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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
FOR THE FISCAL YEAR ENDED MARCH 31, 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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DELAWARE 94-3154669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
199 JEFFERSON DRIVE, MENLO PARK, 94025
CAM
(Address of principal executive (Zip code)
offices)
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Registrant's telephone number, including area code: (415) 473-3100
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Preferred Share Purchase Rights
(Title of class)
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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
filing requirements for the past 90 days. Yes _/X/_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes _/X/_
The aggregate value of voting stock held by non-affiliates of the registrant
was approximately $150,584,624 as of May 30, 1997, based upon the closing price
of the Registrant's Common Stock reported for such date on the Nasdaq National
Market. Shares of Common Stock held by each executive officer and director and
by each person who owns 10% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. The determination
of affiliate status is not necessarily a conclusive determination for other
purposes. As of May 30, 1997, the registrant had outstanding 9,579,747 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated into Part III of this report by
reference to the Proxy Statement for the registrant's 1997 annual meeting of
stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this Form 10-K. Certain information is incorporated into Parts II and IV of
this report by reference to the Registrant's annual report to stockholders for
the year ended March 31, 1997.
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PERCLOSE, INC.
INDEX
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PAGE NUMBER
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PART I.................................................................................................. 1
Item 1. BUSINESS............................................................................... 1
Item 2. PROPERTIES............................................................................. 18
Item 3. LEGAL PROCEEDINGS...................................................................... 18
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 18
PART II................................................................................................. 18
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................. 18
Item 6. SELECTED FINANCIAL DATA................................................................ 18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................... 18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................ 19
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE... 19
PART III................................................................................................ 19
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................................... 19
Item 11. EXECUTIVE COMPENSATION................................................................. 19
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................... 19
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................... 19
PART IV................................................................................................. 20
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....................... 20
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PART I
ITEM 1. BUSINESS
THE COMPANY
Perclose, Inc. ("Perclose" or the "Company") was incorporated in California
in March 1992 and reincorporated in Delaware in October 1995. Perclose designs,
develops, manufactures and markets a family of minimally invasive systems used
to surgically close arterial access sites in catheterization procedures such as
angioplasty and angiography. The Company's proprietary, single-use systems are
inserted through the same tract used during catheterization and enable the
clinician to suture close the access site immediately following the
catheterization. The Company's percutaneous vascular surgery ("PVS") systems are
designed to provide routine, definitive closure by replicating results
previously obtainable only through open surgery, without the associated risks
and costs. The Company believes that its PVS products provide significant
clinical and economic advantages over current compression methods of arterial
access site closure. These advantages include achieving rapid hemostasis,
reducing nursing time required to monitor patients, allowing early patient
ambulation and discharge, enabling more efficient use of the catheterization
laboratory and improving patient comfort. In addition, for certain high risk
patients, such as those who have experienced a heart attack, the Company's
products allow continuation of aggressive anticoagulation, thrombolytic or
anti-restenosis drug therapy without increasing the risk of bleeding
complications at the arterial access site.
The Company commenced international shipments of its products in December
1994 and United States shipments in April 1997. These systems are currently
marketed in Germany, France, the United Kingdom, Italy, Switzerland, Israel,
Japan and the United States under regulatory approvals where required.
INDUSTRY OVERVIEW
This Report on Form 10-K contains certain forward looking statements
regarding future events with respect to the Company. Actual events or results
may differ materially as a result of the factors described herein and in the
documents incorporated herein by reference, including, in particular, those
factors described under "Additional Risk Factors."
THERAPEUTIC INTERVENTIONAL CARDIOLOGY MARKET. More than 6 million people in
the United States have been diagnosed with coronary artery disease, which is a
formation of atherosclerotic plaque that causes blood flow restrictions, or
blockages, within the coronary arteries. These blockages can occur anywhere
within the complex network of arteries that provide blood to the heart muscle.
If left untreated, coronary artery disease can cause severe chest pain and lead
to heart attacks. The principal means of treating coronary artery disease
include coronary artery bypass grafting ("CABG"), a highly invasive open
surgical procedure, and percutaneous transluminal coronary angioplasty ("balloon
angioplasty") as well as other percutaneous catheter-based procedures including
atherectomy and stenting. Since its clinical introduction in 1978, balloon
angioplasty has emerged as the principal less invasive alternative to CABG.
Industry sources estimate that there are approximately 850,000 balloon
angioplasty, atherectomy, stenting and intra-aortic balloon pump procedures
performed worldwide, including approximately 525,000 such procedures in the
United States.
At the beginning of a balloon angioplasty procedure, the physician initiates
anticoagulation drug therapy, which is continued throughout the procedure. A
local anesthetic is administered and a small incision is made in the groin area
to gain access to the femoral artery, which is punctured to create an access
site for catheterization devices. The cardiologist inserts an introducer sheath
into the femoral artery and places a guiding catheter through the introducer
sheath to create a path from outside the patient to the arteries of the heart.
The cardiologist advances a small guidewire through the inside of the guiding
catheter, into the coronary artery and across the site of the blockage. A
balloon catheter is delivered over
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the guidewire through the inside of the guiding catheter into the artery and
across the site of the blockage. The balloon is inflated to compress the
blockage against the walls of the artery, thereby enlarging the diameter of the
arterial lumen and increasing blood flow to the heart muscle. At the conclusion
of the procedure, the cardiologist decides if the benefits of continued
anticoagulation therapy that can prevent clot formation in the coronary arteries
outweigh the increased risk of bleeding at the femoral artery access site. This
decision influences the level of post-procedure nursing observation and the
length of the hospital stay, which is typically one to three days.
Other catheter-based therapeutic coronary procedures include atherectomy and
stenting. Atherectomy encompasses several types of devices that are designed to
remove atherosclerotic plaque that blocks blood flow in the arteries. These
procedures include directional coronary atherectomy in which plaque is removed
with a miniature cutting system, rotational atherectomy in which a high speed,
rotating burr is used to grind plaque into microscopic particles, and laser
atherectomy in which laser energy delivered through a fiber optic catheter is
used to ablate plaque. Directional and rotational atherectomy devices often
require introducer sheaths and catheters of greater diameter than balloon
angioplasty catheters.
Stents are implantable, metal, tube shaped devices delivered on a balloon
catheter and permanently deployed at a blockage site to maintain increased lumen
diameter by mechanically supporting the artery. Stenting procedures have been
reported to reduce the risk of abrupt coronary artery closure, thereby creating
the possibility for outpatient stenting due to a reduced need to keep patients
under nursing observation post-procedure. The current potential for outpatient
stenting is, however, limited by the inability to achieve predictable, sustained
hemostasis of the arterial access site.
DIAGNOSTIC CARDIOLOGY MARKET AND OTHER PERCUTANEOUS VASCULAR
PROCEDURES. Patients believed to have coronary artery disease typically undergo
angiography to determine the extent and location of their arterial blockages.
Angiography is a diagnostic procedure in which dye is delivered through a
catheter directly into the coronary arteries. The patient's coronary arteries
can be visualized using an x-ray imaging system that produces a real-time image.
Similar to therapeutic interventional procedures, angiography is performed using
a catheter placed into the vascular system through a puncture in the femoral
artery. Industry sources estimate that angiography is performed annually on
approximately 3.1 million patients worldwide including over 1.8 million patients
in the United States. Angiography procedures represent a significant market
opportunity for arterial closure devices because many of these patients are kept
under nursing observation for several hours following the procedure primarily to
confirm achievement of hemostasis.
Many other catheterization procedures rely on percutaneous access to the
vascular system through a puncture in the femoral artery. These procedures
include peripheral vascular therapeutic and diagnostic procedures, of which
approximately 285,000 and 2.7 million, respectively, are performed annually
worldwide. These procedures may represent a significant market opportunity for
arterial closure devices because many of these patients are kept under nursing
observation following the procedure primarily to confirm achievement of
hemostasis. Therefore, the availability of reliable arterial access site closure
devices could facilitate early discharge of these patients. Percutaneous
vascular surgery devices could also be used to close femoral artery access sites
in interventional neuroradiology catheterization procedures, electrophysiology
procedures to map and ablate cardiac arrhythmias and intra-aortic balloon pump
procedures. In addition, emerging percutaneous catheterization procedures and
other new interventional procedures, including catheter-based vascular grafts,
cardiac pulmonary support procedures and percutaneous treatment of abdominal
aortic aneurysms, may also represent new market opportunities for the Company's
products.
ARTERIAL ACCESS SITE MANAGEMENT. Following catheter-based coronary
procedures such as balloon angioplasty, atherectomy, stenting and angiography,
the physician must close the arterial access site. In current practice,
anticoagulation therapy is discontinued for up to four hours prior to closure of
the
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access site to allow the patient's clotting function to normalize. During this
period, the introducer sheath is left in place and the patient must remain
immobile in bed to prevent bleeding at the access site. Once the introducer
sheath is removed, intense direct pressure is applied to the puncture site for
at least 20 minutes to over one hour to facilitate formation of a blood clot in
order to seal the arterial access site. This pressure is applied manually or
with a large C-clamp or other pressure device placed around the patient's leg. A
dislodged clot can result in internal or external bleeding, which may
necessitate transfusions or result in other vascular complications if not
immediately controlled. Because any movement may dislodge the clot, the patient
is required to remain immobile under close nursing observation in a coronary
care unit for an additional 4 to 24 hours after the procedure, depending on the
amount of anticoagulation drug therapy used and the type of procedure performed.
Current closure methods may result in substantial costs, limit operating
efficiencies and constrain the scheduling and usage of the catheterization
laboratory by the number of beds and nursing staff in the coronary care unit.
The arterial access site can be affected by other complications associated
with current compression methods, including a hematoma in which a coagulated
blood mass forms at the access site, a pseudoaneurysm in which blood continues
to flow from the artery into the coagulated blood mass at the access site,
femoral nerve damage from extended compression, and a vagal response
characterized by a sharp drop in blood pressure. Patients often experience
significant pain and discomfort during compression of the artery and in the
period in which they are required to be immobile, and may require pain
medication. Many patients report that the pain associated with compression of
the artery and immobilization is the most uncomfortable and difficult aspect of
the catheterization procedure.
In addition to the anticoagulation therapy administered during routine
coronary catheterization procedures, the Company believes that post-procedure
anticoagulation therapy is necessary in certain patients who are at an elevated
risk of formation of a life-threatening blood clot in the coronary arteries. The
Company believes these patients may represent up to 30% of therapeutic coronary
catheterization patients and include patients who have experienced a heart
attack, received stents that may lead to clot formation, or undergone
complicated balloon angioplasty characterized by dissection of the arterial wall
during expansion of the balloon. For these patients, optimal therapy usually
requires continued anticoagulation therapy to keep blood clots from forming, new
drugs to reduce the risk of restenosis or thrombolytics to dissolve existing
clots. In current practice, the interventional cardiologist is faced with the
choice of discontinuing anticoagulation therapy and closing the arterial access
site using compression or continuing drug therapy and leaving the sheath in
place overnight, which requires the patient to remain immobile and extends the
hospital stay. The cardiologist must therefore manage the difficult balance of
preventing clot formation in the coronary arteries while encouraging a clot
formation to close the arterial access site. In high clinical need patients,
current arterial access site management options may lead to a greater risk of
heart attack, higher vascular complication rates, significant patient discomfort
during immobilization, intensive nursing monitoring, extended hospitalization
and increased health care costs.
PERCLOSE SOLUTION
The Company believes that its percutaneous vascular surgery systems, which
achieve rapid closure of arterial access sites following percutaneous
catheterization procedures, overcome the clinical disadvantages of current
closure methods and will enable catheterization laboratories to achieve
increased operating efficiencies and cost savings. The Company's products enable
the physician to suture arterial access sites percutaneously, providing a means
of closure that has been possible only through open vascular surgery. Since the
introduction of catheterization procedures, open vascular surgery has been the
definitive method used to close arterial access sites that do not respond to
conventional compression therapy. Open surgery requires a long incision in the
patient's groin area, involves a significant recovery period and increases
overall treatment costs. While surgeons can close the arterial access site with
one or two sutures, the invasive nature of open surgery makes it unsuitable for
routine use in catheterization patients. The Perclose systems are designed to
provide routine, definitive closure by replicating through a minimally
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invasive procedure the results previously obtainable only through open surgery
without the associated risks and costs. The ease of use of the Perclose systems
is enhanced by the design of the products which relies on standard
cardiovascular catheterization techniques.
The Perclose systems are used in the catheterization laboratory to close the
arterial access site as the final step in the procedure. By achieving rapid
hemostasis, the Perclose systems reduce the need for the patient to remain
immobile under close observation in the coronary care unit. This result
minimizes pain and discomfort to the patient and allows the patient to ambulate
shortly after the catheterization procedure. Early ambulation of patients can
also improve utilization of hospital resources. For example, in current
practice, angiography is usually performed in the morning to permit same-day
discharge following observation and confirmation of hemostasis. Earlier
ambulation and discharge of these patients may contribute to more efficient
usage of the of catheterization laboratory by allowing scheduling of diagnostic
procedures throughout the day.
The Perclose systems, which surgically close the access site and do not rely
on the body's clotting process to achieve hemostasis, are ideally suited for use
in patients who would benefit from aggressive anticoagulation or other drug
therapy. Therefore, cardiologists can optimize drug therapy independent of
arterial access site management requirements.
OTHER CLOSURE DEVICES
Several new closure devices have been developed in response to the need for
improved methods of arterial access site closure following catheterization
procedures. These devices include the Company's systems as well as collagen plug
devices manufactured by two other companies. These collagen plug devices are
delivered through a sheath and placed at the site of the femoral artery
puncture. Both collagen plug devices have received PMA approval from the FDA.
The Company believes that collagen plug devices do not fully and satisfactorily
address the current need for an improved closure method. These collagen plugs
still rely on the body's clotting function, which is enhanced by the presence of
collagen, and may still require external pressure to achieve closure of the
arterial access site. The Company's percutaneous vascular surgery systems
provide a mechanical suture closure which aids in the natural healing process
and, like open surgical repair, does not rely on the body's clotting function.
The Perclose systems should therefore allow more aggressive anticoagulation and
other drug therapy following catheterization.
BUSINESS STRATEGY
The Company's is the leader in the design, development and commercialization
of suture-based closure devices; its primary objective is to establish
percutaneous vascular surgery using the Company's products as the standard of
care for post-catheterization arterial access site management. The following are
key elements of the Company's strategy:
- DEMONSTRATE CLINICAL UTILITY AND COST-EFFECTIVENESS. The Company
believes that percutaneous vascular surgical repair of arterial access sites
decreases time to ambulation and discharge with lower treatment costs and
improved comfort for all patients, and can reduce complication rates in high
clinical need patients. The Company uses data collected from clinical trials to
demonstrate the clinical and cost advantages of its products to physicians and
health care payors.
- FOCUSED MARKETING, SALES AND PHYSICIAN TRAINING. The Company's
products are currently marketed to interventional cardiologists, radiologists
and catheterization laboratory administrators. The Company commenced
international shipments of its products in December 1994. These systems are
currently marketed internationally in Germany, France, the United Kingdom,
Italy, Switzerland, Israel and Japan under regulatory approvals where required.
The Company markets its products in the United States through a direct sales
organization. The Company believes that the majority of interventional
catheterization procedures in the United States are performed in high volume
catheterization laboratories, and that these institutions can be served by a
relatively small, focused sales force. The
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Company develops and maintains close working relationships with its customers to
address their needs for products and services and to receive input regarding the
Company's product development plans. The Company builds these relationships
through focused physician training, which the Company believes will also be a
key factor in encouraging cardiologists to use the Company's products. The
Company will continue to provide a standardized, in-the-field training course in
the markets it enters.
- ACCESS NEW MARKET OPPORTUNITIES. The Company believes that several
other minimally invasive catheterization procedures, both currently used and
under development, will be candidates for the Company's products. The Company
intends to expand its product marketing efforts to new clinical applications,
including electrophysiology and interventional neuroradiology catheterization
procedures and intra-aortic balloon pump procedures, where percutaneous surgical
closure of arterial access sites can meet significant clinical needs or achieve
cost reductions.
- TECHNOLOGICAL LEADERSHIP. The Company intends to position itself at
the forefront of technological leadership and innovation in percutaneous
vascular surgery. The Company continually evaluates new developments in
percutaneous catheterization procedures and will seek to expand its product
development efforts to address access site closure following these new
procedures, including catheter-based vascular grafts, treatment of abdominal
aortic aneurysms and cardiac pulmonary support procedures. The large diameter
catheter devices required for these procedures make closure of the arterial
access site difficult using conventional compression methods. The Company
believes that larger diameter versions of its current products could be used to
close the arterial access sites in these procedures, making it feasible to
perform such procedures in a minimally invasive manner. The Company also intends
to continue to focus on improving the ease of use and reducing the manufacturing
costs of its products. In order to protect its proprietary position, the Company
will continue to pursue an aggressive patent filing and prosecution strategy.
- EXTENDING THE TECHNOLOGY PLATFORM. The Company intends to supply its
core technology to other high value surgical areas that could benefit by
remotely fixturing vascular tissue and precisely delivering needles and sutures
to sites that are currently operated on using conventional surgical techniques.
Two of the Company's products have been approved in the United States. The
remainder of the Company's products cannot be sold commercially in the United
States unless and until FDA approvals or clearances are obtained, and FDA
approvals or clearances may not be received for several years, if at all. The
Company's business is also subject to additional significant risks, including
the dependence of the Company on the Prostar, Prostar Plus, Techstar and
Techstar XL products, the lack of extensive clinical data demonstrating that
certain of the Company's products are safe and effective and the risk that the
Company's products will not gain market acceptance.
