-----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, RyEuSzdJdS0+GSmtfkMEfd0ybDcLbLXUPCrRwlck15vHnP3TskXhHEeY8TCiwHP2 edcPwXBgkPNr1JRI3ssZxg== 0000912057-97-020658.txt : 19970619 0000912057-97-020658.hdr.sgml : 19970619 ACCESSION NUMBER: 0000912057-97-020658 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970618 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERCLOSE INC CENTRAL INDEX KEY: 0000934438 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 943154669 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-26890 FILM NUMBER: 97625840 BUSINESS ADDRESS: STREET 1: 199 JEFFERSON DRIVE CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 4154733100 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1997. 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, 94025 CAM (Address of principal executive (Zip code) offices)
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, $0.001 par value (Title of class) Preferred Share Purchase Rights (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 disclosure 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. Yes _/X/_ The aggregate value of voting stock held by non-affiliates of the registrant was approximately $150,584,624 as of May 30, 1997, based upon the closing price 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 30, 1997, the registrant had outstanding 9,579,747 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 1997 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, 1997. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PERCLOSE, INC. INDEX
PAGE NUMBER ------------- PART I.................................................................................................. 1 Item 1. BUSINESS............................................................................... 1 Item 2. PROPERTIES............................................................................. 18 Item 3. LEGAL PROCEEDINGS...................................................................... 18 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 18 PART II................................................................................................. 18 Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................. 18 Item 6. SELECTED FINANCIAL DATA................................................................ 18 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................................................... 18 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................ 19 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE... 19 PART III................................................................................................ 19 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................................... 19 Item 11. EXECUTIVE COMPENSATION................................................................. 19 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................... 19 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................... 19 PART IV................................................................................................. 20 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....................... 20
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 close the access site immediately following the catheterization. The Company's percutaneous vascular surgery ("PVS") systems are designed to provide routine, definitive closure by replicating results previously obtainable only through open surgery, without the associated risks and costs. The Company believes that its PVS products 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 products in December 1994 and United States shipments in April 1997. These systems are currently marketed in Germany, France, the United Kingdom, Italy, Switzerland, Israel, Japan and the United States under regulatory approvals where required. 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 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 there are approximately 850,000 balloon angioplasty, atherectomy, stenting and intra-aortic balloon pump procedures performed worldwide, including approximately 525,000 such procedures in the United States. 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 1 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 femoral artery 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. Atherectomy encompasses several types of devices that are designed to remove atherosclerotic plaque that blocks blood flow in the arteries. 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. Stents are implantable, metal, tube shaped devices delivered on a balloon catheter and permanently deployed at a blockage site to maintain increased lumen diameter by mechanically supporting the artery. 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 is performed annually on approximately 3.1 million patients worldwide 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, are performed annually worldwide. These procedures may represent a significant market 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 femoral artery 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 2 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 often experience significant pain and discomfort during compression of the artery and in the period in which they are required to be immobile, and may 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. PERCLOSE SOLUTION The Company believes that its percutaneous 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 3 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. OTHER CLOSURE DEVICES 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 PMA approval from the FDA. 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 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. BUSINESS STRATEGY The Company's is the leader in the design, development and commercialization of suture-based closure devices; its primary objective is 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 uses data collected from clinical trials to demonstrate the clinical and cost advantages of its products to physicians and health care payors. - FOCUSED MARKETING, SALES AND PHYSICIAN TRAINING. The Company's products are currently marketed to interventional cardiologists, radiologists and catheterization laboratory administrators. The Company commenced international shipments of its products in December 1994. These systems are currently marketed internationally in Germany, France, the United Kingdom, Italy, Switzerland, Israel and Japan under regulatory approvals where required. The Company markets its products in the United States through a direct sales organization. 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 4 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. - EXTENDING THE TECHNOLOGY PLATFORM. The Company intends to supply its core technology to other high value surgical areas that could benefit by remotely fixturing vascular tissue and precisely delivering needles and sutures to sites that are currently operated on using conventional surgical techniques. Two of the Company's products have been approved in the United States. The remainder of 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, Techstar and Techstar XL 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 two product families, the Prostar and Techstar systems. The Prostar 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 and 7F arterial access sites. Products within each product family can have the added designation of Plus or XL. The Plus and XL designations signify the second and third generations, respectively, of the Prostar and Techstar systems evolution. The Plus and XL enhancements have reduced procedure time, increased ease of use, increased patient comfort and reduced 5 manufacturing cost. The following table summarizes the markets addressed by and current status of each of the Company's products:
PRODUCT FAMILY(1) TARGETED APPLICATIONS ------------- STATUS(2) - ------------------------------------------------ PROSTAR ---------------------------------------------------- HIGH CLINICAL NEED (2 SUTURE) UNITED STATES INTERNATIONAL - ------------------------------------------------ ------------- ------------------------------ -------------------- Anticoagulated Stents 8F PMA Supplement Filed Commercial Sales Complicated Angioplasty Atherectomy 9F Commercial Sales Not Marketed Intra-aortic Balloon Pump Electrophysiology Ablation 10F PMA Supplement Filed Commercial Sales Thrombolytic Drugs Anti-Restenosis Drugs 11F Commercial Sales Not Marketed TECHSTAR EARLY AMBULATION/DISCHARGE (1 SUTURE) UNITED STATES INTERNATIONAL - ------------------------------------------------ ------------- ------------------------------ -------------------- Stents 6F PMA Supplement Filed Commercial Sales Angioplasty Peripheral Radiology 7F PMA Supplement Planned Commercial Sales Interventional Neuroradiology Diagnostic Angiography Peripheral Radiology 6FS PMA Supplement Planned Commercial Sales
- ------------------------ (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, the United Kingdom, Italy, Switzerland, Israel, Japan and the United States. PROSTAR AR SYSTEMS AND PROCEDURE. Prostar systems are sterile, single-use systems which, as currently configured, consist 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 (sizes 9F and 11F only). The Prostar system is currently marketed internationally in 8F and 10F sizes and is marketed in the United States in the 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 6 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. TECHSTAR SYSTEMS. Techstar systems are sterile, single-use systems which consist 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 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 while the 7F diameter system is suitable for closure of puncture sites dilated by 7F interventional and diagnostic introducer sheaths. The Techstar 6FS diameter system is shorter in length than the Techstar 6F and is suitable for use after peripheral diagnostic and interventional procedures for vascular disease of the lower legs. Significant differences of the configuration of the second generation designs include 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, improve ease of use and ease of manufacturability and reduce manufacturing cost. The XL, or third generation, design further increases the operator's ease of use of the device and reduces the procedure time to less than five minutes. CLINICAL AND REGULATORY STATUS Perclose systems are currently being marketed in internationally in Germany, France, the United Kingdom, Italy, Switzerland, Israel and Japan under regulatory approvals where required. The Company obtained CE mark certification in 1996 which allows it to market its products in all member European Union countries without obtaining country specific approvals and to ship its products to European Union countries directly from its United States manufacturing facility. In April 1997 the Company received approval from the United States Food and Drug Administration for clearance of its Prostar systems for commercial sale in the United States under the Pre-Market Approval regulatory pathway. In May 1997 the Company filed an application with the FDA for clearance of its Techstar systems for commercial sale in the United States under the Pre-Market Approval Supplement regulatory pathway and in June 1997 the Company submitted a PMA Supplement application for clearance of the Prostar Plus and Prostar XL systems for sale in the United States. The Company, through Getz Brothers Company Ltd., its Japanese distributor, has received regulatory approval to market the Prostar, Prostar Plus, Techstar and Techstar XL 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 Company's products in Japan, and there can be no assurance that such reimbursement approvals will be obtained in a timely manner or at all. MARKETING AND DISTRIBUTION The Company's international 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 marketed internationally in Germany, France, the United Kingdom, Italy, Switzerland, Israel and Japan through independent distributors. 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 distributors typically 7 purchase the Company's products at a discount from the end user 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. The Company also has eight persons directly involved with physician training and assisting distributors that are assigned to European and Asian territories. All of the Company's revenues through March 31, 1997 were derived from export sales to international distributors, primarily in Europe, none of which are affiliated with the Company. 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 59%, 15% and 15%, respectively, of net sales for the fiscal year ended March 31, 1997. The Company markets its products in the United States through a direct sales organization. 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 provides 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 a 14 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. In addition, the Company intends to apply its core technology to other high value surgical areas that could benefit by remotely fixturing vascular tissue and precisely delivering needles and sutures where current conventional surgical techniques are used. Research and development expenses for fiscal 1995, 1996 and 1997 were $3.1 million, $3.1 million and $4.7 million respectively. MANUFACTURING The Company currently manufactures its products for the United States market in its class 10,000 clean room facility in Menlo Park, California. The Company has also entered into an agreement with AorTech Europe, a contract manufacturer located in Glasgow, Scotland. For international markets, the Company manufactures subassemblies of its products at its Menlo Park facility with final assembly occurring at AorTech. AorTech performs final assembly, packaging, and ships the Company's products to distributors outside the United States. AorTech Europe is ISO 9002 certified and operates a class 10,000 clean room. The Company has received the CE Mark from the European Union and plans to reduce its reliance on AorTech in the future and consolidate its manufacturing activity at its Menlo Park, California facility in fiscal 1998. 8 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 commercial sales in the United States, would have a material adverse effect on the Company's business, financial condition and results of operations. 