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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
_X_ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
or
___ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from __________ to
__________.
Commission File Number
0-26890
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PERCLOSE, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C>
DELAWARE 94-3154669
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
199 JEFFERSON DRIVE, MENLO PARK, CA 94025-1114
(Address of Principal Executive Offices) (Zip Code)
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Registrant's telephone, including area code: (650) 473-3100
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes _X_ No ____
As of September 26, 1997 there were 9,627,497 shares of the Registrant's
Common Stock.
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<S> <C>
Exhibit Index on 14
page:
Total number of 14 (hard copy version)
pages: 15 (Edgar version)
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PERCLOSE, INC.
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1997 and March 31, 1997.............................. 2
Statements of Operations for the three months and six months ended September 30, 1997
and 1996.............................................................................. 3
Statements of Cash Flows for the six months ended September 30, 1997 and 1996........... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 7
PART II. OTHER INFORMATION.................................................................................... 16
SIGNATURES.................................................................................................... 17
EXHIBIT INDEX................................................................................................. 18
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1
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PERCLOSE, INC.
BALANCE SHEETS
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<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1997
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(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,627,556 $ 2,677,278
Short-term investments.................................... 15,355,441 24,995,229
Accounts receivable....................................... 1,331,838 1,529,959
Inventories............................................... 1,134,389 743,531
Prepaid expenses.......................................... 1,272,442 279,894
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Total current assets.................................... 21,721,666 30,225,891
Equipment and leasehold improvements...................... 4,119,418 3,101,256
Less accumulated depreciation............................. (2,003,035) (1,454,533)
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2,116,383 1,646,723
Officer notes receivable.................................... 600,000 400,000
Other assets................................................ 205,284 241,221
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Total assets................................................ $ 24,643,333 $32,513,835
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 454,161 $ 422,646
Accrued compensation...................................... 864,960 852,255
Accrued license fee....................................... 50,000 200,000
Accrued warranty.......................................... 307,937 324,313
Accrued clinical trial costs.............................. 275,577 309,812
Other accrued expenses.................................... 633,726 520,247
Current portion of notes payable.......................... 310,733 373,795
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Total current liabilities............................... 2,897,094 3,003,068
Long-term portion of notes payable........................ -- 128,387
Stockholders' equity:
Common stock, $0.001 par value............................ 9,626 9,564
Additional paid-in capital................................ 58,797,906 58,308,167
Deferred compensation..................................... (733,779) (891,789)
Accumulated deficit....................................... (36,327,514) (28,043,562)
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Total stockholders' equity.................................. 21,746,239 29,382,380
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Total liabilities and stockholders' equity.................. $ 24,643,333 $32,513,835
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2
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PERCLOSE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1997 1996 1997 1996
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Net revenues.......................................... $ 1,209,551 $ 1,034,354 $ 2,379,795 $ 2,534,529
Operating expenses:
Cost of goods sold.................................. 1,796,712 1,061,117 3,249,358 2,223,156
Research and development............................ 1,291,126 1,329,680 2,525,216 2,394,644
Marketing, general and administrative............... 2,734,080 1,312,503 5,580,671 2,495,895
------------- ------------- ------------- -------------
Total operating expenses.......................... 5,821,918 3,703,300 11,355,245 7,113,695
------------- ------------- ------------- -------------
Loss from operations.................................. (4,612,367) (2,668,946) (8,975,450) (4,579,166)
Interest income....................................... 289,620 484,734 704,963 954,037
Interest expense...................................... (32,743) (33,422) (92,380) (64,410)
------------- ------------- ------------- -------------
256,877 451,312 612,583 889,627
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Net loss.............................................. $ (4,355,490) $ (2,217,634) $ (8,362,867) $ (3,689,539)
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Net loss per share.................................... $ (0.45) $ (0.23) $ (0.87) $ (0.39)
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Shares used in computing net loss per share........... 9,617,410 9,497,105 9,598,151 9,497,988
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3
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PERCLOSE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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SIX MONTHS ENDED
SEPTEMBER 30,
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1997 1996
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OPERATING ACTIVITIES
Net loss....................................................................... $ (8,362,867) $ (3,689,539)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation................................................................. 548,502 292,204
Deferred compensation amortization........................................... 158,010 51,095
Changes in operating assets and liabilities:
Accounts receivable.......................................................... 198,121 (925,261)
Other receivables............................................................ -- (96,634)
Inventory.................................................................... (390,858) (93,594)
Prepaid expenses............................................................. (992,548) 91,108
Accounts payable............................................................. 31,515 295,274
Accrued expenses............................................................. (74,427) 625,723
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Net cash provided by (used in) operating activities........................ (8,884,552) (3,449,624)
INVESTING ACTIVITIES
Purchases of short-term investments............................................ (2,794,468) (12,038,795)
Proceeds from sales and maturities of short-term investments................... 12,513,171 12,399,794
Purchases of equipment and improvements........................................ (1,018,162) (728,655)
Other assets................................................................... 35,937 (145,400)
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Net cash provided by (used in) investing activities........................ 8,736,478 (513,056)
FINANCING ACTIVITIES
Principal payments under capital
lease obligations and notes payable.......................................... (191,449) (174,963)
Proceeds from issuance (retirements) of common stock........................... 489,801 83,028
Repurchase of common stock..................................................... -- (47,396)
Issuance of employee notes receivable.......................................... (200,000) --
-------------- --------------
Net cash provided by (used in) financing activities........................ 98,352 (139,331)
Net increase (decrease) in cash and cash equivalents......................... (49,722) (4,102,011)
Cash and cash equivalents at beginning of period............................. 2,677,278 9,803,777
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Cash and cash equivalents at end of period................................... $ 2,627,556 $ 5,701,766
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</TABLE>
4
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PERCLOSE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
The operating results of the interim periods presented are not necessarily
indicative of the results for the year ending March 31, 1998 or for any future
interim period. The accompanying financial statements should be read in
conjunction with the audited financial statements and notes thereto for the year
ended March 31, 1997 included in the Company's Annual Report on Form 10-K as
filed with the Securities Exchange Commission. The accompanying balance sheet at
March 31, 1997 is derived from audited financial statements at that date.