PRODUCTS AND TECHNOLOGY
The Company currently has two product families, the Prostar and Techstar
systems. The Prostar systems provide two sutures for closing arterial access
sites ranging in diameter from 7 French (7F) to 11 French (11F). One French size
is equal to one-third of a millimeter in diameter (3F=1mm). The Techstar systems
use single-suture devices for suturing 6F and 7F arterial access sites. Products
within each product family can have the added designation of Plus or XL. The
Plus and XL designations signify the second and third generations, respectively,
of the Prostar and Techstar systems evolution. The Plus and XL enhancements have
reduced procedure time, increased ease of use, increased patient comfort and
reduced
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manufacturing cost. The following table summarizes the markets addressed by and
current status of each of the Company's products:
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PRODUCT
FAMILY(1)
TARGETED APPLICATIONS ------------- STATUS(2)
- ------------------------------------------------ PROSTAR ----------------------------------------------------
HIGH CLINICAL NEED (2 SUTURE) UNITED STATES INTERNATIONAL
- ------------------------------------------------ ------------- ------------------------------ --------------------
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Anticoagulated Stents 8F PMA Supplement Filed Commercial Sales
Complicated Angioplasty
Atherectomy 9F Commercial Sales Not Marketed
Intra-aortic Balloon Pump
Electrophysiology Ablation 10F PMA Supplement Filed Commercial Sales
Thrombolytic Drugs
Anti-Restenosis Drugs 11F Commercial Sales Not Marketed
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TECHSTAR
EARLY AMBULATION/DISCHARGE (1 SUTURE) UNITED STATES INTERNATIONAL
- ------------------------------------------------ ------------- ------------------------------ --------------------
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Stents 6F PMA Supplement Filed Commercial Sales
Angioplasty
Peripheral Radiology 7F PMA Supplement Planned Commercial Sales
Interventional Neuroradiology
Diagnostic Angiography
Peripheral Radiology 6FS PMA Supplement Planned Commercial Sales
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(1) "F" refers to French size. 1 French is equal to 1/3 millimeter in diameter.
"6FS" refers to a 6F short length Perclose system.
(2) Commercial sales occur in Germany, France, the United Kingdom, Italy,
Switzerland, Israel, Japan and the United States.
PROSTAR AR SYSTEMS AND PROCEDURE. Prostar systems are sterile, single-use
systems which, as currently configured, consist of a four-needle, two-suture
Prostar Percutaneous Vascular Surgical Device, a Prostar Pre-Dilator (for the 9F
and 11F sizes only), a Perclose Knot Pusher, and a Prostar Guidewire (sizes 9F
and 11F only). The Prostar system is currently marketed internationally in 8F
and 10F sizes and is marketed in the United States in the 9F and 11F sizes. The
8F, 9F and 10F systems are suitable for arterial access sites dilated by 7F to
10F introducer sheaths used during balloon angioplasty, stenting, and rotational
atherectomy procedures. The 11F system is used to close puncture sites dilated
by 10F or 11F introducer sheaths used during directional coronary atherectomy
and intra-aortic balloon pump procedures.
At the end of the catheterization procedure, the introducer sheath used in
the procedure is removed utilizing a standard over-the-wire exchange technique.
For the Prostar 9F and 11F systems, the Prostar Pre-Dilator is inserted to
expand the tract from the skin incision to the artery to assist in positioning
the Prostar Percutaneous Vascular Surgical Device. Once the pre-dilation of the
tract from the skin incision to the artery is complete, another over-the-wire
exchange is performed. Next, the flexible sheath of the Prostar Percutaneous
Vascular Surgical Device is inserted in the artery over a guidewire. The unique
design of the device allows the physician to maintain hemostasis throughout the
procedure. The device includes two marker ports in the needle guide, proximal to
the tips of the needles. Arterial blood flow into the marker ports indicates
that the device has been properly positioned with the needles and sutures inside
the arterial lumen. Once positioned, the pull handle is drawn away from the
patient, deploying the needles and sutures. As the needles advance toward the
artery wall, they are guided by a ramp that precisely positions the needles
around the arterial access site. The needles are captured in the barrel of the
device which also positions the needles for removal. Two needles, each attached
to the end of a single suture, will create one surgical stitch. The needles are
removed from the device and detached from the sutures which are then
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tied in a standard surgical square knot. The device is removed and the knots are
advanced to the arterial access site with the Perclose Knot Pusher. The knots
can be further secured with additional throws, which are also advanced with the
Knot Pusher.
TECHSTAR SYSTEMS. Techstar systems are sterile, single-use systems which
consist of a two-needle, single-suture Techstar Percutaneous Vascular Surgical
Device and a Perclose Knot Pusher. The Techstar system is currently marketed
internationally in 6F, 7F and 6FS (short) sizes. The 6F diameter system is
suitable for closure of arterial access sites in therapeutic and diagnostic
procedures having puncture sites dilated by 6F or smaller introducer sheaths
while the 7F diameter system is suitable for closure of puncture sites dilated
by 7F interventional and diagnostic introducer sheaths. The Techstar 6FS
diameter system is shorter in length than the Techstar 6F and is suitable for
use after peripheral diagnostic and interventional procedures for vascular
disease of the lower legs.
Significant differences of the configuration of the second generation
designs include a rotating barrel that eliminates the need for a separate
pre-dilator and a monorail configuration that eliminates the need for an
additional guidewire. These features, together with several other design
changes, improve ease of use and ease of manufacturability and reduce
manufacturing cost. The XL, or third generation, design further increases the
operator's ease of use of the device and reduces the procedure time to less than
five minutes.
CLINICAL AND REGULATORY STATUS
Perclose systems are currently being marketed in internationally in Germany,
France, the United Kingdom, Italy, Switzerland, Israel and Japan under
regulatory approvals where required. The Company obtained CE mark certification
in 1996 which allows it to market its products in all member European Union
countries without obtaining country specific approvals and to ship its products
to European Union countries directly from its United States manufacturing
facility.
In April 1997 the Company received approval from the United States Food and
Drug Administration for clearance of its Prostar systems for commercial sale in
the United States under the Pre-Market Approval regulatory pathway. In May 1997
the Company filed an application with the FDA for clearance of its Techstar
systems for commercial sale in the United States under the Pre-Market Approval
Supplement regulatory pathway and in June 1997 the Company submitted a PMA
Supplement application for clearance of the Prostar Plus and Prostar XL systems
for sale in the United States.
The Company, through Getz Brothers Company Ltd., its Japanese distributor,
has received regulatory approval to market the Prostar, Prostar Plus, Techstar
and Techstar XL systems in Japan and intends to commence clinical trials in
Japan that will form the basis for an application for reimbursement approvals in
the Japanese health care system. The Company's distributor will be responsible
for management of clinical trials and obtaining reimbursement approval for the
Company's products in Japan, and there can be no assurance that such
reimbursement approvals will be obtained in a timely manner or at all.
MARKETING AND DISTRIBUTION
The Company's international sales and marketing strategy is to focus on
interventional cardiologists and radiologists through established distributors
in major international markets, subject to required regulatory approvals.
Perclose systems are marketed internationally in Germany, France, the United
Kingdom, Italy, Switzerland, Israel and Japan through independent distributors.
The Company generally operates under written distribution agreements with its
distributors, although the Company does not have written agreements with certain
distributors, typically those in smaller markets. Distributors with which the
Company has distribution agreements generally have the exclusive right to sell
the Company's products within a defined territory. These distributors also
typically market other medical products, although the Company generally seeks to
obtain covenants from its distributors prohibiting them from marketing medical
devices that compete directly with the Company's products. The Company's
distributors typically
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purchase the Company's products at a discount from the end user list price and
resell the products to hospitals and clinics. Sales to international
distributors are denominated in United States dollars. The end-user price is
determined by the distributor and varies from country to country. The Company
also has eight persons directly involved with physician training and assisting
distributors that are assigned to European and Asian territories.
All of the Company's revenues through March 31, 1997 were derived from
export sales to international distributors, primarily in Europe, none of which
are affiliated with the Company. Sales to A.D. Krauth & Co. GmbH, Medicorp and
Getz Brothers Company Ltd., the Company's German, French and Japanese
distributors, respectively, accounted for approximately 59%, 15% and 15%,
respectively, of net sales for the fiscal year ended March 31, 1997.
The Company markets its products in the United States through a direct sales
organization. The Company believes that the majority of interventional
catheterization procedures in the United States are performed in high volume
catheterization laboratories, and that these institutions can be served by a
relatively small, focused sales force. The Company develops and maintains close
working relationships with its customers to address their needs for products and
services and to receive input regarding the Company's product development plans.
The Company builds these relationships through focused physician training, which
the Company believes will also be a key factor in encouraging cardiologists to
use the Company's products. The Company provides a standardized, in-the-field
training course in the markets it enters.
As the Company expands existing product lines and introduces systems for new
applications, the Company will broaden its marketing and sales activities to
reach key practitioners, clinicians and administrators in markets targeted by
the Company.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are performed internally
by a 14 person research and development staff. Future research and development
efforts are expected to involve application of the Company's core arterial
access site closure technology to other catheterization procedures, including
vascular grafts, treatment of abdominal aortic aneurysms and cardiac pulmonary
support procedures. The large diameter catheter devices used in these procedures
make closure of the arterial access site difficult with conventional compression
methods. The Company believes that larger diameter versions of its current
products could be used for closure of arterial access sites in these procedures,
making it feasible to perform such procedures in a minimally invasive manner. In
addition, the Company intends to apply its core technology to other high value
surgical areas that could benefit by remotely fixturing vascular tissue and
precisely delivering needles and sutures where current conventional surgical
techniques are used.
Research and development expenses for fiscal 1995, 1996 and 1997 were $3.1
million, $3.1 million and $4.7 million respectively.
MANUFACTURING
The Company currently manufactures its products for the United States market
in its class 10,000 clean room facility in Menlo Park, California. The Company
has also entered into an agreement with AorTech Europe, a contract manufacturer
located in Glasgow, Scotland. For international markets, the Company
manufactures subassemblies of its products at its Menlo Park facility with final
assembly occurring at AorTech. AorTech performs final assembly, packaging, and
ships the Company's products to distributors outside the United States. AorTech
Europe is ISO 9002 certified and operates a class 10,000 clean room. The Company
has received the CE Mark from the European Union and plans to reduce its
reliance on AorTech in the future and consolidate its manufacturing activity at
its Menlo Park, California facility in fiscal 1998.
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The Company purchases components from various suppliers and relies on single
sources for several parts. To date, the Company has not experienced any
significant adverse affects resulting from shortages of components. Delays
associated with any future part shortages, particularly as the Company scales up
its manufacturing activities in support of international distributor orders and
commercial sales in the United States, would have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company does not have experience in manufacturing its products in large scale
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 lack of qualified personnel.
Difficulties encountered by the Company in manufacturing scale-up could have a
material adverse effect on its business, financial condition and results of
operations.
COMPETITION
Competition in the emerging market for arterial access site closure devices
is expected to be intense and to increase. The Perclose systems compete against
conventional manual compression devices, mechanical compression devices and
newer collagen plugs. Several companies supply C-clamp devices and C.R. Bard
markets the Femostop compression arch. Datascope and Kensey Nash have received
PMA approval from the FDA for products that use collagen plugs to achieve
hemostasis. American Home Products has exclusive distribution rights to the
Kensey-Nash device in the United States and internationally. Several other
companies are reported to be developing or have tried to develop arterial
closure devices, some of which have an established presence in the field of
interventional cardiology, including Boston Scientific Corporation, C.R. Bard,
Schneider (a subsidiary of Pfizer, Inc.), United States Surgical Corporation,
Global Therapeutics Inc. and Guidant Corporation. Many of the Company's
competitors have substantially greater name recognition and financial resources
than the Company and also have greater resources and expertise in the areas of
research and development, obtaining regulatory approvals, manufacturing and
marketing. There can be no assurance that the Company's competitors will not
succeed in developing and marketing technologies and products that are more
effective than those developed and marketed by the Company or that would render
the Company's technology and products obsolete or noncompetitive. Additionally,
there is no assurance that the Company will be able to compete effectively
against such competitors in terms of manufacturing, marketing and sales. Also,
there can be no assurance that the Company's products will be able to
demonstrate clinical efficacy or cost effectiveness advantages over competing
products, or that clinical trials will demonstrate such advantages.
The Company believes that the primary competitive factors in the market for
arterial closure devices are clinical need, complications, efficacy, time to
patient ambulation and discharge, ease of use and price. In addition, the length
of time required for products to be developed and to receive regulatory and, in
some cases, reimbursement approval is an important competitive factor. The
medical device industry is characterized by rapid and significant technological
change. Accordingly, the Company's success will depend in part on its ability to
respond quickly to medical and technological changes through the development and
introduction of new products. Product development involves a high degree of risk
and there can be no assurance that the Company's new product development efforts
will result in any commercially successful products.
In addition, the medical device market is generally characterized by rapid
change and by frequent emergence of new technologies, products and procedures.
There can be no assurance that any such new technologies, products or procedures
will not reduce the number of coronary catheterization procedures performed.
PATENTS AND PROPRIETARY RIGHTS
Perclose's policy is to protect its proprietary position by, among other
methods, filing United States and foreign patent applications to protect
technology, inventions and improvements that are important to its business. The
Company has three issued United States patents covering certain aspects of the
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percutaneous suturing technology used in the Company's products and has
exclusive licenses under two additional issued patents relating to a different
method of percutaneous suturing not currently employed by the Company's
products. The Company has six United States patent applications pending in the
areas of device design, percutaneous suturing for vascular puncture sites and
accessory devices. The Company has also licensed, on a nonexclusive basis,
certain coating technology used in its products. Under the license, the Company
is obligated to pay royalties on sales of products using this coating
technology. The Company has also filed several international patent applications
corresponding to certain of its United States patent applications.
The patent positions of medical device companies, including those of the
Company, are uncertain and involve complex and evolving legal and factual
questions. The coverage sought in a patent application either can be denied or
significantly reduced before or after the patent is issued. Consequently, there
can be no assurance that any patent applications will result in the issuance of
patents, or that the Company's issued or any future patents will provide
significant protection or commercial advantage or will not be circumvented by
others. Since patent applications are secret until patents are issued in the
United States or corresponding applications are published in international
countries, and since publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, the Company cannot be certain
that it was the first to make the inventions covered by each of its pending
patent applications or that it was the first to file patent applications for
such inventions. There can be no assurance that patents held by or licensed to
the Company or any patents that may be issued as a result of the Company's
pending or future patent applications will be of commercial benefit, afford the
Company adequate protection from competing products or technologies or will not
be challenged by competitors or others or declared invalid. Also, there can be
no assurance that the Company will have the financial resources to defend its
patents from infringement or claims of invalidity.
In the event a third party has also filed a patent application relating to
an invention claimed in a Company patent application, the Company may be
required to participate in an interference proceeding declared by the USPTO to
determine priority of invention, which could result in substantial uncertainties
and costs to the Company, even if the eventual outcome is favorable to the
Company. There can be no assurance that any patents issued to the Company would
be held valid by a court of competent jurisdiction.
The Company relies upon trade secret protection for certain unpatented
aspects of other proprietary technology. There is no assurance that others will
not independently develop or otherwise acquire substantially equivalent
proprietary information or techniques, others will not otherwise gain access to
the Company's proprietary technology or disclose such technology, or the Company
can meaningfully protect its trade secrets.
The Company typically requires its employees and consultants to execute
appropriate confidentiality and proprietary information agreements upon the
commencement of employment or consulting relationship with the Company. 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, except 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 invention provisions. There can be no
assurance, however, that these agreements will provide meaningful protection or
adequate remedies for the Company in the event of unauthorized use, transfer or
disclosure of such information or inventions.
GOVERNMENT REGULATION
UNITED STATES REGULATION. The Company's systems are regulated in the United
States as medical devices by the FDA under the Federal Food, Drug, and Cosmetic
Act ("FDC Act") and require premarket clearance or approval by the FDA prior to
commercialization. In addition, certain material
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<PAGE>
changes or modifications to medical devices also are subject to FDA review and
clearance or approval. Pursuant to the FDC Act, the FDA regulates the research,
testing, manufacture, safety, labeling, storage, record keeping, advertising,
distribution and production of medical devices in the United States.
Noncompliance with applicable requirements can result in warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, failure of the government to grant premarket clearance
or premarket approval for devices, and criminal prosecution. Medical devices are
classified into one of three classes, Class I, II or III, on the basis of the
controls deemed by the FDA to be necessary to reasonably ensure their safety and
effectiveness. Class I devices are subject to general controls (e.g., labeling,
premarket notification and adherence to GMPs). Class II devices are subject to
general controls and to special controls (e.g., performance standards,
postmarket surveillance, patient registries and FDA guidelines). Generally,
Class III devices are those which must receive premarket approval by the FDA to
ensure their safety and effectiveness (e.g., life-sustaining, life-supporting
and implantable devices, or new devices which have not been found substantially
equivalent to legally marketed devices), and require clinical testing to ensure
safety and effectiveness and FDA approval prior to marketing and distribution.
The FDA also has the authority to require clinical testing of Class I and Class
II devices. A PMA application must be filed if the proposed device is not
substantially equivalent to a legally marketed predicate device or if it is a
Class II device for which the FDA has called for such applications.
If human clinical trials of a device are required and if the device presents
a "significant risk," the manufacturer or the distributor of the device is
required to file an IDE application prior to commencing human clinical trials.
The IDE application must be supported by data, typically including the results
of animal and, possibly, mechanical testing. If the IDE application is approved
by the FDA, human clinical trials may begin at a specific number of
investigational sites with a maximum number of patients, as approved by the
agency. Sponsors of clinical trials are permitted to sell those devices
distributed in the course of the study provided such costs do not exceed
recovery of the costs of manufacture, research, development and handling. The
clinical trials must be conducted under the auspices of an independent
institutional review board ("IRB") established pursuant to FDA regulations.
Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
510(k) notification or approval of a PMA application. If a medical device
manufacturer or distributor can establish that a device is "substantially
equivalent" to a legally marketed Class I or Class II device, or to a Class II
device for which the FDA has not called for PMAs, the manufacturer or
distributor may seek clearance from the FDA to market the device by filing a
510(k) notification. The 510(k) notification may need to be supported by
appropriate data establishing the claim of substantial equivalence to the
satisfaction of the FDA. The FDA recently has been requiring a more rigorous
demonstration of substantial equivalence.
Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an order
is issued by the FDA. No law or regulation specifies the time limit by which the
FDA must respond to a 510(k) notification. At this time, the FDA typically
responds to the submission of a 510(k) notification within 150 to 200 days. An
FDA order may declare that the device is substantially equivalent to another
legally marketed device and allow the proposed device to be marketed in the
United States. The FDA, however, may determine that the proposed device is not
substantially equivalent or require further information, including clinical
data, to make a determination regarding substantial equivalence. Such
determination or request for additional information could delay market
introduction of the products that are the subject of the 510(k) notification.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to a legally marketed device, the
manufacturer or distributor must seek premarket approval of the proposed device
through submission of a PMA application. A PMA application must be supported by
extensive data, including preclinical and clinical trial data, as well as
extensive literature to prove the safety and effectiveness of the device.
Following receipt of a PMA application, if the FDA determines that the
application is sufficiently complete to permit a substantive review, the FDA
will "file"
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the application. Under the FDC Act, the FDA has 180 days to review a PMA
application, although the review of such an application more often occurs over a
protracted time period, and generally takes approximately two years or more from
the date of filing to complete.
The PMA application approval process can be expensive, uncertain and
lengthy. A number of devices for which premarket approval has been sought have
never been approved for marketing. The review time is often significantly
extended by the FDA, which may require more information or clarification of
information already provided in the submission. During the review period, an
advisory committee likely will be convened to review and evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's GMP requirements prior to approval of an
application. If granted, the approval of the PMA application may include
significant limitations on the indicated uses for which a product may be
marketed.
The Company received approval of a PMA application with the FDA to sell the
Prostar systems commercially in the United States and has filed PMA Supplement
applications for the Techstar, Techstar XL, Prostar Plus and Prostar XL systems.
There can be no assurance that the Company will be able to obtain further PMA
application approvals to market its systems, 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.
The Company is also required to register as a medical device manufacturer
with the FDA and state agencies, such as the CDHS, and to list its products with
the FDA. The Company has been inspected and been approved by both the FDA and
the CDHS for compliance with the FDA's GMP and other applicable regulations.
These regulations require that the Company manufacture its products and maintain
its documents in a prescribed manner with respect to manufacturing, testing and
control activities. Further, the Company is required to comply with various FDA
requirements for design, safety, advertising and labeling. in June 1995, the
Company's Menlo Park, California facility was inspected by the CDHS, and the
Company was subsequently granted a California medical device manufacturing
license.
The Company is required to provide information to the FDA on death or
serious injuries alleged to have been associated with the use of its medical
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur. In addition, the
FDA prohibits an approved device from being marketed for unapproved
applications. If the FDA believes that a company is not in compliance with the
law, it can institute proceedings to detain or seize products, issue a recall,
enjoin future violations and assess civil and criminal penalties against the
company, its officers and its employees. Failure to comply with the regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.
The advertising of most FDA-regulated products is subject to both FDA and
Federal Trade Commission jurisdiction. The Company also is subject to regulation
by the Occupational Safety and Health Administration and by other governmental
entities.
Regulations regarding the manufacture and sale of the Company's products are
subject to change. The Company cannot predict what impact, if any, such changes
might have on its business, financial condition or results of operations.
INTERNATIONAL REGULATION. International sales of the Company's products are
subject to the regulatory agency product registration requirements of each
country. The regulatory review process varies from country to country. The
Company's distributors have obtained regulatory approval in several
international markets. At this time, the 8F and 10F Prostar systems and the 6F,
7F and 6FS Techstar systems are being marketed in Germany, France, the United
Kingdom, the Italy, Switzerland, Israel and Japan under regulatory approvals
where required.
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The Company has implemented policies and procedures to allow the Company to
receive ISO 9001 qualification of its processes. The ISO 9000 series of
standards for quality operations has been developed to ensure that companies
know the standards of quality to which they must adhere to receive
certification. The European Union has promulgated rules which require that
medical products receive by mid-1998 the right to affix the CE mark, an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives. ISO 9000 certification is
one of the CE mark certification requirements. In July 1996 the Company received
the CE mark certification.
The Company, through its Japanese distributor, has received regulatory
approval for commercial sale of its products in Japan and intends to commence
clinical trials in Japan that will form the basis of an application for
reimbursement approvals in the Japanese health care system. The Company's
distributor will be responsible for management of clinical trials and obtaining
reimbursement approval for the Prostar and Techstar systems in Japan. There can
be no assurance such approvals will be obtained in a timely manner or at all.
THIRD-PARTY REIMBURSEMENT
Market acceptance of the Company's products in international markets may be
dependent in part upon the availability of reimbursement within prevailing
health care payment systems. However, in general, the Company's customers do not
receive specific, cost based direct reimbursement for the use of Perclose
products.
Reimbursement and health care payment systems in international markets vary
significantly by country. The main types of health care payment systems in
international markets are government sponsored health care and private
insurance. Countries with government sponsored health care, such as the United
Kingdom, have a centralized, nationalized health care system. New devices are
brought into the system through negotiations between departments at individual
hospitals at the time of budgeting. In most foreign countries, there are also
private insurance systems that may offer payments for alternative therapies.
Although not as prevalent as in the United States, health maintenance
organizations are emerging in certain European countries. Currently, users of
the Company's products in Germany have obtained reimbursement from certain
private payors. The Company's products have also been purchased by hospitals in
nationalized systems in the United Kingdom and Canada. The Company received
governmental reimbursement approvals for private hospitals in France that was
subsequently withdrawn in October 1996. The Company is attempting to restore its
reimbursement with the French health care regulatory authorities. Through its
local distributor, the Company intends to undertake clinical studies in Japan to
support governmental reimbursement approvals. The Company may not receive
reimbursement approvals in Japan in a timely manner, or at all. The Company may
seek additional international reimbursement approvals, although there can be no
assurance that any such approvals will be obtained in a timely manner, or at
all, and failure to receive additional 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.
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 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. The Company anticipates that hospital
administrators and physicians will justify the additional cost of an arterial
access site closure device by the attendant cost savings and clinical benefits
derived from the use of the Company's products.
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Separate reimbursement for the Company's products is not expected to be
available in the United States and there can be no assurance that reimbursement
for the Company's products will be available in international markets under
either governmental or private reimbursement systems. 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.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves the risk of product liability claims. The
Company has not experienced any product liability claims to date. Although the
Company maintains product liability insurance with coverage limits of $1.0
million per occurrence and an annual aggregate maximum of $1.0 million, there
can be no assurance that product liability claims will not exceed such insurance
coverage limits, which could have a material adverse effect on the Company, or
that such insurance will be available on commercially reasonable terms or at
all.
EMPLOYEES
As of May 31, 1997, the Company had 132 full-time employees. Approximately
14 persons were engaged in research and development activities, 57 persons were
engaged in manufacturing and manufacturing engineering, nine persons were
engaged in quality assurance and regulatory affairs, 41 persons were engaged in
sales and marketing and 11 persons were engaged in general and administrative
functions. No employees are covered by collective bargaining agreements, and the
Company believes it maintains good relations with its employees. The Company is
dependent upon a number of key management and technical personnel, and the loss
of services of one or more key employees would have a material adverse effect on
the Company.
ADDITIONAL RISK FACTORS
LIMITED OPERATING HISTORY. The Company has a limited history of operations.
Since its inception in March 1992 through 1994, the Company was primarily
engaged in research and development of its percutaneous arterial access site
closure products. Since December 1994, the Company has generated limited
revenues from international sales in certain markets and since May 1997 has
generated limited revenues from the United States. The Company does not have
experience in manufacturing, marketing or selling its products in quantities
necessary for achieving profitability. There can be no assurance that the
Company's product systems will be further commercialized or that the Company
will achieve significant revenues from either international or United States
sales. In addition, there can be no assurance that the Company will achieve or
sustain profitability in the future.
HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES. The Company has
experienced significant operating losses since inception and, as of March 31,
1997, had an accumulated deficit of $28.0 million. The development and further
commercialization of the Company's current products and other new products, if
any, will require substantial development, clinical, regulatory, manufacturing
and other expenditures. The Company expects its operating losses to continue for
at least the next year 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.
FLUCTUATIONS IN OPERATING RESULTS. The Company's results of operations may
fluctuate significantly from quarter to quarter and will depend upon numerous
factors, including actions relating to
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regulatory and reimbursement matters, progress of clinical trials, the extent to
which the Company's products gain market acceptance, introduction of alternative
means from arterial access site closure and competition. Results of operations
will also be affected by the timing of orders received from distributors, the
extent to which the Company expands its international distribution network and
the ability of distributors to effectively promote the Company's products.
DEPENDENCE UPON INTERNATIONAL OPERATIONS AND SALES. Prior to May 1997 all
of the Company's product sales were outside the United States. The Company
currently relies on contract manufacturers in Europe for final assembly,
sterilization, testing, packaging and shipment of products sold internationally.
The Company markets and sells its products outside the United States primarily
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 and use of international contract
manufacturers are subject to several risks, including the risk of financial
instability of distributors or contract manufacturers, 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.
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 and
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, 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 system or any future product
in any international market.
LIMITED SALES AND MARKETING EXPERIENCE. The Company has only limited
experience marketing and selling its 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
countries, Japan and Israel. The Company has 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 retain direct sales
personnel or that future sales efforts of the Company will be successful.
RISK OF INADEQUATE FUNDING. The Company plans to continue to expend
substantial funds for clinical trials in support of regulatory and reimbursement
approvals, expansion of sales and marketing activities, research and
development, and establishment of commercial-scale manufacturing capabilities.
The Company may be required to expend greater-than-anticipated funds if
unforeseen difficulties arise in the course of clinical trials of the Perclose
systems, in connection with obtaining necessary regulatory and reimbursement
approvals or in other aspects of the Company's business. Although the Company
believes that its current cash balances and cash generated from the future sale
of products will be sufficient to meet the Company's operating and capital
requirements through calendar 1998, there can be no assurance that the Company
will not require additional financing within this time frame. The Company's
future liquidity and capital requirements will depend upon numerous factors,
including the progress of the Company's
15
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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. Any additional required financing may
not be available on satisfactory terms, if at all. Future equity financings may
result in dilution to the holders of the Company's Common Stock.
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 also 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.
POSSIBLE VOLATILITY OF STOCK PRICE. The stock market has from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. In
addition, the market price of the shares of Common Stock is likely to be highly
volatile. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new products by the Company or its
competitors, FDA and international regulatory actions, actions with respect to
reimbursement matters, developments with respect to patents or proprietary
rights, public concern as to the safety of products developed by the Company or
others, changes in health care policy in the United States and internationally,
changes in stock market analyst recommendations regarding the Company, other
medical device companies or the medical device industry generally and general
market conditions may have a significant effect on the market price of the
Common Stock.
The executive officers of the Registrant, who are elected by the board of
directors, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- --------------------------------------------------------------------------
<S> <C> <C>
Henry A. Plain, Jr.............. 39 President, Chief Executive Officer and Director
Randolph E. Campbell............ 40 Vice President, Operations
Jeffrey M. Closs................ 36 Vice President, International Sales and Marketing
Ronald W. Songer................ 39 Vice President, Research and Development
Kenneth E. Ludlum............... 44 Vice President, Finance and Administration and Chief Financial Officer
Coy F. Blevins.................. 49 Vice President, U.S. Sales
John G. McCutcheon.............. 36 Vice President, Marketing
</TABLE>
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MR. PLAIN joined Perclose in February 1993 as President and Chief Executive
Officer and a member of the Company's board of directors. From 1981 until
joining the Company, Mr. Plain held various management positions in the
pharmaceutical, agricultural and medical device units of Eli Lilly and Company
("Lilly"), a diversified pharmaceutical and medical products company, serving
most recently as Director of Worldwide Manufacturing Human Resources from
November 1992 to February 1993. Mr. Plain served as Director of Marketing at
Devices for Vascular Intervention ("DVI"), then a subsidiary of Lilly, from June
1991 to November 1992 and as Human Resource Manager at DVI from February 1990
through June 1991. Mr. Plain holds a B.S. in Finance from the University of
Missouri.
MR. CAMPBELL joined Perclose in January 1994 as Vice President of
Operations. From 1986 until joining the Company, Mr. Campbell held various
management positions at DVI, serving most recently as Director of Manufacturing
Engineering from 1992 to 1994 and previously as Director of Product Development
from 1990 to 1992. Mr. Campbell holds a B.S. in Chemical Engineering from the
University of California at Berkeley.
MR. CLOSS joined Perclose in January 1994 as Vice President of International
Sales and Marketing and General Manager, Europe. From 1991 until joining the
Company, Mr. Closs was Director of Sales and Marketing, Europe, Middle East and
Africa for DVI. From June 1985 to May 1991, Mr. Closs held positions in sales
and marketing with the Bentley Laboratories Division of Baxter Healthcare
Corporation. Mr. Closs holds a B.A. in Psychology from the University of
California at Los Angeles and an M.B.A. from Emory University.
MR. SONGER joined Perclose in April 1993 as Vice President of Research and
Development. From 1990 until joining Perclose, Mr. Songer was Director of
Catheter Systems Research and Development for The Spectranetics Corporation, a
manufacturer of laser atherectomy systems. Prior to joining Spectranetics, Mr.
Songer was Manager of Research and Development for the movable wire systems unit
of ACS. Mr. Songer holds a B.S. in Nuclear Engineering from the University of
California at Santa Barbara and an M.S. in Mechanical Engineering from the
University of California at Berkeley.
MR. LUDLUM joined Perclose as Vice President of Finance and Administration
and Chief Financial Officer in May 1996. From November 1995 until joining
Perclose, Mr. Ludlum was an independent business and financial consultant to
health care and high growth companies. From November 1993 to November 1995, Mr.
Ludlum was Vice President, Finance & Administration and Chief Financial Officer
of RiboGene, Inc., a biopharmaceutical company. From December 1991 to November
1993, Mr. Ludlum was Vice President, Finance and Administration, Treasurer,
Chief Financial Officer and Secretary of Alteon Inc., a publicly traded
biopharmaceutical company developing therapies for diabetes. From 1986 to
December 1991, Mr. Ludlum held various positions with Montgomery Securities,
most recently as a Partner in the health care finance group. Mr. Ludlum holds a
B.S. in business from Lehigh University and an M.B.A. from Columbia Business
School.
MR. BLEVINS joined Perclose as Director of U.S. Sales in January 1994 and
was promoted to Vice President, U.S. Sales in July 1996. From 1990 through 1993
Mr. Blevins was a Regional Sales Manager with DVI.
MR. MCCUTCHEON joined Perclose in January 1994 as Director of Marketing. In
July 1996 Mr. McCutcheon was promoted to Vide President, Marketing. From 1992
until joining the Company, Mr. McCutcheon was Marketing Manager at DVI. Form
1985 to 1992, Mr. McCutcheon held positions in sales and marketing with the
Bentley Laboratories Division of Baxter Healthcare Corporation. Mr. McCutcheon
holds a B.A. in Economics and in Psychology and an M.B.A., both from the
University of California, Los Angeles.
17
<PAGE>
ITEM 2. PROPERTIES
The Company leases approximately 31,000 square feet consisting of two
adjacent facilities in Menlo Park, California. One of these facilities has an
environmental controlled, class 10,000 clean room for medical device assembly
together with warehouse, laboratory and office space. The facility leases have
terms expiring in August 1998 and February 1999. The Company believes its
facilities are adequate to meet its immediate requirements but is planning to
relocate to a larger facility in calendar 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market (ticker
symbol PERC). The approximate number of record holders of the Company's Common
Stock at May 30, 1997 was 289. The Company has not paid any dividends since its
inception and does not intend to pay any dividends in the foreseeable future.
The Company completed an initial public offering of 2,500,000 shares of
Common Stock in November 1995. Prior to the initial public offering, the
Company's Common Stock was not publicly traded.
Quarterly high and low bid prices of the Company's Common Stock are as
follows:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Fiscal Year Ended March 31, 1996
11/7/95-12/31/95................................................... $19 1/8 $12 3/4
Quarter Ended 3/31/96.............................................. 26 1/4 15
Fiscal Year Ended March 31, 1997
Quarter Ended 6/30/96.............................................. 24 3/4 20 1/2
Quarter Ended 9/30/96.............................................. 23 1/4 13
Quarter Ended 12/31/96............................................. 24 1/4 16
Quarter Ended 3/31/97.............................................. 27 3/4 19
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to the
portion of the Registrant's 1997 annual report to stockholders entitled
"Selected Financial Data" and is included in Exhibit 13.1 to this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated by reference to the
portion of the Registrant's 1997 annual report to stockholders entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and is included in Exhibit 13.1 to this report.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
portion of the Registrant's 1997 annual report to stockholders entitled
"Financial Statements" and is included in Exhibit 13.1 to this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report on Form
10-K in that the Registrant will file a definitive proxy statement within 120
days after the end of its fiscal year pursuant to Regulation 14A with respect to
the 1997 Annual Meeting of Stockholders (the "Proxy Statement") to be held July
15, 1997 and certain information included therein is incorporated herein by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to directors is incorporated
by reference to the information under the caption "Proposal No. 1 -- Election of
Directors" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the caption "Record Date and Stock Ownership" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" in the Proxy Statement.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following Financial Statements of Perclose, Inc. and Report of Ernst
& Young LLP, Independent Auditors are incorporated by reference in the
respective portions of the Registrant's 1997 annual report to
stockholders included in Exhibit 13.1 to this report:
Report of Ernst & Young LLP, Independent Auditors
Balance Sheets, March 31, 1997 and 1996
Statements of Operations, Years Ended March 31, 1997, 1996 and 1995
Statements of Stockholders' Equity, Years Ended March 31, 1997, 1996
and 1995
Statements of Cash Flows, Years Ended March 31, 1997, 1996 and 1995
Notes to Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedule entitled "Valuation and Qualifying
Accounts" is included at page S-1 of this Form 10-K.
