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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 JUNE 30, 1999
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.)
400 SAGINAW DRIVE, REDWOOD CITY, CA 94063-4749
(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 June 30, 1999, there were 11,174,966 shares of the Registrant's
Common Stock outstanding.
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PERCLOSE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE
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<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
and March 31, 1999...................................................... 3
Condensed Consolidated Statements of Income for the three months
ended June 30, 1999 and 1998............................................ 4
Condensed Consolidated Statements of Cash Flows for the three months
ended June 30, 1999 and 1998............................................ 5
Notes to Condensed Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............. 19a
PART II. OTHER INFORMATION................................................................. 20
INDEX TO EXHIBITS.......................................................................... 20
SIGNATURES................................................................................. 21
</TABLE>
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PERCLOSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
------- -------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 5,913 $ 7,333
Short-term investments ............................................. 25,128 22,864
Accounts receivable, net ........................................... 9,937 7,762
Inventories ........................................................ 3,701 2,549
Prepaid expenses ................................................... 874 689
------- --------
Total current assets ............................................ 45,553 41,197
Equipment and leasehold improvements, net ............................ 6,259 5,767
Officer notes receivable ............................................. 200 200
Other assets ......................................................... 2,402 2,426
------- --------
Total assets.......................................................... $ 54,414 $ 49,590
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 1,008 $ 1,717
Accrued compensation ............................................... 1,469 1,886
Accrued warranty ................................................... 977 45
Other accrued expenses ............................................. 1,434 995
Notes payable ...................................................... 24 32
-------- --------
Total current liabilities ....................................... 4,912 4,675
Commitments and contingencies:
Deferred rent ........................................................ 82 --
Stockholders' equity:
Preferred stock, $0.001 par value .................................. -- --
Common stock, $0.001 par value ..................................... 11 11
Additional paid-in capital ......................................... 82,967 81,427
Accumulated other comprehensive income (loss) ...................... (84) (31)
Accumulated deficit ................................................ (33,326) (36,219)
Deferred compensation .............................................. (148) (273)
-------- --------
Total stockholders' equity ........................................... 49,420 44,915
-------- --------
Total liabilities and stockholders' equity ........................... $ 54,414 $ 49,590
======== ========
</TABLE>
See accompanying notes.
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PERCLOSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
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<S> <C> <C>
Net revenues ....................................................... $ 16,045 $ 8,364
Cost of goods sold ................................................. 4,246 3,190
-------- --------
Gross profit........................................................ 11,799 5,174
Operating expenses:
Research and development ........................................ 2,959 1,629
Selling, general and administrative ............................. 5,937 3,633
-------- --------
Total operating expenses ..................................... 8,896 5,262
-------- --------
Income (loss) from operations ...................................... 2,903 (88)
Other income (expense):
Interest income, net ............................................ 440 426
Other income (expense) .......................................... (128) (40)
-------- --------
Total other income ........................................... 312 386
-------- --------
Income before income taxes ......................................... 3,215 298
Provision for income taxes ......................................... 322 15
-------- --------
Net income ......................................................... $ 2,893 $ 283
======== ========
Basic earnings per common share .................................... $ 0.26 $ 0.03
======== ========
Diluted earnings per common share .................................. $ 0.24 $ 0.02
======== ========
Shares used in computing basic earnings per share .................. 11,118 10,752
======== ========
Shares used in computing diluted earnings per share ................ 12,256 11,425
======== ========
</TABLE>
See accompanying notes.