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 the Company 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 devices, mechanical compression devices and newer collagen plugs. Several companies supply C-clamp devices and C.R. Bard markets the Femostop compression arch. Datascope and Kensey Nash have received PMA approval from the FDA for products that use collagen plugs to achieve hemostasis. American Home Products has exclusive distribution rights to the Kensey-Nash device in the United States and internationally. Several other companies are reported to be developing or have tried to develop arterial closure devices, some of which have an established presence in the field of interventional cardiology, including Boston Scientific Corporation, C.R. Bard, 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. 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 three issued United States patents covering certain aspects of the 9 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 six 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 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 REGULATION. 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 10 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 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" 11 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 received approval of a PMA application with the FDA to sell the Prostar systems commercially in the United States and has filed PMA Supplement applications for the Techstar, Techstar XL, Prostar Plus and Prostar XL systems. There can be no assurance that the Company will be able to obtain further 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. The Company has been inspected and been approved 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, the Company is required to comply with various FDA requirements for design, safety, advertising and labeling. 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 REGULATION. 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 international markets. At this time, the 8F and 10F Prostar systems and the 6F, 7F and 6FS Techstar systems are being marketed in Germany, France, the United Kingdom, the Italy, Switzerland, Israel and Japan under regulatory approvals where required. 12 The Company has implemented policies and procedures to allow the Company to receive ISO 9001 qualification of its processes. The ISO 9000 series of standards for quality operations has 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. In July 1996 the Company received the CE mark certification. The Company, through its Japanese distributor, has received regulatory approval for commercial sale of its products 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. However, in general, the Company's customers do not receive specific, cost based direct reimbursement for the use of Perclose products. 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 systems in the United Kingdom and Canada. The Company received governmental reimbursement approvals for private hospitals in France that was subsequently withdrawn in October 1996. The Company is attempting to restore its reimbursement with the French health care regulatory authorities. Through its local distributor, the Company 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. 13 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, 1997, the Company had 132 full-time employees. Approximately 14 persons were engaged in research and development activities, 57 persons were engaged in manufacturing and manufacturing engineering, nine persons were engaged in quality assurance and regulatory affairs, 41 persons were engaged in sales and marketing and 11 persons were 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 through 1994, the Company was primarily engaged in research and development of its percutaneous arterial access site closure products. Since December 1994, the Company has generated limited revenues from international sales in certain markets and since May 1997 has generated limited revenues from the United States. The Company 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 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, 1997, had an accumulated deficit of $28.0 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 year 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 14 regulatory and reimbursement matters, progress of clinical trials, the extent to which the Company's products gain market acceptance, introduction of alternative means from 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. Prior to May 1997 all of the Company's product sales were outside the United States. The Company currently 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 and 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 its products 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 Israel. The Company has established a direct sales force in the United States. 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 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 its current cash balances and cash generated from the future sale of products will be sufficient to meet the Company's operating and capital requirements through calendar 1998, 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 15 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. The executive officers of the Registrant, who are elected by the board of directors, are as follows:
NAME AGE POSITION - -------------------------------- --- -------------------------------------------------------------------------- Henry A. Plain, Jr.............. 39 President, Chief Executive Officer and Director Randolph E. Campbell............ 40 Vice President, Operations Jeffrey M. Closs................ 36 Vice President, International Sales and Marketing Ronald W. Songer................ 39 Vice President, Research and Development Kenneth E. Ludlum............... 44 Vice President, Finance and Administration and Chief Financial Officer Coy F. Blevins.................. 49 Vice President, U.S. Sales John G. McCutcheon.............. 36 Vice President, Marketing
16 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 Devices for Vascular Intervention ("DVI"), then a subsidiary of Lilly, 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 Perclose 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 of Alteon Inc., a publicly traded biopharmaceutical company developing therapies for diabetes. From 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. MR. BLEVINS joined Perclose as Director of U.S. Sales in January 1994 and was promoted to Vice President, U.S. Sales in July 1996. From 1990 through 1993 Mr. Blevins was a Regional Sales Manager with DVI. MR. MCCUTCHEON joined Perclose in January 1994 as Director of Marketing. In July 1996 Mr. McCutcheon was promoted to Vide President, Marketing. From 1992 until joining the Company, Mr. McCutcheon was Marketing Manager at DVI. Form 1985 to 1992, Mr. McCutcheon held positions in sales and marketing with the Bentley Laboratories Division of Baxter Healthcare Corporation. Mr. McCutcheon holds a B.A. in Economics and in Psychology and an M.B.A., both from the University of California, Los Angeles. 17 ITEM 2. PROPERTIES The Company leases approximately 31,000 square feet consisting of two adjacent facilities in Menlo Park, California. One of these facilities has an environmental controlled, class 10,000 clean room for medical device assembly together with warehouse, laboratory and office space. The facility leases have terms expiring in August 1998 and February 1999. The Company believes its facilities are adequate to meet its immediate requirements but is planning to relocate to a larger facility in calendar 1998. 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. 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 approximate number of record holders of the Company's Common Stock at May 30, 1997 was 289. 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 bid prices of the Company's Common Stock are as follows:
QUARTER ENDED HIGH LOW - --------------------------------------------------------------------------- --------- --------- Fiscal Year Ended March 31, 1996 11/7/95-12/31/95................................................... $19 1/8 $12 3/4 Quarter Ended 3/31/96.............................................. 26 1/4 15 Fiscal Year Ended March 31, 1997 Quarter Ended 6/30/96.............................................. 24 3/4 20 1/2 Quarter Ended 9/30/96.............................................. 23 1/4 13 Quarter Ended 12/31/96............................................. 24 1/4 16 Quarter Ended 3/31/97.............................................. 27 3/4 19
ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference to the portion of the Registrant's 1997 annual report to stockholders entitled "Selected Financial Data" and is 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 1997 annual report to stockholders entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is included in Exhibit 13.1 to this report. 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated by reference to the portion of the Registrant's 1997 annual report to stockholders entitled "Financial Statements" and is included in Exhibit 13.1 to this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 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 1997 Annual Meeting of Stockholders (the "Proxy Statement") to be held July 15, 1997 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. 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. 19 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 1997 annual report to stockholders included in Exhibit 13.1 to this report: Report of Ernst & Young LLP, Independent Auditors Balance Sheets, March 31, 1997 and 1996 Statements of Operations, Years Ended March 31, 1997, 1996 and 1995 Statements of Stockholders' Equity, Years Ended March 31, 1997, 1996 and 1995 Statements of Cash Flows, Years Ended March 31, 1997, 1996 and 1995 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, 1997. (C) EXHIBITS
EXHIBIT NO. DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 3.1(1) Restated Certificate of Incorporation. 3.2(1) Bylaws of the Registrant. 3.3(2) Certificate of Designations of Rights, Preferences and Privileges of Series A Participating Preferred Stock. 3.4(2) Preferred Shares Rights Agreement, dated as of January 27, 1997. 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. 10.3(1) 1995 Director Option Plan. 10.4(1) 1995 Employee Stock Purchase Plan and forms of agreements thereunder.
20
EXHIBIT NO. DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 10.5(1) Lease Agreement (the "Lease Agreement") 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 Second amendment to Lease Agreement dated September 10, 1996. 10.7 Third amendment to Lease Agreement dated March 21, 1997. 10.8(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. 10.9(1) Shareholder Rights Agreement dated August 23, 1995 between the Registrant and certain holders of the Registrant's securities. 10.10 Employment Agreement dated May 8, 1996 between the Registrant and Kenneth E. Ludlum. 10.11(1) Agreement dated March 30, 1993 between the Registrant and LocalMed, Inc. 10.12 Promissory Note between the Registrant and John G. McCutcheon dated January 31, 1997. 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. 24.1 Power of Attorney (See page 22). 27.1 Financial Data Schedule.
- ------------------------ (1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (File No. 33-97128) and incorporated herein by reference. (2) Filed as an Exhibit to the Registrant's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on January 28, 1997, and incorporated herein by reference. 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, 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 dates indicated. SIGNATURE TITLE DATE - ----------------------------------- ---------------------------- ------------- /s/ HENRY A. PLAIN, JR. President, Chief Executive June 18, 1997 --------------------------------- Officer and Director Henry A. Plain, Jr. (Principal Executive Officer) /s/ KENNETH E . LUDLUM Vice President, Finance and June 18, 1997 --------------------------------- Administration and Chief Kenneth E. Ludlum Financial Officer (Principal Financial and Accounting Officer) /s/ MICHAEL L. EAGLE Director June 18, 1997 --------------------------------- Michael L. Eagle /s/ VAUGHN D. BRYSON Director June 18, 1997 --------------------------------- Vaughn D. Bryson /s/ SERGE LASHUTKA Director June 18, 1997 --------------------------------- Serge Lashutka /s/ JOHN B. SIMPSON, PH.D., M.D. Director June 18, 1997 --------------------------------- John B. Simpson, Ph.D., M.D. /s/ JAMES W. VETTER, M.D. Director June 18, 1997 --------------------------------- James W. Vetter, M.D. /s/ MARK A. WAN Director June 18, 1997 --------------------------------- Mark A. Wan 22 PERCLOSE, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS MARCH 31, 1997
BALANCE AT BALANCE AT BEGINNING END OF OF PERIOD ADDITIONS(1) DEDUCTIONS(2) 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 March 31, 1997 Allowance for returns and doubtful accounts................ $ 20,000 $ 761,000 $ 605,000 $ 176,000
- ------------------------ (1) Amounts charged to expense during fiscal year, including a $500,000 reserve for sales returns relating to one distributor in fiscal year 1997. (2) Doubtful accounts written off and, in fiscal year 1997, sales returns of $540,000 relating to one distributor and $65,000 relating to miscellaneous sales returns. S-1 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 3.1(1) Restated Certificate of Incorporation. 3.2(1) Bylaws of the Registrant. 3.3(2) Certificate of Designations of Rights, Preferences and Privileges of Series A Participating Preferred Stock. 3.4(2) Preferred Shares Rights Agreement, dated as of January 27, 1997. 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. 10.3(1) 1995 Director Option Plan. 10.4(1) 1995 Employee Stock Purchase Plan and forms of agreements thereunder. 10.5(1) Lease Agreement (the "Lease Agreement") 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 Second amendment to Lease Agreement dated September 10, 1996. 10.7 Third amendment to Lease Agreement dated March 21, 1997. 10.8(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. 10.9(1) Shareholder Rights Agreement dated August 23, 1995 between the Registrant and certain holders of the Registrant's securities. 10.10 Employment Agreement dated May 8, 1996 between the Registrant and Kenneth E. Ludlum. 10.11(1) Agreement dated March 30, 1993 between the Registrant and LocalMed, Inc. 10.12 Promissory Note between the Registrant and John G. McCutcheon dated January 31, 1997. 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. 24.1 Power of Attorney (See page 22). 27.1 Financial Data Schedule.