All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or the notes
thereto.
3. EXHIBITS
Refer to (c) below.
(B) REPORTS ON FORM 8-K
The Company was not required to and did not file any reports on Form 8-K
during the three months ended March 31, 1997.
(C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
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.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
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 Second amendment to Lease Agreement dated September 10, 1996.
10.7 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 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 Promissory Note between the Registrant and John G. McCutcheon dated January 31, 1997.
11.1 Statement Re: Computation of Per Share Losses.
13.1 Portions of Annual Report to Stockholders Incorporated by Reference.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (See page 22).
27.1 Financial Data Schedule.
</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.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PERCLOSE, INC.
By: /s/ HENRY A. PLAIN, JR.
-----------------------------------------
Henry A. Plain, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Henry A. Plain, Jr. and Kenneth E.
Ludlum, jointly and severally, his or her attorneys-in-fact, and each with the
power of substitution, for him or her in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------- ---------------------------- -------------
/s/ HENRY A. PLAIN, JR. President, Chief Executive June 18, 1997
--------------------------------- Officer and Director
Henry A. Plain, Jr. (Principal Executive
Officer)
/s/ KENNETH E . LUDLUM Vice President, Finance and June 18, 1997
--------------------------------- Administration and Chief
Kenneth E. Ludlum Financial Officer
(Principal Financial and
Accounting Officer)
/s/ MICHAEL L. EAGLE Director June 18, 1997
---------------------------------
Michael L. Eagle
/s/ VAUGHN D. BRYSON Director June 18, 1997
---------------------------------
Vaughn D. Bryson
/s/ SERGE LASHUTKA Director June 18, 1997
---------------------------------
Serge Lashutka
/s/ JOHN B. SIMPSON, PH.D., M.D. Director June 18, 1997
---------------------------------
John B. Simpson, Ph.D., M.D.
/s/ JAMES W. VETTER, M.D. Director June 18, 1997
---------------------------------
James W. Vetter, M.D.
/s/ MARK A. WAN Director June 18, 1997
---------------------------------
Mark A. Wan
22
<PAGE>
PERCLOSE, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
MARCH 31, 1997
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
OF PERIOD ADDITIONS(1) DEDUCTIONS(2) PERIOD
----------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
March 31, 1995
Allowance for doubtful accounts............................ $ 0 $ 40,000 $ 0 $ 40,000
March 31, 1996
Allowance for doubtful accounts............................ $ 40,000 $ 20,000 $ 40,000 $ 20,000
March 31, 1997
Allowance for returns and doubtful accounts................ $ 20,000 $ 761,000 $ 605,000 $ 176,000
</TABLE>
- ------------------------
(1) Amounts charged to expense during fiscal year, including a $500,000 reserve
for sales returns relating to one distributor in fiscal year 1997.
(2) Doubtful accounts written off and, in fiscal year 1997, sales returns of
$540,000 relating to one distributor and $65,000 relating to miscellaneous
sales returns.
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C>
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 Second amendment to Lease Agreement dated September 10, 1996.
10.7 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 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 Promissory Note between the Registrant and John G. McCutcheon dated January 31, 1997.
11.1 Statement Re: Computation of Per Share Losses.
13.1 Portions of Annual Report to Stockholders Incorporated by Reference.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (See page 22).
27.1 Financial Data Schedule.
</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.
<PAGE>
EXHIBIT 10.6
SECOND AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE, made this 10th day of September, 1996,
between DAVID D. BOHANNON ORGANIZATION, a California corporation, herein
referred to as "Landlord", and PERCLOSE, INC., a Delaware corporation,
(successor in interest to Perclose, Inc., a California corporation), herein
referred to as "Tenant".
RECITALS
1. Landlord and Tenant's predecessor in interest have previously
entered into a Lease entitled "Business Park Lease" dated July 6, 1993 for
demised premises (the "Premises") located at 195-199 Jefferson Drive, Menlo
Park, California, as more particularly described in said Lease.
2. Landlord and Tenant's predecessor in interest have previously
entered into a First Amendment to Lease dated January 31, 1995 (the Lease and
First Amendment to Lease herein collectively referred to as the "Lease")
which First Amendment to Lease demised to Tenant certain additional space
located at 191 and 193 Jefferson Drive as more fully set out therein.
3. Landlord and Tenant now wish to provide for the expansion of Tenant
into additional space located at 177 Jefferson Drive, Menlo Park, California
and to amend the base rent due under the Lease and otherwise modify the
Lease, all as more particularly set forth hereinbelow.
NOW, THEREFORE, in consideration of the covenants and conditions
contained herein, Landlord and Tenant agree to amend the Lease as follows:
1. Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord the Expansion Space located at 177 Jefferson Drive (hereinafter
Expansion Space) as described in EXHIBIT "X" and shown ON EXHIBIT "X-1"
hereto for a term commencing on September 1, 1996 and continuing through and
including September 30, 1998. Base rent for the Expansion Space shall be set
forth in paragraph 2 hereof.
2. Commencing on September 1, 1996, Tenant's base rent under the Lease
shall increase by Forty Thousand Eight Hundred Dollars ($40,800.00) per
annum, payable in twelve (12) equal monthly installments of Three Thousand
Four Hundred Dollars ($3,400.00).
The increase in base rent scheduled to occur as of October 1, 1997 with
respect to the premises demised to Tenant under the Lease shall not apply to
the base rent reserved hereunder for the Expansion Space which will remain
the same throughout the demised term.
3. Tenant accepts the Expansion Space in its "as is" condition;
provided that Landlord agrees to deliver the Expansion Space to Tenant with
all electrical, plumbing and HVAC systems serving the Expansion Space in good
working order. Any improvements to the Expansion Space shall be made by Tenant
at its sole cost and
1
<PAGE>
expense in accordance with plans and specifications therefor which are
subject to Landlord's prior approval.
4. Except as herein modified, the terms of the Lease are and shall
remain the same.
IN WITNESS WHEREOF, the parties have executed this Second Amendment to
Lease as of the date first hereinabove written.
TENANT: LANDLORD:
PERCLOSE, INC., DAVID D. BOHANNON ORGANIZATION,
a Delaware corporation a California corporation
By: /s/ Kenneth E. Ludlum By: /s/ Robert J. Webster
---------------------------------- ---------------------------------
Vice President Vice President
By: /s/ Kenneth E. Ludlum By: /s/ Ernest Lotti, Jr.
---------------------------------- ---------------------------------
Assistant Secretary Assistant Secretary
2
<PAGE>
EXHIBIT "A"
BOHANNON INDUSTRIAL PARK
177 JEFFERSON DRIVE
MENLO PARK, CALIFORNIA
DESCRIPTION OF DEMISED PREMISES
FOR
"PERCLOSE"
All that certain real property situate in the State of California,
County of San Mateo, City of Menlo Park and is described as follows:
A portion of Parcel 2, as said parcel is designated on the map entitled
"PARCEL MAP, BEING A RESUBDIVISION OF PARCEL 2 OF P.M. REC. IN VOLUME 27 AT
PAGE 39 AND PARCELS 2 AND 3 OF P.M. RECORDED IN VOLUME 28 AT PAGE 8, SAN
MATEO COUNTY RECORDS BOHANNON INDUSTRIAL PARK, MENLO PARK, SAN MATEO COUNTY,
CALIFORNIA," which map was filed in the Office of the Recorded of the County
of San Mateo, State of California on January 12, 1976 in Volume 30 of Parcel
Maps at Page 20, more particularly described as follows:
Commencing at the most westerly corner of said Parcel 2, from which corner
the point of beginning of the demised premises bears South 67 DEG. 17' East
171.00 feet and North 22 DEG. 43' East 56.00 feet; Thence from said point
of beginning North 22 DEG. 43' East 100.00 feet; Thence South 67 DEG. 17'
East 40.00 feet; Thence South 22 DEG. 43' West 100.00 feet; Thence North
67 DEG. 17' West 40.00 feet to the point of beginning.
Containing approximately 4,000 SQUARE FEET.
SEPT. 3, 1996
<PAGE>
[FLOOR PLAN]
JEFFERSON DRIVE
EXHIBIT "B"
<PAGE>
EXHIBIT 10.7
THIRD AMENDMENT TO LEASE
THIS THIRD AMENDMENT TO LEASE is made this 21 day of March, 1997,
between DAVID D. BOHANNON ORGANIZATION, a California corporation, herein
referred to as "Landlord", and PERCLOSE, INC., a Delaware corporation, herein
referred to as "Tenant".
RECITALS
1. Landlord and Tenant's predecessor in interest have previously entered
into a Lease entitled "Business Park Lease" dated July 6, 1993 for demised
premises located at 195-199 Jefferson Drive, Menlo Park, California, as more
particularly described in said Lease.
2. Landlord and Tenant's predecessor in interest have previously entered
into a First Amendment to Lease dated January 31, 1995, which First Amendment
to Lease demised to Tenant certain additional space located at 191 and 193
Jefferson Drive as more fully set out therein.
3. Tenant acquired its interest in the Lease as a result of the
reincorporation of Perclose, Inc., a California corporation, to Perclose,
Inc., a Delaware corporation, on or about September 1, 1995.
4. Landlord and Tenant have previously entered into a Second Amendment to
Lease date September 10, 1996 (the Lease, as amended, is herein referred to
as the "Lease"), which Second Amendment to Lease demised to Tenant certain
additional space located at 177 Jefferson Drive, Menlo Park, California, as
more fully set out therein.
5. Landlord and Tenant now wish to provide for the expansion of Tenant
into additional space located at 171 Jefferson Drive and 175 Jefferson Drive,
Menlo Park, California, and to amend the base rent due under the Lease, the
Security Deposit held pursuant to the Lease, and otherwise modify the Lease,
all as more particularly set forth hereinbelow.
NOW, THEREFORE, in consideration of the covenants and conditions contained
herein, Landlord and Tenant agree to amend the Lease as follows:
1. A Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord the demised premises located at 171 Jefferson Drive (hereinafter,
"171 Expansion Space") as described in EXHIBIT "X" and shown on EXHIBIT "X-1"
hereto for a term commencing on February 1, 1997 (the date Landlord delivered
possession of the 171 Expansion Space to Tenant in an "as is" condition), and
continuing through and including February 29, 1999. Base rent for the 171
Expansion Space shall be as set forth in paragraph 1.B. hereof. Effective
February 1, 1997, the 171 Expansion Space shall become part of the demised
premises under the Lease for all purposes set forth therein.
1
<PAGE>
B. Commencing on February 1, 1997, Tenant's base rent under the Lease
shall increase by Forty Eight Thousand Two Hundred Ten Dollars ($48,210.00)
per annum, payable in twelve (12) equal monthly installments of Four Thousand
Seventeen and 50/100 Dollars ($4,017.50).
2. A. Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord the demised premises located at 175 Jefferson Drive (hereinafter,
"175 Expansion Space") as described in EXHIBIT "Y" and shown on EXHIBIT "Y-1"
hereto for a term commencing on the EARLIER to occur of: (i) delivery of
possession of the 175 Expansion Space to Tenant after Landlord's work for
such 175 Expansion Space is completed pursuant to paragraph 6.B. hereinbelow,
or (ii) July 1, 1997 (the "175 Expansion Space Commencement Date"), and
continuing through and including June 30, 1999. Base rent for the 175
Expansion Space shall be as set forth in paragraph 2.B. hereof. Upon the 175
Expansion Space Commencement Date, the 175 Expansion Space shall become part
of the demised premises under the Lease for all purposes set forth herein.
B. Commencing on the 175 Expansion Space Commencement Date, Tenant's
base rent under the Lease shall increase by Sixty Thousand Dollars
($60,000.00) per annum, payable in twelve (12) equal monthly installments of
Five Thousand Dollars ($5,000.00).
3. The increase in base rent scheduled to occur as of October 1, 1997 with
respect to certain premises demised to Tenant under the Lease (i.e., the
191-199 Jefferson Drive premises) shall not apply to the base rent reserved
hereunder for the 171 Expansion Space nor for the 175 Expansion Space which
will remain the same throughout the demised term thereof.
4. Upon execution of this Third Amendment to Lease, Tenant shall pay to
Landlord the amount of Nine Thousand Seventeen and 50/100 Dollars ($9,017.50)
which shall be held as a Security Deposit pursuant to the terms of SECTION
19.9. of the Lease. Upon payment of said amount to Landlord, Tenant's total
Security Deposit held pursuant to the Lease, as amended herein, shall be
Twenty Thousand Six Hundred Fifty Seven and 50/100 Dollars ($20,657.50).
5. The option to extend the demised term of the Lease contained in SECTION
1.3. of the Lease shall apply to the entire demised premises leased by Tenant
(including the 171 Expansion Space and the 175 Expansion Space) pursuant to
the Lease, as amended herein, and the parties agree to the following with
respect thereto:
A. In the event Tenant exercises its option to extend the demised term
of the Lease, the dates of the extended term shall be as follows: (i) for the
demised premises located at 195-199 Jefferson Drive, 191 and 193 Jefferson
Drive, and 177 Jefferson Drive (the "177, 191-199 Jefferson Premises"), from
October 1, 1998, to and including September 30, 2001; (ii) for the 171
Expansion Space (i.e., 171 Jefferson Drive), from March 1, 1999, to and
including February 28, 2002; and (iii) for the 175 Expansion Space (i.e., 175
Jefferson Drive), from July 1, 1999, to and including June 30, 2002.
2
<PAGE>
B. The base rent during the extended term shall be established pursuant
to SECTIONS 1.3, 2.3 AND 19.20 (if applicable) of the Lease, and shall
commence as of the applicable commencement dates of the extended term (i.e.,
October 1, 1998, for the 177, 191-199 Jefferson Premises; March 1, 1999, for
the 171 Expansion Space; and July 1, 1999 for the 175 Expansion Space). The
"fair market rental value" defined in SECTION 2.3 of the Lease shall also
include the value associated with the Tenant Improvements made by Landlord in
the 171 Expansion Space, as provided hereinbelow, as well as all other
improvements made to the 171 Expansion Space and 175 Expansion Space.
C. Should Tenant elect to exercise the option to extend, Tenant's
written notice to Landlord shall be given at least one hundred eighty (180)
days before September 30, 1998, with respect to the entire demised premises,
including the 171 Expansion Space and the 175 Expansion Space.
D. The option to extend the demised term can only be exercised by
Perclose, Inc., a Delaware corporation, for its use of the entire demised
premises and may not be transferred to any assignee, sublessee or other
successor in interest nor may it be exercised by Perclose, Inc., a Delaware
corporation, for any such assignee, sublessee or other successor in interest.
6. A. Subject to the provisions hereof, Landlord shall provide certain
leasehold improvements ("Tenant Improvements") to be made to the 171
Expansion Space in accordance with the plans and specifications dated
December 26, 1996, for the Tenant Improvements (the "Plans") prepared by
Stevens Design (the "Architect"). Once approved by Landlord and Tenant the
Plans shall be made a part hereof as EXHIBIT C. Landlord's and Tenant's
approval of the Plans shall not be unreasonably withheld. The actual cost of
the Tenant Improvements made pursuant to the Plans shall be borne by Landlord.
Immediately following approval of the Plans, Landlord shall apply for all
requisite building permits and approvals for construction of the Tenant
Improvements in accordance with the Plans. On or about June 1, 1997, subject
to the provisions hereof, Landlord shall cause a contractor ("Contractor")
selected by Landlord to commence construction of the Tenant Improvements and
diligently prosecute the same to completion in a good and workmanlike manner
in accordance with the Plans.
Tenant shall have the right to make changes in the Plans on or before
April 30, 1997, provided such changes are approved by Landlord, such approval
not to be unreasonably withheld or delayed, and provided further that the
increased construction costs for any and all changes to the approved Plans
shall be borne by Tenant. Tenant shall pay to Landlord the aggregate net
increase in cost for such changes within five (5) days after substantial
completion of the Tenant Improvements. Any such change(s) may be made only in
a writing approved and signed by Landlord. As used herein the cost of
providing the changes to the Plans shall include all soft costs, including
reasonable fees, architect's fees, fees for permits, consulting engineer
fees, contractor fees, inspection fees, fees for testing services and fees
for processing and completing changes to the Plans, in addition to actual
hard costs of construction.
