then discuss revenue and net income from our three operating units. Page 8 Item 2. Management's Discussion and Analysis of Results of Operations And Financial Condition (cont'd) Financial Overview Revenue per Operating Unit Three Months Ended March 31, 1999 1998 ------ ------ U.S. Medical $3,436 $3,892 Europe Medical 634 511 Industrial 3,007 2,150 ------ ------ Total revenues $7,077 $6,553 ====== ====== Net income (loss) per Operating Unit Three Months Ended March 31, Segment net earnings (loss): 1999 1998 ------- ------- U.S. Medical $(1,130) $ (470) Europe Medical (268) (584) ------- ------- Subtotal - Medical (1,398) (1,054) Industrial 473 260 ------- ------- Total net earnings (loss) $ (925) $ (794) ======= ======= Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 Revenue for the three months ended March 31, 1999 totaled $7,077,000, an increase of $524,000, or 8%, over the three months ended March 31, 1998. Increased revenue included a 41% increase in disposable sales, a 40% increase in revenue from Polymicro, and a 43% increase in service revenue offset by a 75% decrease in equipment revenue due to the lack of shipments to United States Surgical Corporation, a division of Tyco International, Ltd. Revenue, excluding equipment revenue from United States Surgical Corporation of $1,245,000 during the three months ended March 31, 1998, increased 33% for the three months ended March 31, 1999 as compared to the same period in 1998. We completed the shipments of laser systems to United States Surgical Corporation in the third quarter of 1998. As such, there were no sales to United States Surgical Corporation during the three months ended March 31, 1999. Increased disposable revenue, which consists of single-use catheter products, resulted from an increase of 37% in sales of coronary angioplasty catheters and a 36% increase in sales of lead removal devices over our 1998 levels. These increases were primarily a result of unit volume increases combined with increased average selling prices across each product line in the United States and Europe. Polymicro revenues were up as a result of increased sales of precision silica glass capillary tubing and assemblies into new capillary electrophoresis applications such as DNA sequencing and increased sales to existing gas chromatography customers. Page 9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (cont'd) Gross margins increased to 58% during the three months ended March 31, 1999 as compared to 53% for the three months ended March 31, 1998. This improvement was due to a combination of improved manufacturing efficiencies for both our medical and industrial groups, price increases averaging 5% on our catheter products effective in December 1998, and a higher proportion of disposable revenue in relation to total revenue, which generates higher margins than equipment, service or industrial products. Operating expenses grew 17% during the three months ended March 31, 1999 to $5,035,000 as compared to $4,318,000 for the three months ended March 31, 1998. Marketing and sales expenses increased by 3% to $2,491,000 for the three months ended March 31, 1999. This increase relates to investments made in the United States for additional field personnel. This is offset by a decrease in Europe due primarily to a decrease in clinical trial costs. In 1998, our Europe Medical segment was funding certain clinical trials that were substantially completed during 1998. Therefore, expenditures in this area during the three months ended March 31, 1999 were minimal. General and administrative expense grew 17% to $1,296,000 for the three months ended March 31, 1999. This increase is attributable to increased personnel costs at the Industrial segment associated with building the necessary infrastructure to support its increased revenue base combined with increased legal fees within the medical segment. Research and development expense increased by 78% to $1,048,000. Approximately 75% of the increase was due to increased product development costs combined with clinical trial costs associated with clearing blockages in the upper leg. The remaining increase relates to similar costs for our industrial segment, Polymicro. Interest income is down slightly due to lower yields and lower average cash balances for the three months ended March 31, 1999 as compared to the same period in 1998. Interest expense related primarily to interest charges on our loan from Silicon Valley Bank. Net loss for the three months ended March 31, 1999 increased by 16% to a loss of $925,000 from a loss of $794,000 for the three months ended March 31, 1998. Net loss increased due to a 33% increase in the loss from the medical division offset by an 82% increase in the net income of the industrial group, Polymicro. U.S. Medical Revenue from our medical business in the United States decreased 12% to $3,436,000 for the three months ended March 31, 1999 as compared to revenue of $3,892,000 for the three months ended March 31, 1998. Excluding the equipment revenue of $1,245,000 from United States Surgical Corporation during the three months ended March 31, 1998, revenue increased 30% for the three months ended March 31, 1999 as compared to the same period for 1998. Disposable revenue increased 48%, led by a 51% increase in coronary angioplasty revenue and a 33% increase in lead removal devices. Service revenue increased 46%. Net loss from this unit increased 140% to a loss of $1,130,000 for the three months ended March 31, 1999 as compared to a loss of $470,000 for the three months ended March 31, 1998. The increased net loss was primarily due to increased operating expenses led by higher research and development costs. Page 10 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (cont'd) Europe Medical Revenue from our medical business in Europe increased 24% to $634,000 for the three months ended March 31, 1999 as compared to revenue of $511,000 for the three months ended March 31, 1998. This increase was generated from increased sales of peripheral catheters and lead removal devices. In January 1999, a direct sales organization began operations in Germany, which is the largest market for our products in Europe. Prior to 1999, we used an exclusive distributor to sell our products in Germany. Net loss from European operations decreased by 54%. This decrease is attributed to a 38% increase in gross margin and a 25% decrease in operating expenses as a result of the completion of certain clinical trials in Europe in 1998. The functional currency of Spectranetics International, B.V. is the Dutch guilder. All revenue and expenses are translated to United States dollars in the consolidated statements of operations using weighted average exchange rates during the year. Fluctuation in Dutch guilder currency rates during the three months ended March 31, 1999 as compared to the three months ended March 31, 1998 caused an increase in revenues and operating expenses of less than 1% of consolidated revenues and operating expenses, respectively. Industrial - Polymicro Technologies, Inc. Polymicro revenue was up 40% to $3,007,000 for the three months ended March 31, 1999 as compared to revenue of $2,150,000 for the three months ended March 31, 1998, due to sales of precision silica glass capillary tubing and assemblies into new capillary electrophoresis applications such as DNA sequencing and increased sales to existing gas chromatography customers. Net income from Polymicro increased by 82% to $473,000 for the three months ended March 31, 1999 as compared to net income of $260,000 for the three months ended March 31, 1998. This increase was due to a 45% increase in gross margin amounts partially offset by a 45% increase in operating expenses. We recently announced that we are contemplating strategic alternatives for Polymicro, which could include the sale of Polymicro. We anticipate that we would use any capital raised from such a transaction to accelerate developmental programs for our core medical business. While we have had discussions with several parties, we have not entered into any agreement to sell Polymicro. We have not set a fixed time frame for a decision. We may decide not to sell Polymicro or we may fail to obtain offers to purchase Polymicro at a price we deem satisfactory. Liquidity and Capital Resources As of March 31, 1999, we had cash, cash equivalents and investment securities of $9,790,000 compared to $4,158,000 at December 31, 1998. In February 1999, Spectranetics completed the private placement of 3,800,000 shares of its common stock and received cash proceeds, net of offering costs, therefrom of $6,856,000. Page 11 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (cont'd) Cash used by operating activities totaled $696,000 for the three months ended March 31, 1999, primarily due to uses of cash totaling $653,000 related to increased inventories and $567,000 related to decreased accounts payable and accrued liabilities. These uses of cash were offset by cash provided of $442,000 due to decreases in accounts receivable and $342,000 of decreases in other assets. The table below describes the growth in receivables and inventory in relative terms, through the calculation of financial ratios. Days sales outstanding is calculated by dividing the ending accounts receivable balance by the average daily sales for the quarter. Inventory turns is calculated by dividing annualized cost of sales for the quarter by ending inventory. ---------------------------------------------------------------------- March 31, 1999 December 31, 1998 -------------- ----------------- Days Sales Outstanding 59 62 Inventory Turns 3.9 5.2 ---------------------------------------------------------------------- Receivables considered to be overdue were not material as of March 31, 1999 or December 31, 1998. The decline in inventory turns is primarily due to increased equipment inventory at March 31, 1999 as compared to December 31, 1998. Capital expenditures were $266,000 for the three months ended March 31, 1999 as compared to $632,000 for three months ended March 31, 1998. Net cash provided by financing activities was $6,620,000. This cash was comprised of proceeds from the private stock placement which totaled $6,856,000, net of issue costs and $52,000 from the sales of common stock associated with stock option exercises, which were offset by $288,000 from principal payments on debt and capital lease obligations. During 1997, we secured a $2,000,000 credit line collateralized by equipment (equipment line). The equipment line bears interest, which is accrued monthly, at a rate equal to three-quarters of a percent above the prime rate (interest rate of 8.5% at March 31, 1999), and matures on December 23, 2000. At March 31, 1999, the equipment line had an outstanding balance of $1,400,000. As of December 31, 1998, we were in breach of certain covenants under this agreement, for which we obtained a waiver from the lender. As of March 31, 1999 we are in compliance with the debt covenants and we expect to remain compliant with these covenants for the remainder of 1999. During 1998, we entered into a $330,000 loan agreement collateralized by equipment held for rental or loan owned by Spectranetics International, B.V. The loan bears interest at 6.51% per annum and matures in December 2003. At March 31, 1999, the loan had an outstanding balance of $290,000. At March 31, 1999 and December 31, 1998, we placed a number of systems on rental, loan and fee per procedure programs. A total of $2,542,000 and $2,350,000 were recorded as equipment held for rental or loan as of March 31, 1999 and December 31, 1998, respectively, and are being depreciated over three to five years. This equipment was transferred from inventory at cost. We will continue to offer these programs as we execute our strategy of increasing our installed base of laser systems in major cardiac centers. Page 12 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (cont'd) We currently use three placement programs: (1) Rental programs - Straight rental program with terms varying from 6 months to 3 years. Rental revenues in the amount of $3,000 to $5,000 are invoiced on a monthly basis and revenue is recognized upon invoicing. Catheter revenues are recognized when shipped and invoiced. The lasers are transferred from inventory to the equipment held for rental or loan account upon shipment of the laser to the customer. The laser is then depreciated over three to five years, depending on the type of laser. Depreciation on these lasers is included in cost of revenues. At the end of the rental term, if the customer elects to purchase the unit, revenue is recognized upon invoicing the customer after receiving a valid purchase order. Cost of sales equal to the net book value of the system is also recorded at this time. (2) Loan programs - We "loan" a laser system to an institution for use over a short period of time, usually three to six months. The loan of the equipment is to create awareness of the product and no revenue is earned or recognized in connection with the placement of this laser. The units are transferred to the equipment held for rental or loan account upon shipment of the laser system. The laser systems are depreciated over a three to five year period which is expensed to cost of revenue. (3) Fee for procedure - This program is similar to the rental program except that revenues are derived from a premium attached to the sale of each single use laser catheter. Revenue equal to the premium charged above list price for each catheter sold is recognized as rental revenues. This rental income is immaterial to the financial statements, representing less than 1% of consolidated revenue. All other accounting treatment is consistent with that noted above in the "rental programs". We believe our liquidity and capitalization as of March 31, 1999 is sufficient to meet our operating and capital requirements through December 31, 2000. Revenue increases from current levels may be necessary to sustain us over the long-term. Year 2000 The year 2000 ("Y2K") issue arose because many computer programs existing today utilize only two characters to recognize a year. Therefore, when the year 2000 arrives, these programs may not properly recognize a year beginning with "20" instead of "19". The Y2K issue may result in the improper processing of dates and date-sensitive calculations by computers and other microprocessor-controlled equipment as the year 2000 is approached and reached. State of Readiness