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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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)
DELAWARE 94-3154669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
199 JEFFERSON DRIVE, MENLO PARK, CA 94025-1114
(Address of principal executive offices) (Zip Code)
Registrant's telephone, including area code: (650) 473-3100
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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 1998, there were 10,848,855 shares of the
Registrant's Common Stock outstanding.
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PERCLOSE, INC.
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998
and March 31, 1998.................................................. 3
Condensed Consolidated Statements of Operations for the
three months and six months ended September 30, 1998 and 1997....... 4
Condensed Consolidated Statements of Cash Flows for the
six months ended September 30, 1998 and 1997........................ 5
Notes to Condensed Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................... 10
PART II. OTHER INFORMATION ................................................. 20
INDEX TO EXHIBITS ........................................................... 21
SIGNATURES .................................................................. 22
<PAGE>
PERCLOSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
September 30, March 31,
1998 1998
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................. $ 13,337 $ 13,232
Short-term investments..................... 16,526 18,349
Accounts receivable, net................... 4,361 3,455
Inventories................................ 1,907 1,619
Prepaid expenses........................... 511 628
------------- -------------
Total current assets.................... 36,642 37,283
Equipment and leasehold improvements, net.... 2,781 2,277
Officer notes receivable..................... 600 600
Other assets................................. 1,861 291
------------- -------------
Total assets................................. $ 41,884 $ 40,451
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 637 $ 782
Accrued compensation....................... 1,452 1,202
Accrued warranty........................... 191 191
Other accrued expenses..................... 922 955
Notes payable.............................. 110 379
------------- -------------
Total current liabilities............... 3,312 3,509
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value.......... -- --
Common stock, $0.001 par value............. 11 11
Additional paid-in capital................. 80,076 79,433
Treasury stock............................. (293) --
Deferred compensation...................... (572) (739)
Accumulated deficit and other
comprehensive income..................... (40,650) (41,763)
------------- -------------
Total stockholders' equity................... 38,572 36,942
------------- -------------
Total liabilities and stockholders' equity... $ 41,884 $ 40,451
============= =============
See accompanying notes.
<PAGE>
PERCLOSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------------- --------------------------
1998 1997 1998 1997
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net revenues................................... $ 9,123 $ 1,210 $ 17,487 $ 2,380
Cost of goods sold............................. 3,270 1,797 6,460 3,250
------------ ------------ ----------- -----------
Gross margin................................... 5,853 (587) 11,027 (870)
Operating expenses:
Research and development................... 1,883 1,291 3,512 2,525
Selling, general and administrative........ 3,629 2,735 7,262 5,581
------------ ------------ ----------- -----------
Total operating expenses................ 5,512 4,026 10,774 8,106
------------- ------------ ----------- -----------
Income (loss) from operations................. 341 (4,613) 253 (8,976)
Other income (expense)
Interest income, net....................... 424 271 850 666
Other income (expense)..................... 29 (14) (11) (53)
------------- ------------ ----------- -----------
Total other income (expense)............ 453 257 839 613
Income (loss) before income taxes............. 794 (4,356) 1,092 (8,363)
Provision for income taxes.................... 39 -- 54 --
------------- ------------ ----------- -----------
Net income (loss)............................. $ 755 $ (4,356) $ 1,038 $ (8,363)
============= ============ =========== ===========
Basic earnings (loss) per common share........ $ 0.07 $ (0.45) $ 0.10 $ (0.87)
============= ============= =========== ===========
Diluted earnings (loss) per common share...... $ 0.07 $ (0.45) $ 0.09 $ (0.87)
============= ============= =========== ===========
Shares used in computing basic earnings(loss)
per share..................................... 10,817 9,617 10,785 9,598
============= ============= =========== ===========
Shares used in computing diluted earnings
(loss)per share................................ 11,271 9,617 11,339 9,598
============= ============= ============ ==========
</TABLE>
See accompanying notes.
<PAGE>
PERCLOSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Operating Activities
Net income (loss).................................................. $ 1,038 $ (8,363)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization................................... 749 549
Deferred compensation amortization.............................. 167 158
Changes in operating assets and liabilities:
Accounts receivable.......................................... (906) 198
Inventories.................................................. (288) (391)
Prepaid expenses............................................. 117 (993)
Accounts payable............................................. (145) 32
Other accrued expenses...................................... 217 (74)
------------- ------------
Net cash provided by (used in) operating activities......... 949 (8,884)
Investing Activities
Purchases of short-term investments................................ (5,474) (2,794)
Proceeds from sales and maturities of short-term investments....... 7,372 12,513
Purchases of equipment and leasehold improvements.................. (1,051) (1,018)
Other assets....................................................... (1,772) 35
------------- ------------
Net cash provided by (used in) investing activities......... (925) 8,736
Financing Activities
Payments under notes payable....................................... (269) (191)
Proceeds from issuance of common stock............................. 643 489
Repurchase of common stock......................................... (293) --
Proceeds from and (issuance of ) officer notes receivable.......... -- (200)
------------- ------------
Net cash provided by financing activities .................. 81 98
------------- ------------
Net increase (decrease) in cash and cash equivalents.............. 105 (50)
Cash and cash equivalents at beginning of period.................. 13,232 2,677
------------- ------------
Cash and cash equivalents at end of period........................ $ 13,337 $ 2,627
============= ============
</TABLE>
See accompanying notes.
<PAGE>
PERCLOSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included.