- ------------------------ (1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (File No. 33-97128) and incorporated herein by reference. (2) Filed as an Exhibit to the Registrant's Registration Statement on Form 8-A filed with the Securities and Exchange Commission on January 28, 1997, and incorporated herein by reference. EX-10.6 2 2ND AMENDMENT TO LEASE AGREEMENT EXHIBIT 10.6 SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE, made this 10th day of September, 1996, between DAVID D. BOHANNON ORGANIZATION, a California corporation, herein referred to as "Landlord", and PERCLOSE, INC., a Delaware corporation, (successor in interest to Perclose, Inc., a California corporation), herein referred to as "Tenant". RECITALS 1. Landlord and Tenant's predecessor in interest have previously entered into a Lease entitled "Business Park Lease" dated July 6, 1993 for demised premises (the "Premises") located at 195-199 Jefferson Drive, Menlo Park, California, as more particularly described in said Lease. 2. Landlord and Tenant's predecessor in interest have previously entered into a First Amendment to Lease dated January 31, 1995 (the Lease and First Amendment to Lease herein collectively referred to as the "Lease") which First Amendment to Lease demised to Tenant certain additional space located at 191 and 193 Jefferson Drive as more fully set out therein. 3. Landlord and Tenant now wish to provide for the expansion of Tenant into additional space located at 177 Jefferson Drive, Menlo Park, California and to amend the base rent due under the Lease and otherwise modify the Lease, all as more particularly set forth hereinbelow. NOW, THEREFORE, in consideration of the covenants and conditions contained herein, Landlord and Tenant agree to amend the Lease as follows: 1. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Expansion Space located at 177 Jefferson Drive (hereinafter Expansion Space) as described in EXHIBIT "X" and shown ON EXHIBIT "X-1" hereto for a term commencing on September 1, 1996 and continuing through and including September 30, 1998. Base rent for the Expansion Space shall be set forth in paragraph 2 hereof. 2. Commencing on September 1, 1996, Tenant's base rent under the Lease shall increase by Forty Thousand Eight Hundred Dollars ($40,800.00) per annum, payable in twelve (12) equal monthly installments of Three Thousand Four Hundred Dollars ($3,400.00). The increase in base rent scheduled to occur as of October 1, 1997 with respect to the premises demised to Tenant under the Lease shall not apply to the base rent reserved hereunder for the Expansion Space which will remain the same throughout the demised term. 3. Tenant accepts the Expansion Space in its "as is" condition; provided that Landlord agrees to deliver the Expansion Space to Tenant with all electrical, plumbing and HVAC systems serving the Expansion Space in good working order. Any improvements to the Expansion Space shall be made by Tenant at its sole cost and 1 expense in accordance with plans and specifications therefor which are subject to Landlord's prior approval. 4. Except as herein modified, the terms of the Lease are and shall remain the same. IN WITNESS WHEREOF, the parties have executed this Second Amendment to Lease as of the date first hereinabove written. TENANT: LANDLORD: PERCLOSE, INC., DAVID D. BOHANNON ORGANIZATION, a Delaware corporation a California corporation By: /s/ Kenneth E. Ludlum By: /s/ Robert J. Webster ---------------------------------- --------------------------------- Vice President Vice President By: /s/ Kenneth E. Ludlum By: /s/ Ernest Lotti, Jr. ---------------------------------- --------------------------------- Assistant Secretary Assistant Secretary 2 EXHIBIT "A" BOHANNON INDUSTRIAL PARK 177 JEFFERSON DRIVE MENLO PARK, CALIFORNIA DESCRIPTION OF DEMISED PREMISES FOR "PERCLOSE" All that certain real property situate in the State of California, County of San Mateo, City of Menlo Park and is described as follows: A portion of Parcel 2, as said parcel is designated on the map entitled "PARCEL MAP, BEING A RESUBDIVISION OF PARCEL 2 OF P.M. REC. IN VOLUME 27 AT PAGE 39 AND PARCELS 2 AND 3 OF P.M. RECORDED IN VOLUME 28 AT PAGE 8, SAN MATEO COUNTY RECORDS BOHANNON INDUSTRIAL PARK, MENLO PARK, SAN MATEO COUNTY, CALIFORNIA," which map was filed in the Office of the Recorded of the County of San Mateo, State of California on January 12, 1976 in Volume 30 of Parcel Maps at Page 20, more particularly described as follows: Commencing at the most westerly corner of said Parcel 2, from which corner the point of beginning of the demised premises bears South 67 DEG. 17' East 171.00 feet and North 22 DEG. 43' East 56.00 feet; Thence from said point of beginning North 22 DEG. 43' East 100.00 feet; Thence South 67 DEG. 17' East 40.00 feet; Thence South 22 DEG. 43' West 100.00 feet; Thence North 67 DEG. 17' West 40.00 feet to the point of beginning. Containing approximately 4,000 SQUARE FEET. SEPT. 3, 1996 [FLOOR PLAN] JEFFERSON DRIVE EXHIBIT "B" EX-10.7 3 3RD AMENDMENT TO LEASE AGREEMENT EXHIBIT 10.7 THIRD AMENDMENT TO LEASE THIS THIRD AMENDMENT TO LEASE is made this 21 day of March, 1997, between DAVID D. BOHANNON ORGANIZATION, a California corporation, herein referred to as "Landlord", and PERCLOSE, INC., a Delaware corporation, herein referred to as "Tenant". RECITALS 1. Landlord and Tenant's predecessor in interest have previously entered into a Lease entitled "Business Park Lease" dated July 6, 1993 for demised premises located at 195-199 Jefferson Drive, Menlo Park, California, as more particularly described in said Lease. 2. Landlord and Tenant's predecessor in interest have previously entered into a First Amendment to Lease dated January 31, 1995, which First Amendment to Lease demised to Tenant certain additional space located at 191 and 193 Jefferson Drive as more fully set out therein. 3. Tenant acquired its interest in the Lease as a result of the reincorporation of Perclose, Inc., a California corporation, to Perclose, Inc., a Delaware corporation, on or about September 1, 1995. 4. Landlord and Tenant have previously entered into a Second Amendment to Lease date September 10, 1996 (the Lease, as amended, is herein referred to as the "Lease"), which Second Amendment to Lease demised to Tenant certain additional space located at 177 Jefferson Drive, Menlo Park, California, as more fully set out therein. 5. Landlord and Tenant now wish to provide for the expansion of Tenant into additional space located at 171 Jefferson Drive and 175 Jefferson Drive, Menlo Park, California, and to amend the base rent due under the Lease, the Security Deposit held pursuant to the Lease, and otherwise modify the Lease, all as more particularly set forth hereinbelow. NOW, THEREFORE, in consideration of the covenants and conditions contained herein, Landlord and Tenant agree to amend the Lease as follows: 1. A Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the demised premises located at 171 Jefferson Drive (hereinafter, "171 Expansion Space") as described in EXHIBIT "X" and shown on EXHIBIT "X-1" hereto for a term commencing on February 1, 1997 (the date Landlord delivered possession of the 171 Expansion Space to Tenant in an "as is" condition), and continuing through and including February 29, 1999. Base rent for the 171 Expansion Space shall be as set forth in paragraph 1.B. hereof. Effective February 1, 1997, the 171 Expansion Space shall become part of the demised premises under the Lease for all purposes set forth therein. 1 B. Commencing on February 1, 1997, Tenant's base rent under the Lease shall increase by Forty Eight Thousand Two Hundred Ten Dollars ($48,210.00) per annum, payable in twelve (12) equal monthly installments of Four Thousand Seventeen and 50/100 Dollars ($4,017.50). 2. A. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the demised premises located at 175 Jefferson Drive (hereinafter, "175 Expansion Space") as described in EXHIBIT "Y" and shown on EXHIBIT "Y-1" hereto for a term commencing on the EARLIER to occur of: (i) delivery of possession of the 175 Expansion Space to Tenant after Landlord's work for such 175 Expansion Space is completed pursuant to paragraph 6.B. hereinbelow, or (ii) July 1, 1997 (the "175 Expansion Space Commencement Date"), and continuing through and including June 30, 1999. Base rent for the 175 Expansion Space shall be as set forth in paragraph 2.B. hereof. Upon the 175 Expansion Space Commencement Date, the 175 Expansion Space shall become part of the demised premises under the Lease for all purposes set forth herein. B. Commencing on the 175 Expansion Space Commencement Date, Tenant's base rent under the Lease shall increase by Sixty Thousand Dollars ($60,000.00) per annum, payable in twelve (12) equal monthly installments of Five Thousand Dollars ($5,000.00). 3. The increase in base rent scheduled to occur as of October 1, 1997 with respect to certain premises demised to Tenant under the Lease (i.e., the 191-199 Jefferson Drive premises) shall not apply to the base rent reserved hereunder for the 171 Expansion Space nor for the 175 Expansion Space which will remain the same throughout the demised term thereof. 4. Upon execution of this Third Amendment to Lease, Tenant shall pay to Landlord the amount of Nine Thousand Seventeen and 50/100 Dollars ($9,017.50) which shall be held as a Security Deposit pursuant to the terms of SECTION 19.9. of the Lease. Upon payment of said amount to Landlord, Tenant's total Security Deposit held pursuant to the Lease, as amended herein, shall be Twenty Thousand Six Hundred Fifty Seven and 50/100 Dollars ($20,657.50). 5. The option to extend the demised term of the Lease contained in SECTION 1.3. of the Lease shall apply to the entire demised premises leased by Tenant (including the 171 Expansion Space and the 175 Expansion Space) pursuant to the Lease, as amended herein, and the parties agree to the following with respect thereto: A. In the event Tenant exercises its option to extend the demised term of the Lease, the dates of the extended term shall be as follows: (i) for the demised premises located at 195-199 Jefferson Drive, 191 and 193 Jefferson Drive, and 177 Jefferson Drive (the "177, 191-199 Jefferson Premises"), from October 1, 1998, to and including September 30, 2001; (ii) for the 171 Expansion Space (i.e., 171 Jefferson Drive), from March 1, 1999, to and including February 28, 2002; and (iii) for the 175 Expansion Space (i.e., 175 Jefferson Drive), from July 1, 1999, to and including June 30, 2002. 2 B. The base rent during the extended term shall be established pursuant to SECTIONS 1.3, 2.3 AND 19.20 (if applicable) of the Lease, and shall commence as of the applicable commencement dates of the extended term (i.e., October 1, 1998, for the 177, 191-199 Jefferson Premises; March 1, 1999, for the 171 Expansion Space; and July 1, 1999 for the 175 Expansion Space). The "fair market rental value" defined in SECTION 2.3 of the Lease shall also include the value associated with the Tenant Improvements made by Landlord in the 171 Expansion Space, as provided hereinbelow, as well as all other improvements made to the 171 Expansion Space and 175 Expansion Space. C. Should Tenant elect to exercise the option to extend, Tenant's written notice to Landlord shall be given at least one hundred eighty (180) days before September 30, 1998, with respect to the entire demised premises, including the 171 Expansion Space and the 175 Expansion Space. D. The option to extend the demised term can only be exercised by Perclose, Inc., a Delaware corporation, for its use of the entire demised premises and may not be transferred to any assignee, sublessee or other successor in interest nor may it be exercised by Perclose, Inc., a Delaware corporation, for any such assignee, sublessee or other successor in interest. 6. A. Subject to the provisions hereof, Landlord shall provide certain leasehold improvements ("Tenant Improvements") to be made to the 171 Expansion Space in accordance with the plans and specifications dated December 26, 1996, for the Tenant Improvements (the "Plans") prepared by Stevens Design (the "Architect"). Once approved by Landlord and Tenant the Plans shall be made a part hereof as EXHIBIT C. Landlord's and Tenant's approval of the Plans shall not be unreasonably withheld. The actual cost of the Tenant Improvements made pursuant to the Plans shall be borne by Landlord. Immediately following approval of the Plans, Landlord shall apply for all requisite building permits and approvals for construction of the Tenant Improvements in accordance with the Plans. On or about June 1, 1997, subject to the provisions hereof, Landlord shall cause a contractor ("Contractor") selected by Landlord to commence construction of the Tenant Improvements and diligently prosecute the same to completion in a good and workmanlike manner in accordance with the Plans. Tenant shall have the right to make changes in the Plans on or before April 30, 1997, provided such changes are approved by Landlord, such approval not to be unreasonably withheld or delayed, and provided further that the increased construction costs for any and all changes to the approved Plans shall be borne by Tenant. Tenant shall pay to Landlord the aggregate net increase in cost for such changes within five (5) days after substantial completion of the Tenant Improvements. Any such change(s) may be made only in a writing approved and signed by Landlord. As used herein the cost of providing the changes to the Plans shall include all soft costs, including reasonable fees, architect's fees, fees for permits, consulting engineer fees, contractor fees, inspection fees, fees for testing services and fees for processing and completing changes to the Plans, in addition to actual hard costs of construction. 