We have divided our Y2K exposure into three major areas: o internal systems; o products; and o potential Y2K problems associated with outside vendors. Page 13 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (cont'd) Because we believe that our primary Y2K issues could arise in the area of internal systems, we have focused on this area and have almost completed this phase of our Y2K project. New computer systems, which are designed to be Y2K compliant, were installed and implemented during the first half of 1998 at our facilities in Colorado Springs, Colorado and Phoenix, Arizona. We are currently evaluating our computer systems at our European subsidiary, Spectranetics International B.V., for Y2K compliance. These computer systems are the foundation for our business operations and include, but are not limited to, business functions such as order entry, shipping, purchasing, inventory control, manufacturing, accounts receivable, accounts payable, and general ledger. We are also in the process of reviewing other equipment that contains date-sensitive information. We have implemented a Y2K compliant phone system at our headquarters and are reviewing other equipment for potential Y2K issues. We expect to complete our review of internal systems by June 30, 1999 and do not expect a material adverse effect on our operations as a result of this review. We have reviewed our products and determined that there are no date-sensitive fields contained in any of the software within our products; therefore, we do not believe that our products will be affected by Y2K issues. We are in the process of identifying any risks associated with the Y2K problem as it relates to outside vendors with systems that interface with our systems. We expect to complete this review by June 30, 1999. Based on a preliminary review of the Y2K impact associated with outside vendors, we do not expect this issue to have a material adverse effect on our operations. However, since third party year 2000 compliance is not within our control, we cannot assure that Y2K issues affecting the systems of other companies on which our systems rely will not have a material adverse effect on our operations. Costs to Address the Y2K Issue Costs to address the Y2K issue include hardware, software, and implementation costs paid to outside consultants associated primarily with the implementation of a new computer system. These costs were directly related to the purchase and implementation of the new computer system, not for the remediation of current systems to make them y2k compliant. For the three months ended March 31, 1999 no costs of this type had been incurred. These costs totaled $999,000 for the twelve months ended December 31, 1998 and were capitalized and will be depreciated over a three to five year period. The costs were financed primarily through financing activities, which include capital leases and a draw on our line of credit. Depreciation costs for the three months ended March 31, 1999 and 1998 totaled $64,000 and $16,000, respectively. Interest costs associated with the capital leases used to finance hardware and software totaled $3,000 and $4,000, respectively, for the three months ended March 31, 1999 and 1998. We do not expect to incur material future costs associated with the Y2K issue as it relates to internal systems. No other expenses, which include non-capitalized equipment and consulting costs, were incurred for the three months ended March 31, 1999 and 1998. Risks Presented By The Year 2000 Issue To date, we have not identified any Y2K issues that we believe could materially adversely affect us or for which a suitable solution cannot be implemented. However, as the review of our internal systems and interfaces with outside vendors progresses, it is possible that Y2K issues may be identified that could result in a material adverse effect on our operations. For more information, see "Risk Factors - Year 2000 Issues Could Hurt Our Business." Page 14 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (cont'd) Contingency Plans Although we have not prepared a formal contingency plan to date, we intend to continue to assess our Y2K risks and develop contingency plans as appropriate. Risk Factors We Have Continued to Suffer Losses. We have incurred net losses since our inception in June 1984. At March 31, 1999, we had accumulated $73.7 million in net losses since inception. We anticipate that our net losses will continue in the foreseeable future. We may be unable to increase sales or achieve profitability. Limited Cash on Hand, Additional Financing May Be Needed and We May Not Be Able to Obtain It. We believe that our existing cash, cash from operations and the proceeds from our private placement to the selling stockholders should be sufficient to support our plans through at least December 31, 2000. However, we may need to raise additional cash prior to that time. We may be unable to obtain additional financing, if needed, on satisfactory terms or at all. If financing is not available on acceptable terms, we may be unable to make capital expenditures, compete effectively or withstand the effects of adverse market and economic conditions. Cash flow from operating activities may not be sufficient to sustain our long-term operations unless we are able to increase sales and control expenses. If we finance future operations through additional issuances of equity securities, you may suffer dilution and the price of the common stock may fall. Our Small Sales and Marketing Team May be Unable to Compete with our Larger Competitors or Reach All Potential Customers. Many of our competitors have larger sales and marketing operations than ours. This allows those competitors to spend more time with customers, which gives them a significant advantage over our team in making sales. Our 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 three months ended March 31, 1999, our revenues from international operations represented 9% of consolidated revenues. Changes in overseas economic conditions, currency exchange rates, foreign tax laws or tariffs or other trade regulations could adversely affect our ability to market our products in these and other countries. As we expand our international operations, we expect our sales and expenses denominated in foreign currencies to expand. Our Products are Still New and May Not Be Accepted in Their Markets. Excimer laser technology is a relatively new procedure that competes with more established therapies for restoring circulation to clogged or obstructed arteries. Market acceptance of the excimer laser system depends on our ability to provide adequate clinical and economic data that shows the clinical efficacy of and patient need for excimer laser angioplasty and lead removal. Page 15 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (cont'd) We May Be Unable to Compete Successfully in our Highly Competitive Industry in Which Many Other Competitors are Bigger Companies. Our primary competitors are manufacturers of products used in competing therapies, such as: o balloon angioplasty, which uses a balloon to push obstructions out of the way; o stent implantation; o open chest bypass surgery; and o atherectomy, a mechanical method for removing arterial blockages. We also compete with companies that develop lead extraction devices or removal methods, such as mechanical sheaths. Almost all of our competitors have substantially greater financial, manufacturing, marketing and technical resources than we do. We expect competition to intensify. We believe that the primary competitive factors in the interventional cardiovascular market are: o the ability to treat a variety of lesions safely and effectively; o the impact of managed care practices and procedure costs; o ease of use; o size and effectiveness of sales forces; and o research and development capabilities. SCIMED Life Systems, Inc. (a subsidiary of Boston Scientific Corporation), Cordis Corporation (a subsidiary of Johnson & Johnson Interventional Systems), Advanced Cardiovascular Systems, Inc. (a subsidiary of Guidant Corporation), and Bard and Schneider (a subsidiary of Pfizer Inc.) are the leading balloon angioplasty manufacturers. SCIMED, Cordis, Advanced Cardiovascular Systems and Medtronic, Inc. are the leading stent providers in the United States. Manufacturers of atherectomy devices include Devices for Vascular Intervention, Inc. (a subsidiary of Guidant Corporation) and Heart Technology, Inc. (a subsidiary of Boston Scientific Corporation). Failure of Third Parties to Reimburse Medical Providers for our Products May Reduce Our Sales. We sell our CVX-300 laser unit primarily to hospitals, which then bill third-party payors such as government programs and private insurance plans, for the services the hospitals provide using the CVX-300 laser unit. Unlike balloon angioplasty and atherectomy, laser angioplasty requires the purchase of expensive capital equipment. In some circumstances, the amount reimbursed to hospitals for procedures involving our products may not be adequate to cover a hospital's costs. We do not believe that reimbursement has materially adversely affected our business to date, but continued cost containment measures could hurt our business in the future. 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 Page 16 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (cont'd) problems or expect to experience reimbursement problems may not purchase our excimer laser systems in the future. Regulatory Compliance is Very Expensive and Can Often Be Denied or Significantly Delayed. The industry in which we compete is subject to extensive regulation by the FDA and comparable state and foreign agencies. Complying with these regulations is costly and time consuming. International regulatory approval processes may take longer than the FDA approval process. If we fail to comply with applicable regulatory requirements, we may be subject to, among other things, fines, suspensions of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions. We may be unable to obtain future regulatory approval in a timely manner or at all if existing regulations are changed or new regulations are adopted. For example, the FDA approval process for the use of excimer laser technology in clearing blocked arteries in the lower leg has taken longer than we anticipated, due to requests for additional clinical data and changes in regulatory requirements. Failures in Clinical Trials May Hurt Our Business and Our Stock Price. All of Spectranetics' potential products are subject to extensive regulation and will require approval from the Food and Drug Administration and other regulatory agencies prior to commercial sale. The results from pre-clinical testing and early clinical trials may not be predictive of results obtained in large clinical trials. Companies in the medical device industry have suffered significant setbacks in various stages of clinical trials, even in advanced clinical trials after promising results had been obtained in earlier trials. The development of safe and effective products is highly uncertain and subject to numerous risks. The product development process may take several years, depending on the type, complexity, novelty and intended use of the product. Product candidates that may appear to be promising in development may not reach the market for a number of reasons. Product candidates may: o be found ineffective; o take longer to progress through clinical trials than had been anticipated; or o require additional clinical data and testing. In particular, our Prima(R) laser guidewire, which allows excimer laser energy to assist in crossing totally blocked arteries, has not been as effective as we expected. Also, during the course of review of the Prima guidewire by the FDA, alternative technologies have surfaced which may limit market acceptance of the Prima guidewire. We cannot guarantee that the clinical trials relating to any of our products will be successful. We Have Important Sole Source Suppliers and May Be Unable to Replace Them if They Stop Supplying Us. We purchase certain components of our CVX-300 laser unit from several sole source suppliers. We do not have guaranteed commitments from these suppliers and order products through purchase orders placed with these suppliers from time to time. While we believe that we could obtain replacement components from alternative suppliers, we may be unable to do so. Potential Product Liability Claims and Insufficient Insurance Coverage May Hurt Our Business and Stock Price. We are subject to risk of product liability claims. We maintain product liability insurance with coverage and aggregate maximum amounts of $5 million. The coverage limits of our insurance policies may be inadequate, and insurance coverage with acceptable terms could be unavailable in the future. Technological Change May Result in Our Products Being Obsolete. We derive approximately two-thirds of our revenues from the sale or lease of the CVX-300 laser unit and the sale of disposable Page 17 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (cont'd) devices. Technological progress or new developments in our industry could adversely affect sales of our products. Many companies, some of which have substantially greater resources than we do, are engaged in research and development for the treatment and prevention of coronary artery disease. These include pharmaceutical approaches as well as development of new or improved angioplasty, atherectomy or other devices. Our products could be rendered obsolete as a result of future innovations in the treatment of vascular disease. Our Patents and Proprietary Rights May be Proved Invalid so Competitors Can Copy Our Products; We May Infringe Other Companies' Rights. We hold patents and licenses to use patented technology, and have patent applications pending. Any patents for which we have applied may not be granted. In addition, our patents may not be sufficiently broad to protect our technology or to give us any competitive advantage. Our patents could be challenged as invalid or circumvented by competitors. In addition, the laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. We do not have patents in many foreign countries. We could be adversely affected if any of our licensors terminate our licenses to use patented technology. We are aware of patents and patent applications owned by others relating to laser and fiber-optic technologies, which, if determined to be valid and enforceable, may be infringed by Spectranetics. Holders of certain patents, including holders of patents involving the use of lasers in the body, have contacted us and requested that we enter into license agreements for the underlying technology. We cannot guarantee you that a patent holder will not file a lawsuit against us and may prevail. If we decide that we need to license this technology, we may be unable to obtain these licenses on favorable terms or at all. We may not be able to develop or otherwise obtain alternative technology. Litigation concerning patents and proprietary rights is time-consuming, expensive, unpredictable and could divert the efforts of our management. An adverse ruling could subject us to significant liability, require us to seek licenses and restrict our ability to manufacture and sell our products. Protections Against Unsolicited Takeovers in Our Rights Plan, Charter and Bylaws May Reduce or Eliminate our Stockholders' Ability to Resell Their Shares at a Premium Over Market Price. We have a stockholder rights plan that may prevent an unsolicited change of control of Spectranetics. The rights plan may adversely affect the market price of our common stock or the ability of stockholders to participate in a transaction in which they might otherwise receive a premium for their shares. Under the rights plan, rights to purchase preferred stock in certain circumstances have been issued to holders of outstanding shares of common stock, and rights will be issued in the future for any newly issued common stock. 