-----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, Vpi8GcH7/fMT50/HopbujTzy3IOr1GsyqEJleAu8p7KsO8sPUQujvFy/lK8DMjoJ G9ku6Cxm39uISiPVPBt1pQ== 0000950134-02-002968.txt : 20020415 0000950134-02-002968.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950134-02-002968 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19711 FILM NUMBER: 02593791 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 FORMER COMPANY: FORMER CONFORMED NAME: THE SPECTRANETICS CORP DATE OF NAME CHANGE: 19900510 10-K 1 d95352e10-k.txt FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 2001 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE YEAR ENDED DECEMBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-19711 THE SPECTRANETICS CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 84-0997049 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
96 TALAMINE COURT COLORADO SPRINGS, COLORADO 80907 (Address of principal executive offices and zip code) Registrant's Telephone Number, including Area Code: (719) 633-8333 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock of the Registrant, as of March 13, 2002, computed by reference to the closing sale price of the voting stock held by non-affiliates on such date, was approximately $93,070,868. As of March 13, 2002, there were outstanding 23,718,101 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its 2002 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than April 30, 2002, are incorporated by reference into Part III as specified herein. Portions of the Registrant's 2001 Annual Report to Security Holders are incorporated by reference into Parts II and IV as specified herein. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS PART I...................................................... 1 Item 1. Business........................................... 1 General................................................... 1 Strategy............................................... 1 Technology................................................ 2 CVX-300(R) Excimer Technology.......................... 2 Product Applications...................................... 3 Excimer Laser Atherectomy.............................. 3 Cardiac Lead Removal Systems........................... 5 Peripheral Vascular Disease Therapy.................... 6 Restenosed Stents...................................... 7 Sales and Marketing....................................... 7 Domestic Operations.................................... 7 International Operations............................... 8 Government Regulation..................................... 8 Section 510(K) Devices................................. 9 PMA Devices............................................ 9 Competition............................................... 11 Patents and Proprietary Rights............................ 12 Research and Development.................................. 13 Manufacturing............................................. 13 Third-Party Reimbursement................................. 13 Product Liability and Insurance........................... 14 Employees................................................. 14 Item 2. Properties......................................... 14 Item 3. Legal Proceedings.................................. 14 Item 4. Submission of Matters to a Vote of Security Holders............................................ 14 PART II..................................................... 15 Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters........................ 15 Item 6. Selected Financial Data............................ 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ Item 7A. Quantitative and Qualitative Disclosure About Market Risk........................................ 15 Item 8. Financial Statements and Supplementary Data........ 16 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure................ 16 PART III.................................................... 16 Item 10. Directors and Executive Officers of the Registrant......................................... 16 Item 11. Executive Compensation............................. 16 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 16 Item 13. Certain Relationships and Related Transactions..... 16 PART IV..................................................... 17 Item 14. Exhibits and Reports on Form 8-K................... 17
i PART I The information set forth below includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created by that section. You are cautioned not to place undue reliance on these forward-looking statements and to note that they speak only as of the date hereof. Factors that could cause actual results to differ materially from those set forth in the forward-looking statements are set forth below and include, but are not limited to, the following: - Market acceptance of excimer laser atherectomy technology; - Market acceptance of excimer laser removal of pacemaker and defibrillator leads; - Technological changes resulting in product obsolescence; - The inability to obtain patents with respect to new products; - Adverse state or federal legislation and regulation; - Availability of vendor-sourced component products at reasonable prices; and - The risk factors listed from time to time in our filings with the Securities and Exchange Commission as well as those set forth in Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors." ITEM 1. BUSINESS GENERAL We develop, manufacture, market and distribute a proprietary excimer laser system and related accessory products for the treatment of certain coronary and vascular conditions. Excimer laser technology delivers comparatively cool ultraviolet light in short, controlled energy pulses to ablate or remove tissue. Our excimer laser system includes the CVX-300(R) laser unit and various fiber optic delivery devices, including disposable catheters and sheaths. Our excimer laser system is the only excimer laser system approved in the United States and Europe for use in multiple, minimally invasive cardiovascular applications. Our excimer laser system is used in atherectomy procedures to open clogged or obstructed arteries. It is also used to remove lead wires from patients with implanted pacemakers or cardioverter defibrillators, which are electronic devices that regulate the heartbeat. We also have regulatory approval to market our products in two key international markets. In conjunction with our distributor Heiwa Bussan Co., Ltd., we recently received approval to market some of our coronary atherectomy products in Japan, and are seeking additional approvals there for our newer coronary products and our lead removal product line. In Europe, in addition to our coronary atherectomy and lead removal product lines, we also have approval to market our products to treat artery blockages in the upper and lower leg. We are currently sponsoring clinical trials in order to obtain regulatory approval in the United States to market our products domestically for use in the leg. Spectranetics is a Delaware corporation formed in 1984. Our principal executive offices are located at 96 Talamine Court, Colorado Springs, Colorado 80907. Our telephone number is (719) 633-8333. Strategy Our strategy includes the following key points: - Leverage technical expertise in generation and delivery of excimer energy. We have designed our excimer laser platform to support multiple existing and potential therapeutic applications for the treatment of cardiovascular disease. We are exploring additional applications of our core excimer laser technology for novel treatments of coronary and vascular conditions. We currently have two major clinical trials under way testing additional applications for the excimer laser in the United States. 1 - Expand disposable device revenues from existing customer base. By training additional cardiologists, surgeons and other specialists at existing customer hospitals and introducing physicians already familiar with our products to new products and applications, we intend to increase our revenue stream from sales of current and future disposable devices to existing customers. In 2001, we trained 166 physicians in the general use of our equipment and trained 321 physicians in the use of our product as a pretreatment within restenosed (clogged) stents prior to brachytherapy (radiation therapy). - Expand installed customer base. We intend to expand our customer base by continuing to focus our sales efforts on cardiac centers that perform the majority of interventional procedures. To help accomplish this goal, we are running a special price promotion on our lasers at the beginning of 2002, offering them for $90,000 compared with our list price of $249,000. TECHNOLOGY Excimer laser ablation removes plaque or tissue by delivering relatively cool excimer laser energy to a blockage or lesion. This laser beam breaks down the molecular bonds of plaque or tissue in a process known as photoablation, without significant thermal damage to surrounding tissue. Laser ablation involves the insertion of a laser catheter or sheath into an artery or vein through a small incision. When the tip of the catheter or sheath has been placed at the site of the blockage or lesion, the physician activates the laser beam to ablate the plaque or tissue. CVX-300(R) Excimer Technology Our proprietary CVX-300 excimer laser unit is designed for use in a variety of cardiovascular applications. When coupled with our fiber optic laser devices, the system generates and delivers 308 nanometer wavelength ultraviolet light pulses to a lesion to remove plaque or tissue. The current list price of the CVX-300 is $249,000, but we began a special price promotion at the beginning of 2002 in which lasers are being offered for $90,000. We offer various financing options, including leasing options through a third-party leasing company specializing in medical devices. On February 19, 1993, the Food and Drug Administration (FDA) approved the Spectranetics CVX-300 excimer laser unit and 1.4 and 1.7 millimeter diameter fiber optic catheters for the following six indications for use in the treatment of coronary artery disease: - saphenous vein grafts; - total occlusions crossable by a guidewire; - ostial lesions (blockages at the beginning of arteries); - lesions with moderate calcification; - long lesions; and - lesions where angioplasty balloon failures have occurred. Additional catheter sizes and improved models to treat the six original indications have been approved by the FDA over the ensuing years (see chart on page 10). On October 15, 2001, we received FDA approval for the use of the Spectranetics excimer laser and related catheters for an additional coronary indication -- for use within restenosed stents prior to brachytherapy (radiation therapy). In all of these coronary atherectomy indications, we offer an alternative or adjunct to traditional balloon angioplasty and atherectomy (rotational cutters and burrs). Unlike conventional balloons that merely compress arterial plaque against the stent or vessel wall, laser atherectomy dissolves the material, resulting in a larger diameter opening. The CVX-300 excimer laser unit was also initially approved for lead removal procedures on December 9, 1997. In November 1994, we received ISO 9001 certification from the TUV Product Service GmbH (TUV) in Munich, Germany, which allows us to market our products in the European Community within compliance of 2 the manufacturing quality regulations. We hold EC Cert G1990821401007, G7011221401012 and G7990821401008; QA Cert Q1Z990821401011 with EN 550 Supplement with inclusion of ISO 13485:1996. In addition the CMDCAS (Canadian) certification was recommended by TUV during our last audit in January 2002. We have received CE (Communaute Europeene) mark registration for all of our current products, with the exception of the POINT9 X-80(TM) catheter, which we expect to receive CE mark registration in 2002. The CE mark indicates that a product is certified for sale throughout the European Union and that the manufacturer of the product complies with applicable safety and quality standards. On September 28, 2001, in conjunction with our distributor Heiwa Bussan Co., Ltd., we received regulatory approval from the Japanese Ministry of Health and Welfare (MHW) to market our laser and various sizes of our Extreme(R), Vitesse(R) E and Vitesse(R) C coronary catheters in Japan. We have submitted our application for reimbursement approval for these products in Japan, which may take up to two years to obtain. We do not expect our sales in Japan to be significant until reimbursement approval is attained. In addition, we are in various stages of the submission process to obtain regulatory approval in Japan for some of our newer products. Since receiving FDA approval in 1993, more than 50,000 patients have been safely treated with excimer laser coronary atherectomy. Initial FDA approval for use of the excimer laser for coronary applications was based on the results of the Percutaneous Excimer Laser Coronary Angioplasty (PELCA) Study, which evaluated a registry of laser usage in blocked coronary arteries in 2,432 patients with a mean age of 63 years. Clinical success (i.e., reduction in the size of the lesion to less than 50 percent of the diameter of the artery without heart attack, death, or the need for emergency bypass surgery during hospitalization) was achieved in 89% of these patients. Of note, there was no difference in success rate or complications for long lesions, total occlusions crossable with a guidewire, saphenous vein grafts and aorto-ostial lesions, suggesting that complex lesions could be safely and effectively treated with excimer laser coronary atherectomy. More recent studies utilizing current catheter technology in complex lesion subsets report significantly higher success rates of more than 95 percent. We believe that the CVX-300 system provides the following benefits: - Reduced procedure time. Patient outcome audits, which compare excimer laser procedures to balloon angioplasty and rotational atherectomy, reveal the excimer laser method shortens procedure times and reduces radiation exposure to the patient from fluoroscopic imaging used during the procedure, thereby improving lab efficiency. - Ease of use. During a laser procedure, it may be necessary to adjust laser energy output. The CVX-300 laser unit is computer-controlled, which allows the physician to change energy levels without interrupting the treatment to remove the catheter from the patient for recalibration. This feature also enables the physician to begin the procedure with the minimum level of energy that might be required and, if necessary, to easily adjust the energy level upward during the procedure. - Small size and easy set-up. Space in cardiac catheterization labs is usually limited. In addition, many hospitals have multiple catheterization labs. As a result of a number of proprietary and patented laser and catheter design features, the CVX-300 laser unit is portable and typically requires five minutes to set up. This combination of features allows the CVX-300 laser unit to be transported easily between laboratories within the hospital. PRODUCT APPLICATIONS Excimer Laser Atherectomy Background. Percutaneous coronary intervention, or PCI, is a minimally invasive medical procedure used to treat coronary artery disease, or atherosclerosis, and is performed by interventional cardiologists and radiologists. We estimate there are approximately 1.35 million PCI procedures performed worldwide. We estimate that approximately 10 to 15 percent of these patients could benefit from the use of our products, including patients with total occlusions crossable by a guidewire, occluded saphenous vein grafts, long lesions, 3 and lesions where a balloon failure has occurred.* In these indications, we offer an alternative or adjunct to traditional balloon angioplasty or the need for coronary bypass surgery. Unlike conventional balloons that merely compress arterial plaque against the stent or vessel wall, laser atherectomy actually dissolves the material. We focus our marketing efforts on seven approved coronary indications: - saphenous vein grafts; - total occlusions crossable by a guidewire; - ostial lesions (blockages at the beginning of arteries); - lesions with moderate calcification; - long lesions; - lesions where angioplasty balloon failures have occurred; and - pretreatment of restenosed stents prior to brachytherapy. In Europe, we focus our marketing efforts on the approved coronary indications shown above as well as laser treatment of all in-stent restenoses and blockages in the arteries of the upper and lower legs. Disposable Laser Catheters. We have developed a broad selection of proprietary laser devices designed to meet physician needs and multiple indications for use, including excimer laser coronary atherectomy and peripheral excimer laser atherectomy in the upper and lower leg. Early laser catheters contained only a few large optical fibers to transmit the laser energy. These early devices were stiff, had difficulty accessing arterial anatomy and suffered from poor ablation characteristics. Current innovative laser catheter designs contain hundreds of very small diameter, flexible glass fibers that can access more difficult-to-reach coronary anatomy. The smaller fibers also produce better laser energy distribution at the tip of the catheter for more uniform ablation. Laser catheters are designed to provide several advantages over other atherectomy devices. These catheters, which we produce in sizes ranging from .9 to 2.5 millimeters in diameter, consist of concentric or eccentric bundles of optical fibers mounted within a thin plastic tubing. Fibers are coupled to the laser using a patented intelligent connector, which requires no adjustments by the physician. This connector provides information about the device being used to the CVX-300 laser unit computer, which controls the calibration cycle and energy output. The catheter's combination of trackability, flexibility and ablation characteristics enables the physician to access difficult-to-treat lesions. Our line of disposable catheters includes the following: - Extreme(R) Laser Catheter. In October 1993, the FDA approved the Extreme(R) laser concentric catheter, which was our first high-performance coronary laser catheter. It is an over-the-wire (OTW) catheter with good flexibility and an active ablation area covering a high percentage of the catheter tip. Other catheter features include the patented metal rim tip designed for visualization and alignment and a proprietary lubricious coating for easy access. The Extreme(R) laser catheter is available in 0.9, 1.4, 1.7 and 2.0 millimeter tip diameters. Spectranetics has received the CE Mark of approval for use of its Extreme atherectomy line of catheters in Europe, and has received approval from the MHW to market the 1.4, 1.7 and 2.0 millimeter size Extreme catheters in Japan (but have not yet received reimbursement approval in Japan). - Vitesse(R) Cos Catheter. The Vitesse(R) Cos concentric laser catheter, which succeeded the Vitesse(R) C catheter, was approved by the FDA in January 2000. Like its predecessor (which received regulatory approval in the United States in October 1994 and in Japan in September 2001, with reimbursement - --------------- * Amounts were estimated by Spectranetics based on extrapolation from available industry data. Patient population estimates are subject to inherent uncertainties. We are unable to determine with any degree of certainty the number of procedures for any indication or the number of patients who are suitable for treatment using these procedures. 4 approval in Japan still pending), this is a rapid-exchange (Rx) catheter, which incorporates a "monorail design" that can be threaded onto and exchanged over a guidewire more conveniently than over-the-wire models. It is also compatible with a wide range of guidewires. The fibers in the Vitesse(R) Cos are "optimally spaced" and laboratory tests have demonstrated that it produces greater debulking, or plaque removal, compared with its predecessor catheter. The Vitesse(R) Cos laser catheter is available in 1.4, 1.7 and 2.0 millimeter tip diameters. In Europe, we received the CE Mark of approval for this laser catheter in November 1998. - Vitesse(R) E Laser Catheter. The Vitesse(R) E eccentric rapid-exchange (Rx) laser catheter is our first directional coronary laser catheter. The 1.7 millimeter diameter catheter was approved by the FDA in July 1995, and the 2.0 millimeter catheter was approved by the FDA in September 1997. Spectranetics received the CE Mark of approval for use of these atherectomy catheters in Europe in February 1997 and MHW approval for use in Japan in September 2001, but we are still awaiting Japanese reimbursement approval. This catheter utilizes an eccentric (or one-sided) fiber array at the tip that can be rotated by the operator to create a larger channel through the blockage. - POINT 9(TM) Millimeter Catheter. The POINT 9(TM) concentric catheter comes in both the Extreme (OTW) and Vitesse (Rx) models. The Vitesse model received CE Mark and FDA approvals in July and August 2000, respectively. The Extreme model received CE Mark approval in Europe in August 1999 and FDA approval in the United States in July 2000. The POINT 9 millimeter catheters are our smallest diameter atherectomy catheters and are designed for use in vessels as small as 1.5 millimeters in diameter, as well as larger vessels with total occlusions passable by a guidewire or where angioplasty balloon failures have occurred. On June 13, 2001, Spectranetics received FDA approval to market the POINT 9 X-80 catheter, which has the ability to use higher laser parameters to penetrate lesions where balloon failures have occurred and other difficult-to-treat lesions. - Spectranetics Support Catheter(TM). In November 1999 we received clearance from the FDA to market the Spectranetics Support Catheter in the .014 and .018 inch models. This is a non-laser-based accessory product designed for use in the cardiovascular system to assist in accessing and/or crossing lesions. The primary function is to support an angioplasty guidewire. We also received the CE Mark of approval in April 1999 to market this product in Europe. Cardiac Lead Removal Systems Background. Approximately one million patients worldwide are implanted with pacemakers and implantable cardioverter defibrillators, or ICDs, annually.* Pacemakers and ICDs are electronic devices that regulate the heartbeat. We believe that approximately 5% to 10% of these patients will eventually require pacemaker or ICD lead removal. Competitive methods available to remove implanted leads include open-chest surgery and transvenous removal with plastic sheaths, each of which has significant drawbacks. For example, open-chest surgery is costly and traumatic to the patient. The plastic sheath method sometimes results in damage to the cardiovascular system, thereby necessitating surgery, and may cause the lead to disassemble during the removal procedure. Spectranetics Laser Sheath (SLS(TM)). We have designed a laser-assisted lead removal device, the Spectranetics Laser Sheath (SLS(TM)), to be used with our CVX-300 excimer laser unit to remove implanted leads with minimal force. The SLS uses excimer laser energy focused through the tip of the SLS to facilitate lead removal by removing scar tissue surrounding the lead. In addition to resulting in less trauma and a lower complication rate, procedure time is reduced significantly. - --------------- *Amounts were estimated by Spectranetics based on extrapolation from available industry data. Patient population estimates are subject to inherent uncertainties. We are unable to determine with any degree of certainty the number of procedures for any indication or the number of patients who are suitable for treatment using these procedures. 5 The SLS consists of optical fibers arranged in a circle between inner and outer polymer tubing. The inner opening of the device is designed to allow a lead wire to pass through it as the device slides over the lead wire and toward the tip in the heart. Following the removal of scar tissue with the SLS, the lead wire is removed from the heart with counter-traction. We have been marketing our 12 French (Fr) SLS since December 1997. In September 1998, we received FDA market approval for our 14 Fr and 16 Fr Spectranetics Laser Sheaths, which are designed to free larger diameter implanted pacemaker and ICD leads. On February 1, 2002, Spectranetics received FDA approval to market an improved model of its 16 Fr Laser Sheath. Spectranetics received the CE Mark of approval for use of its laser sheath devices in Europe in February and July 1997, and October 2001. Lead Locking Device (LLD(TM)). In October 1999, we received clearance from the FDA to market the LLD under a 510(k) application. This product was the first Spectranetics' product to go through the 510(k) regulatory process, which typically takes less time than other regulatory approval processes, such as pre- market approval or a pre-market approval supplement. We also received the CE Mark of approval for this product in Europe in March 1999. The LLD product complements our current SLS product line and, since it is not laser-based, can also be used in connection with the mechanical removal of pacemaker or defibrillator leads. The LLD is a novel mechanical device that assists in the removal of faulty leads by providing traction to the leads, which are typically wire spirals. The LLD is inserted into the center opening (i.e., lumen) of the lead and then a braid surrounding the LLD expands to fill and grip the entire length of the lead's inner circumference, in effect converting a spiral into a solid "pipe," which can more easily be extracted. Other devices on the market, which merely grip the lead at the far end, provide less stability and frequently release their grip on the lead. In a randomized clinical trial completed in October 1996, the Spectranetics Laser Sheath (SLS(TM)) increased the complete lead removal success rate to 94% from 65% with other techniques. A more recent study completed in 1999 and published in December 2000 reported that using both the SLS and LLD increased the success rate to 98 percent. Peripheral Vascular Disease Therapy Background. The prevalent treatment options for total blockages in the upper leg are medical management to minimize symptoms and bypass surgery. Amputation below the knee may be required for critical limb ischemia. We estimate that approximately 300,000 upper bypass surgeries and 170,000 amputations are performed annually worldwide as a result of peripheral vascular blockages. In addition, we estimate that about 700,000 people are treated for leg pain through conventional medical management.* Laser therapy is being evaluated as an alternative treatment to bypass surgery, amputation and conventional medical management. Our catheters for these applications are approved in Europe for use in treating peripheral vascular disease. Clinical Trials. On November 30, 2001, the last patient was enrolled in the PELA (Peripheral Excimer Laser Angioplasty) trial, a 250-patient randomized clinical trial, coordinated in the United States and Europe, to evaluate the use of laser technology in patients with total occlusions at least 10 centimeters in length in the upper leg. The primary endpoint for the PELA trial is clinical patency, which is a measurement of the degree to which the artery is open, twelve months following the procedure. On December 21, 2001, Spectranetics received approval from the FDA to begin the PELA Phase 3 trial at 21 sites. PELA Phase 3 is a registry of up to 120 patients with total occlusions at least 10 centimeters in length in the upper leg. On January 26, 2001, Spectranetics received FDA approval to begin Phase 2 of the LACI (Laser Angioplasty for Critical Limb Ischemia) trial, which deals with multi-vessel peripheral vascular disease in patients presenting with critical limb ischemia (CLI). Patients with CLI have severe circulatory disease - --------------- *Amounts were estimated by Spectranetics based on extrapolation from available industry data. Patient population estimates are subject to inherent uncertainties. We are unable to determine with any degree of certainty the number of procedures for any indication or the number of patients who are suitable for treatment using these procedures. 