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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 OCTOBER 1, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. For the
transition period from to .
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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) 474-3000
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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
Yes [X] No [ ]
As of October 31, 1999, there were 11,215,582 shares of the
Registrant's Common Stock outstanding.
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PERCLOSE, INC.
TABLE OF CONTENTS
<TABLE>
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Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999 and March 31,1999............... 3
Condensed Consolidated Statements of Income for the three months and six months ended
September 30, 1999 and 1998.................................................................... 4
Condensed Consolidated Statements of Cash Flows for the six months ended September 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 Risks.................................... 20
PART II. OTHER INFORMATION.......................................................................................... 21
INDEX TO EXHIBITS.................................................................................................... 21
SIGNATURES........................................................................................................... 22
</TABLE>
2
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PERCLOSE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data)
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- ---------
<S> <C> <C>
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 9,314 $ 7,333
Short-term investments ................................................. 23,056 22,864
Accounts receivable, net ............................................... 10,636 7,689
Other receivables ...................................................... 1,061 73
Inventories ............................................................ 3,425 2,549
Prepaid expenses ....................................................... 953 689
-------- --------
Total current assets ................................................ 48,445 41,197
Equipment and leasehold improvements, net ................................ 7,073 5,767
Officer notes receivable ................................................. 200 200
Other assets ............................................................. 2,380 2,426
-------- --------
Total assets ............................................................. $ 58,098 $ 49,590
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 1,508 $ 1,717
Accrued compensation ................................................... 1,753 1,886
Accrued warranty ....................................................... 219 45
Other accrued expenses ................................................. 1,780 995
Notes payable .......................................................... -- 32
Capital lease obligations .............................................. 43 --
-------- --------
Total current liabilities ........................................... 5,303 4,675
Deferred rent ............................................................ 125 --
Capital lease obligations-long term ...................................... 105 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value ...................................... -- --
Common stock, $0.001 par value ......................................... 11 11
Additional paid-in capital ............................................. 83,613 81,427
Accumulated other comprehensive income (loss) .......................... (79) (31)
Accumulated deficit .................................................... (30,885) (36,219)
Deferred compensation .................................................. (95) (273)
-------- --------
Total stockholders' equity ............................................... 52,565 44,915
-------- --------
Total liabilities and stockholders' equity ............................... $ 58,098 $ 49,590
======== ========
</TABLE>
See accompanying notes.
3
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PERCLOSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------- ---------------------------------
1999 1998 1999 1998
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Net revenues ................................ $ 16,496 $ 9,123 $ 32,541 $ 17,487
Cost of goods sold .......................... 5,513 3,270 9,759 6,460
-------- -------- -------- --------
Gross profit ................................ 10,983 5,853 22,782 11,027
Operating expenses:
Research and development ................. 2,471 1,883 5,430 3,512
Selling, general and administrative ...... 6,191 3,629 12,128 7,262
-------- -------- -------- --------
Total operating expenses .............. 8,662 5,512 17,558 10,774
-------- -------- -------- --------
Income from operations ...................... 2,321 341 5,224 253
Other income (expense)
Interest income, net ..................... 400 424 840 850
Other income (expense) ................... (9) 29 (137) (11)
-------- -------- -------- --------
Total other income (expense) .......... 391 453 703 839
Income before income taxes .................. 2,712 794 5,927 1,092
Provision for income taxes .................. 271 39 593 54
-------- -------- -------- --------
Net income .................................. $ 2,441 $ 755 $ 5,334 $ 1,038
======== ======== ======== ========
Basic earnings per common share ............. $ 0.22 $ 0.07 $ 0.48 $ 0.10
======== ======== ======== ========
Diluted earnings per common share ........... $ 0.20 $ 0.07 $ 0.43 $ 0.09
======== ======== ======== ========
Shares used in computing basic earnings per
share ....................................... 11,204 10,817 11,161 10,785
======== ======== ======== ========
Shares used in computing diluted earnings per
share ....................................... 12,474 11,271 12,370 11,339
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
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PERCLOSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
--------------------------