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; Page 18 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition (cont'd) o announcements of technological innovations or new products by Spectranetics or our competitors; o governmental regulation; o developments with respect to patents or proprietary rights; o public concern regarding the safety of products developed by Spectranetics or others; o general market conditions; and o financing future operations through additional issuances of equity securities, which may result in dilution to existing stockholders and falling stock prices. Year 2000 Issues Could Hurt Our Business. We installed and implemented new computer systems at our Colorado and Arizona facilities in the first half of 1998. Although our new software is designed to be year 2000 compliant, we cannot assure that this software contains all necessary data code changes. We are currently evaluating our other computer systems for year 2000 compliance. Although we expect all of our critical systems to be year 2000 compliant by June 30, 1999, there is a risk that some or all of our systems will not be year 2000 compliant by 2000. Upon review of our product offerings, we have determined that the software within our products does not contain date-sensitive fields. As a result, we do not believe that our products will be affected by year 2000 issues. We cannot assure, however, that all of our products are year 2000 compliant. We are in the process of obtaining information from outside vendors regarding systems that interface with our systems. Based on currently available information, we do not believe that year 2000 issues relating to these systems will adversely affect our business. However, since third party year 2000 compliance is not within our control, we cannot assure that any year 2000 issues affecting our outside vendors will not adversely affect our business. Item 3. Quantitative and Qualitative Disclosures About Market Risk Our primary market risks include changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. We do not use financial instruments to any degree to manage these risks. We do not use financial instruments to manage changes in commodity prices and do not hold or issue financial instruments for trading purposes. Our debt consists of obligations with a fixed interest rate ranging from 5.75% to 6.51% as well as an obligation with a variable interest rate equal to the prime rate plus three-quarters of a percent. An increase or decrease in the prime rate of 1% would cause interest expense to increase or decrease by approximately $16,000 over a twelve month period. Part II.---OTHER INFORMATION - -------------------------------------------------------------------------------- Item 1. Legal Proceedings In 1993, we entered into a license agreement with Pillco Limited Partnership granting us a license regarding certain patents. In 1996, Pillco Limited Partnership transferred all of its right, title and interest in the patents and license agreement to Interlase LP. In July 1998, we were served a Garnishment Summons instructing us to make royalty payments due under the license to the ex-wife of one of the named inventors of the licensed patents, who is also a partner of Interlase LP. The Garnishment Summons was issued by a state court in Virginia where this divorce proceeding was pending. In September 1998, Interlase LP purported to assign all of its right, title and interest in the patents to White Star Holdings, Ltd. Page 19 Item 1. Legal Proceedings (cont'd) ("White Star"), an offshore company. White Star subsequently demanded payment of the royalties. In light of the competing demands from White Star and a Receiver appointed by the Virginia court to collect the assets of Interlase LP, we notified White Star and the Receiver that the funds would be deposited into a segregated, interest-bearing account until we could determine the rightful owner of the royalty payments. In October 1998, White Star filed suit against us in the U.S. District Court for the District of Colorado, alleging that we breached the license agreement by failing to remit the royalty payments. We responded to White Star's claim by following well-established procedure and requesting that the court determine which of White Star and the Interlase LP Receiver is entitled to receive the royalty payments. We also requested and were granted permission to deposit all of the disputed royalties into the registry of the Court. In January 1999, White Star issued a notice to us purporting to terminate the license agreement. White Star proceeded to distribute a press release describing the purported termination of the license agreement. In January 1999, we sought and were granted a temporary restraining order restraining White Star and its agents from taking any further steps to terminate the license agreement, from issuing further press releases concerning the litigation or the status of the license agreement, and from contacting any of our customers regarding such matters. In March 1999, a preliminary injunction was issued by the U.S. District Court of Colorado restraining White Star from all actions described in the temporary restraining order. We believe that White Star's claims are baseless and will vigorously defend against their allegations. We have also filed a motion with the U.S. District Court of Colorado to assert additional claims against White Star. Items 2-5. Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The following documents are filed herewith and made a part of this report on Form 10-Q: Exhibit 10.19 - Employment contract between the Spectranetics Corporation and Henk Kos dated January 1, 1997. Exhibit 10.20 - Form of the Stock Purchase Agreement, dated as of December 22, 1998 by and between The Spectranetics Corporation and the stockholders named in Spectranetics' Registration Statement on Form S-3 filed on December 29, 1998, as subsequently amended. (file no. 333-69829) Exhibit 27.1 - Financial Data Schedule for 1999 First Quarter Form 10-Q. (b) Reports on Form 8-K Spectranetics Announced Financial Results for Fiscal 1998 Filed on February 2, 1999 Spectranetics Announced that It Was Considering Strategic Alternatives for Polymicro Technologies, Inc. Filed on February 23, 1999 Page 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Spectranetics Corporation (Registrant) May 5, 1999 By: /s/ James P. McCluskey --------------------------------- James P. McCluskey Vice President, Finance Secretary/Treasurer and Principal Financial Officer Page 21 THE SPECTRANETICS CORPORATION Form 10-Q for the Period Ended March 31, 1999 EXHIBIT INDEX Exhibit Number Description - -------------------------------------------------------------------------------- 10.19 Employment contract between the Spectranetics Corporation and Henk Kos dated January 1, 1997. 10.20 Form of the Stock Purchase Agreement, dated as of December 22, 1998 by and between The Spectranetics Corporation and the stockholders named in Spectranetics' Registration Statement on Form S-3 filed on December 29, 1998, as subsequently amended. (file no. 333-69829) 27.1 Financial Data Schedule for 1999 First Quarter Form 10-Q. Page 22 EX-10.19 2 EMPLOYMENT AGREEMENT Spectranetics EMPLOYMENT AGREEMENT The undersigned: 1. THE SPECTRANETICS CORPORATION, represented by James P. McCluskey, hereafter referred to as "The Company"; and 2. Hendricus Kos, hereafter referred to as "the Employee"; WHEREAS The general meeting of shareholders of Spectranetics International B.V. has appointed the Employee at its meeting of January 8, 1993 as Managing Director ("statutair directeur") of Spectranetics International B.V. Employee has now accepted the position of Vice President, Sales & Marketing of the Company as per January 1, 1997, as of which date the hereinafter contained conditions will apply. The actual performance of his duties in this respect in the Netherlands will be minor in relation to his duties as Vice President, Sales & Marketing of the Company worldwide. The Parties acknowledge that the position for which the Employee has been offered and for which the employee has accepted is high within management and involves worldwide sales of the Company's products. The Parties further acknowledge that Employee will be privy to the most sensitive of the Company's information, including, without limitation, trade secrets, lists of customer identities, list of potential customers, technical information and specifications, page 2 Speccorp.agr. 5/21/97 marketing materials, marketing plans, promotional strategies, research and development materials and plans, as well as all other marketing and technical strategies. The Parties acknowledge that this information is highly sensitive and valuable to the Company and involves the underpinnings of the Company's global business. Accordingly, the Parties intend and expect that this Agreement protect the confidentiality of such information and prevent the use of such information in competition with the Company's business. NOW HEREBY AGREE AS FOLLOWS: Article 1 Employment 1.1 Subject to the terms and conditions of this agreement, the Employee hereby undertakes to act as Vice President, Sales & Marketing, in the employ of the Company, and the Company hereby so employs the Employee. 1.2 The function of the Employee is set out in his job description per attached. 1.3 The Company is entitled to change and/or adapt the function of the Employee in case this reasonably will be required by the Company. 1.4 The Employee will report to the C.E.O. and President of the Spectranetics Corporation. Article 2 Term 2.1 This Agreement shall be effective when executed by both parties, subject to the conditions set forth herein, and the term and conditions of this Agreement shall be as set forth herein. 2.2 Employee and the Company agree that employee shall be employed at will and may be terminated with or without cause at any time. However, the parties agree that they shall give notice of their intent to terminate this Agreement six months prior to termination beginning on the last day of the month in which notice is given. Article 3 Obligations of the Employee 3.1 In addition to any other obligations imposed by Colorado Common Law, employee's job description, and as may be imposed upon the employee by instructions from the company, the employee shall have the following obligations. Except for the performance of his duties as Managing Director of Spectranetics International B.V. in the Netherlands, the Employee shall devote his working time and his best efforts to the Company and its business and he shall not be engaged or financially interested, in any manner, in any other employment or business during the term of this agreement. 3.2 The Employee shall also at all times observe the best interests of the Company and all subsidiaries/group companies (all the aforementioned companies hereinafter to be called the "Group Companies"). page 3 Speccorp.agr. 5/21/97 3.3 The Employee shall duly observe the directives given by the C.E.O. and President of the Spectranetics Corporation concerning the general course of the Company's financial, social and economic policy and its personnel management. Article 4 Remuneration 4.1 The Employee shall receive a fixed gross salary of USD 11.800,-- per month, (including vacation allowance) payable bi-weekly in the gross amount of $5,446.15. 4.2 The Employee is entitled to receive annual incentive compensation when those plans exist and in accordance with the annual incentive compensation plan program in place at that time. It is understood that these plans may change from time to time. The incentive program for 1997 is described in annex 1. 