6 resulting in resting leg pain, non-healing ulcers of the foot or lower leg, or gangrenous areas that are likely candidates for amputation (Rutherford Categories 4, 5, and 6). Frequently these patients also suffer from coronary artery disease, hypertension and diabetes. The Phase 2 trial will involve 137 registry patients and up to 30 training patients at 20 domestic and several European sites. The primary endpoint of Phase 2 is limb salvage (i.e., freedom from major amputation) for a 6-month follow-up period. As of March 13, 2002 110 patients at 14 sites have been treated in the LACI Phase 2 registry. We cannot assure that the clinical trials using excimer laser catheters to unblock peripheral arteries will demonstrate our technology is safe, will result in favorable success rates or, if the trials are successful, that we will receive FDA approval for these devices. We have received CE Mark of approval for our line of peripheral catheters in Europe. Restenosed Stents Background. Stents are thin, steel, slotted tubes or coils that are implanted through a percutaneous procedure to support the walls of coronary arteries. We estimate that approximately 1.4 million stents are implanted in patients annually. Twenty to 25 percent of stents may develop blockages due to restenosis, or tissue ingrowth, which can lead to partial or total occlusion of the arteries, and 15 percent of them may be candidates for brachytherapy (radiation therapy)* Clinical Trials. On October 10, 2001, Spectranetics received approval from the FDA to market our coronary atherectomy products to pretreat instent restenosis prior to brachytherapy. As a result, we concluded enrollment in our Laser Angioplasty in Restenosed Stents (LARS) trial, which had been conducted to study the use of our laser catheters in debulking stents which have restenosed. We no longer intend to pursue the broader instent restenosis label (with or without brachytherapy) in the United States. Spectranetics has received CE Mark approval to allow us to market our excimer laser atherectomy catheters throughout Europe for the treatment of restenosed stainless steel coronary stents, with or without brachytherapy. SALES AND MARKETING Our sales goals are to increase the use of laser catheters and other disposable devices and to increase the installed base of excimer laser systems. We plan to introduce new physicians and institutions to the efficacy, safety, ease of use and growing indications of excimer laser technology through published studies of clinical applications. By leveraging the success of existing product applications, we hope to promote the use of our technology in new applications. Providing customers with answers about the cost of acquisition, use of the laser and reimbursement codes is critical to the education process. Through the following marketing and distribution strategy, both in the United States and internationally, we believe that we will be positioned to capitalize not only on the core competency of excimer laser technology in coronary atherectomy, but also in lead extraction and in other new areas of development for excimer laser technology in the cardiovascular system. Domestic Operations We estimate that there are about 1,500 interventional cardiac catheterization laboratories in hospitals in the United States.* Our United States sales efforts focus on the major cardiac catheterization labs, including teaching institutions, which perform the majority of interventional procedures. Our United States sales and marketing team consists of marketing managers, district sales managers and clinical account managers. We are focused on expanding our product line and developing an appropriate infrastructure to support sales growth, and have increased our sales and marketing capabilities over the last few years through the - --------------- *Amounts were estimated by Spectranetics based on extrapolation from available industry data. Patient population estimates are subject to inherent uncertainties. We are unable to determine with any degree of certainty the number of procedures for any indication or the number of patients who are suitable for treatment using these procedures. 7 addition of personnel to our marketing and sales team. Since the use of excimer laser technology is highly specialized, we believe that our marketing managers and direct sales team must have extensive knowledge about the use of our products and the various physician groups we serve. Our marketing activities are designed to support our direct sales team and include advertising and product publicity in trade journals, newsletters, continuing education programs, and attendance at trade shows and professional association meetings. We have marketing managers who are responsible for global marketing activities for a given market segment, i.e., excimer laser atherectomy and cardiac lead removal systems. At December 31, 2001, we had 26 field sales employees consisting of district sales managers and clinical account managers. The roles of each member of the sales team are outlined below: District Sales Managers are responsible for the overall management of a district, including sales of lasers and disposable products. They are directly responsible for the performance of the Clinical Account Managers in their district. Clinical Account Managers, who have experience working in hospital catheter labs, support the district managers. Their primary function is to assist in training our customers by standing in on cases, assisting in catheter and laser parameter selection, and helping ensure proper protocol is used by clinicians. Our field team also includes 10 service engineers who are responsible for installation of each laser and participate in the training program at each site. We provide a one-year warranty on laser sales, which includes parts, service and replacement gas. We offer extended service to our customers under annual service contracts or on a fee-for-service basis. International Operations In Europe, there are approximately 275,000 balloon angioplasty procedures performed annually in approximately 450 interventional cardiac catheterization laboratories.* In 1993, we began marketing and selling our products in Europe and surrounding areas through Spectranetics International, B.V., a wholly owned subsidiary, as well as through distributors. In the fourth quarter of 2000, we made the decision to restructure our European operations and utilize a distributor in Germany, our largest European market. We now utilize distributors throughout Europe and the Middle East with the exception of France, the Netherlands and Belgium, where we utilize a direct sales force. In 2001, Spectranetics International, B.V., revenues totaled $2,224,000, or 8 percent of our revenue. In addition to the operations of Spectranetics International, B.V., we conduct international business in the Pacific Rim, South America and Australia through distributors. In 2001, revenues from these foreign operations totaled $746,000, or 3 percent of our revenue. Foreign sales may be subject to certain risks, including export/import licenses, tariffs, other trade regulations and foreign medical regulations. Tariff and trade policies, domestic and foreign tax and economic policies, exchange rate fluctuations and international monetary conditions have not significantly affected our business to date. For more information, see "Risk Factors -- We Are Exposed to Problems That Come from Having International Operations" set forth in Exhibit 13.1 herewith. GOVERNMENT REGULATION In the United States, all medical devices are subject to FDA regulation under the Medical Device Amendments of the Federal Food, Drug and Cosmetics Act, or FFDCA, and are classified into one of three categories: Class I, Class II, and Class III. Products in Class I are the least invasive and pose the least amount of risk, while products in Class II pose more potential risk to patients, and Class III products provide the most - --------------- *Amounts were estimated by Spectranetics based on extrapolation from available industry data. Patient population estimates are subject to inherent uncertainties. We are unable to determine with any degree of certainty the number of procedures for any indication or the number of patients who are suitable for treatment using these procedures. 8 potential risk. The FDA approval process becomes more rigorous for products classified as higher potential risk. Section 510(k) Devices Section 510(k) of the FFDCA is available in certain instances for Class I and Class II products. It requires that before introducing most Class II and some Class I devices into interstate commerce, the company introducing the product must first submit information to the FDA demonstrating that the device is substantially equivalent in terms of safety and effectiveness to a device legally marketed prior to March 1976. When the FDA determines that the device is substantially equivalent, the agency issues a "clearance" letter that authorizes marketing of the product. The Support Catheter and the LLD have been precleared by the FDA under the "510(k)" process. Subsequent to its initial introduction, a manufacturer may make changes to its previously cleared products. Under certain circumstances, a new 510(k) is required when a manufacturer makes a change that could significantly affect the device's safety or effectiveness or the manufacturer makes a major change to the device's intended use. Before implementing the change, the manufacturer is responsible for evaluating each change to determine whether to file a new 510(k). There is a risk that the FDA will not agree with the manufacturer's decision and will require the filing of a new 510(k). PMA Devices The CVX-300 laser unit and related devices are designated as Class III devices. Class III devices are devices that are represented to be life-sustaining or life-supporting, or that present potential unreasonable risk of illness or injury. Class III devices are subject to the most rigorous FDA approval process, the pre-market approval, or PMA, process. Pre-market approval of a Class III device generally requires the completion of three major steps. The first step involves the granting of an investigational device exemption, or IDE, by the FDA, which permits the proposed product to be used in controlled human clinical trials. Upon completion of a sufficient number of clinical cases to determine the safety and effectiveness of the proposed product for specific indications, a pre-market approval application is then prepared and submitted to the FDA for review. The pre-market approval application must contain the results of the clinical trials, the results of all relevant bench tests, laboratory and animal studies, a complete description of the device and its components, and a detailed description of the methods, facilities, and controls used to manufacture the device. In addition, the submission must include the proposed labeling and promotional literature. If the FDA determines that the pre-market approval application is sufficiently complete to permit a substantive review, the FDA will accept the application for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the pre-market approval application, which represents the second major step in pre-market approval of a Class III device. An FDA review of a pre-market approval application generally takes one to two years from the date the pre-market approval application is accepted for filing, but may take significantly longer. The review time is often significantly extended by the FDA asking for more information or clarification of information already provided in the submission. During the review period, an advisory committee, typically a panel of clinicians, will likely be convened to review and evaluate the application and provide recommendations to the FDA at a public panel meeting as to whether the device should be approved. Companies are typically requested to make a presentation at the public panel meeting. The FDA is not bound by the recommendations of the advisory panel. Toward the end of the pre-market approval review process, the FDA will generally conduct an inspection of the manufacturer's facilities to ensure that the facilities are in compliance with applicable Good Manufacturing Practice requirements, which are outlined under FDA's Quality System Regulation. If the FDA's evaluations of both the pre-market approval application and the manufacturing facilities are favorable, the FDA will either issue an approval letter or an approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the pre-market approval application. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will complete the third 9 major step by issuing a pre-market approval letter, authorizing commercial marketing of the device for certain indications. If the FDA's evaluations of the pre-market approval application or manufacturing facilities are not favorable, the FDA will deny approval of the pre-market approval application or issue a "not approvable" letter. The FDA may also determine that additional clinical trials are necessary, in which case pre-market approval may be delayed for several years while additional clinical trials are conducted and submitted in an amendment to the pre-market approval application. The pre-market approval process can be expensive, uncertain and lengthy and a number of devices for which FDA approval has been sought by other companies have never been approved for marketing. Modifications to a device that is the subject of a pre-market approval, its labeling, or manufacturing process may require approval by the FDA of pre-market approval supplements or new pre-market approval applications. Supplements to a pre-market approval application often require the submission of the same type of information required for an initial pre-market approval application, except that the supplement is generally limited to that information needed to support the proposed change from the product covered in the original pre-market approval application. The chart below summarizes the United States and major world market regulatory approval status of each of our products and procedures for their particular indications. The CE Mark designates regulatory approval throughout Europe, and the Ministry of Health and Welfare (MHW) grants regulatory approval in Japan. We have yet to receive reimbursement approval in Japan.
PRODUCT AND PROCEDURE FDA CE MARK MHW - --------------------- --- ------- --- CVX-300(R).................................................. 2/93 9/96 9/01 Coronary Atherectomy Extreme(R)................................................ 10/93 12/96 9/01 Vitesse(R) C.............................................. 10/94 12/96 9/01 Vitesse(R) E.............................................. 9/97 2/97 9/01 Vitesse(R) Cos............................................ 1/00 11/98 POINT 9(TM) Extreme....................................... 7/00 8/99 POINT 9(TM) Vitesse....................................... 8/00 7/00 POINT 9(TM) X-80.......................................... 6/01 Restenosed stents prior to brachytherapy.................. 10/01 Restenosed stents*........................................ 1/98 Support Catheter.......................................... 11/99 4/99 Pacing Lead and ICD Lead Extraction SLS 12 Fr................................................. 12/97 2/97 SLS 14 Fr................................................. 9/98 2/97 SLS 16 Fr................................................. 9/98 2/97 SLS 16 Fr, improved....................................... 1/02 LLD....................................................... 10/99 3/99 Peripheral Atherectomy Upper leg................................................. Trials 11/96 Lower leg................................................. Trials 11/96
- --------------- * Includes pretreatment prior to brachytherapy We received our initial investigational device exemption to perform excimer laser percutaneous coronary atherectomy in May 1989. In February 1991, we submitted our pre-market approval application, which was accepted for filing by the FDA in June 1991. On November 26, 1991, our pre-market approval application was reviewed by a public advisory panel, and we received a recommendation for approval of the CVX-300 laser unit and two sizes of our soft-rim catheters. As part of the approval process, we were inspected in October 1991 by the FDA to verify our compliance with Good Manufacturing Practices requirements. The final step in the approval process, the issuance of a letter by the FDA approving the application, occurred on February 19, 10 1993. In September 1993, we received pre-market approval for the Gen4-CVX300 laser. In March and December 1999, we received pre-market approval of modifications to the operating software for the CVX-300. We cannot assure that the FDA will approve our current or future pre-market approval applications or supplements on a timely basis or at all. The absence of such approvals could have a material adverse impact on our ability to generate future revenues. For more information, see "Risk Factors -- Failures in Clinical Trials May Hurt Our Business" set forth in Exhibit 13.1 filed herewith. Any products we manufacture or distribute pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA. Device manufacturers are required to register their establishments and list their devices with the FDA, and are subject to periodic inspections by the FDA and certain state agencies. The FFDCA requires devices to be manufactured in accordance with Quality System Regulation requirements, which impose certain process, procedure and documentation requirements upon us with respect to product development, manufacturing and quality assurance activities. We have developed systems and controls that we believe will enable us to comply with Quality System Regulation requirements; however, we cannot assure that we will be able to maintain compliance with these requirements. In addition, the Medical Device Reporting, or MDR, regulation obligates us to inform the FDA whenever there is reasonable evidence to suggest that one of our devices may have caused or contributed to death or serious injury, or when one of our devices malfunctions and, if the malfunction were to recur, the device would be likely to cause or contribute to death or serious injury. There can be no assurance that the FDA will agree with our determinations as to whether particular incidents meet the threshold for MDR reporting. Labeling and promotional activities are also subject to scrutiny by the FDA and, in certain instances, by the Federal Trade Commission. The FDA actively enforces regulations prohibiting marketing of products for unapproved uses. Noncompliance with requirements under the FFDCA or accompanying regulations can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant pre-market approval, withdrawal of marketing approvals, and criminal prosecution. The FDA also has authority to request repair, replacement or refund of the cost of any device manufactured or distributed by us. International sales of our products are subject to foreign regulations, including health and medical safety regulations. The regulatory review process varies from country to country. Many countries also impose product standards, packaging and labeling requirements, and import restrictions on devices. Exports of products that have been approved by the FDA do not require FDA authorization for export. However, foreign countries often require a FDA Certificate to Foreign Government verifying that the product complies with FFDCA requirements. To obtain a Certificate to Foreign Government, the device manufacturer must certify to the FDA that the product has been granted approval in the United States and that the manufacturer and the exported products are in substantial compliance with the FFDCA and all applicable or pertinent regulations. The FDA may refuse to issue a Certificate to Foreign Government if significant outstanding Quality System Regulation violations exist. We are subject to certain federal, state and local regulations regarding environmental protection and hazardous substance controls, among others. To date, compliance with such environmental regulations has not had a material effect on our capital expenditures or competitive position. See "Risk Factors -- Regulatory Compliance Is Very Expensive and Can Often Be Denied or Significantly Delayed" set forth in Exhibit 13.1 filed herewith. COMPETITION Methods for the treatment of cardiovascular disease are numerous and we expect them to increase in number. Almost all of our competitors have substantially greater financial, manufacturing, marketing and technical resources than we do. Consequently, we expect intense competition to continue in the marketplace. Although our excimer laser technology competes against stents and balloon angioplasty catheters, direct competition comes from manufacturers of atherectomy and thrombectomy devices. In the lead removal 11 market, we compete worldwide with lead removal devices manufactured by Cook Vascular Inc. and we compete in Europe with devices manufactured by VascoMed. We estimate that approximately 80% of coronary interventions involve the placement of a stent. The leading stent providers in the United States are SCIMED Life Systems, Inc. (a subsidiary of Boston Scientific Corporation), Cordis Corporation (a subsidiary of Johnson & Johnson Interventional Systems), Guidant Corporation, Medtronic, Inc. and JOMED N.V. The leading balloon angioplasty manufacturers are SCIMED, Cordis, Guidant and Medtronic. Manufacturers of atherectomy or thrombectomy devices include SCIMED, Guidant and Possis Medical, Inc. We believe that the primary competitive factors in the interventional cardiovascular market are: - the ability to treat a variety of lesions safely and effectively; - the impact of managed care practices and procedure costs; - ease of use; - size and effectiveness of sales forces; and - research and development capabilities. For more information, see "Risk Factors -- We May Be Unable to Compete Successfully in Our Highly Competitive Industry in Which Many Other Competitors Are Bigger Companies" set forth in Exhibit 13.1 filed herewith. PATENTS AND PROPRIETARY RIGHTS We hold 33 issued United States patents, four issued patents in each of France, Germany, Italy and the Netherlands and one issued patent in Japan. Also, we have three United States patent applications pending and eight foreign patent applications pending. Any patents for which we have applied may not be granted. In addition, our patents may not be sufficiently broad to protect our technology or to provide us with any competitive advantage. Our patents could be challenged as invalid or circumvented by competitors. In addition, the laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. We could be adversely affected if any of our licensors terminates our licenses to use patented technology. We do not have patents in any foreign countries other than those listed above. It is our policy to require our employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting relationship with us. Each agreement provides that all confidential information developed or made known to the individual during the course of the relationship will be kept confidential and not disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions developed by the individual shall be our exclusive property, other than inventions unrelated to our business and developed entirely on the employee's own time. There can be no assurance that these agreements will provide meaningful protection for our trade secrets in the event of unauthorized use or disclosure of such information. We also rely on trade secrets and unpatented know-how to protect our proprietary technology and may be vulnerable to competitors who attempt to copy our products or gain access to our trade secrets and know-how. Litigation concerning patents and proprietary rights is time-consuming, expensive, unpredictable and could divert the efforts of our management. An adverse ruling could subject us to significant liability, require us to seek licenses and restrict our ability to manufacture and sell our products. We hold several non-exclusive, royalty-bearing license agreements for patents covering basic areas of laser technology. In addition, we acquired an exclusive, royalty-bearing license for a proprietary catheter coating. Additional licenses held by us include an exclusive license to patents covering laser-assisted lead removal and an exclusive license relating to certain aspects of excimer laser technology in our products. 12 RESEARCH AND DEVELOPMENT From inception through 1988, our primary emphasis in research and development was on the CVX-300 laser unit. Since 1988, our research and development efforts have focused on refinement of the CVX-300 laser unit and laser device technology. We are also exploring additional applications for the CVX-300 laser unit and are developing advanced laser devices designed to facilitate greater use in existing applications. Our team of research scientists, engineers and technicians substantially performs all of our research and development activities. Our research and development expense totaled $3,496,000 in 2001, $3,911,000 in 2000, and $3,578,000 in 1999. MANUFACTURING We assemble and test substantially all of our product line and have vertically integrated a number of processes in an effort to provide increased quality and reliability of the components used in the production process. Many of the processes are proprietary and were developed by us. We believe that our level of manufacturing integration allows us to control costs, quality and process advancements, to accelerate new product development cycle time and to provide greater design flexibility. Raw materials, components and subassemblies used in our products are purchased from outside suppliers and are generally readily available from multiple sources. Our manufacturing facilities are subject to periodic inspections by regulatory authorities, including Quality System Regulations compliance inspections by the FDA and TUV, which is the European governing body equivalent to the FDA. We have undergone eight inspections by the FDA for Quality System Regulations compliance since 1990, and the TUV has conducted an inspection each year since 1993. Each inspection resulted in a limited number of noted observations, to which we believe we have provided adequate responses. We purchase certain components of our CVX-300 laser unit from several sole source suppliers. We do not have guaranteed commitments from these suppliers, as we order products through purchase orders placed with these suppliers from time to time. While we believe we could obtain replacement components from alternative suppliers, we may be unable to do so. In addition, we may encounter difficulties in scaling up production of laser units and disposable devices and hiring and training additional qualified manufacturing personnel. Any of these difficulties could lead to quarterly fluctuations in operating results and adversely affect us. THIRD-PARTY REIMBURSEMENT Our CVX-300 laser unit and related fiber-optic laser devices are generally purchased by hospitals, which then bill various third party payers for the health care services provided to their patients. These payers include Medicare, Medicaid and private insurance payers. Most public and private insurance payers base their payment systems upon the Medicare Program. The Medicare Program reimburses hospitals based on predetermined amounts per diagnosis code for inpatient hospital services (those lasting 24 hours or more) and predetermined amounts per procedure performed for outpatient hospital services (those lasting less than 24 hours), and it reimburses physicians based on a fee schedule per procedure performed. At present, many of our customers using the CVX-300 for laser atherectomy are obtaining reimbursement for inpatient hospital services under the same code as for balloon angioplasty, or for balloon angioplasty with stent. Lead removal procedures using the SLS are reimbursed using the same inpatient hospital codes for non-laser lead removal or lead removal and replacement. We expect that our customers will continue to do so. Hospital outpatient codes and physician services codes differentiate atherectomy procedures from PCI procedures utilizing only balloons or only balloons and stents. Reimbursement amounts are generally adequate to cover the cost of laser ablation procedures. Procedure costs and payment rates vary depending on the complexity of the procedure, various patient factors and geographical location. 13 While we believe that a laser atherectomy procedure offers a less costly alternative for the treatment of certain types of heart disease, we cannot assure that the procedure will be viewed as cost-effective under changing reimbursement guidelines or other health care payment systems. For more information, see "Risk Factors -- Failure of Third Parties to Reimburse Medical Providers for Our Products May Reduce Our Sales" set forth in Exhibit 13.1 filed herewith. PRODUCT LIABILITY AND INSURANCE Our business entails the risk of product liability claims. We maintain product liability insurance in the amount of $5,000,000 per occurrence with an annual aggregate maximum of $5,000,000. We cannot assure, however, that product liability claims will not exceed such insurance coverage limits or that such insurance coverage limits will continue to be available on acceptable terms, or at all. See "Risk Factors -- Potential Product Liability Claims and Insufficient Insurance Coverage May Hurt Our Business and Stock Price" set forth in Exhibit 13.1 filed herewith. EMPLOYEES As of February 28, 2002, we had 141 employees, including ten in research and development and clinical affairs, 57 in manufacturing and 66 in marketing, sales and administration in the United States and eight in marketing, sales and administration in Europe. None of our employees is covered by collective bargaining agreements. We believe that the success of our business will depend, in part, on our ability to attract and retain qualified personnel. We believe that our relationship with our employees is good. ITEM 2. PROPERTIES We lease a total of approximately 50,000 square feet in three buildings in Colorado Springs, Colorado. These facilities contain approximately 35,000 square feet of manufacturing space and approximately 15,000 square feet devoted to marketing, research and administrative activities. The leases for two of these facilities expire December 31, 2002 and June 30, 2004. The lease for the third facility expires December 31, 2003, but we have the option to renew it for an additional year. Spectranetics International B.V. leases 4,394 square feet in Leusden, The Netherlands. The facility houses our operations for the marketing and distribution of products in Europe, and the lease expires June 30, 2003. We believe these facilities are adequate to meet our requirements for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The Company is involved in legal proceedings in the normal course of business and does not expect them to have a material adverse effect on our business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS Our Common Stock is traded on The Nasdaq National Market under the symbol "SPNC." The table below sets forth the high and low sales prices for the Company's Common Stock as reported on The Nasdaq National Market for each calendar quarter in 2001 and 2000. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent the sales prices in actual transactions.