3 Landlord and Tenant agree that construction of the Tenant Improvements is anticipated to commence on or about June 1, 1997, and is anticipated to be substantially completed on or about July 1, 1997. The parties agree to the following: (i) the Plans shall be approved by Landlord and Tenant on or before May 1, 1997, to allow for the timely issuance of building permits and approvals; (ii) Tenant, its employees, agents, contractors and representatives, shall vacate the entire 171 Expansion Space before June 1, 1997 (or such later date as advised by Landlord to Tenant if commencement of construction of the Tenant Improvements is delayed due to a delay in obtaining building permits or approvals), to allow the Contractor to commence to construct the Tenant Improvements and shall remain vacated until substantial completion of the Tenant Improvements; (iii) the applicable portion of Tenant's base rent for the 171 Expansion Space (i.e., the amount of $4,017.50) shall abate during the thirty (30) day period during which the Tenant Improvements are being constructed, and the parties agree that in no event shall the abatement of said portion of base rent be extended beyond thirty (30) days; and (iv) upon notice from Landlord to Tenant of the substantial completion of such work as certified by the Architect, Tenant shall accept the 171 Expansion Space in an "as is" condition subject to the punch list items described in the following sentence. Tenant shall, within thirty (30) days of certification by Architect that the Tenant Improvements are substantially complete, notify Landlord and Contractor of any items of work that are defective or incomplete. Landlord shall thereafter diligently pursue on Tenant's behalf the correction or completion of said items. B. In addition to the Tenant Improvements to be made to the 171 Expansion Space in accordance with the Plans, Landlord shall, at Landlord's expense, cause the Contractor to provide and install a fire sprinkler system in the 171 Expansion Space and 175 Expansion Space. C. Any additional work to be performed in the 171 Expansion Space and 175 Expansion Space other than that provided for hereinabove and designated as Landlord's work shall be performed at the sole cost of Tenant in accordance with detailed plans and specifications therefor which must be approved, in writing, by Landlord or Landlord's Architect before work is commenced. Tenant shall furnish Landlord with a set of "as built" plans after any such work is completed. 4 7. Except as herein modified, the terms of the Lease are and shall remain the same. IN WITNESS WHEREOF, the parties have executed this Third Amendment to Lease as of the date first hereinabove written. TENANT: LANDLORD: PERCLOSE, INC., DAVID D. BOHANNON ORGANIZATION, a Delaware corporation a California corporation By: /s/ Hank Plain By: /s/ Robert J. Webster ---------------------------------- --------------------------------- Vice President Vice President By: /s/ Kenneth E. Ludlum By: /s/ Ernest Lotti, Jr. ---------------------------------- --------------------------------- Secretary Assistant Secretary 5 EXHIBIT "X" BOHANNON INDUSTRIAL PARK 171 JEFFERSON DRIVE MENLO PARK, CALIFORNIA DESCRIPTION OF DEMISED PREMISES FOR "PERCLOSE" All that certain real property situate in the State of California, Country of San Mateo, City of Menlo Park and is described as follows: A portion of Parcel 2, as said parcel is designated on the map entitled "PARCEL MAP, BEING A RESUBDIVISION OF PARCEL 2 OF P.M. REC. IN VOLUME 27 AT PAGE 39 AND PARCELS 2 AND 3 OF P.M. RECORDED IN VOLUME 28 AT PAGE 8, SAN MATEO COUNTY RECORDS BOHANNON INDUSTRIAL PARK, MENLO PARK, SAN MATEO COUNTY, CALIFORNIA," which map was filed in the Office of the Recorded of the County of San Mateo, State of California on January 12, 1976 in Volume 30 of Parcel Maps at Page 20, more particularly described as follows: Commencing at the most westerly corner of said Parcel 2, from which corner the point of beginning of the demised premises bears South 67 DEG. 17' East 51.00 feet and North 22 DEG. 43' East 56.00 feet; Thence from said point of beginning North 22 DEG. 43' East 100.00 feet; Thence South 67 DEG. 17' East 40.00 feet; Thence South 22 DEG. 43' West 40.00 feet; Thence North 67 DEG. 17' West 13.10 feet; Thence South 22 DEG. 43' West 60.00 feet; Thence North 67 DEG. 17' West 26.90 feet to the point of beginning. Containing approximately 3,214 SQUARE FEET, more of less. Jan. 14, 1997 [FLOOR PLAN] JEFFERSON DRIVE EXHIBIT "X-1" EXHIBIT "Y" BOHANNON INDUSTRIAL PARK 175 JEFFERSON DRIVE MENLO PARK, CALIFORNIA DESCRIPTION OF DEMISED PREMISES FOR "PERCLOSE" All that certain real property situate in the State of California, County of San Mateo, City of Menlo Park and is described as follows: A portion of Parcel 2, as said parcel is designated on the map entitled "PARCEL MAP, BEING A RESUBDIVISION OF PARCEL 2 OF P.M. REC. IN VOLUME 27 AT PAGE 39 AND PARCELS 2 AND 3 OF P.M. RECORDED IN VOLUME 28 AT PAGE 8, SAN MATEO COUNTY RECORDS BOHANNON INDUSTRIAL PARK, MENLO PARK, SAN MATEO COUNTY, CALIFORNIA," which map was filed in the Office of the Recorded of the County of San Mateo, State of California on January 12, 1976 in Volume 30 of Parcel Maps at Page 20, more particularly described as follows: Commencing at the most westerly corner of said Parcel 2, from which corner the point of beginning of the demised premises bears South 67 DEG. 17' East 51.00 feet, North 22 DEG. 43' East 56.00 feet and South 67 DEG. 17' East 80.00 feet; Thence from said point of beginning North 22 DEG. 43' East 100.00 feet; Thence South 67 DEG. 17' East 40.00 feet; South 22 DEG. 43' West 100.00 feet; Thence North 67 DEG. 17' West 40.00 feet to the point of beginning. Containing approximately 4,000 SQUARE FEET, more or less. March 13, 1997 [FLOOR PLAN] JEFFERSON DRIVE EXHIBIT "Y-1" EX-10.10 4 EMPLOYMENT AGREEMENT EXHIBIT 10.10 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is effective as of May 8, 1996, by and between Kenneth E. Ludlum (the "Employee") and Perclose, Inc., a Delaware corporation (the "Company"). R E C I T A L S A. The Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication and objectivity of the Employee, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. B. The Board believes that it is imperative to provide the Employee with certain severance benefits upon the Employee's termination of employment following a Change of Control which provide the Employee with enhanced financial security and provide sufficient incentive and encouragement to the Employee to remain with the Company following a Change of Control. C. In order to accomplish the foregoing objectives, the Board of Directors has directed the Company, upon execution of this Agreement by the Employee, to agree to the terms provided herein. D. Certain capitalized terms used in the Agreement are defined in Section 6 below. In consideration of the mutual covenants herein contained, and in consideration of the continuing employment of Employee by the Company, the parties agree as follows: 1. DUTIES AND SCOPE OF EMPLOYMENT; CANCELLATION OF EXISTING CONTRACTS. (a) POSITION. The Company shall employ the Employee in the position of Vice President, as such position was defined in terms of responsibilities and compensation as of the effective date of this Agreement; provided, however, that the Board of Directors shall have the right, prior to the occurrence of a Change of Control, to revise such responsibilities and compensation from time to time as the Board of Directors may deem necessary or appropriate. (b) OBLIGATIONS. The Employee shall devote his full business efforts and time to the Company and its subsidiaries. The foregoing, however, shall not preclude the Employee from engaging in such activities and services as do not interfere or conflict with his responsibilities to the Company, including finishing certain consulting projects, such projects not to exceed three days and to be completed by June 15, 1996. (c) EXISTING CONTRACTS. The Company and Employee agree that the terms of any existing employment agreement will be superseded by the terms herein at the time there is a Change of Control. 2. BASE COMPENSATION. The Company shall pay the Employee as compensation for his services a base salary at the annualized rate of $145,000. Such salary shall be reviewed at least annually and shall be increased from time to time subject to accomplishment of such performance and contribution goals and objectives as may be established from time to time by the Board of Directors. Such salary shall be paid periodically in accordance with normal Company payroll. The annual compensation specified in this Section 2, together with any increases in such compensation that the Board of Directors may grant from time to time, is referred to in this Agreement as "Base Compensation." 3. EMPLOYEE BENEFITS. The Employee shall be eligible to participate in the employee benefit plans and executive compensation programs maintained by the Company applicable to other key executives of the Company, including (without limitation) retirement plans, savings or profit-sharing plans, deferred compensation plans, supplemental retirement or excess-benefit plans, stock option, incentive or other bonus plans, life, disability, health, accident and other insurance programs, paid vacations, and similar plans or programs, subject in each case to the generally applicable terms and conditions of the plan or program in question and to the determination of any committee administering such plan or program. 4. TERM OF EMPLOYMENT. The Company and the Employee acknowledge that the Employee's employment is at will, as defined under applicable law. If the Employee's employment terminates for any reason, the Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement, or as may otherwise be available in accordance with the Company's established employee plans and policies at the time of termination. The terms of this Agreement shall terminate upon the earlier of (i) the date that all obligations of the parties hereunder have been satisfied or (ii) twelve (12) months after a Change of Control. A termination of the terms of this Agreement pursuant to the preceding sentence shall be effective for all purposes, except that such termination shall not affect the payment or provision of compensation or benefits on account of a termination of employment occurring prior to the termination of the terms of this Agreement. 5. SEVERANCE BENEFITS. (a) TERMINATION FOLLOWING A CHANGE OF CONTROL. If the Company terminates the Employee's employment at any time within 12 months after a Change of Control, then the Employee shall be entitled to receive severance benefits as follows: (i) VOLUNTARY RESIGNATION; INVOLUNTARY TERMINATION. If the Employee's employment terminates either by Employee's voluntary resignation or as a result of Involuntary Termination other than for Cause, then the Employee shall be entitled to receive (a) severance pay -2- equal to six months salary in the case of voluntary resignation and twelve months salary in the case of Involuntary Termination other than for Cause, (b) vacation pay equal to the amount of compensation for accrued but unused vacation time, payable in a lump sum at the time of or prior to the Termination Date and (c) life, medical, dental, accident and disability insurance and other similar benefits as are provided by the Company to other key executives of the Company for six months following the Termination Date in the case of voluntary resignation and for twelve months following the Termination Date in the case of Involuntary Termination without Cause. Any Severance Payment to which Employee is entitled pursuant to this Section shall be paid on the Termination Date. (ii) TERMINATION FOR CAUSE. If the Employee is terminated for Cause, then the Employee shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and policies at the time of such termination. (iii) DISABILITY; DEATH. If the Company terminates the Employee's employment as a result of the Employee's Disability, or such Employee's employment is terminated due to the death of the Employee, then the Employee shall not be entitled to receive severance or other benefits except for those (if any) as may then be established under the Company's then existing severance and benefits plans and policies at the time of such Disability or death. (b) TERMINATION APART FROM CHANGE OF CONTROL. In the event the Employee's employment is terminated for any reason, either prior to the occurrence of a Change of Control or after the 12-month period following a Change of Control, then the Employee shall be entitled to receive severance and all other benefits for six months following such termination. (c) OPTIONS. Subject to Section 9 below, upon a Change of Control 100% of the unvested portion of any stock option held by the Employee under the Company's stock option plans shall automatically be accelerated and the Employee or the Employee's representative, as the case may be, shall have the right to exercise all or any portion of such stock option, in addition to any portion of the option exercisable prior to the Change of Control. 