<PAGE>
- ------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
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 DECEMBER 25, 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
------------------------
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 (Zip Code)
offices)
Registrant's telephone, including area code: (650) 473-3100
------------------------
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 January 22, 1999, there were 10,848,410 shares of the Registrant's
Common Stock outstanding.
- --------------------------------------------------------------------------------
<PAGE>
PERCLOSE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1998
and March 31, 1998. . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three
months and nine months ended December 31, 1998 and 1997 . . . . 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended December 31, 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 . . . . . . . . . . . . . . . . . . . . . . . .21
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
</TABLE>
2
<PAGE>
PERCLOSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, expect per share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
-------------------- ----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 7,008 $ 13,232
Short-term investments....................................... 20,740 18,349
Accounts receivable, net..................................... 5,947 3,455
Inventories.................................................. 2,131 1,619
Prepaid expenses............................................. 799 628
-------------------- ----------------
Total current assets...................................... 36,625 37,283
Equipment and leasehold improvements, net...................... 4,095 2,277
Officer notes receivable....................................... 600 600
Other assets................................................... 2,386 291
-------------------- ----------------
Total assets................................................... $ 43,706 $ 40,451
-------------------- ----------------
-------------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 776 $ 782
Accrued compensation......................................... 1,542 1,202
Accrued warranty............................................. 191 191
Other accrued expenses....................................... 1,197 955
Notes payable................................................ 70 379
-------------------- ----------------
Total current liabilities................................. 3,776 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................................... 79,410 79,433
Deferred compensation........................................ (466) (739)
Accumulated deficit and other comprehensive income (loss).... (39,025) (41,763)
-------------------- ----------------
Total stockholders' equity..................................... 39,930 36,942
-------------------- ----------------
Total liabilities and stockholders' equity..................... $ 43,706 $ 40,451
-------------------- ----------------
-------------------- ----------------
</TABLE>
See accompanying notes.
3
<PAGE>
PERCLOSE, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------------------- ------------------------------
1998 1997 1998 1997
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues............................................... $ 11,564 $ 2,412 $ 29,051 $ 4,792
Cost of goods sold......................................... 3,334 2,133 9,794 5,383
-------------- -------------- ------------- -------------
Gross profit (loss)........................................ 8,230 279 19,257 (591)
Operating expenses:
Research and development................................ 2,125 1,377 5,637 3,902
Selling, general and administrative..................... 4,684 3,025 11,946 8,606
-------------- -------------- ------------- -------------
Total operating expenses............................. 6,809 4,402 17,583 12,508
-------------- -------------- ------------- -------------
Income (loss) from operations.............................. 1,421 (4,123) 1,674 (13,099)
Other income (expense)
Interest income, net.................................... 403 290 1,253 956
Other income (expense).................................. (44) 6 (55) (47)
-------------- -------------- ------------- -------------
Total other income................................... 359 296 1,198 909
Income (loss) before income taxes.......................... 1,780 (3,827) 2,872 (12,190)
Provision for income taxes................................. 89 -- 143 --
-------------- -------------- ------------- -------------
Net income (loss).......................................... $ 1,691 $ (3,827) $ 2,729 $ (12,190)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Basic earnings (loss) per common share..................... $ 0.16 $ (0.38) $ 0.25 $ (1.25)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Diluted earnings (loss) per common share................... $ 0.14 $ (0.38) $ 0.24 $ (1.25)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Shares used in computing basic earnings (loss)
per share................................................ 10,810 9,980 10,793 9,726
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Shares used in computing diluted earnings (loss)
per share................................................ 11,761 9,980 11,487 9,726
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
PERCLOSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
December 31,
-------------------------------------
1998 1997
--------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................................... $ 2,729 $ (12,190)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization..................................... 1,085 770
Deferred compensation amortization................................ 394 237
Changes in operating assets and liabilities:
Accounts receivable............................................ (2,492) (333)
Inventories.................................................... (512) (344)
Prepaid expenses............................................... (171) (960)
Accounts payable............................................... (6) 91
Other accrued expenses......................................... 582 169
--------------- -----------
Net cash provided by (used in) operating activities........... 1,609 (12,560)
INVESTING ACTIVITIES
Purchases of short-term investments.................................. (13,708) (17,119)
Proceeds from sales and maturities of short-term investments......... 11,326 18,360
Purchases of equipment and leasehold improvements.................... (2,634) (1,391)
Other assets......................................................... (2,364) 91
--------------- -----------
Net cash provided by (used in) investing activities (7,380) (59)
FINANCING ACTIVITIES
Payments under notes payable......................................... (309) (291)
Proceeds from issuance of common stock............................... 713 20,151
Repurchase of common stock........................................... (857) -
Proceeds from and (issuance of ) officer notes receivable............ - (200)
--------------- -----------
Net cash provided by (used in) financing activities........... (453) 19,660
--------------- -----------
Net increase (decrease) in cash and cash equivalents................ (6,224) 7,041
Cash and cash equivalents at beginning of period.................... 13,232 2,677
--------------- -----------
Cash and cash equivalents at end of period.......................... $ 7,008 $ 9,718
--------------- -----------
--------------- -----------
</TABLE>
See accompanying notes.