3
<PAGE>
Landlord and Tenant agree that construction of the Tenant Improvements is
anticipated to commence on or about June 1, 1997, and is anticipated to be
substantially completed on or about July 1, 1997. The parties agree to the
following: (i) the Plans shall be approved by Landlord and Tenant on or
before May 1, 1997, to allow for the timely issuance of building permits and
approvals; (ii) Tenant, its employees, agents, contractors and
representatives, shall vacate the entire 171 Expansion Space before June 1,
1997 (or such later date as advised by Landlord to Tenant if commencement of
construction of the Tenant Improvements is delayed due to a delay in
obtaining building permits or approvals), to allow the Contractor to commence
to construct the Tenant Improvements and shall remain vacated until
substantial completion of the Tenant Improvements; (iii) the applicable
portion of Tenant's base rent for the 171 Expansion Space (i.e., the amount
of $4,017.50) shall abate during the thirty (30) day period during which the
Tenant Improvements are being constructed, and the parties agree that in no
event shall the abatement of said portion of base rent be extended beyond
thirty (30) days; and (iv) upon notice from Landlord to Tenant of the
substantial completion of such work as certified by the Architect, Tenant
shall accept the 171 Expansion Space in an "as is" condition subject to the
punch list items described in the following sentence. Tenant shall, within
thirty (30) days of certification by Architect that the Tenant Improvements
are substantially complete, notify Landlord and Contractor of any items of
work that are defective or incomplete. Landlord shall thereafter diligently
pursue on Tenant's behalf the correction or completion of said items.
B. In addition to the Tenant Improvements to be made to the 171
Expansion Space in accordance with the Plans, Landlord shall, at Landlord's
expense, cause the Contractor to provide and install a fire sprinkler system
in the 171 Expansion Space and 175 Expansion Space.
C. Any additional work to be performed in the 171 Expansion Space and
175 Expansion Space other than that provided for hereinabove and designated
as Landlord's work shall be performed at the sole cost of Tenant in
accordance with detailed plans and specifications therefor which must be
approved, in writing, by Landlord or Landlord's Architect before work is
commenced. Tenant shall furnish Landlord with a set of "as built" plans after
any such work is completed.
4
<PAGE>
7. Except as herein modified, the terms of the Lease are and shall remain
the same.
IN WITNESS WHEREOF, the parties have executed this Third Amendment to
Lease as of the date first hereinabove written.
TENANT: LANDLORD:
PERCLOSE, INC., DAVID D. BOHANNON ORGANIZATION,
a Delaware corporation a California corporation
By: /s/ Hank Plain By: /s/ Robert J. Webster
---------------------------------- ---------------------------------
Vice President Vice President
By: /s/ Kenneth E. Ludlum By: /s/ Ernest Lotti, Jr.
---------------------------------- ---------------------------------
Secretary Assistant Secretary
5
<PAGE>
EXHIBIT "X"
BOHANNON INDUSTRIAL PARK
171 JEFFERSON DRIVE
MENLO PARK, CALIFORNIA
DESCRIPTION OF DEMISED PREMISES
FOR
"PERCLOSE"
All that certain real property situate in the State of California,
Country of San Mateo, City of Menlo Park and is described as follows:
A portion of Parcel 2, as said parcel is designated on the map entitled
"PARCEL MAP, BEING A RESUBDIVISION OF PARCEL 2 OF P.M. REC. IN VOLUME 27 AT
PAGE 39 AND PARCELS 2 AND 3 OF P.M. RECORDED IN VOLUME 28 AT PAGE 8, SAN
MATEO COUNTY RECORDS BOHANNON INDUSTRIAL PARK, MENLO PARK, SAN MATEO COUNTY,
CALIFORNIA," which map was filed in the Office of the Recorded of the County
of San Mateo, State of California on January 12, 1976 in Volume 30 of Parcel
Maps at Page 20, more particularly described as follows:
Commencing at the most westerly corner of said Parcel 2, from which
corner the point of beginning of the demised premises bears South 67 DEG. 17'
East 51.00 feet and North 22 DEG. 43' East 56.00 feet; Thence from said
point of beginning North 22 DEG. 43' East 100.00 feet; Thence South
67 DEG. 17' East 40.00 feet; Thence South 22 DEG. 43' West 40.00 feet;
Thence North 67 DEG. 17' West 13.10 feet; Thence South 22 DEG. 43' West
60.00 feet; Thence North 67 DEG. 17' West 26.90 feet to the point of
beginning.
Containing approximately 3,214 SQUARE FEET, more of less.
Jan. 14, 1997
<PAGE>
[FLOOR PLAN]
JEFFERSON DRIVE
EXHIBIT "X-1"
<PAGE>
EXHIBIT "Y"
BOHANNON INDUSTRIAL PARK
175 JEFFERSON DRIVE
MENLO PARK, CALIFORNIA
DESCRIPTION OF DEMISED PREMISES
FOR
"PERCLOSE"
All that certain real property situate in the State of
California, County of San Mateo, City of Menlo Park and is described as
follows:
A portion of Parcel 2, as said parcel is designated on the map entitled
"PARCEL MAP, BEING A RESUBDIVISION OF PARCEL 2 OF P.M. REC. IN VOLUME
27 AT PAGE 39 AND PARCELS 2 AND 3 OF P.M. RECORDED IN VOLUME 28 AT
PAGE 8, SAN MATEO COUNTY RECORDS BOHANNON INDUSTRIAL PARK, MENLO PARK, SAN
MATEO COUNTY, CALIFORNIA," which map was filed in the Office of the Recorded
of the County of San Mateo, State of California on January 12, 1976 in
Volume 30 of Parcel Maps at Page 20, more particularly described as
follows:
Commencing at the most westerly corner of said Parcel 2, from which
corner the point of beginning of the demised premises bears South 67 DEG. 17'
East 51.00 feet, North 22 DEG. 43' East 56.00 feet and South 67 DEG. 17'
East 80.00 feet; Thence from said point of beginning North 22 DEG. 43' East
100.00 feet; Thence South 67 DEG. 17' East 40.00 feet; South 22 DEG. 43'
West 100.00 feet; Thence North 67 DEG. 17' West 40.00 feet to the point of
beginning.
Containing approximately 4,000 SQUARE FEET, more or less.
March 13, 1997
<PAGE>
[FLOOR PLAN]
JEFFERSON DRIVE
EXHIBIT "Y-1"
<PAGE>
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is effective as of May 8,
1996, by and between Kenneth E. Ludlum (the "Employee") and Perclose, Inc., a
Delaware corporation (the "Company").
R E C I T A L S
A. The Board of Directors of the Company (the "Board") has determined
that it is in the best interests of the Company and its stockholders to
assure that the Company will have the continued dedication and objectivity of
the Employee, notwithstanding the possibility, threat or occurrence of a
Change of Control (as defined below) of the Company.
B. The Board believes that it is imperative to provide the Employee
with certain severance benefits upon the Employee's termination of employment
following a Change of Control which provide the Employee with enhanced
financial security and provide sufficient incentive and encouragement to the
Employee to remain with the Company following a Change of Control.
C. In order to accomplish the foregoing objectives, the Board of
Directors has directed the Company, upon execution of this Agreement by the
Employee, to agree to the terms provided herein.
D. Certain capitalized terms used in the Agreement are defined in
Section 6 below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. DUTIES AND SCOPE OF EMPLOYMENT; CANCELLATION OF EXISTING CONTRACTS.
(a) POSITION. The Company shall employ the Employee in the
position of Vice President, as such position was defined in terms of
responsibilities and compensation as of the effective date of this Agreement;
provided, however, that the Board of Directors shall have the right, prior to
the occurrence of a Change of Control, to revise such responsibilities and
compensation from time to time as the Board of Directors may deem necessary
or appropriate.
(b) OBLIGATIONS. The Employee shall devote his full business
efforts and time to the Company and its subsidiaries. The foregoing,
however, shall not preclude the Employee from engaging in such activities and
services as do not interfere or conflict with his responsibilities to the
Company, including finishing certain consulting projects, such projects not
to exceed three days and to be completed by June 15, 1996.
<PAGE>
(c) EXISTING CONTRACTS. The Company and Employee agree that the
terms of any existing employment agreement will be superseded by the terms
herein at the time there is a Change of Control.
2. BASE COMPENSATION. The Company shall pay the Employee as
compensation for his services a base salary at the annualized rate of
$145,000. Such salary shall be reviewed at least annually and shall be
increased from time to time subject to accomplishment of such performance and
contribution goals and objectives as may be established from time to time by
the Board of Directors. Such salary shall be paid periodically in accordance
with normal Company payroll. The annual compensation specified in this
Section 2, together with any increases in such compensation that the Board of
Directors may grant from time to time, is referred to in this Agreement as
"Base Compensation."
3. EMPLOYEE BENEFITS. The Employee shall be eligible to participate
in the employee benefit plans and executive compensation programs maintained
by the Company applicable to other key executives of the Company, including
(without limitation) retirement plans, savings or profit-sharing plans,
deferred compensation plans, supplemental retirement or excess-benefit plans,
stock option, incentive or other bonus plans, life, disability, health,
accident and other insurance programs, paid vacations, and similar plans or
programs, subject in each case to the generally applicable terms and
conditions of the plan or program in question and to the determination of any
committee administering such plan or program.
4. TERM OF EMPLOYMENT. The Company and the Employee acknowledge that
the Employee's employment is at will, as defined under applicable law. If
the Employee's employment terminates for any reason, the Employee shall not
be entitled to any payments, benefits, damages, awards or compensation other
than as provided by this Agreement, or as may otherwise be available in
accordance with the Company's established employee plans and policies at the
time of termination. The terms of this Agreement shall terminate upon the
earlier of (i) the date that all obligations of the parties hereunder have
been satisfied or (ii) twelve (12) months after a Change of Control. A
termination of the terms of this Agreement pursuant to the preceding sentence
shall be effective for all purposes, except that such termination shall not
affect the payment or provision of compensation or benefits on account of a
termination of employment occurring prior to the termination of the terms of
this Agreement.
5. SEVERANCE BENEFITS.
(a) TERMINATION FOLLOWING A CHANGE OF CONTROL. If the Company
terminates the Employee's employment at any time within 12 months after a
Change of Control, then the Employee shall be entitled to receive severance
benefits as follows:
(i) VOLUNTARY RESIGNATION; INVOLUNTARY TERMINATION. If the
Employee's employment terminates either by Employee's voluntary resignation
or as a result of Involuntary Termination other than for Cause, then the
Employee shall be entitled to receive (a) severance pay
-2-
<PAGE>
equal to six months salary in the case of voluntary resignation and twelve
months salary in the case of Involuntary Termination other than for Cause,
(b) vacation pay equal to the amount of compensation for accrued but unused
vacation time, payable in a lump sum at the time of or prior to the
Termination Date and (c) life, medical, dental, accident and disability
insurance and other similar benefits as are provided by the Company to other
key executives of the Company for six months following the Termination Date
in the case of voluntary resignation and for twelve months following the
Termination Date in the case of Involuntary Termination without Cause. Any
Severance Payment to which Employee is entitled pursuant to this Section
shall be paid on the Termination Date.
(ii) TERMINATION FOR CAUSE. If the Employee is terminated
for Cause, then the Employee shall not be entitled to receive severance or
other benefits except for those (if any) as may then be established under the
Company's then existing severance and benefits plans and policies at the time
of such termination.
(iii) DISABILITY; DEATH. If the Company terminates the
Employee's employment as a result of the Employee's Disability, or such
Employee's employment is terminated due to the death of the Employee, then
the Employee shall not be entitled to receive severance or other benefits
except for those (if any) as may then be established under the Company's then
existing severance and benefits plans and policies at the time of such
Disability or death.
(b) TERMINATION APART FROM CHANGE OF CONTROL. In the event the
Employee's employment is terminated for any reason, either prior to the
occurrence of a Change of Control or after the 12-month period following a
Change of Control, then the Employee shall be entitled to receive severance
and all other benefits for six months following such termination.
(c) OPTIONS. Subject to Section 9 below, upon a Change of Control
100% of the unvested portion of any stock option held by the Employee under
the Company's stock option plans shall automatically be accelerated and the
Employee or the Employee's representative, as the case may be, shall have the
right to exercise all or any portion of such stock option, in addition to any
portion of the option exercisable prior to the Change of Control.
6. DEFINITION OF TERMS. The following terms referred to in this
Agreement shall have the following meanings:
(a) CHANGE OF CONTROL. "Change of Control" shall mean the
occurrence of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing 50% or more of the
total voting power represented by the Company's then outstanding voting
securities; or
-3-
<PAGE>
(ii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all the Company's assets.
(b) INVOLUNTARY TERMINATION. "Involuntary Termination" shall mean
(i) without the Employee's express written consent, the assignment to the
Employee of any duties or the significant reduction of the Employee's duties,
either of which is inconsistent with the Employee's position with the Company
and responsibilities in effect immediately prior to such assignment, or the
removal of the Employee from such position and responsibilities; (ii) without
the Employee's express written consent, a substantial reduction, without good
business reasons, of the facilities and perquisites (including office space
and location) available to the Employee immediately prior to such reduction;
(iii) a reduction by the Company in the Base Compensation of the Employee as
in effect immediately prior to such reduction; (iv) a material reduction by
the Company in the kind or level of employee benefits to which the Employee
is entitled immediately prior to such reduction with the result that the
Employee's overall benefits package is significantly reduced; (v) the
relocation of the Employee to a facility or a location more than 25 miles
from the Employee's then present location, without the Employee's express
written consent; (vi) any purported termination of the Employee by the
Company which is not effected for Disability or for Cause, or any purported
termination for which the grounds relied upon are not valid; or (vii) the
failure of the Company to obtain the assumption of this Agreement by any
successors contemplated in Section 7 below.
(c) CAUSE. "Cause" shall mean (i) any act of personal dishonesty
taken by the Employee in connection with his responsibilities as an employee
and intended to result in substantial personal enrichment of the Employee,
(ii) the conviction of a felony, (iii) a willful act by the Employee which
constitutes gross misconduct and which is injurious to the Company, and (iv)
continued violations by the Employee of the Employee's obligations under
Section 1 of this Agreement which are demonstrably willful and deliberate on
the Employee's part after there has been delivered to the Employee a written
demand for performance from the Company which describes the basis for the
Company's belief that the Employee has not substantially performed his duties.
(d) DISABILITY. "Disability" shall mean that the Employee has been
unable to perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the
Employee or the Employee's legal representative (such Agreement as to
acceptability not to be unreasonably withheld). Termination resulting from
Disability may only be effected after at least 30 days' written notice by the
Company of its intention to terminate the Employee's employment. In the
event that
-4-
<PAGE>
the Employee resumes the performance of substantially all of his duties
hereunder before the termination of his employment becomes effective, the
notice of intent to terminate shall automatically be deemed to have been
revoked.
(e) TERMINATION DATE. "Termination Date" shall mean (i) if this
Agreement is terminated by the Company for Disability, thirty (30) days after
notice of termination is given to the Employee (provided that the Employee
shall not have returned to the performance of the Employee's duties on a
full-time basis during such thirty (30) day period), (ii) if the Employee's
employment is terminated by the Company for any other reason, the last date
of regular employment, as provided for in the notice of termination, provided
that if within thirty (30) days after the Company gives the Employee notice
of termination, the Employee notifies the Company that a dispute exists
concerning the termination, the Termination Date shall be the date on which
the dispute is finally determined, either by mutual written agreement of the
parties, by final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal
having been perfected), or (iii) if the Agreement is terminated by the
Employee, the date on which the Employee delivers the notice of termination
to the Company.
7. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. Any successor to the Company (whether
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's
business and/or assets shall assume the obligations under this Agreement and
agree expressly to perform the obligations under this Agreement in the same
manner and to the same extent as the Company would be required to perform
such obligations in the absence of a succession. For all purposes under this
Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this subsection (a) or which becomes bound by the terms of this
Agreement by operation of law.
(b) EMPLOYEE'S SUCCESSORS. The terms of this Agreement and all
rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
8. NOTICE.
(a) GENERAL. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of
the Employee, mailed notices shall be addressed to him at the home address
which he most recently communicated to the Company in writing. In the case
of the Company, mailed notices shall be addressed to its corporate
headquarters, and all notices shall be directed to the attention of its
Secretary.
-5-
<PAGE>
(b) NOTICE OF TERMINATION. Any termination by the Company for
Cause or by the Employee as a result of a voluntary resignation or an
Involuntary Termination shall be communicated by a notice of termination to
the other party hereto given in accordance with Section 8 of this Agreement.
Such notice shall indicate the specific termination provision in this
Agreement relied upon, shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination under the provision
so indicated, and shall specify the termination date (which shall be not more
than 30 days after the giving of such notice). The failure by the Employee
to include in the notice any fact or circumstance which contributes to a
showing of Involuntary Termination shall not waive any right of the Employee
hereunder or preclude the Employee from asserting such fact or circumstance
in enforcing his rights hereunder.
9. MISCELLANEOUS PROVISIONS.
(a) NO DUTY TO MITIGATE. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement, nor shall
any such payment be reduced by any earnings that the Employee may receive
from any other source.
(b) WAIVER. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed
to in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by
the other party shall be considered a waiver of any other condition or
provision or of the same condition or provision at another time.
(c) WHOLE AGREEMENT. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into
by either party with respect to the subject matter hereof.
(d) CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(e) SEVERABILITY. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full
force and effect.
(f) ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction. Punitive damages shall not be awarded.
(g) NO ASSIGNMENT OF BENEFITS. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option
or assignment, either by voluntary or involuntary assignment or by operation
of law, including (without limitation) bankruptcy, garnish-
-6-
<PAGE>
ment, attachment or other creditor's process, and any action in violation of
this subsection (g) shall be void.
(h) EMPLOYMENT TAXES. All payments made pursuant to this Agreement
will be subject to withholding of applicable income and employment taxes.
(i) ASSIGNMENT BY COMPANY. The Company may assign its rights under
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another affiliate of the Company or to the Company;
provided, however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of assignment.
In the case of any such assignment, the term "Company" when used in a
section of this Agreement shall mean the corporation that actually employs
the Employee.
(j) COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the date set
forth above.
