-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D2rImzSHMd+/iH1RqJKMZH08KNl9EsIU4RqSB8oc/RPyWVTdm3vtgTTNjN7/KLo9 uiw7irHeY+wNwvN8Es9XWA== 0000912057-96-013420.txt : 19960701 0000912057-96-013420.hdr.sgml : 19960701 ACCESSION NUMBER: 0000912057-96-013420 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19960628 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERCLOSE INC CENTRAL INDEX KEY: 0000934438 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 3154669 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26890 FILM NUMBER: 96588063 BUSINESS ADDRESS: STREET 1: 199 JEFFERSON DRIVE CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 4154733100 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended March 31, 1996. 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 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (415) 473-3100 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value (Title of class) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosures of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate value of voting stock held by non-affiliates of the Registrant was approximately $139,361,053 as of May 31, 1996, based upon the average of the high and low prices of the Registrant's Common Stock reported for such date on the Nasdaq National Market. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes. As of May 31, 1996, the Registrant had outstanding 9,485,769 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Certain information is incorporated into Part III of this report by reference to the Proxy Statement for the Registrant's 1996 annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K. Certain information is incorporated into Parts II and IV of this report by reference to the Registrant's annual report to stockholders for the year ended March 31, 1996. PERCLOSE, INC. INDEX PAGE NUMBER ------ PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The Company . . . . . . . . . . . . . . . . . . . . . . . . . 2 Industry Overview . . . . . . . . . . . . . . . . . . . . . . 2 Perclose Solution . . . . . . . . . . . . . . . . . . . . . .4 Business Strategy . . . . . . . . . . . . . . . . . . . . . . 4 Products and Technology . . . . . . . . . . . . . . . . . . . 5 Clinical and Regulatory Status. . . . . . . . . . . . . . . . 7 Marketing and Distribution. . . . . . . . . . . . . . . . . . 7 Research and Development. . . . . . . . . . . . . . . . . . . 8 Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . 8 Competition . . . . . . . . . . . . . . . . . . . . . . . . . 9 Patents and Proprietary Rights. . . . . . . . . . . . . . . . 9 Government Regulation . . . . . . . . . . . . . . . . . . . .10 Third-Party Reimbursement . . . . . . . . . . . . . . . . . .12 Product Liability and Insurance . . . . . . . . . . . . . . .13 Employees . . . . . . . . . . . . . . . . . . . . . . . . . .13 Additional Risk Factors . . . . . . . . . . . . . . . . . . .13 Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . .15 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . .15 Item 4. Submission of Matters to a Vote of Security Holders . . . . .15 PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . .16 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . .16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . .16 Item 8. Financial Statements and Supplementary Data . . . . . . . . .16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . .16 PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Item 10. Directors And Executive Officers of The Registrant. . . . . .17 Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . .18 Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . . . . . . . . . .18 Item 13. Certain Relationships and Related Transactions. . . . . . . .18 PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . .19 PART I ITEM 1. BUSINESS THE COMPANY Perclose, Inc. ("Perclose" or the "Company") was incorporated in California in March 1992 and reincorporated in Delaware in October 1995. Perclose designs, develops, manufactures and markets a family of minimally invasive systems used to surgically close arterial access sites in catheterization procedures such as angioplasty and angiography. The Company's proprietary, single-use systems are inserted through the same tract used during catheterization and enable the clinician to suture closed the access site immediately following the catheterization. The Company's Prostar, Prostar Plus and Techstar percutaneous vascular surgery systems are designed to provide routine, definitive closure by replicating results previously obtainable only through open surgery, without the associated risks and costs. Over 19,000 of the Company's systems have been sold since introduction. The Company believes that the Prostar, Prostar Plus and Techstar systems provide significant clinical and economic advantages over current compression methods of arterial access site closure. These advantages include achieving rapid hemostasis, reducing nursing time required to monitor patients, allowing early patient ambulation and discharge, enabling more efficient use of the catheterization laboratory and improving patient comfort. In addition, for certain high risk patients, such as those who have experienced a heart attack, the Company's products allow continuation of aggressive anticoagulation, thrombolytic or anti-restenosis drug therapy without increasing the risk of bleeding complications at the arterial access site. The Company commenced international shipments of its Prostar, Techstar and Prostar Plus systems in December 1994, July 1995 and January 1996, respectively. These systems are currently marketed in Germany, France, Canada, the United Kingdom, the Netherlands, South Africa, Spain and Japan under regulatory approvals where required. In March 1996, the Company completed a clinical trial of the Prostar systems in the United States under an IDE approved by the FDA. The randomized trial was conducted at six investigational sites, involved a total of 500 patients and compared the Prostar system with mechanical compression. The approved protocol for the IDE trial addressed the collection of clinical data as well as time to ambulation. The Company plans to file a PMA application for approval to market the Prostar system in the United States based on the data obtained from the clinical trial. The Company is conducting two additional FDA approved IDE clinical trials in the United States of other Perclose systems. Both trials are being conducted under protocols similar to that of the Prostar clinical trial. A trial for the Techstar 6F was initiated in April 1996 and a trial for the Prostar Plus 8F was initiated in May 1996. INDUSTRY OVERVIEW This Report on Form 10-K contains certain forward looking statements regarding future events with respect to the Company. Actual events or results may differ materially as a result of the factors described herein and in the documents incorporated herein by reference, including, in particular, those factors described under "Additional Risk Factors." THERAPEUTIC INTERVENTIONAL CARDIOLOGY MARKET. More than 6 million people in the United States have been diagnosed with coronary artery disease, which is a formation of atherosclerotic plaque that causes blood flow restrictions, or blockages, within the coronary arteries. These blockages can occur anywhere within the complex network of arteries that provide blood to the heart muscle. If left untreated, coronary artery disease can cause severe chest pain and lead to heart attacks. The principal means of treating coronary artery disease include coronary artery bypass grafting ("CABG"), a highly invasive open surgical procedure, and percutaneous transluminal coronary angioplasty ("balloon angioplasty") as well as other new, percutaneous catheter-based procedures including atherectomy and stenting. Since its clinical introduction in 1978, balloon angioplasty has emerged as the principal less invasive alternative to CABG. Industry sources estimate that during 1994 approximately 850,000 balloon angioplasty, atherectomy, stenting and intra-aortic balloon pump procedures were performed worldwide, including approximately 525,000 such procedures in the United States. Industry sources estimate that the number of therapeutic and -1- diagnostic catheter-based coronary procedures worldwide increased at an annual rate of 13% and 5%, respectively, from 1990 to 1994. At the beginning of a balloon angioplasty procedure, the physician initiates anticoagulation drug therapy, which is continued throughout the procedure. A local anesthetic is administered and a small incision is made in the groin area to gain access to the femoral artery, which is punctured to create an access site for catheterization devices. The cardiologist inserts an introducer sheath into the femoral artery and places a guiding catheter through the introducer sheath to create a path from outside the patient to the arteries of the heart. The cardiologist advances a small guidewire through the inside of the guiding catheter, into the coronary artery and across the site of the blockage. A balloon catheter is delivered over the guidewire through the inside of the guiding catheter into the artery and across the site of the blockage. The balloon is inflated to compress the blockage against the walls of the artery, thereby enlarging the diameter of the arterial lumen and increasing blood flow to the heart muscle. At the conclusion of the procedure, the cardiologist decides if the benefits of continued anticoagulation therapy that can prevent clot formation in the coronary arteries outweigh the increased risk of bleeding at the arterial access site. This decision influences the level of post-procedure nursing observation and the length of the hospital stay, which is typically one to three days. Other catheter-based therapeutic coronary procedures include atherectomy and stenting. The Company believes that the advent of atherectomy and stenting has been responsible for a significant portion of the growth in therapeutic, catheter-based coronary procedures. The emergence of these procedures has emphasized the need for improved arterial access site management techniques because of the increased use of anticoagulation therapy and the large diameter of atherectomy catheters. Atherectomy encompasses several types of devices that are designed to remove atherosclerotic plaque causing an arterial blockage. These procedures include directional coronary atherectomy in which plaque is removed with a miniature cutting system, rotational atherectomy in which a high speed, rotating burr is used to grind plaque into microscopic particles, and laser atherectomy in which laser energy delivered through a fiber optic catheter is used to ablate plaque. Directional and rotational atherectomy devices often require introducer sheaths and catheters of greater diameter than balloon angioplasty catheters. Use of atherectomy devices may require more aggressive anticoagulation therapy than balloon angioplasty. Stents are implantable metal devices delivered on a balloon catheter and permanently deployed at a blockage site to maintain increased lumen diameter by mechanically supporting the artery. In the United States, current labeling of FDA-approved stent devices requires the use of aggressive, long-term anticoagulation therapy in order to avoid blood clot formation at the stent site in the artery. The required anticoagulation therapy has contributed to increased vascular complications at the arterial access site, often extending the hospital stay and sometimes requiring open vascular surgery to control bleeding. Although improved stenting techniques and new stent devices may reduce the need for aggressive anticoagulation in the weeks following the procedure, the Company believes that anticoagulation therapy will continue to be used during stenting procedures in the United States and, in certain high risk patients, may be required for a period of time following the procedure. In addition, stenting procedures have been reported to reduce the risk of abrupt coronary artery closure, thereby creating the possibility for outpatient stenting due to a reduced need to keep patients under nursing observation post-procedure. The current potential for outpatient stenting is, however, limited by the inability to achieve predictable, sustained hemostasis of the arterial access site. DIAGNOSTIC CARDIOLOGY MARKET AND OTHER PERCUTANEOUS VASCULAR PROCEDURES. Patients believed to have coronary artery disease typically undergo angiography to determine the extent and location of their arterial blockages. Angiography is a diagnostic procedure in which dye is delivered through a catheter directly into the coronary arteries. The patient's coronary arteries can be visualized using an x-ray imaging system that produces a real-time image. Similar to therapeutic interventional procedures, angiography is performed using a catheter placed into the vascular system through a puncture in the femoral artery. Industry sources estimate that angiography was performed on approximately 3.1 million patients worldwide in 1994, including over 1.8 million patients in the United States. Angiography procedures represent a significant market opportunity for arterial closure devices because many of these patients are kept under nursing observation for several hours following the procedure primarily to confirm achievement of hemostasis. Many other catheterization procedures rely on percutaneous access to the vascular system through a puncture in the femoral artery. These procedures include peripheral vascular therapeutic and diagnostic procedures, of which approximately 285,000 and 2.7 million, respectively, were performed worldwide in 1994. These procedures may represent a significant market -2- opportunity for arterial closure devices because many of these patients are kept under nursing observation following the procedure primarily to confirm achievement of hemostasis. Therefore, the availability of reliable arterial access site closure devices could facilitate early discharge of these patients. Percutaneous vascular surgery devices could also be used to close arterial access sites in interventional neuroradiology catheterization procedures, electrophysiology procedures to map and ablate cardiac arrhythmias and intra-aortic balloon pump procedures. In addition, emerging percutaneous catheterization procedures and other new interventional procedures, including catheter-based vascular grafts, cardiac pulmonary support procedures and percutaneous treatment of abdominal aortic aneurysms, may also represent new market opportunities for the Company's products. ARTERIAL ACCESS SITE MANAGEMENT. Following catheter-based coronary procedures such as balloon angioplasty, atherectomy, stenting and angiography, the physician must close the arterial access site. In current practice, anticoagulation therapy is discontinued for up to four hours prior to closure of the access site to allow the patient's clotting function to normalize. During this period, the introducer sheath is left in place and the patient must remain immobile in bed to prevent bleeding at the access site. Once the introducer sheath is removed, intense direct pressure is applied to the puncture site for at least 20 minutes to over one hour to facilitate formation of a blood clot in order to seal the arterial access site. This pressure is applied manually or with a large C-clamp or other pressure device placed around the patient's leg. A dislodged clot can result in internal or external bleeding, which may necessitate transfusions or result in other vascular complications if not immediately controlled. Because any movement may dislodge the clot, the patient is required to remain immobile under close nursing observation in a coronary care unit for an additional 4 to 24 hours after the procedure, depending on the amount of anticoagulation drug therapy used and the type of procedure performed. Current closure methods may result in substantial costs, limit operating efficiencies and constrain the scheduling and usage of the catheterization laboratory by the number of beds and nursing staff in the coronary care unit. The arterial access site can be affected by other complications associated with current compression methods, including a hematoma in which a coagulated blood mass forms at the access site, a pseudoaneurysm in which blood continues to flow from the artery into the coagulated blood mass at the access site, femoral nerve damage from extended compression, and a vagal response characterized by a sharp drop in blood pressure. Patients may also experience significant pain and discomfort during compression of the artery and in the period in which they are required to be immobile, and often require pain medication. Many patients report that the pain associated with compression of the artery and immobilization is the most uncomfortable and difficult aspect of the catheterization procedure. In addition to the anticoagulation therapy administered during routine coronary catheterization procedures, the Company believes that post-procedure anticoagulation therapy is necessary in certain patients who are at an elevated risk of formation of a life-threatening blood clot in the coronary arteries. The Company believes these patients may represent up to 30% of therapeutic coronary catheterization patients and include patients who have experienced a heart attack, received stents that may lead to clot formation, or undergone complicated balloon angioplasty characterized by dissection of the arterial wall during expansion of the balloon. For these patients, optimal therapy usually requires continued anticoagulation therapy to keep blood clots from forming, new drugs to reduce the risk of restenosis or thrombolytics to dissolve existing clots. In current practice, the interventional cardiologist is faced with the choice of discontinuing anticoagulation therapy and closing the arterial access site using compression or continuing drug therapy and leaving the sheath in place overnight, which requires the patient to remain immobile and extends the hospital stay. The cardiologist must