The Company's fiscal year ends on the last Friday in March. The Company's
fiscal quarters end on the Friday closest to the end of each calendar quarter.
The three months shown as having ended September 30, 1997 and 1996 actually
ended on September 26, 1997 and September 27, 1996, respectively. For ease of
presentation, the accompanying financial statements have been shown as ending on
the last day of the calendar month.
NOTE 2. INVENTORIES
Inventories consist of the following:
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SEPTEMBER 30, MARCH 31,
1997 1997
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Raw materials...................................................... $ 699,851 $ 311,952
Work-in-process.................................................... 79,259 385,993
Finished goods..................................................... 355,279 45,586
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$ 1,134,389 $ 743,531
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NOTE 3. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding. Common equivalent shares from stock options are excluded
from the computation, as their effect is antidilutive.
RECENT PRONOUNCEMENTS
In February 1997 the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which the Company is required to adopt on December
31, 1997. At that time the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of convertible preferred stock, stock options, and common and
common equivalent shares issued during the period twelve
5
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PERCLOSE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 3. NET LOSS PER SHARE (CONTINUED)
months prior to the initial public offering will be excluded. The impact of
Statement 128 on the calculation of primary and fully diluted loss per share for
the three months and six months ended September 30, 1997 and 1996 is not
expected to be material.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT ON FORM 10-Q (THIS
"REPORT") AND IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, CERTAIN
STATEMENTS IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ARE FORWARD LOOKING STATEMENTS. WHEN USED IN THIS REPORT,
THE WORD "EXPECTS," "ANTICIPATES," "ESTIMATES," AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE PROJECTED. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE RISKS SET FORTH BELOW UNDER "FACTORS AFFECTING FUTURE OPERATING
RESULTS," IN PARTICULAR, THOSE RELATING TO THE COMPANY'S DEPENDENCE ON THE
PROSTAR AND TECHSTAR PRODUCTS, UNCERTAINTY OF MARKET ACCEPTANCE, HISTORY OF
LOSSES AND EXPECTATION OF FUTURE LOSSES, FLUCTUATIONS IN OPERATING RESULTS,
GOVERNMENT REGULATION, COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE,
LIMITED MANUFACTURING EXPERIENCE AND SCALE-UP RISK, UNCERTAINTY RELATING TO NEW
PRODUCT DEVELOPMENT, LIMITED SALES AND MARKETING EXPERIENCE, RELIANCE ON PATENTS
AND PROPRIETARY TECHNOLOGY AND UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT.
OVERVIEW
Perclose designs, develops, manufactures and markets minimally invasive
medical devices that automate the delivery of needles and sutures for the
surgical closure of arterial access sites in coronary catheterization
procedures. The Company is also developing devices for the connection of blood
vessels in conventional and minimally invasive coronary artery bypass graft
("CABG") procedures. The Company's first products, the Prostar and Techstar
products, are a family of devices that surgically close arterial access sites
after catheterization procedures such as angioplasty, stenting, atherectomy and
angiography, termed percutaneous vascular surgery ("PVS").
The Company commenced international shipments of its first Prostar and
Techstar products in December 1994 and July 1995, respectively. In April 1997,
the Company received FDA Premarket Approval ("PMA") for commercial sale in the
United States of the initial Prostar products. In November 1997, the Company
received PMA supplement approval for commercial sale in the United States of its
initial Techstar and Techstar XL products. In June 1997, the Company submitted
to the FDA a PMA supplement seeking approval for commercial sale in the United
States of certain Prostar Plus and Prostar XL products.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net revenues increased from $1.0 million for the three months ended
September 30, 1996 to $1.2 million for the three months ended September 30,
1997. The increase in revenues from the comparable year ago period is due
primarily to the commencement of sales in the United States in May 1997, which
comprised 74% of net sales for the three months ended September 30, 1997.
International revenue for the three months ended September 30, 1997 decreased
from the three-month period ended September 30, 1996 as distributors reduced
purchases of existing PVS products in anticipation of new product introductions.
Sales to the Company's German distributor represented 21% of net sales in the
September 1997 quarter.
Cost of goods sold increased from $1.1 million for the three months ended
September 30, 1996 to $1.8 million for the three months ended September 30,
1997. The increase is attributable in part to a change in the mix of products
away from the second generation Prostar products sold in Europe to first
generation Prostar products, which were launched in the United States in 1997.