5
<PAGE>
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 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 condensed consolidated 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 nine month periods shown as having ended December 31, 1998 and
1997 actually ended on December 25, 1998 and December 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):
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ------------
<S> <C> <C>
Raw materials.............................. $ 509 $ 409
Work-in-process............................ 1,268 552
Finished goods............................. 354 658
------------ ------------
$ 2,131 $ 1,619
------------ ------------
------------ ------------
</TABLE>
6
<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 nine
months ended December 31, 1998 and 1997 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-----------------------------------------
1998 1997 1998 1997
------- --------- -------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) for basic and
diluted EPS:..................... $ 1,691 $ (3,827) $ 2,729 $(12,190)
------- --------- -------- ---------
Denominator for basic EPS --
Weighted-average shares......... 10,810 9,980 10,793 9,726
Effect of dilutive securities:
Stock options................... 951 -- 694 --
------- --------- -------- ---------
Denominator for diluted EPS --
Adjusted weighted-average
shares outstanding and assumed
conversions..................... 11,761 9,980 11,487 9,726
------- --------- -------- ---------
------- --------- -------- ---------
</TABLE>
For the three and nine months ended December 31, 1997 the effect of the
assumed exercise of stock options was antidilutive, therefore basic and diluted
loss per share as presented on the 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 are considered to be 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 A . This diversification of risk is consistent with the Company's
investment policy, which is to maintain liquidity and to 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.
7
<PAGE>
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.
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 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 nine months ended December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- -----------------
1998 1997 1998 1997
-------- --------- ------- --------
<S> <C> <C> <C> <C>
Net income (loss)................. $ 1,691 $ (3,827) $ 2,729 $(12,190)
Other comprehensive income:
Change in unrealized gain (loss)
on available-for-sale
investments....................... (67) (3) (9) 76
-------- --------- ------- --------
Comprehensive income (loss)....... $ 1,624 $ (3,830) $ 2,720 $(12,114)
-------- --------- ------- --------
-------- --------- ------- --------
</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
effective for the Company beginning fiscal year 1999. While the Company does
not anticipate that FASB 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.
8
<PAGE>
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 and October 1998 the Company repurchased 56,800 shares at a cost of
$857,000 under this repurchase program. All of the repurchased shares were
subsequently canceled and returned to the status of authorized, unissued shares.
NOTE 9. 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 December 31, 1998.
9
<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-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 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-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.
During 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 and Techstar Percutaneous Vascular
Surgery ("PVS") products.
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 nine month periods shown as having ended December 31, 1998 and
1997 actually ended on December 25, 1998 and December 26, 1997, respectively.
For ease of presentation, the accompanying financial statements have been shown
as ending on the last day of the calendar month.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
REVENUES. The Company's net revenues increased to $11.6 million for the
three months ended December 31, 1998 from $2.4 million for the three months
ended December 31, 1997. The increase in revenues is primarily attributable to
the introduction of the latest generation of the Company's Prostar and Techstar
products in the United States. Combined shipments of Prostar and Techstar units
increased to approximately 49,000 units for the three months ended December 31,
1998 from 13,000 units for the three months ended December 31, 1997. Domestic
10
<PAGE>
sales as a percentage of total revenue for the three months ended December 31,
1998 increased to 91% from 80% for the three months ended December 31, 1997.
Sales of Prostar and Techstar products accounted for 74% and 26%, respectively,
of the net revenues for the three months ended December 31, 1998.