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PERCLOSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES
Net income ........................................................ $ 2,893 $ 283
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization .................................. 505 377
Deferred compensation amortization ............................. 125 84
Compensation expense related to consultants' stock options ..... 132 --
Changes in operating assets and liabilities:
Accounts receivable ......................................... (2,175) (694)
Inventories ................................................. (1,152) (507)
Prepaid expenses ............................................ (286) 104
Accounts payable ............................................ (709) 124
Accrued compensation ........................................ (417) (12)
Accrued warranty ............................................ 932 --
Other accrued expenses ...................................... 521 (5)
---------- ----------
Net cash provided by (used in) operating activities ........ 369 (246)
INVESTING ACTIVITIES
Purchases of short-term investments ............................... (5,473) (4,464)
Proceeds from sales and maturities of short-term investments ...... 3,156 3,583
Purchases of equipment and leasehold improvements ................. (974) (513)
Proceeds from sale of fixed assets ................................ 78 --
Other assets ...................................................... 24 (690)
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Net cash used in investing activities ...................... (3,189) (2,084)
FINANCING ACTIVITIES
Payments under notes payable ...................................... (8) (207)
Proceeds from issuance of common stock ............................ 1,408 197
Repayment of officer notes receivable ............................. -- 200
---------- ----------
Net cash provided by financing activities ................. 1,400 190
---------- ----------
Net (decrease) in cash and cash equivalents ..................... (1,420) (2,140)
Cash and cash equivalents at beginning of period ................. 7,333 13,232
---------- ----------
Cash and cash equivalents at end of period ....................... $ 5,913 $ 11,092
========== ==========
</TABLE>
See accompanying notes.
5
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PERCLOSE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed 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 condensed consolidated financial statements include the accounts
of Perclose, Inc. and its wholly owned subsidiary, Perclose Deutschland, GmbH
formed in June 1998. All significant 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, 2000 or
for any future interim period. The accompanying condensed consolidated
financial statements should be read in conjunction with the audited financial
statements and notes thereto for the year ended March 31, 1999 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, 1999 is
derived from audited financial statements at that date.
The Company's fiscal year ends on the last Friday in March and
consists of four 13 week quarters. The Company's fiscal quarters end on the
Friday closest to the end of the corresponding calendar quarter. In order to
keep the quarters ending at approximately the end of the calendar month, the
quarter ended July 2, 1999 had 14 weeks. The three month periods shown as
having ended June 30, 1999 and 1998 actually ended on July 2, 1999 and June
26, 1998, 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):
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
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<S> <C> <C>
Raw materials .............................................. $ 900 $ 700
Work-in-process ............................................ 1,099 967
Finished goods ............................................. 1,702 882
---------- ----------
$ 3,701 $ 2,549
========== ==========
</TABLE>
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NOTE 3. EARNINGS 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 months ended June 30, 1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Numerator:
Net income for basic and diluted EPS....................... $ 2,893 $ 283
------------ ------------
Denominator for basic EPS-- Weighted-average shares......... 11,118 10,752
Effect of dilutive securities-- Stock options.................. 1,138 673
------------ ------------
Denominator for diluted EPS--
Adjusted weighted-average shares outstanding and
assumed conversions.......................................... 12,256 11,425
============ ============
</TABLE>
NOTE 4. COMPREHENSIVE INCOME
Accumulated other comprehensive income presented in the accompanying
consolidated balance sheet consists of the accumulated net unrealized gains and
losses on available-for-sale marketable securities as well as net unrealized
gains and losses on foreign currency translation, net of the related tax effect.
The tax effects for other comprehensive income were immaterial for all periods
presented.
The components of comprehensive income, net of related tax, for the three months
ended June 30, 1999 and June 30, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Net income ..................................... $ 2,893 $ 283
Other comprehensive income:
Change in unrealized gain (loss) on
available-for-sale investments............. (51) 16
Change in unrealized gain (loss) on foreign
currency translation....................... (2) -
-------------- --------------
Comprehensive income ........................... $ 2,840 $ 299
============== ==============
</TABLE>
NOTE 5. SEGMENT INFORMATION
The Company operates as one segment, the sale of Percutaneous Vascular
Surgery products and sells these products primarily to hospitals and medical
device distributors. The Company only
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reports profit and loss information on an aggregate basis to the chief
operating decision maker of the Company. The Company markets its products
outside the United States (mainly Europe and Japan) through its sales
organizations and distributors.