The first generation products cost significantly more to produce than subsequent
generation products. In addition, establishing new production lines for Techstar
and converting first generation Prostar production lines over to second and
third generation lines contributed to higher cost of goods sold. Higher expense
levels are also associated with the training of production workers, the use of
prototype materials and increased purchases of tools and equipment. These
increases were offset, in part, by a decrease related to a change in expense
allocation methodology between the research and manufacturing departments.
7
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Research and development expenses remained relatively unchanged at $1.3
million for the three months ended September 30, 1996 and for the three months
ended September 30, 1997. Research and development expenses increased due to
increased payroll expense resulting from headcount additions and a change in the
cost allocation methodology of capturing expenses relating to research and
development. Offsetting these increases was a decrease in clinical trial
expenses during the September 30, 1997 period.
Marketing, general and administrative expenses increased from $1.3 million
for the three months ended September 30, 1996 to $2.7 million for the three
months ended September 30, 1997. The increase was primarily due to the
establishment of a U.S. field sales force, along with an increase in the support
staff required to handle the increased volume of sales.
Net interest income decreased from $451,000 for the three months ended
September 30, 1996 to $257,000 for the three months ended September 30, 1997
primarily due to a lower level of cash and short term investments.
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net revenues decreased from $2.5 million for the six months ended September
30, 1996 to $2.4 million for the six months ended September 30, 1997. The
decrease in revenues from the comparable year ago period is due primarily to a
decrease in international revenue which was partially offset by the commencement
of sales in the United States in May 1997. Sales in the United States comprised
63.0% of net revenues for the six months ended September 30, 1997. Sales to the
Company's German distributor represented 14% of net sales for the six months
ended September 30, 1997.
Cost of goods sold increased from $2.2 million for the six months ended
September 30, 1996 to $3.2 million for the six months ended September 30, 1997.
The increase is attributable in part to a change in the mix of products away
from the second generation Prostar products sold in Europe to first generation
Prostar products, which were launched in the United States in 1997. The first
generation products cost significantly more to produce than subsequent
generation products. In addition, establishing new production lines for Techstar
and converting first generation Prostar production lines over to second and
third generation lines contributed to higher cost of goods sold. Higher expense
levels are associated with the training of production workers, the use of
prototype materials and increased purchases of tools and equipment. These
increases were offset, in part, by a decrease related to a change in expense
allocation methodology between the research and manufacturing departments.
Research and development expenses increased from $2.4 million for the six
months ended September 30, 1996 to $2.5 million for the six months ended
September 30, 1997. Research and development expenses increased due to increased
payroll expense resulting from headcount additions and a change in the cost
allocation methodology of capturing expenses relating to research and
development. Partially offsetting these increases was a decrease in clinical
trial expenses during the September 30, 1997 period.
Marketing, general and administrative expenses increased from $2.5 million
for the six months ended September 30, 1996 to $5.6 million for the six months
ended September 30, 1997. The increase was primarily due to the establishment of
a U.S. field sales force, along with an increase in the support staff required
to handle the increased volume of sales.
Net interest income decreased from $890,000 for the six months ended
September 30, 1996 to $613,000 for the six months ended September 30, 1997
primarily due to a lower level of cash and and short term investments.
INCOME TAXES
The Company has incurred only state minimum taxes since inception, which are
included in other income and expense. The Company has incurred net losses in
prior fiscal years and expects to incur a net loss in the current fiscal year.
The Company has not generated any net income to date and therefore has not paid
any federal taxes since inception.
8
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Realization of deferred tax assets is dependent on future earnings, if any,
the timing and amount of which are uncertain. Accordingly, a valuation allowance
has been established in an amount equal to the net deferred assets of the
Company to reflect these uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash used in operating activities was $8.9 million for the
six months ended September 30, 1997, compared to $3.4 million for the six months
ended September 30, 1996. The increase reflected higher spending levels in sales
and marketing which accompanied product introductions in the United States and
higher spending on marketing in Europe.
The Company's net cash provided by investing activities was $8.7 million for
the six months ended September 30, 1997 compared to net cash used in investing
activities of $513,000 for the six months ended September 30, 1996. For the six
months ended September 30, 1997, net sales of short-term investments generated
$9.7 million in cash that was offset by $1.0 million for purchases of equipment.
These equipment purchases were primarily for computer and production equipment
due to increased personnel hires and manufacturing activities. In the six months
ended September 30, 1996, net proceeds from short-term investments generated
$361,000 that was offset by $729,000 for equipment purchases.
The Company's net cash provided by financing activities was $98,000 for the
six months ended September 30, 1997, compared to net cash used in financing
activities of $139,000 for the six months ended September 30, 1996. For the six
months ended September 30, 1997, proceeds from the issuance of Common Stock of
$490,000 were offset by principal payments under capital lease obligations and
notes payable of $191,000 and issuance of employee loans of $200,000. For the
six months ended September 30, 1996, principal payments under capital lease
obligations and notes payable of $175,000 were offset by proceeds from the
issuance of Common Stock of $83,000.