The consolidated financial statements include the accounts of Perclose,
Inc. and its wholly owned subsidiary, Perclose Deutschland, GmbH formed in June
1998. All intercompany balances and transactions have been eliminated in
consolidation.
The operating results of the interim periods presented are not
necessarily indicative of the results for the year ending March 31, 1999 or for
any future interim period. The accompanying financial statements should be read
in conjunction with the audited financial statements and notes thereto for the
year ended March 31, 1998 included in the Company's Annual Report on Form 10-K
as filed with the Securities and Exchange Commission. The accompanying balance
sheet at March 31, 1998 is derived from audited financial statements at that
date.
The Company's fiscal year ends on the last Friday in March. The
Company's fiscal quarters end on the Friday closest to the end of each calendar
quarter. The three and six month periods shown as having ended September 30,
1998 and 1997 actually ended on September 25, 1998 and September 26, 1997,
respectively. For ease of presentation, the accompanying financial statements
have been shown as ending on the last day of the calendar month.
NOTE 2. INVENTORIES
Inventories consist of the following (in thousands):
September 30, March 31,
1998 1998
------------ ------------
Raw materials......... $ 519 $ 409
Work-in-process....... 682 552
Finished goods........ 706 658
============ ============
$ 1,907 $ 1,619
============ ============
<PAGE>
NOTE 3. PER SHARE DATA
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share ("EPS") computations for the three and
six months ended September 30, 1998 and 1997 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) numerator for basic and
diluted EPS:................................. $ 755 $ (4,356) $ 1,038 $ (8,363)
---------- ---------- ---------- ----------
Denominator:
Denominator for basic EPS--
Weighted-average shares..................... 10,817 9,617 10,785 9,598
Effect of dilutive securities:
Stock options............................... 454 -- 554 --
========== ========== ========== ==========
Denominator for diluted EPS--
Adjusted weighted-average shares
outstanding and assumed conversions....... 11,271 9,61 11,339 9,598
========== ========== ========== ==========
</TABLE>
For the three and six months ended September 30, 1998, options to
purchase 389,764 and 157,860 shares, respectively, of common stock were
outstanding but were not included in the computation of diluted EPS as their
effect was anti-dilutive.
For the three and six months ended September 30, 1997 the effect of the
assumed exercise of stock options was antidilutive, therefore basic and diluted
loss per share as presented on the standalone statements of operations are the
same.
NOTE 4. CASH, CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES
CASH AND CASH EQUIVALENTS. The Company invests its excess cash in
government and corporate securities. Highly liquid investments with maturities
of three months or less at the date of acquisition are considered by the Company
to be cash equivalents. Investments with maturities beyond three months at the
date of acquisition and that mature within one year from the balance sheet are
considered to be short-term investments. Investments with maturities longer than
one year from the balance sheet date are also classified as short-term
investments .
The Company maintains its cash, cash equivalents and short-term
investments in a range of fixed income securities from various issuers with
original maturities not exceeding twenty four months and S&P credit ratings not
lower than AA . This diversification of risk is consistent with the Company's
investment policy, which is to maintain liquidity and ensure the safety of
principal.
AVAILABLE-FOR-SALE SECURITIES. 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.
<PAGE>
NOTE 5. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" (FASB 130). FASB 130 establishes rules
for the reporting and display of comprehensive income and its components.
Specifically, FASB 130 requires unrealized holding gains and losses on the
Company's available-for-sale securities which are currently reported separately
in stockholders' equity to be included in other comprehensive income and the
disclosure of total comprehensive income. Beginning April 1, 1998, the Company
adopted FASB 130, however, the adoption of the Statement had no impact on the
Company's net income or stockholders' equity.
The components of comprehensive income, net of related tax, for the
three and six months ended September 30, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss)...................... $ 755 $ (4,356) $ 1,038 $ (8,363)
Other comprehensive income:
Change in unrealized gain (loss) on
available-for-sale investments......... 58 20 75 79
---------- ---------- ---------- ----------
Comprehensive income (loss)............ $ 813 $ (4,336) $ 1,113 $ (8,284)
========== ========== ========== ==========
</TABLE>
NOTE 6. COMMITMENTS
In June 1998, the Company entered into a new facility lease agreement
for approximately 80,000 square feet of office, laboratory, cleanroom and
manufacturing space which it expects to occupy in early 1999. The base rent is
approximately $173,000 per month and commenced August 1, 1998. Additionally, the
Company has established a $518,000 security deposit and a $1.0 million letter of
credit in connection with the new facility lease
NOTE 7. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
(FASB 131). FASB 131 will require the Company to use the "management approach"
in disclosing financial information on operating segments. This statement is
also effective for the Company beginning fiscal year 1999. While the Company
does not anticipate that SFAS No. 131 will have a material impact on its
financial reporting and disclosures, changes, if any, will first be reflected in
the Company's 1999 Annual Report on Form 10-K.
NOTE 8. STOCK REPURCHASE PLAN
In September 1998, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of the Company's Common Stock. During
September 1998 the Company repurchased 17,300 shares at a cost of $293,000 under
this repurchase program.