Geographic sources of net revenues based on the location of
customers are as follows (in thousands) for the three months ended June 30,
1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------
1999 1998
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<S> <C> <C>
United States net revenues ................................. $ 14,827 $ 7,354
Foreign net revenues ....................................... 1,218 1,010
---------- ----------
Total net revenues ......................................... $ 16,045 $ 8,364
========== ==========
</TABLE>
During the three months ended June 30, 1999 and 1998, no single customer
contributed 10% or more of the Company's net revenues.
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
effective for fiscal years commencing after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company currently does not make use of derivatives
and management anticipates that the adoption of SFAS No. 133 will not have a
significant effect on earnings or the financial position of the Company.
NOTE 7. LEGAL PROCEEDINGS
In March 1998, the Company received a patent infringement complaint
stating that it is being sued by Kensey Nash Corporation of Exton,
Pennsylvania, and Sherwood Medical Company of St. Louis, Missouri. Sherwood
Medical Company was Kensey Nash's marketing partner for its Angioseal product
at the time the suit was filed and is a subsidiary of Tyco International,
Ltd. The suit, filed in U.S. District Court for the Eastern District of
Pennsylvania, asserts that Perclose PVS devices infringe a 1997 Kensey Nash
patent. The Company has responded to the patent infringement complaint filed
by Kensey Nash Corporation and Sherwood Medical Company.
In its response in May 1998 to the complaint, Perclose denies that
its Prostar and Techstar devices infringe the Kensey Nash patent. In
addition, Perclose seeks a declaration from the Court that Perclose does not
infringe the Kensey Nash patent, and that the patent is both invalid and
unenforceable. At the same time, the Company countersued Kensey Nash
Corporation, Sherwood Medical Company and Tyco claiming the patent on which
Kensey Nash Corporation and Sherwood Medical Company sued is invalid and not
infringed and also claiming counterdefendants have engaged in antitrust and
unfair competition violations. In March 1999, Tyco sold the marketing rights
to Kensey Nash's Angio Seal product to St. Jude Medical, Inc. The case's
trial date is unscheduled at the current time. Management believes the patent
infringement complaint is without merit and intends to defend itself and its
intellectual property rights vigorously.
8
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NOTE 8. SUBSEQUENT EVENTS
On July 8, 1999 Abbott Laboratories, Inc. and Perclose announced that the
companies had entered into a definitive agreement for Abbott to acquire
Perclose in a stock-for-stock merger for $54 per share subject to a minimum
of 1.1 Abbott shares and a maximum of 1.35 Abbott shares. The merger is
intended to be accounted for as a pooling of interests, tax-free to Perclose
shareholders, and is expected to close in the fourth quarter of calendar
1999, subject to the approval of Perclose stockholders, regulatory agencies
and other customary closing conditions. The number of shares to be issued to
Perclose stockholders is designed to provide $54 worth of Abbott stock for
each Perclose share at the time of the merger, subject to a minimum of 1.1
and a maximum of 1.35 Abbott shares.
In early July 1999 Perclose also announced a voluntary, lot specific recall
of the Techstar 6XL product. The recall is due to a manufacturing process
variation that led to difficulty in deploying the needles featured in the
Company's suture-based technology. Perclose plans to replace the recalled
units with product in inventory. Activities associated with the recall are
proceeding according to plan. The Company has an insurance policy covering
the costs associated with product recalls due to, among other things, design
specifications, design controls and product performance. A formal claim under
this insurance policy has not yet been made for the Techstar 6XL products.
The Company has accrued for the estimated costs of the product recall and
recorded a receivable for the anticipated insurance proceeds for the quarter
ended June 30, 1999.
In early July 1999 the Perclose Board of Directors voted to terminate the
open market share repurchase program initiated in September 1998. No shares
have been repurchased under this program since October 1998.
9
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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-Registered Trademark- AND
TECHSTAR-Registered Trademark- 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, Inc. (the "Company") 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
and Techstar 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 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
and Techstar Percutaneous Vascular Surgery ("PVS") products in December 1994
and July 1995, respectively. During fiscal year 1998, the Company received
several FDA pre-market approvals ("PMA") and PMA supplement approvals for
commercial sale in the United States of various versions of its Prostar and
Techstar products.