COMPANY PERCLOSE, INC.,
a Delaware corporation
By: /s/ Henry A. Plain, Jr.
-----------------------------------------
Title: President and Chief Executive Officer
-------------------------------------
EMPLOYEE Kenneth E. Ludlum
--------------------------------------------
Kenneth E. Ludlum
-7-
<PAGE>
EXHIBIT 10.12
PROMISSORY NOTE
$200,000.00 January 31, 1997
1. PRINCIPAL AND INTEREST. FOR VALUE RECEIVED, the
undersigned borrower ("Borrower") promises to pay to Perclose, Inc., a
Delaware corporation (the "Company"), or order, at its principal offices
the principal amount of $200,000.00 with interest thereon on the rate of five
and 81/100 percent (5.81%) per annum, compounded annually from the date
hereof, on the unpaid balance of the principal sum. Principal and interest
shall be due and payable on December 31, 1999.
Interest accruing on the principal amount of the Note from the date
hereof until December 31, 1999 shall be added to the principal amount of the
Note. Payments, if any, received between the date hereof and December 31,
1999 shall be considered to be repayments of the principal amount of the Note.
2. REPAYMENT. Notwithstanding the foregoing, in the event that the
Borrower's employment with the Company is terminated for any reason prior to
repayment of the principal of and accrued interest on this Note, all such
outstanding principal and accrued interest shall be due and payable upon the
termination of the Borrower's employment.
In the event of a merger of the Company with or into another corporation
or the sale of substantially all of the assets of the Company, the Note may
be assigned to the successor corporation or a Parent or Subsidiary thereof
(the "Successor Corporation"). If the Note is assigned, the Borrower shall
continue to repay the Note as provided above to the Successor Corporation.
Following such an assignment, in the event that the Borrower's employment
with the Successor Corporation is terminated for any reason prior to
repayment of the principal of and accrued interest on this Note, all such
outstanding principal and accrued interest shall be due and payable upon the
termination of the Borrower's employment.
All principal and interest is payable in lawful money of the United
States of America. THE PRIVILEGE IS RESERVED TO PREPAY ANY PORTION OF THE
NOTE AT ANY TIME WITHOUT PENALTY.
3. SECURITY. This Note is secured by a pledge of options to acquire
10,000 shares of Common Stock of the Company and all shares of Common Stock
issuable upon exercise of such options (collectively, the "Pledged
Securities") held by Borrower. The parties agree that the options to acquire
the Common Stock of the Company which are included among the Pledged
Securities shall be the first options to become vested in the Borrower. The
Borrower shall deliver to the Secretary of the Company as escrow agent
("Escrow Holder") all certificates or instruments representing the Pledged
Securities. In the event of default in payment when due of any indebtedness
under the Note, the Company may elect then, or at any time thereafter, to
exercise all rights available to a secured party under the California Uniform
Commercial Code, including the right to sell the Pledged Securities at a
private or public sale or repurchase the Pledged Securities. The parties
agree that the repurchasing of the Pledged Securities by the Company, or by
any person to whom the Company may
<PAGE>
have assigned its rights hereunder, is commercially reasonable if made at the
Fair Market Value (as defined below) of the Pledged Securities. "Fair Market
Value" means, as of any date, the value of Common Stock determined as follows:
(a) If the Pledged Securities are listed on any established stock
exchange or a national market system, including without limitation
the Nasdaq National Market or The Nasdaq SmallCap Market of The
Nasdaq Stock Market, their Fair Market Value shall be the closing
sales price for such securities (or the closing bid, if no sales
were reported) as quoted on such exchange or system for the last
market trading day prior to the time of determination, as reported
in THE WALL STREET JOURNAL;
(b) If the Pledged Securities are regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair
Market Value of a such securities shall be the mean between the high
bid and low asked prices for such securities on the date of
determination, as reported in THE WALL STREET JOURNAL; or
(c) In the absence of an established market for the Pledged Securities,
the Fair Market Value thereof shall be determined in good faith by
the Board of Directors of the Company.
The proceeds of any sale or repurchase shall be applied in the following
order:
1. To pay all reasonable expenses of the Company in enforcing this
Note, including reasonable attorney's fees.
2. In satisfaction of the remaining indebtedness under the Note.
3. To the Borrower, any remaining proceeds.
Upon full payment by the Borrower of all amounts due on the Note, the
Escrow Holder shall deliver to the Borrower the instrument(s) or
certificate(s) representing the Pledged Securities in the Escrow Holder's
possession belonging to the Borrower and the executed original of the Note
marked "canceled" by the Company, and the Escrow Holder shall be discharged
of all further obligations hereunder.
Except for the above-referenced pledge, none of the Pledged Securities
or any beneficial interest therein shall be transferred, encumbered or
otherwise disposed of in any way until the payment in full of the Note, other
than by will or the laws of descent and distribution; provided, however, that
the Company may, upon request of the Borrower but at the sole discretion of
the Company, consent to the release from escrow of some or all of the Pledged
Securities to the Borrower for the purpose of allowing the Borrower to
exercise some or all of the vested options which are Pledged Securities (the
"Released Options") and to sell the shares of Common Stock issued
-2-
<PAGE>
upon exercise of the Released Options for the purpose of repaying any part
of the principal amount of this Note and/or any part of the accrued interest
thereon.
The Borrower agrees to execute such instruments and other documents and
to take such other actions as the Company shall request for the purpose of
carrying out the purposes of this Section 3.
4. MISCELLANEOUS. Should any action or proceeding be commenced to
collect this Note or any portion of this Note, such sum as the court may deem
reasonable shall be added hereto as attorneys' fees. The Borrower waives
presentment for payment, protest, notice of protest, and notice of nonpayment
of this Note. This Note shall be governed by and construed according to the
laws of the State of California, without regard to the conflicts of law
provisions thereof.
/s/ John G. McCutcheon
------------------------------
(Signature of Borrower)
John G. McCutcheon
------------------------------
(Print Name of Borrower)
Agreed to and accepted as of the date set forth above:
PERCLOSE, INC.
By: /s/ Kenneth E. Ludlum
----------------------------
Name: Kenneth E. Ludlum
--------------------------
Title: Vice President, Finance
and Administration
-------------------------
Date: January 31, 1997
--------------------------
-3-
<PAGE>
PERCLOSE, INC.
EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE LOSSES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------
1997 1996 1995(1)
------------- ------------- -------------
<S> <C> <C> <C>
HISTORICAL
Weighted average common shares outstanding........................... 9,517,229 4,795,295
Shares related to SAB No. 55, 64 and 83.............................. -- 1,229,297
------------- -------------
Number of shares used in computing per share amounts................. 9,517,229 6,024,592
------------- -------------
------------- -------------
Net loss............................................................. $ (9,657,595) $ (8,084,019)
------------- -------------
------------- -------------
Net loss per share................................................... $ (1.01) $ (1.34)
------------- -------------
------------- -------------
PRO FORMA
Weighted average common shares outstanding........................... 4,795,295 1,476,247
Common equivalent shares attributable to convertible preferred
stock.............................................................. 1,828,004 3,133,720
Shares related to SAB No. 55, 64 and 83.............................. 1,229,297 2,107,366
------------- -------------
Number of shares used in computing pro forma per share amounts....... 7,852,596 6,717,333
------------- -------------
------------- -------------
Net loss............................................................. $ (8,084,019) $ (6,992,858)
------------- -------------
------------- -------------
Pro forma net loss per share......................................... $ (1.03) $ (1.04)
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(1) Pro forma Net loss per share is presented for 1995.
<PAGE>
[LOGO]
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except per share data) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Years Ended March 31,
Statements of Operations Data:
Net revenues. . . . . . . . . . . . . . $ 4,456 $ 2,457 $ 178 $ - $ -
Loss from operations. . . . . . . . . . (11,293) (8,860) (7,192) (2,676) (615)
Net loss. . . . . . . . . . . . . . . . (9,658) (8,084) (6,993) (2,624) (608)
Net loss per share(1) . . . . . . . . . (1.01) (1.34) (1.04) - -
Shares used in per share
calculations(1) . . . . . . . . . . . 9,517 6,025 6,717 -
At March 31,
Balance Sheets Data:
Cash, cash equivalents and
short-term investments. . . . . . . . $ 27,673 $37,857 $ 8,127 $ 5,539 $ 1,441
Total assets. . . . . . . . . . . . . . 32,514 40,916 10,949 6,386 1,613
Current liabilities . . . . . . . . . . 3,003 1,905 1,315 487 106
Long term obligations . . . . . . . . . 128 511 593 174 -
Total stockholders' equity. . . . . . . 29,382 38,500 9,041 5,725 1,507
</TABLE>
- ----------------------------
(1) Prior to 1995, statements of operations data omit the historical net loss
per share, as it was not presented in the initial public offering
registration statement pursuant to SEC guidelines. Pro forma net loss per
share is presented for 1995. See Note 1 of Notes to Financial Statements.
<PAGE>
OVERVIEW The Company has a fiscal year ending March 31. Since its inception in
March 1992, the Company has been engaged in the design, development, clinical
testing, manufacture and sale of a family of suture-based Percutaneous
Vascular Surgery (PVS) systems that close the femoral artery access site
following catheter procedures that diagnose or clear blocked arteries. These
products are known as the Prostar, Prostar Plus, Techstar and Techstar XL
systems. The Company has received regulatory approvals where required to
market certain of these products in Europe, Canada, Japan and the United
States.
In April 1997 the Company received approval from the United States Food
and Drug Administration ("FDA") for clearance of its Prostar systems for
commercial sale in the United States under the Pre-Market Approval ("PMA")
regulatory pathway. In May 1997 the Company filed an application with the FDA
for clearance of its Techstar systems for commercial sale in the United
States under the Pre-Market Approval Supplement ("PMA Supplement") regulatory
pathway. An Investigational Device Exemption ("IDE") clinical trial for the
Prostar Plus systems was completed in December 1996 and, following completion
of data analysis, the Company plans to submit a PMA Supplement application
for clearance of the Prostar Plus systems for sale in the United States.
There can be no assurance as to when or whether the Company will receive
approval of such PMA Supplement applications. Delays in or the failure to
receive FDA approval of PMA Supplement applications would have a material
adverse effect on the Company's business, financial condition and results of
operations.
RESULTS OF OPERATIONS FISCAL YEARS ENDED MARCH 31, 1997 AND 1996 Net
revenues of $4.5 million in fiscal year 1997 increased from $2.5 million in
fiscal year 1996 as a result of increased volume of Techstar and Prostar Plus
shipments to international distributors. Sales attributable to the Company's
German, French and Japanese distributors in fiscal 1997 were 59%, 15% and 15%
of total sales, respectively. Sales to the French distributor were lower than
anticipated due to the French government's discontinuation of direct
reimbursement to private French hospitals for the use of Perclose products in
October 1996. The Company and its distributor are currently formulating
different reimbursement and marketing strategies for selling the Company's
products in France. The fiscal year 1996 revenues of $2.5 million represented
shipments of Prostar, Prostar Plus and Techstar systems to international
distributors.
Cost of goods sold decreased to $4.7 million in fiscal year 1997 from
$4.8 million in fiscal year 1996 as a result of higher costs of producing
earlier versions of products in fiscal year 1996 that have been phased out of
the product mix and efficiencies gained in manufacturing in fiscal year 1997.
Research and development expenses increased 55% to $4.7 million in
fiscal year 1997 from $3.1 million in fiscal year 1996. This increase was
primarily the result of costs associated with the Prostar Plus and Techstar
U.S. clinical studies, additional personnel required for continued product
development of the Company's PVS products and the development of new products.
Marketing, general and administrative expenses increased 81% to $6.3
million in fiscal year 1997 from $3.5 million in fiscal year 1996. The
increase was primarily due to increases in sales and marketing personnel,
expansion of the Company's European and United States field sales forces,
other sales and marketing expenditures and, to a lesser degree, increased
administrative personnel costs.
Net interest income increased to $1.6 million for fiscal year 1997 from
$776,000 for fiscal year 1996, primarily due to the higher cash and
investment balances for a full year in fiscal year 1997 versus approximately
half a year in fiscal 1996 from the Company's initial public offering, which
occurred on November 7, 1995.
FISCAL YEARS ENDED MARCH 31, 1996 AND 1995 Net revenues of $2.5 million in
fiscal year 1996 were the result of Prostar, Prostar Plus and Techstar
shipments to international distributors, with 53% and 25% of the
PERCLOSE NINE ANNUAL REPORT
<PAGE>
sales attributable to the Company's German and French distributors,
respectively. The Company commenced international commercial shipments in
December 1994 and for fiscal year 1995 had total net revenues of $178,000
representing initial shipments of Prostar systems to the Company's German,
English and Canadian distributors.
Cost of goods sold increased to $4.8 million in fiscal year 1996 from
$2.1 million in fiscal year 1995 as a result of direct material costs
associated with products sold and a significant increase in personnel and
other costs associated with the commencement of manufacturing and assembly
operations, manufacturing engineering and support functions, and a materials
procurement and handling function.
Research and development expenses were approximately equal at $3.1
million in fiscal year 1996 and fiscal year 1995. Fiscal year 1996 had higher
costs associated with additional personnel required for new product
development of the Company's Prostar, Prostar Plus and Techstar systems when
compared to fiscal year 1995, but fiscal 1995 included a license fee totaling
$378,000.
Marketing, general and administrative expenses increased 62% to $3.5
million in fiscal year 1996 from $2.2 million in fiscal year 1995. The
increase was primarily due to increases in personnel and costs associated with
the expansion of the Company's European branch office, marketing
expenditures, physician training expenses related to the international
commercial introduction of the Prostar and Techstar systems and increased
administrative personnel in the United States.
Net interest income increased to $775,000 for fiscal year 1996 from
$199,000 for fiscal year 1995 as a result of higher cash and investment
balances from the Company's initial public offering in November 1995.
INCOME TAXES The Company has not generated any net income to date and
therefore has not paid any federal income taxes since its inception. No
income tax benefit has been recorded for the net operating losses incurred in
the fiscal years ended March 31, 1997, 1996, and 1995. Accordingly,
valuation allowances, in amounts equal to the net deferred tax assets as of
March 31, 1997, 1996, and 1995 have been established in each period.
LIQUIDITY AND CAPITAL RESOURCES During the fiscal years ended March 31,
1997, 1996 and 1995 the Company used cash to fund operations of $8.5 million,
$7.3 million, and $7.0 million respectively. The increase in cash used in
operations during fiscal year 1997 was due to increases in spending on sales
and marketing personnel and related expenditures, higher expenses associated
with increased research and development activities, and, to a lesser degree,
increased general and administrative expenses.
The Company's net cash provided by investing activities was $1.9 million
in fiscal year 1997 compared to net cash used in investing activities of
$24.2 million and $2.5 million in fiscal 1996 and fiscal 1995, respectively.
In fiscal 1997, net proceeds from short-term investments generated $3.1
million in cash that was offset by $1.3 million used for purchases of
equipment. These equipment purchases were primarily for computer and
production equipment due to increased personnel hires and manufacturing
activities. In fiscal 1996 and fiscal 1995, net cash used included net
purchases of short-term investments of $24.8 million versus $1.4 million and
purchases of equipment of $0.5 million versus $1.0 million.
Net cash used in financing activities of $0.5 million in 1997 was due to
payment of notes payable and the issuance of employee notes receivables.
Issuances of common stock and preferred stock provided net cash of $37.6
million in fiscal 1996 and $10.7 million in fiscal 1995.
The Company's principal source of liquidity at March 31, 1997 consisted
of cash, cash equivalents and short-term investments of $27.7 million. From
inception through March 31, 1997, Perclose raised $22.7 million in net
proceeds of private equity financings and stock option exercises and $34.2
million in an initial public offering. In addition, the Company borrowed $1.3
million under an equipment credit facility.
The Company anticipates that its operating losses will continue for at
least the next year since it plans to expend substantial resources in
funding clinical trials in
PERCLOSE TEN ANNUAL REPORT
<PAGE>
support of regulatory approvals and continues to expand research,
development, 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 1998, there can be no
assurance that the Company will not require additional financing within this
time frame. There can be no assurance that additional financing, if required,
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
This 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. The Company's future results of operations could vary
significantly as a result of the factors described in this section.
The Prostar, Prostar Plus, Techstar, and Techstar XL systems are
currently the Company's only products. The Prostar systems have been approved
in the United States by the FDA and other products have been approved in
certain international markets by the appropriate regulatory authorities. The
clinical data that have been obtained to date on the Techstar, Techstar XL
and Prostar Plus systems has not been reviewed 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, the clinical trial data may identify significant technical or other
obstacles to be overcome prior to obtaining necessary United States
regulatory or United States and international reimbursement approvals. If the
Techstar, Techstar XL, and Prostar Plus systems do not prove to be safe and
effective in United States clinical trials or if the Company is otherwise
unable to commercialize these products successfully in the United States, the
Company's business financial condition and results of operations could be
materially and adversely affected.
In April 1997 the Company received approval from the United States Food
and Drug Administration for clearance of its Prostar systems for commercial
sale in the United States under the Pre-Market Approval regulatory pathway.
In May 1997 the Company filed an application with the FDA for clearance of
its Techstar systems for commercial sale in the United States under the
Pre-Market Approval Supplement regulatory pathway. An IDE clinical trial for
the Prostar Plus systems was completed in December 1996 and, following
completion of data analysis, the Company also plans to submit a PMA
Supplemental application for clearance of the Prostar Plus systems for sale
in the United States. There can be no assurance as to when or whether the
Company will receive approval of such PMA Supplement applications. Delays in
or the failure to receive FDA approval of PMA Supplement applications would
have a material adverse effect on the Company's business, future financial
condition and results of operations.