NOTE 9. STOCK OPTION RE-PRICING
In September 1998 the Company offered employees the option to exchange
stock options to purchase 1,342,168 shares of common stock with an aggregate
exercise price of $28.6 million for new options to purchase 1,342,168 shares
with an exercise price of $11.50 per share and an aggregate exercise price of
$15.4 million. All of the re-priced options have vesting provisions consistent
with the terms of the original option grant. In exchange for the offer to
re-price stock options, employees agreed to a moratorium on exercising re-priced
options until March 16, 1999.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In addition to the other information in this Report on Form 10-Q (this
"Report") and in the documents incorporated by reference herein, certain
statements in Management's Discussion and Analysis of Financial Condition and
Results of Operations are forward looking statements. When used in this Report,
the word "expects," "anticipates," "estimates," and similar expressions are
intended to identify forward looking statements. Such statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. These risks and uncertainties include, but are not limited
to, those risks set forth below under "Factors Affecting Future Operating
Results," in particular, those relating to the Company's dependence on the
Prostar(R) and Techstar(R) products, uncertainty of market acceptance, history
of losses and risk of inability to sustain profitability, fluctuations in
operating results, government regulation, competition and risk of technological
obsolescence, limited manufacturing experience and scale-up risk, uncertainty
relating to new product development, limited sales and marketing experience,
reliance on patents and proprietary technology and uncertainty of third-party
reimbursement.
OVERVIEW
Perclose designs, manufactures and markets less invasive medical
devices that automate the surgical closure or connection of blood vessels. The
Company's first product family, the Prostar(R) and Techstar(R) products, which
are marketed worldwide, surgically close the arterial access site in the femoral
artery after catheterization procedures such as angioplasty, stenting,
atherectomy and diagnostic angiography. A second group of products, The
Heartflo(TM) System, is under development and is designed to automate the
surgical connection of blood vessels in conventional and minimally invasive
coronary artery bypass surgery.
The Company commenced international shipments of its first Prostar(R)
and Techstar(R) products in December 1994 and July 1995, respectively. In fiscal
year 1998, the Company received several FDA premarket approvals ("PMA") and PMA
supplement approvals for commercial sale in the United States of various
versions of its Prostar(R) and Techstar(R) Percutaneous Vascular Surgery ("PVS")
products.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES. The Company's net revenues increased 654% to $9.1 million for
the three months ended September 30, 1998 from $1.2 million for the three months
ended September 30, 1997. The primary reason for the increase in revenues was
higher sales in the United States resulting from the introduction of the latest
generation of the Company's Prostar(R) and Techstar(R) products. Domestic sales
as a percentage of total revenue for the three months ended September 30, 1998
increased to 90% from 74% for the corresponding 1997 quarter. The mix of
Techstar(R) and Prostar(R) revenue for the current quarter was 67% and 32%,
respectively.
<PAGE>
COST OF GOODS SOLD. Cost of goods sold increased to $3.3 million for
the three months ended September 30, 1998, an increase of 82% from $1.8 million
for the three months ended September 30, 1997. The increase in cost of goods
sold was primarily attributable to an increase in units sold for the three
months ended September 30, 1998 as compared to the same period in 1997. However,
per unit indirect costs for the three months ended September 30, 1998 were lower
than the per unit indirect costs for the same period ended September 30, 1997,
reflecting both operating efficiencies as well as the production of a larger
volume of units over which to spread fixed manufacturing overhead costs. The
Company's gross margin for the three months ended September 30, 1998 was 64%
compared to a gross margin of 62% for the three months ended June 30, 1998, and
a negative gross margin of 49% for the three months ended September 30, 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
46% to $1.9 million for the three months ended September 30, 1998 from $1.3
million for the three months ended September 30, 1997. This increase was mainly
the result of payroll related costs associated with a 97% increase in headcount,
with the most significant personnel increase attributable to quality assurance.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 33% to $3.6 million for the three months ended
September 30, 1998 from $2.7 million for the three months ended September 30,
1997. The increase was primarily due to the expansion of the United States sales
force which resulted in both higher payroll related costs as well as increased
travel expenses. Additionally, the marketing staff expanded from the year
earlier period. Finally, general and administrative expenses increased as a
result of hiring additional support personnel for the expanded sales force and
to handle the larger sales volume.
INTEREST INCOME, NET. Net interest income increased 56 % to $424,000
for the three months ended September 30, 1998 from $271,000 for the three months
ended September 30, 1997 primarily as a result of higher average cash and
short-term investments balances from the Company's public offering of common
stock in November 1997.
OTHER INCOME AND EXPENSE. Other income and expense increased 305% to
income of $29,000 for the three months ended September 30, 1998 from expense of
$14,000 for the three months ended September 30, 1997. One of the principal
components of other income and expense for the quarter ended September 30, 1998
is comprised of foreign currency gains and losses related to the Company's
French and German distributor accounts receivable balances. Beginning in July of
1997 the Company began invoicing these distributors in their local currencies
rather than in U.S. dollars. Exchange gains for the three months ended September
30,1998 were $57,000 compared to an exchange loss of $8,000 for the same period
ended September 30, 1997.
The other principal component of other income and expense relates to
the payment of franchise taxes. Franchise tax payments for the three months
ended September 30, 1998 were $23,000 compared to $6,000 for the three months
ended September 30, 1997.
<PAGE>
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES. Net revenues for the six months ended September 30, 1998
increased 635% to $17.5 million from $2.4 million for the six months ended
September 30, 1997. In this same period net international revenue increased to
$2.0 million from $0.9 million while domestic net revenue increased to $15.5
million from $1.5 million. The mix of Techstar(R) and Prostar(R) revenue for the
six months ended September 30, 1998 was 48% and 52%, respectively. In the six
months ended September 30, 1997 domestic revenue consisted only of Prostar(R)
sales as the Techstar(R) product had not yet received FDA approval.