therefore manage the difficult balance of preventing clot formation in the coronary arteries while encouraging a clot formation to close the arterial access site. In high clinical need patients, current arterial access site management options may lead to a greater risk of heart attack, higher vascular complication rates, significant patient discomfort during immobilization, intensive nursing monitoring, extended hospitalization and increased health care costs. Several new closure devices have been developed in response to the need for improved methods of arterial access site closure following catheterization procedures. These devices include the Company's systems as well as collagen plug devices manufactured by two other companies. These collagen plug devices are delivered through a sheath and placed at the site of the femoral artery puncture. Both collagen plug devices have received recommendations for PMA approval from an FDA advisory panel and one such device received PMA approval for United States commercial sale in October 1995. The Company believes that collagen plug devices do not fully and satisfactorily address the current need for an improved closure method. These collagen plugs still rely on the body's clotting function, which is enhanced by the presence of -3- collagen, and may still require external pressure to achieve closure of the arterial access site. The Company's percutaneous vascular surgery systems provide a mechanical suture closure which aids in the natural healing process and, like open surgical repair, does not rely on the body's clotting function. The Perclose systems should therefore allow more aggressive anticoagulation and other drug therapy following catheterization. PERCLOSE SOLUTION The Company believes that its pereutaneous vascular surgery systems, which achieve rapid closure of arterial access sites following percutaneous catheterization procedures, overcome the clinical disadvantages of current closure methods and will enable catheterization laboratories to achieve increased operating efficiencies and cost savings. The Company's products enable the physician to suture arterial access sites percutaneously, providing a means of closure that has been possible only through open vascular surgery. Since the introduction of catheterization procedures, open vascular surgery has been the definitive method used to close arterial access sites that do not respond to conventional compression therapy. Open surgery requires a long incision in the patient's groin area, involves a significant recovery period and increases overall treatment costs. While surgeons can close the arterial access site with one or two sutures, the invasive nature of open surgery makes it unsuitable for routine use in catheterization patients. The Perclose systems are designed to provide routine, definitive closure by replicating through a minimally invasive procedure the results previously obtainable only through open surgery without the associated risks and costs. The ease of use of the Perclose systems is enhanced by the design of the products which relies on standard cardiovascular catheterization techniques. The Perclose systems are used in the catheterization laboratory to close the arterial access site as the final step in the procedure. By achieving rapid hemostasis, the Perclose systems reduce the need for the patient to remain immobile under close observation in the coronary care unit. This result minimizes pain and discomfort to the patient and allows the patient to ambulate shortly after the catheterization procedure. Early ambulation of patients can also improve utilization of hospital resources. For example, in current practice, angiography is usually performed in the morning to permit same-day discharge following observation and confirmation of hemostasis. Earlier ambulation and discharge of these patients may contribute to more efficient usage of the of catheterization laboratory by allowing scheduling of diagnostic procedures throughout the day. The Perclose systems, which surgically close the access site and do not rely on the body's clotting process to achieve hemostasis, are ideally suited for use in patients who would benefit from aggressive anticoagulation or other drug therapy. Therefore, cardiologists can optimize drug therapy independent of arterial access site management requirements. The Company's products cannot be sold commercially in the United States unless and until FDA approvals or clearances are obtained, and FDA approvals or clearances may not be received for several years, if at all. BUSINESS STRATEGY The Company's objectives are to become the leader in the design, development and commercialization of suture-based closure devices and to establish percutaneous vascular surgery using the Company's products as the standard of care for post-catheterization arterial access site management. The following are key elements of the Company's strategy: - DEMONSTRATE CLINICAL UTILITY AND COST-EFFECTIVENESS. The Company believes that percutaneous vascular surgical repair of arterial access sites decreases time to ambulation and discharge with lower treatment costs and improved comfort for all patients, and can reduce complication rates in high clinical need patients. The Company intends to use data collected from clinical trials to demonstrate the anticipated clinical and cost advantages of its products to physicians and health care payors. - SEEK EARLY REGULATORY APPROVALS IN TARGETED MARKETS. The Company seeks to obtain required regulatory approvals as early as possible, particularly in countries with favorable regulatory environments. The Company has obtained regulatory approvals for its current Prostar, Prostar Plus and Techstar systems in several major European markets, Japan, Canada and several other countries. The Company, through its Japanese distributor, has obtained Japanese regulatory approval for the Prostar, Prostar Plus and Techstar systems and intends to commence clinical trials to support reimbursement approval in Japan. -4- The Company plans to file a PMA application for each system in the United States upon completion of the applicable clinical trial. - FOCUSED MARKETING, SALES AND PHYSICIAN TRAINING. The Company's products are currently marketed to interventional cardiologists, radiologists and catheterization laboratory administrators through leading distributors in Germany, France, Canada, the United Kingdom, the Netherlands, South Africa, Spain and Japan. The Company plans to market its products in the United States through a direct sales organization if and when PMA approval is received. The Company believes that the majority of interventional catheterization procedures in the United States are performed in high volume catheterization laboratories, and that these institutions can be served by a relatively small, focused sales force. The Company develops and maintains close working relationships with its customers to address their needs for products and services and to receive input regarding the Company's product development plans. The Company builds these relationships through focused physician training, which the Company believes will also be a key factor in encouraging cardiologists to use the Company's products. The Company will continue to provide a standardized, in-the-field training course in the markets it enters. - ACCESS NEW MARKET OPPORTUNITIES. The Company believes that several other minimally invasive catheterization procedures, both currently used and under development, will be candidates for the Company's products. The Company intends to expand its product marketing efforts to new clinical applications, including electrophysiology and interventional neuroradiology catheterization procedures and intra-aortic balloon pump procedures, where percutaneous surgical closure of arterial access sites can meet significant clinical needs or achieve cost reductions. - TECHNOLOGICAL LEADERSHIP. The Company intends to position itself at the forefront of technological leadership and innovation in percutaneous vascular surgery. The Company continually evaluates new developments in percutaneous catheterization procedures and will seek to expand its product development efforts to address access site closure following these new procedures, including catheter-based vascular grafts, treatment of abdominal aortic aneurysms and cardiac pulmonary support procedures. The large diameter catheter devices required for these procedures make closure of the arterial access site difficult using conventional compression methods. The Company believes that larger diameter versions of its current products could be used to close the arterial access sites in these procedures, making it feasible to perform such procedures in a minimally invasive manner. The Company also intends to continue to focus on improving the ease of use and reducing the manufacturing costs of its products. In order to protect its proprietary position, the Company will continue to pursue an aggressive patent filing and prosecution strategy. The Company's products cannot be sold commercially in the United States unless and until FDA approvals or clearances are obtained, and FDA approvals or clearances may not be received for several years, if at all. The Company's business is also subject to additional significant risks, including the dependence of the Company on the Prostar, Prostar Plus and Techstar products, the lack of extensive clinical data demonstrating that certain of the Company's products are safe and effective and the risk that the Company's products will not gain market acceptance. PRODUCTS AND TECHNOLOGY The Company currently has three product families, the Prostar, Prostar Plus and Techstar systems. The Prostar and Prostar Plus systems provide two sutures for closing arterial access sites ranging in diameter from 7 French (7F) to 11 French (11F). One French size is equal to one-third of a millimeter in diameter (3F = 1mm). The Techstar systems use single-suture devices for suturing 6F to 8F arterial access sites. The following table summarizes the markets addressed by and current status of each of the Company's products: -5-
- ------------------------------------------------------------------------------------------------------------------------- PRODUCT TARGETED APPLICATIONS FAMILY(1) STATUS - ----------------------------------- --------------- ------------------------------------------------------------- PROSTAR/ PROSTAR PLUS HIGH CLINICAL NEED (2 SUTURE) UNITED STATES INTERNATIONAL(2) - ----------------------------------- --------------- --------------------------- -------------------------- Anticoagulated Stents 8F IDE Clinical Trial Ongoing Commercial Sales Complicated Angioplasty Atherectomy 9F IDE Clinical Trial Completed Commercial Sales Intra-aortic Balloon Pump Electrophysiology Ablation 10F Product Development Completed Clinical Evaluation Thrombolytic Drugs Anti-Restenosis Drugs 11F IDE Clinical Trial Completed Commercial Sales TECHSTAR EARLY AMBULATION/DISCHARGE (1 SUTURE) UNITED STATES INTERNATIONAL - ----------------------------------- --------------- --------------------------- -------------------------- Stents 6F IDE Clinical Trial Ongoing Commercial Sales Angioplasty Peripheral Radiology 7F Product Development Commercial Sales Completed Interventional Neuroradiology Diagnostic Angiography 8F Product Development Commercial Sales Completed Peripheral Radiology 6 FS Product Development Commercial Sales Completed - ------------------------------------------------------------------------------------------------------------------------- (1) "F" refers to French size. 1 French is equal to 1/3 millimeter in diameter. "6FS" refers to a 6F short length Perclose system. (2) Commercial sales occur in Germany, France, Canada, the United Kingdom, the Netherlands, South Africa, Spain and Japan. - -------------------------------------------------------------------------------------------------------------------------
PROSTAR SYSTEM AND PROCEDURE. Prostar is a sterile, single-use system which, as currently configured, consists of a four-needle, two-suture Prostar Percutaneous Vascular Surgical Device, a Prostar Pre-Dilator (for the 9F and 11F sizes only), a Perclose Knot Pusher, and a Prostar Guidewire. The Prostar system is currently marketed internationally in 8F, 9F and 11F sizes. The 8F, 9F and 10F systems are suitable for arterial access sites dilated by 7F to 10F introducer sheaths used during balloon angioplasty, stenting, and rotational atherectomy procedures. The 11F system is used to close puncture sites dilated by 10F or 11F introducer sheaths used during directional coronary atherectomy and intra-aortic balloon pump procedures. At the end of the catheterization procedure, the introducer sheath used in the procedure is removed utilizing a standard over- the-wire exchange technique. For the Prostar 9F and 11F systems, the Prostar Pre-Dilator is inserted to expand the tract from the skin incision to the artery to assist in positioning the Prostar Percutaneous Vascular Surgical Device. Once the pre-dilation of the tract from the skin incision to the artery is complete, another over-the-wire exchange is performed. Next, the flexible sheath of the Prostar Percutaneous Vascular Surgical Device is inserted in the artery over a guidewire. The unique design of the device allows the physician to maintain hemostasis throughout the procedure. The device includes two marker ports in the needle guide, proximal to the tips of the needles. Arterial blood flow into the marker ports indicates that the device has been properly positioned with the needles and sutures inside the arterial lumen. Once positioned, the pull handle is drawn away from the patient, deploying the needles and sutures. As the needles advance toward the artery wall, they are guided by a ramp that precisely positions the needles around the arterial access site. The needles are captured in the barrel of the device which also positions the needles for removal. Two needles, each attached to the end of a single suture, will create one surgical stitch. The needles are removed from the device and detached from the sutures which are then tied in a standard surgical square knot. The device is removed and the knots are advanced to the arterial access site with the Perclose Knot Pusher. The knots can be further secured with additional throws, which are also advanced with the Knot Pusher. -6- TECHSTAR SYSTEM. Techstar is a sterile, single-use system which consists of a two-needle, single-suture Techstar Percutaneous Vascular Surgical Device and a Perclose Knot Pusher. The Techstar system is currently marketed internationally in 6F, 7F, 8F and 6FS (short) sizes. The 6F diameter system is suitable for closure of arterial access sites in therapeutic and diagnostic procedures having puncture sites dilated by 6F or smaller introducer sheaths. The 7F diameter system is suitable for closure of sites in therapeutic and diagnostic procedures having puncture sites dilated by 7F interventional and diagnostic introducer sheaths. The 8F diameter system is suitable for closure of sites in therapeutic and diagnostic procedures having puncture sites dilated by 8F interventional cardiology introducer sheaths. The 6FS diameter system is a shorter system suitable for use in peripheral diagnostic and interventional procedures for vascular diseases of the lower legs. The shorter version allows radiologists to close arterial access sites after these peripheral procedures. Significant differences of the configuration of the Techstar systems versus the Prostar 9F and 11F systems include the use of only two needles and a single suture, a rotating barrel that eliminates the need for a separate pre-dilator, and a monorail configuration that eliminates the need for an additional guidewire. These features, together with several other design changes incorporated into the Techstar system, improve ease of use and ease of manufacturability and reduce manufacturing cost. The Prostar Plus 8F and 10F systems incorporate the design improvements of the Techstar systems, but use the four-needle, two-suture configuration. CLINICAL AND REGULATORY STATUS Perclose systems are currently being marketed in Germany, France, Canada, the United Kingdom, the Netherlands, South Africa, Spain and Japan under regulatory approvals where required. Continued marketing of these products in member countries of the European Union will require the Company to obtain by mid-1998 the certifications necessary for the CE mark to be affixed to these products. The Company has not obtained all such certifications and, although the Company expects that it will be able to obtain such certifications, there can be no assurance that the Company will do so in a timely manner. In March 1996, the Company completed a clinical trial of the Prostar systems in the United States under an IDE approved by the FDA. The randomized trial was conducted at six investigational sites, involved a total of 500 patients and compared the Prostar system with mechanical compression. The approved protocol for the IDE trial addressed the collection of clinical data as well as time to ambulation and time to discharge. The Company plans to file a PMA application for approval to market the Prostar system in the United States based on the data obtained from the clinical trial. The Company is conducting two additional FDA approved IDE clinical trials in the United States of other Perclose systems. Both trials are being conducted under protocols similar to that of the Prostar clinical trial. A trial for the Techstar 6F was initiated in April 1996 and a trial for the Prostar Plus 8F was initiated in May 1996. The Company, through Getz Brothers Company Ltd., its Japanese distributor, has received regulatory approval to market the Prostar, Prostar Plus and Techstar systems in Japan and intends to commence clinical trials in Japan that will form the basis for an application for reimbursement approvals in the Japanese health care system. The Company's distributor will be responsible for management of clinical trials and obtaining reimbursement approval for the Prostar and Techstar systems