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES
Net income .................................................. $ 5,334 $ 1,038
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ............................ 1,024 749
Deferred compensation amortization ....................... 178 167
Compensation expense related to consultants' stock options 324 --
Changes in operating assets and liabilities:
Accounts receivable ................................... (2,947) (886)
Other receivables ..................................... (988) (20)
Inventories ........................................... (876) (288)
Prepaid expenses ...................................... (466) 117
Accounts payable ...................................... (209) (145)
Accrued compensation .................................. (133) 250
Accrued warranty ...................................... 174 --
Deferred rent ......................................... 125 --
Other accrued expenses ................................ 785 (33)
-------- --------
Net cash provided by operating activities ............ 2,325 949
INVESTING ACTIVITIES
Purchases of short-term investments ......................... (5,473) (5,474)
Proceeds from sales and maturities of short-term investments 5,233 7,372
Purchases of equipment and leasehold improvements ........... (2,206) (1,051)
Proceeds from sale of fixed assets .......................... 78 --
Other assets ................................................ 46 (1,772)
-------- --------
Net cash used in investing activities ................ (2,322) (925)
FINANCING ACTIVITIES
Payments under notes payable ................................ (32) (269)
Capital lease obligations ................................... 148 --
Proceeds from issuance of common stock ...................... 1,862 643
Repurchase of common stock .................................. -- (293)
-------- --------
Net cash provided by financing activities ........... 1,978 81
-------- --------
Net increase in cash and cash equivalents .................. 1,981 105
Cash and cash equivalents at beginning of period ........... 7,333 13,232
-------- --------
Cash and cash equivalents at end of period ................. $ 9,314 $ 13,337
======== ========
</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 first three
months, the quarter ended July 2, 1999, had 14 weeks. The three month periods
shown as having ended September 30, 1999 and 1998 actually ended on October 1,
1999 and September 25, 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>
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September 30, March 31,
1999 1999
------------------- -------------------
<S> <C> <C>
Raw materials.................... $ 1,356 $ 700
Work-in-process.................. 1,206 967
Finished goods................... 863 882
------------------- -------------------
$ 3,425 $ 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 and six months ended September 30, 1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------- ---------------------
1999 1998 1999 1998
------- ------ ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income numerator for basic and
diluted EPS: ...................... $ 2,441 $ 755 $ 5,334 $ 1,038
------- ------- ------- -------
Denominator:
Denominator for basic EPS--
Weighted-average shares ........... 11,204 10,817 11,161 10,785
Effect of dilutive securities:
Stock options ..................... 1,270 454 1,209 554
------- ------- ------- -------
Denominator for diluted EPS--
Adjusted weighted-average shares
Outstanding and assumed conversions 12,474 11,271 12,370 11,339
======= ======= ======= =======
</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 and six months ended September 30, 1999 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
----------------- ---------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income ............................... $ 2,441 $ 755 $ 5,334 $ 1,038
Other comprehensive income:
Change in unrealized gain (loss)
on available-for-sale investments..... 5 58 (48) 75
Change in unrealized gain (loss)
on foreign currency translation ...... 2 -- -- --
------- ------- ------- -------
Comprehensive income ..................... $ 2,448 $ 813 $ 5,286 $ 1,113
======= ======= ======= =======
</TABLE>
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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 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.
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. PENDING MERGER
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.
NOTE 9. PRODUCT RECALL
In early July 1999 Perclose announced a voluntary, lot specific recall
of the Techstar 6XL product. The recall was due to a manufacturing process
variation that led to difficulty in a small number of instances with deploying
the needles featured in the Company's suture-based technology. Perclose replaced
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 during the quarter
ended June 30, 1999.
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 Prostar-Registered Trademark- products,
which are marketed in the U.S. and internationally, surgically close the
arterial access site in the femoral artery after catheterization procedures
such as angioplasty, stenting, atherectomy and diagnostic angiography. The
Techstar-Registered Trademark- products are available worldwide to surgically
close the arterial access site in the femoral artery following diagnostic
catheterization procedures. Outside the U.S., the Techstar products are also
available for use following interventional catheterization procedures. A
second group of products, the Heartflo-TM- System, is under development and
is designed to automate the surgical connection of blood vessels in
conventional and minimally invasive coronary artery bypass surgery.
The Company commenced international shipments of its first Prostar 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. A pre-market approval supplement (PMAS) application has been submitted
for the new generation of PVS product, the Closer-TM- 6F, for use following
diagnostic catheterization procedures. Data from a 200 patient clinical trial,
conducted at five cardiovascular centers, were submitted to support the PMAS.
The PMAS application is currently under review.