GROSS PROFIT. Gross profit increased to $8.2 million for the three months
ended December 31, 1998 from $279,000 for the three months ended December 31,
1997. Gross profit increased to 71% of net revenues for the quarter ended
December 31, 1998 from 12% of net revenues for the quarter ended December 31,
1997. 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.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 54%
to $2.1 million for the three months ended December 31, 1998 from $1.4 million
for the three months ended December 31, 1997. 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 increased due to an accelerated development
schedule for the Company's next generation PVS product.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 55% to $4.7 million for the three months ended December 31,
1998 from $3.0 million for the three months ended December 31, 1997. 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. Fifteen clinical specialists joined the sales force in the
current quarter. These individuals facilitate training at the Company's larger
accounts, thereby allowing the sales force to open new accounts. Additionally,
the Company's 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 39% to $403,000 for
the three months ended December 31, 1998 from $290,000 for the three months
ended December 31, 1997 primarily as a result of higher average balances for
cash and short-term investments resulting from the Company's common stock
offering in November 1997.
NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997
REVENUES. Net revenues for the nine months ended December 31, 1998
increased to $29.1 million from $4.8 million for the nine months ended December
31, 1997. Combined shipments of Prostar and Techstar units increased to 127,000
units for the nine months ended December 31, 1998 from 27,000 units for the
nine months ended December 31, 1997. Domestic sales as a percentage of total
revenue for the nine months ended December 31,1998 increased to 90% from 72% for
nine months ended December 31, 1997. Sales of Prostar and Techstar products
accounted for 66% and 34%, respectively, of net revenues for the nine months
ended December 31, 1998.
11
<PAGE>
GROSS PROFIT. Gross profit increased to $19.3 million for the nine
months ended December 31, 1998 from a negative gross profit of $591,000 for
the nine months ended December 31, 1997. Gross profit increased to 66% of net
revenues for the nine months ended December 31, 1998 from a negative gross
profit of 12% of net revenues for the nine months ended December 31, 1997.
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.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 44%
to $5.6 million for the nine months ended December 31, 1998 from $3.9 million
for the nine months ended December 31, 1997. The increase in research and
development costs was attributable to a significant increase in headcount
resulting in higher payroll expenses. The Company was working on the next
generation PVS product at an accelerated development schedule, as well as
continuing with the clinical testing models of the Heartflo-TM- device. The two
projects required much higher spending levels for prototype supplies and outside
services in the current nine-month period than that required in the nine months
ended December 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 39% to $11.9 million for the nine months ended December 31,
1998 from $8.6 million for the nine months ended December 31, 1997. 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. 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 31% to $1.3 million
for the nine months ended December 31, 1998 from $1.0 million for the nine
months ended December 31, 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.
INCOME TAXES
The income tax provision for the three and nine months ended December 31,
1998 of $89,000 and $143,000, 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 nine months ended December 31, 1997 as
the Company did not have taxable income.
As of March 31, 1998, the Company had net operating loss carryforwards for
federal and state tax purposes of approximately $38.0 million and $15.0 million,
respectively, which will expire from 1998 through 2013 if not utilized. The
Company also had research and development tax credit carryforwards of
approximately $250,000 and $130,000, respectively, for federal and state 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.
12
<PAGE>
QUARTERLY TREND ANALYSIS
The following tables summarize certain statement of operations data,
percent of net revenue and trends for the quarterly periods specified.
Statement of operations data or trends from period to period, should not be
considered as representative of results of operations for future periods. The
Company's results of operations may fluctuate from period to period and may be
affected by those risks and uncertainties set forth under "Factors Affecting
Operating Results."