COST OF GOODS SOLD. Cost of goods sold increased 99% to $6.5 million
for the six months ended September 30, 1998 from $3.3 million for the six months
ended September 30, 1997. The increase in cost of goods sold was primarily
attributable to an increase in units sold for the six months ended September 30,
1998 as compared to the same period in 1997. On a per unit basis indirect costs
for the six months ended September 30, 1998 were lower than indirect costs for
the six months ended September 30, 1997, reflecting both operating efficiencies
as well as the production of a larger volume of units over which to spread fixed
manufacturing overhead costs. The Company's gross margin for the six months
ended September 30, 1998 was 63% compared to a negative gross margin of 37% for
the six months ended September 30, 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 39%
to $3.5 million for the six months ended September 30, 1998 from $2.5 million
for the six months ended September 30, 1997. This increase was mainly the result
of payroll related costs attributable to significant personnel increases in
quality assurance. The Company was simultaneously working on future generations
of the current PVS products and clinical testing models of the Heartflo(TM)
device.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 30% to $7.3 million for the six months ended
September 30, 1998 from $5.6 million for the six months ended September 30,
1997. The increase was primarily due to the expansion of the United States sales
force which resulted in both higher payroll related costs as well as increased
travel expenses. The headcount for international sales has remained constant
while management has focused on expanding the domestic sales force.
Additionally, the marketing staff expanded from the year earlier period.
Finally, general and administrative expenses increased as a result of hiring
additional support personnel for the expanded sales force and to handle the
larger sales volume.
INTEREST INCOME, NET. Net interest income increased 28% to $850,000 for the
six months ended September 30, 1998 from $666,000 for the six months ended
September 30, 1997 primarily as a result of higher average balances for cash and
short-term investments from the Company's common stock offering in November
1997.
OTHER INCOME AND EXPENSE. Other income and expense decreased 80% to
expense of $11,000 for the six months ended September 30, 1998 from expense of
$53,000 for the six months ended September 30, 1997. Foreign exchange gains for
the six months ended September 30, 1998 were $42,000 compared to $8,000 for the
six months ended September 30, 1997. Franchise tax payments for the six months
ended September 30, 1998 were $36,000 compared to $45,000 for the six months
ended September 30, 1997.
INCOME TAXES
The income tax provision for the three and six months ended September
30, 1998 of $39,000 and $54,000, respectively, is attributable to current income
taxes and consists principally of state and federal minimum taxes. No income tax
provision was recorded for the three and six months ended September 30, 1997 as
a result of losses in fiscal year 1998.
As of March 31, 1998, the Company had net operating loss carryforwards for
federal and California tax purposes of approximately $38.0 million and $15.0
million, respectively, which will expire from 1998 through 2012 if not utilized.
The Company also had research and development tax credit carryforwards of
approximately $250,000 and $130,000, respectively, for federal and California
tax purposes expiring from 2007 through 2013 if not utilized. Utilization of the
net operating loss and tax credit carryforwards may be subject to an annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986, as amended, and similar state provisions.
YEAR 2000 COMPLIANCE STATUS OF PLAN, COSTS AND CONTINGENCY PLAN
The Company is aware of the software compatibility issues associated
with existing computer systems as the year 2000 approaches. The "year 2000
problem" is pervasive and complex, as virtually every computer operation will be
affected in some way by the rollover of the two-digit year value from 99 to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company recognizes the importance of the Year 2000 issue and has
recently assigned a project leader to supervise an assessment of the Company's
Year 2000 readiness. The scope of the Year 2000 readiness effort includes
software, hardware, electronic data interchange, manufacturing and lab
equipment, facilities, utilities, as well as supplier and customer readiness.
Management does not anticipate that the Company will incur significant operating
expenses or be required to invest heavily in computer systems improvements to be
Year 2000 compliant since the Company primarily uses packaged computer
applications in its business, and has already obtained certifications of Year
2000 compliance from its software vendors. As of September 30, 1998, the Company
had not incurred any expenses outside of ordinary operating expenses in
connection with its Year 2000 assessment.
In addition to internal Year 2000 software and equipment assessment and
remediation activities, the Company intends to contact its suppliers and
customers within the next three months to assess their compliance. There can be
no absolute assurances that there will not be a material adverse effect on the
Company if third parties do not convert their systems in a timely manner and in
a way that is compatible with the Company's systems. Any Year 2000 compliance
problem of either the Company, its suppliers, or customers could materially
adversely affect the Company's business, results of operations, cash flows,
financial condition and prospects.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash provided by operating activities was $0.9
million for the six months ended September 30, 1998, compared to net cash used
of $8.9 million for the six months ended September 30, 1997. The Company's
transition to profitability in the current six month period, which resulted in
net income of $1.0 million compared to a net loss of $8.4 million for the six
months ended September 30, 1997, was the main reason for the generation of cash
provided by operating activities in the current six month period.
The Company's net cash used by investing activities was $0.9 million
for the six months ended September 30, 1998 compared to net cash provided by
investing activities of $8.7 million for the six months ended September 30,
1997. For the six months ended September 30, 1998 net proceeds from sales and
maturities of short-term investments generated $1.9 million in cash as compared
to $9.7 million for the same period in 1997. Equipment purchases for the six
months ended September 30, 1998, as well as for the six months ended September
30, 1997 were $1.0 million. The major equipment purchases for the current six
month period were related to the acquisition of manufacturing machinery and
equipment, and to a lesser extent, computer hardware and software.
