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