Unaudited, in thousands except for percentage data
<TABLE>
<CAPTION>
SELECTED QUARTERLY INCOME STATEMENT OF OPERATIONS DATA
Dec 97 Mar 98 Jun 98 Sep 98 Dec 98
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues........................... $ 2,412 $ 5,839 $ 8,364 $ 9,123 $ 11,564
Gross profit........................... 279 3,439 5,174 5,853 8,230
Research and development............... 1,377 1,547 1,629 1,883 2,125
Selling, general and administrative.... 3,025 3,924 3,633 3,629 4,684
Income (loss) from operations.......... (4,123) (2,032) (88) 341 1,421
Net income (loss)...................... $ (3,827) $(1,606) $ 283 $ 755 $ 1,691
<CAPTION>
PERCENTAGE OF QUARTERLY NET REVENUE
Dec 97 Mar 98 Jun 98 Sep 98 Dec 98
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues........................... 100% 100% 100% 100% 100%
Gross profit........................... 12 59 62 64 71
Research and development............... 57 26 19 21 18
Selling, general and administrative.... 125% 67% 43 40 41
Income from operations................. -- -- -- 4 12
Net income............................. -- -- 3% 8% 15%
<CAPTION>
QUARTERLY PERCENTAGE CHANGE COMPARED AS A % OF THE PRECEDING QUARTER
Mar 98 Jun 98 Sep 98 Dec 98
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues........................... 142% 43% 9% 27%
Gross profit........................... 1,133 50 13 41
Research and development............... 2 5 16 13
Selling, general and administrative.... 30% (7%) 0 29
Income from operations................. -- -- -- 317
Net income............................. -- -- 167% 124%
</TABLE>
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash provided by operating activities was $1.6 million
for the nine months ended December 31, 1998, compared to net cash used of
$12.6 million for the nine months ended December 31, 1997. The Company's
transition to profitability in the current nine month period, which resulted in
net income of $2.7 million compared to a net loss of $12.2 million for the nine
months ended December 31, 1997, was the main reason for the generation of cash
provided by operating activities in the current nine month period.
The Company's net cash used by investing activities was $7.4 million for
the nine months ended December 31, 1998 compared to net cash used by investing
activities of $59,000 for the nine months ended December 31, 1997. For the nine
months ended December 31, 1998 net purchases of short-term investments used $2.4
million in cash as compared to $1.2 million of net proceeds for the same period
in 1997. Equipment and leasehold improvement purchases for the nine months
ended December 31, 1998 were $2.6 million, as compared to $1.4 million for the
nine months ended December 31, 1997. The major equipment and leasehold
improvement purchases for the current nine month period were related to the
build out of a new headquarters and manufacturing facility, as well as the
acquisition of machinery and tooling for both manufacturing and R&D products.
Other assets increased by $2.4 million for the nine months ended
December 31, 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
the 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 released after eighteen months upon the Company meeting certain financial
criteria. The standard security deposit of $518,000 is 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 after
completion of certain construction activities. Lease payments on the new
building commenced in August 1998.
The Company's net cash used by financing activities was $453,000 for the
nine months ended December 31, 1998, compared to cash generated of $19.7 million
for the nine months ended December 31, 1997 primarily as a result of the
Company's common stock offering in November 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 and October 1998 the Company
repurchased 56,800 shares at a cost of $857,000 under this repurchase program.
The Company's principal source of liquidity at December 31, 1998 consisted
of cash, cash equivalents and short-term investments of $27.7 million versus
$31.6 million at March 31, 1998.
14
<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, 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.
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 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 software in its
business, and has already obtained certifications of Year 2000 compliance from
its software vendors. As of December 31, 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 has contacted its critical suppliers in
order to assess their compliance. As of December 31, 1998 two thirds of those
suppliers contacted have responded. All responses indicate that the supplier is
aware of the Year 2000 issue and intends to be compliant. With regard to those
suppliers who have not yet responded, if there is any question as to a
supplier's ability to provide product after December 31, 1999 a joint effort
will be made between quality assurance and the materials group to assist that
supplier in achieving compliance or qualify another supplier. There can be no
assurance 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.
15
<PAGE>
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 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.
HISTORY OF LOSSES AND LIMITED HISTORY OF PROFITABILITY. The Company has a
limited history of profitability. The Company has experienced significant
operating losses since inception and has incurred a cumulative net loss of
approximately $39.0 million as of December 31, 1998. Although the Company
recorded net income for each of the three quarters in the nine months ended
December 31, 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
16
<PAGE>
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. The Company plans to move to a new headquarters and
manufacturing facility in the March 1999 quarter and will require FDA approval
of the manufacturing facility in order to ship approved product from the new
facility to U.S. customers.
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, 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.
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.
17
<PAGE>
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 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 bypass 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.
18
<PAGE>
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,
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 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.
19
<PAGE>
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.
20
<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 December 31, 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
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 December 31, 1998.