4.3 The Employee is entitled to stock options as described in the stock option plan, annex 2 to the extent and under the terms and conditions set forth in such stock option plan. 4.4 The Employee is entitled to participate in the Employee Stock Purchase Plan of The Spectranetics Corporation to the extent and under the terms and conditions set forth in such Employee Stock Purchase Plan. It should be noted that as an officer of the corporation the Employee will be subject to additional restrictions for participation in said plan. Article 5 Pension The Employee will stay entitled to participate in the pension plan of Spectranetics International B.V. to the extent and under the terms and conditions set forth in such pension plan. Article 6 Car and Other Reimbursements The Company will provide a monthly auto allowance in the amount of $750.00 month to cover the purchase or lease of a vehicle, registration fees, licenses, maintenance, insurance and applicable income taxes. In addition, for business use of the vehicle, reimbursement will be provided in the amount of $.09/mile to cover oil, gas and tires. The Company shall reimburse the Employee's telephone expenses. Article 7 Vacation The Employee shall conform to the current U.S. vacation policy of 20 days of vacation per annum under this contract, the contract between the Employee and Spectranetics International B.V. included, such vacation to be taken in consultation with the Company. The Employee is not allowed to take vacation for a period longer than three (3) weeks in sequence. page 4 Speccorp.agr., 5/21/97 Article 8 Health-insurance The Employee shall be entitled to participate in the health insurance plan of Spectranetics International B.V. to the extent permitted and on the terms and conditions set forth in such health insurance plan. Article 9 Illness 9.1 During illness or other inability for work of the Employee, the Company will supplement the social benefits of the Employee up to 100% (one hundred percent) of his after tax normal monthly check during a period of one (1) year. In case the inability for work is interrupted for a period of less than 30 days, the inability for work is deemed not to have been interrupted in view of the aforementioned period of one year. 9.2 The Company will provide disability insurance for the Employee after the period of one year as described in the disability plan of Spectranetics International B.V. Article 10 Company Property Upon termination of this agreement for any reason whatsoever, the Employee shall immediately deliver to the Company all correspondence, papers, documents, including without limitation customer lists, and other property belonging to the Company and all subsidiaries/group companies of the latter both in the Netherlands and abroad, which may be in his possession or under his control or which refer to or discuss the company's business. Article 11 Confidentiality 11.1 The Employee will not provide anyone with confidential business information, neither during employment nor after termination of employment. The Employee agrees at all times during the term his employment and thereafter to hold in strictest confidence, and not to use, except for the benefit of the Company, or to disclose to any person, firm or corporation, without the written authorization of the Board of Directors of the Company ("Board"), any proprietary information of the Company. Employee agrees to obtain the Board's written approval before publishing or submitting for publication any material (written, verbal or otherwise) that relates to any work at the Company and/or incorporates any proprietary information. Employee hereby recognizes that all Proprietary Information will be the sole property of the Company and its assigns. 11.2 The Employee is forbidden to have, or to show to others, books, correspondence, drawings, calculations and other documents as well as copies or notes of the above mentioned ("Proprietary Information"). The term "Proprietary Information" shall mean any and all confidential and/or proprietary knowledge, data or information of the Company. By way of illustration but not limitation. "Proprietary Information" includes a) trade secrets, inventions, mask works, ideas, processes, formulas, source and object codes, data, programs, other works of authorship, know-how, improvements, discoveries, development, designs and techniques (hereinafter collectively referred to as "Inventions"); and b) page 5 Speccorp.agr., 5/21/97 information regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and c) information regarding the skills and compensation of other employees of the company. Notwithstanding the foregoing, it is understood that "Proprietary Information" does not include and at all such times, Employee is free to use information which is generally known to the public or in the trade or industry, is known to Employee at the time of its first disclosure to Employee by the Company or becomes known to Employee lawfully from a third party without any restriction on disclosure, and his own, skill, knowledge, know-how and experience to whatever extent and in whichever way Employee may wish. 11.3 All these correspondence, notes, drawings, calculations, etc. must be given to the Company at the end of employment, even if they are/were addressed to the Employee. 11.4 The Employee is obliged not to use any information about personnel other than for the purpose of registration or for the purpose of his job. The Employee is also obliged not to inform unauthorized persons about personnel. 11.5 The Employee recognizes that the Company imposes the Employee secrecy of all particulars regarding the Company and its organization. The Employee is forbidden to provide any kind of information regarding the Company and its organization to others. 11.6 The Employee agrees and recognizes that the Company has received and in the future will receive Proprietary Information from third parties subject to a duty on the Company's part to maintain the confidentiality of such information and, in some cases, to use it only for certain limited purposes. Employee agrees that he owes the Company and such third parties, both during the term of employment and thereafter, a duty to hold all such Proprietary Information in the strictest confidence and not to, except as is consistent with the Company's agreement with the third party, disclose it to any person, firm or corporation or use it for the benefit of anyone other than the Company or such third party, unless expressly authorized to act otherwise by an officer of the Company. 11.7 The Employee agrees that he will not, during his employment with the Company, in breach of any agreement or unlawfully use or disclose any confidential information or trade secrets of his former or concurrent employers or companies, if any, and that he will not bring on to the premises of the Company any unpublished documents or any property belonging to his former or concurrent employers or companies unless previously and specifically consented to in writing by the particular employer or company. Article 12 Non-Competition 12.1 Employee agrees that during the period of his employment by the Company he will not, without the company's express written consent, engage or prepare to engage in any activity in competition with the Company or accept employment, provide services to, or establish a business relationship with a business or individual engaged in or preparing to engage in page 6 Speccorp.agr. 5/21/97 competition with the Company. For the period of Employee's employment by the Company and for one (1) year after the date of his separation from the Company he will not (a) induce any employee, officer, director, consultant or independent contractor of the Company to leave the service of the Company or (b) solicit the business of any client or customer of the Company (other than on behalf of the Company). If any restriction set forth in this Section is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable. 12.2 Customers referred to in Article 12.1 are all business relations to whom the Company has sold and/or delivered any products during a period of 12 months previous to the termination of this agreement, as well as any prospects at the date of termination of this agreement. 12.3 Company's business and Company's customers are located worldwide. In addition, as Vice President, Sales and Marketing for The Spectranetics Corporation, employee will perform his services through the United States. Therefore, the parties agree that this non-competition provision is reasonable in geographic scope with respect to all customers outside the United States and with respect to employee's participation in equal or similar companies with business interests within the United States. 12.4 When the Employee leaves the employ of the Company, he agrees to deliver to the Company (and will not keep in his possession, recreate or deliver to anyone else) any and all devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or property, together with all copies thereof (in whatever medium recorded) belonging to the Company, its successors or assigns whether kept at the Company, home or elsewhere. Employee further agrees that any property situated on the Company's premises and owned by the Company, including disks and other storage media, filing cabinets or other work areas, is subject to inspection by Company personnel at any time with our without notice. Prior to leaving, Employee agrees to cooperate with the Company in completing and signing the Company's termination statement for technical and management personnel confirming the above and his obligations under this Agreement. Article 13 Rights Upon Termination 13.1 In case of termination of this agreement by the company, without cause or due to company re-organization (merger, acquisition, internal restructuring, etc.), the Company will provide one year's severance from the date notice is given under Article 2.2 and will pay to return the employee to the Netherlands. Severance will include base salary, benefits, allowances and reimbursements, in whatever form. Employee acknowledges that during this one year period, he is bound by the non-competition provision in Article 12 herein in the same manner as he would be bound if he were still employed. It should be understood that application of this Article supersedes the compensation outlined in Article 2.2. page 7 Speccorp.agr., 5/21/97 13.2 Should the Employee be terminated, the Employee, shall be entitled to exercise to the full extent permitted pursuant to the option agreements and stock option plan of the company, those stock options which have vested. All the Stock Options held by the Employee shall remain exercisable after the termination of his employment for a period of three (3) months, but in no event beyond ten (10) years from the date of grant set forth in paragraph 1 of each of the Option Agreements. 13.3 In case the Employee is terminated for good cause, or if employee terminates his employment hereunder for his convenience, the company shall pay employee his salary through the date of such termination at the rate in effect at the time of the notice of termination, and the company shall thereafter have no further obligations to employee under this Agreement. For purposes of this agreement, "good cause" shall mean (1) employee fails to substantially perform his duties hereunder (other than such failure resulting from executive's incapacity due to physical or mental illness); or (2) Employee engages in one or more acts of dishonesty or insubordination or violates a written company policy. 13.4 If the Employee is reassigned back to Europe, this would not be deemed termination. 13.5 When the Employee leaves the employ of the Company, he agrees to deliver to the Company (and will not keep in his possession, recreate or deliver to anyone else) any and all devices, records, data, notes, reports, proposals, lists correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or Article 14 Special Achievements 14.1 If the Employee achieves something, which can be considered a result of his work by the Company and which can lead to certain rights of industrial or intellectual property or ownership in the Netherlands or elsewhere, the Company has a right to those achievements. Included are: inventions, achievements in industrial designing, computer programs, etc. 14.2 The Employee is obliged, as soon as he has made such an achievement, to inform the Company immediately. 14.3 If the achievement leads to an appliance for patent, the Company will, if the Employee wishes, promote that the Employee's name will be mentioned in the patent. 14.4 All costs resulting from the above-mentioned will be at the Company's expense. Article 15 Liquidated Damages If employee breaches the provisions of Articles 10, 11, 12 and 13, the Company may pursue its legal and equitable remedies against the employee. However, employee and company agree that damages for violations of these provisions are difficult to measure, and that violations of these provisions may cause irreparable harm. Therefore, the parties agree that, in addition to any other remedies available to the company, employee shall pay to the company. as liquidated damages. page 8 Speccorp.agr. 5/27/97 one year's gross salary together with 1% of one year's gross salary for each day that such act is continued, all without prejudice to all other remedies of the company, including the right of the company to claim full damages, should these exceed the liquidated damages or to seek injunctive relief to prevent continued violations. Article 16 Medical Examination On request of the Company, the Employee will, from time to time, be medically examined. Article 17 Changes Changes in this contract must be mutually agreed upon and confirmed in writing. Article 18 Applicable law This agreement shall be construed and governed in accordance with the laws of the State of Colorado, notwithstanding the Employee's activities abroad. Article 19 Competent Court Any dispute relating to the provisions of this agreement between parties will be exclusively settled in the first instance by the Courts in Colorado Springs, except in the case of a legal provision of mandatory law which stipulates otherwise. If the court of competent jurisdiction determines that any term or provision of this Agreement is invalid or unenforceable, then the remaining terms and provisions will be unimpaired. Such court will have the authority to modify or replace the invalid or unenforceable term or provision with a valid and enforceable term or provision which most accurately represents the Parties' intention with respect to the invalid or unenforceable term or provision. Thus signed in duplicate on January 1, 1997 at Colorado Springs, Colorado, USA. /s/ James P. McCluskey /s/ Hendricus Kos - ----------------------------- ------------------------------- The Spectranetics Corporation Employee James P. McCluskey Hendricus Kos EX-10.20 3 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT The Spectranetics Corporation 96 Talamine Court Colorado Springs, CO 80907 Ladies & Gentlemen: The undersigned, ______________________ (the "Investor"), hereby confirms its agreement with you as follows: 1. This Stock Purchase Agreement (the "Agreement") is made as of December 22, 1998 between The Spectranetics Corporation, a Delaware corporation (the "Company"), and the Investor. 2. The Company has authorized the sale and issuance of up to 3,800,000 shares (the "Shares") of Common Stock of the Company, $.001 par value per share (the "Common Stock"), subject to adjustment by the Company's Board of Directors, to certain investors in a private placement conditioned upon registration of the Shares for resale (the "Offering"). 