The Company's principal source of liquidity at September 30, 1997 consisted
of cash, cash equivalents, and short-term investments of $18.0 million. From
inception through September 30, 1997, Perclose raised $23.2 million in net
proceeds of private equity financing and stock option exercises and $34.2
million in its initial public offering. In addition, the Company has borrowed
$1.3 million under an equipment credit facility, of which a balance of
approximately $311,000 remained outstanding as of September 30, 1997.
The Company anticipates that its operating losses will continue for at least
the next three fiscal quarters since it plans to expend substantial resources in
funding product development and continues to expand manufacturing, marketing and
sales activities. Although Perclose believes that current cash balances and
short-term investments along with cash generated from the future sales of
products will be sufficient to meet the Company's operating and capital
requirements through fiscal 1999, there can be no assurance that the Company
will not require additional financing within this time frame or after. There can
be no assurance that such additional financing will be available on satisfactory
terms or at all. In any event, Perclose may in the future seek to raise
additional funds through bank facilities, debt or equity offerings or other
sources of capital. Perclose's future liquidity and capital requirements will
depend on numerous factors, including progress of the Company's clinical trials,
actions relating to regulatory and reimbursement matters, the costs and timing
of expansion of marketing, sales, manufacturing and product development
activities, the extent to which the Company's products gain market acceptance
and competitive developments.
FACTORS AFFECTING OPERATING RESULTS
DEPENDENCE UPON PROSTAR AND TECHSTAR PRODUCTS. The Prostar and Techstar
products for percutaneous closure of arterial access sites following
catheterization procedures are currently the Company's only product families.
The Prostar 9F and 11F products and Techstar 6F and Techstar XL 6F products have
received FDA PMA approval for commerical sale in the United States. The Prostar
and Techstar products have also been approved for sale in certain international
markets by the appropriate regulatory authorities.
9
<PAGE>
The Company has submitted PMA supplements to the FDA for the Prostar Plus 8F and
10F and Prostar XL 8F products; however, such products have not yet been
approved as safe and effective under applicable FDA regulatory guidelines. There
can be no assurance that these products will prove to be safe and effective
under applicable regulatory guidelines. In addition, clinical trial data may
identify significant technical or other obstacles to be overcome prior to
obtaining necessary U.S. regulatory approvals for the Prostar Plus and Prostar
XL products or U.S. and international reimbursement approvals. If the Company is
unable to commercialize the Prostar and Techstar products successfully in the
United States, the Company's business, financial condition and results of
operations will be materially and adversely affected. In addition, there can be
no assurance as to when or whether the Company will receive FDA clearance or
approval for sale of other PVS products or any other products in the United
States. There can be no assurance that the Company's development efforts will be
successful or that any further PVS products or any other product developed by
the Company will be safe or effective, capable of being manufactured in
commercial quantities at acceptable costs, approved by appropriate regulatory
and reimbursement authorities or successfully marketed. Furthermore, because the
Prostar and Techstar products represent the Company's sole near-term product
focus, the Company could be materially and adversely affected if these products
are not successfully commercialized and if future generation products are not
successfully developed, do not receive regulatory approvals and are not
successfully commercialized.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's Prostar and Techstar
products represent a new method of closing arterial access sites and there can
be no assurance that these products will gain any significant degree of market
acceptance among physicians, patients and health care payors, even if necessary
international and U.S. regulatory and reimbursement approvals are obtained. The
Company believes that recommendations and endorsements by physicians will be
essential for market acceptance of the Prostar and Techstar products, and there
can be no assurance that any such recommendations or endorsements will be
obtained. Physicians will not use the Prostar and Techstar products unless they
determine, based on clinical data and other factors, that these products are an
attractive alternative to other means of closing arterial access sites and that
the clinical benefits to the patient and cost savings achieved through use of
these products outweigh the cost of the products. Such determinations will
depend, in part, on the ability of the Company's products to reduce the time to
ambulation and the length of hospital stays associated with coronary
catheterization procedures. Acceptance among physicians will also depend upon
the Company's ability to train interventional cardiologists and other potential
users of the Company's products in percutaneous vascular surgery closure
techniques, which such physicians typically have not performed, and the
willingness of such users to learn these new techniques. Failure of the
Company's products to achieve significant market acceptance will have a material
adverse effect on the Company's business, financial condition and results of
operations.
HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES. The Company has a
limited history of operations. Since its inception in March 1992, the Company
has been primarily engaged in research and development of its percutaneous
arterial access site closure products. The Company has generated limited
revenues from international sales in certain markets, which sales commenced in
December 1994. Since May 1997, the Company has generated limited revenues from
domestic sales. The Company has experienced significant operating losses since
inception and, as of September 30, 1997, had an accumulated deficit of $36.3
million. The development and commercialization of the Company's current products
and other new products, if any, will require substantial research and
development, clinical, regulatory, manufacturing and other expenditures. The
Company's net loss for the six months ended September 30, 1997 increased to $8.4
million from $3.7 million in the six months ended September 30, 1996 primarily
as a result of increased sales and marketing expenses associated with hiring
sales personnel in preparation for introduction of the Prostar 9F and 11F
products and the Techstar 6F and Techstar XL 6F products. The Company expects
its operating losses to continue for at least the next three fiscal quarters as
it continues to expend substantial resources in funding clinical trials in
support of regulatory and reimbursement approvals, expansion of manufacturing,
marketing and sales activities and research and development. There can be no
assurance that the Company will achieve or sustain profitability.