The Company's fiscal year ends on the last Friday in March and
consists of four 13 week quarters. The Company's fiscal quarters end on the
Friday closest to the end of the corresponding calendar quarter. In order to
keep the quarters ending at approximately the end of the calendar month, the
quarter ended July 2, 1999 had 14 weeks. The three month periods shown as
having ended June 30, 1999 and 1998 actually ended on July 2, 1999 and June
26, 1998, respectively. For ease of presentation, the accompanying financial
statements have been shown as ending on the last day of the calendar month.
On July 8, 1999 Abbott Laboratories, Inc. and Perclose announced
that the companies had entered into a definitive agreement for Abbott to
acquire Perclose. Under the terms of the agreement Abbott will acquire
Perclose in a stock-for-stock merger for $54 per share. The merger is
intended to be accounted for as a pooling of interests, tax-free to Perclose
stockholders, and is expected to close in the fourth quarter of 1999, subject
to the approval of Perclose stockholders, regulatory agencies and other
customary closing conditions. The number of shares
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to be issued to Perclose stockholders is designed to provide $54 worth of
Abbott stock for each Perclose share, subject to a minimum of 1.1 Abbott
shares and a maximum of 1.35 Abbott shares.
RESULTS OF OPERATIONS
REVENUES. The Company's net revenues increased 92% to $16.0 million
for the three months ended June 30, 1999 from $8.4 million for the three
months ended June 30, 1998. Revenue shipments of Prostar and Techstar units
increased by 98% to approximately 73,000 units for the three months ended
June 30, 1999 from 37,000 units for the three months ended June 30, 1998.
Domestic sales as a percentage of total revenue for the three months ended
June 30, 1999 increased to 92% from 88% for the three months ended June 30,
1998. Sales of Prostar and Techstar products accounted for 29% and 71%,
respectively, of the net revenues for the three months ended June 30, 1999.
The increase in the revenues for the first quarter of fiscal 2000 was due
primarily to an increase in sales of Techstar 6F XL systems in the United
States.
GROSS PROFIT. Gross profit increased to $11.8 million for the three
months ended June 30, 1999 from $5.2 million for the three months ended June
30, 1998. Gross profit increased to 74% of net revenues for the quarter ended
June 30, 1999 from 62% of net revenues for the quarter ended June 30, 1998.
The increase in gross profit was primarily due to increases in sales and
production volumes, which contributed to reductions in fixed overhead cost
per unit and enabled the Company to achieve improvements in manufacturing
efficiency. Production volume of Techstar and Prostar devices increased 120%
to 97,000 units for the quarter ending June 30, 1999 from 44,000 units
produced during the quarter ending June 30, 1998. In addition, manufacturing
process changes were implemented which resulted in a reduction of variable
overhead costs. Despite the significant increase in volume, switching to a
new supplier of sterilization services resulted in a cost savings in the
quarter ended June 30, 1999 as compared to the quarter ended June 30, 1998.
Freight costs on outgoing shipments also decreased as a result of a change in
the customer shipping policy. Lastly, effective July 1, 1998 the royalty
payments on shipments of Prostar were lowered.
RESEARCH AND DEVELOPMENT. Research and development expenses
increased 82% to $3.0 million for the three months ended June 30, 1999 from
$1.6 million for the three months ended June 30, 1998. The increase in
research and development costs was attributable to a significant increase in
headcount resulting in higher payroll expenses. In addition, materials and
services associated with prototype builds for the Company's next generation
PVS product, the Closer occurred in the 1999 period that did not occur in the
1998 period.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 63% to $5.9 million for the three months
ended June 30, 1999 from $3.6 million for the three months ended June 30,
1998. The increase was primarily due to the expansion of the Company's
domestic sales force which resulted in both higher payroll-related costs as
well as increased travel expenses. Headcount of the domestic sales force,
including clinical specialists, almost doubled from 36 as of June 30, 1998 to
71 as of June 30, 1999. 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 slightly to
$440,000 for the three months ended June 30, 1999 from $426,000 for the three
months ended June 30, 1998. The
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amount of cash and short term investments and related yields did not change
significantly between the two periods.