HIGH LOW ------ ----- Year Ended December 31, 2001 1st Quarter............................................... $3.063 1.375 2nd Quarter............................................... 3.240 1.313 3rd Quarter............................................... 2.740 1.500 4th Quarter............................................... 4.250 1.700 Year Ended December 31, 2000 1st Quarter............................................... $8.313 3.625 2nd Quarter............................................... 6.875 4.000 3rd Quarter............................................... 5.000 3.000 4th Quarter............................................... 3.750 1.000
We have not paid cash dividends on our Common Stock in the past and do not expect to do so in the foreseeable future. The payment of dividends in the future will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant. The closing sales price of our Common Stock on March 13, 2002, was $4.000. On March 13, 2002, we had 732 shareholders of record. ITEM 6. SELECTED FINANCIAL DATA Information appearing under the caption "Selected Six-Year Financial Data" in the Company's 2001 Annual Report to security holders included in Exhibit 13.1 to this report is incorporated herein by reference. The Selected Six-Year Financial Data should be read in conjunction with the Company's consolidated financial statements and accompanying notes incorporated by reference in Item 8 hereof. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2001 Annual Report to security holders included in Exhibit 13.1 to this report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Our primary market risks include changes in foreign currency exchange rates and interest rates. Market risk is the risk of potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. We do not use financial instruments to any degree to manage these risks. The Company does not use financial instruments to manage changes in commodity prices and does not hold or issue financial instruments for trading or other speculative purposes. Our debt consists of obligations with fixed interest rates ranging from 5.75 percent to 8 percent. The Company does not consider the potential losses in future earnings, cash flows and fair values from reasonable near-term changes in exchange rates or interest rates to be material. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Pages five through 32 of the Company's 2001 Annual Report to security holders, which include the consolidated financial statements and the Independent Auditors' Report as listed in Item 14 (a), are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information appearing under the captions "Proposal 1 -- Election of Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" of the registrant's definitive Proxy Statement to be used in connection with its 2002 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information appearing under the captions "Executive Compensation," "Grants of Stock Options," "Stock Option Exercises and Fiscal Year-End Stock Option Value," "Director Compensation" and "Compensation Committee Interlocks and Insider Participations" of the Company's 2002 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information appearing under the caption "Security Ownership of Certain Beneficial Owners and Management" of the Company's 2002 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. 16 PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K (a) Documents Filed as a Part of The Report (1) Financial Statements The following information contained at pages five through 32 of the Company's Annual Report to security holders is incorporated by reference in Part II, Item 8 hereof: Independent Auditors' Report Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Operations and Other Comprehensive Income for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements (2) Financial Statement Schedule Not applicable. (b) Reports on Form 8-K Not applicable. (c) Exhibit Index to The Spectranetics Corporation Annual Report on Form 10-K for Fiscal Year Ended December 31, 2001:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 Agreement and Plan of Reorganization between The Spectranetics Corporation and Advanced Interventional Systems, Inc., dated January 24, 1994.(1) 2.1(a) Amendment to Agreement and Plan of Reorganization between The Spectranetics Corporation and Advanced Interventional Systems, Inc., dated May 17, 1994.(2) 2.2 Certificate of Ownership and Merger of Advanced Interventional Systems, Inc. Into The Spectranetics Corporation, dated December 27, 1995.(13) 2.3 Merger Agreement dated as of May 24, 1999 among the Company, Polymicro Technologies, Inc., PMT Holdings, LLC, and Polymicro Technologies, LLC.(20) 3.1 Restated Certificate of Incorporation.(1) 3.1(a) Certificate of Amendment to Restated Certificate of Incorporation.(12) 3.1(b) Certificate of Amendment to Restated Certificate of Incorporation.(18) 3.2 Bylaws of the Company.(3) 4.1 Form of Common Stock Certificate of the Company.(4) 4.2 Rights Agreement, dated as of May 6, 1996, between the Company and Norwest Bank Minnesota, N.A.(14) 10.1 Lease covering a portion of the Company's facilities between the Company and Duane and Donna Basse dated November 10, 1994.(12) 10.1(a) Lease covering a portion of the Company's facilities between the Company and Duane and Donna Basse dated September 1, 1997.(14)
17
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.1(b) Lease covering a portion of the Company's facilities between the Company and Duane and Donna Basse dated June 1, 2001. 10.2 Lease covering a portion of the Company's facilities between the Company and American Investment Management dated February 17, 1995.(12) 10.2(a) Lease covering a portion of the Company's facilities between the Company and John or Sharon Sanders dated December 23, 1997.(19) 10.2(b) Lease covering a portion of the Company's facilities between the Company and John or Sharon Sanders dated December 8, 2000. 10.3 Lease covering a portion of the Company's facilities between the Company and Full Circle Partnership III dated September 11, 1985.(3) 10.3(a) Amendment to lease covering a portion of the Company's facilities between the Company and Full Circle Partnership III July 24, 1997.(19) 10.4(a) Amendment to lease covering a portion of the Company's facilities between the Company and Talamine Properties dated February 15, 1992.(7) 10.4(b) Amendment to lease covering a portion of the Company's facilities between the Company and Talamine Properties dated February 16, 1993.(1) 10.4(c) Amendment to lease covering a portion of the Company's facilities between the Company and Talamine Properties dated October 3, 1994.(12) 10.5 1991 Stock Option Plan, as amended.(11) 10.5(a) 1991 Stock Option Plan, as amended.(17) 10.6 1990 Incentive Stock Option Plan.(6) 10.7 1989 Incentive Stock Option Plan and First Amendment thereto.(6) 10.8 Nonemployee Director Stock Option Plan.(8) 10.8(a) Stock Option Plan for Outside Directors.(10) 10.9 Employee Stock Purchase Plan (as amended).(9) 10.10 The 1997 Equity Participation Plan of The Spectranetics Corporation.(21) 10.10(a) NonQualified Stock Option Agreement dated as of April 17, 1996, between the Company and Emile J. Geisenheimer.(21) 10.10(b) NonQualified Stock Option Agreement dated as of March 3, 1997, between the Company and Joseph A. Largey.(21) 10.10(c) Form of NonQualified Stock Option Agreement for Officers.(21) 10.10(d) Form of NonQualified Stock Option Agreement for Employees.(21) 10.10(e) Form of NonQualified Stock Option Agreement for Independent Directors.(21) 10.10(f) Form of Incentive Stock Option Agreement for Officers.(21) 10.10(g) Form of Incentive Stock Option Agreement for Employees.(21) 10.11 License Agreement with Patlex Corporation, dated January 1, 1992 (confidential treatment has been granted for portions of this agreement).(7) 10.12 License Agreement with Pillco Limited Partnership, dated February 1, 1993 (confidential treatment has been granted for portions of this agreement).(7) 10.13 Vascular Laser Angioplasty Catheter License Agreement with Bio-Metric Systems, Inc., dated April 7, 1992 (confidential treatment has been granted for portions of this agreement).(6)
18
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.14 Exclusive License Agreement between the United States of America and James B. Laudenslager and Thomas J. Pacala dated March 25, 1985; and Exclusive License Agreement between the United States of America and LAIS dated April 29, 1990.(5) 10.15 License Agreement between Medtronic, Inc. and the Company, dated February 28, 1997 (confidential treatment has been granted for portions of this agreement).(15) 10.16 License Agreement between United States Surgical Corporation and the Company, dated September 25, 1997 (confidential treatment has been granted for portions of this agreement).(16) 10.17 Supply Agreement between United States Surgical Corporation and the Company, dated September 25, 1997 (confidential treatment has been granted for portions of this agreement).(16) 10.18 Loan and Security Agreement between Silicon Valley Bank and the Company, dated December 24, 1997.(19) 10.19 Exclusive Purchase and Distribution Agreement between The Spectranetics Corporation and Orbus Medical Technologies, Inc. dated March 12, 1998 (confidential treatment has been granted for portions of this agreement).(18) 10.20 Form of Stock Purchase Agreement, dated as of December 22, 1998 among the Company and the stockholders named in the Company's Registration Statement on Form S-3 (File No. 333-69829).(22) 10.21 Employment Agreement between the Company and Henk Kos dated January 1, 1997.(22) 10.22 First Amendment to the 1997 Equity Participation Plan.(24) 10.23 Second Amendment to the 1997 Equity Participation Plan.(23) 10.24 Compromise, Settlement and Release Agreement dated October 25, 2000 between the Company, Edwards Lifesciences LLC, Baxter Healthcare Corporation and LaserSight Patents, Inc.(confidential treatment has been granted for portions of this agreement)(25) 10.25 Third Amendment to the 1997 Equity Participation Plan. 13.1 Portions of Registrant's 2001 Annual Report to security holders incorporated herein by reference. 21.1 Subsidiary of the Company. 23.1 Consent of Independent Auditors.
- --------------- (1) Incorporated by reference to the Company's 1993 Annual Report on Form 10-K filed on March 31, 1994. (2) Incorporated by reference to exhibits previously filed by the Company with its Registration Statement on Form S-4 filed May 18, 1994 (File No. 33-79106). (3) Incorporated by reference to exhibits previously filed by the Company with its Registration Statement on Form S-1, filed December 5, 1991 (File No. 33-44367). (4) Incorporated by reference to exhibits previously filed by the Company with its Amendment No. 2 to the Registration Statement, filed January 24, 1992 (File No. 33-44367). (5) Incorporated by reference to exhibits previously filed by LAIS with its Registration Statement on Form S-1 filed August 30, 1991 (File No. 33-42457). (6) Incorporated by reference to exhibits previously filed by the Company with its Amendment No. 1 to the Registration Statement on Form S-1, filed January 10, 1992 (File No. 33-44367). 19 (7) Incorporated by reference to exhibits previously filed by the Company with its Annual Report for 1992 on Form 10-K filed March 31, 1993. (8) Incorporated by reference to exhibits previously filed by the Company with its Registration Statement on Form S-8 filed April 1, 1992 (File No. 33-46725). (9) Incorporated by reference to exhibits previously filed by the Company with its Registration Statement on Form S-8 filed December 30, 1994 (File No. 33-88088). (10) Incorporated by reference to exhibits previously filed by the Company with its Registration Statement on Form S-8 filed November 16, 1995 (File No. 33-99406). (11) Incorporated by reference to exhibits previously filed by the Company with its Registration Statement on Form S-8 filed October 6, 1994 (File No. 33-85198). (12) Incorporated by reference to exhibits previously filed by the Company with its 1994 Annual Report on Form 10-K filed on March 31, 1995. (13) Incorporated by reference to the Company's 1995 Annual Report on Form 10-K filed on April 29, 1996. (14) Incorporated by reference to exhibits previously filed by the Company with its Current Report on Form 8-K filed on May 6, 1996. (15) Incorporated by reference to exhibits previously filed by the Company with its Form 10-Q for the quarter ended on March 31, 1997. (16) Incorporated by reference to exhibits previously filed by the Company with its Form 10-Q for the quarter ended on September 30, 1997. (17) Incorporated by reference to exhibits previously filed by the Company with its Registration Statement on Form S-8 filed July 19, 1996. (18) Incorporated by reference to exhibits previously filed by the Company with its Form 10-Q for the quarter ended on June 30, 1998. (19) Incorporated by reference to exhibits previously filed by the Company with its 1997 Annual Report on Form 10-K filed on March 30, 1998. (20) Incorporated by reference to exhibits previously filed by the Company with its Current Report on Form 8-K filed on June 8, 1999. (21) Incorporated by reference to exhibits previously filed by the Company with its Registration Statement on Form S-8 filed June 17, 1998 (File No. 333-57015). (22) Incorporated by reference to exhibits previously filed by the Company with its Form 10-Q for the quarter ended March 31, 1999. (23) Incorporated by reference to exhibit previously filed by the Company with its Registration Statement on Form S-8 filed on November 22, 2000. (24) Incorporated by reference to exhibit previously filed by the Company with its 2000 Annual Report on Form 10-K filed on March 30, 2001. (25) Incorporated by reference to exhibit previously filed by the Company with its 2000 Annual Report on Form 10-K filed on March 30, 2001. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Colorado Springs, State of Colorado, on this 29th day of March, 2002. THE SPECTRANETICS CORPORATION By: /s/ JOSEPH A. LARGEY ---------------------------------- Joseph A. Largey President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOSEPH A. LARGEY President and Chief Executive March 29, 2002 - ----------------------------------------------------- Officer, Director (Principal Joseph A. Largey Executive Officer) /s/ PAUL C. SAMEK Vice President, Finance March 29, 2002 - ----------------------------------------------------- (Principal Financial and Paul C. Samek Accounting Officer) /s/ EMILE J. GEISENHEIMER Director and Chairman of the March 29, 2002 - ----------------------------------------------------- Board of Directors Emile J. Geisenheimer /s/ CORNELIUS C. BOND, JR. Director March 29, 2002 - ----------------------------------------------------- Cornelius C. Bond, Jr. /s/ R. JOHN FLETCHER Director March 29, 2002 - ----------------------------------------------------- R. John Fletcher /s/ JOSEPH M. RUGGIO, MD Director March 29, 2002 - ----------------------------------------------------- Joseph M. Ruggio, MD /s/ JOHN G. SCHULTE Director March 29, 2002 - ----------------------------------------------------- John G. Schulte /s/ MARVIN L. WOODALL Director March 29, 2002 - ----------------------------------------------------- Marvin L. Woodall
21 EXHIBIT INDEX List of Exhibits filed with Form 10-K for the year ended December 31, 2001
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.1(b) -- Lease covering a portion of the Company's facilities between the Company and Duane and Donna Basse dated June 1, 2001. 10.2(b) -- Lease covering a portion of the Company's facilities between the Company and John or Sharon Sanders dated December 8, 2000. 10.25 -- Third Amendment to the 1997 Equity Participation Plan. 13.1 -- Portions of Registrant's 2001 Annual Report to security holders incorporated herein by reference. 21.1 -- Subsidiary of the Company. 23.1 -- Consent of Independent Auditors.