3. The Company and the Investor agree that the Investor will purchase from the Company and the Company will sell to the Investor, for a purchase price of $_________ per share, or an aggregate purchase price of $__________, ___________ Shares pursuant to the Terms and Conditions for Purchase of Shares attached hereto as Annex I and incorporated herein by reference as if fully set forth herein. Unless otherwise requested by the Investor, certificates representing the shares purchased by the Investor will be registered in the Investor's name and address as set forth below. 4. The Investor represents that, except as set forth below, (a) it has had no position, office or other material relationship within the past three years with the Company or its affiliates, (b) neither it, nor any group of which it is a member or to which it is related, beneficially owns (including the right to acquire or vote) any securities of the Company and (c) it has no direct or indirect affiliation or association with any NASD member. Exceptions: ________________________________________________________________________________ ________________________________________________________________________________ (If no exceptions, write "none." If left blank, response will be deemed to be "none.") Please confirm that the foregoing correctly sets forth the agreement between us by signing in the space provided below for that purpose. INVESTOR By:___________________________________________ Print Name:___________________________________ Title:________________________________________ Address:______________________________________ ______________________________________________ Tax ID No.:___________________________________ Contact name:_________________________________ Telephone:____________________________________ Name in which shares should be registered (if different):_______________________________ AGREED AND ACCEPTED: THE SPECTRANETICS CORPORATION ________________________________________________ By: Joseph A. Largey Title: President and Chief Executive Officer ANNEX I TERMS AND CONDITIONS FOR PURCHASE OF SHARES 1. Authorization and Sale of the Shares. Subject to the terms and conditions of this Agreement, the Company has authorized the sale of up to 3,800,000 Shares. The Company reserves the right to increase or decrease this number. 2. Agreement to Sell and Purchase the Shares; Subscription Date. 2.1 At the Closing (as defined in Section 3), the Company will sell to the Investor, and the Investor will purchase from the Company, upon the terms and conditions hereinafter set forth, the number of Shares set forth on the signature page hereto at the purchase price set forth on such signature page. 2.2 The Company proposes to enter into substantially identical Stock Purchase Agreements with certain other investors (the "Other Investors") and expects to complete sales of Shares to them. Other Investors will not receive more favorable terms than the Investor. (The Investor and the Other Investors are hereinafter sometimes collectively referred to as the "Investors," and this Agreement and the Stock Purchase Agreements executed by the Other Investors are hereinafter sometimes collectively referred to as the "Agreements.") The Company will accept executed Agreements from Investors for the purchase of Shares commencing upon the date on which the Company provides the Investors with the proposed purchase price per Share and concluding upon the date (the "Subscription Date") on which the Company has (i) executed Agreements with Investors for the purchase of at least 3,000,000 Shares, and (ii) notified BancBoston Robertson Stephens (the "Placement Agent") in writing that it is no longer accepting Agreements from Investors for the purchase of Shares. The Company may not enter into any Agreements after the Subscription Date. 3. Delivery of the Shares at Closing. The completion of the purchase and sale of the Shares (the "Closing") shall occur at a place and time (the "Closing Date") to be specified by the Company and the Placement Agent, not later than 90 days after the date the Registration Statement (as hereinafter defined) is filed with the Securities and Exchange Commission (the "SEC") and of which the Investors will be notified in advance by the Placement Agent. At the Closing, the Company shall deliver to the Investor one or more stock certificates representing the number of Shares set forth on the signature page hereto, each such certificate to be registered in the name of the Investor or, if so indicated on the signature page hereto, in the name of a nominee designated by the Investor. The Company's obligation to issue the Shares to the Investor shall be subject to the following conditions, any one or more of which may be waived by the Company: (a) receipt by the Company of a certified or official bank check or wire transfer of funds in the full amount of the purchase price for the Shares being purchased hereunder as set forth on the signature page hereto; and (b) the accuracy of the representations and warranties made by the Investors and the fulfillment of those undertakings of the Investors to be fulfilled prior to the Closing. Notwithstanding anything to the contrary elsewhere herein, the Company's obligation to close shall be subject to the Company's receipt of at least $6,000,000 in proceeds from the sale of the Shares. The Investor's obligation to purchase the Shares shall be subject to the following conditions, any one or more of which may be waived by the Investor: (a) Investors shall have executed Agreements for the purchase of at least 3,000,000 Shares; (b) the Company shall have (i) filed a registration statement (the "Registration Statement") within five (5) business days after the Subscription Date, (ii) received an indication from the SEC that it has no further comments with respect to the Registration Statement, and (iii) submitted an acceleration request providing for the Registration Statement to be declared effective at a time immediately following the Closing and on or prior to the 90th day after the date of its filing; and (c) satisfaction of all of the conditions set forth in Section 6 of the Placement Agency Agreement dated as of December 22, 1998 between the Company and the Placement Agent. The Investor's obligations hereunder are expressly not conditioned on the purchase by any or all of the Other Investors of the Shares that they have agreed to purchase from the Company. Notwithstanding anything to the contrary elsewhere herein, the Investor's obligation to close shall be subject to the Company's receipt of at least $6,000,000 in proceeds from the sale of the Shares. 1 4. Representations, Warranties and Covenants of the Company. The Company hereby represents and warrants to, and covenants with, the Investor, as follows: 4.1 Organization. Each of the Company and its Subsidiaries (as defined in Rule 405 under the Securities Act of 1933, as amended (the "Securities Act")), is duly organized and validly existing in good standing under the laws of the jurisdiction of its organization. Each of the Company and its Subsidiaries has full power and authority to own, operate and occupy its properties and to conduct its business as presently conducted and as described in the private placement memorandum, dated November 9, 1998 distributed in connection with the sale of the Shares (including the documents incorporated by reference therein, the "Placement Memorandum") and is registered or qualified to do business and in good standing in each jurisdiction in which it owns or leases property or transacts business and where the failure to be so qualified would have a material adverse effect upon the business, financial condition, properties or operations of the Company and its Subsidiaries, considered as one enterprise, and no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. The Company does not have any Subsidiaries nor does it control, directly or indirectly, or own, directly or indirectly, any shares of stock or any other equity interest of any corporation, partnership or limited liability company, other than as disclosed in the Placement Memorandum. 4.2 Due Authorization. The Company has all requisite power and authority to execute, deliver and perform its obligations under the Agreements, and the Agreements have been duly authorized and validly executed and delivered by the Company and constitute legal, valid and binding agreements of the Company enforceable against the Company in accordance with their terms, except as rights to indemnity and contribution may be limited by state or federal securities laws or the public policy underlying such laws, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.3 Non-Contravention. The execution and delivery of the Agreements, the issuance and sale of the Shares to be sold by the Company under the Agreements, the fulfillment of the terms of the Agreements and the consummation of the transactions contemplated thereby will not (A) conflict with or constitute a violation of, or default (with the passage of time or otherwise) under, (i) any material bond, debenture, note or other evidence of indebtedness, or under any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company or any Subsidiary is a party or by which it or any of its Subsidiaries or their respective properties are bound, (ii) the charter, by-laws or other organizational documents of the Company or any Subsidiary, or (iii) any law, administrative regulation, ordinance or order of any court or governmental agency, arbitration panel or authority applicable to the Company or any Subsidiary or their respective properties, or (B) result in the creation or imposition of any lien, encumbrance, claim, security interest or restriction whatsoever upon any of the material properties or assets of the Company or any Subsidiary or an acceleration of indebtedness pursuant to any obligation, agreement or condition contained in any material bond, debenture, note or any other evidence of indebtedness or any material indenture, mortgage, deed of trust or any other agreement or instrument to which the Company or any Subsidiary is a party or by which any of them is bound or to which any of the property or assets of the Company or any Subsidiary is subject. No consent, approval, authorization or other order of, or registration, qualification or filing with, any regulatory body, administrative agency, or other governmental body in the United States is required for the execution and delivery of the Agreements and the valid issuance and sale of the Shares to be sold pursuant to the Agreements, other than such as have been made or obtained, and except for any securities filings required to be made under federal or state securities laws. 4.4 Capitalization. The capitalization of the Company as of October 31, 1998 is as set forth in the Placement Memorandum. The Company has not issued any capital stock since that date other than pursuant to (i) employee benefit plans disclosed in the Placement Memorandum, or (ii) outstanding warrants or options disclosed in the Placement Memorandum. The Shares to be sold pursuant to the Agreements have been duly authorized, and when issued and paid for in accordance with the terms of the Agreements will be duly and validly issued, fully paid and nonassessable. The outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and were not issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. Except as set forth in or contemplated by the Placement Memorandum, there are no outstanding rights (including, without limitation, preemptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any unissued shares of capital stock or other equity interest in the Company or any Subsidiary, or any contract, commitment, agreement, understanding or 2 arrangement of any kind to which the Company is a party or of which the Company has knowledge and relating to the issuance or sale of any capital stock of the Company or any Subsidiary, any such convertible or exchangeable securities or any such rights, warrants or options. The Company holds no shares of capital stock in its Treasury. Without limiting the foregoing, no preemptive right, co-sale right, registration right, right of first refusal or other similar right exists with respect to the Shares or the issuance and sale thereof. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale of the Shares. The Company owns the entire equity interest in each of its Subsidiaries, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest, other than as described in the Placement Memorandum. Except as disclosed in the Placement Memorandum, there are no stockholders agreements, voting agreements or other similar agreements with respect to the Common Stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company's stockholders. 4.5 Legal Proceedings. There is no material legal or governmental proceeding pending or, to the knowledge of the Company, threatened to which the Company or any Subsidiary is or may be a party or of which the business or property of the Company or any Subsidiary is or may be subject that is not disclosed in the Placement Memorandum. 4.6 No Violations. Neither the Company nor any Subsidiary is in violation of its charter, bylaws, or other organizational document, or in violation of any law, administrative regulation, ordinance or order of any court or governmental agency, arbitration panel or authority applicable to the Company or any Subsidiary, which violation, individually or in the aggregate, would be reasonably likely to have a material adverse effect on the business or financial condition of the Company and its Subsidiaries, considered as one enterprise, or is in default in any material respect in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness in any indenture, mortgage, deed of trust or any other agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary is bound or by which the properties of the Company or any Subsidiary are bound or affected, and there exists no condition which, with the passage of time or otherwise, would constitute a material default under any such document or instrument or result in the imposition of any material penalty or the acceleration of any material indebtedness. 