There can be no assurance as to when or whether the Company will receive
FDA clearance or approval for sale of the Prostar Plus, Techstar or Techstar
XL systems in the United States. There can be no assurance that the Company's
development efforts will be successful or that the Prostar Plus, Techstar and
Techstar XL systems 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,
Techstar, Techstar XL and Prostar Plus systems represent the Company's sole
near-term product focus, the Company could be materially and adversely
affected if these systems are not successfully commercialized.
PERCLOSE ELEVEN ANNUAL REPORT
<PAGE>
The Company's largest markets have been Germany, France and Japan. The
Company, through its Japanese distributor, has applied for and received
regulatory approval to sell the Prostar, Prostar Plus, Techstar and Techstar
XL systems in Japan and intends to commence clinical trials in Japan that
will form the basis of an application for Japanese reimbursement approval.
The Company has received certain reimbursement approvals in certain states in
Germany. In October 1996 the Company's French distributor was informed that
the French government has decided to discontinue direct reimbursement to
private French hospitals for the use of Perclose products. The Company's
products still retain regulatory approval in France. The Company and its
distributor are currently formulating different reimbursement and marketing
strategies for selling the Company's products to private hospitals in France.
The Company experienced a lower level of sales to its French distributor in
the three most recent quarters and it is likely that the Company will, as a
result of the current limited reimbursement availability in France,
experience a lower level of sales in France in future fiscal periods than it
had obtained prior to the September 1996 quarter.
The Company's 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 United States regulatory and
reimbursement approvals are obtained. The Company believes that factors
affecting market acceptance include: recommendations and endorsements from
physicians, that the products represent an attractive alternative to other
means of closing arterial access sites, that the products reduce the time to
ambulation and hospital stays, and the Company's ability to train
international cardiologists. Failure of the Company's products to achieve
significant market acceptance would have a material adverse effect on the
Company's business, financial condition and results of operations.
Perclose has a limited history of operations and has experienced
significant operating losses since inception. As of March 31, 1997 the
Company had an accumulated deficit of $28.0 million. The Company has been
primarily engaged in research and development of its percutaneous vascular
surgery products. The Company has generated limited revenues from
international sales in certain markets, which sales commenced in December
1994, and does not have experience in manufacturing, marketing or selling its
products in quantities necessary for achieving profitability. Manufacturers
often encounter difficulties in scaling up production of new products,
including problems involving production yields, quality control and
assurance, component supply and shortage of qualified personnel. Difficulties
encountered by Perclose in manufacturing scale-up could have a material
adverse effect on its business, financial condition and results of operation.
There can be no assurance that the Prostar, Prostar Plus, Techstar and
Techstar XL systems will be successfully commercialized or that the Company
will achieve significant revenues from either international or domestic
sales. Sales through international distributors are subject to risks,
including the risk of financial instability and the risk that the
distributors will not effectively promote the Company's products. Loss,
termination or ineffectiveness of distributors could have a material adverse
effect 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.
The Company anticipates that its operating losses will continue for at
least the next year since it plans to expend substantial resources in funding
clinical trials in support of regulatory approvals and continues to expand
research, development, marketing and sales activities. Even so there can be
no assurance that the Company will achieve or sustain profitability in the
future.
PERCLOSE TWELVE ANNUAL REPORT
<PAGE>
The Company anticipates that its results of operations will fluctuate on
a quarterly basis for the forseeable future due to several factors, including
actions relating to regulatory and reimbursement matters, progress of
clinical trials, the extent to which the Company's products gain market
acceptance, introduction of alternative means for arterial access site
closure, and competitive developments. Results of operations will also be
affected by the timing of orders received from distributors, the extent to
which the Company expands its international distribution network and the
ability of distributors to effectively promote the Company's products.
Competition in the emerging market for arterial access site closure
devices is expected to be intense and to increase. The Company believes its
principal competition will come from existing compression closure techniques,
as well as newer collagen plug closure devices. Most of the Company's
competitors have significantly greater 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 more attractive than any that are
being developed by the Company, or that such competitors will not succeed in
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 rapid change and by frequent
emergence of new technologies, products or procedures. There can be no
assurance that any such new technologies, products or procedures will not
reduce the number of coronary catheterization procedures performed.
The Company currently manufactures and ships products shortly after
receipt of orders, and the Company anticipates that it will continue to do so
in the future. Accordingly, to date the Company has not developed a
significant backlog and the Company does not anticipate that it will develop
a material backlog in the future.
PERCLOSE THIRTEEN ANNUAL REPORT
<PAGE>
MARCH 31,
----------------------------
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,677,278 $ 9,803,777
Short-term investments 24,995,229 28,052,742
Accounts receivable, net of allowance for
returns and doubtful accounts of $176,000 in
1997 and $20,000 in 1996 1,529,959 923,429
Inventories 743,531 529,606
Prepaid expenses 279,894 274,364
------------ ------------
Total current assets 30,225,891 39,583,918
Equipment and leasehold improvements, net 1,646,723 982,122
Officer notes receivable 400,000 --
Other assets 241,221 350,421
------------ ------------
Total assets $ 32,513,835 $ 40,916,461
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 422,646 $ 317,222
Accrued compensation 852,255 413,840
Accrued license fee 200,000 188,750
Accrued warranty 324,313 79,044
Accrued clinical trial costs 309,812 --
Other accrued expenses 520,247 550,209
Short-term portion of notes payable 373,795 356,153
------------ ------------
Total current liabilities 3,003,068 1,905,218
Long-term portion of notes payable 128,387 510,789
Commitments
Stockholders' equity:
Common stock, $0.001 par value
Authorized shares: 30,000,000
Issued and outstanding shares: 9,566,069 in
1997 and 9,501,782 in 1996 9,564 9,502
Additional paid-in capital 58,308,167 57,372,411
Deferred compensation (891,789) (444,852)
Accumulated deficit (28,043,562) (18,436,607)
------------ ------------
Total stockholders' equity 29,382,380 38,500,454
------------ ------------
Total liabilities and stockholders' equity $ 32,513,835 $ 40,916,461
------------ ------------
------------ ------------
See accompanying notes.
PERCLOSE FOURTEEN ANNUAL REPORT
<PAGE>
Years Ended March 31,
----------------------------------------
1997 1996 1995
------------ ------------ -----------
Net revenues $ 4,455,805 $ 2,457,087 $ 178,152
Operating expenses:
Cost of goods sold 4,703,340 4,772,022 2,149,388
Research and development 4,745,054 3,058,529 3,065,400
Marketing, general and administrative 6,300,895 3,486,188 2,155,304
------------ ------------ -----------
Total operating expenses 15,749,289 11,316,739 7,370,092
------------ ------------ -----------
Loss from operations (11,293,484) (8,859,652) (7,191,940)
Interest income 1,752,831 941,389 258,338
Interest expense (116,942) (165,756) (59,256)
------------ ------------ -----------
Net interest income 1,635,889 775,633 199,082
------------ ------------ -----------
Net loss $ (9,657,595) $ (8,084,019) $(6,992,858)
------------ ------------ -----------
Net loss per share $ (1.01) $ (1.34)
------------ ------------
Shares used in computing net loss
per share 9,517,229 6,024,592
------------ ------------
Pro forma net loss per share $ (1.04)
-----------
Shares used in computing pro forma
net loss per share 6,717,333
-----------
See accompanying notes.
PERCLOSE FIFTEEN ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
----------------- --------------- Paid-in Accumulated Deferred Stockholders'
Shares Amount Shares Amount Capital Deficit Compensation Equity
------ ------ ------ ------ --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1994 3,133,720 $3,134 1,455,671 $1,456 $ 8,952,483 $(3,231,897) $ -- $ 5,725,076
Issuance of common stock
under option plan -- -- 526,571 526 92,887 -- -- 93,413
Issuance of Series D
covertible preferred
stock, net of issuance
costs of $383,545 1,053,920 1,054 -- -- 10,154,601 -- -- 10,155,655
Issuance of Series D
convertible preferred
stock, for purchase of
license 6,000 6 -- -- 59,994 -- -- 60,000
Deferred compensation
related to stock options -- -- -- -- 292,950 -- 292,950 --
Net loss -- -- -- -- -- (6,992,858) -- (6,992,858)
--------- ------ --------- ------ ----------- ----------- ------------ -----------
Balance at March 31, 1995 4,193,640 4,194 1,982,242 1,982 19,552,915 (10,224,755) (292,950) 9,041,386
Issuance of common stock
under employee stock
purchase and option plans -- -- 125,113 125 100,330 -- -- 100,455
Issuance of Series D
convertible preferred
stock, net of issuance
costs of $1,180 325,787 326 -- -- 3,256,364 -- -- 3,256,690
Conversion of preferred
stock in connection with
initial public offering (4,519,427)(4,520) 4,519,427 4,520 -- -- -- --
Issuance of common stock
in connection with
initial public offering,
net of issuance costs of
$569,969 -- -- 2,875,000 2,875 34,185,906 -- -- 34,188,781
Deferred compensation
related to stock options -- -- -- -- 276,896 -- (276,896) --
Amortization of deferred
compensation -- -- -- -- -- -- 124,994 124,994
Unrealized loss on
short-term investments -- -- -- -- -- (127,833) -- (127,833)
Net loss -- -- -- -- -- (8,084,019) -- (8,084,019)
--------- ------ --------- ------ ----------- ----------- ------------ -----------
Balance at March 31, 1996 -- -- 9,501,782 9,502 57,372,411 (18,436,607) (444,852) 38,500,454
Issuance of common stock
under employee stock
purchase and option
plans, net of repurchases -- -- 64,287 62 226,531 -- -- 226,593
Deferred compensation
related to cancellation
of stock options -- -- -- -- (193,373) -- 193,373 --
Deferred compensation
related to consultants'
stock options -- -- -- -- 902,598 -- (902,598) --
Amortization of deferred
compensation related
to stock options -- -- -- -- -- -- 262,288 262,288
Unrealized gain on
short-term investments -- -- -- -- -- 50,640 -- 50,640
Net Loss -- -- -- -- -- (9,657,595) -- (9,657,595)
--------- ------ --------- ------ ----------- ----------- ------------ -----------
Balance at March 31, 1997 -- $ -- 9,566,069 $9,564 $58,308,167 $(28,043,562) $ (891,789) $29,382,380
--------- ------ --------- ------ ----------- ----------- ------------ -----------
</TABLE>
See accompanying notes.
PERCLOSE SIXTEEN ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (9,657,595) $ (8,084,019) $ (6,992,858)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 668,472 672,556 336,480
Deferred compensation amortization 262,288 124,994 --
Issuance of convertible preferred stock for license -- -- 60,000
Changes in operating assets and liabilities:
Accounts receivable (593,612) (810,262) (109,955)
Other receivables and prepaid expenses (18,448) (117,294) (118,979)
Inventory (213,925) 427,443 (957,049)
Accounts payable 105,424 (42,662) 170,585
Accrued warranty 245,270 79,044 --
Accrued clinical trial costs 309,812 -- --
Other accrued expenses 419,702 436,604 631,382
------------ ----------- -----------
Net cash provided by (used in) operating activities (8,472,612) (7,313,596) (6,980,394)
INVESTING ACTIVITIES
Purchases of short-term investments (22,442,833) (32,180,575) (7,870,138)
Proceeds from sales and maturities of
short-term investments 25,550,986 8,383,140 6,476,515
Purchases of equipment and improvements (1,333,073) (454,618) (996,377)
Other assets 109,200 44,888 (129,815)
------------ ----------- -----------
Net cash provided by (used in) investing activities 1,884,280 (24,207,165) (2,519,815)
FINANCING ACTIVITIES
Principal payments under notes payable (364,760) (299,464) (120,450)
Proceeds from borrowing on notes payable -- 334,484 565,201
Proceeds from issuance of preferred stock -- 3,256,690 10,155,655
Proceeds from issuance of common stock 273,989 34,289,236 93,413
Repurchase of common stock (47,396) -- --
Issuance of officer notes receivable (400,000) -- --
------------ ----------- -----------
Net cash provided by (used in) financing activities (538,167) 37,580,946 10,693,819
Net increase (decrease) in cash and cash equivalents (7,126,499) 6,060,185 1,193,610
Cash and cash equivalents at beginning of year 9,803,777 3,743,592 2,549,982
------------ ----------- -----------
Cash and cash equivalents at end of year $ 2,677,278 $ 9,803,777 $ 3,743,592
------------ ----------- -----------
Supplemental disclosures of cash flows information:
Cash paid for interest $ 68,000 $ 83,628 $ 59,256
</TABLE>
See accompanying notes.
PERCLOSE SEVENTEEN ANNUAL REPORT
<PAGE>
NOTE 1.
ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION Perclose, Inc. (or the "Company") was incorporated in the state
of California in March 1992 and was reincorporated in Delaware in October
1995. The Company is a medical device company which develops, manufactures
and markets minimally invasive vascular surgical devices for closing femoral
artery access sites following angioplasty and angiography procedures. The
Company was in the development stage through March 31, 1994, and its
activities during that time consisted primarily of raising capital,
recruiting personnel and performing research and development. The Company
commenced initial sales of its products to customers in Europe and Canada
during the fourth quarter of fiscal 1995.
BASIS OF PRESENTATION Beginning with fiscal 1995, the Company's fiscal year
ends on the last Friday in March. For ease of presentation, the accompanying
financial statements have been shown as ending on March 31 of each year.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH EQUIVALENTS The Company considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash
equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the
balance sheet for cash and cash equivalents and short-term investments
approximate fair value. The fair value of short-term investments is based on
quoted market prices.
The carrying amount of the Company's notes payable approximates their
fair value. The fair values of the Company's notes payable are estimated
using discounted cash flow analyses, based on the Company's current
incremental borrowing rate for similar types of borrowing arrangements.
AVAILABLE-FOR-SALE SECURITIES At March 31, 1997 and 1996 all short-term
investments are designated as available-for-sale. Available-for-sale
securities are carried at fair value with unrealized gains and losses, net of
tax, reported in accumulated deficit. The amortized cost of
available-for-sale debt securities is adjusted for the amortization of
premiums and the accretion of discounts to maturity. Such amortization is
included in interest income.
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in
interest income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income.
The following is a summary of available-for-sale securities at
March 31, 1997:
<TABLE>
Gross
Amortized Unrealized Estimated
Cost Losses Fair Value
----------- --------- -----------
<S> <C> <C> <C>
Obligations of federal
government agencies $ 6,880,976 $(23,594) $ 6,857,382
Corporate obligations,
principally commercial
paper and corporate
notes 20,607,656 (53,599) 20,554,057
----------- --------- -----------
Total $27,488,632 $(77,193) $27,411,439
----------- --------- -----------
Amounts included in
short-term investments $25,072,422 $(77,193) $24,995,229
Amounts included in cash
and cash equivalents 2,416,210 -- 2,416,210
----------- --------- -----------
Total $27,488,632 $(77,193) $27,411,439
----------- --------- -----------
</TABLE>
The following is a summary of available-for-sale securities as of
March 31, 1996:
<TABLE>
Gross
Amortized Unrealized Estimated
Cost Losses Fair Value
----------- --------- -----------
<S> <C> <C> <C>
Obligations of federal
government agencies $ 2,966,642 $ -- $ 2,966,642
Corporate obligations,
prinipally commercial
paper and corporate
notes 33,180,046 (127,833) 33,052,213
----------- --------- -----------
Total $36,146,688 $(127,833) $36,018,855
----------- --------- -----------
----------- --------- -----------
Amounts included in
short-term investments $28,180,575 $(127,833) $28,052,742
Amounts included in cash
and cash equivalents 7,966,113 -- 7,966,113
----------- --------- -----------
Total $36,146,688 $(127,833) $36,018,855
----------- --------- -----------
----------- --------- -----------
</TABLE>
During the year ended March 31, 1997, there were sales of
available-for-sale securities with immaterial gross realized losses.
Available-for-sale debt securities at
PERCLOSE EIGHTEEN ANNUAL REPORT
<PAGE>
March 31, 1997, by contractual maturity, are shown below:
<TABLE>
Estimated Fair Value
----------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Due in one year or less $14,222,891 $26,319,173
Due between one and two years 13,188,548 9,699,682
----------- -----------
Total $27,411,439 $36,018,855
----------- -----------
----------- -----------
</TABLE>
INVENTORIES Inventories are stated at the lower of cost (first-in, first-out
method) or market and are compromised of the following at March 31:
<TABLE>
1997 1996
-------- --------
<S> <C> <C>
Raw materials $311,952 $226,808
Work-in-process 385,993 197,583
Finished goods 45,586 105,215
-------- --------
Total $743,531 $529,606
-------- --------
-------- --------
</TABLE>
EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements
are stated at cost. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets, ranging from one to five
years, or over the term of the lease, if shorter.
<TABLE>
1997 1996
----------- -----------
<S> <C> <C>
Equipment $ 2,625,714 $ 1,742,670
Furniture and fixtures 400,781 259,391
Leasehold improvements 74,761 48,414
----------- -----------
3,101,256 2,050,475
Less accumulated depreciation (1,454,533) (1,068,353)
------------ -----------
Total $ 1,646,723 $ 982,122
------------ -----------
------------ -----------
</TABLE>
OTHER ASSETS At March 31, 1997, the Company had approximately $216,981 of
restricted deposits ($326,000 at March 31, 1996) included in other assets
supporting leasehold improvements being performed on the Company's facility.
REVENUE RECOGNITION Revenues from sales of products are recognized at the
time of shipment with allowances provided for estimated returns and warranty
costs.
NET LOSS PER SHARE Except as noted below, historical net loss per share is
computed using the weighted average number of common shares outstanding.