INDEX TO EXHIBITS
Exhibit No. Description
- ------------ -----------
10.15 1995 Director Option Plan, as amended to date and Form
of Director Option Agreement thereunder.
27.1 Financial Data Schedule (Edgar version only).
21
<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: February 8, 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)
22
<PAGE>
PERCLOSE, INC.
1995 DIRECTOR OPTION PLAN
(AS AMENDED EFFECTIVE DECEMBER 11, 1998)
1. PURPOSES OF THE PLAN. The purposes of this 1995 Director Option Plan
are to attract and retain the best available personnel for service as Outside
Directors (as defined herein) of the Company, to provide additional incentive to
the Outside Directors of the Company to serve as Directors, and to encourage
their continued service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "BOARD" means the Board of Directors of the Company.
(b) "CODE" means the Internal Revenue Code of 1986, as amended.
(c) "COMMON STOCK" means the Common Stock of the Company.
(d) "COMPANY" means Perclose, Inc., a Delaware corporation.
(e) "CONTINUOUS STATUS AS A DIRECTOR" means the absence of any
interruption or termination of service as a Director.
(f) "DIRECTOR" means a member of the Board.
(g) "EMPLOYEE" means any person, including officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a Director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(i) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share of
Common Stock shall be the closing sales price for such stock (or the closing
bid, if no sales were reported) as quoted on such system or exchange (or the
exchange with the greatest volume of trading in Common Stock) on the day of
determination, as reported in THE WALL STREET
<PAGE>
JOURNAL or such other source as the Board deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but
not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the day of determination, as reported in THE WALL
STREET JOURNAL or such other source as the Board deems reliable, or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(j) "NEW OUTSIDE DIRECTOR" means an Outside Director who becomes a
Director after the effective date of this Plan.
(k) "OPTION" means a stock option granted pursuant to the Plan.
(l) "OPTIONED STOCK" means the Common Stock subject to an Option.
(m) "OPTIONEE" means an Outside Director who receives an Option.
(n) "OUTSIDE DIRECTOR" means a Director who is not an Employee.
(o) "PARENT" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(p) "PLAN" means this Perclose, Inc. 1995 Director Option Plan.
(q) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 10 of the Plan.
(r) "SUBSIDIARY" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of
1986.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 10 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is four hundred thousand (400,000) Shares (the "Pool") of Common
Stock. The Shares may be authorized but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan; provided, however, that Shares that have actually been
issued under the Plan shall not be returned to the Plan and shall not become
available for future distribution under the Plan.
4. ADMINISTRATION AND GRANTS OF OPTIONS UNDER THE PLAN.
<PAGE>
(a) PROCEDURE FOR GRANTS. The provisions set forth in this Section
4(a) shall not be amended more than once every six months, other than to comport
with changes in the Code, the Employee Retirement Income Security Act of 1974,
as amended, or the rules thereunder.
(i) Each New Outside Director shall be automatically
granted an Option to purchase fifteen thousand (15,000) Shares (a "First
Option") on the date on which such person first becomes a Director, whether
through election by the stockholders of the Company or appointment by the Board
to fill a vacancy.
(ii) After a First Option has been granted to a New Outside
Director or Outside Director, such individual shall thereafter be eligible for
discretionary option grants (each a "Subsequent Option"), provided that on the
date of any such Subsequent Option grant, such New Outside Director or Outside
Director shall have served on the Board for at least six (6) months. The Board
shall act as administrator of the Plan with respect to Subsequent Option grants.
The grants of Subsequent Options shall be structured in a manner to satisfy the
requirements for exemption under Securities and Exchange Commission Rule 16b-3.
(iii) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, any exercise of an Option made before the Company has obtained
stockholder approval of the Plan in accordance with Section 16 hereof shall be
conditioned upon obtaining such stockholder approval of the Plan in accordance
with Section 16 hereof.
(iv) The terms of a First Option granted hereunder shall be
as follows:
(A)the term of the First Option shall be ten (10) years.
(B)the First Option shall be exercisable only while the Outside Director
remains a Director of the Company, except as set forth in Section 8 hereof.
(C)the exercise price per Share shall be 100% of the fair market value per
Share on the date of grant of the First Option. In the event that the date of
grant of the First Option is not a trading day, the exercise price per Share
shall be the Fair Market Value on the next trading day immediately following the
date of grant of the First Option.