in Japan, and there can be no assurance that such approvals will be obtained in a timely manner or at all. MARKETING AND DISTRIBUTION The Company's initial sales and marketing strategy is to focus on interventional cardiologists and radiologists through established distributors in major international markets, subject to required regulatory approvals. Perclose systems are currently marketed in Germany, France, Canada, the United Kingdom, the Netherlands, South Africa, Spain and Japan through independent distributors, and the Company intends to add distributors in other countries as its sales and marketing efforts are expanded. The Company generally operates under written distribution agreements with its distributors, although the Company does not have written agreements with certain distributors, typically those in smaller markets. Distributors with which the Company has distribution agreements generally have the exclusive right to sell the Company's products within a defined territory. These distributors also typically market other medical products, although the Company generally seeks to obtain covenants from its distributors prohibiting them from marketing medical devices that compete directly with the Company's products. The Company's -7- distributors typically purchase the Company's products at a discount from list price and resell the products to hospitals and clinics. Sales to international distributors are denominated in United States dollars. The end-user price is determined by the distributor and varies from country to country. All of the Company's revenues through March 31, 1996 were derived from export sales to international distributors, primarily in Europe, none of which are affiliated with the Company. Exports to Europe constituted 87% and 85% of the Company's net sales in the fiscal years ended March 31, 1995 and 1996, respectively. Sales to A.D. Krauth & Co. GmbH, Medicorp and Getz Brothers Company Ltd., the Company's German, French and Japanese distributors, respectively, accounted for approximately 52%, 25% and 8%, respectively of net sales for the fiscal year ended March 31, 1996. The Company plans to market its products domestically through a direct sales organization if and when PMA approval is received. The Company believes that the majority of interventional catheterization procedures in the United States are performed in high volume catheterization laboratories, and that these institutions can be served by a relatively small, focused sales force. The Company will seek to develop and maintain close working relationships with its customers to address their needs for products and services and to receive input regarding the Company's product development plans. The Company intends to build these relationships through focused physician training, which the Company believes will also be a key factor in encouraging cardiologists to use the Company's products. The Company will continue to provide a standardized, in-the-field training course in the markets it enters. As the Company expands existing product lines and introduces systems for new applications, the Company will broaden its marketing and sales activities to reach key practitioners, clinicians and administrators in markets targeted by the Company. RESEARCH AND DEVELOPMENT The Company's research and development activities are performed internally by its 11 person research and development staff. Future research and development efforts are expected to involve application of the Company's core arterial access site closure technology to other catheterization procedures, including vascular grafts, treatment of abdominal aortic aneurysms and cardiac pulmonary support procedures. The large diameter catheter devices used in these procedures make closure of the arterial access site difficult with conventional compression methods. The Company believes that larger diameter versions of its current products could be used for closure of arterial access sites in these procedures, making it feasible to perform such procedures in a minimally invasive manner. Research and development expenses for fiscal 1994, 1995 and 1996 were $1.6 million, $3.1 million and $3.1 million, respectively. MANUFACTURING The Company manufactures its products at its facility in Menlo Park, California. To establish a manufacturing presence within the European Community, the Company has entered into an agreement with AorTech Europe, a contract manufacturer located in Glasgow, Scotland. AorTech performs final assembly, packaging, and shipment of the Company's products to distributors outside the United States. AorTech Europe is ISO 9002 certified and operates a class 10,000 cleanroom. The Company purchases components from various suppliers and relies on single sources for several parts. To date, the Company has not experienced any significant adverse affects resulting from shortages of components. Delays associated with any future part shortages, particularly as the Company scales up its manufacturing activities in support of international distributor orders and, if FDA approval is received, commercial introduction in the United States, would have a material adverse effect on the Company's business, financial condition and results of operations. The Company currently manufactures subassemblies of its products at its Menlo Park facility with final assembly occurring at AorTech. The Company does not have experience in manufacturing its products in large scale commercial quantities. Manufacturers often encounter difficulties in scaling up production of new products, including problems involving production yields, quality control and assurance, component supply and lack of qualified personnel. Difficulties encountered by -8- Perclose in manufacturing scale-up could have a material adverse effect on its business, financial condition and results of operations. COMPETITION Competition in the emerging market for arterial access site closure devices is expected to be intense and to increase. The Perclose systems compete against conventional manual compression, compression devices, and newer collagen plugs. Several companies supply C-clamp devices and C.R. Bard markets the Femostop compression arch. Datascope has received PMA approval from the FDA for, and Kensey-Nash has received a favorable FDA advisory panel recommendation for, products that use collagen plugs to achieve hemostasis. Kensey-Nash may receive PMA approval for its Angioseal device during 1996. The Company believes that American Home Products has distribution rights to the Kensey-Nash device in the United States and internationally. Several other companies are reported to be developing arterial closure devices, some of which have an established presence in the field of interventional cardiology, including Boston Scientific Corporation, Schneider (a subsidiary of Pfizer, Inc.), United States Surgical Corporation, Global Therapeutics Inc. and Guidant Corporation. Many of the Company's competitors have substantially greater name recognition and financial resources than the Company and also have greater resources and expertise in the areas of research and development, obtaining regulatory approvals, manufacturing and marketing. There can be no assurance that the Company's competitors will not succeed in developing and marketing technologies and products that are more effective than those developed and marketed by the Company or that would render the Company's technology and products obsolete or noncompetitive. Additionally, there is no assurance that the Company will be able to compete effectively against such competitors in terms of manufacturing, marketing and sales. Also, there can be no assurance that the Company's products will be able to demonstrate clinical efficacy or cost effectiveness advantages over competing products, or that clinical trials will demonstrate such advantages. The Company believes that the primary competitive factors in the market for arterial closure devices are clinical need, complications, efficacy, time to patient ambulation and discharge, ease of use and price. In addition, the length of time required for products to be developed and to receive regulatory and, in some cases, reimbursement approval is an important competitive factor. The medical device industry is characterized by rapid and significant technological change. Accordingly, the Company's success will depend in part on its ability to respond quickly to medical and technological changes through the development and introduction of new products. Product development involves a high degree of risk and there can be no assurance that the Company's new product development efforts will result in any commercially successful products. The Company believes it competes favorably with respect to these factors, although there is no assurance that it will be able to continue to do so. In addition, the medical device market is generally characterized by rapid change and by frequent emergence of new technologies, products and procedures. There can be no assurance that any such new technologies, products or procedures will not reduce the number of coronary catheterization procedures performed. PATENTS AND PROPRIETARY RIGHTS Perclose's policy is to protect its proprietary position by, among other methods, filing United States and foreign patent applications to protect technology, inventions and improvements that are important to its business. The Company has two issued United States patents covering certain aspects of the percutaneous suturing technology used in the Company's products and has exclusive licenses under two additional issued patents relating to a different method of percutaneous suturing not currently employed by the Company's products. The Company has five United States patent applications pending in the areas of device design, percutaneous suturing for vascular puncture sites and accessory devices. The Company has also licensed, on a nonexclusive basis, certain coating technology used in its products. Under the license, the Company is obligated to pay royalties on sales of products using this coating technology. The Company has also filed several international patent applications corresponding to certain of its United States patent applications. The patent positions of medical device companies, including those of the Company, are uncertain and involve complex and evolving legal and factual questions. The coverage sought in a patent application either can be denied or significantly reduced before or after the patent is issued. Consequently, there can be no assurance that any patent applications will result in the issuance of patents, or that the Company's issued or any future patents will provide significant protection or commercial advantage or will -9- not be circumvented by others. Since patent applications are secret until patents are issued in the United States or corresponding applications are published in international countries, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, the Company cannot be certain that it was the first to make the inventions covered by each of its pending patent applications or that it was the first to file patent applications for such inventions. There can be no assurance that patents held by or licensed to the Company or any patents that may be issued as a result of the Company's pending or future patent applications will be of commercial benefit, afford the Company adequate protection from competing products or technologies or will not be challenged by competitors or others or declared invalid. Also, there can be no assurance that the Company will have the financial resources to defend its patents from infringement or claims of invalidity. In the event a third party has also filed a patent application relating to an invention claimed in a Company patent application, the Company may be required to participate in an interference proceeding declared by the USPTO to determine priority of invention, which could result in substantial uncertainties and costs to the Company, even if the eventual outcome is favorable to the Company. There can be no assurance that any patents issued to the Company would be held valid by a court of competent jurisdiction. The Company relies upon trade secret protection for certain unpatented aspects of other proprietary technology. There is no assurance that others will not independently develop or otherwise acquire substantially equivalent proprietary information or techniques, others will not otherwise gain access to the Company's proprietary technology or disclose such technology, or the Company can meaningfully protect its trade secrets. The Company typically requires its employees and consultants to execute appropriate confidentiality and proprietary information agreements upon the commencement of employment or consulting relationship with the Company. These agreements generally provide that all confidential information developed or made known to the individual by the Company during the course of the individual's relationship with the Company, is to be kept confidential and not disclosed to third parties, except in specific circumstances. The agreements generally provide that all inventions conceived by the individual in the course of rendering services to the Company shall be the exclusive property of the Company; however, certain of the Company's agreements with consultants, who typically are employed on a full-time basis by academic institutions or hospitals, do not contain assignment of invention provisions. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for the Company in the event of unauthorized use, transfer or disclosure of such information or inventions. GOVERNMENT REGULATION UNITED STATES. The Company's systems are regulated in the United States as medical devices by the FDA under the Federal Food, Drug, and Cosmetic Act ("FDC Act") and require premarket clearance or approval by the FDA prior to commercialization. In addition, certain material changes or modifications to medical devices also are subject to FDA review and clearance or approval. Pursuant to the FDC Act, the FDA regulates the research, testing, manufacture, safety, labeling, storage, record keeping, advertising, distribution and production of medical devices in the United States. Noncompliance with applicable requirements can result in warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, and criminal prosecution. Medical devices are classified into one of three classes, Class I, II or III, on the basis of the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices are subject to general controls (E.G., labeling, premarket notification and adherence to GMPs). Class II devices are subject to general controls and to special controls (E.G., performance standards, postmarket surveillance, patient registries, and FDA guidelines). Generally, Class III devices are those which must receive premarket approval by the FDA to ensure their safety and effectiveness (E.G.,life-sustaining, life-supporting and implantable devices, or new devices which have not been found substantially equivalent to legally marketed devices), and require clinical testing to ensure safety and effectiveness and FDA approval prior to marketing and distribution. The FDA also has the authority to require clinical testing of Class I and Class II devices. A PMA application must be filed if the proposed device is not substantially equivalent to a legally marketed predicate device or if it is a Class II device for which the FDA has called for such applications. If human clinical trials of a device are required and if the device presents a "significant risk," the manufacturer or the distributor of the device is required to file an IDE application prior to commencing human clinical trials. The IDE application -10- must be supported by data, typically including the results of animal and, possibly, mechanical testing. If the IDE application is approved by the FDA, human clinical trials may begin at a specific number of investigational sites with a maximum number of patients, as approved by the agency. Sponsors of clinical trials are permitted to sell those devices distributed in the course of the study provided such costs do not exceed recovery of the costs of manufacture, research, development and handling. The clinical trials must be conducted under the auspices of an independent institutional review board ("IRB") established pursuant to FDA regulations. Generally, before a new device can be introduced into the market in the United States, the manufacturer or distributor must obtain FDA clearance of a 510(k) notification or approval of a PMA application. If a medical device manufacturer or distributor can establish that a device is "substantially equivalent" to a legally marketed Class I or Class II device, or to a Class II device for which the FDA has not called for PMAs, the manufacturer or distributor may seek clearance from the FDA to market the device by filing a 510(k) notification. The 510(k) notification may need to be supported by appropriate data establishing the claim of substantial equivalence to the satisfaction of the FDA. The FDA recently has been requiring a more rigorous demonstration of substantial equivalence. Following submission of the 510(k) notification, the manufacturer or distributor may not place the device into commercial distribution until an order is issued by the FDA. No law or regulation specifies the time limit by which the FDA must respond to a 510(k) notification. At this time, the FDA typically responds to the submission of a 510(k) notification within 150 to 200 days. An FDA order may declare that the device is substantially equivalent to another legally marketed device and allow the proposed device to be marketed in the United States. The FDA, however, may determine that the proposed device is not substantially equivalent or require further information, including clinical data, to make a determination regarding substantial equivalence. Such determination or request for additional information could delay market introduction of the products that are the subject of the 510(k) notification. If a manufacturer or distributor of