EX-10.1(B) 3 d95352ex10-1b.txt LEASE DATED JUNE 1, 2001 EXHIBIT 10.1(b) STATE OF COLORADO COUNTY OF EL PASO This Lease agreement, made and entered into by and between DUANE and DONNA BASSE, hereinafter referred to as "Landlord", and SPECTRANETICS CORPORATION, hereinafter referred to as "Tenant"; WITNESSETH 1. LEASED PREMISES AND TERM: In consideration of the obligation of Tenant to pay rent as herein provided, and in consideration of the other terms and covenants hereof, Landlord hereby demises and leases to Tenant and Tenant hereby takes from Landlord certain premises situated within the County of El Paso, State of Colorado, more particularly described as follows: APPROX. 24,576 SQ. FEET CONSISTING OF THE BUILDING LOCATED AT 3305 NORTH CASCADE AVENUE, COLO. SPRINGS, Colorado 80907, WITH A LEGAL DESCRIPTION OF: LOT 2, CASCADE INDUSTRIAL PARK A SUB. OF LOT 1, BLOCK 1, COLO. SPRINGS, COLORADO together with all rights, privileges, easements, appurtances and immunities belonging to or in any pertaining to the said premises and together with the building and other improvements erected, to have and hold the same for a term commencing on June 01, 2001, and ending 36 months thereafter. 2. RENT AND SECURITY DEPOSIT: a) Tenant agrees to pay Landlord rent for said premises at the rate of (39,792.00) THIRTY THREE THOUSAND SEVEN HUNDRED NINETY TWO Dollars per quarter on a net, net, net rental basis. One such quarterly installment shall be due on June 01, 2001, and a like quarterly installment shall be due and payable on or before the first day of each succeeding calendar quarter during the hereby demised term. Tenant agrees at the time of execution of this lease, to deposit with the Landlord the cash sum of (1,433.60) FOURTEEN HUNDRED THIRTY THREE DOLLARS AND 60 CENTS as a security deposit. b) Other remedies for nonpayment of rent notwithstanding, if the quarterly rental payment is not received by Landlord on or before the tenth day of the month for which it is due, Tenant shall pay Landlord interest on the overdue amount at the rate of 1-1/2 percent per month from the day the amount became due until the date it actually is received by Landlord. 3. TAXES AND INSURANCE: As additional rent, Tenant shall pay to Landlord on the first day of each month 1/12 Tenant's pro rata share of the estimated tax on the Leased Premises for the current year plus 1/12 Tenant's pro rata share of the current premium for any liability or casualty insurance carried by Landlord on the Leased Premises. If the actual real property tax is greater than that estimated by Landlord, Tenant shall pay the excess amount within thirty days after billing by Landlord. If the actual real property tax is less than estimated by Landlord, Landlord shall refund the overpayment to Tenant within thirty days after payment of the tax by Landlord. As used in this paragraph, "real property tax" shall mean any form of assessment (both general and special), levy, penalty, or tax (other than estate or inheritance tax) imposed by any authority having direct or indirect power tax any legal or equitable interest of Landlord in the Leased Premises, including any tax on rent (other than income tax) in lieu of or in addition to normal real property taxes or assessments. Any such billing by Landlord to Tenant that is not paid within 30 days shall bear interest at 1-1/2% per month. Tenant may, at its sole cost and expense (in its name or in the name of Landlord, or in the name of both, as it may deem appropriate) dispute and contest the real property tax, and is such case, said disputed tax must be paid prior to being contested. Tenant acknowledges the right to contest solely for a refund. Should the real property tax contested be held valid, Tenant shall pay all items, court costs, attorney's fees, interest and penalties relating thereto. 4. CHARACTER OF OCCUPANCY: The demised premises shall be used only for the purpose of receiving, storing, shipping, and selling products, materials and merchandise made and/or sold by Tenant, and for such other lawful purposes as may be incidental thereto. Tenant shall at its own cost and expense obtain any and all licenses and permits necessary for such use. Tenant shall comply with all government laws, ordinances and regulations applicable to the use of the demised premises, and shall promptly comply with all government orders and directives for the correction, prevention and abatement of nuisances in or upon, or connected with the demised premises, all at Tenant's sole expense. Tenant shall not permit the Leased premises to be used in any way which would, in the opinion of Landlord, be extra hazardous on account of fire or otherwise or which would an any way increase or render void the fire insurance on the leased Premises. 5. REPAIRS AND MAINTENANCE: Tenant shall, at its own expense, keep in good repair and condition the interior and exterior of the Lease Premises. Tenant's obligation shall extend to the entire Leased Premises, including but not limited to the roof, exterior walls, gutters, glass, heating, ventilation and air conditioning systems, plumbing, pipes, fixtures and other equipment, except that Landlord shall correct any latent defects due to faulty construction which may exist at the time Tenant takes possession of the Leased Premises. Tenant also agrees to maintain at its sole expense all grounds, landscaping and parking areas. Unless otherwise agreed by Landlord and Tenant, all grounds, landscaping and parking area maintenance and repair shall be performed by Landlord and Tenant shall be billed for its pro rata share of such expense. If either Landlord or Tenant fails to perform any duty described above, the other may give notices of such failure. If the duty is not permitted by the responsible party within thirty days after notice (or within a reasonable shorter period in the case of emergency), the other party may perform the repair or maintenance work and charge the responsible party for any expense incurred. The responsible party shall pay the expense incurred. Landlord and landlord's agents and representatives shall have the right to enter and inspect the demised premises at any time during reasonable business hours, for the purpose of ascertaining the condition of the demised premises or in order to make such repairs as may be required to be made by Tenant or Landlord under the terms of this Lease. At the termination of this Lease, Tenant shall deliver up the leased premises with all improvements located thereon in good repair and condition and will deliver all keys therefore at the office of the Landlord. 6. ALTERATIONS: Tenant shall not make major alterations, additions or improvements to the demised premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant may, without the consent of Landlord but at its own expense and in a good workmanlike manner make such minor alterations, additions or improvements or erect, remove or alter such partitions, or erect such shelves, bins, machinery and trade fixtures as it may deem advisable, without altering the basic character of the building or improvements, and in each case complying with all applicable government laws, ordinances, regulations and other requirements. At the termination of this Lease, Tenant shall, if Landlord so elects, remove all alterations, additions, improvements and partitions erected by Tenant and restore the premises to their original condition, otherwise such improvements shall be delivered up to Landlord with the premises. All shelves, bins, machinery and trade fixtures installed by Tenant may be removed by Tenant at the termination of this lease if Tenant so elects and shall be so removed if required by Landlord. All such removals and restorations shall be accomplished in a good workmanlike manner so as not to damage the primary structure of structural qualities of the building and other improvements situated on the demised premises. 7. SIGNS: Tenant shall have the right to install signs as it may desire upon the roof and exterior walls of said building subject to Landlord's prior written approval and subject to any governmental laws, ordinances, regulations and other requirements. Tenant shall remove all such signs at the termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury, defacement, or overloading of the building and other improvements. 8. UTILITIES: Tenant shall pay all charges incurred for any utility services metered to his demised premises or for Tenant's pro-rata share of the utility services provided to the demised premises, and billed to Tenant by Landlord. 9. LEASE ASSIGNMENT OR SUBLETTING: Tenant shall not have the right to assign this Lease or to sublet the whole or any part of the demised premises, unless prior approval of Landlord is obtained. Not withstanding any such assignment or subletting Tenant shall at all times remain fully responsible and liable for the payment of rent herein specified and for compliance with all of its provisions and covenants of this Lease. Upon the occurrence of an "event of default" as herein defined, if the demised premises or any part thereof are then assigned or sublet, Landlord, in addition to any other remedies herein provided or provided by law, may at its option collect directly from such assignee or subtenant all rents becoming due to Tenant under such assignment, or sublease and apply such rent against any sums due to it by Tenant hereunder, and no such collection shall be construed to constitute a novation or a release of Tenant from the further performance of its obligations hereunder. Landlord shall also have the right to assign any of its rights under this Lease. 10. INSURANCE, LIABILITY AND PROPERTY: Landlord shall not be liable to Tenant or Tenant's employees, agents or visitors, or to any other person whomsoever, for any injury to person or damage to property on or about the demised premises, caused by the negligence or misconduct of Tenant, its agents, servants or employees, or of any other person entering upon the premises under express or implied invitation of Tenant, or caused by leakage or gas, oil, water or steam or by electricity emanating from the premises, or due to any other cause whatsoever, and Tenant agrees to indemnify Landlord and hold it harmless from any loss, expense or claims arising out of any such damage or injury. Tenant shall, throughout the demised term, at its sole cost and expense, provide and keep in force with responsible insurance companies, satisfactory to Landlord and to any mortgagee under a mortgage constituting a lien upon the demised premises, public liability and property damage insurance, the liability limits of said insurance shall be a minimum of $500,000.00 single limit, protecting Landlord and such mortgagee as well as Tenant against liability to any employees or servants of Tenant or to any other person whomsoever arising out of or in connection with Tenant's use of the leased premises or the condition of the leased premises. Tenant is to furnish Landlord with certificate of liability. Landlord shall, at Tenants expense, procure and maintain at all times during the term of this Lease a policy or policies of insurance covering loss or damage to the premises (exclusive of Tenant's trade fixtures and equipment), providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief. 11. DAMAGE OR DESTRUCTION: In the event improvements on the premises are damaged by any casualty which is covered under an insurance policy required to be maintained pursuant to Paragraph 10, then Landlord may at Landlord's option, either (a) repair such damage as soon as reasonably possible at Landlord's expense, in which event this Lease shall continue in full force and effect, or (b) give written notice to Tenant within thirty (30) days after the date of occurrence of such damage of Landlord's intention to cancel and terminate this Lease as of the date of the occurrence of the damage. In the event Landlord elects to terminate this lease, Tenant shall have the right within ten (10) days after receipt of the required notice to notify Landlord in writing of Tenant's intention to repair such damage at Tenant's expense, without reimbursement from Landlord, in which event this Lease shall continue in full force and effect, and Tenant shall proceed to make such repairs as soon as reasonably possible. If Tenant does not give such notice within ten (10) day period this Lease shall be cancelled and terminated as of the date of the occurrence of such damage. If the premises are totally destroyed during the term of this Lease from any cause whether or not covered by the insurance required under Paragraph 10 (including any destruction required by any authorized public authority), this Lease shall automatically terminate as of the date of such total destruction. If the premises are partially destroyed or damaged during the last six (6) months of the term of this Lease, Landlord may at Landlord's option, cancel and terminate this lease as of the date of the occurrence of the damage by giving written notice to Tenant of Landlord's election to do so within thirty (30) days after the date of such damage by fire or other cause, or to make any restoration or replacement of any panelings, decorations, office fixtures, partitions, railings, ceilings, floor covering, equipment, machinery or fixtures or any other improvements or property installed in the premises by Tenant or at the direct or indirect expense of Tenant. Tenant shall be required to restore or replace same in the event of damage. If the premises are partially destroyed or damaged and Landlord or Tenant repairs them pursuant to this Lease, the rent payable hereunder for the period during which such damage and repair continues shall be abated in proportion to the extent which Tenant's use of the premises is impaired. Except for abatement of rent, if any, Tenant shall have no claim against Landlord for any damage suffered by reason of such damage, destruction, repair or restoration. If Landlord shall be obligated to repair or restore the premises and shall not commence such repair or restoration within ninety (90) days after such obligation shall accrue. Tenant may, at Tenant's option, cancel and terminate this Lease by written notice to Landlord at any time prior to the commencement of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. 12. EMINENT DOMAIN: a) If the whole or any substantial part of the demised premises should be taken for any public or quasi-public use under any governmental law, ordinance or by right of eminent domain or by private purchase in lieu thereof, this Lease shall terminate and the rent shall be abated during the unexpired portion of this Lease, effective when the physical taking of said premises shall occur. Separate awards for damage to the respective interests of Landlord and Tenant hereunder shall be made, and each shall be entitled to receive and retain such awards as shall be made to it, and the termination of this Lease shall not affect the rights of the respective parties to the awards. b) If less than a substantial part of the demised premises should be taken for any public or quasi-public use under any government law, ordinance or regulation, or by right of eminent, or by private purchase in lieu thereof, this Lease shall not terminate, but the rent payable hereunder during the unexpired portion of this Lease shall be reduced to such extent as may be fair and reasonable under all of the circumstances. Separate awards shall be made in such event for damages to the respective interests of Landlord and Tenant hereunder. 13. HOLDING OVER: Should Tenant, or any of its successors in interest, hold over the leased premises, or any part thereof, after the expiration of the term of this Lease, unless otherwise agreed in writing, such holding over shall constitute and be construed as tenancy from month to month only, at a rental equal to the rent paid the last month of the term of this Lease plus twenty per cent (20%) of such amount. 14. TENANT DEFAULT: The following events shall be events of default by Tenant under this lease: a) Tenant shall fail to pay any installment of the rent hereby reserved and such failure shall continue for a period of ten (10) days. b) Tenant shall fail to comply with any term, provision, or covenant of this Lease, other than the payment of rent, and shall not cure such failure within thirty (30) days. c) Tenant shall become insolvent, or shall make a transfer in fraud of creditors, or shall make an assignment for the benefit of creditors. d) Tenant shall file a petition under any section or chapter of the National Bankruptcy Act, as amended, or under any similar law or statute of the United States or any State thereof; or Tenant shall be adjudged bankrupt or insolvent in proceedings filed against Tenant thereunder. e) A receiver or Trustee shall be appointed for all or substantially of all the assets of Tenant. f) Tenant shall desert or vacate any substantial portion of the premises. Upon the occurrence of any such events of default, Landlord shall have the option to pursue any one or more of the following remedies without any notice of demand whatsoever: 1) Terminate this Lease, in which event Tenant shall immediately surrender the premises to Landlord, and if Tenant fails so to do, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the leased premises and expel or remove Tenant and any other person who may be occupying said premises or any part thereof, by force if necessary, without being liable for prosecution or any claim of damages therefore; and Tenant agrees pay to Landlord on demand the amount of all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the premises on satisfactory terms or otherwise, including any damages Landlord may incur because of special sums expended for fixing up premises for Tenant. 2) Enter upon and take possession of the leased premises and expel or remove Tenant and any other person who may be occupying said premises or any part thereof, by force if necessary, without being liable for prosecution or any claim for damages therefore, and relet the premises and receive the rent therefore; and Tenant agrees to pay to Landlord on demand any deficiency that may arise by reason of such reletting. 3) Enter upon the leased premises, by force if necessary, without being liable for prosecution or any claim for damages therefore, and do whatever Tenant is obligated to do under the terms of this Lease; and the Tenant agrees to reimburse Landlord on demand for any expenses which Landlord may incur in thus effecting compliance with Tenant's obligations under this Lease, and Tenant further agrees that Landlord shall not be liable for any damages, resulting to Tenant from such action, whether caused by negligence of Landlord or otherwise. Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by law, nor shall pursuit of any remedy herein provided constitute a forfeiture or waiver of any waiver of any rent due to Landlord hereunder or of any damages accruing to Landlord by reason of the violation of any of the terms, provisions and covenants herein contained. No waiver by Landlord of any violation or breach of any of the terms, provisions and covenants herein contained shall be deemed or construed to constitute a waiver of any other violation or breach of any of the terms, provisions, and covenants herein contained shall be deemed or construed to constitute a waiver of any other violation or breach of any of the terms, provisions, and covenants herein contained. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver of such default. 15. ATTORNEY'S FEES. If on account of any breach or default by Tenant in Tenant's obligations under the terms and conditions of this lease, it shall become necessary for Landlord to employ an attorney to enforce or defend any of Landlord's rights or remedies, hereunder, Tenant agrees to pay any reasonable attorney's fees incurred by Landlord in such connection. 16. QUIET ENJOYMENT. Landlord warrants that it has full right to execute and to perform this lease and to grant the estate leased, and, that Tenant, upon payment of the required rents and performing the terms, conditions, covenants and agreements contained in this Lease, shall peaceably and quietly have, hold and enjoy the Leased Premises during the full term of this Lease as well as any extension or renewal. However, Tenant accepts this Lease subject and subordinate to any underlying lease, mortgage, deed or trust, or other lien presently existing upon the Leased Premises. Landlord hereby is irrevocably vested with full power and authority to subordinate Tenant's interest under this agreement to any underlying lease, mortgage, deed of trust or other lien hereafter placed on the Leased Premises, and Tenant agrees upon demand to execute additional instruments subordinating this Lease as Landlord may require. If the interest of the Landlord under this Lease shall be transferred by reason of foreclosure or other proceedings for enforcement of any lien, deed of trust or mortgage on the Leased Premises, Tenant shall be bound to the transferee (sometimes called the "Purchaser") under the terms, covenants and conditions of the Lease for the balance of the term remaining, and any extensions or renewals, with the same force and effect as if the Purchaser were the Landlord under this Lease. Tenant agrees to attorn to the Purchaser, as its Landlord, the attornment to be effective and self-operative without the execution of any further instruments upon the Purchaser succeeding to the interest of the Landlord under this Lease. The respective rights and obligations of Tenant and the Purchaser upon the attornment, to the extend of the then remaining balance of the term of this Lease and any extensions and renewals, shall be and are the same as those set forth in this Lease. 17. NOTICE ADDRESS: Each provision of this instrument or of any applicable government laws, ordinances, regulations, and other requirements with reference to the sending, mailing, or delivery of any payment by Landlord to Tenant or with reference to the sending, mailing, or delivery of any notice or the making of any payment by Landlord to Tenant or with reference to the sending, mailing, or delivery of any notice of the making of any payment by Landlord to Tenant or with reference to the sending, mailing, or delivery of any notice of the making of any payment by Tenant shall be deemed to be complied with when and if the following steps are taken. a) All rent and other payments required to be made by Tenant to Landlord hereunder shall be payable to Landlord in El Paso County, Colorado at the address hereinbelow set forth of at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith. b) All payments required to be made by Landlord to Tenant hereunder shall be payable to Tenant at the address herein below set forth, or at such other address within the continental United States as Tenant may specify from time to time by written notice delivered in accordance within. c) Any notice or document required or permitted to be delivered hereunder shall be deemed to be delivered whether actually received or not when deposited in the United States Mail, postage prepaid. Registered Mail, Return Receipt Requested, addressed to the parties hereto at the respective addresses set out opposite their names below, or at such other addresses as they have theretofore specified by written notice delivered in accordance herewith. Landlord DUANE and DONNA BASSE Tenant SPECTRANETICS CORPORATION --------------------------- --------------------------- P.O. BOX 9601 96 TALAMINE COURT --------------------------- --------------------------- COLO. SPRINGS, CO 80932 COLO. SPRINGS, CO 80907 --------------------------- --------------------------- If and when, included the term "landlord" as used in this instrument, there is more than one person, firm, or corporation, all shall jointly arrange among themselves for their joint execution of such a notice specifying some individual at some specific address in El Paso County, Colorado or any other location, for the receipt of notices and payments to Landlord; if and when, included within the term "Tenant" as used in this instrument, there is more than one person, firm, or corporation, all shall jointly arrange among themselves for their joint execution of such a notice specifying some individual at some specific address within the continental United States for receipt of notices and payments to Tenant. All parties included within the terms "Landlord" and Tenant", respectively, shall be bound by notices given in accordance with the provisions of this paragraph to the same effect as if each had received such notice. 18. OTHER PROVISIONS: a) See attached addendum for paragraph 20 through 23. b) The terms, provisions and covenants and conditions contained in this Lease, shall apply to, inure to the benefit of, and be binding upon the parties hereto and upon their respective successors in interest and legal representatives except as otherwise herein expressly provided. Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise require. 19. CORPORATE RESOLUTION: If this instrument is executed by a corporation, such execution has been authorized by a duly adopted resolution of the Board of Directors at such corporation and copy thereof furnished to Landlord. Executed the 1st day of June 2001. LANDLORD TENANT: BY: /s/ DUANE H. BASSE BY: /s/ LAWRENCE E. MARTEL --------------------------------- -------------------------------- BY: /s/ DONNA BASSE Title: V.P. Operations --------------------------------- ----------------------------- BY: -------------------------------- Title: ----------------------------- ADDENDUM TO LEASE 20. RENEWAL OPTION: Tenant shall have the right to renew this Lease for a period of one (1) additional year at the expiration of the term hereof at a rental rate to be hereinafter determined, subject to all conditions and agreements herein contained; provided, however, that Tenant shall notify the Landlord of his election to renew the Lease by giving Landlord written notice of such election on or before six (6) months prior to the expiration of the original term hereof. 21. All snow and ice removal shall be Tenant's responsibility and shall be at Tenant's expense. 22. Landlord grants to Tenant first right of refusal for the purchase of the properties located at: 3305 North Cascade Avenue and 3337 North Cascade Avenue Colo. Springs, Colorado 80907 23. This renewal Lease will need to be signed by an executive officer of the corporation. EX-10.2(B) 4 d95352ex10-2b.txt LEASE DATED DECEMBER 8, 2000 EXHIBIT 10.2(b) COMMERCIAL LEASE THIS LEASE AGREEMENT made this 8th day of December, 2000, by and between John Sanders, hereinafter called "Landlord: and Spectranetics Corporation, hereinafter called "Tenant". 