10
<PAGE>
FLUCTUATIONS IN OPERATING RESULTS. The Company anticipates that its results
of operations will fluctuate significantly from quarter to quarter and will
depend upon numerous factors, including actions relating to regulatory and
reimbursement matters, progress and results of clinical trials, the extent to
which the Company's or its competitors' products gain market acceptance,
introduction of alternative means for arterial access site closure and
competitive developments. Due to the elective nature of many coronary
catheterization procedures, patients may defer such procedures during the summer
vacation season. As a result, the Company may experience seasonal fluctuations
in its results of operations, particularly in the second fiscal quarter. Results
of operations will also be affected by the timing of orders received from
distributors, the extent to which the Company is able to expand its
manufacturing capabilities and its international and domestic distribution
networks and the ability of distributors to effectively promote the Company's
products. In addition, depending upon the timing of new product introductions,
competitive factors and warranty claims and product returns, the Company may
need to make allowances for product obsolescence, excess inventory and warranty
claims and product returns. While the Company is currently and will likely
continue making such allowances, there can be no assurance that such allowances
will be adequate to cover all costs associated with such items.
GOVERNMENT REGULATION. Clinical testing, manufacture, promotion and sale of
the Company's products are subject to extensive regulation by numerous
governmental authorities in the United States, principally the FDA, and
corresponding foreign regulatory agencies. The Federal Food, Drug, and Cosmetic
Act ("FDC Act"), and other federal and state statutes and regulations govern or
influence the testing, manufacture, labeling, advertising, distribution and
promotion of drugs and devices. Noncompliance with applicable requirements can
result in fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, refusal to authorize the marketing of
new products or to allow the Company to enter into government supply contracts,
and criminal prosecution.
The Company's Prostar and Techstar PVS products are regulated as Class III
medical devices for which FDA approval of a PMA application must be obtained
prior to U.S. commercial sales. A PMA application must be supported by extensive
information, including preclinical and clinical trial data. The PMA process is
expensive, lengthy and uncertain, and a number of products for which PMA
applications have been submitted have never been approved for marketing. In
April 1997, the Company received PMA approval for commercial sale in the United
States of its Prostar 9F and 11F products. In November 1997, the Company
received PMA approval for commercial sale in the United States of its Techstar
6F and Techstar XL 6F products. In June 1997, the Company submitted to the FDA a
PMA supplement for the Prostar Plus 8F and 10F and Prostar XL 8F products for
sale in the United States. There can be no assurance that the Company will be
able to obtain further PMA application or PMA supplement approvals to market its
products, or any other products, on a timely basis, if at all, and delays in
receipt or failure to receive such approvals, the loss of previously received
approvals, or failure to comply with existing or future regulatory requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In August 1997, a competitor of the Company petitioned the FDA for review of
the PMA approval granted to the Prostar 9F and 11F products. The petition was
filed pursuant to a provision of the FDC Act permitting any interested party to
request that the FDA refer an approval order and the basis for the order to an
independent advisory committee of experts, who are to review the information and
provide the FDA with a report and recommendation. Under this provision, the FDA
is required to make public the advisory committee's report and recommendation
and to issue an order either affirming, reversing or modifying the approval. To
the Company's knowledge, the FDA has conducted a review pursuant to this
provision twice since the enactment of the Medical Device Amendments of 1976.
The Company responded to the petition by submitting comments in September 1997
arguing that the FDA should deny it. No assurance can be given that the FDA will
not grant the request to convene an advisory committee to review the PMA
approval granted to the Prostar 9F and 11F products, nor can assurance be given
that the FDA will not, after such review, issue an order reversing or
unfavorably modifying the original PMA approval. Any such action by the FDA
would have a material adverse effect on the Company. Sales of medical devices
outside of the United
11
<PAGE>
States are subject to international regulatory requirements that vary from
country to country. The time required to obtain approval for sale
internationally may be longer or shorter than that required for FDA approval,
and the requirements may differ. The Company has obtained the certifications
necessary to enable the CE mark to be affixed to the Company's Prostar and
Techstar products for commercial sales in member countries of the European
Union. The Company has not obtained all other such international certifications
and there can be no assurance it will be able to do so in a timely manner. The
Company has received regulatory approval to market the Prostar, Prostar Plus,
Techstar and Techstar XL products in Japan. The Company, through its Japanese
distributor, intends to commence clinical trials in Japan that will form the
basis of an application for reimbursement approvals in the Japanese health care
system. There can be no assurance Japanese reimbursement approvals will be
obtained in a timely manner or at all. Many other countries in which the Company
currently operates or intends to operate either do not currently regulate
medical devices or have minimal registration requirements; however, these
countries may develop more extensive regulations in the future that could affect
the Company's ability to market its products. In addition, significant costs and
requests for additional information may be encountered by the Company in its
efforts to obtain and maintain regulatory approvals. Any such events could
substantially delay or preclude the Company from marketing its products in the
United States or internationally.