Other assets increased by $1.8 million for the six months ended
September 30, 1998 primarily as a result of a $518,000 security deposit and the
establishment of a $1.0 million letter of credit made in connection with a new
facility lease. The letter of credit designates the landlord as beneficiary and
provides that the landlord may draw down the letter of credit in the amount
equal to any default under the lease. The letter of credit will be required for
a minimum of eighteen months, after which upon the Company's meeting certain
financial criteria, the letter of credit will be released. The facility lease
agreement also requires a standard security deposit of $518,000 to be held by
the lessor for the term of the lease. The Company entered into the lease
agreement for an 80,000 square foot headquarters, research and manufacturing
facility in June 1998, which it expects to occupy beginning in early 1999. Lease
payments on the new building commenced in August 1998. The Company is seeking to
sublease approximately 20,000 square feet of the space. The new facility is
expected to increase the Company's capital investment costs over the next six
months due to the build out of new laboratories, clean room, warehouse and
office space and the purchase of additional equipment.
The Company's net cash provided by financing activities was $81,000 for
the six months ended September 30, 1998, compared to $98,000 for the six months
ended September 30, 1997. In September 1998, the Company's Board of Directors
authorized the repurchase of up to 500,000 shares of the Company's Common Stock.
During September 1998 the Company repurchased 17,300 shares at a cost of
$293,000 under this repurchase program.
The Company's principal source of liquidity at September 30, 1998
consisted of cash, cash equivalents and short-term investments of $29.9 million.
The Company has borrowed $1.3 million under an equipment credit facility, of
which a principal balance of approximately $44,000 remained outstanding as of
September 30, 1998.
<PAGE>
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, there can
be no assurance that the Company will not require additional financing. 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 the extent to which the Company's
products gain market acceptance, progress of the Company's clinical trials for
future products, actions relating to regulatory and reimbursement matters, the
costs and timing of expansion of marketing, sales, manufacturing and product
development activities, and competitive developments. Due to these and other
factors there can be no assurance that the Company will sustain profitability
beyond the current quarter.
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 from those anticipated in such forward-looking statements as a
result of the factors described in this section.
DEPENDENCE UPON PROSTAR(R) AND TECHSTAR(R) PRODUCTS. The Prostar(R) and
Techstar(R) products for percutaneous closure of arterial access sites following
catheterization procedures are currently the Company's only marketed products.
There can be no assurance as to when or whether the Company will receive FDA
clearance or approval for sale of other PVS products or any other products in
the United States. There can be no assurance that the Company's development
efforts will be successful or that any further PVS products or any other product
developed by the Company will be safe or effective, capable of being
manufactured in commercial quantities at acceptable costs, approved by
appropriate regulatory and reimbursement authorities or successfully marketed.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's Prostar(R) and Techstar(R)
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
sustained market acceptance among physicians, patients and health care payors.
Physicians will not use the Prostar(R) and Techstar(R) products unless they
determine, based on clinical data and other factors, that these products are an
attractive alternative to other means of closing arterial access sites and that
the clinical benefits to the patient and cost savings achieved through use of
these products outweigh the cost of the products. Such determinations will
depend, in part, on the ability of the Company's products to reduce the time to
ambulation and the length of hospital stays associated with coronary
catheterization procedures. Failure of the Company's products to achieve
significant market acceptance could have a material adverse effect on the
Company's business, financial condition and results of operations.
<PAGE>
HISTORY OF LOSSES AND LIMITED HISTORY OF PROFITABILITY. The Company has a
limited history of operations. The Company has experienced significant operating
losses since inception and has incurred a cumulative net loss of approximately
$40.7 million as of September 30, 1998. Although the Company recorded net income
for each of the two quarters in the six months ended September 30, 1998, there
can be no assurance that the Company will be able to increase its level of
profitability or to sustain profitability. Failure to increase or sustain the
level of profitability could have a material adverse effect on the Company's
future operating results.
FLUCTUATIONS IN OPERATING RESULTS. The Company anticipates that its results of
operations will fluctuate significantly from quarter to quarter and will depend
upon numerous factors, including the extent to which the Company's products gain
market acceptance, introduction of alternative means for arterial access site
closure and competitive developments, actions relating to regulatory and
reimbursement matters, and progress and results of clinical trials. Due to the
elective nature of many coronary catheterization procedures, patients may defer
such procedures during the summer vacation season. As a result, the Company may
experience seasonal fluctuations in its results of operations, particularly in
the second fiscal quarter. Results of operations will also be affected by the
timing of orders received from distributors and the extent to which the Company
is able to expand its manufacturing capabilities. In addition, depending upon
the timing of new product introductions, warranty claims and product returns,
the Company may need to make allowances for product obsolescence, excess
inventory, warranty claims and product returns. While the Company is currently
and will likely continue to make such allowances, there can be no assurance that
such allowances will be adequate to cover all costs associated with such items.
GOVERNMENT REGULATION. Clinical testing, manufacture, promotion and sale of the
Company's products are subject to extensive regulation by numerous governmental
authorities in the United States, principally the FDA, and corresponding foreign
regulatory agencies. The Federal Food, Drug, and Cosmetic Act ("FDC Act"), and
other federal and state statutes and regulations govern or influence the
testing, manufacture, labeling, advertising, distribution and promotion of drugs
and devices. Noncompliance with applicable requirements can result in fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal to authorize the marketing of new products or
to allow the Company to enter into government supply contracts, and criminal
prosecution. The Company's Prostar(R) and Techstar(R) PVS products are regulated
as Class III medical devices.
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain approval for sale internationally may be longer or
shorter than that required for FDA approval, and the requirements may differ.