6. DEFINITION OF TERMS. The following terms referred to in this Agreement shall have the following meanings: (a) CHANGE OF CONTROL. "Change of Control" shall mean the occurrence of any of the following events: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company's then outstanding voting securities; or -3- (ii) The stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (b) INVOLUNTARY TERMINATION. "Involuntary Termination" shall mean (i) without the Employee's express written consent, the assignment to the Employee of any duties or the significant reduction of the Employee's duties, either of which is inconsistent with the Employee's position with the Company and responsibilities in effect immediately prior to such assignment, or the removal of the Employee from such position and responsibilities; (ii) without the Employee's express written consent, a substantial reduction, without good business reasons, of the facilities and perquisites (including office space and location) available to the Employee immediately prior to such reduction; (iii) a reduction by the Company in the Base Compensation of the Employee as in effect immediately prior to such reduction; (iv) a material reduction by the Company in the kind or level of employee benefits to which the Employee is entitled immediately prior to such reduction with the result that the Employee's overall benefits package is significantly reduced; (v) the relocation of the Employee to a facility or a location more than 25 miles from the Employee's then present location, without the Employee's express written consent; (vi) any purported termination of the Employee by the Company which is not effected for Disability or for Cause, or any purported termination for which the grounds relied upon are not valid; or (vii) the failure of the Company to obtain the assumption of this Agreement by any successors contemplated in Section 7 below. (c) CAUSE. "Cause" shall mean (i) any act of personal dishonesty taken by the Employee in connection with his responsibilities as an employee and intended to result in substantial personal enrichment of the Employee, (ii) the conviction of a felony, (iii) a willful act by the Employee which constitutes gross misconduct and which is injurious to the Company, and (iv) continued violations by the Employee of the Employee's obligations under Section 1 of this Agreement which are demonstrably willful and deliberate on the Employee's part after there has been delivered to the Employee a written demand for performance from the Company which describes the basis for the Company's belief that the Employee has not substantially performed his duties. (d) DISABILITY. "Disability" shall mean that the Employee has been unable to perform his duties under this Agreement as the result of his incapacity due to physical or mental illness, and such inability, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Employee or the Employee's legal representative (such Agreement as to acceptability not to be unreasonably withheld). Termination resulting from Disability may only be effected after at least 30 days' written notice by the Company of its intention to terminate the Employee's employment. In the event that -4- the Employee resumes the performance of substantially all of his duties hereunder before the termination of his employment becomes effective, the notice of intent to terminate shall automatically be deemed to have been revoked. (e) TERMINATION DATE. "Termination Date" shall mean (i) if this Agreement is terminated by the Company for Disability, thirty (30) days after notice of termination is given to the Employee (provided that the Employee shall not have returned to the performance of the Employee's duties on a full-time basis during such thirty (30) day period), (ii) if the Employee's employment is terminated by the Company for any other reason, the last date of regular employment, as provided for in the notice of termination, provided that if within thirty (30) days after the Company gives the Employee notice of termination, the Employee notifies the Company that a dispute exists concerning the termination, the Termination Date shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected), or (iii) if the Agreement is terminated by the Employee, the date on which the Employee delivers the notice of termination to the Company. 7. SUCCESSORS. (a) COMPANY'S SUCCESSORS. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and/or assets which executes and delivers the assumption agreement described in this subsection (a) or which becomes bound by the terms of this Agreement by operation of law. (b) EMPLOYEE'S SUCCESSORS. The terms of this Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. NOTICE. (a) GENERAL. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Employee, mailed notices shall be addressed to him at the home address which he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. -5- (b) NOTICE OF TERMINATION. Any termination by the Company for Cause or by the Employee as a result of a voluntary resignation or an Involuntary Termination shall be communicated by a notice of termination to the other party hereto given in accordance with Section 8 of this Agreement. Such notice shall indicate the specific termination provision in this Agreement relied upon, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and shall specify the termination date (which shall be not more than 30 days after the giving of such notice). The failure by the Employee to include in the notice any fact or circumstance which contributes to a showing of Involuntary Termination shall not waive any right of the Employee hereunder or preclude the Employee from asserting such fact or circumstance in enforcing his rights hereunder. 9. MISCELLANEOUS PROVISIONS. (a) NO DUTY TO MITIGATE. The Employee shall not be required to mitigate the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that the Employee may receive from any other source. (b) WAIVER. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Employee and by an authorized officer of the Company (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) WHOLE AGREEMENT. No agreements, representations or understandings (whether oral or written and whether express or implied) which are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. (d) CHOICE OF LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. (e) SEVERABILITY. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. (f) ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Punitive damages shall not be awarded. (g) NO ASSIGNMENT OF BENEFITS. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including (without limitation) bankruptcy, garnish- -6- ment, attachment or other creditor's process, and any action in violation of this subsection (g) shall be void. (h) EMPLOYMENT TAXES. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes. (i) ASSIGNMENT BY COMPANY. The Company may assign its rights under this Agreement to an affiliate, and an affiliate may assign its rights under this Agreement to another affiliate of the Company or to the Company; provided, however, that no assignment shall be made if the net worth of the assignee is less than the net worth of the Company at the time of assignment. In the case of any such assignment, the term "Company" when used in a section of this Agreement shall mean the corporation that actually employs the Employee. (j) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the date set forth above. COMPANY PERCLOSE, INC., a Delaware corporation By: /s/ Henry A. Plain, Jr. ----------------------------------------- Title: President and Chief Executive Officer ------------------------------------- EMPLOYEE Kenneth E. Ludlum -------------------------------------------- Kenneth E. Ludlum -7- EX-10.12 5 PROMISSORY NOTE EXHIBIT 10.12 PROMISSORY NOTE $200,000.00 January 31, 1997 1. PRINCIPAL AND INTEREST. FOR VALUE RECEIVED, the undersigned borrower ("Borrower") promises to pay to Perclose, Inc., a Delaware corporation (the "Company"), or order, at its principal offices the principal amount of $200,000.00 with interest thereon on the rate of five and 81/100 percent (5.81%) per annum, compounded annually from the date hereof, on the unpaid balance of the principal sum. Principal and interest shall be due and payable on December 31, 1999. Interest accruing on the principal amount of the Note from the date hereof until December 31, 1999 shall be added to the principal amount of the Note. Payments, if any, received between the date hereof and December 31, 1999 shall be considered to be repayments of the principal amount of the Note. 2. REPAYMENT. Notwithstanding the foregoing, in the event that the Borrower's employment with the Company is terminated for any reason prior to repayment of the principal of and accrued interest on this Note, all such outstanding principal and accrued interest shall be due and payable upon the termination of the Borrower's employment. In the event of a merger of the Company with or into another corporation or the sale of substantially all of the assets of the Company, the Note may be assigned to the successor corporation or a Parent or Subsidiary thereof (the "Successor Corporation"). If the Note is assigned, the Borrower shall continue to repay the Note as provided above to the Successor Corporation. Following such an assignment, in the event that the Borrower's employment with the Successor Corporation is terminated for any reason prior to repayment of the principal of and accrued interest on this Note, all such outstanding principal and accrued interest shall be due and payable upon the termination of the Borrower's employment. All principal and interest is payable in lawful money of the United States of America. THE PRIVILEGE IS RESERVED TO PREPAY ANY PORTION OF THE NOTE AT ANY TIME WITHOUT PENALTY. 3. SECURITY. This Note is secured by a pledge of options to acquire 10,000 shares of Common Stock of the Company and all shares of Common Stock issuable upon exercise of such options (collectively, the "Pledged Securities") held by Borrower. The parties agree that the options to acquire the Common Stock of the Company which are included among the Pledged Securities shall be the first options to become vested in the Borrower. The Borrower shall deliver to the Secretary of the Company as escrow agent ("Escrow Holder") all certificates or instruments representing the Pledged Securities. In the event of default in payment when due of any indebtedness under the Note, the Company may elect then, or at any time thereafter, to exercise all rights available to a secured party under the California Uniform Commercial Code, including the right to sell the Pledged Securities at a private or public sale or repurchase the Pledged Securities. The parties agree that the repurchasing of the Pledged Securities by the Company, or by any person to whom the Company may have assigned its rights hereunder, is commercially reasonable if made at the Fair Market Value (as defined below) of the Pledged Securities. "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (a) If the Pledged Securities are listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, their Fair Market Value shall be the closing sales price for such securities (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in THE WALL STREET JOURNAL; (b) If the Pledged Securities are regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a such securities shall be the mean between the high bid and low asked prices for such securities on the date of determination, as reported in THE WALL STREET JOURNAL; or (c) In the absence of an established market for the Pledged Securities, the Fair Market Value thereof shall be determined in good faith by the Board of Directors of the Company. The proceeds of any sale or repurchase shall be applied in the following order: 1. To pay all reasonable expenses of the Company in enforcing this Note, including reasonable attorney's fees. 2. In satisfaction of the remaining indebtedness under the Note. 3. To the Borrower, any remaining proceeds. Upon full payment by the Borrower of all amounts due on the Note, the Escrow Holder shall deliver to the Borrower the instrument(s) or certificate(s) representing the Pledged Securities in the Escrow Holder's possession belonging to the Borrower and the executed original of the Note marked "canceled" by the Company, and the Escrow Holder shall be discharged of all further obligations hereunder. Except for the above-referenced pledge, none of the Pledged Securities or any beneficial interest therein shall be transferred, encumbered or otherwise disposed of in any way until the payment in full of the Note, other than by will or the laws of descent and distribution; provided, however, that the Company may, upon request of the Borrower but at the sole discretion of the Company, consent to the release from escrow of some or all of the Pledged Securities to the Borrower for the purpose of allowing the Borrower to exercise some or all of the vested options which are Pledged Securities (the "Released Options") and to sell the shares of Common Stock issued -2- upon exercise of the Released Options for the purpose of repaying any part of the principal amount of this Note and/or any part of the accrued interest thereon. The Borrower agrees to execute such instruments and other documents and to take such other actions as the Company shall request for the purpose of carrying out the purposes of this Section 3. 4. MISCELLANEOUS. Should any action or proceeding be commenced to collect this Note or any portion of this Note, such sum as the court may deem reasonable shall be added hereto as attorneys' fees. The Borrower waives presentment for payment, protest, notice of protest, and notice of nonpayment of this Note. This Note shall be governed by and construed according to the laws of the State of California, without regard to the conflicts of law provisions thereof. /s/ John G. McCutcheon ------------------------------ (Signature of Borrower) John G. McCutcheon ------------------------------ (Print Name of Borrower) Agreed to and accepted as of the date set forth above: PERCLOSE, INC. By: /s/ Kenneth E. Ludlum ---------------------------- Name: Kenneth E. Ludlum -------------------------- Title: Vice President, Finance and Administration ------------------------- Date: January 31, 1997 -------------------------- -3- EX-11.1 6 STATEMENT RE: COMPUTATION OF PER SHARE LOSSES PERCLOSE, INC. EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE LOSSES