Regulatory approvals, if granted, may include significant limitations on the
indicated uses for which a product may be marketed. In addition, to obtain such
approvals, the FDA and certain foreign regulatory authorities impose numerous
other requirements with which medical device manufacturers must comply. FDA
enforcement policy strictly prohibits the marketing of approved medical devices
for unapproved uses. In addition, product approvals could be withdrawn for
failure to comply with regulatory standards or the occurrence of unforeseen
problems following the initial marketing. The Company will be required to adhere
to the FDA's Quality System Regulation ("QS Reg.") and similar regulations in
other countries, which include testing, control, documentation and other quality
assurance procedures. Ongoing compliance with the QS Reg. and other applicable
regulatory requirements will be monitored through periodic inspections by
federal and state agencies, including the FDA and the California Department of
Health Services ("CDHS"), and by comparable agencies in other countries. Failure
to comply with applicable regulatory requirements, including marketing products
for unapproved uses, could result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal of the FDA to grant approvals or
clearances, withdrawal of approvals and criminal prosecution. Changes in
existing regulations or adoption of new governmental regulations or policies
could prevent or delay regulatory approval of the Company's products. Certain
material changes to medical devices also are subject to FDA review and clearance
or approval.
COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE. Competition in the
emerging market for arterial access site closure devices is intense and expected
to increase. The Company believes its principal competition will come from
conventional compression devices and collagen plug closure devices. Conventional
compression products are marketed by several companies that supply C-clamp
closure devices. C.R. Bard, Inc. markets the Femostop compression arch device.
Datascope Corp. and Kensey Nash Corporation ("Kensey Nash") have received PMA
approval from the FDA for products that use collagen plugs to achieve
hemostasis. American Home Products Corporation ("American Home Products") has
exclusive worldwide distribution rights to the Kensey Nash device. Most of the
Company's competitors have significantly greater name recognition, experience,
financial, technical, research, marketing, sales, distribution and other
resources than the Company. There can be no assurance that the Company's
competitors will not succeed in developing or marketing technologies and
products that are technologically superior, more effective or commercially
attractive than any that are being developed by the Company, or that such
competitors will not succeed in obtaining regulatory approval, introducing or
commercializing any such products prior to the Company. Such developments could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the medical device market is generally
characterized by
12
<PAGE>
rapid and significant technological change and frequent emergence of new
technologies, products and procedures. Accordingly, the Company's success will
also depend in part on its ability to respond quickly to medical and
technological changes.
LIMITED MANUFACTURING EXPERIENCE AND SCALE-UP RISK. The Company has only
limited experience in manufacturing the Prostar and Techstar products. The
Company currently manufactures in limited quantities the Prostar and Techstar
products for U.S. clinical trials, limited domestic commercial sales,
international clinical trials and limited international commercial sales. The
Company does not have experience in manufacturing its products in commercial
quantities. Manufacturers often encounter difficulties in scaling up production
of new products, including problems involving production yields, quality control
and assurance, component supply and shortages of qualified personnel, compliance
with FDA regulations, and the need for further FDA approval of new manufacturing
processes. Difficulties encountered by Perclose in manufacturing scale-up could
have a material adverse effect on its business, financial condition and results
of operations. There can be no assurance that future manufacturing difficulties,
which could have a material adverse effect on the Company's business, financial
condition and results of operations, will not occur.
DEPENDENCE UPON KEY SUPPLIERS. Perclose purchases components used in its
products from various suppliers and relies on single sources for several
components. For certain of these components, there are relatively few
alternative sources of supply. Establishing additional or replacement suppliers
for any of the components used in the Company's products, if required, may not
be accomplished quickly and could involve significant additional costs. Any
supply interruption from vendors or failure of the Company to obtain alternative
vendors, if required, for any of the components used to manufacture the
Company's products would limit the Company's ability to manufacture its products
and could therefore have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY RELATING TO NEW PRODUCT DEVELOPMENT. The Company's strategy
involves the design and development of new products designed to allow cardiac
surgeons to automate the rapid placement of sutures in blood vessels during CABG
surgery. The product development process is time-consuming and costly, and there
can be no assurance that product development will be successfully completed,
that necessary regulatory clearances or approvals will be granted by the FDA on
a timely basis, or at all, or that the potential products will achieve market
acceptance. Failure by the Company to develop, obtain necessary regulatory
clearances or approvals for, or successfully market potential new products could
have a material adverse effect on the Company's business, financial condition
and results of operations.
DEPENDENCE UPON INTERNATIONAL OPERATIONS AND SALES. Prior to 1997, all of
the Company's product sales were derived from export sales to international
distributors, none of which are affiliated with the Company. The Company markets
and sells its products outside the United States through a network of
international distributors, and the Company's international sales are largely
dependent on the marketing efforts of, and sales by, these distributors. Sales
through distributors are subject to several risks, including the risk of
financial instability of distributors, the risk of manufacturing and quality
control problems with contract manufacturers and the risk that distributors will
not effectively promote the Company's products. Loss or termination of
distribution relationships could have a material adverse affect on the Company's
international sales efforts and could result in the Company repurchasing unsold
inventory from former distributors by virtue of local laws applicable to
distribution relationships, provisions of distribution agreements or negotiated
settlements entered into with such distributors. In addition, a number of risks
are inherent in international operations and transactions. International sales
and operations may be limited or disrupted by the imposition of government
controls, export license requirements, political instability, trade
restrictions, changes in tariffs, difficulties in staffing, coordinating
communications among and managing international operations. Additionally, the
Company's business, financial condition and results of operations may be
adversely affected by fluctuations in international currency exchange rates as
well as increases in duty rates,
13
<PAGE>
difficulties in obtaining export licenses, constraints on its ability to
maintain or increase prices, and competition. There can be no assurance that the
Company will be able to successfully commercialize the Prostar or Techstar
products or any future product in any international market.