The Company has obtained the certifications necessary to enable the CE mark to
be affixed to the Company's Prostar(R) and Techstar(R) products for commercial
sales in member countries of the European Union. The Company has not obtained
all other such international certifications and there can be no assurance it
will be able to do so in a timely manner. The Company has received regulatory
approval to market the Prostar(R) and Techstar(R) products in Japan. The
Company, through its Japanese distributor, commenced clinical trials in Japan
that will form the basis of an application for reimbursement approvals in the
Japanese health care system. There can be no assurance Japanese reimbursement
approvals will be obtained in a timely manner or at all.
COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE. Competition in the emerging
market for arterial access site closure devices is intense and is expected to
increase. Most of the Company's competitors have significantly greater name
recognition, experience, financial, technical, research, marketing, sales,
distribution and other resources than the Company. There can be no assurance
that the Company's competitors will not succeed in developing or marketing
technologies and products that are technologically superior, more effective or
commercially attractive than any that are being developed by the Company, or
that such competitors will not succeed in obtaining regulatory approval,
introducing or commercializing any such products prior to the Company. Such
developments could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the medical device
market is generally characterized by rapid and significant technological change
and frequent emergence of new technologies, products and procedures.
Accordingly, the Company's success will also depend in part on its ability to
respond quickly to medical and technological changes.
LIMITED MANUFACTURING EXPERIENCE AND SCALE-UP RISK. The Company has only limited
experience in manufacturing the Prostar(R) and Techstar(R) products. The Company
currently manufactures the Prostar(R) and Techstar(R) products for domestic and
international commercial sales. There can be no assurance that future
manufacturing difficulties, which could have a material adverse effect on the
Company's business, financial condition and results of operations, will not
occur.
In November 1997, Perclose voluntarily recalled specific lots of
Techstar(R) XL 6 french ("F") PVS products. The Company traced the problem
resulting in the recall to a defective mold which resulted in one part of the
product being out of specification in particular production runs. The problem
was not attributable to a design defect. The Company is not aware of any adverse
patient consequences resulting from these product performance issues. The
Company replaced the recalled Techstar(R) XL 6F units with Techstar(R) 6F units
in inventory at the time of the recall. The recall and replacement had only an
immaterial effect on its results of operations during the third and fourth
quarters of fiscal 1998. However, there can be no assurance that future product
problems necessitating recalls will not arise in the future, and any such future
recall could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE UPON KEY SUPPLIERS. Perclose purchases components used in its
products from various suppliers and relies on single sources for several
components. For certain of these components, there are relatively few
alternative sources of supply. Establishing additional or replacement suppliers
for any of the components used in the Company's products, if required, may not
be accomplished quickly and could involve significant additional costs. Any
supply interruption from vendors or failure of the Company to obtain alternative
vendors, if required, for any of the components used to manufacture the
Company's products would limit the Company's ability to manufacture its products
and could therefore have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY RELATING TO NEW PRODUCT DEVELOPMENT. The Company's product
development strategy involves the design and development of the Heartflo system,
designed to allow cardiac surgeons to automate the rapid placement of sutures in
blood vessels during coronary artery bybass graft ("CABG") surgery. The product
development process is time-consuming and costly, and there can be no assurance
that product development will be successfully completed, that necessary
regulatory clearances or approvals will be granted by the FDA on a timely basis,
or at all, or that the potential products will achieve market acceptance.
Failure by the Company to develop, obtain necessary regulatory clearances or
approvals for, or successfully market potential new products could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RELIANCE ON PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY. The Company's
ability to compete effectively will depend in part on its ability to develop and
maintain proprietary aspects of its technology. There can be no assurance that
the Company's issued patents, any patents that may be issued as a result of the
Company's U.S. or international patent applications, or the patent under which
the Company has license rights, will offer any degree of protection. There can
be no assurance that any patents that may be issued or licensed to the Company
or any of the Company's patent applications will not be challenged, invalidated
or circumvented in the future. In addition, there can be no assurance that
competitors, many of which have substantial resources and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents that will prevent, limit or interfere with the Company's ability to
make, use or sell its products either in the United States or in international
markets.
In March 1998, the Company was sued for patent infringement by a
competitor, Kensey Nash Corporation, and that competitor's distributor, Sherwood
Medical, a subsidiary of Tyco International Ltd. In May 1998, the Company
countersued Kensey Nash Corporation, Sherwood Medical and Tyco International
(U.S.) Inc. (dba The Kendall Company) claiming the patent on which Kensey Nash
Corporation and Sherwood Medical sued is invalid and not infringed and also
claiming counterdefendants have engaged in antitrust and unfair competition
violations.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. Any
litigation or interference proceedings, including the proceeding currently
pending against the Company, will result in substantial expense to the Company
and significant diversion of effort by the Company's technical and management
personnel. An adverse determination in the current pending or in litigation or
interference proceedings to which the Company may become a party could subject
the Company to significant liabilities to third parties or require the Company
to seek licenses from third parties. Although patent and intellectual property
disputes in the medical device area have often been settled through licensing or
similar arrangements, costs associated with such arrangements may be substantial
and could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses would be available to the Company on satisfactory terms if at
all. Adverse determinations in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. In the United States, health care
providers, such as hospitals and physicians that purchase medical devices such
as the Company's products, generally rely on third-party payors, principally
federal Medicare, state Medicaid and private health insurance plans, to
reimburse all or part of the cost of therapeutic and diagnostic catheterization
procedures. Reimbursement for catheterization procedures performed using devices
that have received FDA approval has generally been available in the United
States. The Company anticipates that in a prospective payment system, such as
the diagnostic related group ("DRG") system utilized by Medicare, and in many
managed care systems used by private health care payors, the cost of the
Company's products will be incorporated into the overall cost of the procedure
and that there will be no separate, additional reimbursement for the Company's
products. Failure by physicians, hospitals and other users of the Company's
products to obtain sufficient reimbursement from health care payors for
procedures in which the Company's products are used or adverse changes in
governmental and private third-party payors' policies toward reimbursement for
such procedures would have a material adverse effect on the Company's business,
financial condition and results of operations.