4.7 Governmental Permits, Etc. With the exception of the matters which are dealt with separately in Section 4.1, 4.13, 4.14 and 4.21, each of the Company and its Subsidiaries has all necessary franchises, licenses, certificates and other authorizations from any foreign, federal, state or local government or governmental agency, department, or body that are currently necessary for the operation of the business of the Company and its Subsidiaries as currently conducted and as described in the Placement Memorandum except where the failure to currently possess could not reasonably be expected to have a material adverse effect. 4.8 Intellectual Property. Subject to the matters discussed under "Risk Factors" in the Placement Memorandum (i) each of the Company and its Subsidiaries owns or possesses sufficient rights to use all material patents, patent rights, trademarks, copyrights, licenses, inventions, trade secrets, trade names and know-how (collectively, "Intellectual Property") described or referred to in the Placement Memorandum as owned or used by it or that are necessary for the conduct of its business as now conducted or as proposed to be conducted as described in the Placement Memorandum except where the failure to currently own or possess would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its Subsidiaries considered as one enterprise, (ii) neither the Company nor any of its Subsidiaries has received any notice of, or has any knowledge of, any infringement of or conflict with asserted rights of the Company or any of its Subsidiaries by others with respect to any Intellectual Property and except as described in the Placement Memorandum and except as would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its Subsidiaries considered as one enterprise, (iii) neither the Company nor any of its Subsidiaries has received any notice of, or has any knowledge of, any infringement of or conflict with asserted rights of a third party with respect to any Intellectual Property that, individually or in the aggregate, would have a material adverse effect on the condition (financial or otherwise), earnings, operations, business of the Company and its Subsidiaries considered as one enterprise. 4.9 Financial Statements. The financial statements of the Company and the related notes contained or incorporated by reference in the Placement Memorandum present fairly, in accordance with generally accepted accounting principles, the financial position of the Company and its Subsidiaries as of the dates indicated, and the results of its operations and cash flows for the periods therein specified. Such financial statements (including the 3 related notes) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods therein specified, except as disclosed in the Placement Memorandum. The other financial information contained in the Placement Memorandum has been prepared on a basis consistent with the financial statements of the Company. 4.10 No Material Adverse Change. Except as disclosed in the Placement Memorandum, since September 30, 1998, there has not been (i) any material adverse change in the financial condition or earnings of the Company and its Subsidiaries considered as one enterprise nor has any material adverse event occurred to the Company or its Subsidiaries, (ii) any material adverse event affecting the Company, (iii) any obligation, direct or contingent, that is material to the Company and its Subsidiaries considered as one enterprise, incurred by the Company, except obligations incurred in the ordinary course of business, (iv) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its Subsidiaries, or (v) any loss or damage (whether or not insured) to the physical property of the Company or any of its Subsidiaries which has been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its Subsidiaries considered as one enterprise. 4.11 Disclosure. The information contained in the Placement Memorandum as of the date of such information, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.12 Existing Agreements and Physical Property. Except as set forth in the Placement Memorandum, the agreements to which the Company or any of its Subsidiaries is a party and which are described in the Placement Memorandum are valid agreements, enforceable by the Company, and its Subsidiary (as applicable) except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles and, to the best of the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements. Except as set forth in the Placement Memorandum, the Company owns or leases all such physical properties as are necessary to its operations as now conducted. 4.13 Regulatory Compliance. Except as described in the Placement Memorandum and subject to the matters described under "Risk Factors" in the Placement Memorandum, (i) the Company and its Subsidiaries have operated and currently operate their businesses in conformity with all applicable laws, rules and regulations of each jurisdiction in which they are conducting business, including, without limitation, the United States Food and Drug Administration (the "FDA") and applicable Environmental Laws (as defined below), except where the failure to be so in compliance would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its Subsidiaries considered as one enterprise, (ii) the Company and its Subsidiaries have all licenses, certificates, authorizations, approvals, permits, franchises, orders and consents from all state, federal and other governmental or regulatory authorities including, without limitation, the FDA, which are necessary to the current conduct of their businesses, except where the failure to be so in compliance would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its Subsidiaries considered as one enterprise, (iii) all of such licenses, certificates, authorizations, approvals, permits, franchises, orders and consents are valid and in full force and effect, (iv) the Company and its Subsidiaries have fulfilled and performed, and will fulfill and perform, all of their obligations with respect to, and are operating in compliance with, all such licenses, certificates, authorizations, approvals, permits, franchises, orders and consents and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or result in any impairment of the rights of the holder thereof, except to the extent that any such revocation, termination or impairment would not have a material adverse effect on the financial condition, results of operations, business or business prospects of the Company and its Subsidiaries considered as one enterprise, (v) no such licenses, certificates, authorizations, approvals, permits, franchises, orders or consents contain any restrictions that have or could reasonably be expected to have a material adverse effect on the financial condition, results of operations, business or business prospects of the Company and its Subsidiaries considered as one enterprise, and (vi) the Company is not aware of any existing or imminent matter which could reasonably be expected to have an adverse impact on the current operations or business of the Company and its Subsidiaries considered as one enterprise. For the purposes of this Section 4.13, "Environmental Laws" shall include, without limitation, the Federal Insecticide, Fungicide, Rodenticide Act, Resource Conservation & Recovery Act, Clean Water Act, Safe Drinking Water Act, Atomic Energy Act, Occupational Safety and Health Act, Toxic Substances Control Act, Clean Air Act, Comprehensive Environmental Response, 4 Compensation and Liability Act, Emergency Planning and Community Right-to-Know Act, Hazardous Materials Transportation Act and all analogous or related federal, state or local laws, each as amended, all rules and regulations promulgated pursuant to any of the above statues, and any other foreign, federal, state or local law, statute, ordinance, rule or regulation governing environmental matters, as amended from time to time, including any common law cause of action providing any right or remedy with respect to environmental matters, and all judicial and administrative decisions, orders and decrees issued to the Company or its Subsidiaries relating to environmental matters. 4.14 NASDAQ Compliance. The Company's Common Stock is registered pursuant to Section 12(g) of the Exchange Act and is listed on The Nasdaq Stock Market, Inc. National Market (the "Nasdaq National Market"), and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or de-listing the Common Stock from the Nasdaq National Market, nor has the Company received any notification that the SEC or the National Association of Securities Dealers, Inc. ("NASD") is contemplating terminating such registration or listing. As of the Closing Date, the Company will be in compliance with the listing requirements for the Nasdaq National Market. 4.15 Foreign Corrupt Practices. Neither the Company nor any of its Subsidiaries, nor, to the knowledge of the Company or any Subsidiary, any agent or other person acting on behalf of the Company or any of its Subsidiaries, have (i) directly or indirectly, used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity; (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; (iii) failed to disclose fully any contribution made by the Company or made by any person acting on its behalf and of which the Company is aware in violation of law; (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (v) made any unlawful bribe, rebate, payoff, influence, kick-back or other unlawful payment. 4.16 No Manipulation of Stock. The Company has not taken and will not take, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. 4.17 OSHA. The operations of the Company and its Subsidiaries with respect to any real property currently leased, owned or by any means controlled by the Company or any of its Subsidiaries (the "Real Property") are in compliance with all federal, state, and local laws, ordinances, rules, and regulations relating to occupational health and safety and the environment except where failure to be in such compliance could not reasonably be expected to have a material adverse effect on the current operations or business of the Company and its Subsidiaries considered as one enterprise; the Company and its Subsidiaries maintain all licenses, permits and authorizations necessary to operate under all such laws applicable to the Company and its Subsidiaries except where the failure to so possess could not reasonably be expected to have a material adverse effect on the current operations or business of the Company and its Subsidiaries considered as one enterprise. 4.18 Lock-up Agreements. Lock-up Agreements or similar agreements with the Placement Agent have been, or will be prior to the Closing Date, executed by each of the Company and the Company's executive officers and directors providing that, subject to certain exceptions, such entity or individual will not sell, offer, contract to sell, pledge, grant any option to purchase or otherwise dispose of any shares of the Company's Common Stock for a period ending 90 days after the Registration Statement is declared effective. 4.19 Accounting Controls. The Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 4.20 Loans to Directors or Officers. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business or except in amounts that in the aggregate are not material) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of the members of the families of any of them, except as disclosed in the Placement Memorandum. 5 4.21 Compliance with Florida Statutes. The Company has complied with all provisions of Florida Statutes Section 517.075, and the regulations thereunder, relating to doing business with the Government of Cuba or with any person or affiliate located in Cuba. 4.22 Reporting Status. The Company has filed in a timely manner all documents that the Company was required to file under the Securities Exchange Act of 1934, as amended (the "Exchange Act") during the 12 months preceding the date of this Agreement. The following documents complied in all material respects with the SEC's requirements as of their respective filing dates, and the information contained therein as of the date thereof did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under where they were made not misleading: (a) The Company's Annual Report on Form 10-K for the year ended December 31, 1997; (b) The Company's proxy statement in connection with its 1998 Annual Meeting of Stockholders; and (c) All other documents, if any, filed by the Company with the SEC since December 31, 1997 pursuant to the reporting requirements of the Exchange Act. 4.23 Listing. The Company shall comply with all requirements of the National Association of Securities Dealers, Inc. with respect to the issuance of the Shares and the listing thereof on the Nasdaq National Market. 4.24 Year 2000 Compliance. The information set forth in the Placement Memorandum with respect to the Company's efforts regarding Year 2000 matters (i) conforms in all material respects to the guidelines set forth in SEC Release No. 33-7558 and (ii) accurately describes the status of the Company's efforts regarding Year 2000 matters. To the Company's knowledge, the costs associated with ensuring that the Company is Year 2000 compliant will not have a material adverse effect on the operations or business of the Company and its Subsidiaries considered as one enterprise. 4.25 Taxes. The Company has timely filed all necessary federal, state and foreign income and franchise tax returns and has paid all taxes shown thereon as due, except for such filings or payments as to which the failure to so file or pay would not have a material adverse effect on the Company. 4.27 Press Releases. The Company will not, without the prior approval of the Investor, issue any press release that mentions the Investor by name. 4.28 Insurance. The Company and its Subsidiaries maintain insurance with insurers of recognized financial responsibility of the types and in the amounts generally deemed adequate for their respective businesses and consistent with insurance coverage maintained by similar companies in similar businesses. 5. Representations, Warranties and Covenants of the Investor. 