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 first three
months, the quarter ended July 2, 1999, had 14 weeks. The three month periods
shown as having ended September 30, 1999 and 1998 actually ended on October 1,
1999 and September 25, 1998, respectively. For ease of presentation, the
accompanying financial statements have been shown as ending on the last day of
the calendar month.
10
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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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30,1999 AND 1998
REVENUES. The Company's net revenues increased 81% to $16.5 million for
the three months ended September 30, 1999 from $9.1 million for the three months
ended September 30, 1998. The increase in revenues was primarily a result of
increased shipments of the Techstar 6F XL systems in the United States. Domestic
sales as a percentage of total revenue for the three months ended September 30,
1999 increased to 92% from 90% for the three months ended September 30, 1998.
Sales of Prostar and Techstar products accounted for 27% and 72%, respectively,
of the net revenues for the three months ended September 30, 1999.
GROSS PROFIT. Gross profit increased to $11.0 million for the three
months ended September 30, 1999 from $5.9 million for the three months ended
September 30, 1998. Gross profit increased to 67% of net revenues for the
quarter ended September 30, 1999 from 64% of net revenues for the quarter ended
September 30, 1998. The increase in gross profit was primarily due to increases
in sales and production volumes, which contributed to reductions in overhead
cost per unit and enabled the Company to achieve improvements in manufacturing
efficiency. Production volume of Techstar and Prostar devices increased 99% to
80,000 units for the quarter ending September 30, 1999 from 40,000 units
produced during the quarter ending September 30, 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
31% to $2.5 million for the three months ended September 30, 1999 from $1.9
million for the three months ended September 30, 1998. Most of the increase in
research and development costs was attributable to a significant increase in
headcount resulting in higher payroll expenses. In addition, due to the
additional operating costs of the Company's new facility, research and
development's portion of the facility allocation increased 118% for the three
months ended September 30, 1999 compared to the three months ended September 30,
1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 71% to $6.2 million for the three months ended
September 30, 1999 from $3.6 million for the three months ended September 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. In addition, administrative expenses in the three
months ended September 30, 1999 increased significantly as a result of one time
expenses related to the acquisition by Abbott Laboratories and from litigation
costs associated with a patent infringement suit with a competitor.
OTHER INCOME (EXPENSE). Other income decreased slightly to $391,000 for
the three
11
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months ended September 30, 1999 from $453,000 for the three months ended
September 30, 1998. Although the amount of cash and short term investments
did not change significantly between the two periods, interest income
decreased due to a number of the higher yielding securities that have
matured, thereby reducing the average yield during the three months ended
September 30, 1999.
SIX MONTHS ENDED SEPTEMBER 30,1999 AND 1998
REVENUES. The Company's net revenues increased 86% to $32.5 million for
the six months ended September 30, 1999 from $17.5 million for the six months
ended September 30, 1998. The increase in revenues was primarily a result of
increased shipments of the Techstar 6F XL systems in the United States. Domestic
sales as a percentage of total revenue for the six months ended September 30,
1999 increased to 92% from 89% for the six months ended September 30, 1998.
Sales of Prostar and Techstar products accounted for 27% and 72%, respectively,
of the net revenues for the six months ended September 30, 1999.
GROSS PROFIT. Gross profit increased to $22.8 million for the six
months ended September 30, 1999 from $11.0 million for the six months ended
September 30, 1998. Gross profit increased to 70% of net revenues for the six
months ended September 30, 1999 from 63% of net revenues for the six months
ended September 30, 1998. The increase in gross profit was primarily due to
increases in sales and production volumes, which contributed to reductions in
overhead cost per unit and enabled the Company to achieve improvements in
manufacturing efficiency. Production volume of Techstar and Prostar devices
increased 110% to 176,000 units for the six months ended September 30, 1999 from
84,000 units produced during the six months ended September 30, 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
55% to $5.4 million for the six months ended September 30, 1999 from $3.5
million for the six months ended September 30, 1998. Most of the increase in
research and development costs was attributable to a significant increase in
headcount resulting in higher payroll expenses. In addition, materials and
manufacturing labor associated with prototype builds for the Company's next
generation PVS product, the Closer, were substantially higher in the six months
ended September 30, 1999 as compared to the comparable period ended September
30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased 67% to $12.1 million for the six months ended
September 30, 1999 from $7.3 million for the six months ended September 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. In addition, administrative expenses in the six
months ended September 30, 1999 increased significantly as a result of one time
expenses related to the acquisition by Abbott Laboratories and from litigation
costs associated with a patent infringement suit with a competitor.