medical devices cannot establish that a proposed device is substantially equivalent to a legally marketed device, the manufacturer or distributor must seek premarket approval of the proposed device through submission of a PMA application. A PMA application must be supported by extensive data, including preclinical and clinical trial data, as well as extensive literature to prove the safety and effectiveness of the device. Following receipt of a PMA application, if the FDA determines that the application is sufficiently complete to permit a substantive review, the FDA will "file" the application. Under the FDC Act, the FDA has 180 days to review a PMA application, although the review of such an application more often occurs over a protracted time period, and generally takes approximately two years or more from the date of filing to complete. The PMA application approval process can be expensive, uncertain and lengthy. A number of devices for which premarket approval has been sought have never been approved for marketing. The review time is often significantly extended by the FDA, which may require more information or clarification of information already provided in the submission. During the review period, an advisory committee likely will be convened to review and evaluate the application and provide recommendations to the FDA as to whether the device should be approved. In addition, the FDA will inspect the manufacturing facility to ensure compliance with the FDA's GMP requirements prior to approval of an application. If granted, the approval of the PMA application may include significant limitations on the indicated uses for which a product may be marketed. The Company plans to file a PMA application with the FDA for approval to sell the Perclose systems commercially in the United States when clinical studies are completed. There can be no assurance that the Company will be able to obtain necessary PMA application approvals to market its systems, or any other products, on a timely basis, if at all, and delays in receipt or failure to receive such approvals, the loss of previously received approvals, or failure to comply with existing or future regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is also required to register as a medical device manufacturer with the FDA and state agencies, such as the CDHS and to list its products with the FDA. As such, the Company will be inspected by both the FDA and the CDHS for compliance with the FDA's GMP and other applicable regulations. These regulations require that the Company manufacture its products and maintain its documents in a prescribed manner with respect to manufacturing, testing and control activities. Further, -11- the Company is required to comply with various FDA requirements for design, safety, advertising and labeling. The Company has not yet undergone an FDA GMP inspection. In June 1995, the Company's Menlo Park, California facility was inspected by the CDHS, and the Company was subsequently granted a California medical device manufacturing license. The Company is required to provide information to the FDA on death or serious injuries alleged to have been associated with the use of its medical devices, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur. In addition, the FDA prohibits an approved device from being marketed for unapproved applications. If the FDA believes that a company is not in compliance with the law, it can institute proceedings to detain or seize products, issue a recall, enjoin future violations and assess civil and criminal penalties against the company, its officers and its employees. Failure to comply with the regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. The advertising of most FDA-regulated products is subject to both FDA and Federal Trade Commission jurisdiction. The Company also is subject to regulation by the Occupational Safety and Health Administration and by other governmental entities. Regulations regarding the manufacture and sale of the Company's products are subject to change. The Company cannot predict what impact, if any, such changes might have on its business, financial condition or results of operations. INTERNATIONAL. International sales of the Company's products are subject to the regulatory agency product registration requirements of each country. The regulatory review process varies from country to country. The Company's distributors have obtained regulatory approval in several European countries and Canada and have applied for additional approvals. There can by no assurance, however, that such approvals will be obtained on a timely basis or at all. At this time, the 8F, 9F and 11F Prostar systems and the 6F, 7F, 8F and 6FS Techstar system are being marketed in Germany, France, Canada, the United Kingdom, the Netherlands, South Africa, Spain and Japan under regulatory approvals where required. The Company is in the process of implementing policies and procedures which are intended to allow the Company to receive ISO 9001 qualification of its processes. The ISO 9000 series of standards for quality operations have been developed to ensure that companies know the standards of quality to which they must adhere to receive certification. The European Union has promulgated rules which require that medical products receive by mid-1998 the right to affix the CE mark, an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. ISO 9000 certification is one of the CE mark certification requirements. Failure to receive the right to affix the CE mark will prohibit the Company from selling its products in member countries of the European Union. There can be no assurance that the Company will be successful in meeting certification requirements. The Company, through its Japanese distributor, has received regulatory approval for commercial sale of the Prostar, Prostar Plus and Techstar systems in Japan and intends to commence clinical trials in Japan that will form the basis of an application for reimbursement approvals in the Japanese health care system. The Company's distributor will be responsible for management of clinical trials and obtaining reimbursement approval for the Prostar and Techstar systems in Japan. There can be no assurance such approvals will be obtained in a timely manner or at all. THIRD-PARTY REIMBURSEMENT Market acceptance of the Company's products in international markets may be dependent in part upon the availability of reimbursement within prevailing health care payment systems. Reimbursement and health care payment systems in international markets vary significantly by country. The main types of health care payment systems in international markets are government sponsored health care and private insurance. Countries with government sponsored health care, such as the United Kingdom, have a centralized, nationalized health care system. New devices are brought into the system through negotiations between departments at individual hospitals at the time of budgeting. In most foreign countries, there are also private insurance systems that may offer payments for alternative therapies. Although not as prevalent as in the United States, health maintenance organizations are emerging in certain European countries. Currently, users of the Company's products in Germany have obtained reimbursement from certain private payors. The Company's products have also been purchased by hospitals in nationalized health -12- systems in the United Kingdom and Canada. The Company has received governmental reimbursement approvals for private hospitals in France and intends to undertake clinical studies in Japan to support governmental reimbursement approvals. The Company may not receive reimbursement approvals in Japan in a timely manner, or at all. The Company may seek additional international reimbursement approvals, although there can be no assurance that any such approvals will be obtained in a timely manner, or at all, and failure to receive additional international reimbursement approvals could have an adverse effect on market acceptance of the Company's products in the international markets in which such approvals are sought. In the United States, health care providers, such as hospitals and physicians, that purchase medical devices such as the Company's products, generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or part of the cost of therapeutic and diagnostic catheterization procedures. Reimbursement for catheterization procedures performed using devices that have received FDA approval has generally been available in the United States. The Company anticipates that in a prospective payment system, such as the DRG system utilized by Medicare, and in many managed care systems used by private health care payors, the cost of the Company's products will be incorporated into the overall cost of the procedure and that there will be no separate, additional reimbursement for the Company's products. The Company anticipates that hospital administrators and physicians will justify the additional cost of an arterial access site closure device by the attendant cost savings and clinical benefits derived from the use of the Company's products. Separate reimbursement for the Company's products is not expected to be available in the United States and there can be no assurance that reimbursement for the Company's products will be available in international markets under either governmental or private reimbursement systems. Furthermore, the Company could be adversely affected by changes in reimbursement policies of governmental or private health care payors, particularly to the extent any such changes affect reimbursement for therapeutic or diagnostic catheterization procedures in which the Company s products are used. Failure by physicians, hospitals and other users of the Company's products to obtain sufficient reimbursement from health care payors for procedures in which the Company's products are used or adverse changes in governmental and private third party payors' policies toward reimbursement for such procedures would have a material adverse effect on the Company's business, financial condition and results of operations. PRODUCT LIABILITY AND INSURANCE The Company's business involves the risk of product liability claims. The Company has not experienced any product liability claims to date. Although the Company maintains product liability insurance with coverage limits of $1.0 million per occurrence and an annual aggregate maximum of $1.0 million, there can be no assurance that product liability claims will not exceed such insurance coverage limits, which could have a material adverse effect on the Company, or that such insurance will be available on commercially reasonable terms or at all. EMPLOYEES As of May 31, 1996, the Company had 89 full-time employees. Approximately 11 persons are engaged in research and development activities, 48 persons are engaged in manufacturing and manufacturing engineering, nine persons are engaged in quality assurance and regulatory affairs, 14 persons are engaged in sales and marketing and seven persons are engaged in general and administrative functions. No employees are covered by collective bargaining agreements, and the Company believes it maintains good relations with its employees. The Company is dependent upon a number of key management and technical personnel, and the loss of services of one or more key employees would have a material adverse effect on the Company. ADDITIONAL RISK FACTORS LIMITED OPERATING HISTORY. The Company has a limited history of operations. Since its inception in March 1992, the Company has been primarily engaged in research and development of its percutaneous arterial access site closure products. The Company has generated only limited revenues from international sales in certain markets, which sales commenced in December 1994, and does not have experience in manufacturing, marketing or selling its products in quantities necessary for achieving profitability. There can be no assurance that the Company's product systems will be further commercialized or that the Company -13- will achieve significant revenues from either international or United States sales. In addition, there can be no assurance that the Company will achieve or sustain profitability in the future. HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES. The Company has experienced significant operating losses since inception and, as of March 31, 1996, had an accumulated deficit of $18.4 million. The development and further commercialization of the Company's current products and other new products, if any, will require substantial development, clinical, regulatory, manufacturing and other expenditures. The Company expects its operating losses to continue for at least the next two years as it continues to expend substantial resources in funding clinical trials in support of regulatory and reimbursement approvals, expansion of manufacturing, marketing and sales activities and research and development. FLUCTUATIONS IN OPERATING RESULTS. The Company's results of operations may fluctuate significantly from quarter to quarter and will depend upon numerous factors, including actions relating to regulatory and reimbursement matters, progress of clinical trials, the extent to which the Company's products gain market acceptance, introduction of alternative means for arterial access site closure and competition. Results of operations will also be affected by the timing of orders received from distributors, the extent to which the Company expands its international distribution network and the ability of distributors to effectively promote the Company's products. DEPENDENCE UPON INTERNATIONAL OPERATIONS AND SALES. All of the Company's product sales to date have been outside the United States, and the Company anticipates that substantially all of its revenues will be derived from international sales until such time, if at all, as its products are approved for sale in the United States. The Company relies on contract manufacturers in Europe for final assembly, sterilization, testing, packaging and shipment of products sold internationally. The Company markets and sells its products outside the United States primarily through a network of international distributors, and the Company's international sales are largely dependent on the marketing efforts of, and sales by, these distributors. Sales through distributors and use of international contract manufacturers are subject to several risks, including the risk of financial instability of distributors or contract manufacturers, the risk of manufacturing and quality control problems with contract manufacturers and the risk that distributors will not effectively promote the Company's products. Loss or termination of distribution relationships could have a material adverse affect on the Company's international sales efforts and could result in the Company repurchasing unsold inventory from former distributors by virtue of local laws applicable to distribution relationships, provisions of distribution agreements or negotiated settlements entered into with such distributors. A number of risks are inherent in international operations and transactions. International sales and operations may be limited or disrupted by the imposition of government controls, export license requirements, political instability, trade restrictions, changes in tariffs, difficulties in staffing, coordinating communications among and managing international operations. Additionally, the Company's business, financial condition and results of operations may be adversely affected by fluctuations in international currency exchange rates as well as increases in duty rates, difficulties in obtaining export licenses, constraints on its ability to maintain or increase prices, and competition. There can be no assurance that the Company will be able to successfully commercialize the Prostar or Techstar system or any future product in any international market. LIMITED SALES AND MARKETING EXPERIENCE. The Company has only limited experience marketing and selling the Prostar and Techstar systems, and does not have experience marketing and selling its products in commercial quantities. The Company currently has a limited network of distributors that cover certain European countries, Japan and Canada. Should the Company receive FDA approval to market its products in the United States, the Company intends to establish a direct sales force. Establishing marketing and sales capability sufficient to support sales in commercial quantities will require significant resources, and there can be no assurance that the Company will be able to recruit and retain direct sales personnel or that future sales efforts of the Company will be successful. RISK OF INADEQUATE FUNDING. The Company plans to continue to expend substantial funds for clinical trials in support of regulatory and reimbursement approvals, expansion of sales and marketing activities, research and development, and establishment of commercial-scale manufacturing capabilities. The Company may be required to expend greater-than-anticipated funds if unforeseen difficulties arise in the course of clinical trials of the Perclose systems, in connection with obtaining necessary regulatory and reimbursement approvals or in other aspects of the Company's business. Although the Company believes that the proceeds from this offering together with the Company's current cash balances and cash generated from the future sale of products -14- will be sufficient to meet the Company's operating and capital requirements through calendar 1997, there can be no assurance that the Company will not require additional financing within this time frame. The Company's future liquidity and capital requirements will depend upon numerous factors, including the progress of the Company's clinical trials, actions relating to regulatory and reimbursement matters, the costs and timing of expansion of marketing, sales, manufacturing and product development activities, the extent to which the Company's products gain market acceptance, and competitive developments. Any additional required financing may not be available on satisfactory terms, if at all. Future equity financings may result in dilution to the holders of the Company's Common Stock. PRODUCT LIABILITY AND RECALL RISK; LIMITED INSURANCE COVERAGE. The manufacture and sale of medical products entail significant risk of product liability claims or product recalls. There can be no assurance that the Company's existing insurance coverage limits are adequate to protect the Company from any liabilities it might incur in connection with the clinical trials or sales of its products. In addition, the Company may require increased product liability coverage as its products are commercialized. Such insurance is expensive and in the future may not be available on acceptable terms, if at all. A successful product liability claim or series of claims brought against the Company in excess of its insurance coverage, or a recall of the Company's products, could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE UPON KEY PERSONNEL. The Company is dependent upon a number of key management and technical personnel. The loss of the services of one or more key employees would have a material adverse effect on the Company. The Company's success will also depend on its ability to attract and retain additional highly qualified management and technical personnel. The Company faces intense competition for qualified personnel, many of whom are often subject to competing employment offers, and there can be no assurance that the Company will be able to attract and retain such personnel. Furthermore, the Company relies on the services of several medical and scientific consultants, all of whom are employed on a full-time basis by hospitals or academic or research institutions. Such consultants are therefore not available to devote their full time or attention to the Company's affairs. POSSIBLE VOLATILITY OF STOCK PRICE. The stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. In addition, the market price of the shares of Common Stock is likely to be highly volatile. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new products by the Company or its competitors, FDA and international regulatory actions, actions with respect to reimbursement matters, developments with respect to patents or proprietary rights, public concern as to the safety of products developed by the Company or others, changes in health care policy in the United States and internationally, changes in stock market analyst recommendations regarding the Company, other medical device companies or the medical device industry generally and general market conditions may have a significant effect on the market price of the Common Stock. ITEM 2. PROPERTIES The Company leases an approximately 20,000 square foot facility in Menlo Park, California. This facility includes an environmentally controlled, class 10,000 clean room for device assembly together with warehouse, laboratory and office space. The facility is leased through August 1998. The Company believes its facilities are adequate to meet its current and reasonably anticipated future requirements. ITEM 3. LEGAL PROCEEDINGS The Company is not party to any legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. -15- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the NASDAQ National Market (ticker symbol PERC). The number of record holders of the Company's Common Stock at May 31, 1996 was 197. The Company has not paid any dividends since its inception and does not intend to pay any dividends in the foreseeable future. The Company completed an initial public offering of 2,500,000 shares of Common Stock in November 1995. Prior to the initial public offering, the Company's Common Stock was not publicly traded. Quarterly high and low stock prices are as follows: Quarter Ended High Low ---------------------------------------- -------- -------- December 31, 1995 (from November 7, 1995) $ 19 1/8 $ 12 3/4 March 31, 1996 26 1/4 15 ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference to the portion of the Registrant's 1996 annual report to stockholders entitled "Selected Financial Data" and included in Exhibit 13.1 to this report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference to the portion of the Registrant's 1996 annual report to stockholders entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and included in Exhibit 13.1 to this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference to the portion of the Registrant's 1996 annual report to stockholders entitled "Financial Statements" and included in Exhibit 13.1 to this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -16- PART III Certain information required by Part III is omitted from this Report on Form 10-K in that the Registrant will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A with respect to the 1996 Annual Meeting of Stockholders (the "Proxy Statement") to be held September 24, 1996 and certain information included therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item relating to directors is incorporated by reference to the information under the caption "Proposal No. 1 - -- Election of Directors" in the Proxy Statement. The executive officers of the Registrant, who are elected by the board of directors, are as follows: Name Age Position - ---------------------- --- ------------------------------------------------- Henry A. Plain, Jr. 38 President, Chief Executive Officer and Director Randolph E. Campbell 39 Vice President of Operations Jeffrey M. Closs 35 Vice President of International Sales and Marketing, General Manager, Europe Ronald W. Songer 38 Vice President of Research and Development Kenneth E. Ludlum 43 Vice President of Finance and Administration and Chief Financial Officer MR. PLAIN joined Perclose in February 1993 as President and Chief Executive Officer and a member of the Company's board of directors. From 1981 until joining the Company, Mr. Plain held various management positions in the pharmaceutical, agricultural and medical device units of Eli Lilly and Company ("Lilly"), a diversified pharmaceutical and medical products company, serving most recently as Director of Worldwide Manufacturing Human Resources from November 1992 to February 1993. Mr. Plain served as Director of Marketing at DVI from June 1991 to November 1992 and as Human Resource Manager at DVI from February 1990 through June 1991. Mr. Plain holds a B.S. in Finance from the University of Missouri. MR. CAMPBELL joined the Company in January 1994 as Vice President of Operations. From 1986 until joining the Company, Mr. Campbell held various management positions at DVI, serving most recently as Director of Manufacturing Engineering from 1992 to 1994 and previously as Director of Product Development from 1990 to 1992. Mr. Campbell holds a B.S. in Chemical Engineering from the University of California at Berkeley. MR. CLOSS joined Perclose in January 1994 as Vice President of International Sales and Marketing and General Manager, Europe. From 1991 until joining the Company, Mr. Closs was Director of Sales and Marketing, Europe, Middle East and Africa for DVI. From June 1985 to May 1991, Mr. Closs held positions in sales and marketing with the Bentley Laboratories Division of Baxter Healthcare Corporation. Mr. Closs holds a B.A. in Psychology from the University of California at Los Angeles and an M.B.A. from Emory University. MR. SONGER joined Perclose in April 1993 as Vice President of Research and Development. From 1990 until joining Perclose, Mr. Songer was Director of Catheter Systems Research and Development for The Spectranetics Corporation, a manufacturer of laser atherectomy systems. Prior to joining Spectranetics, Mr. Songer was Manager of Research and Development for the movable wire systems unit of ACS. Mr. Songer holds a B.S. in Nuclear Engineering from the University of California at Santa Barbara and an M.S. in Mechanical Engineering from the University of California at Berkeley. MR. LUDLUM joined Perclose as Vice President of Finance and Administration and Chief Financial Officer in May 1996. From November 1995 until joining Perclose, Mr. Ludlum was an independent business and financial consultant to health care and high growth companies. From November 1993 to November 1995, Mr. Ludlum was Vice President, Finance & Administration and Chief Financial Officer of RiboGene, Inc., a biopharmaceutical company. From December 1991 to November 1993, Mr. Ludlum was Vice President, Finance and Administration, Treasurer, Chief Financial Officer and Secretary to the Board of Directors of Alteon Inc., a publicly traded biopharmaceutical company devoloping therapies for diabetes. From -17- 1986 to December 1991, Mr. Ludlum held various positions with Montgomery Securities, most recently as a Partner in the health care finance group. Mr. Ludlum holds a B.S. in business from Lehigh University and an M.B.A. from Columbia Business School. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information under the caption "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information under the caption "Record Date and Stock Ownership" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information under the caption "Certain Transactions" in the Proxy Statement. -18- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The following Financial Statements of Perclose, Inc. and Report of Ernst & Young LLP, Independent Auditors are incorporated by reference in the respective portions of the Registrant's 1996 annual report to stockholders included in Exhibit 13.1 to this report: Report of Ernst & Young LLP, Independent Auditors Balance Sheets, March 31, 1996 and 1995 Statements of Operations, Years Ended March 31, 1996, 1995 and 1994 Statement of Stockholders' Equity, Years Ended March 31, 1996, 1995 and 1994 Statements of Cash Flows, Years Ended March 31, 1996, 1995 and 1994 Notes to Financial Statements 2. FINANCIAL STATEMENT SCHEDULES The financial statement schedule entitled "Valuation and Qualifying Accounts" is included at page S-1 of this Form 10-K. All other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the notes thereto. 3. EXHIBITS Refer to (c) below. (b) REPORTS ON FORM 8-K The Company was not required to and did not file any reports on Form 8-K during the three months ended March 31, 1996. (c) EXHIBITS EXHIBIT NO. DESCRIPTION - ------- --------------------------------------------------------------------- 3.1(1) Articles of Incorporation of Perclose, Inc., a California corporation, as currently in effect. 3.2(1) Certificate of Incorporation of Perclose, Inc., a Delaware corporation, as in effect immediately following reincorporation. 3.3(1) Form of Restated Certificate of Incorporation of the Company to be filed after the closing of the offering made under this Registration Statement. 3.4(1) Bylaws of the Registrant, as currently in effect. 3.5(1) Bylaws of the Registrant, as in effect immediately following reincorporation. 4.1(1) Specimen Common Stock Certificate. 10.1(1) Form of Indemnification Agreement between the Company and each of its directors and officers. 10.2(1) 1992 Stock Plan and form of Stock Option Agreement thereunder. -19- EXHIBIT NO. DESCRIPTION - ------- --------------------------------------------------------------------- 10.3(1) 1995 Director Option Plan. 10.4(1) 1995 Employee Stock Purchase Plan and forms of agreements thereunder. 10.5(1) Lease dated July 6, 1993 between Registrant and the David D. Bohanon Organization for facility located at 199 Jefferson Drive, Menlo Park, California, as amended by First Amendment to Lease dated January 31, 1994. 10.6(1) Loan and Security Agreement dated September 29, 1994 between the Registrant, Silicon Valley Bank and MMC/GATX Partnership No. I, as amended by Loan Modification Agreement. 10.7(1) Shareholder Rights Agreement dated August 23, 1995 between the Registrant and certain holders of the Registrant's securities. 10.8(1) Employment Agreement dated March 28, 1995 between the Registrant and Steve Van Dick. 10.9(1) Agreement dated March 30, 1993 between the Registrant and LocalMed, Inc. 11.1 Calculation of earnings per share. 13.1 Portions of Annual Report to Stockholders Incorporated by Reference. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 24.1(1) Power of Attorney. 27.1 Financial Data Schedule. - -------------------- (1) Filed as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-97128) and incorporated herein by reference. -20- SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PERCLOSE, INC. By: /s/ HENRY A. PLAIN, JR. ------------------------------------------ Henry A. Plain, Jr., PRESIDENT AND CHIEF EXECUTIVE OFFICER KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Henry A. Plain, Jr. and Kenneth E. Ludlum, jointly and severally, his or her attorneys-in-fact, and each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. SIGNATURE TITLE DATE - --------------------------------- ----------------------------- -------------- /s/ HENRY A. PLAIN, JR. President, Chief Executive June 28, 1996 - --------------------------------- Officer and Director Henry A. Plain, Jr. (Principal Executive Officer) /s/ KENNETH E . LUDLUM Vice President and Chief June 28, 1996 - --------------------------------- Financial Officer (Principal Kenneth E. Ludlum Financial and Accounting Officer) /s/ ROBERT C. BELLAS, JR. Director June 28, 1996 - --------------------------------- Robert C. Bellas, Jr. /s/ VAUGHN D. BRYSON Director June 28, 1996 - --------------------------------- Vaughn D. Bryson /s/ TOMOAKI HINOHARA, M.D. Director June 28, 1996 - --------------------------------- Tomoaki Hinohara, M.D. /s/ JOHN B. SIMPSON, PH.D., M.D. Director June 28, 1996 - --------------------------------- John B. Simpson, Ph.D., M.D. /s/ JAMES W. VETTER, M.D. Director June 28, 1996 - --------------------------------- James W. Vetter, M.D. /s/ MARK A. WAN Director June 28, 1996 - --------------------------------- Mark A. Wan PERCLOSE, INC. - -------------------------------------------------------------------------------- SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS MARCH 31, 1996
BALANCE AT BEGINNING BALANCE AT OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD ---------- --------- ---------- ------------- March 31, 1995 Allowance for doubtful accounts $ 0 $40,000 $ 0 $40,000 March 31, 1996 Allowance for doubtful accounts $40,000 $20,000 $40,000 $20,000
S-1 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ------- -------------------------------------------------------------------- 11.1 Statement Re: Computation of Per Share Losses 13.1 Portions of Annual Report to Stockholders Incorporated by Reference. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 27.1 Financial Data Schedule. EX-11.1 2 EXHIBIT 11.1 PERCLOSE, INC. EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE LOSSES
YEAR ENDED MARCH 31, -------------------- 1996 1995(1) 1994 ---- ------- ---- HISTORICAL Weighted average common shares outstanding . . . . . . . . . . . . . . . . 4,795,295 1,454,454 Shares related to SAB No. 55, 64 and 83. . . . . . . . . . . . . . . . . . 1,229,297 2,107,366 ----------- ----------- Number of shares used in computing per share amounts . . . . . . . . . . . 6,024,592 3,561,820 ----------- ----------- ----------- ----------- Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(8,084,019) $(2,624,226) ----------- ----------- ----------- ----------- Net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.34) $ (0.74) ----------- ----------- ----------- ----------- PRO FORMA Weighted average common shares outstanding . . . . . . . . . . . . . . . . 4,795,295 1,476,247 Common equivalent shares attributable to convertible preferred stock . . . 1,828,004 3,133,720 Shares related to SAB No. 55, 64, and 83 . . . . . . . . . . . . . . . . . 1,229,297 2,107,366 ----------- ----------- Number of shares used in computing pro forma per share amounts . . . . . . 7,852,596 6,717,333 ----------- ----------- ----------- ----------- Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(8,084,019) $(6,992,858) ----------- ----------- ----------- ----------- Pro forma Net loss per share . . . . . . . . . . . . . . . . . . . . . . . $ (1.03) $ (1.04) ----------- ----------- ----------- ----------- - ----------------------------------------------------------------------------------------------------------------------------------