(D)the First Option shall become exercisable as to 1/48 of the Shares
subject to the First Option at the end of each full month following the date of
grant, subject to continued service as an Outside Director.
(v) The terms of a Subsequent Option granted hereunder
shall be as follows:
(A)the term of the Subsequent Option shall be ten (10) years.
(B)the Subsequent Option shall be exercisable only while the Outside
Director remains a Director of the Company, except as set forth in Section 8
hereof.
<PAGE>
(C)the exercise price per Share shall be 100% of the fair market value per
Share on the date of grant of the Subsequent Option. In the event that the date
of grant of the First Option is not a trading day, the exercise price per Share
shall be the Fair Market Value on the next trading day immediately following the
date of grant of the First Option.
(D)each the Subsequent Option shall become exercisable on a vesting
schedule determined by the Board at the date of grant.
(vi) In the event that any Option granted under the Plan
would cause the number of Shares subject to outstanding Options plus the number
of Shares previously purchased under Options to exceed the Pool, then the
remaining Shares available for Option grant shall be granted under Options to
the Outside Directors on a pro rata basis. No further grants shall be made
until such time, if any, as additional Shares become available for grant under
the Plan through action of the stockholders to increase the number of Shares
which may be issued under the Plan or through cancellation or expiration of
Options previously granted hereunder.
5. ELIGIBILITY. Options may be granted only to Outside Directors. All
Options shall be granted in accordance with the terms set forth in Section 4
hereof. An Outside Director who has been granted an Option may, if he is
otherwise eligible, be granted an additional Option or Options in accordance
with such provisions.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board or its approval by the stockholders of the
Company as described in Section 16 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 11 of the Plan.
7. FORM OF CONSIDERATION. The consideration to be paid for the Shares to
be issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (iv) delivery of a properly
executed exercise notice together with such other documentation as the Company
and the broker, if applicable, shall require to effect an exercise of the Option
and delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (v) any combination of the foregoing methods of payment.
8. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times as are set forth in
Section 4 hereof; provided, however, that no Options
<PAGE>
shall be exercisable until stockholder approval of the Plan in accordance with
Section 16 hereof has been obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) RULE 16b-3. Options granted to Outside Directors must comply
with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act
or any successor thereto and shall contain such additional conditions or
restrictions as may be required thereunder to qualify Plan transactions, and
other transactions by Outside Directors that otherwise could be matched with
Plan transactions, for the maximum exemption from Section 16 of the Exchange
Act.
(c) TERMINATION OF CONTINUOUS STATUS AS A DIRECTOR. In the event an
Optionee's Continuous Status as a Director terminates (other than upon the
Optionee's death or disability), the Optionee may exercise his or her Option,
but only within three (3) months from the date of such termination, and only to
the extent that the Optionee was entitled to exercise it on the date of such
termination (but in no event later than the expiration of its ten (10) year
term). To the extent that the Optionee was not entitled to exercise an Option
on the date of such termination, and to the extent that the Optionee does not
exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate.
(d) DISABILITY OF OPTIONEE. In the event Optionee's Continuous
Status as a Director terminates as a result of disability, the Optionee may
exercise his or her Option, but only within twelve (12) months from the date of
such termination, and only to the extent that the Optionee was entitled to
exercise it on the date of such termination (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of termination, or if he or she does
not exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate.
<PAGE>
(e) DEATH OF OPTIONEE. In the event of an Optionee's death, the
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance may exercise the Option, but only within twelve (12)
months following the date of death, and only to the extent that the Optionee was
entitled to exercise it on the date of death (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to exercise such Option
does not exercise such Option (to the extent otherwise so entitled) within the
time specified herein, the Option shall terminate.
9. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER, ASSET
SALE OR CHANGE OF CONTROL.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of Shares covered by each outstanding
Option, the number of Shares which have been authorized for issuance under the
Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per Share covered by each such outstanding Option, and the number of
Shares issuable pursuant to the automatic grant provisions of Section 4 hereof
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of Shares
subject to an Option.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it will terminate immediately prior to the
consummation of such proposed action.