1. LEASED PREMISES: Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the premises known as 144 and 148 Talamine Court containing approximately 4800 square feet. 2. TERM: To have and to hold the leased premises unto Tenant for a term of 36 months commencing on the 1st day of January, 2001, and ending on the 31st day of December, 2003, unless sooner terminated as hereinafter provided. The tenant has the option to renew for one additional year with a six percent increase in rents. LANDLORD shall not have any liability for loss or damage to Tenant's work or to fixtures, equipment or other property of Tenant installed or placed by Tenant in the leased premises. Any occupancy by Tenant prior to beginning of the term, even though rent free, shall in all other respects be the same as that of a Tenant under this lease and by such occupancy, Tenant shall be bound by all terms of this lease. By occupying the leased premises, as a Tenant, or to complete Tenant's work, install fixtures, facilities or equipment, or to perform finishing work. Tenant shall be deemed to have accepted the same and acknowledged that the leased premises are in the condition required by the Landlord's covenants. Occupancy by the Tenant, before the term, will be prorated to the number of days of occupancy, unless rent free. 3. RENT: Tenant agrees to pay the total sum of $87,864 in U.S. dollars for a three year lease plus $32,860 if the tenant agrees to extend the lease one year. This is a gross lease and the Landlord is responsible for the exterior of the building, taxes, land, water, exterior utilities and fire insurance on the structure only. All other utilities, additional tenant finish, garbage and other services are the responsibility of the Tenant. The rent shall be paid in equal, monthly installments, IN ADVANCE, on or before the 1st day of each month, as follows: 1st Year Monthly Rental Amount: $2300 Annual: $27,600 2nd Year Monthly Rental Amount: $2438 Annual: $29,256 3rd Year Monthly Rental Amount: $2584 Annual: $31,008 4th Year 1 year extension Rent: $2739 Annual: $32,868 to the Landlord at this address of: 154 Talamine Court, Colorado Springs, CO. 80907. On the anniversary date of this lease agreement and every year thereafter until the end of this agreement, at six (6) percent increase in rents will be added to the prior years rental amount. One monthly installment of the rent shall be due and payable on or before the first day of the execution of this lease by the Tenant for the first month's rent and a like monthly installment shall be due and payable on or before the first day of each calendar month succeeding the "commencement date" during the term. (a). This lease is expressly contingent upon Tenant providing the landlord an acceptable financial statement. (b). All expenses incurred by the Tenant, are the sole responsibility of the Tenant. If, however, the Tenant creates a situation whereby the Landlord incurs expenses brought on by the Tenant's neglect or the Tenant causes the property to be encumbered in any way, the Landlord shall have the right to call these expenses as rents and in the event of nonpayment, Landlord shall have all the rights and remedies as herein provided for failure to pay rent. (c). The Tenant is responsible for ALL Tenant finish, and cannot encumber or cause to encumber the premise or any adjoining premises or any other premises not rented by the Tenant. (d). There is a Ten (10) days "grace" period after the first of the month to pay rents. (e). LATE CHARGES: In the event the rent provided for herein is not received by Landlord on the first day of each month and extends beyond the "grace period" for each month, a late charge equal to one quarter (1/4) percent of the monthly rental amount shall be due and payable to Landlord for each day of delinquency up to 25 days and one (1%) over 25 days. If rent is mailed, Tenant is responsible for loss or mail delay. Nothing contained herein shall obligate the Landlord to accept the rent after the "grace period", nor does the Landlord waive any of it's legal rights which may be available for default of Tenant by inclusion of this provision in this Commercial Lease. In the event Tenant pays rent by check and the check is not honored by the Landlords bank, there will be a charge of thirty ($30) dollars for each returned check, in addition, Tenant remains responsible for current rents and any additional charges incurred by the Landlord for later rents. 4. USAGE: Tenant warrants and represents to Landlord that the premises shall be used and occupied only for the purposes of Light Manufacturing and/or Office use. Use of toxic chemicals is not permitted. Tenant shall not create any nuisance or otherwise interfere with, annoy or disturb any other Tenant. Tenant shall not commit, or suffer to be committed, any waste on the premises, nor shall Tenant permit the premises to be used in any unlawful activity or way which would, in the opinion of the Landlord, be extra hazardous. Tenant accepts the Premises subject to all matters of record and to all applicable laws. 5. Tenant shall arrange for and pay all charges for janitorial services performed in or on the Premises during the Term of this Lease, and at such times as Landlord shall require so as to maintain the quality and appearance of the building both inside and out. 6. SERVICES: Tenant shall pay all charges for gas, water, sewer, electricity, and other utilities used by Tenant on the Premises during the term of this lease. If possible, all such utilities shall be separately metered and billed in Tenant's name. In the event that a separate itemization is not available, Tenant shall pay it's pro rata portion based on the square footage or other pro rata method deemed equitable by the Landlord. Tenant shall be responsible for all telephone and telecommunication charges. (a) Landlord's failure to any extent to furnish these defined services, or any cessation thereof, shall neither render Landlord liable in any respect for damages either person or property, be construed as an eviction or partial eviction of Tenant, work as an abatement of rent, nor relieve Tenant from fulfillment of any covenant in this lease. 7. REPAIRS AND MAINTENANCE: Unless otherwise expressly provided, Landlord shall maintain only the roof, foundation, common parking area, common landscaped areas, heating and air conditioning and soundness of the exterior walls (excluding all exterior glass and exterior or overhead doors) of the building in good repair and condition except for reasonable wear and tear. Tenant shall pay for the repair of any damage caused by the negligence or default of Tenant or Tenant's agents, invites and employees. Landlord shall not be liable to Tenant except as expressly provided in this lease, for any damage or inconvenience, and Tenant shall not be entitled to any abatement or reduction of rent be reason of any repairs, alterations or additions made by Landlord under this lease. (a). Tenant shall forthwith at its expense replace any cracked or broken glass used in the leased premises. (b). Tenant, at its own expense, shall maintain all fixtures, lighting fixtures, floor covering, interior painting and decorating in a good clean, safe and wholesome condition at all times during the term of this lease. (c). Tenant is to return the premises to the Landlord at the termination of this lease in as good of condition as existed at the "commencement date" of this lease, ordinary wear and tear excepted as defined by the landlord. The cost for any repairs or maintenance work to bring the premises to such condition shall be borne by the Tenant and full or partial remedy may come from the Tenants "deposit". 8. COMMON AREAS: The term "common areas" shall mean all that portion of building improvements, grounds, parking, and landscaping which is constructed for lease to Tenants or hereafter leased to Tenants. Tenant shall not at any time interfere with the rights of Landlord and other tenants, and their employees, customers and invites, to use any part of the common areas. The Landlord has the right to erect "for rent" or "for sale" signs on the common area as well as add any improvements as required by the Landlord. 9. ALTERATIONS AND IMPROVEMENTS: Written approval by the Landlord for any and all alterations and improvements is required. Landlord may at its option, require Tenant, at the expense of the Tenant, to remove any physical additions and/or repair any alteration in order to restore the Premises to the condition existing at the time Tenant took possession. 10. LIENS ON PREMISES: Tenant shall not permit any lien to be placed and remain on the Premises, building or common areas as a result of its conduct for any reason for a period longer than thirty (30) days. Tenant shall also post notice pursuant to Colorado Revised Statues, 1973, as amended, 38-22-101, et. seq. negating Landlord's liability for any mechanic's liens resulting from any work, labor or materials performed for or delivered at Tenants request for incorporation into the premises. 11. CONDEMNATION: If, during the term of this lease, all or a substantial part of the premises are taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain or by purchase in lieu thereof, and the taking would prevent or materially interfere with the use of the premises by the Tenant for the purpose for which they are then being used, this lease shall be terminated and all rents shall be abated during the unexpired portion of the lease effective on the date physical possession is taken by the condemning authority. Tenant agrees that it shall have no claim to the condemnation award. 12. SECURITY DEPOSIT: Tenant, in lieu of the tenant finish work done by the tenant, hereby has the security deposit waived. 13. INSURANCE: The Landlord shall at all times during the Term of the lease, maintain a policy or policies of insurance as Landlord deems appropriate. Landlord shall not be obligated in any way or manner to insure any personal property of the Tenant. Tenant shall, at Tenant's expense, maintain such other liability insurance as Tenant deems appropriate to protect Tenant and Landlord from loss and the Landlord shall be named as "additional insured" on the tenants liability policy. A current copy of the Tenant's insurance policy is to be maintained by the Landlord. 14. WAIVER OF SUBROGATION: Anything in this lease to the contrary notwithstanding, Landlord and Tenant hereby waive and release each other of and from any and all rights of recovery, claim, action or cause of action against each other, their agents, officers and employees, for any loss or damage that may occur to the premises. Improvements to the common areas or building of which the premises are a part, or personal property (building contents) within the building, by reason of fire or the elements regardless of cause or origin, where such loss or damage is insured against and subject to an insurance policy in force at the time of such loss or damage. Because this paragraph will preclude the assignment of any claim mentioned herein by way of subrogation or otherwise to an insurance company or any other person, each party to this lease agrees immediately to give to each insurance company which has issued to it policies of insurance covering all risk of direct physical loss, written notice of the Terms of the mutual waivers contained in this paragraph, and to have the insurance policies properly endorsed, if necessary, to prevent the invalidation of the insurance coverages by reason of the mutual waivers contained in this paragraph. 15. INDEMNITY: Tenant shall indemnify and hold harmless Landlord from and against any and all claims arising from Tenant's use of the premises, or from the conduct of Tenant's business or from any activity, work or things done, permitted or suffered by Tenant, in or about the premises or elsewhere. In case any action or proceeding be brought against Landlord by reason of such claim, Tenant shall defend the same at Tenant's expense by counsel satisfactory to Landlord. Tenant hereby assumes all risk of damage to property or injury to persons in, upon or about the premises arising from any cause and Tenant hereby waives all claims in respect thereof against Landlord. Tenant hereby agrees that Landlord shall not be liable for injury to Tenant's business or any loss of income therefrom or damage to the goods, ware, merchandise or other property of Tenant, Tenant's employees, invites, customers, or any other person in or about the premises; nor shall Landlord be liable for injury to the person of Tenant, Tenant's employees, agents, or contractors, whether such damage or injury is cause by or results from fire, explosion, steam, electricity, gas, water, rain, or from the breakage, leakage, obstruction, or the damage or injury results from conditions arising upon the premises or upon other portions of the new building of which the premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Tenant. 16. FIRE OR OTHER CASUALTY: In the case the building shall be partially or totally destroyed by fire or other casualty insurable under standard fire insurance so as to become partially or totally untenable, the same shall be repaired as speedily as possible at the expense of Landlord, unless Landlord shall elect not to rebuild, as hereinafter provided, and an equitable part of the rent shall be abated until so repaired based upon the time and to the extent the leased premises are untenable. If the Landlord determines not to rebuild or repair premises of the Tenant, the Landlord will notify the Tenant of those intentions in writing within 60 days of the casualty loss. In no event in the case of any such destruction shall Landlord be required to repair or replace Tenant's stock in trade, lease hold improvements, fixtures, equipment furnishings, or floor coverings. Tenant covenants to make such repairs and replacements and to furnish Landlord, on demand, evidence of insurance assuring its ability to do so. 17. LANDLORD'S RIGHT OF ENTRY: Landlord shall during the term thereof, have the right, at all reasonable hours, to enter and inspect the premises, with or without the Tenants approval. 18. ASSIGNMENT OR SUBLEASE: Tenant shall not assign or in any manner transfer this lease or any interest therein, nor sublet said leased premises or any part or parts hereof, nor permit occupancy by anyone without the prior written consent of the Landlord. Consent shall not be unreasonably withheld by Landlord. In the event of any subletting, the Tenant shall nevertheless at all times, remain fully responsible and liable for rent payments and for compliance of with all its other obligations under the terms, provisions and covenants of this lease. In the event of any assignment of this lease, the Tenant shall be liable only for the first thirty (30) days of rent of the pre-approved assignee. Any collection directly by Landlord from the assignee or subtenant shall not be construed to constitute a or release of Tenant from the further performance of it's obligations under this lease. 19. DEFAULTS: REMEDIES: PAYMENTS: Time is of the essence in all matters concerning this lease. Any delay on the part of Landlord in exercising any right or insisting upon the performance of any obligation of Tenant, shall not constitute a waiver of Landlord's right to exercise these rights or insist upon these performances in the future: (a) Events of Default. The following events shall be events of default by Tenant under this lease: (1) Tenant shall have failed to fully pay when due any installment of rent or any other charge provided herein. (2) Tenant fails to comply with any other provision or provisions of this lease. (3) Tenant voluntary or involuntary petitions for relief pursuant to the bankruptcy or insolvency laws of the United States, or of any state, is filed by the Tenant or guarantor. (4) Tenant has the attachment, seizure, levy upon or taking possession by any receiver custodian, or assignee for the benefit of creditors of any portion of the property of Tenant or guarantor. (5) Tenant or guarantor makes an assignment for the benefit of creditors. (6) An action against the Tenant or guarantor which effects its financial condition adversely or materially. (b) Notice of Default. In the event of a default pursuant to Section (a) above, Landlord may, by serving three (3) days written notice upon Tenant, elect either to: (1) Cancel and terminate this lease, or (2) Terminate Tenant's right to possession only without termination of this lease. (c) In the event Landlord delivers to Tenant a Notice of Default, which notice does not state that Landlord has elected to Terminate the lease, Landlord may at its option enter the Premises and take and hold possession thereof, until Tenant has met its obligation as stated by Colorado Statutes. All rights of a Landlord may be exercised by the Landlord at the discretion of the Landlord. (d) Landlord shall have the right to cancel and terminate this lease by a service five (5) day written notice on Tenant of such further election. Landlord shall have the right to pursue any remedy at law or in equity that may be available to Landlord. (e) In the event Landlord delivers to Tenant a Notice of Default which states that Landlord has elected to Terminate the Lease, Landlord shall be entitled to recover from Tenant liquidated damages in an amount equal to the amount of rent which would be payable under the terms of the lease for the remainder of the lease term if the lease had not been terminated. (f) Tenant's property. If Tenant shall fail to remove any of Tenant's personal property within ten (10) days of receipt of a Notice of Default, or upon the Termination of this lease for any cause whatsoever, the Landlord at its option, may remove the same in any manner that it shall choose, and store the said effect without liability to the Landlord for loss thereof in any public or private warehouse, and the Tenant agrees to pay Landlord on Demand, and all expenses are incurred in such removal, including court costs and attorney's fees and storage charges on such personal property for any length of time the personal property shall be in storage; or the Landlord at its option, without notice, may sell said personal property, or any of the same, at a private sale and without legal process, for such prices as the Landlord may obtain, and apply the proceeds of such sale upon any amounts due under this lease from the Tenant to the Landlord and upon the expenses incidental to the removal, storage, and sale of the personal property, rendering the surplus, if any, to the Tenant. (g) Lien. Landlord is hereby given a lien that is subordinate to existing lien positions at the "commencement date". Further, the Tenant agrees to secure this lease with equipment, fixtures and furniture of "The Perfect Bindery" and shall personally guarantee against loss of rents and the terms and conditions of this lease. (f) Landlord's Default. Should Landlord be in default under the terms of this lease, Landlord shall have five (5) days in which to cure the same after written notice to the Landlord by the Tenant is received. (g) Right of Entry. In the event of Tenant's default hereunder, Landlord may, in addition to all other rights and remedies, re-enter the premises, change any and all of the locks on doors and other barriers, and distrain, seize, remove or store, all property upon the premises. Tenant hereby agrees that such acts by Landlord shall not constitute an eviction, constructive otherwise, shall not terminate this lease, and shall not render the Landlord liable for trespass, forcible entry and detainer, conversion. 20. ACTS OF GOD. Landlord shall not be required to perform any covenant or obligation in this lease, or be liable in damages to Tenant, so long as the performance or non-performance of the covenant or obligation is delayed, caused by or prevented by an act of God or force majeure. Act of God and Force Majeure shall mean strikes, lockouts, sit-downs, material or labor restriction, delays by any municipal, governmental and/or quasi-governmental authority, unusual transportation delays, material or supply shortages or back order, riots, floods, freezing, wash-outs, explosions, earthquakes, fire, storms, acts of the public enemy, acts of vandals, wars, insurrections, delays by utility suppliers, and any other cause not reasonably within the control of the Landlord and which by the exercise of due diligence Landlord is unable, wholly or in part, to prevent or overcome. 21. ATTORNEY'S FEES. In the event Tenant defaults in the performance of any of the terms, covenants, agreements or conditions contained in this lease, and Landlord places in the hands of an attorney the enforcement of all or any part of this lease, the collection of any rent due or to become due or the recovery of the possession of the premises, Tenant agrees to pay Landlord's attorney fees. In the event, suit is brought against the Landlord and Landlord is found to be "at fault", Landlord shall pay for Tenants Attorney's Fees. 22. HOLDING OVER. In the event of holding over by the Tenant after the expiration or termination of this lease, the holdover shall be as a Tenant at will and all of the terms and provisions of this lease shall continue in force except that rents will be an amount equal to 1-1/2 times the rent which would have been payable by Tenant had the hold over period been part of the original term of this lease. 23. RIGHTS OF FIRST MORTGAGEE OR SUBSEQUENT TRANSFEREES. Tenant accepts this lease subject and subordinate to any recorded deed conveying title, first or other mortgage deed of trust lien presently existing or hereafter created upon the premises, building and/or common areas. Tenant agrees upon demand and in a reasonable time period to execute additional instruments subordinating this lease as Landlord may require. 24. ESTOPPEL CERTIFICATES AND ATTORNMENT. Tenant agrees to furnish promptly, from time to time, upon request of Landlord or Landlord's mortgages a statement certifying that the Tenant is in possession of the premises: the premises are acceptable: the lease is in full force and effect: the lease is unmodified: Tenant claims no present charge, lien, or claim of offset against rent: the rent is paid for the current month, but is not prepaid for more than one month and will not be prepaid for more than one month in advance: three is no existing default by reason of some act or omission by Landlord: and such other matters as may be reasonably required for foreclosure, or in the event of exercised of the power of sale under any mortgage or deed of trust made by the Landlord under this lease. No mortgagee shall be liable for any act or omission of Landlord, be bound by any payment of rent, additional rent or any other charge made more than thirty (30) days in advance of the due date thereof, or be bound by any assignment, surrender, termination, cancellation, amendment or modification of the lease without the express written consent of the mortgagee. 25. GOVERNING LAW. This lease is made and delivered in the State of Colorado and shall be interpreted, construed, and enforced in accordance with the laws thereof. 26. SUCCESSORS. This lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective heirs, personal representatives, successors and assigns. 27. TIME OF ESSENCE. Time is of the essence in this lease. 28. MISCELLANEOUS. The captions appearing in this lease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of such paragraph. If any provision of this lease shall ever be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision of this lease, and all other provisions shall continue in full force and effect. 29. NON WAIVER. The receipt by Landlord of rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach and no provision of this lease shall be deemed to have been waived by Landlord unless such waiver be in writing signed by the Landlord. 30. NOTICE: All rent and other payments required to be made by Tenant shall be payable to Landlord at the address set forth below, or at such other address as Landlord may specify from time to time by written notice. Landlord: American Investment Management Co. 154 Talamine Court Colorado Springs, Co. 80907 Any notices will be mailed to the address set forth below, or at such other address as Tenant may specify from time to time by written notice. Tenant: 31. Tenants lease, upon written request to the landlord, can be extended another 12 months beyond the stated period of this lease agreement with a two and one half (2.5) percent increase in rents for that period. 3.2. ENTIRE AGREEMENT AND LIMITATION OF WARRANTIES: It is expressly agreed by Tenant, as a material consideration for the execution of this lease; that this lease, with the specific references to written extrinsic documents, is the entire agreement of the parties; that there are, and were, no verbal representations, warranties, understandings, stipulations, agreements or promises pertaining to this lease or the expressly mentioned written extrinsic documents not incorporated in writing in this lease. Landlord and Tenant expressly agree that there are and shall be no implied warranties which extend beyond those expressly set forth in this lease. It is likewise agreed that this lease may not be altered, waived, amended or extended except by an instrument in writing signed by both Landlord and Tenant. There are a total of ten (10) pages in this lease. Signed in County of El Paso, City of Colorado Springs, State of Colorado on this 8th day of December, 2000, Landlord: Tenant: By John Sanders By Larry Martel ------------------------------ ----------------------------- Title: V.P. Operations ------------------------- EX-10.25 5 d95352ex10-25.txt THIRD AMENDMENT - 1997 EQUITY PLAN EXHIBIT 10.25 THIRD AMENDMENT TO THE 1997 EQUITY PARTICIPATION PLAN OF THE SPECTRANETICS CORPORATION This Third Amendment to the 1997 Equity Participation Plan of The Spectranetics Corporation (the "Amendment") is adopted by the Board of Directors of The Spectranetics Corporation, a Delaware corporation (the "Company"), effective as of January 2, 2001. RECITALS I. The Company's 1997 Equity Participation Plan (the "Plan') was adopted by the Board of Directors (the "Board") on April 14, 1997, approved by the stockholders on June 9, 1997, and became effective on June 9, 1997. The Company's First Amendment to the Plan was approved by the Board on October 22, 1997 and the Second Amendment to the Plan was approved by the Board on April 25, 2000. II. The Board desires to amend the Plan to provide the Compensation Committee of the Board with the power and authority to grant options to independent directors of the Company in lieu of all or any portion of any director fees to which such independent directors may be entitled. III. Effective as of January 2, 2001, the Board unanimously adopted the Amendment in the form given below. AMENDMENT A. Section 3.4(f) is hereby added to the Plan to read as follows: "(f) The Committee shall from time to time, in its absolute discretion, be permitted to grant an Option to purchase additional shares of Common Stock to each Independent Director of the Company in lieu of all or any portion of any director fees to which each Independent Director may be entitled in such amounts and upon such terms as the Committee determines. Any Option granted pursuant to this Section 3.4(f) shall be in addition to Options granted pursuant to 3.4(d) or 3.4 (e) hereof, or the Company's Stock Option Plan For Outside Directors which was adopted by the Board on April 19, 1995." The undersigned, Guy A. Childs, Assistant Secretary to the Company, hereby certifies that the Board adopted the foregoing Amendment as stated in recital III above. Executed at Colorado Springs, Colorado this 15th day of March, 2001. /s/ Guy A. Childs ----------------- Guy A. Childs, Assistant Secretary EX-13.1 6 d95352ex13-1.txt PORTIONS OF REGISTRANT'S 2001 ANNUAL REPORT EXHIBIT 13.1 SELECTED FINANCIAL DATA THE SPECTRANETICS CORPORATION AND SUBSIDIARIES The following selected financial data, as of and for each year in the six-year period ended December 31, 2001, are derived from our consolidated financial statements. The information set forth below should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Financial Statements and Notes thereto included elsewhere in this annual report. The selected balance sheet data as of December 31, 2001 and 2000, and statement of operations data for each year in the three-year period ended December 31, 2001, have been derived from our audited financial statements also included elsewhere herein. The selected historical balance sheet data as of December 31, 1999, 1998, 1997 and 1996, and statement of operations data for the years ended December 31, 1998, 1997 and 1996, are derived from, and are qualified by reference to, audited financial statements of the Company not included herein. All data have been adjusted to exclude the operations of Polymicro Technologies, Inc., the Company's wholly owned subsidiary, which was sold in June 1999.