OTHER INCOME (EXPENSE). Net other income decreased to $703,000 for the
six months ended September 30, 1999 from $839,000 for the six months ended
September 30, 1998. Interest income decreased slightly due to a lower average
yield during the six months ended September 30, 1999. In addition, rent and
operating expenses exceeded rental income for a facility that was not fully
sub-leased during the 1999 period.
12
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INCOME TAXES
The income tax provision for the three and six months ended September
30, 1999 and 1998 is based on a projected effective tax rate of 10% and 5%,
respectively. The tax rates differ from the statutory rate of 35% primarily due
to the benefits of the use of tax net operating loss forwards. The income tax
provision anticipated is attributable to current foreign, state, and federal
minimum income taxes.
As of fiscal year end 1999, the Company had net operating loss
carryforwards for federal and state tax purposes of approximately $39.0 million
and $14.0 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 $2.3
million for the six months ended September 30, 1999, compared to $949,000 for
the six months ended September 30, 1998. The Company's increased profitability
in the six months ended September 30, 1999, which resulted in net income of $5.3
million compared to net income of $1.0 million for the six months ended
September 30, 1998, was the main reason for the increased generation of cash in
the current six month period. A higher sales volume in the six months ended
September 30, 1999 resulted in $876,000 of cash being used to increase inventory
levels, and $2.9 million additional cash being used to support accounts
receivable.
The Company's net cash used by investing activities was $2.3 million
for the six months ended September 30, 1999 compared to net cash used by
investing activities of $925,000 for the six months ended September 30, 1998.
For the six months ended September 30, 1999 net purchases of short-term
investments used $240,000 in cash as compared to $1.9 million of net proceeds
for the same period in 1998. Equipment and leasehold improvement purchases for
the six months ended September 30, 1999 were $2.2 million, as compared to $1.1
million for the six months ended September 30, 1998. The larger equipment
purchases related to tooling for the Closer (the new generation Techstar) as
well as machinery for the machine shop, which will provide additional capacity
to maintain the quick turn around needed for new product development. In
addition, final invoices were paid related to the build out of the Company's new
headquarters and manufacturing facility.
The Company's net cash generated by financing activities was $2.0
million for the six months ended September 30, 1999, compared to cash generated
of $81,000 for the six months ended September 30, 1998. Proceeds from the
issuance of common stock relating to option exercises provided $1.9 million for
the current period compared to $643,000 for the period ended September 30, 1998.
The Company's principal source of liquidity at September 30, 1999
consisted of cash,
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cash equivalents and short-term investments of $32.4 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, utility reliability and 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 has completed the replacement of its system servers and 90% of its
desktop work stations. The remaining 10% of the desktop work stations will be
replaced by November 30, 1999. The new equipment will facilitate Year 2000
readiness, however, the equipment is being acquired for the purpose of replacing
older computers. In addition to relying on the certification of its suppliers,
the Company has completed testing by its internal computer staff to ensure Year
2000 compliance relating to computer hardware and software.
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. The Company has not incurred any expenses outside of
ordinary operating expenses in connection with its Year 2000 assessment and
compliance plan.
14
<PAGE>
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 September 1999 all
suppliers of the Company's Techstar and Prostar products have been contacted and
have responded. Responses indicate that the suppliers are aware of the Year 2000
issue and intend to be compliant. During October 1999 additional suppliers
associated with the Company's new Closer-TM- product were contacted. The
majority of the responses have yet to be returned. 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.
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
15
<PAGE>
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 September 30,1999, had an accumulated
deficit of approximately $30.9 million. Although the Company has recorded net
income for each quarter since 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.
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.
16
<PAGE>
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 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
17
<PAGE>
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 was due to a manufacturing process
variation that led to difficulty in a number of instances with deploying the
needles featured in the Company's suture-based technology. Perclose replaced 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 during 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 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
18
<PAGE>
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 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
19
<PAGE>
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.
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.
20
<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
October 1, 1999.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
27.1 Financial Data Schedule (Edgar version only).
</TABLE>
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: November 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
<TABLE> <S> <C>
<PAGE>
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