(c) MERGER OR ASSET SALE. 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, each outstanding Option shall be assumed or an equivalent option
shall be substituted by the successor corporation or a Parent or Subsidiary of
the successor corporation. In the event that the successor corporation does not
agree to assume the Option or to substitute an equivalent option, each
outstanding Option shall become fully vested and exercisable, including as to
Shares as to which it would not otherwise be exercisable. If an Option becomes
fully vested and exercisable in the event of a merger or sale of assets, the
Board shall notify the Optionee that the Option shall be fully exercisable for a
period of thirty (30) days from the date of such notice, and the Option shall
terminate upon the expiration of
<PAGE>
such period. For the purposes of this paragraph, the Option shall be considered
assumed if, following the merger or sale of assets, the option or right confers
the right to purchase, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares).
11. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. Except as set forth in Section 4, the
Board may at any time amend, alter, suspend, or discontinue the Plan, but no
amendment, alteration, suspension, or discontinuation shall be made which would
impair the rights of any Optionee under any grant theretofore made, without his
or her consent. In addition, to the extent necessary and desirable to comply
with Rule 16b-3 under the Exchange Act (or any other applicable law or
regulation), the Company shall obtain stockholder approval of any Plan amendment
in such a manner and to such a degree as required.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4 hereof.
13. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares, if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
14. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve
<PAGE>
and keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.
15. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
16. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the stockholders of the Company at or prior to the first annual
meeting of stockholders held subsequent to the granting of an Option hereunder.
Such stockholder approval shall be obtained in the degree and manner required
under applicable state and federal law.
<PAGE>
PERCLOSE, INC.
1995 DIRECTOR OPTION PLAN
DIRECTOR OPTION AGREEMENT
Perclose, Inc., a Delaware corporation (the "Company"), has granted to
__________( the Optionee"), an option to purchase a total of _________
shares (the "Shares") of the Company's Common Stock (the "Optioned Stock"),
at the price determined as provided herein, and in all respects subject to
the terms, definitions and provisions of the Company's 1995 Director Option
Plan (the "Plan") adopted by the Company which is incorporated herein by
reference. The terms defined in the Plan shall have the same defined
meanings herein.
1. NATURE OF THE OPTION. This Option is a nonstatutory option and
is not intended to qualify for any special tax benefits to the Optionee.
2. EXERCISE PRICE. The exercise price is ____________ for each
share of Common Stock.
3. EXERCISE OF OPTION. This Option shall be exercisable during
its term in accordance with the provisions of Section 8 of the Plan as
follows:
(i) RIGHT TO EXERCISE.
(a) This Option shall be exercisable in accordance
with the following schedule:
[ ]
(b) This Option may not be exercised for a fraction of a
share.
(c) In the event of Optionee's death, disability or
other termination of service as a Director, the
exercisability of the Option is governed by
Section 8 of the Plan.
(ii) METHOD OF EXERCISE. This Option shall be exercisable by
written notice which shall state the election to exercise the Option and the
number of Shares in respect of which the Option is being exercised. Such
written notice, in the form attached hereto as Exhibit A, shall be signed by
the Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company. The written notice shall be accompanied by payment
of the exercise price.
<PAGE>
4. METHOD OF PAYMENT. Payment of the exercise price shall be by
any of the following, or a combination thereof, at the election of the
Optionee:
(i) cash;
(ii) check; or
(iii) other shares which (x) in the case of shares acquired
upon exercise of an Option, have been owned by the Optionee for more than six
(6) months on the date of surrender, and (y) have a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised; or
(iv) delivery of a properly executed exercise notice together
with such other documentation as the Company and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company
of the sale or loan proceeds required to pay the exercise price; or
(v) any combination of the foregoing methods of payment.
5. RESTRICTIONS ON EXERCISE. This Option may not be exercised if
the issuance of the Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulations, or if such issuance
would not comply with the requirements of any stock exchange upon which the
Shares may then be listed. As a condition to the exercise of this Option,
the Company may require Optionee to make any representation and warranty to
the Company as may be required by any applicable law or regulation.
6. NON-TRANSFERABILITY OF OPTION. This Option may not be
transferred in any manner otherwise than by will or by the laws of descent or
distribution and may be exercised during the lifetime of Optionee only by the
Optionee. The terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
7. TERM OF OPTION. This Option may not be exercised more than ten
(10) years from the date of grant of this Option, and may be exercised during
such period only in accordance with the Plan and the terms of this Option.