Years Ended December 31, (In thousands, except per-share data) 2001 2000 1999 1998 1997 1996 ------- ------ ------ ------ ------ ------ STATEMENT OF OPERATIONS DATA Revenue $27,808 26,900 22,305 18,565 14,696 13,661 Cost of revenue 8,459 8,282 7,397 7,347 6,787 6,172 Selling, general and administrative 14,277 17,843 13,902 12,288 10,211 7,525 Research, development and other technology 4,915 5,287 4,622 3,161 2,746 2,242 Litigation settlement costs, net -- 3,654 -- -- -- -- Reorganization costs and litigation reserves -- 1,200 1,358 -- -- -- ------- ------ ------ ------ ------ ------ Operating income (loss) $ 157 (9,366) (4,974) (4,231) (5,048) (2,278) Other income, net 433 838 758 95 202 380 ------- ------ ------ ------ ------ ------ Net income (loss) from continuing operations $ 590 (8,528) (4,216) (4,136) (4,846) (1,898) ------- ------ ------ ------ ------ ------ Net income (loss) $ 590 (8,698) 5,169 (3,275) (4,620) (1,367) ======= ====== ===== ====== ====== ====== Income (loss) from continuing operations per share: Basic $ 0.03 (0.36) (0.19) (0.22) (0.26) (0.10) Diluted $ 0.02 (0.36) (0.19) (0.22) (0.26) (0.10) Weighted average common shares outstanding: Basic 23,547 23,298 22,407 19,018 18,654 18,430 Diluted 24,161 23,298 22,407 19,018 18,654 18,430
As of December 31, (In thousands, except per-share data) 2001 2000 1999 1998 1997 1996 ------- ------ ------ ------ ------ ------ BALANCE SHEET DATA Working capital $ 3,552 11,337 8,957 4,536 7,587 8,787 Cash, cash equivalents and investment securities 12,884 11,921 20,125 4,158 8,590 7,150 Equipment, net 4,119 4,760 3,675 3,129 1,628 2,190 Total assets 25,713 27,360 34,038 21,385 24,778 22,316 Long-term debt including capital lease obligations, net of current portion 57 1,649 411 1,433 1,376 451 Shareholders' equity 16,657 15,716 23,386 11,268 14,063 18,510 Book value per common share outstanding $ 0.69 0.67 1.04 0.59 0.75 1.00
5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. SUCH STATEMENTS ARE BASED ON CURRENT ASSUMPTIONS THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL OUTCOMES AND RESULTS TO DIFFER MATERIALLY. FOR A DESCRIPTION OF SUCH RISKS AND UNCERTAINTIES, WHICH COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM ANY ANTICIPATED RESULTS, PERFORMANCE OR ACHIEVEMENTS, PLEASE SEE THE DISCUSSION BELOW. SPECTRANETICS DISCLAIMS ANY INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY FINANCIAL PROJECTIONS OR FORWARD-LOOKING STATEMENTS DUE TO NEW INFORMATION OR OTHER EVENTS. We develop, manufacture, market and service an excimer laser unit, fiber optic delivery devices and related accessory products for minimally invasive surgical procedures within the cardiovascular system. Our CVX-300(R) excimer laser is the only system approved by the FDA for multiple cardiovascular procedures, including coronary atherectomy and removal of faulty pacemaker and defibrillator leads. Our laser system competes against alternative technologies, including balloon catheters, cardiovascular stents, and mechanical atherectomy and thrombectomy devices. Our growth strategy is to increase utilization of our FDA-approved products, expand our installed base of laser systems, and develop additional applications 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 we secured FDA approval in 2001 to market our product for use in restenosed (clogged) stents (thin steel mesh tubes used to support the walls of coronary arteries) as a pretreatment prior to brachytherapy (radiation therapy). We are currently conducting two FDA-approved clinical trials evaluating the use of our excimer laser system to treat blocked arteries in the upper and lower leg. These trials are on schedule to result in additional FDA-approved applications in the United States during the second half of 2003, if successful. In June 1999, we sold our wholly owned subsidiary, Polymicro Technologies, Inc. (PTI), a manufacturer and distributor of drawn silica glass products, which include capillary tubing and specialty fiber optics. The operations of PTI are reflected in our financial statements as a discontinued operation and our discussion and analysis focuses on our continuing medical business only. The year ended December 31, 2001, was the first full year of profitability and positive cash flow for the Company. Achievement of this objective was accomplished primarily as a result of effective cost-management programs. Our objectives for the year ending December 31, 2002 include: GROW REVENUE 10 TO 15 PERCENT. We plan to achieve this objective through expanded marketing efforts, a growing and more seasoned field sales force, and a special promotion in which lasers will be offered for $90,000, compared with a current list price of $249,000. We have targeted 30 to 50 new laser placements in 2002. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES ACCELERATE MILESTONES WITHIN OUR CLINICAL TRIAL ACTIVITIES. Our leading clinical priority is to accelerate completion of enrollment and the FDA submission for our LACI trial, which deals with blockages in the lower legs. We will also be working to prepare our PELA submission to the FDA in as timely a manner as possible. PELA deals with blocked arteries in the upper leg. We believe that these trials are on track for FDA approval during the last half of 2003. MAINTAIN PROFITABILITY. Although we intend to make key investments in 2002 to prepare for marketing peripheral atherectomy after expected FDA approval during the second half of 2003, we expect to maintain profitability for the full year after approximately break-even results for the first quarter of 2002. The key investments include adding senior marketing personnel, establishing insurance reimbursement procedures, spurring publication of clinical studies in peer-reviewed journals, establishing a higher profile at medical conferences, developing product enhancements tailored to the peripheral opportunity, training physicians, and preparing and printing marketing materials. RESULTS OF OPERATIONS (OVERVIEW)
REVENUE (In thousands) 2001 2000 1999 -------- -------- -------- United States $ 25,584 $ 24,052 $ 19,457 Europe 2,224 2,848 2,848 -------- -------- -------- TOTAL $ 27,808 $ 26,900 $ 22,305 ======== ======== ========
NET INCOME (LOSS) (In thousands) 2001 2000 1999 -------- -------- -------- United States $ 445 $ (6,165) $ (2,317) Europe 145 (2,363) (1,899) -------- -------- -------- TOTAL $ 590 $ (8,528) $ (4,216) ======== ======== ========
In the next section we discuss 2001 and 2000 revenue and net income (loss) from continuing operations. YEAR ENDED DECEMBER 31, 2001, COMPARED WITH YEAR ENDED DECEMBER 31, 2000 Revenue in 2001 was $27,808,000, up $908,000, or three percent, from 2000. The increase is due to an eight percent increase in equipment revenue, a two percent increase in disposable products revenue and a seven percent increase in service revenue. Equipment revenue increased eight percent due to increased rental revenue under the Company's Evergreen rental program. Revenue from laser units sold in 2001 was approximately the same as 2000. For the year ended December 31, 2001, we placed (sold, rented or provided for evaluation) 15 excimer laser systems compared with 48 in 2000. The decrease in laser placements is primarily a result of fewer placements under our laser evaluation program, which does not generate up-front equipment revenue. At December 31, 2001, the installed base included 327 excimer laser systems (230 in the United States), compared with 312 at December 31, 2000 (215 in the United States). The increase in disposable products revenue, which primarily consists of single-use catheter products, is comprised of a three percent increase in lead removal devices and a significant increase in peripheral atherectomy catheters from a small base, partially offset by a two percent decline in coronary atherectomy catheters. Service revenue increased seven percent in 2001, as the larger installed base of the Company's excimer laser systems in the United States offset the impact of utilizing distributors to perform service in Europe in 2001. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES Gross margin increased to 70 percent in 2001, from 69 percent in 2000. This improvement was a combination of higher average selling prices on lasers and disposable products sales, combined with increased manufacturing efficiencies. Operating expenses declined 31 percent in 2001 to $19,192,000, compared with $27,984,000 in 2000. In 2000, net litigation settlement costs of $3,654,000 and reorganization costs of $1,200,000 were recognized. Excluding those costs, operating expenses declined 17 percent in 2001 for the reasons discussed below. For the year ended December 31, 2001, we consolidated several operating expense line items. "Selling, general and administrative" includes marketing and sales and general and administrative expenses. "Research, development and other technology" includes research and development, clinical studies, regulatory expenses and royalties. For the year ended December 31, 2000, we reclassified regulatory expenses as part of research and development costs; in prior years, regulatory expenses had been included in "General and administrative" expense. All prior years have been reclassified to conform to the current presentation. Selling, general and administrative expenses of $14,277,000 were down 20 percent from $17,843,000 in 2000, due to a 25 percent decline in marketing and sales expense and a seven percent decline in general and administrative expense. The restructuring of our European operation, which eliminated our direct sales force in Germany and switched to a distributor-based sales model, accounted for more than half of the decline in marketing and sales expense. The remainder was due to widespread expense reductions within the U.S. sales and marketing organization, including lower travel and entertainment expenses, and decreased expenditures for conventions and advertising. General and administrative expenses were down due to a variety of cost reductions, the most significant of which was reduced legal expenses. Research, development and other technology expense includes research and development, clinical studies, regulatory, and royalties expenses. This category of expenses declined $372,000, or seven percent, in 2001 to $4,915,000. The overall decrease is primarily due to a 19 percent reduction in research and development expenses, primarily attributable to the cancellation of a research contract with an outside entity. Clinical studies and regulatory expenses were consistent with prior year levels. Royalties expense increased three percent from the prior year amount, primarily due to additional royalties related to the litigation settlement in October 2000. Interest income decreased 36 percent to $594,000, due primarily to lower yields on our investment securities, which consist primarily of U.S. government and agency obligations with original maturities of less than two years. Interest expense of $150,000 increased 44 percent from the prior year due to the interest related to installments on past royalties in connection with the litigation settlement entered into during the year ended December 31, 2000. Net income was $590,000 in 2001, compared with a loss of $8,698,000 in 2000. In 2000, the Company recognized a $3,654,000 litigation settlement expense, $1,200,000 of reorganization costs, and $170,000 of tax expense related to the sale of a discontinued operation. Excluding these costs, our net loss was $3,674,000 in 2000. The improvement in net income, excluding these costs, of $4,264,000 was primarily due to $3,938,000 of operating expense reductions combined with slightly higher revenue, which was primarily a result of increased selling prices for lasers and disposable products, and improved manufacturing efficiencies. YEAR ENDED DECEMBER 31, 2000, COMPARED WITH YEAR ENDED DECEMBER 31, 1999 Revenue in 2000 was $26,900,000, up $4,595,000, or 21 percent, from 1999. The increase is due to a 27 percent increase in disposable products revenue and a 22 percent increase in service revenue, partially offset by a three percent decline in equipment revenue. The increase in disposable products revenue is attributable to a 63 percent increase in lead removal devices and a 16 percent increase in atherectomy catheters. Service revenue increased 22 percent in 2000 due to the larger installed base of the Company's excimer laser systems. At December 31, 2000, the installed base included 312 excimer laser systems (215 in the United States), compared with 264 (172 in the United States) at December 31, 1999. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES For the year ended December 31, 2000, we placed (sold, rented or provided for evaluation) 48 excimer laser systems, compared with 38 in 1999. However, equipment revenue decreased three percent in 2000 due to fewer sales of our CVX-300 laser systems, which was partially offset by increased rental revenue resulting from the success of our Evergreen rental program. Gross margin increased to 69 percent in 2000 from 67 percent in 1999. This improvement was due to a combination of increased manufacturing efficiencies and a change in sales mix to more disposable products revenue in relation to total revenue. Disposable products generate higher margins than equipment or service. Operating expenses grew 41 percent in 2000 to $27,984,000, compared with $19,882,000 in 1999. In 2000, net litigation settlement costs of $3,654,000 and reorganization costs of $1,200,000 were recognized. In 1999, reorganization costs and litigation reserves of $1,358,000 were recognized. Excluding these costs, operating expenses grew 25 percent in 2000 to $23,130,000 from $18,524,000 in 1999, for the reasons discussed below. Selling, general and administrative expenses increased $3,941,000, or 28 percent, in 2000 to $17,843,000, primarily due to a 31 percent increase in marketing and sales expenses for additional sales personnel and increased commissions resulting from higher U.S. revenue in 2000. We doubled our U.S. field sales organization in the last half of 1999 compared with 1998, and then expanded it an additional 30 percent in 2000. In addition, general and administrative expenses grew 21 percent in 2000 from 1999, primarily because of increased personnel-related expenses and the absence of an allocation to our former industrial business. Research, development and other technology expense increased $665,000, or 14 percent, in 2000 to $5,287,000. About half of the increase was due to higher costs for clinical trials associated with peripheral atherectomy to clear blockages in the upper and lower leg and a trial dealing with clearing blockages within restenosed stents (LARS). The rest of the increase was attributable to higher royalties expense as a result of increased revenue compared with 1999 and additional royalties beginning in October 2000 related to the settlement of a patent infringement lawsuit. In October 2000, we entered into a settlement and release agreement related to a patent infringement lawsuit filed in August 1999. The agreement provided that each party release all claims and counterclaims against each other, that we enter into a license agreement and pay a royalty for the use of certain patents in the United States and abroad until the expiration of the last patent on November 15, 2005, and that 15 lasers be returned to Spectranetics for future sale. In addition, we recorded a net charge of $3,654,000 during the year ended December 31, 2000, to reflect the cost of past royalties to the agreement date, and legal fees related to this suit, offset by our release from a prior obligation to provide defined medical devices to United States Surgical Corporation, a division of Tyco International. The payments for past royalties are being made in three annual installments beginning November 2000. Reorganization costs of $1,200,000 to restructure our European operations were recorded in 2000, compared with reorganization costs and litigation reserves totaling $1,358,000 in 1999. The 1999 costs primarily reflected litigation reserves for legal proceedings relating to a patent infringement lawsuit, and also included costs related to a management restructuring in Europe. Interest income increased 20 percent to $923,000 due to higher average cash and investment balances as a result of cash received from the private placement of common stock in February 1999 and cash received from the sale of Polymicro in June 1999. Interest expense decreased slightly from the prior year and related primarily to our equipment loan. Loss from continuing operations in 2000 was $8,528,000, compared with $4,216,000 in 1999. The higher operating loss was primarily due to increases in expenses discussed above, especially litigation settlement costs, partially offset by higher revenue and gross margin. Excluding reorganization reserves and litigation costs from both years, the loss in 2000 was $3,674,000, compared with $2,858,000 in 1999. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES INCOME TAXES At December 31, 2001, we had net operating loss carryforwards for U.S. federal income tax purposes of approximately $52 million, which are available to offset future federal taxable income, if any, and expire at varying dates from 2003 through 2021. The annual use of the net operating loss carryforwards is limited under Section 382 of the Internal Revenue Code of 1986. An alternative minimum tax credit carryforward of $253,000 is available to offset future tax liabilities and has no expiration date. The Company also has tax loss carryforwards in the Netherlands, which have no expiration date, of approximately 64 million Dutch guilders ($25 million U.S. dollars) available to offset future taxable income, if any. We also had research and experimentation tax credit carryforwards for federal income tax purposes at December 31, 2001, of approximately $3 million, which are available to reduce future federal income taxes, if any, and expire at varying dates through 2021. The annual use of portions of the research and experimentation credit carryforwards is also limited under Section 382 of the Internal Revenue Code of 1986. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2001, we had cash, cash equivalents and investment securities of $12,884,000, up $963,000 from $11,921,000 at December 31, 2000. The year ended December 31, 2001, was the first full year we generated positive cash flow. For the year ended December 31, 2001, cash provided by operating activities totaled $1,189,000, which was primarily a result of cash earnings (net income plus depreciation and amortization) of $2,422,000 and a $1,359,000 reduction of accounts receivable, partially offset by a reduction in accounts payable and accrued liabilities of $2,305,000. This reduction in accounts payable and accrued liabilities related primarily to the payment of costs associated with our European restructuring and the second of three installments on past royalties agreed upon as part of the litigation settlement in 2000. The final installment is due in November 2002. For the year ended December 31, 2000, cash used in operating activities totaled $7,604,000. The improvement in cash provided by operating activities compared with last year is primarily a result of our net income of $590,000 during the year ended December 31, 2001, combined with improved working capital management, which contributed to reductions in accounts receivable and inventory. The table below presents the reduction in receivables and inventory in relative terms, through the presentation of financial ratios. Days sales outstanding are calculated by dividing the ending net accounts receivable balance by the average daily sales from the fourth quarter. Inventory turns are calculated by dividing annualized cost of sales for the fourth quarter by ending inventory.
2001 2000 ---- ---- Days sales outstanding 59 78 Inventory turns 4.7 3.2
For the year ended December 31, 2001, cash used by investing activities was $341,000 compared with cash provided by investing activities of $4,876,000 during the year ended December 31, 2000. The increased cash used by investing activities is due to fluctuations in our portfolio mix between cash, cash equivalents and investment securities. Capital expenditures during the year ended December 31, 2001, totaled $290,000, compared with $579,000 during the same period last year. We do not expect our capital requirements to change significantly in 2002 compared with 2001 levels. Net cash provided by financing activities was $76,000 during the year ended December 31, 2001, compared with $51,000 for the same period last year. Financing activities consist primarily of proceeds from sale of common stock to employees, either through the exercise of stock options or the employee stock purchase plan, partially offset by principal payments on long-term debt and capital lease obligations. At December 31, 2001, total debt, including capital lease obligations, was $228,000. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES At December 31, 2001, 2000 and 1999, we had placed a number of systems on rental or loan programs. A total of $5,089,000, $4,839,000 and $3,331,000 was recorded as equipment held for rental or loan at December 31, 2001, 2000 and 1999, respectively, and is being depreciated over three to five years. In 2001, we used two placement programs in addition to the sale of laser systems: 1. Evergreen rental program - This rental program was introduced in July 1999. Rental revenue under this program varies on a sliding scale depending on the customer's catheter purchases each month. Rental revenue is invoiced on a monthly basis and revenue is recognized upon invoicing. The laser unit is transferred to the equipment held for rental or loan account upon shipment, and depreciation expense is recorded within cost of sales based upon a three- to five-year expected life of the unit. 2. Evaluation programs - We "loan" a laser system to an institution for use over a short period of time, usually three to six months. The loan of the equipment is to create awareness of our products and their capabilities, and no revenue is earned or recognized in connection with the placement of a loaned laser (although sales of disposable products result from the laser placement). The laser unit is transferred to the equipment held for rental or loan account upon shipment, and depreciation expense is recorded within selling, general and administrative expense based upon a three- to five-year expected life of the unit. At the beginning of 2002, we are running a price promotion in which we are offering lasers for sale at $90,000, compared with a list price of $249,000, and have arranged for a third-party leasing company to provide financing for our customers, if necessary. As a result, we anticipate that fewer new customers will opt for the Evergreen rental program during this promotion. In addition, we anticipate that some customers currently on the Evergreen rental program may decide to purchase their lasers at the $90,000 price. We believe our liquidity and capitalization as of December 31, 2001, are sufficient to meet our operating and capital requirements through at least December 31, 2002. CONVERSION TO THE EURO For the year ended December 31, 2001, Spectranetics International, B.V., used the Dutch guilder as its functional currency. On January 1, 2002, Spectranetics International, B.V., adopted the euro as its functional currency. The conversion to the euro is not expected to have a material effect on our consolidated financial results of operations. CRITICAL ACCOUNTING POLICIES Our consolidated financial statements are affected by the accounting policies used and the estimates and assumptions made by management during their preparation. Below is a discussion of our critical accounting policies and their impact on the preparation of our consolidated financial statements. REVENUE RECOGNITION. Revenue from the sale of our products is recognized when products are shipped. Title transfers to the customer upon shipment. Revenue from product maintenance contracts and equipment rentals is deferred and recognized ratably over the contract period. Revenue from the rental of our excimer laser systems is recognized on a monthly basis based on a calculated rental fee. The calculated rental fee depends on the monthly catheter purchases of each customer. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES ALLOWANCES AND ACCRUED LIABILITIES. On an ongoing basis, management evaluates its estimates and judgments, including those relating to product returns, bad debts, inventories, income taxes, warranty obligations, royalty obligations, reorganization costs, contingencies, and litigation. We base our estimates and judgments on historical experience and on various other factors we believe to be reasonable under the circumstances. These judgments and estimates form the basis for the carrying values of certain assets and liabilities that are not objectively available from other sources. Carrying values of these assets and liabilities may differ under different assumptions or conditions. NEW ACCOUNTING PRONOUNCEMENTS On June 30, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. Major provisions of these Statements are as follows: All business combinations initiated after September 30, 2001, must use the purchase method of accounting; the pooling of interest method of accounting is prohibited, except for transactions initiated before July 1, 2001; intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability; goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually, except in certain circumstances, and whenever there is an impairment indicator; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting; and effective January 1, 2002, goodwill will no longer be subject to amortization. The adoption of this standard will not have a material impact on our consolidated financial position, results of operations, or cash flows. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The adoption of this standard will not have a material impact on our consolidated financial position, results of operations, or cash flows. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 establishes one accounting model to be used for long-lived assets to be disposed of by sale, and broadens the presentation of discontinued operations to include more disposal transactions. The adoption of this standard will not have a material impact on our consolidated financial position, results of operations, or cash flows. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES RISK FACTORS WE HAVE ONLY RECENTLY ATTAINED PROFITABILITY. We incurred net losses from operations since our inception in June 1984 until the second quarter of 2001. At December 31, 2001, we had accumulated $75.7 million in net losses since inception. Although we anticipate maintaining profitability for the foreseeable future, with the exception of an occasional quarterly loss, we may be unable to do so. OUR SMALL SALES AND MARKETING TEAM MAY BE UNABLE TO COMPETE WITH OUR LARGER COMPETITORS OR TO REACH ALL POTENTIAL CUSTOMERS. Many of our competitors have larger sales and marketing operations than we do. This allows those competitors to spend more time with potential customers and to focus on a larger number of potential customers, which gives them a significant advantage over our team in making sales. OUR PRODUCTS MAY NOT BE ACCEPTED IN THEIR MARKETS. Excimer laser technology 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 and cost effectiveness of, and patient benefits from, excimer laser atherectomy and lead removal. WE MAY BE UNABLE TO COMPETE SUCCESSFULLY WITH BIGGER COMPANIES IN OUR HIGHLY COMPETITIVE INDUSTRY. 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 and thrombectomy, using mechanical methods to remove arterial blockages. We also compete with companies marketing lead extraction devices or removal methods, such as mechanical sheaths. In the lead removal market, we compete worldwide with lead removal devices manufactured by Cook Vascular Inc. and we compete in Europe with devices manufactured by VascoMed. 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, related reimbursement to the health care provider, and procedure costs; o ease of use; o size and effectiveness of sales forces; and o research and development capabilities. We estimate that approximately 80 percent of coronary interventions involve the placement of a stent. The leading stent providers in the United States are SCIMED Life Systems, Inc. (a subsidiary of Boston Scientific Corporation); Cordis Corporation (a subsidiary of Johnson & Johnson Interventional Systems); Guidant Corporation; Medtronic, Inc.; and JOMED N.V. The leading balloon angioplasty manufacturers are SCIMED, Cordis, Guidant and Medtronic. Manufacturers of atherectomy or thrombectomy devices include SCIMED, Guidant and Possis Medical, Inc. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES 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 payers, such as government programs and private insurance plans, for the services the hospitals provide using the CVX-300 laser unit. Unlike balloon angioplasty, laser atherectomy requires the purchase or lease of expensive capital equipment. In some circumstances, the amount reimbursed to a hospital 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 atherectomy in most of the procedures we submitted to the FDA for pre-market approval. Adjunctive balloon angioplasty requires the purchase of a balloon catheter in addition to the laser catheter. While all approved procedures using the excimer laser system are reimbursable, some third-party payers attempt to deny reimbursement for procedures they believe are duplicative, such as adjunctive balloon angioplasty performed together with laser atherectomy. Third-party payers may also attempt to deny reimbursement if they determine that a device used in a procedure was experimental, was used for a non-approved indication, or was not used in accordance with established pay protocols regarding cost-effective treatment methods. Hospitals that have experienced reimbursement problems or expect to experience reimbursement problems may not purchase our excimer laser systems in the future. TECHNOLOGICAL CHANGE MAY RESULT IN OUR PRODUCTS BECOMING OBSOLETE. We derive substantially all of our revenue from the sale or lease of the CVX-300 laser unit, related disposable devices and service. 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, thrombectomy or other devices. Our products could be rendered obsolete as a result of future innovations in the treatment of vascular disease. 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 fines, suspensions of approvals, seizures or recalls of products, operating restrictions, criminal prosecutions and other penalties. 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, as well as clearing blockages within restenosed stents, 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 FDA 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 apparently promising results had been obtained in earlier trials. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES The development of safe and effective products is uncertain and subject to numerous risks. The product development process may take several years, depending on the type, complexity, novelty and intended use of the product. Product candidates that may appear to be promising in development may not reach the market for a number of reasons. Product candidates may: o be found ineffective; o take longer to progress through clinical trials than had been anticipated; or o require additional clinical data and testing. We cannot guarantee that we will gain FDA approval to market the use of our excimer laser system to treat blocked arteries in the upper and lower leg. If we do not receive these FDA approvals, our business may suffer. OUR EUROPEAN OPERATIONS MAY NOT CONTINUE TO BE SUCCESSFUL OR MAY NOT BE ABLE TO ACHIEVE REVENUE GROWTH. In January 2001 we established a distributor relationship in Germany, and now utilize distributors throughout most of Europe. The sales and marketing efforts on our behalf by distributors in Europe could fail to attain long-term success. WE ARE EXPOSED TO THE PROBLEMS THAT COME FROM HAVING INTERNATIONAL OPERATIONS. For the year ended December 31, 2001, our revenue from international operations represented 11 percent of consolidated revenue. 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. WE HAVE IMPORTANT SOLE SOURCE SUPPLIERS AND MAY BE UNABLE TO REPLACE THEM IF THEY STOP SUPPLYING US. We purchase certain components of our CVX-300 laser unit from several sole source suppliers. We do not have guaranteed commitments from these suppliers and order products through purchase orders placed with these suppliers from time to time. While we believe that we could obtain replacement components from alternative suppliers, we may be unable to do so. POTENTIAL PRODUCT LIABILITY CLAIMS AND INSUFFICIENT INSURANCE COVERAGE MAY HURT OUR BUSINESS AND STOCK PRICE. We are subject to risk of product liability claims. We maintain product liability insurance with coverage and aggregate maximum amounts of $5,000,000. The coverage limits of our insurance policies may be inadequate, and insurance coverage with acceptable terms could be unavailable in the future. OUR PATENTS AND PROPRIETARY RIGHTS MAY BE PROVED INVALID, WHICH WOULD ENABLE COMPETITORS TO 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 we have applied for may not be granted. In addition, our patents may not be sufficiently broad to protect our technology or to give us any competitive advantage. Our patents could be challenged as invalid or circumvented by competitors. In addition, the laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. We do not have patents in many foreign countries. We could be adversely affected if any of our licensors terminates our licenses to use patented technology. Although we are not aware of any, there may be 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, may contact us and request that we enter into license agreements for the underlying technology. We cannot guarantee a patent holder will not file a lawsuit against us and prevail. If we decide that we need to license 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. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES 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. OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE. The market price of our common stock, similar to other small-cap medical device companies, has been, and is likely to continue to be, highly volatile. The following factors may significantly affect the market price of our common stock: o fluctuations in operating results; o announcements of technological innovations or new products by Spectranetics or our competitors; o governmental regulation; o developments with respect to patents or proprietary rights; o public concern regarding the safety of products developed by Spectranetics or others; o general market conditions; and o financing of future operations through additional issuances of equity securities, which may result in dilution to existing stockholders and falling stock prices. 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 stockholders' 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 is 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. 16 INDEPENDENT AUDITORS' REPORT THE SPECTRANETICS CORPORATION AND SUBSIDIARIES The Board of Directors and Shareholders The Spectranetics Corporation: We have audited the accompanying consolidated balance sheets of The Spectranetics Corporation and subsidiaries (collectively, the Company) as of December 31, 2001 and 2000, and the related consolidated statements of operations and other comprehensive income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Spectranetics Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Denver, Colorado January 25, 2002 17 CONSOLIDATED BALANCE SHEETS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
Years Ended December 31, (In thousands, except share amounts) 2001 2000 -------- ------- ASSETS Current assets: Cash and cash equivalents $ 3,093 2,195 Investment securities available for sale 2,046 9,726 Trade accounts receivable, less allowance for doubtful accounts and sales returns of $642 and $398, respectively 4,717 6,097 Inventories 1,795 2,585 Prepaid expenses and other current assets 900 729 -------- ------- Total current assets 12,551 21,332 ======== ======= Equipment and leasehold improvements, at cost: Manufacturing equipment and computers 6,253 6,220 Leasehold improvements 861 830 Equipment held for rental or loan 5,089 4,839 Furniture and fixtures 179 175 -------- ------- Total 12,382 12,064 Less accumulated depreciation and amortization (8,263) (7,304) -------- ------- Net equipment and leasehold improvements 4,119 4,760 Intangible assets, net 1,015 908 Other assets 283 360 Long-term investment securities available for sale 7,745 -- -------- ------- Total assets $ 25,713 27,360 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 273 814 Accrued liabilities 7,562 7,838 Deferred revenue 993 1,182 Current portion of long-term debt 153 146 Current portion of capital lease obligations 18 15 -------- ------- Total current liabilities 8,999 9,995 -------- ------- Long-term portion of settlement obligation -- 1,415 Long-term debt, net of current portion 57 215 Capital lease obligations, net of current portion -- 19 -------- ------- Total liabilities 9,056 11,644 -------- ------- Shareholders' equity: Preferred stock, $.001 par value. Authorized 5,000,000 shares; none issued -- -- Common stock, $.001 par value. Authorized 60,000,000 shares; issued and outstanding: 23,599,500 shares in 2001 and 23,425,880 shares in 2000 24 23 Additional paid-in capital 92,638 92,259 Accumulated other comprehensive loss (276) (247) Accumulated deficit (75,729) (76,319) -------- ------- Total shareholders' equity 16,657 15,716 -------- ------- Commitments and contingencies (notes 5, 6, 7, 8, 9, 11, 15 and 16) -------- ------- Total liabilities and shareholders' equity $ 25,713 27,360 ======== =======
(See accompanying notes to consolidated financial statements.) 18 CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
Years Ended December 31, (In thousands, except share and per-share amounts) 2001 2000 1999 ------------ ------------ ------------ Revenue $ 27,808 26,900 22,305 Cost of revenue 8,459 8,282 7,397 ------------ ------------ ------------ Gross margin 19,349 18,618 14,908 ------------ ------------ ------------ Operating expenses: Selling, general and administrative 14,277 17,843 13,902 Research, development and other technology 4,915 5,287 4,622 Litigation settlement costs, net -- 3,654 -- Reorganization costs and litigation reserves -- 1,200 1,358 ------------ ------------ ------------ Total operating expenses 19,192 27,984 19,882 ------------ ------------ ------------ Operating income (loss) 157 (9,366) (4,974) Other income (expense): Interest expense (150) (104) (156) Interest income 594 923 771 Other, net (11) 19 143 ------------ ------------ ------------ Total 433 838 758 ------------ ------------ ------------ Net income (loss) from continuing operations 590 (8,528) (4,216) Discontinued operations: Gain on sale (income taxes) of discontinued industrial subsidiary, Polymicro Technologies, Inc. -- (170) 8,664 Income from operations of discontinued industrial subsidiary, Polymicro Technologies, Inc. -- -- 721 ------------ ------------ ------------ Gain/income (income taxes) from discontinued operations -- (170) 9,385 ------------ ------------ ------------ Net income (loss) 590 (8,698) 5,169 Other comprehensive (loss) (29) (119) (36) ------------ ------------ ------------ Comprehensive income (loss) $ 561 (8,817) 5,133 ============ ============ ============ Earnings per common and common equivalent share: Income (loss) from continuing operations $ 0.03 (0.36) (0.19) Income (loss) from discontinued operations -- (0.01) 0.42 ------------ ------------ ------------ Net income (loss) per share $ 0.03 (0.37) 0.23 ============ ============ ============ Earnings per share, assuming full dilution: Income (loss) from continuing operations $ 0.02 (0.36) (0.19) Income (loss) from discontinued operations -- (0.01) 0.42 ------------ ------------ ------------ Net income (loss) per share $ 0.02 (0.37) 0.23 ============ ============ ============ Weighted average shares outstanding Basic 23,547,380 23,298,145 22,406,606 Diluted 24,161,269 23,298,145 22,406,606
(See accompanying notes to consolidated financial statements.) 19 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
OTHER ADDITIONAL COMPREHENSIVE TOTAL PAR PAID-IN INCOME ACCUMULATED SHAREHOLDERS' (In thousands, except share amounts) SHARES VALUE CAPITAL (LOSS) DEFICIT EQUITY ---------- ---------- ---------- ------------- ----------- ------------- BALANCES AT DECEMBER 31, 1998 19,110,825 $ 19 84,131 (92) (72,790) 11,268 Sale of common stock in a private placement 3,800,000 4 6,533 -- -- 6,537 Exercise of stock options 82,068 -- 241 -- -- 241 Shares purchased under employee stock purchase plan 44,295 -- 48 -- -- 48 Options granted for consulting services -- -- 57 -- -- 57 Amortization of warrant expense -- -- 102 -- -- 102 Foreign currency translation adjustment -- -- -- (36) -- (36) Net income -- -- -- -- 5,169 5,169 ---------- ---------- ---------- ---------- ---------- ---------- BALANCES AT DECEMBER 31, 1999 23,037,188 23 91,112 (128) (67,621) 23,386 Exercise of stock options 335,479 -- 895 -- -- 895 Shares purchased under employee stock purchase plan 53,213 -- 142 -- -- 142 Options granted for consulting services -- -- 8 -- -- 8 Amortization of warrant expense -- -- 102 -- -- 102 Unrealized loss on investment securities -- -- -- (43) -- (43) Foreign currency translation adjustment -- -- -- (76) -- (76) Net loss -- -- -- -- (8,698) (8,698) ---------- ---------- ---------- ---------- ---------- ---------- BALANCES AT DECEMBER 31, 2000 23,425,880 23 92,259 (247) (76,319) 15,716 Exercise of stock options 11,095 -- 35 -- -- 35 Shares purchased under employee stock purchase plan 162,525 1 203 -- -- 204 Options granted for consulting services -- -- 40 -- -- 40 Amortization of warrant expense -- -- 101 -- -- 101 Unrealized gain on investment securities -- -- -- 14 -- 14 Foreign currency translation adjustment -- -- -- (43) -- (43) Net income -- -- -- -- 590 590 ---------- ---------- ---------- ---------- ---------- ---------- BALANCES AT DECEMBER 31, 2001 23,599,500 $ 24 92,638 (276) (75,729) 16,657 ========== ========== ========== ========== ========== ==========
(See accompanying notes to consolidated financial statements.) 20 CONSOLIDATED STATEMENTS OF CASH FLOWS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
Years Ended December 31, (In thousands) 2001 2000 1999 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 590 (8,698) 5,169 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Income from discontinued operations -- -- (721) Income taxes (gain on sale) of Polymicro Technologies, Inc. -- 170 (8,664) Depreciation and amortization 1,832 1,731 1,340 Options granted for consulting services 40 8 57 Changes in operating assets and liabilities: Trade accounts receivable, net 1,359 (580) (1,578) Inventories 773 136 (698) Equipment held for rental or loan, net (529) (1,876) (1,173) Prepaid expenses and other current assets (271) (110) 3 Other assets (86) (150) 190 Accounts payable and accrued liabilities (2,305) 2,103 1,515 Deferred revenue (214) (338) (70) ------- ------- ------- Net cash provided (used) by operating activities 1,189 (7,604) (4,630) ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (290) (579) (431) Net cash received from discontinued operations -- -- 1,140 Net proceeds from sale of Polymicro Technologies, Inc. -- -- 14,346 (Purchase) sale of investment securities, net (51) 5,455 (15,414) ------- ------- ------- Net cash provided (used) by investing activities (341) 4,876 (359) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of common stock to employees 238 1,037 289 Proceeds from sale of common stock in a private placement, net of issue costs -- -- 6,537 Principal payments on long-term debt and capital lease obligations (162) (986) (1,058) ------- ------- ------- Net cash provided by financing activities 76 51 5,768 ------- ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (26) (28) (37) ------- ------- ------- Net increase (decrease) in cash and cash equivalents 898 (2,705) 742 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,195 4,900 4,158 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,093 2,195 4,900 ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for interest $ 157 115 166 Cash paid for income taxes -- 283 --
(See accompanying notes to consolidated financial statements.) 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) ORGANIZATION, NATURE OF BUSINESS AND BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of The Spectranetics Corporation, a Delaware corporation, and its wholly owned subsidiary, Spectranetics International, B.V. (collectively, the Company). All intercompany balances and transactions have been eliminated in consolidation. The Company's primary business is the design, manufacture and marketing of a proprietary excimer laser system and related accessory products for use in minimally invasive surgical procedures within the cardiovascular system. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ significantly from those estimates. Certain reclassifications have been made in the 2000 and 1999 financial statements to conform with the financial statement presentation for December 31, 2001. Marketing and sales expenses were combined with general and administrative expenses and shown as "Selling, general, and administrative" expense. Royalties expense was combined into "Research, development, and other technology" expense. Prior year amounts have been reclassified to conform to the current year presentation. (b) CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents of approximately $3,076,000 and $1,884,000 at December 31, 2001 and 2000, respectively, consist primarily of certificates of deposit, government-backed securities, money market accounts, commercial paper and repurchase agreements stated at cost, which approximates fair value. (c) INVESTMENT SECURITIES Investment securities at December 31, 2001, are classified as available-for-sale for purposes of Financial Accounting Standards Board Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and accordingly, are carried at fair value. The difference between carrying cost and fair value is recorded as an unrealized gain or loss on investment securities and recorded within "Other comprehensive loss." At December 31, 2001 and 2000, the unrealized loss totaled $29,000 and $43,000, respectively. (d) INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. (e) EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are recorded at cost. Equipment acquired under capital leases is recorded at the present value of minimum lease payments at the inception of the lease. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets of three to seven years for manufacturing equipment, computers, and furniture and fixtures. Equipment held for rental or loan is depreciated using the straight-line method over three to five years. Equipment acquired under capital leases and leasehold improvements is amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. (f) INTANGIBLE ASSETS Intangible assets, which consist primarily of patents, are amortized using the straight-line method over periods ranging from five to 13 years. (g) LONG-LIVED ASSETS The Company accounts for long-lived assets under the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS No. 121). Under SFAS No. 121, the carrying value of long-lived assets is reviewed annually for impairment. Events that may indicate a need to assess recoverability include significant changes in business conditions, continuing losses, or a forecasted inability to achieve at least break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon undiscounted cash flow projections. Should an impairment in value be indicated, the carrying value of the asset is adjusted to its estimated fair value. No adjustments for impairment of assets have been recognized. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES (h) FINANCIAL INSTRUMENTS At December 31, 2001 and 2000, the carrying value of financial instruments approximates the fair value of the instruments based on terms and related interest rates. Financial instruments include cash and cash equivalents, investment securities, trade accounts receivable, accounts payable, long-term debt and settlement obligations. (i) REVENUE RECOGNITION Revenue from the sale of the Company's products is recognized when products are shipped to the customer and title transfers upon shipment. Revenue from product maintenance contracts and equipment rentals is deferred and recognized ratably over the contract period. (j) WARRANTIES The Company provides for the cost of estimated future warranty repairs when the products are shipped to customers and bases its estimates primarily on historical experience. (k) STOCK-BASED COMPENSATION PLAN The Company accounts for its stock-based compensation plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. Under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), entities are permitted to recognize as expense the fair value of all stock-based awards on the date of grant over the vesting period. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB 25 and provide pro forma earnings (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosures required by SFAS No. 123. (l) RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred and totaled approximately $1,770,000 and $2,185,000 for the years ended December 31, 2001 and 2000, respectively. (m) NET INCOME (LOSS) PER SHARE The Company calculates net income (loss) per share under the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). Under SFAS No. 128, basic earnings per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding. Shares issued during the period and shares reacquired during the period are weighted for the portion of the period they were outstanding. Diluted earnings per share are computed in a manner consistent with that of basic earnings per share while giving effect to all potentially dilutive common shares outstanding during the period using the treasury stock method. (n) FOREIGN CURRENCY TRANSLATION The Company's primary functional currency is the U.S. dollar. Certain transactions of the Company and its subsidiaries are consummated in currencies other than the U.S. dollar. Realized gains and losses from these transactions are included in the consolidated statements of operations as they occur. Spectranetics International, B.V., used its local currency (Dutch guilder) as its functional currency for the years presented. Accordingly, net assets are translated at year-end exchange rates while income and expense accounts are translated at average exchange rates during the year. Adjustments resulting from these translations are reflected in shareholders' equity as accumulated other comprehensive loss. (o) INCOME TAXES The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires the use of the asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is required to the extent it is more likely than not that a deferred tax asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES (p) SHAREHOLDERS' EQUITY AND PRIVATE PLACEMENT OF COMMON STOCK In February 1999, the Company completed the private placement of 3,800,000 shares of common stock and received cash proceeds, net of offering costs, of $6,537,000. (q) DISCONTINUED OPERATIONS In June 1999, the Company completed the sale of its industrial subsidiary, Polymicro Technologies, Inc. (PTI), for $15,000,000 in cash. PTI manufactures drawn silica glass products for industrial, aerospace and medical uses, with an emphasis on the analytical instrument market. The income from PTI up to the date of disposal is shown as "Income from operations of discontinued industrial subsidiary" in the consolidated statements of operations. During 2000, federal income tax returns were prepared for the impact of the disposition. These tax returns resulted in greater income taxes on the disposition than originally estimated. Accordingly, additional income taxes of $170,000 were recognized in 2000. NOTE 2 INVESTMENT SECURITIES INVESTMENT SECURITIES CONSIST OF THE FOLLOWING AS OF DECEMBER 31:
(In thousands) 2001 2000 ------ ------ SHORT-TERM INVESTMENTS U.S. Treasury and agency notes $1,035 1,000 Corporate notes 1,011 8,726 ------ ------ TOTAL $2,046 9,726 ====== ====== LONG-TERM INVESTMENTS U.S. Treasury and agency notes $4,592 -- Corporate notes 3,153 -- ------ ------ TOTAL $7,745 -- ====== ======
Unrealized gain for the year ended December 31, 2001, was $14,000, which has been included in "Other comprehensive loss." Realized gains and losses are determined using the specific identification method. There were no significant realized gains or losses during 2001 or 2000. Contractual maturities of all investment securities at December 31, 2000, were less than one year. NOTE 3 INVENTORIES INVENTORIES CONSIST OF THE FOLLOWING AS OF DECEMBER 31:
(In thousands) 2001 2000 ------ ------ Raw materials $ 259 472 Work in process 372 845 Finished goods 1,164 1,268 ------ ------ Total $1,795 2,585 ====== ======
NOTE 4 INTANGIBLE ASSETS INTANGIBLE ASSETS AS OF DECEMBER 31 ARE AS FOLLOWS:
(In thousands) 2001 2000 ------- ------- Patents $ 3,743 3,743 Other 380 -- Less accumulated amortization (3,108) (2,835) ------- ------- TOTAL $ 1,015 908 ======= =======
24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES NOTE 5 ACCRUED LIABILITIES ACCRUED LIABILITIES CONSIST OF THE FOLLOWING AS OF DECEMBER 31:
(In thousands) 2001 2000 ------ ------ Accrued payroll and related expenses $1,928 1,458 Accrued litigation and reorganization expenses 494 1,714 Accrued warranty expense 324 295 Accrued clinical study expense 537 -- Accrued royalty expense 2,419 2,163 Other accrued expenses 1,860 2,208 ------ ------ Total $7,562 7,838 ====== ======
NOTE 6 DEFERRED REVENUE "Deferred revenue-current" in the amounts of $993,000 and $1,182,000 at December 31, 2001 and 2000, respectively, relates to payments in advance for various product maintenance contracts in which revenue is initially deferred and recognized over the life of the contract, which is generally one year. NOTE 7 DEBT During 1993, the Company issued a note payable in the amount of $1,050,000 to obtain certain patent rights. The note is for a ten-year period with annual payments of $105,000 due on May 1st. The note was non-interest bearing and was discounted to $827,000, using a discount rate of 5.75 percent. At December 31, 2001, the note had a remaining balance of $100,000. During 1998, the Company entered into a $330,000 loan agreement collateralized by equipment held for rental or loan owned by Spectranetics International, B.V. The loan bears interest at 6.51 percent per annum and matures in December 2003. At December 31, 2001, the amount outstanding on this loan was $110,000. ANNUAL MATURITIES OF DEBT FOR EACH OF THE NEXT TWO YEARS FOLLOW: (In thousands) 2002 $153 2003 57 ---- TOTAL $210 ====
NOTE 8 LITIGATION SETTLEMENT In October 2000, the Company entered into a settlement and release agreement with Baxter Healthcare Corporation (and its spin-off company, Edwards Life Sciences LLC - collectively, Baxter) related to a patent infringement lawsuit filed by Baxter in August 1999. The agreement provided that the Company and Baxter each release all claims and counterclaims against each other, and Spectranetics enter into a license agreement for use of certain patents in the United States and abroad until the expiration of the last patent on November 15, 2005. The Company is required to pay a royalty through the life of the patents. In addition, the Company recorded a net charge of $3,654,000 during the year ended December 31, 2000, to reflect the cost of past royalties to the agreement date and legal fees related to this suit, offset by release of the Company's prior obligation to provide defined medical devices to United States Surgical Corporation, a division of Tyco International. United States Surgical Corporation transferred certain assets to Baxter in July 1999. In addition, Baxter returned to the Company 15 laser systems for resale. The payments for past royalties are being made in three annual installments beginning November 2000. As of December 31, 2001, accrued liabilities included $1,540,000 for past royalties that will be paid in November 2002. NOTE 9 STOCK-BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS At December 31, 2001 and 2000, the Company had two stock-based compensation plans which are described below. (a) STOCK OPTION PLANS The Company maintains stock option plans that provide for the grant of incentive stock options, nonqualified stock options and stock appreciation rights. The plans provide that incentive stock options be granted with exercise prices not less than the fair market value at the date of grant. Options granted through December 31, 2001, vest over one to four years and expire ten years from the date of grant. Options granted to the Board of Directors vest immediately or over three years from the date of grant, and expire ten years from the date of grant. At December 31, 2001, there were 2,169,335 shares available for future issuance under these plans. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES THE FOLLOWING IS A SUMMARY OF OPTION ACTIVITY DURING THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2001:
WEIGHTED SHARES AVERAGE UNDER EXERCISE OPTION PRICE --------- -------- OPTIONS OUTSTANDING AT DECEMBER 31, 1998 3,214,583 $3.19 Granted 971,528 3.31 Exercised (82,068) 1.95 Canceled (223,847) 3.85 --------- ----- OPTIONS OUTSTANDING AT DECEMBER 31, 1999 3,880,196 $3.21 Granted 1,152,737 3.61 Exercised (335,479) 2.67 Canceled (282,214) 3.50 --------- ----- OPTIONS OUTSTANDING AT DECEMBER 31, 2000 4,415,240 $3.33 Granted 937,557 2.11 Exercised (11,095) 3.00 Canceled (267,907) 3.82 --------- ----- OPTIONS OUTSTANDING AT DECEMBER 31, 2001 5,073,795 $3.09 ========= =====
At December 31, 2001, the weighted average remaining contractual life of outstanding options was 6.9 years, and 3,461,744 options were exercisable at a weighted average exercise price of $3.16 per share. The per-share weighted-average fair value of stock options granted during 2001, 2000 and 1999, was $1.55, $2.73 and $2.55 per share, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 2001-expected dividend yield of zero percent, risk-free interest rate of 4.3 percent, expected volatility of 91 percent, and an expected life of 6.20 years; 2000-expected dividend yield of zero percent, risk-free interest rate of five percent, expected volatility of 101 percent, and an expected life of 6.06 years; 1999-expected dividend yield of zero percent, risk-free interest rate of 6.2 percent, expected volatility of 99 percent, and an expected life of 5.87 years. OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 2001:
NUMBER WEIGHTED NUMBER RANGE OF OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED EXERCISE PRICES AS OF REMAINING AVERAGE AS OF AVERAGE LOW HIGH DECEMBER 31, 2001 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2001 EXERCISE PRICE - ------------- ------------- ----------------- ---------------- -------------- ----------------- ------------- $ 0.84 $ 1.12 104,917 5.11 $ 0.84 104,917 $ 0.84 1.31 1.56 512,250 8.74 1.55 226,063 1.54 1.63 1.75 615,183 7.63 1.66 367,802 1.68 1.81 2.63 485,966 8.10 2.26 178,903 2.03 2.66 3.03 901,857 6.74 2.85 654,759 2.90 3.03 3.13 469,558 7.05 3.10 382,995 3.09 3.19 3.31 548,254 5.17 3.32 548,254 3.32 3.31 4.41 632,982 7.25 3.76 433,673 3.72 4.44 6.38 782,420 6.44 5.41 543,970 5.18 7.38 21.80 20,408 0.84 9.56 20,408 9.56 --------- --------- 5,073,795 3,461,744 ========= =========
As discussed in Note 1, the Company applies APB 25 in accounting for its plans and, accordingly, because the Company grants options at or above fair value on the date of grant, no compensation cost has been recognized for stock option grants to employees in the accompanying consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options and stock purchase plan shares, as discussed below, under SFAS No. 123, the Company's net income (loss) and income (loss) per share would have been the pro forma amounts shown below:
(In thousands, except per-share amounts) 2001 2000 1999 --------- --------- --------- NET INCOME (LOSS) As reported $ 590 (8,698) 5,169 Pro forma (1,755) (10,912) 2,751 --------- --------- --------- NET INCOME (LOSS) PER SHARE, BASIC As reported $ 0.03 (0.37) 0.23 Pro forma (0.07) (0.47) 0.12 --------- --------- --------- INCOME (LOSS) PER SHARE, ASSUMING FULL DILUTION As reported $ 0.02 (0.37) 0.23 Pro forma (0.07) (0.47) 0.12 --------- --------- ---------
Pro forma net income (loss) reflects only options and stock purchase rights granted in 1995 and after. Therefore, the full impact of calculating compensation cost for stock options and stock purchase rights under SFAS No. 123 is not reflected in the pro forma net income (loss) amounts presented above because compensation is recognized over the option or purchase right vesting period, and compensation cost for options and stock purchase rights granted prior to January 1, 1995, is not considered. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES (b) STOCK PURCHASE PLAN In September 1992, the Company adopted an employee stock purchase plan, which provides for the sale of up to 850,000 shares of common stock. The plan provides eligible employees the opportunity to acquire common stock in accordance with Section 423 of the Internal Revenue Code of 1986. Stock can be purchased each six-month period per year (twice per year). The purchase price is equal to 85 percent of the lower of the price at the beginning or the end of the six-month period. Shares issued under the plan totaled 162,525, 53,213 and 44,295 in 2001, 2000 and 1999, respectively. Under SFAS No. 123, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black-Scholes model with the following assumptions: 2001-expected dividend yield of zero percent, risk-free interest rate of 1.67 percent, expected volatility of 94 percent, and an expected life of six months; 2000-expected dividend yield of zero percent, risk-free interest rate of 5.17 percent, expected volatility of 109 percent, and an expected life of six months; 1999-expected dividend yield of zero percent, risk-free interest rate of 5.68 percent, expected volatility of 79 percent, and an expected life of six months. The weighted average fair value of purchase rights granted in 2001, 2000 and 1999 was $1.43, $0.91, and $1.25, respectively, per right. (c) 401(k) PLAN The Company maintains a salary reduction savings plan under section 401(k) of the Internal Revenue Code, which the Company administers for participating employees' contributions. All full-time employees are covered under the plan after meeting minimum service requirements. The Company has made no contributions to the plan. NOTE 10 NET INCOME (LOSS) PER SHARE
(In thousands) 2001 2000 1999 ------- ------- ------- NET INCOME (LOSS) Income (loss) from continuing operations $ 590 (8,528) (4,216) Gain/income (income taxes) from discontinued operations -- (170) 9,385 ------- ------- ------- Net income (loss) $ 590 (8,698) 5,169 ======= ======= ======= COMMON SHARES OUTSTANDING Historical common shares outstanding at beginning of year 23,426 23,037 19,110 Weighted average common shares issued 121 261 3,297 ------- ------- ------- Weighted average common shares outstanding - basic $23,547 23,298 22,407 Effect of dilution - stock options 614 -- -- ------- ------- ------- Weighted average common shares outstanding - diluted 24,161 23,298 22,407 ======= ======= ======= EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Income (loss) from continuing operations $ 0.03 (0.36) (0.19) Income (loss) from discontinued operations -- (0.01) 0.42 ------- ------- ------- Net income (loss) per share 0.03 (0.37) 0.23 ======= ======= ======= EARNINGS PER SHARE, ASSUMING FULL DILUTION Income (loss) from continuing operations $ 0.02 (0.36) (0.19) Income (loss) from discontinued operations -- (0.01) 0.42 ------- ------- ------- Net income (loss) per share 0.02 (0.37) 0.23 ======= ======= =======
27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES NOTE 11 LEASES The Company leases certain equipment under capital leases, and office space, furniture and equipment under noncancelable operating leases with initial terms that expire at various dates through 2005. INCLUDED IN MANUFACTURING EQUIPMENT AND COMPUTERS ARE THE FOLLOWING AMOUNTS RELATING TO ASSETS HELD UNDER CAPITAL LEASES AS OF DECEMBER 31:
(In thousands) 2001 2000 ---- ---- Manufacturing equipment and computers $ 69 69 Less accumulated amortization (69) (61) ---- ---- TOTAL $ -- 8 ==== ====
THE PRESENT VALUE OF FUTURE MINIMUM CAPITAL LEASE PAYMENTS AND FUTURE MINIMUM LEASE PAYMENTS UNDER NONCANCELABLE OPERATING LEASES AS OF DECEMBER 31, 2001, ARE AS FOLLOWS:
CAPITAL OPERATING (In thousands) LEASES LEASES ------- --------- Years ending December 31 2002 $ 19 $447 2003 -- 228 2004 -- 100 2005 -- 4 ---- ---- Total minimum lease payments 19 $779 Less amounts representing interest (1) -- ---- ---- Present value of net minimum lease payments 18 -- Less current portion of capital lease obligations (18) -- ---- ---- CAPITAL LEASE OBLIGATIONS, NONCURRENT $ -- -- ==== ====
Rent expense under operating leases totaled approximately $525,000, $562,000 and $491,000 for the years ended December 31, 2001, 2000 and 1999, respectively. NOTE 12 INCOME TAX At December 31, 2001, we had net operating loss carryforwards for U.S. federal income tax purposes of approximately $52 million, which are available to offset future federal taxable income, if any, and expire at varying dates from 2003 through 2021. The annual use of the net operating loss carryforwards is limited under Section 382 of the Internal Revenue Code of 1986. An alternative minimum tax credit carryforward of $253,000 is available to offset future tax liabilities and has no expiration date. The Company also has tax loss carryforwards in the Netherlands, which have no expiration date, of approximately 64 million Dutch guilders ($25 million U.S. dollars) available to offset future taxable income, if any. We also had research and experimentation tax credit carryforwards for federal income tax purposes at December 31, 2001, of approximately $3 million, which are available to reduce future federal income taxes, if any, and expire at varying dates through 2021. The annual use of portions of the research and experimentation credit carryforwards is also limited under Section 382 of the Internal Revenue Code of 1986. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES THE TAX EFFECTS OF TEMPORARY DIFFERENCES THAT GIVE RISE TO SIGNIFICANT PORTIONS OF THE DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES AT DECEMBER 31 ARE AS FOLLOWS:
(In thousands) 2001 2000 -------- -------- DEFERRED TAX ASSETS Net operating loss carryforwards-- U.S. and related states $ 20,559 30,199 Foreign net operating loss carryforwards 10,022 7,974 Research and experimentation tax credit and other carryforwards 2,889 3,169 Royalty reserve, due to accrual for financial reporting purposes 967 1,421 Warranty reserve, due to accrual for financial reporting purposes 107 80 Accrued liabilities, not deducted until paid for tax purposes 749 562 Inventories, principally due to accrual for obsolescence for financial reporting purposes, net of additional costs inventoried for tax purposes (21) 146 Equipment, primarily due to differences in cost basis and depreciation methods (71) 56 Deferred revenue, due to deferral for financial reporting purposes 377 370 Alternative minimum tax credit 253 253 Other 83 63 -------- -------- Total gross deferred tax assets 35,914 44,293 Less valuation allowance (35,914) (44,293) -------- -------- NET DEFERRED TAX ASSETS $ -- -- ======== ========
The Company has recorded a valuation allowance equal to the gross deferred tax asset at December 31, 2001 and 2000, due to the uncertainty of realization. The net change in the valuation allowance includes the effect of state income taxes, temporary differences for financial statement and tax purposes, and the utilization of the Company's net operating loss and other carryforwards. INCOME TAX BENEFIT ATTRIBUTABLE TO LOSS FROM CONTINUING OPERATIONS DIFFERED FROM THE AMOUNTS COMPUTED BY APPLYING THE U.S. FEDERAL INCOME TAX RATE OF 34 PERCENT TO LOSS FROM CONTINUING OPERATIONS AS A RESULT OF THE FOLLOWING:
(In thousands) 2001 2000 1999 ------- ------- ------- Computed expected tax benefit $ 201 (2,900) (1,433) Reduction (increase) in income taxes resulting from: State and local income taxes, net of federal benefit 42 (338) (167) Permanent differences 144 144 262 Change in valuation allowance (8,379) 2,932 (1,918) Utilization of net operating loss carryforward 8,100 -- 3,564 Foreign operations (108) 162 (238) Other, net -- -- (70) ------- ------- ------- TOTAL $ -- -- -- ======= ======= =======
29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES NOTE 13 CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially expose the Company to concentrations of credit risk, as defined by the Financial Accounting Standards Board's Statement No. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentration of Credit Risk, consist primarily of cash equivalents, investment securities and accounts receivable. The Company's cash equivalents and investment securities consist of financial instruments issued by various institutions and government entities. The Company's investment policy is designed to limit the Company's exposure to concentrations of credit risk. The Company's accounts receivable are due from a variety of health care organizations and distributors throughout the United States and Europe. No single customer represented more than ten percent of accounts receivable for any period. The Company provides for uncollectible amounts upon recognition of revenue and when specific credit problems arise. Management's estimates for uncollectible amounts have been adequate during historical periods, and management believes that all significant credit risks have been identified at December 31, 2001. The Company has not entered into any hedging transactions nor any transactions involving financial derivatives. NOTE 14 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 income or loss. As a result of the sale of PTI in June 1999, the Company operates in one distinct line of business consisting of developing, manufacturing, marketing and distributing of a proprietary excimer laser system and related accessory products for the treatment of certain coronary and vascular conditions. The Company has identified two reportable geographic segments within this line of business: U.S. Medical and Europe Medical. U.S. Medical and Europe Medical offer the same products and services, but operate in different geographic regions and have different distribution networks. Additional information regarding each reportable segment is shown below. (a) U.S. MEDICAL Products offered by this reportable segment include an excimer laser unit (equipment), fiber-optic delivery devices and related accessory products (disposables), and service of the excimer laser unit (service). The Company is subject to product approvals from the FDA. At December 31, 2001, FDA-approved products were used in conjunction with coronary atherectomy and the removal of non-functioning leads from pacemakers and cardiac defibrillators. This segment's customers are primarily located in the United States; however, the geographic areas served by this segment also include Canada, Mexico, South America, the Pacific Rim and Australia. U.S. Medical is also corporate headquarters for the Company. Accordingly, research and development, as well as corporate administrative functions, are performed within this reportable segment. As of December 31, 2001, 2000 and 1999, cost allocations of these functions to Europe Medical have not been performed. Allocations to income from operations of discontinued industrial subsidiary for general and administrative activities totaled $190,000 for the year ended December 31, 1999. Revenue associated with intersegment transfers to Europe Medical was $1,074,000, $1,626,000 and $1,372,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Revenue is based upon transfer prices, which provide for intersegment profit that is eliminated upon consolidation. For each of the years ended December 31, 2001, 2000 and 1999, intersegment revenue and intercompany profits are not included in the segment information in the table shown below. (b) EUROPE MEDICAL The Europe Medical segment is a marketing and sales subsidiary located in the Netherlands that serves Europe and the Middle East. Products offered by this reportable segment are the same as those offered by U.S. Medical. The Company has received CE mark approval for products that relate to three applications of excimer laser technology: coronary atherectomy, lead removal and peripheral atherectomy to clear blockages in leg arteries. 30 SUMMARY FINANCIAL INFORMATION RELATING TO REPORTABLE CONTINUING SEGMENT OPERATIONS IS SHOWN BELOW. INTERSEGMENT TRANSFERS, AS WELL AS INTERCOMPANY ASSETS AND LIABILITIES, ARE EXCLUDED FROM THE INFORMATION PROVIDED:
(In thousands) 2001 2000 1999 ------- ------- ------- REVENUE Equipment $ 4,429 3,603 3,870 Disposables 17,396 17,162 12,856 Service 3,440 2,936 2,541 Other 319 351 190 ------- ------- ------- Subtotal - U.S. Medical 25,584 24,052 19,457 ------- ------- ------- Equipment 113 588 436 Disposables 1,825 1,708 2,094 Service 286 552 318 ------- ------- ------- Subtotal - Europe Medical 2,224 2,848 2,848 ------- ------- ------- TOTAL REVENUE $27,808 26,900 22,305 ======= ======= =======
In 2001, 2000 and 1999, no individual customer represented ten percent or more of consolidated revenue. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES
(In thousands) 2001 2000 1999 ------- ------- ------- INTEREST INCOME U.S. Medical $ 574 910 768 Europe Medical 20 13 3 ------- ------- ------- Total interest income $ 594 923 771 ======= ======= ======= INTEREST EXPENSE U.S. Medical $ 132 89 137 Europe Medical 18 15 19 ------- ------- ------- Total interest expense $ 150 104 156 ======= ======= ======= DEPRECIATION EXPENSE U.S. Medical $ 1,419 1,302 845 Europe Medical 28 89 165 ------- ------- ------- Total depreciation $ 1,447 1,391 1,010 ======= ======= ======= AMORTIZATION EXPENSE U.S. Medical $ 342 340 330 Europe Medical 43 -- -- ------- ------- ------- Total amortization $ 385 340 330 ======= ======= ======= SEGMENT NET INCOME (LOSS) U.S. Medical $ 445 (6,165) (2,317) Europe Medical 145 (2,363) (1,899) ------- ------- ------- Total net income (loss) $ 590 (8,528) (4,216) ======= ======= ======= SEGMENT ASSETS U.S. Medical $24,141 25,231 32,298 Europe Medical 1,572 2,129 1,740 ------- ------- ------- Total assets $25,713 27,360 34,038 ======= ======= ======= CAPITAL EXPENDITURES U.S. Medical $ 290 566 395 Europe Medical -- 13 36 ------- ------- ------- Total capital expenditures $ 290 579 431 ======= ======= =======
THE COMPANY OPERATES IN SEVERAL COUNTRIES OUTSIDE OF THE UNITED STATES. REVENUE FROM FOREIGN OPERATIONS BY SEGMENT IS SUMMARIZED AS FOLLOWS:
2001 2000 1999 ------ ------ ------ U.S. Medical $ 746 306 764 Europe Medical 2,224 2,848 2,848 ------ ------ ------ TOTAL FOREIGN REVENUE $2,970 3,154 3,612 ====== ====== ======
There were no individual countries, other than the United States, that represented at least ten percent of consolidated revenue in 2001, 2000 or 1999. Long-lived assets located in foreign countries are concentrated in Europe, and totaled $429,000 and $134,000 as of December 31, 2001 and 2000, respectively. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE SPECTRANETICS CORPORATION AND SUBSIDIARIES NOTE 15 REORGANIZATION COSTS DURING THE YEAR ENDED DECEMBER 31, 2001, REORGANIZATION COSTS PRIMARILY ASSOCIATED WITH THE ELIMINATION OF THE DIRECT SALES ORGANIZATION IN GERMANY TOTALED $1,200,000 AND ARE AS FOLLOWS:
ACCRUED AMOUNTS ACCRUED COSTS AS OF PAID COSTS AS OF DECEMBER 31, DURING DECEMBER 31, (In thousands) 2000 2001 2001 ------------ ------- ------------ Termination and severance costs $ 700 513 187 Legal fees 150 150 -- Cancellation of contracts and leases 172 168 4 Other 38 38 -- ------ ------ ------ TOTAL $1,060 869 191 ====== ====== ======
Additional costs of $140,000 relate primarily to a provision for bad debt expense associated with the restructuring as of December 31, 2000. At December 31, 2001, this provision had a balance of $15,000. The termination and severance costs relate to eight employees within the sales organization in Germany. Effective January 1, 2001, a direct sales organization was no longer used in Germany; instead, a distributor has been contracted to continue selling the Company's products in Germany. The remaining reorganization costs accrued at December 31, 2001, are expected to be paid in 2002. NOTE 16 COMMITMENTS AND CONTINGENCIES The Company generally provides a one-year warranty on the sale of its excimer laser. The Company records warranty expense within cost of revenue at the time of the sale. As warranty costs are incurred, they are charged against the warranty liability. The Company is obligated under various licensing and royalty agreements, which require the Company to pay royalties based on a percentage of net sales of certain products, subject to minimum and maximum amounts for certain agreements. The agreements expire at various dates concurrent with the expiration dates of the respective patents. NOTE 17 VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS BALANCE BEGINNING CHARGED AT END (In thousands) OF YEAR TO EXPENSE DEDUCTIONS OF YEAR ---------- ---------- ---------- ------- YEAR ENDED DECEMBER 31, 1999 Accrued warranty liability 435 332 357 410 Accrued royalty liability 384 1,044 1,149 279 Allowance for doubtful accounts and sales returns 228 49 157 120 Accrued litigation and reorganization reserves -- 1,358 70 1,288 ----- ----- ----- ----- YEAR ENDED DECEMBER 31, 2000 Accrued warranty liability 410 280 395 295 Accrued royalty liability 279 6,666 3,367 3,578* Allowance for doubtful accounts and sales returns 120 371 93 398 Accrued litigation and reorganization reserves 1,288 1,452 1,026 1,714 ----- ----- ----- ----- YEAR ENDED DECEMBER 31, 2001 Accrued warranty liability 295 240 211 324 Accrued royalty liability 3,578 1,419 2,578 2,419** Allowance for doubtful accounts and sales returns 398 332 88 642 Accrued litigation and reorganization reserves 1,714 -- 1,220 494 ----- ----- ----- -----
* Total includes $3,080,000 of litigation settlement obligations consisting of $1,665,000 in accrued liabilities and $1,415,000 classified as long-term portion of litigation settlement obligations. ** Total includes $1,540,000 of litigation settlement obligations. 33 NOTE 18 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per-share amounts) 2001 2000 ------------------------------------------- ---------------------------------------------- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ------- ------- ------- ------- ------- ------- ------- ------- Net sales $ 6,027 7,403 7,214 7,164 6,662 6,808 6,369 7,061 Gross profit 4,217 5,016 5,055 5,061 4,388 4,722 4,519 4,989 Income (loss) from continuing operations (556) 182 522 442 (894) (977) (4,644)(1) (2,013)(2) Net income (loss) $ (556) 182 522 442 (894) (977) (4,644)(1) (2,183)(2,3) Income (loss) from continuing operations per share $ (0.02) 0.01 0.02 0.02 (0.04) (0.04) (0.20)(1) (0.08)(2) Net income (loss) per share $ (0.02) 0.01 0.02 0.02 (0.04) (0.04) (0.20)(1) (0.09)(2)
Unusual or infrequent items: (1) Includes $3,654 of litigation settlement costs, net. (2) Includes $1,200 of reorganization costs. (3) Includes $170 of tax expense on a discontinued operation. 34 EX-21.1 7 d95352ex21-1.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 THE SPECTRANETICS CORPORATION SUBSIDIARY SPECTRANETICS INTERNATIONAL B.V. Established January 1993 Incorporated June 1993 in Nieuwegein, The Netherlands EX-23.1 8 d95352ex23-1.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors The Spectranetics Corporation: We consent to incorporation by reference in the registration statements (Nos. 33-46725, 33-52718, 33-88088, 33-85198, 33-99406, 333-08489, 333-50464, and 333-57015) on Form S-8 and (No. 333-06971) on Form S-3 of The Spectranetics Corporation of our report dated January 25, 2002, relating to the consolidated balance sheets of The Spectranetics Corporation and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001, which report appears in the December 31, 2001 annual report on Form 10-K of The Spectranetics Corporation. KPMG LLP Denver, Colorado March 27, 2002 -----END PRIVACY-ENHANCED MESSAGE-----