5.1 The Investor represents and warrants to, and covenants with, the Company that: (i) the Investor is an "accredited investor" as defined in Regulation D under the Securities Act and the Investor is also knowledgeable, sophisticated and experienced in making, and is qualified to make decisions with respect to investments in shares presenting an investment decision like that involved in the purchase of the Shares, including investments in securities issued by the Company and investments in comparable companies, and has requested, received, reviewed and considered all information it deemed relevant in making an informed decision to purchase the Shares; (ii) the Investor is acquiring the number of Shares set forth on the signature page hereto in the ordinary course of its business and for its own account for investment only and with no present intention of distributing any of such Shares or any arrangement or understanding with any other persons regarding the distribution of such Shares; (iii) the Investor will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Shares except in compliance with the Securities Act, applicable state securities laws and the respective rules and regulations promulgated thereunder; (iv) the Investor has answered all questions on the signature page hereto for use in preparation of the Registration Statement and the answers thereto are true and correct as of the date hereof and will be true and correct as of the Closing Date; (v) the Investor will notify the Company immediately of any 6 change in any of such information until such time as the Investor has sold all of its Shares or until the Company is no longer required to keep the Registration Statement effective; and (vi) the Investor has, in connection with its decision to purchase the number of Shares set forth on the signature page hereto, relied only upon the Placement Memorandum and the representations and warranties of the Company contained herein. Investor understands that its acquisition of the Shares has not been registered under the Securities Act or registered or qualified under any state securities law in reliance on specific exemptions therefrom, which exemptions may depend upon, among other things, the bona fide nature of the Investor's investment intent as expressed herein. Investor has completed or caused to be completed and delivered to the Company the Investor Questionnaire attached as Exhibit D to the Placement Memorandum, which questionnaire is true and correct in all material respects. 5.2 The Investor acknowledges, represents and agrees that no action has been or will be taken in any jurisdiction outside the United States by the Company or the Placement Agent that would permit an offering of the Shares, or possession or distribution of offering materials in connection with the issue of the Shares, in any jurisdiction outside the United States where action for that purpose is required. Each Investor outside the United States will comply with all applicable laws and regulations in each foreign jurisdiction in which it purchases, offers, sells or delivers Shares or has in its possession or distributes any offering material, in all cases at its own expense. The Placement Agent is not authorized to make any representation or use any information in connection with the issue, placement, purchase and sale of the Shares other than as contained in the Placement Memorandum. 5.3 The Investor hereby covenants with the Company not to make any sale of the Shares without complying with the provisions of this Agreement, including Section 7.2 hereof, and without effectively causing the prospectus delivery requirement under the Securities Act to be satisfied, and the Investor acknowledges that the certificates evidencing the Shares will be imprinted with a legend that prohibits their transfer except in accordance therewith. The Investor acknowledges that there may occasionally be times when the Company, based on the advice of its counsel, determines that it must suspend the use of the Prospectus forming a part of the Registration Statement pursuant to Section 7.2 hereof until such time as an amendment to the Registration Statement has been filed by the Company and declared effective by the SEC or until the Company has amended or supplemented such Prospectus. 5.4 The Investor further represents and warrants to, and covenants with, the Company that (i) the Investor has full right, power, authority and capacity to enter into this Agreement and to consummate the transactions contemplated hereby and has taken all necessary action to authorize the execution, delivery and performance of this Agreement, and (ii) this Agreement constitutes a valid and binding obligation of the Investor enforceable against the Investor in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and except as the indemnification agreements of the Investors herein may be legally unenforceable. 5.5 Investor will not, prior to the effectiveness of the Registration Statement, sell, offer to sell, solicit offers to buy, dispose of, loan, pledge or grant any right with respect to (collectively, a "Disposition"), the Common Stock of the Company, nor will Investor engage in any hedging or other transaction which is designed to or could reasonably be expected to lead to or result in a Disposition of Common Stock of the Company by the Investor or any other person or entity. Such prohibited hedging or other transactions would include without limitation effecting any short sale or having in effect any short position (whether or not such sale or position is against the box and regardless of when such position was entered into) or any purchase, sale or grant of any right (including without limitation any put or call option) with respect to the Common Stock of the Company or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from the Common Stock of the Company. 5.6 The Investor understands that nothing in the Placement Memorandum, this Agreement or any other materials presented to the Investor in connection with the purchase and sale of the Shares constitutes legal, tax or investment advice. The Investor has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of Shares. 6. Survival of Representations, Warranties and Agreements. Notwithstanding any investigation made by any party to this Agreement or by the Placement Agent, all covenants, agreements, representations and warranties made 7 by the Company and the Investor herein shall survive the execution of this Agreement, the delivery to the Investor of the Shares being purchased and the payment therefor. 7. Registration of the Shares; Compliance with the Securities Act. 7.1 Registration Procedures and Expenses. The Company shall: (a) subject to receipt of necessary information from the Investors, prepare and file with the SEC, within five (5) business days after the Subscription Date, the Registration Statement to enable the resale of the Shares by the Investors from time to time through the automated quotation system of the Nasdaq National Market or in privately-negotiated transactions; (b) use its reasonable efforts, subject to receipt of necessary information from the Investors, to cause the Registration Statement to become effective within 90 days after the Registration Statement is filed by the Company; (c) prepare and file with the SEC such amendments and supplements to the Registration Statement and the Prospectus used in connection therewith as may be necessary to keep the Registration Statement current and effective for a period not exceeding, with respect to each Investor's Shares purchased hereunder, the earlier of (i) the second anniversary of the Closing Date, (ii) the date on which the Investor may sell all Shares then held by the Investor without restriction by the volume limitations of Rule 144(e) of the Securities Act, or (iii) such time as all Shares purchased by such Investor in this Offering have been sold pursuant to a registration statement. (d) furnish to the Placement Agent and to the Investor with respect to the Shares registered under the Registration Statement such number of copies of the Registration Statement, Prospectuses and Preliminary Prospectuses in conformity with the requirements of the Securities Act and such other documents as the Investor may reasonably request, in order to facilitate the public sale or other disposition of all or any of the Shares by the Investor, provided, however, that the obligation of the Company to deliver copies of Prospectuses or Preliminary Prospectuses to the Investor shall be subject to the receipt by the Company of reasonable assurances from the Investor that the Investor will comply with the applicable provisions of the Securities Act and of such other securities or blue sky laws as may be applicable in connection with any use of such Prospectuses or Preliminary Prospectuses; (e) file documents required of the Company for normal blue sky clearance in states specified in writing by the Investor, provided, however, that the Company shall not be required to qualify to do business or consent to service of process in any jurisdiction in which it is not now so qualified or has not so consented; (f) bear all expenses in connection with the procedures in paragraph (a) through (e) of this Section 7.1 and the registration of the Shares pursuant to the Registration Statement; and (g) advise the Investors, promptly after it shall receive notice or obtain knowledge of the issuance of any stop order by the SEC delaying or suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceeding for that purpose; and it will promptly use its reasonable efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued. The Company understands that the Investor disclaims being an underwriter, but the Investor being deemed an underwriter by the SEC shall not relieve the Company of any obligations it has hereunder, provided, however that if the Company receives notification from the SEC that the Investor is deemed an underwriter, then the period by which the Company is obligated to submit an acceleration request to the SEC shall be extended to the earlier of (i) the 90th day after such SEC notification, or (ii) 120 days after the initial filing of the Registration Statement with the SEC. 7.2 Transfer of Shares After Registration; Suspension. (a) The Investor agrees that it will not effect any disposition of the Shares or its right to purchase the Shares that would constitute a sale within the meaning of the Securities Act except as contemplated in the Registration Statement referred to in Section 7.1 and as described below, and that it will promptly notify the Company of any changes in the information set forth in the Registration Statement regarding the Investor or its plan of distribution. 8 (b) Except in the event that paragraph (c) below applies, the Company shall (i) if deemed necessary by the Company, prepare and file from time to time with the SEC a post-effective amendment to the Registration Statement or a supplement to the related Prospectus or a supplement or amendment to any document incorporated therein by reference or file any other required document so that such Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and so that, as thereafter delivered to purchasers of the Shares being sold thereunder, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) provide the Investor copies of any documents filed pursuant to Section 7.2(b)(i); and (iii) inform each Investor that the Company has complied with its obligations in Section 7.2(b)(i) (or that, if the Company has filed a post-effective amendment to the Registration Statement which has not yet been declared effective, the Company will notify the Investor to that effect, will use its reasonable efforts to secure the effectiveness of such post-effective amendment as promptly as possible and will promptly notify the Investor pursuant to Section 7.2(b)(i) hereof when the amendment has become effective). (c) Subject to paragraph (d) below, in the event (i) of any request by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to a Registration Statement or related Prospectus or for additional information; (ii) of the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose; (iii) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; or (iv) of any event or circumstance which necessitates the making of any changes in the Registration Statement or Prospectus, or any document incorporated or deemed to be incorporated therein by reference, so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or any omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or any omission to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; then the Company shall deliver a certificate in writing to the Investor (the "Suspension Notice") to the effect of the foregoing and, upon receipt of such Suspension Notice, the Investor will refrain from selling any Shares pursuant to the Registration Statement (a "Suspension") until the Investor's receipt of copies of a supplemented or amended Prospectus prepared and filed by the Company, or until it is advised in writing by the Company that the current Prospectus may be used, and has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in any such Prospectus. In the event of any Suspension, the Company will use its reasonable efforts to cause the use of the Prospectus so suspended to be resumed as soon as reasonably practicable within twenty (20) business days after the delivery of a Suspension Notice to the Investor. In addition to and without limiting any other remedies (including, without limitation, at law or at equity) available to the Investor, the Investor shall be entitled to specific performance in the event that the Company fails to comply with the provisions of this Section 7.2(c). (d) Notwithstanding the foregoing paragraphs of this Section 7.2, the Investor shall not be prohibited from selling Shares under the Registration Statement as a result of Suspensions on more than three (3) occasions of not more than thirty (30) days each in any twelve month period, unless, in the good faith judgment of the Company's Board of Directors, upon advice of counsel, the sale of Shares under the Registration Statement in reliance on this paragraph 7.2(d) would be reasonably likely to cause a violation of the Securities Act or the Exchange Act and result in potential liability to the Company. (e) Provided that a Suspension is not then in effect the Investor may sell Shares under the Registration Statement, provided that it arranges for delivery of a current Prospectus to the transferee of such Shares. Upon receipt of a request therefor, the Company has agreed to provide an adequate number of current Prospectuses to the Investor and to supply copies to any other parties requiring such Prospectuses. (f) In the event of a sale of Shares by the Investor, the Investor must also deliver to the Company's transfer agent, with a copy to the Company, a Certificate of Subsequent Sale substantially in the form attached hereto as Exhibit A, so that the shares may be properly transferred. 