8. TAXATION UPON EXERCISE OF OPTION. Optionee understands that,
upon exercise of this Option, he or she will recognize income for tax
purposes in an amount equal to the excess of the then Fair Market Value of
the Shares purchased over the exercise price paid for the Shares. Since the
Optionee is subject to Section 16(b) of the Securities Exchange Act of 1934,
as amended, under certain limited circumstances the measurement and timing of
such income (and the commencement of any capital gain holding period) may be
deferred, and the Optionee is advised to contact a tax advisor concerning the
application of Section 83 in general and the availability of an 83(b)
election in particular in connection with the exercise of the Option. Upon a
resale of the Shares by the Optionee, any difference between the sale price
and the Fair Market Value of the Shares on the date of exercise of the
Option, to the extent not included in income as described above, will be
treated as capital gain or loss.
<PAGE>
DATE OF GRANT: ____________
PERCLOSE, INC.
a Delaware corporation
By:
------------------------------
Henry A. Plain, Jr.
President & CEO
Optionee acknowledges receipt of a copy of the Plan, a copy of which
is attached hereto, and represents that he is familiar with the terms and
provisions thereof, and hereby accepts this Option subject to all of the
terms and provisions thereof. Optionee hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under the Plan.
OPTIONEE:
Dated:
---------------------------
------------------------------------
<PAGE>
EXHIBIT A
PERCLOSE, INC.
1995 DIRECTOR OPTION PLAN
DIRECTOR STOCK OPTION EXERCISE NOTICE
Perclose, Inc.
199 Jefferson Drive
Menlo Park, CA 94025
Attention: Chief Financial Officer
1. EXERCISE OF OPTION. The undersigned ("Optionee") hereby elects
to exercise Optionee's option to purchase _________ shares of the Common Stock
(the "Shares") of Perclose, Inc. (the "Company") under and pursuant to the
Company's 1995 Director Stock Option Plan and the Director Stock Option
Agreement dated ___________________ (the "Agreement").
2. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that
Optionee has received, read and understood the Agreement.
3. FEDERAL RESTRICTIONS ON TRANSFER. Optionee understands that
the Shares must be held indefinitely unless they are registered under the
Securities Act of 1933, as amended (the "1933 Act"), or unless an exemption
from such registration is available, and that the certificate(s) representing
the Shares may bear a legend to that effect. Optionee understands that the
Company is under no obligation to register the Shares and that an exemption
may not be available or may not permit Optionee to transfer Shares in the
amounts or at the times proposed by Optionee.
4. TAX CONSEQUENCES. Optionee understands that Optionee may
suffer adverse tax consequences as a result of Optionee's purchase or
disposition of the Shares. Optionee represents that Optionee has consulted
with any tax consultant(s) Optionee deems advisable in connection with the
purchase or disposition of the Shares and that Optionee is not relying on the
Company for any tax advice.
5. DELIVERY OF PAYMENT. Optionee herewith delivers to the Company
the aggregate purchase price for the Shares that Optionee has elected to
purchase and has made provision for the payment of any federal or state
withholding taxes required to be paid or withheld by the Company.
<PAGE>
6. ENTIRE AGREEMENT. The Agreement is incorporated herein by
reference. This Agreement and the Agreement constitute the entire agreement
of the parties and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof. This Exercise Notice and the Agreement are governed by California
law except for that body of law pertaining to conflict of laws.
Submitted by: Accepted by:
OPTIONEE: PERCLOSE, INC.
By:
----------------------- --------------------------
V.P. of Finance
Address:
------------------------
Dated: Dated:
------------------------------ ----------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS FOUND IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED DECEMBER
31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,008
<SECURITIES> 20,740
<RECEIVABLES> 6,208
<ALLOWANCES> 400
<INVENTORY> 2,131
<CURRENT-ASSETS> 36,625
<PP&E> 7,257
<DEPRECIATION> 3,162
<TOTAL-ASSETS> 43,706
<CURRENT-LIABILITIES> 3,776
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 39,919
<TOTAL-LIABILITY-AND-EQUITY> 43,706
<SALES> 29,051
<TOTAL-REVENUES> 29,051
<CGS> 9,794
<TOTAL-COSTS> 9,794
<OTHER-EXPENSES> 55
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> 2,872
<INCOME-TAX> 143
<INCOME-CONTINUING> 2,729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,729
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.24
</TABLE>