YEAR ENDED MARCH 31, ------------------------------------------- 1997 1996 1995(1) ------------- ------------- ------------- HISTORICAL Weighted average common shares outstanding........................... 9,517,229 4,795,295 Shares related to SAB No. 55, 64 and 83.............................. -- 1,229,297 ------------- ------------- Number of shares used in computing per share amounts................. 9,517,229 6,024,592 ------------- ------------- ------------- ------------- Net loss............................................................. $ (9,657,595) $ (8,084,019) ------------- ------------- ------------- ------------- Net loss per share................................................... $ (1.01) $ (1.34) ------------- ------------- ------------- ------------- 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 7 SELECTED FINANCIAL DATA [LOGO] SELECTED FINANCIAL DATA
(in thousands, except per share data) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------ Years Ended March 31, Statements of Operations Data: Net revenues. . . . . . . . . . . . . . $ 4,456 $ 2,457 $ 178 $ - $ - Loss from operations. . . . . . . . . . (11,293) (8,860) (7,192) (2,676) (615) Net loss. . . . . . . . . . . . . . . . (9,658) (8,084) (6,993) (2,624) (608) Net loss per share(1) . . . . . . . . . (1.01) (1.34) (1.04) - - Shares used in per share calculations(1) . . . . . . . . . . . 9,517 6,025 6,717 - At March 31, Balance Sheets Data: Cash, cash equivalents and short-term investments. . . . . . . . $ 27,673 $37,857 $ 8,127 $ 5,539 $ 1,441 Total assets. . . . . . . . . . . . . . 32,514 40,916 10,949 6,386 1,613 Current liabilities . . . . . . . . . . 3,003 1,905 1,315 487 106 Long term obligations . . . . . . . . . 128 511 593 174 - Total stockholders' equity. . . . . . . 29,382 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. OVERVIEW The Company has a fiscal year ending March 31. Since its inception in March 1992, the Company has been engaged in the design, development, clinical testing, manufacture and sale of a family of suture-based Percutaneous Vascular Surgery (PVS) systems that close the femoral artery access site following catheter procedures that diagnose or clear blocked arteries. These products are known as the Prostar, Prostar Plus, Techstar and Techstar XL systems. The Company has received regulatory approvals where required to market certain of these products in Europe, Canada, Japan and the United States. In April 1997 the Company received approval from the United States Food and Drug Administration ("FDA") for clearance of its Prostar systems for commercial sale in the United States under the Pre-Market Approval ("PMA") regulatory pathway. In May 1997 the Company filed an application with the FDA for clearance of its Techstar systems for commercial sale in the United States under the Pre-Market Approval Supplement ("PMA Supplement") regulatory pathway. An Investigational Device Exemption ("IDE") clinical trial for the Prostar Plus systems was completed in December 1996 and, following completion of data analysis, the Company plans to submit a PMA Supplement application for clearance of the Prostar Plus systems for sale in the United States. There can be no assurance as to when or whether the Company will receive approval of such PMA Supplement applications. Delays in or the failure to receive FDA approval of PMA Supplement applications would have a material adverse effect on the Company's business, financial condition and results of operations. RESULTS OF OPERATIONS FISCAL YEARS ENDED MARCH 31, 1997 AND 1996 Net revenues of $4.5 million in fiscal year 1997 increased from $2.5 million in fiscal year 1996 as a result of increased volume of Techstar and Prostar Plus shipments to international distributors. Sales attributable to the Company's German, French and Japanese distributors in fiscal 1997 were 59%, 15% and 15% of total sales, respectively. Sales to the French distributor were lower than anticipated due to the French government's discontinuation of direct reimbursement to private French hospitals for the use of Perclose products in October 1996. The Company and its distributor are currently formulating different reimbursement and marketing strategies for selling the Company's products in France. The fiscal year 1996 revenues of $2.5 million represented shipments of Prostar, Prostar Plus and Techstar systems to international distributors. Cost of goods sold decreased to $4.7 million in fiscal year 1997 from $4.8 million in fiscal year 1996 as a result of higher costs of producing earlier versions of products in fiscal year 1996 that have been phased out of the product mix and efficiencies gained in manufacturing in fiscal year 1997. Research and development expenses increased 55% to $4.7 million in fiscal year 1997 from $3.1 million in fiscal year 1996. This increase was primarily the result of costs associated with the Prostar Plus and Techstar U.S. clinical studies, additional personnel required for continued product development of the Company's PVS products and the development of new products. Marketing, general and administrative expenses increased 81% to $6.3 million in fiscal year 1997 from $3.5 million in fiscal year 1996. The increase was primarily due to increases in sales and marketing personnel, expansion of the Company's European and United States field sales forces, other sales and marketing expenditures and, to a lesser degree, increased administrative personnel costs. Net interest income increased to $1.6 million for fiscal year 1997 from $776,000 for fiscal year 1996, primarily due to the higher cash and investment balances for a full year in fiscal year 1997 versus approximately half a year in fiscal 1996 from the Company's initial public offering, which occurred on November 7, 1995. FISCAL YEARS ENDED MARCH 31, 1996 AND 1995 Net revenues of $2.5 million in fiscal year 1996 were the result of Prostar, Prostar Plus and Techstar shipments to international distributors, with 53% and 25% of the PERCLOSE NINE ANNUAL REPORT sales attributable to the Company's German and French distributors, respectively. The Company commenced international commercial shipments in December 1994 and for fiscal year 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 increased to $4.8 million in fiscal year 1996 from $2.1 million in fiscal year 1995 as a result of direct material costs associated with products sold and 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 at $3.1 million in fiscal year 1996 and fiscal year 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 fiscal year 1996 from $2.2 million in fiscal year 1995. The increase was primarily due 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. Net interest income increased to $775,000 for fiscal year 1996 from $199,000 for fiscal year 1995 as a result of higher cash and investment balances from the Company's initial public offering in November 1995. INCOME TAXES The Company has not generated any net income to date and therefore has not paid any federal income taxes since its inception. No income tax benefit has been recorded for the net operating losses incurred in the fiscal years ended March 31, 1997, 1996, and 1995. Accordingly, valuation allowances, in amounts equal to the net deferred tax assets as of March 31, 1997, 1996, and 1995 have been established in each period. LIQUIDITY AND CAPITAL RESOURCES During the fiscal years ended March 31, 1997, 1996 and 1995 the Company used cash to fund operations of $8.5 million, $7.3 million, and $7.0 million respectively. The increase in cash used in operations during fiscal year 1997 was due to increases in spending on sales and marketing personnel and related expenditures, higher expenses associated with increased research and development activities, and, to a lesser degree, increased general and administrative expenses. The Company's net cash provided by investing activities was $1.9 million in fiscal year 1997 compared to net cash used in investing activities of $24.2 million and $2.5 million in fiscal 1996 and fiscal 1995, respectively. In fiscal 1997, net proceeds from short-term investments generated $3.1 million in cash that was offset by $1.3 million used for purchases of equipment. These equipment purchases were primarily for computer and production equipment due to increased personnel hires and manufacturing activities. In fiscal 1996 and fiscal 1995, net cash used included net purchases of short-term investments of $24.8 million versus $1.4 million and purchases of equipment of $0.5 million versus $1.0 million. Net cash used in financing activities of $0.5 million in 1997 was due to payment of notes payable and the issuance of employee notes receivables. Issuances of common stock and preferred stock provided net cash of $37.6 million in fiscal 1996 and $10.7 million in fiscal 1995. The Company's principal source of liquidity at March 31, 1997 consisted of cash, cash equivalents and short-term investments of $27.7 million. From inception through March 31, 1997, Perclose raised $22.7 million in net proceeds of private equity financings and stock option exercises and $34.2 million in an initial public offering. In addition, the Company borrowed $1.3 million under an equipment credit facility. The Company anticipates that its operating losses will continue for at least the next year since it plans to expend substantial resources in funding clinical trials in PERCLOSE TEN ANNUAL REPORT support of regulatory approvals and continues to expand research, development, 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 fiscal 1998, 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 of operations could vary significantly as a result of the factors described in this section. The Prostar, Prostar Plus, Techstar, and Techstar XL systems are currently the Company's only products. The Prostar systems have been approved in the United States by the FDA and other products have been approved in certain international markets by the appropriate regulatory authorities. The clinical data that have been obtained to date on the Techstar, Techstar XL and Prostar Plus systems has not been reviewed under applicable FDA regulatory guidelines. There can be no assurance that these products will prove to be safe and effective under applicable regulatory guidelines. In addition, the clinical trial data may identify significant technical or other obstacles to be overcome prior to obtaining necessary United States regulatory or United States and international reimbursement approvals. If the Techstar, Techstar XL, and 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 these products successfully in the United States, the Company's business financial condition and results of operations could be materially and adversely affected. In April 1997 the Company received approval from the United States Food and Drug Administration for clearance of its Prostar systems for commercial sale in the United States under the Pre-Market Approval regulatory pathway. In May 1997 the Company filed an application with the FDA for clearance of its Techstar systems for commercial sale in the United States under the Pre-Market Approval Supplement regulatory pathway. An IDE clinical trial for the Prostar Plus systems was completed in December 1996 and, following completion of data analysis, the Company also plans to submit a PMA Supplemental application for clearance of the Prostar Plus systems for sale in the United States. There can be no assurance as to when or whether the Company will receive approval of such PMA Supplement applications. Delays in or the failure to receive FDA approval of PMA Supplement applications would have a material adverse effect on the Company's business, future financial condition and results of operations. There can be no assurance as to when or whether the Company will receive FDA clearance or approval for sale of the Prostar Plus, Techstar or Techstar XL systems in the United States. There can be no assurance that the Company's development efforts will be successful or that the Prostar Plus, Techstar and Techstar XL 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, Techstar, Techstar XL and Prostar Plus systems represent the Company's sole near-term product focus, the Company could be materially and adversely affected if these systems are not successfully commercialized. PERCLOSE ELEVEN ANNUAL REPORT The Company's largest markets have been Germany, France and Japan. The Company, through its Japanese distributor, has applied for and received regulatory approval to sell the Prostar, Prostar Plus, Techstar and Techstar XL 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 certain states in Germany. In October 1996 the Company's French distributor was informed that the French government has decided to discontinue direct reimbursement to private French hospitals for the use of Perclose products. The Company's products still retain regulatory approval in France. The Company and its distributor are currently formulating different reimbursement and marketing strategies for selling the Company's products to private hospitals in France. The Company experienced a lower level of sales to its French distributor in the three most recent quarters and it is likely that the Company will, as a result of the current limited reimbursement availability in France, experience a lower level of sales in France in future fiscal periods than it had obtained prior to the September 1996 quarter. 