7.3 Indemnification. For the purpose of this Section 7.3: 9 (i) the term "Selling Stockholder" shall include the Investor and any affiliate of such Investor; (ii) the term "Registration Statement" shall include any final Prospectus, exhibit, supplement or amendment included in or relating to the Registration Statement referred to in Section 7.1; and (iii) the term "untrue statement" shall include any untrue statement or alleged untrue statement, or any omission or alleged omission to state in the Registration Statement a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (a) The Company agrees to indemnify and hold harmless each Selling Stockholder from and against any losses, claims, damages or liabilities to which such Selling Stockholder may become subject (under the Securities Act or otherwise) insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon (i) any untrue statement of a material fact contained in the Registration Statement, or (ii) any failure by the Company to fulfill any undertaking included in the Registration Statement, and the Company will reimburse such Selling Stockholder for any reasonable legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim, or preparing to defend any such action, proceeding or claim, provided, however, that the Company shall not be liable in any such case to the extent that such loss, claim, damage or liability arises out of, or is based upon, an untrue statement made in such Registration Statement in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Selling Stockholder specifically for use in preparation of the Registration Statement or the failure of such Selling Stockholder to comply with its covenants and agreements contained in Sections 5.3 or 7.2 hereof respecting sale of the Shares or any statement or omission in any Prospectus that is corrected in any subsequent Prospectus that was delivered to the Investor prior to the pertinent sale or sales by the Investor. (b) The Investor agrees to indemnify and hold harmless the Company (and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act, each officer of the Company who signs the Registration Statement and each director of the Company) from and against any losses, claims, damages or liabilities to which the Company (or any such officer, director or controlling person) may become subject (under the Securities Act or otherwise), insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon, (i) any failure to comply with the covenants and agreements contained in Section 5.3 or 7.2 hereof respecting sale of the Shares, or (ii) any untrue statement of a material fact contained in the Registration Statement if such untrue statement was made in reliance upon and in conformity with written information furnished by or on behalf of the Investor specifically for use in preparation of the Registration Statement, and the Investor will reimburse the Company (or such officer, director or controlling person), as the case may be, for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim. Indemnification under Section 7.3(b)(ii) above shall be limited to the amount of net proceeds received by Investor from the sale of the Shares. (c) Promptly after receipt by any indemnified person of a notice of a claim or the beginning of any action in respect of which indemnity is to be sought against an indemnifying person pursuant to this Section 7.3, such indemnified person shall notify the indemnifying person in writing of such claim or of the commencement of such action, but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party under this Section 7.3 (except to the extent that such omission materially and adversely affects the indemnifying party's ability to defend such action) or from any liability otherwise than under this Section 7.3. Subject to the provisions hereinafter stated, in case any such action shall be brought against an indemnified person, the indemnifying person shall be entitled to participate therein, and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, shall be entitled to assume the defense thereof, with counsel reasonably satisfactory to such indemnified person. After notice from the indemnifying person to such indemnified person of its election to assume the defense thereof, such indemnifying person shall not be liable to such indemnified person for any legal expenses subsequently incurred by such indemnified person in connection with the defense thereof, provided, however, that if there exists or shall exist a conflict of interest that would make it inappropriate, in the opinion of counsel to the indemnified person, for the same counsel to represent both the indemnified person and such indemnifying person or any affiliate or associate thereof, the indemnified person shall be entitled to retain its own counsel at the expense of such indemnifying person; provided, however, that no indemnifying person shall be responsible for the fees and expenses of more than one separate counsel (together with appropriate local counsel) for all indemnified parties. In no event shall any indemnifying person be liable in respect of any amounts paid in settlement of any action unless the indemnifying person shall have approved the terms of such 10 settlement; provided that such consent shall not be unreasonably withheld. No indemnifying person shall, without the prior written consent of the indemnified person, effect any settlement of any pending or threatened proceeding in respect of which any indemnified person is or could have been a party and indemnification could have been sought hereunder by such indemnified person, unless such settlement includes an unconditional release of such indemnified person from all liability on claims that are the subject matter of such proceeding. (d) If the indemnification provided for in this Section 7.3 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and the Investors on the other in connection with the statements or omissions or other matters which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, in the case of an untrue statement, whether the untrue statement relates to information supplied by the Company on the one hand or an Investor on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement. The Company and the Investors agree that it would not be just and equitable if contribution pursuant to this subsection (d) were determined by pro rata allocation (even if the Investors were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Investor shall be required to contribute any amount in excess of the amount by which the net amount received by the Investor from the sale of the Shares to which such loss relates exceeds the amount of any damages which such Investor has otherwise been required to pay by reason of such untrue statement. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Investors' obligations in this subsection to contribute are several in proportion to their sales of Shares to which such loss relates and not joint. (e) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 7.3, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 7.3 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement as required by the Act and the Exchange Act. The parties are advised that federal or state public policy as interpreted by the courts in certain jurisdictions may be contrary to certain of the provisions of this Section 7.3, and the parties hereto hereby expressly waive and relinquish any right or ability to assert such public policy as a defense to a claim under this Section 7.3 and further agree not to attempt to assert any such defense. 7.4 Termination of Conditions and Obligations. The conditions precedent imposed by Section 5 or this Section 7 upon the transferability of the Shares shall cease and terminate as to any particular number of the Shares when such Shares shall have been effectively registered under the Securities Act and sold or otherwise disposed of in accordance with the intended method of disposition set forth in the Registration Statement covering such Shares or at such time as an opinion of counsel satisfactory to the Company shall have been rendered to the effect that such conditions are not necessary in order to comply with the Securities Act. 7.5 Information Available. So long as the Registration Statement is effective covering the resale of Shares owned by the Investor, the Company will furnish to the Investor: (a) as soon as practicable after it is available, one copy of (i) its Annual Reports to Stockholders (which Annual Reports shall contain financial statements audited in accordance with generally accepted accounting principles by a national firm of certified public accountants), (ii) if not included in substance in the Annual Reports to Stockholders, its Annual Reports on Form 10-K and (iii) its Quarterly Reports on Form 10-Q (the foregoing, in each case, excluding exhibits); 11 (b) upon the reasonable request of the Investor, all exhibits excluded by the parenthetical to subparagraph (a) of this Section 7.5 as filed with the SEC and all other information that is made available to shareholders; and (c) upon the reasonable request of the Investor, an adequate number of copies of the Prospectuses to supply to any other party requiring such Prospectuses; and the Company, upon the reasonable request of the Investor, will meet with the Investor or a representative thereof at the Company's headquarters to discuss all information relevant for disclosure in the Registration Statement covering the Shares and will otherwise cooperate with any Investor conducting an investigation for the purpose of reducing or eliminating such Investor's exposure to liability under the Securities Act, including the reasonable production of information at the Company's headquarters; provided, that the Company shall not be required to disclose any confidential information to or meet at its headquarters with any Investor until and unless the Investor shall have entered into a confidentiality agreement in form and substance reasonably satisfactory to the Company with the Company with respect thereto. 8. Placement Agent's Fee. The Investor acknowledges that the Company intends to pay to the Placement Agent a fee in respect of the sale of the Shares to the Investor. 9. Notices. All notices, requests, consents and other communications hereunder shall be in writing, shall be mailed (A) if within domestic United States by first-class registered or certified airmail, or nationally recognized overnight express courier, postage prepaid, or by facsimile, or (B) if delivered from outside the United States, by International Federal Express or facsimile, and shall be deemed given (i) if delivered by first-class registered or certified mail domestic, three business days after so mailed, (ii) if delivered by nationally recognized overnight carrier, one business day after so mailed, (iii) if delivered by International Federal Express, two business days after so mailed, (iv) if delivered by facsimile, upon electric confirmation of receipt and shall be delivered as addressed as follows: (a) if to the Company, to: The Spectranetics Corporation 96 Talamine Court Colorado Springs, CO 80907 Attn: Chief Financial Officer Phone: (719) 633-8333 Telecopy: (719) 633-2248 (b) with a copy mailed to: Latham & Watkins 135 Commonwealth Drive Menlo Park, CA 94025 Attn: Christopher Kaufman Phone: (650) 328-4600 Telecopy: (650) 463-2600 (c) if to the Investor, at its address on the signature page hereto, or at such other address or addresses as may have been furnished to the Company in writing. 10. Changes. This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Company and the Investor. 11. Headings. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. 12. Severability. In case any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 12 13. Governing Law. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without giving effect to the principles of conflicts of law. 14. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. 15. Attorneys' Fees. If any party to this Agreement brings an action to interpret or enforce its rights under this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees incurred in connection with such action, including any appeal of such action. 13 INSTRUCTION SHEET FOR INVESTOR (to be read in conjunction with the entire Stock Purchase Agreement) A. Complete the following items in the Stock Purchase Agreement: 1. Provide the information regarding the Investor requested on the signature page (page 1). The Agreement must be executed by an individual authorized to bind the Investor. 2. Return the signed Stock Purchase Agreement to: Dominique Semon BancBoston Robertson Stephens Inc. 590 Madison Avenue, 36th Floor New York, NY 10022 Telephone: (212) 319-8900 Facsimile: (212) 610-6125 An executed original Stock Purchase Agreement or a telecopy thereof must be received by 5:00 p.m. California time on a date to be determined and distributed to the Investor at a later date. B. Instructions regarding the transfer of funds for the purchase of Shares will be telecopied to the Investor by the Placement Agent at a later date. C. To resell the Shares after the Registration Statement covering the Shares is effective: (i) Provided that a Suspension of the Registration Statement is not then in effect pursuant to the terms of the Stock Purchase Agreement, the Investor may sell Shares under the Registration Statement, provided that it arranges for delivery of a current Prospectus to the transferee. Upon receipt of a request therefor, the Company has agreed to provide an adequate number of current Prospectuses to each investor and to supply copies to any other parties requiring such Prospectuses. (ii) The Investor must also deliver to the Company's transfer agent, with a copy to the Company, a Certificate of Subsequent Sale in the form attached as Exhibit A to the Stock Purchase Agreement, so that the Shares may be properly transferred. 14 EX-27 4 FDS --
5 This schedule contains summary financial information extracted from the condensed condolidated balance sheet and statement of operations as found on pages 2 and 3 of the Company's Form 10-Q for the period ended March 31, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 9,313 477 4,668 0 3,072 17,900 5,348 0 27,257 7,027 0 0 0 23 17,267 27,257 7,077 7,077 2,981 2,981 5,035 0 49 (925) 0 (925) 0 0 0 (925) (0.04) (0.04) P.P.&E is presented net of accumulated depreciation.
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