OTHER INCOME (EXPENSE). Other expense increased to $128,000 for the
three months ended June 30, 1999 from $40,000 for the three months ended June
30, 1998, primarily as a result of exchange rate losses on outstanding
accounts receivable balances for the Company's German and French customers.
INCOME TAXES
The income tax provision for the three months ended June 30, 1999 of
$322,000 is attributable to current income taxes and consists of foreign
taxes, state income taxes, and federal alternative minimum taxes. The income
tax provision for the three months ended June 30, 1998 of $15,000 is
attributable to current income taxes and consists primarily of state and
federal minimum taxes.
As of fiscal year end 1999, the Company had net operating loss
carryforwards for federal and state tax purposes of approximately $31.0
million and $7.0 million, respectively, which will expire from 2000 through
2012 if not utilized. As of fiscal year end 1999 the future use of the net
operating loss and tax credit carryforwards are not subject to material
limitations resulting from the ownership change limitations provided by the
Internal Revenue Code of 1986, as amended, and similar state provisions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash provided by operating activities was $369,000
for the three months ended June 30, 1999, compared to net cash used of
$246,000 for the three months ended June 30, 1998. The Company's increased
profitability in the current quarter, which resulted in net income of $2.9
million compared to net income of $283,000 for the quarter ended June 30,
1998, was the main reason for the generation of cash provided by operating
activities in the current three month period.
The Company's net cash used by investing activities was $3.2 million
for the three months ended June 30, 1999 compared to net cash used by
investing activities of $2.1 million for the three months ended June 30,
1998. For the three months ended June 30, 1999 net purchases of short-term
investments used $2.3 million in cash as compared to $881,000 of net
purchases for the same period in 1998. Equipment and leasehold improvement
purchases for the three months ended June 30, 1999 were $974,000, as compared
to $513,000 for the three months ended June 30, 1998. The major equipment and
leasehold improvement purchases for the current three month period were
related to final invoices for the build out of the Company's new headquarters
and manufacturing facility, as well as the acquisition of tooling for the
next generation PVS product.
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The Company's net cash generated by financing activities was $1.4 million for
the three months ended June 30, 1999, compared to cash generated of $190,000
for the three months ended June 30, 1998. Proceeds from the issuance of
common stock relating to option exercises provided $1.4 million for the
current quarter compared to $197,000 for the quarter ended June 30, 1998.
The Company's principal source of liquidity at June 30, 1999
consisted of cash, cash equivalents and short-term investments of $31.0
million versus $30.2 million at March 31, 1999.
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, actions relating to
regulatory and reimbursement matters, the costs and timing of expansion of
marketing, sales, manufacturing and product development activities and
competitive developments.
YEAR 2000 COMPLIANCE STATUS OF PLAN, COSTS AND CONTINGENCY PLAN
The Company is aware of 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
assigned a project leader to supervise an assessment of the Company's Year
2000 readiness. The scope of the Year 2000 readiness effort includes computer
software and hardware, electronic data interchange, manufacturing and lab
equipment, facilities systems and utilities, as well as supplier readiness.
The Company has reviewed the Year 2000 issue as it may affect the Company's
business activities. The Company has purchased its internal manufacturing and
financial information systems, and installs on an ongoing basis all updates
and patches as they are released by the suppliers to make certain that the
Company's systems and software are up-to-date and Year 2000 compliant
according to supplier representations. The Company has received Year 2000
compliance certifications from all software vendors from whom the Company has
purchased software. The Company is in the process of replacing most of its
hardware, specifically system servers and desktop work stations. The new
equipment will facilitate Year 2000 readiness, however, the equipment is
being acquired for the purpose of replacing older computers. These
expenditures would have been required even if the Year 2000 issue were not a
concern. All hardware and software are currently being internally tested by
the Company's internal computer staff. Final testing is expected to be
completed by September 1999. The Company is relying on the certification of
its suppliers and internal confirmatory testing to ensure Year 2000
compliance relating to computer hardware and software.