LIMITED SALES AND MARKETING EXPERIENCE. The Company has only limited
experience marketing and selling the Prostar and Techstar products, and does not
have experience marketing and selling its products in commercial quantities. The
Company currently has a limited network of distributors that cover certain
European and Pacific Rim countries. In 1997, the Company established a direct
sales force in the United States. Establishing marketing and sales capability
sufficient to support sales in commercial quantities will require significant
resources, and there can be no assurance that the Company will be able to
obtain, train and retain direct sales personnel or that future sales efforts of
the Company will be successful.
RELIANCE ON PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY. The Company's
ability to compete effectively will depend in part on its ability to develop and
maintain proprietary aspects of its technology. There can be no assurance that
the Company's issued patents, any patents that may be issued as a result of the
Company's U.S. or international patent applications, or the patent under which
the Company has license rights, will offer any degree of protection. There can
be no assurance that any patents that may be issued or licensed to the Company
or any of the Company's patent applications will not be challenged, invalidated
or circumvented in the future. In addition, there can be no assurance that
competitors, many of which have substantial resources and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents that will prevent, limit or interfere with the Company's ability to
make, use or sell its products either in the United States or in international
markets.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not in
the future become subject to patent infringement claims and litigation or
interference proceedings declared by the United States Patent and Trademark
Office ("USPTO") to determine the priority of inventions. The defense and
prosecution of intellectual property suits, USPTO interference proceedings and
related legal and administrative proceedings are both costly and time consuming.
Litigation may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others.
Any litigation or interference proceedings will result in substantial
expense to the Company and significant diversion of effort by the Company's
technical and management personnel. An adverse determination in litigation or
interference proceedings to which the Company may become a party could subject
the Company to significant liabilities to third parties or require the Company
to seek licenses from third parties. Although patent and intellectual property
disputes in the medical device area have often been settled through licensing or
similar arrangements, costs associated with such arrangements may be substantial
and could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses would be available to the Company on satisfactory terms if at
all. Adverse determinations in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition to patents, the Company relies on trade secrets and proprietary
know-how, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. These agreements
generally provide that all confidential information developed or made known to
the individual by the Company during the course of the individual's relationship
with the Company, is to be kept confidential and not disclosed to third parties,
expect in specific circumstances. The agreements generally provide that all
inventions conceived by the individual in the course of rendering services to
the Company shall be the exclusive property of the Company; however, certain of
the Company's agreements with consultants, who typically are employed on a
full-time basis by academic institutions or hospitals, do not contain assignment
of
14
<PAGE>
invention provisions. There can be no assurance that proprietary information or
confidentiality agreements with employees, consultants and others will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known to or independently
developed by competitors.
UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. In the United States, health care
providers, such as hospitals and physicians that purchase medical devices such
as the Company's products, generally rely on third-party payors, principally
federal Medicare, state Medicaid and private health insurance plans, to
reimburse all or part of the cost of therapeutic and diagnostic catheterization
procedures. Reimbursement for catheterization procedures performed using devices
that have received FDA approval has generally been available in the United
States. The Company anticipates that in a prospective payment system, such as
the disease related group ("DRG") system utilized by Medicare, and in many
managed care systems used by private health care payors, the cost of the
Company's products will be incorporated into the overall cost of the procedure
and that there will be no separate, additional reimbursement for the Company's
products. Furthermore, the Company could be adversely affected by changes in
reimbursement policies of governmental or private health care payors,
particularly to the extent any such changes affect reimbursement for therapeutic
or diagnostic catheterization procedures in which the Company's products are
used. Failure by physicians, hospitals and other users of the Company's products
to obtain sufficient reimbursement from health care payors for procedures in
which the Company's products are used or adverse changes in governmental and
private third-party payors' policies toward reimbursement for such procedures
would have a material adverse effect on the Company's business, financial
condition and results of operations.
In international markets, market acceptance of the Company's products may be
dependent in part upon the availability of reimbursement within prevailing
health care payment systems. However, in general, hospitals using the Company's
products do not receive specific, cost-based, direct reimbursement for the use
of Perclose PVS products. Reimbursement and health care payment systems in
international markets vary significantly by country. Failure of the Company to
receive international reimbursement approvals could have an adverse effect on
market acceptance of the Company's products in the international markets in
which such approvals are sought.
PRODUCT LIABILITY AND RECALL RISK; LIMITED INSURANCE COVERAGE. The
manufacture and sale of medical products entail significant risk of product
liability claims or product recalls. There can be no assurance that the
Company's existing insurance coverage limits are adequate to protect the Company
from any liabilities it might incur in connection with the clinical trials or
sales of its products. In addition, the Company may require increased product
liability coverage as its products are commercialized. Such insurance is
expensive and in the future may not be available on acceptable terms, if at all.