In international markets, market acceptance of the Company's products
may be dependent in part upon the availability of reimbursement within
prevailing health care payment systems. Failure of the Company to receive
international reimbursement approvals could have an adverse effect on market
acceptance of the Company's products in the international markets in which such
approvals are sought.
PRODUCT LIABILITY AND RECALL RISK; LIMITED INSURANCE COVERAGE. The manufacture
and sale of medical products entail significant risk of product liability claims
or product recalls. There can be no assurance that the Company's existing
insurance coverage limits are adequate to protect the Company from any
liabilities it might incur in connection with the clinical trials or sales of
its products. In addition, the Company may require increased product liability
coverage as its products are further 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.
POSSIBLE VOLATILITY OF STOCK PRICE. The stock market has recently and 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 Company's 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 and related litigation to which the Company is or may become
a party, 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.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In March 1998, the Company was sued by Kensey Nash Corporation, and such
company's distributor, Sherwood Medical (a subsidiary of Tyco International,
Ltd.) for patent infringement. In May 1998, the Company countersued Kensey Nash
Corporation, Sherwood Medical and Tyco International (U.S.) Inc. (dba The
Kendall Company) claiming the patent on which Kensey Nash Corporation and
Sherwood Medical sued is invalid and not infringed and also claiming
counterdefendants have engaged in antitrust and unfair competition violations.
There were no material developments with respect to this litigation during the
quarter ended September 30, 1998
Item 2. Changes in Securities and use of Proceeds....................... None
Item 3. Defaults Upon Senior Securities................................. None
Item 4. Submission of Matters to a Vote of Security Holders............. None
On July 15, 1998 the Company held its Annual Meeting of Stockholders. The
following individuals were elected to the Board of Directors:
Votes
Votes For Withheld
--------- --------
John B. Simpson, Ph.D, M.D..... 7,265,854 4,850
Henry A. Plain, Jr............. 7,265,854 4,850
Vaughn D. Bryson............... 7,265,854 4,850
In addition, the following individuals held continuing terms of office as
directors subsequent to the annual meeting:
Michael L. Eagle
Serge Lashutka
James W. Vetter, M.D.
Mark A. Wan
The following proposal was approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
Votes Broker
Votes For Against Abstained Non-votes
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
Proposal to ratify the appointment
of the Company's independent auditors... 7,269,654 350 700 0
</TABLE>
Item 5. Other Information............................................... None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits The exhibits listed in the Index to Exhibits are
filed as a part hereof and are incorporated by reference.
b) Reports on Form 8-K: The Company did not file any reports
on Form 8-K for the three months ended September 30, 1998.
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
10.18 Promissory Note between the Registrant and Ronald W. Songer dated August
31, 1998.
10.19 Standby Letter of Credit dated July 14, 1998.
27.1 Financial Data Schedule( Edgar version only).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this 10-Q report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: November 9, 1998 PERCLOSE, INC.
/S/ HENRY A. PLAIN, JR.
Henry A. Plain, Jr.
President and Chief Executive Officer
/S/ KENNETH E. LUDLUM
Kenneth E. Ludlum
Vice President Finance and Administration,
Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
PROMISSORY NOTE
$200,000.00 August 31, 1998
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 57/100 percent (5.57%)
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 August 31,
2001.
Interest accruing on the principal amount of the Note from the date
hereof until August 31, 2001 shall be added to the principal amount of the Note.
Payments, if any, received between the date hereof and August 31, 2001 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 15,000 shares of Common Stock of
the Company (collectively, the "Pledged Securities") held by Borrower. 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
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 sell the shares of
Common Stock 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 non-payment
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/ RONALD W. SONGER
--------------------
Signature of Borrower
Ronald W. Songer
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: VP Finance
Date: 8/19/98
<PAGE>
IRREVOCABLE STANDBY LETTER OF CREDIT NO.SVB98IS0993
DATED: JULY 14, 1998
BENEFICIARY:
SEAPORT CENTRE ASSOCIATES, LLC
C/O WILLIAM WILSON & ASSOCIATES
10 ALMADEN BOULEVARD, #430
SAN JOSE, CA 95113
AS "LANDLORD"
APPLICANT:
PERCLOSE, INC.
199 JEFFERSON DRIVE
MENLO PARK, CA 94025
AS "TENANT"
LETTER OF CREDIT AMOUNT: US$1,000,000.00 (ONE MILLION AND 00/100 U.S. DOLLARS).
EXPIRY DATE: JULY 15, 1999
LOCATION: AT OUR COUNTERS IN SANTA CLARA, CA
DEAR SIR/MADAM:
WE HEREBY ESTABLISH OUR IRREVOCABLE LETTER OF CREDIT NO. SVB98IS0993 IN YOUR
FAVOR IN THE AMOUNT OF US$1,000,000.00 (ONE MILLION AND 00/100 U.S. DOLLARS).