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The product which the Company manufactures is a mechanical device
which does not contain software components. Therefore date sensitivity is not
an issue. The Company believes that it has no material exposure to
contingencies directly related to the Year 2000 issue for the products it has
sold or will sell in the future. As of fiscal quarter ended June 1999, the
Company had not incurred any expenses outside of ordinary operating expenses
in connection with its Year 2000 assessment and compliance plan.
The majority of the Company's production and manufacturing equipment
is non-date dependent table top equipment. The manufacturing equipment that
has date dependent functions have been certified by their vendors as Year
2000 compliant.
The Company recently leased an office and manufacturing headquarters
facility and has installed new building systems throughout the facility. All
such building systems were Year 2000 compliant as certified by the
manufacturer prior to installation.
In addition to internal Year 2000 software and equipment assessment
and remediation activities, the Company has contacted its critical suppliers
in order to assess their compliance. As of fiscal quarter ended June 1999 all
of these suppliers contacted have responded. All responses indicate that the
supplier is aware of the Year 2000 issue and intends to be compliant. 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. However, based
on currently available information, the Company does not believe that the
Year 2000 matters discussed above related to internal systems or products
sold to customers will have a material adverse impact on the Company's
business, financial condition or results of operations.
FACTORS AFFECTING FUTURE 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.
14
<PAGE>
DEPENDENCE UPON PROSTAR AND TECHSTAR PRODUCTS. The Prostar and Techstar products
for percutaneous closure of arterial access sites following catheterization
procedures are currently the Company's only 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 and Techstar products
represent a new method of closing arterial access sites and there can be no
assurance that these products will gain any significant degree of sustained
market acceptance among physicians, patients and health care payors. Physicians
will not use the Prostar and Techstar products unless they determine, based on
clinical data and other factors, that these products are an attractive
alternative to other means of closing arterial access sites and that the
clinical benefits to the patient and cost savings achieved through use of these
products outweigh the cost of the products. Such determinations will depend, in
part, on the ability of the Company's products to reduce the time to ambulation
and the length of hospital stays associated with coronary catheterization
procedures. 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.
UNCERTAINTY RELATING TO NEW PRODUCT DEVELOPMENT. The markets in which the
Company participates are characterized by rapid innovation and development and
introduction of new products. Accordingly, the Company must innovate and develop
new products to maintain and enhance its market position. The Company is
currently developing the Heartflo System, which is designed to enable cardiac
surgeons to automate the rapid placement of sutures in blood vessels during
coronary artery bypass graft surgery. This product is currently under
development and has not yet entered human clinical trials. The Company is also
developing a new generation PVS product, known as the Closer. The Company has
recently completed a clinical trial for this product and has submitted a PMA
supplement application to the FDA for the purpose of obtaining approval to
market this product in the United States. 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.
HISTORY OF LOSSES AND LIMITED HISTORY OF PROFITABILITY. The Company has a
limited history of profitability. The Company experienced significant operating
losses through fiscal year 1998 and, as of June 30, 1999, had an accumulated
deficit of approximately $33.3 million. Although the Company recorded net income
for each quarter beginning with the first quarter in fiscal year 1999, 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.
15
<PAGE>
FLUCTUATIONS IN OPERATING RESULTS. The Company anticipates that its results
of operations will fluctuate significantly from quarter to quarter and will
depend upon numerous factors, including 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 and the certification of its manufacturing facility
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, manufacturing process, labeling, advertising, distribution and
promotion of drugs and devices. Noncompliance with applicable requirements
can result in fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, refusal to authorize the
marketing of new products or to allow the Company to enter into government
supply contracts, and criminal prosecution. The Company's Prostar and
Techstar PVS products are regulated as Class III medical devices and its
manufacturing facility is subject to FDA regulations.
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 and Techstar products for commercial
sales in member countries of the European Union. The Company has not obtained
all other such international certifications and there can be no assurance it
will be able to do so in a timely manner. The Company has received regulatory
approval to market the Prostar and Techstar products in Japan. The Company,
through its Japanese distributor has completed a clinical trial 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
16
<PAGE>
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.