A successful product liability claim or series of claims brought against the
Company in excess of its insurance coverage, or a recall of the Company's
products, could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL. The Company is dependent upon a number of
key management and technical personnel. The loss of the services of one or more
key employees would have a material adverse effect on the Company. The Company's
success will depend on its ability to attract and retain additional highly
qualified management and technical personnel. The Company faces intense
competition for qualified personnel, many of whom are often subject to competing
employment offers, and there can be no assurance that the Company will be able
to attract and retain such personnel. Furthermore, the Company relies on the
services of several medical and scientific consultants, all of whom are employed
on a full-time basis by hospitals or academic or research institutions. Such
consultants are therefore not available to devote their full time or attention
to the Company's affairs.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders
The Company solicited proxies for an annual meeting of shareholders on July
15, 1997. The matters voted upon at the meeting and results of the voting with
respect to those matters were as follows:
FOR WITHHELD
--------- ---------
1 -- Election of Class II Directors:
James W. Vetter, M.D. 8,459,344 10,122
Mark A. Wan 8,460,091 9,375
FOR AGAINST ABSTAIN
--------- --------- --------
2 -- Adoption of the Company's 1997
Stock Plan 5,361,791 1,789,931 5,373
FOR AGAINST ABSTAIN
--------- --------- --------
3 -- Approve an amendment of the
Company's 1995 Director Option
Plan 6,682,761 503,595 5,113
FOR AGAINST ABSTAIN
--------- --------- --------
4 -- Ratify the appointment of Ernst &
Young as the independent auditors
for fiscal year 1998 8,463,786 3,767 1,913
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits: The exhibits listed on the accompanying Index to
Exhibits are filed as a part hereof and are
incorporated by reference.
b) Reports on Form No reports on Form 8-K were filed by the
8-K: Registrant during the quarter ended September 30,
1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this 10-Q report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
Date: November 4, 1997 PERCLOSE, INC.
/S/ HENRY A. PLAIN JR.
------------------------------------------
Henry A. Plain, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ KENNETH E. LUDLUM
------------------------------------------
Kenneth E. Ludlum
VICE PRESIDENT FINANCE AND ADMINISTRATION,
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
</TABLE>
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------
<C> <S>
3.1(1) Restated Certificate of Incorporation.
3.2(1) Bylaws of the Registrant.
3.3(2) Certificate of Designations of Rights, Preferences and
Privileges of Series A Participating Preferred Stock.
3.4(2) Preferred Shares Rights Agreement, dated as of January 27,
1997.
4.1(1) Specimen Common Stock Certificate.
10.1(1) Form of Indemnification Agreement between the Company and each
of its directors and officers.
10.2(1) 1992 Stock Plan and form of Stock Option Agreement thereunder.
10.3(1) 1995 Director Option Plan.
10.4(1) 1995 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.5(1) Lease Agreement (the "Lease Agreement") dated July 6, 1993
between Registrant and the David D. Bohanon Organization for
facility located at 199 Jefferson Drive, Menlo Park,
California, as amended by First Amendment to Lease dated
January 31, 1994.
10.6(3) Second amendment to Lease Agreement dated September 10, 1996.
10.7(3) Third amendment to Lease Agreement dated March 21, 1997.
10.8(1) Loan and Security Agreement dated September 29, 1994 between
the Registrant, Silicon Valley Bank and MMC/GATX Partnership
No. I, as amended by Loan Modification Agreement.
10.9(1) Shareholder Rights Agreement dated August 23, 1995 between the
Registrant and certain holders of the Registrant's
securities.
10.10(3) Employment Agreement dated May 8, 1996 between the Registrant
and Kenneth E. Ludlum.
10.11(1) Agreement dated March 30, 1993 between the Registrant and
LocalMed, Inc.
10.12(3) Promissory Note between the Registrant and John G. McCutcheon
dated January 31, 1997.
10.13(4) Promissory Note between the Registrant and Kenneth E. Ludlum
and Judy M. Wong dated June 26, 1997.
27.1 Financial Data Schedule (Edgar version only).
</TABLE>
- ------------------------
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1
(File No. 33-97128) and incorporated herein by reference.
(2) Filed as an Exhibit to the Registrant's Registration Statement on Form 8-A
filed with the Securities and Exchange Commission on January 28, 1997, and
incorporated herein by reference.
(3) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1997 and incorporated herein by reference.
(4) Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997 and incorporated herein by reference.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,627,556
<SECURITIES> 15,355,441
<RECEIVABLES> 1,331,838
<ALLOWANCES> 0
<INVENTORY> 1,134,389
<CURRENT-ASSETS> 21,721,666
<PP&E> 4,119,418
<DEPRECIATION> 2,003,035
<TOTAL-ASSETS> 24,643,333
<CURRENT-LIABILITIES> 2,897,094
<BONDS> 0
0
0
<COMMON> 9,626
<OTHER-SE> 21,736,613
<TOTAL-LIABILITY-AND-EQUITY> 24,643,333
<SALES> 2,379,795
<TOTAL-REVENUES> 2,379,795
<CGS> 3,249,358
<TOTAL-COSTS> 11,355,245
<OTHER-EXPENSES> 8,105,887
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92,380
<INCOME-PRETAX> (8,362,867)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,362,867)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,362,867)
<EPS-PRIMARY> (.87)
<EPS-DILUTED> (.87)
</TABLE>