THIS AMOUNT IS AVAILABLE FOR PAYMENT TO YOU BY SILICON VALLEY BANK, 3003 TASMAN
DRIVE, SANTA CLARA, CA 95054, ATTN: INTERNATIONAL DEPARTMENT UPON PRESENTATION
OF BENEFICIARY'S DRAFT AT SIGHT DRAWN ON US, AND ACCOMPANIED BY THE FOLLOWING
DOCUMENTS:
1. THE ORIGINAL OF THIS LETTER OF CREDIT AND ALL AMENDMENT(S) IF ANY.
2. A WRITTEN STATEMENT SIGNED BY AN AUTHORIZED AGENT OF THE LANDLORD OR BY THE
LANDLORD STATING THAT THE PERSON WHO IS SIGNING HAS THE AUTHORITY TO SIGN
ON BEHALF OF LANDLORD AND THAT LANDLORD IS ENTITLED TO DRAW DOWN ON THE
LETTER OF CREDIT.
IF YOU SELL OR OTHERWISE TRANSFER YOUR INTEREST IN THE "PREMISES" OR
"DEVELOPMENT" AS SUCH TERMS AS DEFINED IN THAT CERTAIN LEASE AGREEMENT BETWEEN
SEAPORT CENTRE ASSOCIATES , LLC AS LANDLORD, AND PERCLOSE, INC. AS TENANT DATED
APRIL 16, 1998 (THE "LEASE") OR YOUR INTEREST AS LANDLORD UNDER THE LEASE, YOU
SHALL HAVE THE RIGHT TO TRANSFER THIS LETTER OF CREDIT TO SUCH TRANSFEREE,
SUCCESSOR OR ASSIGNEE. THIS LETTER OF CREDIT IS TRANSFERABLE ONLY IN ITS
ENTIRETY UPON OUR RECEIPT OF THIS ORIGINAL LETTER OF CREDIT TOGETHER WITH THE
ATTACHED "EXHIBIT A" DULY COMPLETED AND EXECUTED BY THE BENEFICIARY.
ALL DOCUMENTS INCLUDING DRAFT(S) MUST INDICATE THE NUMBER AND DATE OF THIS
CREDIT.
DOCUMENTS MUST BE SENT TO US VIA OVERNIGHT COURIER OR DELIVERED TO US AT OUR
ADDRESS: SILICON VALLEY BANK, 3003 TASMAN DRIVE, SANTA CLARA, CA 95054, ATTN:
INTERNATIONAL DIVISION.
WE HEREBY ENGAGE WITH THE DRAWERS AND/OR BONAFIDE HOLDERS THAT DRAFT(S) DRAWN
UNDER AND NEGOTIATED IN COMPLIANCE WITH THE TERMS AND CONDITIONS OF THIS LETTER
OF CREDIT WILL BE DULY HONORED ON PRESENTATION.
EXCEPT TO THE EXTENT INCONSISTENT WITH THE EXPRESS TERMS HEREOF, THIS LETTER OF
CREDIT IS SUBJECT TO AND GOVERNED BY THE UNIFORM CUSTOMS AND PRACTICE FOR
DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE
PUBLICATION 500.
/S/ ILLEGIBLE /S/ ILLEGIBLE
------------------- ---------------
AUTHORIZED SIGNATURE AUTHORIZED SIGNATURE
<PAGE>
EXHIBIT "A"
Date:
To: Silicon Valley Bank
3003 Tasman Drive Re: Standby Letter of Credit
Santa Clara, CA 95054 No.SVB98IS0993 issued by
Attn: International Division Silicon Valley Bank, Santa Clara
Standby Letters of Credit L/C amount: US$1,000,000.00
Gentlemen:
For value received, the undersigned Beneficiary hereby irrevocable transfers to:
(Name of Transferee)
(Address)
All rights of the undersigned Beneficiary to draw under the above Letter of
Credit up to its available amount as shown above as of the date of this
transfer.
By this transfer, all rights of the undersigned Beneficiary in such Letter of
Credit are transferred to the Transferee. Transferee shall have the sole rights
as Beneficiary thereof, including sole rights relating to any amendments,
whether increases or extensions or other amendments, and whether now existing or
hereafter made. All amendments are to be advised direct to the Transferee
without necessity of any consent of or notice to the undersigned Beneficiary.
The original of such Letter of Credit is returned herewith, and we ask you to
endorse the transfer on the reverse thereof, and forward it direct to the
Transferee with your customary notice of transfer.
Sincerely,
Signature Authenticated (BENEFICIARY'S NAME)
- -------------------- ------------------------
(Bank) Signature of Beneficiary
- --------------------
Authorized Signature
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND
IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDING SEPTEMBER 30, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,337
<SECURITIES> 16,526
<RECEIVABLES> 4,722
<ALLOWANCES> 361
<INVENTORY> 1,907
<CURRENT-ASSETS> 36,642
<PP&E> 5,674
<DEPRECIATION> 2,893
<TOTAL-ASSETS> 41,884
<CURRENT-LIABILITIES> 3,312
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 38,561
<TOTAL-LIABILITY-AND-EQUITY> 41,884
<SALES> 17,487
<TOTAL-REVENUES> 17,487
<CGS> 6,460
<TOTAL-COSTS> 6,460
<OTHER-EXPENSES> 47
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> 1,092
<INCOME-TAX> 54
<INCOME-CONTINUING> 1,038
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,038
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.09
</TABLE>