(1) Pro forma Net loss per share is presented for 1995. EX-13.1 3 EXHIBIT 13.1 SELECTED FINANCIAL DATA ----------------------------------------------------------------------- PERCLOSE, INC. Years Ended March 31, ------------------------------------- (in thousands, expect per share data) 1996 1995 1994 1993 - ------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Net revenues, product sales $ 2,457 $ 178 $ -- $ -- Loss from operations (8,860) (7,192) (2,676) (615) Net loss (8,084) (6,993) (2,624) (608) Net loss per share(1) (1.34) (1.04) Shares used in per share calculations 6,025 6,717 March 31, ------------------------------------- (in thousands) 1996 1995 1994 1993 - ------------------------------------------------------------------------------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments $37,857 $ 8,127 $ 5,539 $ 1,441 Total assets 40,916 10,949 6,386 1,613 Current liabilities 1,095 1,315 487 106 Long-term obligations 511 593 174 -- Total stockholders' equity 38,500 9,041 5,725 1,507 (1) Prior to 1995, statements of operations data omit the historical net loss per share, as it was not presented in the initial public offering registration statement pursuant to SEC guidelines. Pro forma net loss per share is presented for 1995. See Note 1 of Notes to Financial Statements. -1- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------------ - -------------------------------------------------------------------------------- OVERVIEW Since its inception in March 1992, the Company has been engaged in the design, development, clinical testing and more recently the manufacture and sale of a family of suture-based percutaneous arterial access site closure systems, known as the Prostar, Prostar Plus and Techstar systems. The Company's products are designed to close the puncture made in the femoral artery during catheter-based therapeutic and diagnostic cardiology procedures. The Company has received regulatory approvals where required to market certain of its Prostar, Prostar Plus and Techstar systems in several markets in Europe, Canada and Japan. The Company completed enrollment in its 500-patient randomized clinical study for the Prostar system in the United States in March 1996. The Company plans to use the results of the study to file a PMA application. The Company initiated a clinical study for the Techstar 6F system in the United States in April 1996 under an IDE approved by the FDA. - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS FISCAL YEARS ENDED MARCH 31, 1996 AND 1995 Net revenues of $2.5 million in the fiscal year ended March 31, 1996 were the result of Prostar, Prostar Plus and Techstar shipments to international distributors, with 53% and 25% of the sales attributable to the Company's German and French distributor, respectively. The Company commenced international commercial shipments in December 1994 and for the year ended March 31, 1995 had total net revenues of $178,000 representing initial shipments of Prostar systems to the Company's German, English and Canadian distributors. Cost of goods sold, including manufacturing start-up costs, increased to $4.8 million in the fiscal year ended March 31, 1996 from $2.1 million in the fiscal year ended March 31, 1995 as a result of direct material costs associated with products sold, a significant increase in personnel and other costs associated with the commencement of manufacturing and assembly operations, manufacturing engineering and support functions, and a materials procurement and handling function. Research and development expenses were approximately equal in fiscal 1996 and fiscal 1995. Fiscal year 1996 had higher costs associated with additional personnel required for new product development of the Company's Prostar, Prostar Plus and Techstar systems when compared to fiscal year 1995 but fiscal 1995 included a license fee totaling $378,000. Marketing, general and administrative expenses increased 62% to $3.5 million in the fiscal year ended March 31, 1996 from $2.2 million in the fiscal year ended March 31, 1995. The increase was due primarily to increases in personnel and costs associated with the expansion of the Company's European branch office, marketing expenditures, physician training expenses related to the international commercial introduction of the Prostar and Techstar systems and increased administrative personnel in the United States. Interest income increased to $941,000 for the fiscal year ended March 31, 1996, from $258,000 for the fiscal year ended March 31, 1995 primarily as a result of higher cash balances from the Company's initial public offering. Interest expense increased to $166,000 for the fiscal year ended March 31, 1996 from $59,000 for the fiscal ended March 31, 1995 due to increases in notes payable related to the financing of capital equipment. FISCAL YEARS ENDED MARCH 31, 1995 AND 1994 Net revenues of $178,000 in fiscal 1995 were the result of Prostar shipments to international distributors, with 47% of the sales attributable to the Company's German distributor and 38% of the sales attributable to the Company's British distributor. The Company commenced international commercial shipments in December 1994 and, accordingly, had no revenues in fiscal 1994. Cost of goods sold, including manufacturing start-up costs, increased to $2.1 million in fiscal 1995 from $137,000 in fiscal 1994 as a result of direct material costs associated with products sold, a significant increase in personnel and other costs associated with commencement of manufacturing and assembly operations, manufacturing engineering and support functions, and a materials procurement and handling function. Research and development expenses increased 92% to $3.1 million for fiscal 1995 from $1.6 million in fiscal 1994. This increase was primarily a result of additional personnel required for continued development of the Prostar system, initial clinical studies involving the Prostar system and new product development of the Prostar and Techstar systems. Marketing, general and administrative expenses increased 128% to $2.2 million in fiscal 1995 from $945,000 in fiscal 1994. The increase was due primarily to increases in marketing, physician training and travel expenses related to the international commercial introduction of the Prostar system and increased administrative personnel costs. Interest and other income increased to $258,000 for fiscal 1995 from $66,000 for fiscal 1994 primarily as a result of higher cash balances resulting from private equity financings as well as increases in interest rates. Interest expense increased to $59,000 for fiscal 1995 from $14,000 for fiscal 1994 due to increases in notes payable related to the financing of capital equipment. -2- INCOME TAXES The Company has not generated any net income to date and therefore has not paid any federal income taxes since its inception. The Company accounts for income taxes under Statement of Financial Accounting Standards No.109 ("FAS 109"). Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain. Accordingly, valuation allowances, in amounts equal to the net deferred tax assets as of March 31, 1996 and 1995 have been established in each period to reflect these uncertainties. At March 31, 1996, the Company had federal and state net operating loss carryforwards of $17 million and $7 million, respectively, and federal and state tax credit carryforwards of $190,000 and $120,000, respectively, that will expire at various dates beginning in 1998 through 2011, if not utilized. Utilization of net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating loss and tax credit carryforwards before full utilization. - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Perclose has financed its operations primarily through the sale of equity securities and, to a lesser extent, through an equipment credit and loan agreement and product sales. From inception through March 31, 1996, Perclose raised $22.7 million in net proceeds of private equity financings and stock option exercises and $34.1 million in an initial public offering. In addition, the Company borrowed $1.3 million under an equipment credit facility. During the fiscal years ended March 31, 1996, 1995 and 1994, the Company used cash to fund operations of $7.3, $7.0 million and $2.4 million, respectively. The changes in cash used in operations were due primarily to higher expenses associated with increased research and development activities, initiation of marketing and sales activities in international markets, increased general and administrative expenses to support increased operations and purchases of inventory to support international sales. The Company's expenditures for equipment and improvements have aggregated $2.0 million since inception. The Company's principal source of liquidity at March 31, 1996 consists of cash, cash equivalents and short-term investments of $37.9 million. The Company anticipates that its operating losses will continue for at least the next two years since it plans to expend substantial resources in funding clinical trials in support of regulatory approvals, and continues to expand research and development and marketing and sales activities. Although Perclose believes that current cash balances and short-term investments along with cash generated from the future sales of products will be sufficient to meet the Company's operating and capital requirements through calendar 1997, there can be no assurance that the Company will not require additional financing within this time frame. There can be no assurance that additional financing, if required, will be available on satisfactory terms or at all. In any event, Perclose may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Perclose's future liquidity and capital requirements will depend on numerous factors, including progress of the Company's clinical trials, actions relating to regulatory and reimbursement matters, the costs and timing of expansion of marketing, sales, manufacturing and product development activities, the extent to which the Company's products gain market acceptance, and competitive developments. - -------------------------------------------------------------------------------- FACTORS AFFECTING OPERATING RESULTS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's future results from operations could vary significantly as a result of the factors described in this section. The clinical data obtained to date on the Perclose systems are insufficient to demonstrate the safety and efficacy of these products under applicable United States FDA regulatory guidelines. There can be no assurance that the Company's products will prove to be safe and effective in United States clinical trials under applicable regulatory guidelines. In addition, the clinical trials may identify significant technical or other obstacles to be overcome prior to obtaining necessary United States regulatory or United States and further international reimbursement approvals. If the Prostar, Techstar or Prostar Plus systems do not prove to be safe and effective in United States clinical trials or if the Company is otherwise unable to commercialize the Prostar, Techstar or Prostar Plus systems successfully in the United States, the Company's business, financial condition and results of operations could be materially and adversely affected. The Prostar, Prostar Plus and Techstar systems are currently the Company's only products. These products will require additional development, clinical trials and regulatory approvals before they can be marketed in the United States. There can be no assurance that the Company's development efforts will be successful or that the Prostar, Prostar Plus and Techstar systems or any other product developed by the Company will be safe or effective, capable of being manufactured in commercial quantities at acceptable costs, approved by appropriate regulatory and reimbursement authorities or successfully marketed. Furthermore, because the Prostar, Prostar Plus and Techstar systems represent the Company's sole near-term product focus, the Company's operations could be materially and adversely affected if these systems are not successfully commercialized. In addition, continued sales in Europe will require the Company to obtain by mid-calendar 1998 the certifications needed to affix the CE mark to the Company's products. The Company, through its Japanese distributor, has applied for and received regulatory approval to sell the Prostar,Prostar Plus and Techstar systems in Japan and intends to commence clinical trials in Japan that will form the basis of an application for Japanese reimbursement approval. The Company has received certain reimbursement approvals in France and in certain states in Germany. -3- The Company's products represent a new method of closing arterial access sites and there can be no assurance that these products will gain any significant degree of market acceptance among physicians, patients and health care payors, even if necessary international and United States regulatory and reimbursement approvals are obtained. The Company believes that factors affecting market acceptance include; recommendations and endorsements from physicians, that the products represent an attractive alternative to other means of closing arterial access sites, that the products reduce the time to ambulation and hospital stays, and the Company's ability to train interventional cardiologists. Failure of the Company's products to achieve significant market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. Perclose has a limited history of operations and has experienced significant operating losses since inception. As of March 31, 1996, the Company had an accumulated deficit of $18.4 million. The Company has been primarily engaged in research and development of its percutaneous arterial access site closure products. The Company has generated only limited revenues from international sales in certain markets, which sales commenced in December 1994, and does not have experience in manufacturing, marketing or selling its products in quantities necessary for achieving profitability. Manufacturers often encounter difficulties in scaling up production of new products, including problems involving production yields, quality control and assurance, component supply and shortages of qualified personnel. Difficulties encountered by Perclose in manufacturing scale-up could have a material adverse effect on its business, financial condition and results of operations. Perclose anticipates that substantially all of its future revenues from product sales will be derived from sales to its international distributors, unless and until it receives approval to market its products in the United States. Perclose sells its products internationally to distributors who resell to hospitals. There can be no assurance that the Prostar, Prostar Plus and Techstar systems will be successfully commercialized or that the Company will achieve significant revenues from either international or domestic sales. Sales through international distributors are subject to risks, including the risk of financial instability and the risk that the distributor will not effectively promote the Company's products. Loss, termination or ineffectiveness of distributors could have a material adverse effect on the Company's international sales efforts and could result in the Company repurchasing unsold inventory from former distributors by virtue of local laws applicable to distribution relationships, provisions of distribution agreements or negotiated settlements entered into with such distributors. The Company anticipates that its operating losses will continue for at least the next two years since it plans to expend substantial resources in funding clinical trials in support of regulatory approvals, and continues to expand research and development and marketing and sales activities. Even so there can be no assurance that the Company will achieve or sustain profitability in the future. The Company anticipates that its results of operations will fluctuate on a quarterly basis for the foreseeable future due to several factors, including actions relating to regulatory and reimbursement matters, progress of clinical trials, the extent to which the Company's products gain market acceptance, introduction of alternative means for arterial access site closure, and competitive developments. Results of operations will also be affected by the timing of orders received from distributors, the extent to which the Company expands its international distribution network and the ability of distributors to effectively promote the Company's products. Competition in the emerging market for arterial access site closure devices is expected to be intense and to increase. The Company believes its principal competition will come from existing compression closure techniques, as well as newer collagen plug closure devices. Most of the Company's competitors have significantly greater financial, technical, research, marketing, sales, distribution and other resources than the Company. There can be no assurance that the Company's competitors will not succeed in developing or marketing technologies and products that are technologically superior, more effective or commercially 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 change and by frequent emergence of new technologies, products or procedures. There can be no assurance that any such new technologies, products or procedures will not reduce the number of coronary catherization procedures performed. The Company currently manufactures and ships products shortly after receipt of orders, and the Company anticipates that it will continue to do so in the future. Accordingly, to date the Company has not developed a significant backlog and the Company does not anticipate that it will develop a material backlog in the future. -4- BALANCE SHEETS ------------------------------------------------------------------------ PERCLOSE, INC.
March 31, ---------------------------- 1996 1995 ----------------------------- ASSETS Current assets: Cash and cash equivalents $ 9,803,777 $ 3,743,592 Short-term investments 28,052,742 4,383,140 Accounts receivable, net of allowance for returns and doubtful accounts of $20,000 in 1996 and $40,000 in 1995 920,217 109,955 Other receivables 3,212 101,918 Inventories 529,606 957,049 Prepaid expenses 274,364 58,364 ---------------------------- Total current assets 39,583,918 9,354,018 Equipment and leasehold improvements 2,050,475 1,595,857 Less accumulated depreciation and amortization 1,068,353 395,797 ---------------------------- 982,122 1,200,060 Other assets 350,421 395,309 ---------------------------- Total assets $ 40,916,461 $ 10,949,387 ---------------------------- ---------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 317,222 $ 359,884 Accrued compensation 413,840 246,094 Accrued license fee 188,750 377,500 Other accrued expenses 629,253 92,601 Short-term portion of notes payable 356,153 238,482 ---------------------------- Total current liabilities 1,905,218 1,314,561 Long-term portion of notes payable 510,789 593,440 Commitments Stockholders' equity: Preferred stock, $0.001 par value: Authorized shares: 5,000,000 in 1996 and 4,236,073 in 1995 Issued and outstanding shares: none in 1996 and 4,193,640 (convertible) in 1995 -- 4,194 Common stock, $0.001 par value Authorized shares: 30,000,000 in 1996 and 10,000,000 in 1995 Issued and outstanding shares: 9,501,782 in 1996 and 1,982,242 in 1995 9,502 1,982 Additional paid-in capital 57,372,411 19,552,915 Accumulated deficit (18,436,607) (10,224,755) Deferred compensation (444,852) (292,950) ---------------------------- Total stockholders' equity 38,500,454 9,041,386 ---------------------------- Total liabilities and stockholders' equity $ 40,916,461 $ 10,949,387 ---------------------------- ----------------------------
See accompanying notes. -5- STATEMENTS OF OPERATIONS ------------------------------------------------------------------ PERCLOSE, INC.