MANUFACTURING AND SCALE-UP RISK. The Company currently manufactures the
Prostar and Techstar 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 XL 6 french ("F") PVS products. The Company traced the problem
resulting in the recall to a defective mold. 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 recall and
replacement had only an immaterial effect on its results of operations during
the third and fourth quarters of fiscal year 1998.
In early July 1999 Perclose announced a voluntary, lot specific recall of the
Techstar 6XL product. The recall is due to a manufacturing process variation
that led to difficulty in deploying the needles featured in the Company's
suture-based technology. Perclose plans to replace the recalled units with
product in inventory. Activities associated with the recall are proceeding
according to plan. The Company has an insurance policy covering the costs
associated with product recalls due to, among other things, design
specifications, design controls and product performance. A formal claim under
this insurance policy has not yet been made for the Techstar 6XL products.
The Company has accrued for the estimated costs of the product recall and
recorded a receivable for the anticipated insurance proceeds for the quarter
ended June 30, 1999.
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.
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
17
<PAGE>
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 marketing partner
at the time, Sherwood Medical Company (a subsidiary of Tyco International,
Ltd.). The suit, filed in U.S. District Court for the Eastern District of
Pennsylvania, asserts that Perclose PVS devices infringe a 1997 Kensey Nash
patent. In May 1998, the Company counter-sued Kensey Nash Corporation,
Sherwood Medical Company and Tyco International (U.S.) Inc. ("Tyco") (dba The
Kendall Company) claiming the patent on which Kensey Nash Corporation and
Sherwood Medical Company sued is invalid and not infringed and also claiming
counter-defendants have engaged in antitrust and unfair competition
violations. In March 1999, Tyco sold the marketing rights to the competitive
product to St. Jude Medical, Inc. The case's trial date is unscheduled at the
current time. The Company believes that the case is without merit and intends
to defend itself and its intellectual property rights vigorously.
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
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, including the
currently pending proceedings, 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 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
18
<PAGE>
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 from time to time
experiences 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.
19
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's market risk disclosures set forth in Item 7A of its Annual
Report on Form 10-K for the year ended March 31, 1999 have not changed
significantly.
19A
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1998, the Company received a patent infringement complaint
stating that it is being sued by Kensey Nash Corporation of Exton,
Pennsylvania, and Sherwood Medical Company of St. Louis, Missouri. Sherwood
Medical Company was Kensey Nash's marketing partner for its Angioseal product
at the time the suit was filed and is a subsidiary of Tyco International,
Ltd. The suit, filed in U.S. District Court for the Eastern District of
Pennsylvania, asserts that Perclose PVS devices infringe a 1997 Kensey Nash
patent. The Company has responded to the patent infringement complaint filed
by Kensey Nash Corporation and Sherwood Medical Company.
In its response in May 1998, to the complaint, Perclose denies that
its Prostar and Techstar devices infringe the Kensey Nash patent. In
addition, Perclose seeks a declaration from the Court that Perclose does not
infringe the Kensey Nash patent, and that the patent is both invalid and
unenforceable. At the same time, the Company countersued Kensey Nash
Corporation, Sherwood Medical Company and Tyco claiming the patent on which
Kensey Nash Corporation and Sherwood Medical Company sued is invalid and not
infringed and also claiming counterdefendants have engaged in antitrust and
unfair competition violations. In March 1999, Tyco sold the marketing rights
to Kensey Nash's Angio Seal product to St. Jude Medical, Inc. The case's
trial date is unscheduled at the current time. Management believes the patent
infringement complaint is without merit and intends to defend itself and its
intellectual property rights vigorously.
<TABLE>
<S> <C>
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
ITEM 5. OTHER INFORMATION.................................................. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
</TABLE>
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 June 30, 1999.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ---------- -----------
<S> <C>
27.1 Financial Data Schedule (Edgar version only).
</TABLE>
20
<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: August 13 , 1999 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)
21
<TABLE> <S> <C>
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