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 international 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, 1997 the Company had an accumulated deficit of $28.0 million. The Company has been primarily engaged in research and development of its percutaneous vascular surgery products. The Company has generated 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 shortage 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 operation. There can be no assurance that the Prostar, Prostar Plus, Techstar and Techstar XL 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 distributors 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 year since it plans to expend substantial resources in funding clinical trials in support of regulatory approvals and continues to expand research, development, marketing and sales activities. Even so there can be no assurance that the Company will achieve or sustain profitability in the future. PERCLOSE TWELVE ANNUAL REPORT The Company anticipates that its results of operations will fluctuate on a quarterly basis for the forseeable 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 more attractive than any that are being developed by the Company, or that such competitors will not succeed in 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 catheterization 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. PERCLOSE THIRTEEN ANNUAL REPORT MARCH 31, ---------------------------- 1997 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 2,677,278 $ 9,803,777 Short-term investments 24,995,229 28,052,742 Accounts receivable, net of allowance for returns and doubtful accounts of $176,000 in 1997 and $20,000 in 1996 1,529,959 923,429 Inventories 743,531 529,606 Prepaid expenses 279,894 274,364 ------------ ------------ Total current assets 30,225,891 39,583,918 Equipment and leasehold improvements, net 1,646,723 982,122 Officer notes receivable 400,000 -- Other assets 241,221 350,421 ------------ ------------ Total assets $ 32,513,835 $ 40,916,461 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 422,646 $ 317,222 Accrued compensation 852,255 413,840 Accrued license fee 200,000 188,750 Accrued warranty 324,313 79,044 Accrued clinical trial costs 309,812 -- Other accrued expenses 520,247 550,209 Short-term portion of notes payable 373,795 356,153 ------------ ------------ Total current liabilities 3,003,068 1,905,218 Long-term portion of notes payable 128,387 510,789 Commitments Stockholders' equity: Common stock, $0.001 par value Authorized shares: 30,000,000 Issued and outstanding shares: 9,566,069 in 1997 and 9,501,782 in 1996 9,564 9,502 Additional paid-in capital 58,308,167 57,372,411 Deferred compensation (891,789) (444,852) Accumulated deficit (28,043,562) (18,436,607) ------------ ------------ Total stockholders' equity 29,382,380 38,500,454 ------------ ------------ Total liabilities and stockholders' equity $ 32,513,835 $ 40,916,461 ------------ ------------ ------------ ------------ See accompanying notes. PERCLOSE FOURTEEN ANNUAL REPORT Years Ended March 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ----------- Net revenues $ 4,455,805 $ 2,457,087 $ 178,152 Operating expenses: Cost of goods sold 4,703,340 4,772,022 2,149,388 Research and development 4,745,054 3,058,529 3,065,400 Marketing, general and administrative 6,300,895 3,486,188 2,155,304 ------------ ------------ ----------- Total operating expenses 15,749,289 11,316,739 7,370,092 ------------ ------------ ----------- Loss from operations (11,293,484) (8,859,652) (7,191,940) Interest income 1,752,831 941,389 258,338 Interest expense (116,942) (165,756) (59,256) ------------ ------------ ----------- Net interest income 1,635,889 775,633 199,082 ------------ ------------ ----------- Net loss $ (9,657,595) $ (8,084,019) $(6,992,858) ------------ ------------ ----------- Net loss per share $ (1.01) $ (1.34) ------------ ------------ Shares used in computing net loss per share 9,517,229 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. PERCLOSE FIFTEEN ANNUAL REPORT
Preferred Stock Common Stock Additional Total ----------------- --------------- Paid-in Accumulated Deferred Stockholders' Shares Amount Shares Amount Capital Deficit Compensation Equity ------ ------ ------ ------ --------- ------------ ------------ ------------ Balance at April 1, 1994 3,133,720 $3,134 1,455,671 $1,456 $ 8,952,483 $(3,231,897) $ -- $ 5,725,076 Issuance of common stock under option plan -- -- 526,571 526 92,887 -- -- 93,413 Issuance of Series D covertible preferred stock, net of issuance costs of $383,545 1,053,920 1,054 -- -- 10,154,601 -- -- 10,155,655 Issuance of Series D convertible preferred stock, for purchase of license 6,000 6 -- -- 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 4,193,640 4,194 1,982,242 1,982 19,552,915 (10,224,755) (292,950) 9,041,386 Issuance of common stock under employee stock purchase and option plans -- -- 125,113 125 100,330 -- -- 100,455 Issuance of Series D convertible preferred stock, net of issuance costs of $1,180 325,787 326 -- -- 3,256,364 -- -- 3,256,690 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 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 -- -- 9,501,782 9,502 57,372,411 (18,436,607) (444,852) 38,500,454 Issuance of common stock under employee stock purchase and option plans, net of repurchases -- -- 64,287 62 226,531 -- -- 226,593 Deferred compensation related to cancellation of stock options -- -- -- -- (193,373) -- 193,373 -- Deferred compensation related to consultants' stock options -- -- -- -- 902,598 -- (902,598) -- Amortization of deferred compensation related to stock options -- -- -- -- -- -- 262,288 262,288 Unrealized gain on short-term investments -- -- -- -- -- 50,640 -- 50,640 Net Loss -- -- -- -- -- (9,657,595) -- (9,657,595) --------- ------ --------- ------ ----------- ----------- ------------ ----------- Balance at March 31, 1997 -- $ -- 9,566,069 $9,564 $58,308,167 $(28,043,562) $ (891,789) $29,382,380 --------- ------ --------- ------ ----------- ----------- ------------ -----------
See accompanying notes. PERCLOSE SIXTEEN ANNUAL REPORT
Years Ended March 31, ----------------------------------------- 1997 1996 1995 ------------ ----------- ----------- OPERATING ACTIVITIES Net loss $ (9,657,595) $ (8,084,019) $ (6,992,858) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 668,472 672,556 336,480 Deferred compensation amortization 262,288 124,994 -- Issuance of convertible preferred stock for license -- -- 60,000 Changes in operating assets and liabilities: Accounts receivable (593,612) (810,262) (109,955) Other receivables and prepaid expenses (18,448) (117,294) (118,979) Inventory (213,925) 427,443 (957,049) Accounts payable 105,424 (42,662) 170,585 Accrued warranty 245,270 79,044 -- Accrued clinical trial costs 309,812 -- -- Other accrued expenses 419,702 436,604 631,382 ------------ ----------- ----------- Net cash provided by (used in) operating activities (8,472,612) (7,313,596) (6,980,394) INVESTING ACTIVITIES Purchases of short-term investments (22,442,833) (32,180,575) (7,870,138) Proceeds from sales and maturities of short-term investments 25,550,986 8,383,140 6,476,515 Purchases of equipment and improvements (1,333,073) (454,618) (996,377) Other assets 109,200 44,888 (129,815) ------------ ----------- ----------- Net cash provided by (used in) investing activities 1,884,280 (24,207,165) (2,519,815) FINANCING ACTIVITIES Principal payments under notes payable (364,760) (299,464) (120,450) Proceeds from borrowing on notes payable -- 334,484 565,201 Proceeds from issuance of preferred stock -- 3,256,690 10,155,655 Proceeds from issuance of common stock 273,989 34,289,236 93,413 Repurchase of common stock (47,396) -- -- Issuance of officer notes receivable (400,000) -- -- ------------ ----------- ----------- Net cash provided by (used in) financing activities (538,167) 37,580,946 10,693,819 Net increase (decrease) in cash and cash equivalents (7,126,499) 6,060,185 1,193,610 Cash and cash equivalents at beginning of year 9,803,777 3,743,592 2,549,982 ------------ ----------- ----------- Cash and cash equivalents at end of year $ 2,677,278 $ 9,803,777 $ 3,743,592 ------------ ----------- ----------- Supplemental disclosures of cash flows information: Cash paid for interest $ 68,000 $ 83,628 $ 59,256
See accompanying notes. PERCLOSE SEVENTEEN ANNUAL REPORT NOTE 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 was reincorporated in Delaware in October 1995. The Company is a medical device company which develops, manufactures and markets minimally invasive vascular surgical devices for closing femoral artery access sites following angioplasty and angiography procedures. 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, 1997 and 1996 all short-term investments are designated as available-for-sale. Available-for-sale securities are carried at fair value with unrealized gains and losses, net of tax, reported in accumulated deficit. The amortized cost of available-for-sale debt securities is adjusted for the amortization of premiums and the accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. The following is a summary of available-for-sale securities at March 31, 1997: Gross Amortized Unrealized Estimated Cost Losses Fair Value ----------- --------- ----------- Obligations of federal government agencies $ 6,880,976 $(23,594) $ 6,857,382 Corporate obligations, principally commercial paper and corporate notes 20,607,656 (53,599) 20,554,057 ----------- --------- ----------- Total $27,488,632 $(77,193) $27,411,439 ----------- --------- ----------- Amounts included in short-term investments $25,072,422 $(77,193) $24,995,229 Amounts included in cash and cash equivalents 2,416,210 -- 2,416,210 ----------- --------- ----------- Total $27,488,632 $(77,193) $27,411,439 ----------- --------- -----------
The following is a summary of available-for-sale securities as of March 31, 1996: Gross Amortized Unrealized Estimated Cost Losses Fair Value ----------- --------- ----------- Obligations of federal government agencies $ 2,966,642 $ -- $ 2,966,642 Corporate obligations, prinipally commercial paper and corporate notes 33,180,046 (127,833) 33,052,213 ----------- --------- ----------- Total $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 ----------- --------- ----------- Total $36,146,688 $(127,833) $36,018,855 ----------- --------- ----------- ----------- --------- -----------
During the year ended March 31, 1997, there were sales of available-for-sale securities with immaterial gross realized losses. Available-for-sale debt securities at PERCLOSE EIGHTEEN ANNUAL REPORT March 31, 1997, by contractual maturity, are shown below: Estimated Fair Value ---------------------------------- 1997 1996 ----------- ----------- Due in one year or less $14,222,891 $26,319,173 Due between one and two years 13,188,548 9,699,682 ----------- ----------- Total $27,411,439 $36,018,855 ----------- ----------- ----------- -----------
INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market and are compromised of the following at March 31: 1997 1996 -------- -------- Raw materials $311,952 $226,808 Work-in-process 385,993 197,583 Finished goods 45,586 105,215 -------- -------- Total $743,531 $529,606 -------- -------- -------- --------
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. 1997 1996 ----------- ----------- Equipment $ 2,625,714 $ 1,742,670 Furniture and fixtures 400,781 259,391 Leasehold improvements 74,761 48,414 ----------- ----------- 3,101,256 2,050,475 Less accumulated depreciation (1,454,533) (1,068,353) ------------ ----------- Total $ 1,646,723 $ 982,122 ------------ ----------- ------------ -----------