Years Ended March 31, ----------------------------------------- 1996 1995 1994 ----------------------------------------- Net revenues, product sales $ 2,457,087 $ 178,152 $ -- Operating expenses: Cost of goods sold, including manufacturing start-up expenses 4,772,022 2,149,388 136,534 Research and development 3,058,529 3,065,400 1,594,731 Marketing, general, and administrative 3,486,188 2,155,304 945,018 ----------------------------------------- Total operating expenses 11,316,739 7,370,092 2,676,283 ----------------------------------------- Loss from operations (8,859,652) (7,191,940) (2,676,283) Interest income 941,389 258,338 66,053 Interest expense (165,756) (59,256) (13,996) ----------------------------------------- Net interest income 775,633 199,082 52,057 ----------------------------------------- Net loss $(8,084,019) $(6,992,858) $(2,624,226) ----------------------------------------- ----------------------------------------- Net loss per share $ (1.34) ----------- ----------- Shares used in computing net loss per share 6,024,592 ----------- ----------- Pro forma net loss per share $(1.04) ----------- ----------- Shares used in computing pro forma net loss per share 6,717,333 ----------- -----------
See accompanying notes. -6- STATEMENTS OF CASH FLOWS ------------------------------------------------------------------ PERCLOSE, INC.
Years Ended March 31, ------------------------------------------- 1996 1995 1994 ------------------------------------------- OPERATING ACTIVITIES Net loss $ (8,084,019) $ (6,992,858) $ (2,624,226) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 672,556 336,480 61,470 Deferred compensation amortization 124,994 -- -- Issuance of convertible preferred stock for license -- 60,000 Loss on disposal of equipment -- -- 12,073 Changes in operating assets and liabilities: Accounts receivable (810,262) (109,955) -- Inventory 427,443 (957,049) -- Other receivables and prepaid expenses (117,294) (118,979) (41,303) Accounts payable (42,662) 170,585 156,110 Accrued expenses 515,648 631,382 24,550 ------------------------------------------- Net cash used in operating activities (7,313,596) (6,980,394) (2,411,326) INVESTING ACTIVITIES Purchases of short-term investments (32,180,575) (7,870,138) (12,712,673) Proceeds from maturities of short-term investments 8,383,140 6,476,515 9,872,596 Purchases of equipment and improvements (454,618) (996,377) (537,989) Other assets 44,888 (129,815) (242,102) ------------------------------------------- Net cash used in investing activities (24,207,165) (2,519,815) (3,620,168) FINANCING ACTIVITIES Principal payments under capital lease obligations and notes payable (299,464) (120,450) (28,212) Proceeds from borrowing on notes payable 334,484 565,201 374,171 Proceeds from issuance of preferred stock 3,256,690 10,155,655 6,842,001 Proceeds from issuance of common stock 34,289,236 93,413 292 Payments of stock subscriptions receivable -- -- 101,775 ------------------------------------------- Net cash provided by financing activities 37,580,946 10,693,819 7,290,027 ------------------------------------------- Net increase in cash and cash equivalents 6,060,185 1,193,610 1,258,533 Cash and cash equivalents at beginning of year 3,743,592 2,549,982 1,291,449 ------------------------------------------- Cash and cash equivalents at end of year $ 9,803,777 $ 3,743,592 $ 2,549,982 ------------------------------------------- ------------------------------------------- Supplemental disclosures of cash flow information Cash paid for: Interest $83,628 $59,256 $13,996
See accompanying notes. -7- STATEMENT OF STOCKHOLDERS' EQUITY ------------------------------------------------------------------ PERCLOSE, INC.
Preferred Stock Common Stock -------------------------------------------------------------- Shares Amount Shares Amount -------------------------------------------------------------- Balance at March 31, 1993 1,516,812 $ 1,517 1,452,751 $ 1,453 Issuance of common stock under option plan -- -- 2,920 3 Issuance of Series C convertible preferred stock, net of issuance costs of $29,858 1,616,908 1,617 -- -- Net loss -------------------------------------------------------------- Balance at March 31, 1994 3,133,720 3,134 1,455,671 1,456 Issuance of common stock under option plan -- -- 526,571 526 Issuance of Series D convertible preferred stock, net of issuance costs of $383,545 1,053,920 1,054 -- -- Issuance of Series D convertible preferred stock, for purchase of license 6,000 6 -- -- Deferred compensation related to stock options -- -- -- -- Net loss -- -- -- -- -------------------------------------------------------------- Balance at March 31, 1995 4,193,640 4,194 1,982,242 1,982 Issuance of common stock under employee stock purchase and option plans -- -- 125,113 125 Issuance of Series D convertible preferred stock, net of issuance costs of $1,180 325,787 326 -- -- Conversion of preferred stock in connection with initial public offering (4,519,427) (4,520) 4,519,427 4,520 Issuance of common stock in connection with initial public offering, net of issuance costs of $569,969 -- -- 2,875,000 2,875 Deferred compensation related to stock options -- -- -- -- Amortization of deferred compensation -- -- -- -- Unrealized loss on short-term investments -- -- -- -- Net loss -- -- -- -- -------------------------------------------------------------- Balance at March 31, 1996 -- $ -- 9,501,782 $ 9,502 -------------------------------------------------------------- -------------------------------------------------------------- Additional Total Paid-In Accumulated Deferred Stockholders' Capital Deficit Compensation Equity -------------------------------------------------------------- Balance at March 31, 1993 $ 2,111,810 $ (607,671) $ -- $ 1,507,109 Issuance of common stock under option plan 289 -- -- 292 Issuance of Series C convertible preferred stock, net of issuance costs of $29,858 6,840,384 -- -- 6,842,001 Net loss (2,624,226) -- (2,624,226) -------------------------------------------------------------- Balance at March 31, 1994 8,952,483 (3,231,897) -- 5,725,176 Issuance of common stock under option plan 92,887 -- -- 93,413 Issuance of Series D convertible preferred stock, net of issuance costs of $383,545 10,154,601 -- -- 10,155,655 Issuance of Series D convertible preferred stock, for purchase of license 59,994 -- -- 60,000 Deferred compensation related to stock options 292,950 -- (292,950) -- Net loss (6,992,858) -- (6,992,858) -------------------------------------------------------------- Balance at March 31, 1995 19,552,915 (10,224,755) (292,950) 9,041,386 Issuance of common stock under employee stock purchase and option plans 100,330 -- -- 100,455 Issuance of Series D convertible preferred stock, net of issuance costs of $1,180 3,256,364 -- -- 3,256,690 Conversion of preferred stock in connection with initial public offering -- -- -- -- Issuance of common stock in connection with initial public offering, net of issuance costs of $569,969 34,185,906 -- -- 34,188,781 Deferred compensation related to stock options 276,896 -- (276,896) -- Amortization of deferred compensation -- -- 124,994 124,994 Unrealized loss on short-term investments -- (127,833) -- (127,833) Net loss -- (8,084,019) -- (8,084,019) -------------------------------------------------------------- Balance at March 31, 1996 $ 57,372,411 $ (18,436,607) $ (444,852) $ 38,500,454 -------------------------------------------------------------- --------------------------------------------------------------
See accompanying notes. -8- NOTES TO FINANCIAL STATEMENTS ----------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Perclose, Inc. (or the "Company") was incorporated in the state of California in March 1992 and in October 1995 was reincorporated in Delaware. The Company develops, markets, and sells remote closure devices for increased efficacy and cost-efficiency in interventional cardiology. The Company was in the development stage through March 31, 1994, and its activities during that time consisted primarily of raising capital, recruiting personnel, and performing research and development. The Company commenced initial sales of its products to customers in Europe and Canada during the fourth quarter of fiscal 1995. BASIS OF PRESENTATION Beginning with fiscal 1995, the Company's fiscal year ends on the last Friday in March. For ease of presentation, the accompanying financial statements have been shown as ending on March 31 of each year. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the balance sheet for cash and cash equivalents and short-term investments approximate fair value. The fair value of short-term investments is based on quoted market prices. The carrying amount of the Company's notes payable approximates their fair value. The fair values of the Company's notes payable are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. AVAILABLE-FOR-SALE SECURITIES At March 31, 1996 and 1995 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 a separate component of stockholders' equity. The amortized cost of available-for-sale debt securities is adjusted for the amortization of premiums and the accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than- temporary on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. The following is a summary of available-for-sale securities at March 31, 1996: AMORTIZED GROSS UNREALIZED ESTIMATED FAIR COST LOSSES VALUE ---------------------------------------------- Obligations of federal government agencies $ 2,966,642 $ -- $ 2,966,642 Corporate obligations, principally commercial paper and corporate notes $ 33,180,046 127,833 33,052,213 ---------------------------------------------- $ 36,146,688 $ 127,833 $ 36,018,855 ---------------------------------------------- ---------------------------------------------- Amounts included in short-term investments $ 28,180,575 $ 127,833 $ 28,052,742 Amounts included in cash and cash equivalents 7,966,113 -- 7,966,113 ---------------------------------------------- $ 36,146,688 $ 127,833 $ 36,018,855 ---------------------------------------------- ---------------------------------------------- The following is a summary of available-for-sale securities as of March 31, 1995: AMORTIZED GROSS UNREALIZED ESTIMATED FAIR COST LOSSES VALUE ---------------------------------------------- Obligations of federal government agencies $ 1,931,890 $ -- $ 1,931,890 Corporate obligations 2,451,250 -- 2,451,250 ---------------------------------------------- $ 4,383,140 $ -- $ 4,383,140 ---------------------------------------------- ---------------------------------------------- Amounts included in short-term investments $ 4,383,140 $ -- $ 4,383,140 Amounts included in cash and cash equivalents -- -- -- ---------------------------------------------- $ 4,383,140 $ -- $ 4,383,140 ---------------------------------------------- ---------------------------------------------- During the year ended March 31, 1996, there were no sales of securities available-for-sale or gross realized gains or losses. Available-for-sale debt securities at March 31, 1996, by contractual maturity, are shown below: ESTIMATED FAIR VALUE -------------- Due in one year or less $ 26,319,173 Due after one year to two years 9,699,682 ------------ $ 36,018,855 ------------ ------------ INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market and comprise the following at March 31: 1996 1995 ------------------------- Raw materials $ 226,808 $ 490,812 Work-in-process 197,583 260,736 Finished goods 105,215 205,501 ------------------------ $ 529,606 $ 957,049 ------------------------ ------------------------ -9- EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from one to five years, or over the term of the lease, if shorter. OTHER ASSETS At March 31, 1996, the Company had approximately $326,000 of restricted deposits ($381,000 at March 31, 1995) included in other assets supporting leasehold improvements being performed on the Company's facility. REVENUE RECOGNITION Revenues from sales of products are recognized at the time of shipment with allowances provided for estimated returns. NET LOSS PER SHARE Except as noted below, historical net loss per share is computed using the weighted average number of common shares outstanding. Common equivalent shares from stock options and convertible preferred stock are excluded from the computation as their effect is antidilutive except that, pursuant to the Securities and Exchange Commission (the SEC) Staff Accounting Bulletins, common and common equivalent shares issued during the period beginning twelve months prior to the initial filing of the Company's initial public offering at prices substantially below the initial public offering price have been included in the calculation as if they were outstanding for all periods presented (using the treasury stock method and the assumed public offering price for stock options and warrants and the if-converted method for convertible preferred stock). Historical net loss per share is presented for the year ended March 31, 1996. Historical net loss per share for the year ended March 31, 1994 has not been presented in the accompanying statement of operations since it was not presented in the Company's initial public offering registration statement pursuant to SEC guidelines. Per share information calculated on the above noted basis for 1994 is as follows: Year Ended March 31, 1994 -------------- Net loss per share $ (0.74) ------------ ------------ Shares used in computing net loss per share 3,561,820 ------------ ------------ PRO FORMA NET LOSS PER SHARE Pro forma net loss per share has been computed as described above and also gave effect to common equivalent shares from the convertible preferred stock that automatically converted upon the closing of the Company's initial offering (using the if-converted method). Pro forma net loss per share is presented for the year ended March 31, 1995. Pro forma share information calculated on the above basis for 1996 is as follows: Year Ended March 31, 1996 -------------- Pro forma net loss per share $ (1.03) ------------ ------------ Shares used in computing pro forma net loss per share 7,852,596 ------------ ------------ SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES Supplemental noncash financing activities are as follows: Years Ended March 31, -------------------------------------- 1996 1995 1994 -------------------------------------- Acquisition of equipment under capital lease obligations $ -- $ -- $ 29,112 Issuance of Series D convertible preferred stock for purchase of license $ -- $ 60,000 $ -- RECENT PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based Compensation" which established a fair value based method of accounting for stock-based compensation plans and requires additional disclosures for those companies who elect not to adopt the new method of accounting. The Company will be required to adopt FAS 123 in fiscal 1997. The Company's intention is to continue to account for employee stock awards in accordance with APB Opinion No. 25 and to adopt the "disclosure only" alternative described in FAS 123. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires the Company to review for impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. In certain situations, an impairment loss would be recognized. FAS 121 will become effective for the Company's year ending March 31, 1997. The Company has studied the implications of FAS 121 and, based on its initial evaluation, does not expect its adoption to have a material impact on the Company's financial condition or results of operations. - -------------------------------------------------------------------------------- 2. RELATED PARTY TRANSACTIONS The Company shared its facilities and certain of its personnel and equipment with LocalMed, Inc. ("LocalMed"). LocalMed is a corporation that commenced operations during April 1992 and had common ownership and management with the Company. The Company's facilities and management arrangement with LocalMed ended in July 1993 as the Company relocated to another facility. During the period from April 1992 through July 1993, certain common facilities, personnel and equipment costs were allocated to the respective companies based on the percentage utilized by each company. Management of the Company believes the method used to allocate such common expenses was reasonable. The following represents a summary of expenses allocated to the Company pursuant to this arrangement for the year ended March 31, 1994: Equipment rental $ 8,193 Salaries: General and administrative 20,276 Research and development 27,949 Facilities, materials, and related expenses 52,536 ----------- $ 108,954 ----------- ----------- -10- The Company had no shared costs with LocalMed in fiscal 1996 and 1995. - -------------------------------------------------------------------------------- 3. LEASE ARRANGEMENTS The Company leases its principal facility under an operating lease agreement expiring in August 1998. The agreement requires the Company to pay taxes, insurance, and maintenance expenses. Rental expense was approximately $353,000, $187,000 and $92,000 in fiscal 1996, 1995 and 1994, respectively. The annual minimum rental commitments under all noncancelable operating lease arrangements are as follows at March 31, 1996: 1997 $ 376,000 1998 390,000 1999 208,000 2000 11,000 2001 11,000 ----------- $ 996,000 ----------- ----------- - -------------------------------------------------------------------------------- 4. FINANCING ARRANGEMENTS The Company had a $1,750,000 equipment credit and loan agreement with a bank that expired on March 31, 1996. Loans under the agreement bear interest ranging from 9.07% to 10.60% and are secured by the equipment purchased. Maturities for the next five years under the financing arrangements are as follows at March 31, 1996: 1997 $ 356,000 1998 384,000 1999 113,000 2000 14,000 ----------- $ 867,000 ----------- ----------- - -------------------------------------------------------------------------------- 5. STOCKHOLDERS' EQUITY PUBLIC OFFERING In November 1995, the Company sold a total of 2,875,000 shares of common stock at $13.00 per share through its initial public offering. The net proceeds (after underwriters' commissions and fees and other costs associated with the offering) totaled approximately $34,189,000. In connection with the offering, all convertible preferred stock totaling 4,519,427 shares with an aggregate paid-in value of approximately $22,391,000 were converted into 4,519,427 shares of common stock of the Company. CONVERTIBLE PREFERRED STOCK Convertible preferred stock at March 31, 1995 was as follows: LIQUIDATION DESIGNATED SHARES ISSUED SERIES PREFERENCE SHARES AND OUTSTANDING - -------------------------------------------------------------------------------- A $ 1.00 769,722 769,722 B $ 1.75 747,090 747,090 C $ 4.25 1,619,261 1,616,908 D $ 10.00 1,100.000 1,059,920 ------------------------ Total preferred stock 4,236,073 4,193,640 ------------------------ ------------------------ PREFERRED STOCK In September 1995, the Board of Directors amended, and the stockholders subsequently approved, the Company's Articles of Incorporation to authorize 5,000,000 shares of undesignated preferred stock. Preferred stock may be issued from time to time in one or more series. The Board of Directors is authorized to determine the rights, preferences, privileges, and restrictions granted to and imposed upon any wholly unissued series of preferred stock and to fix the number of shares of any series of preferred stock and the designation of any such series without any vote or action by the Company's stockholders. COMMON STOCK In 1995 the Board of Directors and stockholders approved the reincorporation of the Company in Delaware and authorized capital stock of 30,000,000 shares of common stock and the 5,000,000 shares of preferred stock discussed above. Shares of common stock reserved for future issuance are as follows at March 31, 1996: STOCK OPTION PLANS: Outstanding 841,743 Reserved for future grants 337,761 --------- Total stock option plans 1,179,504 Stock purchase plan 148,141 --------- 1,327,645 --------- --------- - -------------------------------------------------------------------------------- 6. STOCK PLANS STOCK OPTION PLANS The Company currently has two stock option plans for employees, directors and others, the 1992 Stock Plan and the 1995 Director Option Plan. Under the Company's 1992 Stock Plan, the Board of Directors may grant options for the purchase of up to 1,650,000 shares of common stock by directors, employees, and others. Options may be granted at an exercise price of not less than 85% of the estimated fair value of the common stock, at the date of grant, as determined by the Board of Directors. Options are exercisable at such times and under such conditions as determined by the Board of Directors. Options granted under this plan generally become exercisable over a four-year period and generally expire ten years from the date of grant. Unexercised options are canceled upon termination of employment and become available under the plan. The Company's 1995 Director Option Plan grants options automatically each year to non-employee directors of the Company. Options may only be granted at the estimated fair value of the common stock at the date of grant. Options under this plan generally become exercisable over a four-year period and generally expire ten years from the date of grant. Unexercised options are canceled upon the director leaving the Board. -11- Activity under the plans is as follows: OUTSTANDING OPTIONS --------------------------------------------- SHARES AGGREGATE AVAILABLE FOR NUMBER OF PRICE PER EXERCISE GRANT SHARES SHARE PRICE ------------------------------------------------------------ BALANCE AT March 31, 1993 364,578 267,671 $ 0.10 $ 26,766 Shares authorized 300,000 -- $ -- -- Options granted (636,000) 636,000 $ 0.175 - $0.425 147,050 Options exercised -- (2,920) $ 0.10 (292) Options canceled 8,762 (8,762) $ 0.10 (876) ------------------------------------------------------------ BALANCE AT March 31, 1994 37,340 891,989 $ 0.10 - $0.425 172,648 Shares authorized 300,000 -- $ -- -- Options granted (253,750) 253,750 $ 0.425 - $1.00 175,981 Options exercised -- (526,571) $ 0.10 - $0.425 (93,413) Options canceled 18,229 (18,229) $ 0.175 (3,190) ------------------------------------------------------------ BALANCE AT March 31, 1995 101,819 600,939 $ 0.10 - $1.00 252,026 Shares authorized 600,000 -- $ -- -- Options granted (398,000) 398,000 $ 4.00 - $23.50 7,122,500 Options exercised -- (123,254) $ 0.10 - $1.00 (79,913) Options canceled 33,942 (33,942) $ 0.10 - $13.75 (39,867) ----------------------------------------------------------- BALANCE AT March 31, 1996 337,761 841,743 $ 0.10 - $23.50 $ 7,254,746 ------------------------------------------------------------ ------------------------------------------------------------ At March 31, 1996, options to purchase 220,458 shares of common stock were exercisable. Additionally, 203,597 shares exercised under stock options were subject to repurchase, at the option of the Company, at March 31, 1996. DEFERRED COMPENSATION For certain options granted, the Company recognized $569,846 as deferred compensation for the excess of the deemed value for accounting purposes of the common stock issuable upon exercise of such options over the aggregate exercise price of such options. The deferred compensation expense is amortized ratably over the vesting period of the options. For the year ended March 31, 1996, $124,994 was charged to operations. 1995 EMPLOYEE STOCK PURCHASE PLAN In September 1995, the 1995 Employee Stock Purchase Plan was adopted by the Company. An aggregate of 150,000 shares of the Company's common stock have been reserved for issuance under this plan. This plan permits eligible employees to purchase common stock through payroll deductions (which cannot exceed 15% of the employee's compensation) at 85% of its fair market value on specified dates. For the year ended March 31, 1996, 1,859 shares were issued at a price of $11.05 per share. - -------------------------------------------------------------------------------- 7. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets for federal and state income taxes are as follows: Years Ended March 31, ---------------------------- 1996 1995 ---------------------------- Deferred tax assets: Net operating loss carryforwards $ 6,200,000 $ 3,300,000 Tax credit carryforwards 270,000 250,000 Other, net 760,000 400,000 ------------ ------------ 7,230,000 3,950,000 Valuation allowance (7,230,000) (3,950,000) ------------ ------------ $ -- $ -- ------------ ------------ ------------ ------------ Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain. Accordingly, a valuation allowance, in an amount equal to the net deferred tax asset at March 31, 1996 and 1995, has been established to reflect these uncertainties. The change in the valuation allowance was a net increase of $3,280,000, $2,750,000 and $1,100,000 for the fiscal years 1996, 1995 and 1994, respectively. At March 31, 1996, the Company had net operating loss carryforwards for federal and California tax purposes of approximately $17,000,000 and $7,000,000, respectively, which will expire from 1998 through 2011, if not utilized. At March 31, 1996, the Company also had research and development tax credit carryforwards of approximately $190,000 and $120,000, respectively, for federal and California tax purposes expiring from 2007 through 2011, if not utilized. Utilization of net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in expiration of net operating loss and tax credit carryforwards before full utilization. The reconciliation of income tax expense (benefit) attributable to continuing operations computed at the U.S. federal statutory rates to income tax expense (benefit) is as follows: YEARS ENDED MARCH 31, ------------------------------------------- 1996 1995 1994 ------------------------------------------- Tax provision (benefit) at U.S. statutory rates $ (2,748,566) $ (2,377,300) $ (891,965) Loss for which no tax benefit is currently recognizable 2,748,566 2,377,300 891,965 ------------------------------------------ $ -- $ -- $ -- ------------------------------------------ ------------------------------------------ 8. CONCENTRATIONS OF CREDIT AND OTHER RISKS The Company operates in a single industry segment and sells its products primarily to hospitals. The Company markets its products in foreign countries (mainly Europe, Canada, and Japan) through its sales organizations and distributors. Sales to international distributors are denominated in U.S. dollars. In the fiscal year ended March 31, 1996, 87%, 3%, and 8% (85%, 15%, and 0% in the fiscal year ended March 31, 1995) of the Company's net revenues were to Europe, Canada, and Japan, respectively. -12- Sales to significant customers as a percentage of total revenues are as follows: Years Ended March 31, 1996 1995 --------------------- German Distributor 53% 47% Distributor A 5% 38% Distributor B 3% 15% French Distributor 25% -- The Company performs ongoing credit evaluations of its customers but does not require collateral. There have been no material losses on customer receivables. DEPENDENCE ON SYSTEMS The Company has been engaged primarily in researching, developing, testing and obtaining regulatory clearances for its Prostar, Prostar Plus and Techstar systems. The Company believes that these systems are currently the Company's only significant potential products and these systems will require additional development, clinical trials and regulatory approvals before they can be marketed in the United States and internationally. There can be no assurance that the Company's development efforts will be successful or that the systems or any other product developed by the Company will be safe or effective, approved by appropriate regulatory and reimbursement authorities, capable of being manufactured in commercial quantities at acceptable costs or successfully marketed. DEPENDENCE ON INTERNATIONAL DISTRIBUTORS Currently, substantially all of the Company's revenues from product sales are derived from sales to its international distributors. Loss, termination or ineffectiveness of distributors to effectively promote the Company's products could have a material adverse effect on the Company's financial condition and results of operations. DEPENDENCE ON KEY SUPPLIERS The Company purchases certain key components from single source suppliers. Any significant component supply delay or interruption could require the Company to qualify new sources of supply, if available, and could have a material adverse effect on the Company's financial condition and results of operations. Report of Ernst and Young LLP, Independent Auditors ---------------------------------------------------------------------- THE BOARD OF DIRECTORS AND STOCKHOLDERS PERCLOSE, INC. We have audited the accompanying balance sheets of Perclose, Inc. as of March 31, 1996 and 1995, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Perclose, Inc. at March 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP San Jose, California May 1, 1996 -13- EX-23.1 4 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Perclose, Inc. of our report dated May 1, 1996, included in the 1996 Annual Report to Stockholders of Perclose, Inc. Our audits also included the financial statement schedule of Perclose, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-56) pertaining to the 1992 Stock Plan, 1995 Employee Stock Purchase Plan, and 1995 Director Option Plan of Perclose, Inc. of our report dated May 1, 1996 with respect to the financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Perclose, Inc. ERNST & YOUNG LLP San Jose, California June 25, 1996 EX-27 5 EXHIBIT 27
5 0000934438 PERCLOSE, INC. YEAR MAR-31-1996 APR-01-1995 MAR-31-1996 9,803,777 28,052,742 940,217 20,000 529,606 39,583,918 2,050,475 1,068,353 40,916,461 1,905,218 510,789 0 0 38,500,454 0 40,916,461 2,457,087 2,457,087 4,772,022 11,316,739 0 0 775,633 8,084,019 0 8,084,019 0 0 0 8,084,019 1.34 1.34
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