Common equivalent shares from stock options and convertible preferred stock
are excluded from the computation as their effect is antidilutive except
that, pursuant to the Securities and Exchange Commission ("SEC") Staff
Accounting Bulletins, common and common equivalent shares issued during the
period beginning twelve months prior to the initial filing of the Company's
initial public offering at prices substantially below the initial public
offering price have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method and
the assumed public offering price for stock options and warrants and the
if-converted method for convertible preferred stock). Historical net loss per
share is presented for the years ended March 31,1997 and 1996.
PRO FORMA NET LOSS PER SHARE Pro Forma net loss per share has been computed
as described above and also gave effect to common equivalent shares from the
convertible preferred stock that automatically converted upon the closing of
the Company's initial offering (using the if-converted method). Pro forma net
loss per share is presented for the year ended March 31, 1995.
Pro forma share information calculated on the above basis for 1996 is
as follows:
Year Ended March 31, 1996
----
Pro forma net loss per share $ 0.03
Shares used in computing pro forma net
loss per share 7,852,596
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES Supplemental noncash
financing activities are as follows:
Year Ended March 31, 1997 1996 1995
---- ---- ----
Issuance of Series D convertible
preferred stock for purchase of
license $ -- $ -- $60,000
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 months prior to the initial public offering will be
excluded. The impact is expected to result in an increase in the primary loss
per share for the year ended March 31, 1996 of $0.07 per share with no impact
to fiscal 1997. The impact of Statement 128 on the calculation of fully
diluted loss per share for these years is not expected to be material.
RECLASSIFICATIONS Certain prior year amounts have been reclassified to
conform with the current year presentation.
PERCLOSE NINETEEN ANNUAL REPORT
<PAGE>
NOTE 2.
COMMITMENTS
The Company leases its principal facility under an operating lease agreement
expiring in August 1998. The agreement requires the Company to pay taxes,
insurance, and maintenance expenses. Rental expense was approximately
$397,000, $353,000 and $187,000 in fiscal 1997, 1996 and 1995, respectively.
The annual minimum rental commitments under all noncancelable operating
lease arrangements are as follows at March 31, 1997:
- -------------------------------------------------------------------------------
1998 $543,000
1999 350,000
2000 43,000
2001 23,000
2002 17,000
--------
$976,000
--------
--------
- -------------------------------------------------------------------------------
NOTE 3.
FINANCING ARRANGEMENTS
The Company had a $1,750,000 equipment credit and loan agreement with a bank
that expired on March 31, 1996. Loans under the agreement bear interest
ranging from 9.07% to 10.60% and are secured by the equipment purchased.
Maturities for the next three years under the financing arrangements are
as follows at March 31, 1997:
- -------------------------------------------------------------------------------
1998 $377,000
1999 114,000
2000 11,000
--------
Total $502,000
---------
---------
- -------------------------------------------------------------------------------
NOTE 4.
STOCKHOLDERS' EQUITY
PUBLIC OFFERING In November 1995 the Company sold a total of 2,875,000
shares of common stock at $13.00 per share through its initial public
offering. The net proceeds (after underwriters' commissions and fees and
other costs associated with the offering) totaled approximately $34,189,000.
In connection with the offering, all convertible preferred stock totaling
4,519,427 shares with an aggregate paid-in value of approximately $22,391,000
were converted into 4,519,427 shares of common stock of the Company.
- -------------------------------------------------------------------------------
PREFERRED STOCK In September 1995 the Board of Directors amended, and the
stockholders subsequently approved, the Company's Articles of Incorporation
to authorize 5,000,000 shares of undesignated preferred stock. Preferred
stock may be issued from time to time in one or more series. The Board of
Directors is authorized to determine the rights, preferences, privileges,
and restrictions granted to and imposed upon any wholly unissued series of
preferred stock and to fix the number of shares of any series of preferred
stock and the designation of any such series without any vote or action by
the Company's stockholders.
COMMON STOCK Shares of common stock reserved for future issuance are as
follows at March 31, 1997:
- -------------------------------------------------------------------------------
Stock plans:
Options outstanding 1,395,963
Options reserved for future grants 185,943
---------
Total stock option plans 1,581,906
Employee stock purchase plan 131,452
---------
Total reserved shares 1,713,356
---------
---------
- -------------------------------------------------------------------------------
NOTE 5.
STOCK PLANS
STOCK OPTION PLANS The Company currently has two stock option plans for
employees, directors and others -- the 1992 Stock Plan and the 1995 Director
Option Plan.
Under the Company's 1992 Stock Plan, the Board of Directors may grant
options for the purchase of up to 1,650,000 shares of common stock by
directors, employees and others. Options may be granted at an exercise price
of not less than 85% of the estimated fair value of the common stock, at the
date of grant, as determined by the Board of Directors. Options are
exercisable at such times and under such conditions as determined by the
Board of Directors. Options granted under this plan generally become
exercisable over a four-year period and generally expire ten years from the
date of grant. Unexercised options are canceled upon termination of
employment and become available under the plan.
The Company's 1995 Director Option Plan grants options automatically each
year to non-employee directors of the Company. Options may only be granted at
the estimated fair value of the common stock at the date of grant. Options
under this plan generally become exercisable over a four-year period and
generally expire ten years from the date of grant. Unexercised options are
canceled upon the director leaving the Board.
- -------------------------------------------------------------------------------
PERCLOSE TWENTY ANNUAL REPORT
<PAGE>
Activity under the plans is summarized in the below table:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Outstanding Options
------------------------------------------------------------------
Shares Available Number of Price Per Weighted Average
For Grant Shares Share Exercise Price
---------------- --------- ------------------ ----------------
<S> <C> <C> <C> <C>
Balance at April 1, 1994 37,340 891,989 $ 0.10 - $ 0.425 $ .19
Shares authorized 300,000 -- $ -- --
Options granted (253,750) 253,750 $ 0.425 - $ 1.00 $ .69
Options exercised -- (526,571) $ 0.10 - $ 0.425 $ .18
Options canceled 18,229 (18,229) $ 0.425 - $ 1.00 $ .52
-------- ---------
Balance at March 31, 1995 101,819 600,939 $ 0.10 - $ 1.00 $ .41
Shares authorized 600,000 -- $ -- --
Options granted (398,000) 398,000 $ 4.00 - $23.50 $17.46
Options exercised -- (123,254) $ 0.10 - $ 1.00 $ .65
Options canceled 33,942 (33,942) $ 0.10 - $23.50 $ 1.09
------- ---------
Balance at March 31, 1996 337,761 841,743 $ 0.10 - $23.50 $ 8.57
Shares authorized 450,000 -- $ --
Options granted (681,346) 681,346 $15.75 - $24.25 $21.06
Options exercised 47,396 (94,994) $ 0.10 - $15.25 $ .78
Options canceled 32,132 (32,132) $ 0.10 - $23.50 $18.38
------- ---------
Balance at March 31, 1997 185,943 1,395,963 $ 0.10 - $24.25 $14.83
------- ---------
------- ---------
</TABLE>
- -------------------------------------------------------------------------------
Additionally, 23,960 shares exercised under stock options were subject to
repurchase, at the option of the Company, at March 31, 1997.
The following table summarizes information about stock options
outstanding at March 31, 1997:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise as of Contractual Exercise as of Exercise
Prices March 31, 1997 Life Price March 31, 1997 Price
- --------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 0.10 - $ 0.43 304,900 6.59 $ 0.26 212,899 $ 0.23
$ 0.43 - $ 1.00 46,604 7.85 $ 1.00 22,479 $ 1.00
$ 4.00 - $ 6.00 60,834 8.45 $ 5.73 21,562 $ 5.77
$13.00 - $19.00 299,250 9.07 $15.57 45,150 $14.27
$19.75 - $24.25 684,375 9.42 $22.74 53,491 $23.35
--------- -------
$ 0.10 - $24.25 1,395,963 8.63 $14.83 355,581 $ 5.87
--------- -------
</TABLE>
- -------------------------------------------------------------------------------
At March 31, 1996 and 1995, 220,458 and 197,197 shares were exercisable at
weighted average exercise prices of $0.89 and $0.46, respectively.
1995 EMPLOYEE STOCK PURCHASE PLAN In September 1995, the 1995 Employee
Stock Purchase Plan ("ESPP") was adopted by the Company. An aggregate of
150,000 shares of the Company's common stock have been reserved for issuance
under this plan. This plan permits eligible employees to purchase common
stock through payroll deductions (which cannot exceed 15% of the employee's
compensation) at 85% of its fair market value on specified dates. For the
year ended March 31, 1997 and 1996, 16,689 and 1,859 shares were issued under
the ESPP.
- -------------------------------------------------------------------------------
DEFERRED COMPENSATION For certain options granted, the Company recognized
$569,846 as deferred compensation for the excess of the deemed value for
accounting purposes of the common stock issuable upon exercise of such
options over the aggregate exercise price of such options. The deferred
compensation expense is amortized ratably over the vesting period of the
options.
During the year, the Company repurchased 47,396 shares of unvested common
stock and reduced related unamortized deferred compensation by $193,373. For
the year ended March 31, 1997, amortization of $96,504 was charged to
operations.
The Company recognized $902,598 as deferred compensation relating to
stock options granted to consultants during the year ended March 31, 1997 and
has
PERCLOSE TWENTY-ONE ANNUAL REPORT
<PAGE>
charged $165,784 to operations in fiscal 1997. The deferred compensation is
amortized over the vesting period of the options.
STOCK-BASED COMPENSATION. As permitted under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" (FASB 123), the Company has elected
to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) in accounting for stock-based awards to
employees. Under APB 25, the Company generally recognizes no compensation
expense with respect to such awards.
Pro forma information regarding net income and earnings per share is
required by FASB 123 for awards granted after March 31, 1995 as if the
Company had accounted for its stock-based awards to employees under the fair
value method of FASB 123. The fair value of the Company's stock-based awards
to employees was estimated using the minimum value model for awards prior to
the Company's initial public offering on November 7, 1995 and the
Black-Scholes model subsequent to the initial public offering. The
Black-Scholes options valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, the Black-Scholes model requires the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock-based awards to employees have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion the existing models do not necessarily
provide a reliable single measure of the fair value of its stock-based awards
to employees. The fair value of the Company's stock-based awards to employees
was estimated assuming no expected dividends and the following
weighted-average assumptions:
- -------------------------------------------------------------------------------
Options ESPP
--------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
Expected life (years) 5.00 5.00 .50 .38
Expected volatility .70 .70 .77 .69
Risk-free interest rate 6.49 5.45 5.47 5.28
- -------------------------------------------------------------------------------
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period
(for options) and the purchase period (for stock purchases under the ESPP).
The Company's pro forma information follows in thousands except for loss per
share information:
- -------------------------------------------------------------------------------
1997 1996
------------- -----------
Net loss pro forma $(11,538,278) $(8,258,516)
Net loss per share pro forma $ (1.21) $ (1.37)
- -------------------------------------------------------------------------------
Because FASB 123 is applicable only to awards granted subsequent to March
31, 1995, its pro forma effect will not be fully reflected until
approximately 1999.
The weighted-average fair value of options granted during 1997 and 1996
was $13.50 and $10.91 per shares, respectively.
The weighted-average fair value of shares under the ESPP during 1997 and
1996 was $10.79 and $8.22 per share, respectively.
NOTE 6.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets for federal and state income
taxes are as follows:
- -------------------------------------------------------------------------------
Years Ended March 31, 1997 1996
----------- ----------
Deferred tax assets:
Net operating loss carryforwards $ 8,600,000 $6,200,000
Tax credit carryforwards 390,000 270,000
Other, net 1,900,000 760,000
----------- ----------
Total 10,890,000 7,230,000
Valuation allowance (10,890,000) (7,230,000)
----------- ----------
Net $ -- $ --
----------- ----------
- -------------------------------------------------------------------------------
Realization of deferred tax assets is dependent on future earnings, if
any, the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax asset at March 31, 1997
and 1996, has been established to reflect these uncertainties. The change in
the valuation allowance was a net increase of $3,660,000, $3,280,000 and
$2,750,000 for the fiscal years 1997, 1996 and 1995, respectively.
At March 31, 1997, the Company had net operating loss carryforwards for
federal and California tax purposes of approximately $24,000,000 and
$9,000,000, respectively, which will expire from 1998 through 2012, if not
PERCLOSE TWENTY-TWO ANNUAL REPORT
<PAGE>
utilized. At March 31, 1997, the Company also had research and development
tax credit carryforwards of approximately $220,000 and $240,000,
respectively, for federal and California tax purposes expiring from 2007
through 2012, if not utilized. Utilization of net operating loss and tax
credit carryforwards may be subject to a substantial annual limitation due to
the ownership change limitations provided by the Internal Revenue Code of
1986, as amended, and similar state provisions. The annual limitation may
result in expiration of net operating loss and tax credit carryforwards
before full utilization.
The reconciliation of income tax expense (benefit) attributable to
continuing operations computed at the U.S. federal statutory rates to income
tax expense (benefit) is as follows:
- -------------------------------------------------------------------------------
Years Ended March 31, 1997 1996 1995
----------- ----------- -----------
Tax provision (benefit) at
U.S. statutory rates $(3,283,574) $(2,748,566) $(2,377,300)
Loss for which no tax
benefit is currently
recognizable 3,283,574 2,748,566 2,377,300
----------- ----------- -----------
$ -- $ -- $ --
----------- ----------- -----------
- -------------------------------------------------------------------------------
NOTE 7.
EMPLOYEE BENEFIT PLAN
The Company adopted the Perclose 401(k) Retirement Plan to provide retirement
benefits for its employees in December 1994. As allowed under Section 401(k)
of the Internal Revenue Code, the plan provides tax-deferred salary
deductions for eligible employees. Full time employees are eligible to
participate in the next quarter enrollment period or up to ninety days of
service. Participants may make voluntary contributions to the plan up to 15%
of their compensation. The Company does not match contributions towards
the plan.
NOTE 8.
CONCENTRATIONS OF CREDIT
AND OTHER RISKS
The Company operates in a single industry segment and sells its products
primarily to hospitals. The Company markets its products in foreign countries
(mainly Europe and Japan) through its sales organizations and distributors.
Sales to international distributors are denominated in U.S. dollars. In the
fiscal year ended March 31, 1997, 82% and 15% (87% and 8% in the fiscal year
ended March 31, 1996) of the Company's net revenues were to Europe and Japan
respectively.
Sales to significant customers as a percentage of total revenues are as
follows:
- -------------------------------------------------------------------------------
Years Ended March 31, 1997 1996 1995
---- ---- ----
German Distributor 59% 53% 47%
Japanese Distributor 15% 8% --
French Distributor 15% 25% --
U.K. Distributor 2% 3% 38%
Canadian Distributor 1% 3% 15%
- -------------------------------------------------------------------------------
The Company performs ongoing credit evaluations of its customers but does
not require collateral. There have been no material losses on customer
receivables.
DEPENDENCE ON PRODUCT SYSTEMS. The Company has been engaged primarily in
researching, developing, testing and obtaining regulatory clearances for its
Prostar, Prostar Plus, Techstar and Techstar XL systems. The Company believes
that these systems are currently the Company's only significant potential
products and these systems will require additional development, clinical
trials and regulatory approvals before they can be marketed in the United
States.
There can be no assurance that the Company's development efforts will be
successful or that the systems or any other product developed by the Company
will be safe or effective, approved by appropriate regulatory and
reimbursement authorities, capable of being manufactured in commercial
quantities at acceptable costs or successfully marketed.
DEPENDENCE ON INTERNATIONAL DISTRIBUTORS. Currently, substantially all of the
Company's revenues from product sales are derived from sales to its
international distributors. Loss, termination or ineffectiveness of
distributors to effectively promote the Company's products could have a
material adverse effect on the Company's financial condition and results of
operations.
DEPENDENCE ON KEY SUPPLIERS. The Company purchases certain key components from
single source suppliers. Any significant component supply delay or
interruption could require the Company to qualify new sources of supply, if
available, and could have a material adverse effect on the Company's
financial condition and results of operations.
PERCLOSE TWENTY-THREE ANNUAL REPORT
<PAGE>
THE BOARD OF DIRECTORS
AND STOCKHOLDERS
PERCLOSE, INC.
We have audited the accompanying balance sheets of Perclose, Inc. as of March
31, 1997 and 1996, and the related statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Perclose, Inc. at
March 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
April 25, 1997
PERCLOSE TWENTY-FOUR ANNUAL REPORT
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Perclose, Inc. of our report dated April 25, 1997, included in the 1997
Annual Report to Stockholders of Perclose, Inc.
Our audits also included the financial statement schedule of Perclose, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 Nos. 333-56 and 333-17977) pertaining to the 1992 Stock
Plan, 1995 Employee Stock Purchase Plan, and 1995 Director Option Plan of
Perclose, Inc. of our report dated April 25, 1997, with respect to the financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedule included in
this Annual Report (Form 10-K) of Perclose, Inc.
ERNST & YOUNG LLP
San Jose, California
June 13, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,677,278
<SECURITIES> 24,995,229
<RECEIVABLES> 1,529,959
<ALLOWANCES> 0
<INVENTORY> 743,531
<CURRENT-ASSETS> 30,225,891
<PP&E> 1,646,723
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,513,835
<CURRENT-LIABILITIES> 3,003,068
<BONDS> 128,387
0
0
<COMMON> 29,382,380
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 32,513,835
<SALES> 4,455,805
<TOTAL-REVENUES> 4,455,805
<CGS> 4,703,340
<TOTAL-COSTS> 15,749,289
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,635,889
<INCOME-PRETAX> (9,657,595)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,657,595)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,657,595)
<EPS-PRIMARY> (1.01)
<EPS-DILUTED> (1.01)
</TABLE>