OTHER ASSETS At March 31, 1997, the Company had approximately $216,981 of restricted deposits ($326,000 at March 31, 1996) 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 and warranty costs. 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 ("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 years ended March 31,1997 and 1996. 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 $ 0.03 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: Year Ended March 31, 1997 1996 1995 ---- ---- ---- Issuance of Series D convertible preferred stock for purchase of license $ -- $ -- $60,000 RECENT PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which the Company is required to adopt on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of convertible preferred stock, stock options and common and common equivalent shares issued during the period twelve months prior to the initial public offering will be excluded. The impact is expected to result in an increase in the primary loss per share for the year ended March 31, 1996 of $0.07 per share with no impact to fiscal 1997. The impact of Statement 128 on the calculation of fully diluted loss per share for these years is not expected to be material. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the current year presentation. PERCLOSE NINETEEN ANNUAL REPORT NOTE 2. COMMITMENTS 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 $397,000, $353,000 and $187,000 in fiscal 1997, 1996 and 1995, respectively. The annual minimum rental commitments under all noncancelable operating lease arrangements are as follows at March 31, 1997: - ------------------------------------------------------------------------------- 1998 $543,000 1999 350,000 2000 43,000 2001 23,000 2002 17,000 -------- $976,000 -------- -------- - ------------------------------------------------------------------------------- NOTE 3. 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 three years under the financing arrangements are as follows at March 31, 1997: - ------------------------------------------------------------------------------- 1998 $377,000 1999 114,000 2000 11,000 -------- Total $502,000 --------- --------- - ------------------------------------------------------------------------------- NOTE 4. 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. - ------------------------------------------------------------------------------- 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 Shares of common stock reserved for future issuance are as follows at March 31, 1997: - ------------------------------------------------------------------------------- Stock plans: Options outstanding 1,395,963 Options reserved for future grants 185,943 --------- Total stock option plans 1,581,906 Employee stock purchase plan 131,452 --------- Total reserved shares 1,713,356 --------- --------- - ------------------------------------------------------------------------------- NOTE 5. 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. - ------------------------------------------------------------------------------- PERCLOSE TWENTY ANNUAL REPORT Activity under the plans is summarized in the below table: - -------------------------------------------------------------------------------
Outstanding Options ------------------------------------------------------------------ Shares Available Number of Price Per Weighted Average For Grant Shares Share Exercise Price ---------------- --------- ------------------ ---------------- Balance at April 1, 1994 37,340 891,989 $ 0.10 - $ 0.425 $ .19 Shares authorized 300,000 -- $ -- -- Options granted (253,750) 253,750 $ 0.425 - $ 1.00 $ .69 Options exercised -- (526,571) $ 0.10 - $ 0.425 $ .18 Options canceled 18,229 (18,229) $ 0.425 - $ 1.00 $ .52 -------- --------- Balance at March 31, 1995 101,819 600,939 $ 0.10 - $ 1.00 $ .41 Shares authorized 600,000 -- $ -- -- Options granted (398,000) 398,000 $ 4.00 - $23.50 $17.46 Options exercised -- (123,254) $ 0.10 - $ 1.00 $ .65 Options canceled 33,942 (33,942) $ 0.10 - $23.50 $ 1.09 ------- --------- Balance at March 31, 1996 337,761 841,743 $ 0.10 - $23.50 $ 8.57 Shares authorized 450,000 -- $ -- Options granted (681,346) 681,346 $15.75 - $24.25 $21.06 Options exercised 47,396 (94,994) $ 0.10 - $15.25 $ .78 Options canceled 32,132 (32,132) $ 0.10 - $23.50 $18.38 ------- --------- Balance at March 31, 1997 185,943 1,395,963 $ 0.10 - $24.25 $14.83 ------- --------- ------- ---------
- ------------------------------------------------------------------------------- Additionally, 23,960 shares exercised under stock options were subject to repurchase, at the option of the Company, at March 31, 1997. The following table summarizes information about stock options outstanding at March 31, 1997: - -------------------------------------------------------------------------------
Options Outstanding Options Exercisable ------------------------------------------------ ----------------------------------------- Weighted Number Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise as of Contractual Exercise as of Exercise Prices March 31, 1997 Life Price March 31, 1997 Price - --------- -------------- ----------- -------- -------------- -------- $ 0.10 - $ 0.43 304,900 6.59 $ 0.26 212,899 $ 0.23 $ 0.43 - $ 1.00 46,604 7.85 $ 1.00 22,479 $ 1.00 $ 4.00 - $ 6.00 60,834 8.45 $ 5.73 21,562 $ 5.77 $13.00 - $19.00 299,250 9.07 $15.57 45,150 $14.27 $19.75 - $24.25 684,375 9.42 $22.74 53,491 $23.35 --------- ------- $ 0.10 - $24.25 1,395,963 8.63 $14.83 355,581 $ 5.87 --------- -------
- ------------------------------------------------------------------------------- At March 31, 1996 and 1995, 220,458 and 197,197 shares were exercisable at weighted average exercise prices of $0.89 and $0.46, respectively. 1995 EMPLOYEE STOCK PURCHASE PLAN In September 1995, the 1995 Employee Stock Purchase Plan ("ESPP") 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, 1997 and 1996, 16,689 and 1,859 shares were issued under the ESPP. - ------------------------------------------------------------------------------- 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. During the year, the Company repurchased 47,396 shares of unvested common stock and reduced related unamortized deferred compensation by $193,373. For the year ended March 31, 1997, amortization of $96,504 was charged to operations. The Company recognized $902,598 as deferred compensation relating to stock options granted to consultants during the year ended March 31, 1997 and has PERCLOSE TWENTY-ONE ANNUAL REPORT charged $165,784 to operations in fiscal 1997. The deferred compensation is amortized over the vesting period of the options. STOCK-BASED COMPENSATION. As permitted under FASB Statement No. 123, "Accounting for Stock-Based Compensation" (FASB 123), the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for stock-based awards to employees. Under APB 25, the Company generally recognizes no compensation expense with respect to such awards. Pro forma information regarding net income and earnings per share is required by FASB 123 for awards granted after March 31, 1995 as if the Company had accounted for its stock-based awards to employees under the fair value method of FASB 123. The fair value of the Company's stock-based awards to employees was estimated using the minimum value model for awards prior to the Company's initial public offering on November 7, 1995 and the Black-Scholes model subsequent to the initial public offering. The Black-Scholes options valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The fair value of the Company's stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions: - ------------------------------------------------------------------------------- Options ESPP --------------- ---------------- 1997 1996 1997 1996 ---- ---- ---- ---- Expected life (years) 5.00 5.00 .50 .38 Expected volatility .70 .70 .77 .69 Risk-free interest rate 6.49 5.45 5.47 5.28 - ------------------------------------------------------------------------------- For pro forma purposes, the estimated fair value of the Company's stock-based awards to employees is amortized over the options' vesting period (for options) and the purchase period (for stock purchases under the ESPP). The Company's pro forma information follows in thousands except for loss per share information: - ------------------------------------------------------------------------------- 1997 1996 ------------- ----------- Net loss pro forma $(11,538,278) $(8,258,516) Net loss per share pro forma $ (1.21) $ (1.37) - ------------------------------------------------------------------------------- Because FASB 123 is applicable only to awards granted subsequent to March 31, 1995, its pro forma effect will not be fully reflected until approximately 1999. The weighted-average fair value of options granted during 1997 and 1996 was $13.50 and $10.91 per shares, respectively. The weighted-average fair value of shares under the ESPP during 1997 and 1996 was $10.79 and $8.22 per share, respectively. NOTE 6. 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, 1997 1996 ----------- ---------- Deferred tax assets: Net operating loss carryforwards $ 8,600,000 $6,200,000 Tax credit carryforwards 390,000 270,000 Other, net 1,900,000 760,000 ----------- ---------- Total 10,890,000 7,230,000 Valuation allowance (10,890,000) (7,230,000) ----------- ---------- Net $ -- $ -- ----------- ---------- - ------------------------------------------------------------------------------- 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, 1997 and 1996, has been established to reflect these uncertainties. The change in the valuation allowance was a net increase of $3,660,000, $3,280,000 and $2,750,000 for the fiscal years 1997, 1996 and 1995, respectively. At March 31, 1997, the Company had net operating loss carryforwards for federal and California tax purposes of approximately $24,000,000 and $9,000,000, respectively, which will expire from 1998 through 2012, if not PERCLOSE TWENTY-TWO ANNUAL REPORT utilized. At March 31, 1997, the Company also had research and development tax credit carryforwards of approximately $220,000 and $240,000, respectively, for federal and California tax purposes expiring from 2007 through 2012, 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, 1997 1996 1995 ----------- ----------- ----------- Tax provision (benefit) at U.S. statutory rates $(3,283,574) $(2,748,566) $(2,377,300) Loss for which no tax benefit is currently recognizable 3,283,574 2,748,566 2,377,300 ----------- ----------- ----------- $ -- $ -- $ -- ----------- ----------- ----------- - ------------------------------------------------------------------------------- NOTE 7. EMPLOYEE BENEFIT PLAN The Company adopted the Perclose 401(k) Retirement Plan to provide retirement benefits for its employees in December 1994. As allowed under Section 401(k) of the Internal Revenue Code, the plan provides tax-deferred salary deductions for eligible employees. Full time employees are eligible to participate in the next quarter enrollment period or up to ninety days of service. Participants may make voluntary contributions to the plan up to 15% of their compensation. The Company does not match contributions towards the plan. NOTE 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 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, 1997, 82% and 15% (87% and 8% in the fiscal year ended March 31, 1996) of the Company's net revenues were to Europe and Japan respectively. Sales to significant customers as a percentage of total revenues are as follows: - ------------------------------------------------------------------------------- Years Ended March 31, 1997 1996 1995 ---- ---- ---- German Distributor 59% 53% 47% Japanese Distributor 15% 8% -- French Distributor 15% 25% -- U.K. Distributor 2% 3% 38% Canadian Distributor 1% 3% 15% - ------------------------------------------------------------------------------- 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 PRODUCT SYSTEMS. The Company has been engaged primarily in researching, developing, testing and obtaining regulatory clearances for its Prostar, Prostar Plus, Techstar and Techstar XL 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. 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. PERCLOSE TWENTY-THREE ANNUAL REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS PERCLOSE, INC. We have audited the accompanying balance sheets of Perclose, Inc. as of March 31, 1997 and 1996, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Jose, California April 25, 1997 PERCLOSE TWENTY-FOUR ANNUAL REPORT EX-23.1 8 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 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 April 25, 1997, included in the 1997 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 Nos. 333-56 and 333-17977) pertaining to the 1992 Stock Plan, 1995 Employee Stock Purchase Plan, and 1995 Director Option Plan of Perclose, Inc. of our report dated April 25, 1997, 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 13, 1997 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 YEAR MAR-31-1997 MAR-31-1997 2,677,278 24,995,229 1,529,959 0 743,531 30,225,891 1,646,723 0 32,513,835 3,003,068 128,387 0 0 29,382,380 0 32,513,835 4,455,805 4,455,805 4,703,340 15,749,289 0 0 1,635,889 (9,657,595) 0 (9,657,595) 0 0 0 (9,657,595) (1.01) (1.01)
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