-----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, B0NPFnEyFz8iVgtrcCjES4lKRFJKyMqD4gccFR1kSt2PLoIfAj6WoOm800kf9MLh /ULC9Z8m1c21LFQ2xYODJw== 0000912057-99-003781.txt : 19991109 0000912057-99-003781.hdr.sgml : 19991109 ACCESSION NUMBER: 0000912057-99-003781 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991001 FILED AS OF DATE: 19991108 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-Q SEC ACT: SEC FILE NUMBER: 000-26890 FILM NUMBER: 99742723 BUSINESS ADDRESS: STREET 1: 400 SAGINAW DRIVE CITY: REDWOOD CITY STATE: CA ZIP: 94063- BUSINESS PHONE: 4154733100 MAIL ADDRESS: STREET 1: 400 SAGINAW DRIVE CITY: REDWOOD CITY STATE: CA ZIP: 94063 10-Q 1 10-Q - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-Q [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 1999 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to . ---------- ---------- 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.) 400 SAGINAW DRIVE, REDWOOD CITY, CA 94063-4749 (Address of principal executive offices) (Zip Code) Registrant's telephone, including area code: (650) 474-3000 ----------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes [X] No [ ] As of October 31, 1999, there were 11,215,582 shares of the Registrant's Common Stock outstanding. - ------------------------------------------------------------------------------- PERCLOSE, INC. TABLE OF CONTENTS
Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1999 and March 31,1999............... 3 Condensed Consolidated Statements of Income for the three months and six months ended September 30, 1999 and 1998.................................................................... 4 Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 1999 and 1998.................................................................................. 5 Notes to Condensed Consolidated Financial Statements........................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risks.................................... 20 PART II. OTHER INFORMATION.......................................................................................... 21 INDEX TO EXHIBITS.................................................................................................... 21 SIGNATURES........................................................................................................... 22
2 PERCLOSE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value data)
September 30, March 31, 1999 1999 ------------- --------- (Unaudited) ASSETS Current assets: Cash and cash equivalents .............................................. $ 9,314 $ 7,333 Short-term investments ................................................. 23,056 22,864 Accounts receivable, net ............................................... 10,636 7,689 Other receivables ...................................................... 1,061 73 Inventories ............................................................ 3,425 2,549 Prepaid expenses ....................................................... 953 689 -------- -------- Total current assets ................................................ 48,445 41,197 Equipment and leasehold improvements, net ................................ 7,073 5,767 Officer notes receivable ................................................. 200 200 Other assets ............................................................. 2,380 2,426 -------- -------- Total assets ............................................................. $ 58,098 $ 49,590 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ....................................................... $ 1,508 $ 1,717 Accrued compensation ................................................... 1,753 1,886 Accrued warranty ....................................................... 219 45 Other accrued expenses ................................................. 1,780 995 Notes payable .......................................................... -- 32 Capital lease obligations .............................................. 43 -- -------- -------- Total current liabilities ........................................... 5,303 4,675 Deferred rent ............................................................ 125 -- Capital lease obligations-long term ...................................... 105 -- Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value ...................................... -- -- Common stock, $0.001 par value ......................................... 11 11 Additional paid-in capital ............................................. 83,613 81,427 Accumulated other comprehensive income (loss) .......................... (79) (31) Accumulated deficit .................................................... (30,885) (36,219) Deferred compensation .................................................. (95) (273) -------- -------- Total stockholders' equity ............................................... 52,565 44,915 -------- -------- Total liabilities and stockholders' equity ............................... $ 58,098 $ 49,590 ======== ========
See accompanying notes. 3 PERCLOSE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited)
Three Months Ended Six Months Ended September 30, September 30, ------------------- --------------------------------- 1999 1998 1999 1998 --------- --------- ---------- ----------- Net revenues ................................ $ 16,496 $ 9,123 $ 32,541 $ 17,487 Cost of goods sold .......................... 5,513 3,270 9,759 6,460 -------- -------- -------- -------- Gross profit ................................ 10,983 5,853 22,782 11,027 Operating expenses: Research and development ................. 2,471 1,883 5,430 3,512 Selling, general and administrative ...... 6,191 3,629 12,128 7,262 -------- -------- -------- -------- Total operating expenses .............. 8,662 5,512 17,558 10,774 -------- -------- -------- -------- Income from operations ...................... 2,321 341 5,224 253 Other income (expense) Interest income, net ..................... 400 424 840 850 Other income (expense) ................... (9) 29 (137) (11) -------- -------- -------- -------- Total other income (expense) .......... 391 453 703 839 Income before income taxes .................. 2,712 794 5,927 1,092 Provision for income taxes .................. 271 39 593 54 -------- -------- -------- -------- Net income .................................. $ 2,441 $ 755 $ 5,334 $ 1,038 ======== ======== ======== ======== Basic earnings per common share ............. $ 0.22 $ 0.07 $ 0.48 $ 0.10 ======== ======== ======== ======== Diluted earnings per common share ........... $ 0.20 $ 0.07 $ 0.43 $ 0.09 ======== ======== ======== ======== Shares used in computing basic earnings per share ....................................... 11,204 10,817 11,161 10,785 ======== ======== ======== ======== Shares used in computing diluted earnings per share ....................................... 12,474 11,271 12,370 11,339 ======== ======== ======== ========
See accompanying notes. 4 PERCLOSE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six Months Ended September 30, -------------------------- 1999 1998 ----------- ----------- OPERATING ACTIVITIES Net income .................................................. $ 5,334 $ 1,038 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................ 1,024 749 Deferred compensation amortization ....................... 178 167 Compensation expense related to consultants' stock options 324 -- Changes in operating assets and liabilities: Accounts receivable ................................... (2,947) (886) Other receivables ..................................... (988) (20) Inventories ........................................... (876) (288) Prepaid expenses ...................................... (466) 117 Accounts payable ...................................... (209) (145) Accrued compensation .................................. (133) 250 Accrued warranty ...................................... 174 -- Deferred rent ......................................... 125 -- Other accrued expenses ................................ 785 (33) -------- -------- Net cash provided by operating activities ............ 2,325 949 INVESTING ACTIVITIES Purchases of short-term investments ......................... (5,473) (5,474) Proceeds from sales and maturities of short-term investments 5,233 7,372 Purchases of equipment and leasehold improvements ........... (2,206) (1,051) Proceeds from sale of fixed assets .......................... 78 -- Other assets ................................................ 46 (1,772) -------- -------- Net cash used in investing activities ................ (2,322) (925) FINANCING ACTIVITIES Payments under notes payable ................................ (32) (269) Capital lease obligations ................................... 148 -- Proceeds from issuance of common stock ...................... 1,862 643 Repurchase of common stock .................................. -- (293) -------- -------- Net cash provided by financing activities ........... 1,978 81 -------- -------- Net increase in cash and cash equivalents .................. 1,981 105 Cash and cash equivalents at beginning of period ........... 7,333 13,232 -------- -------- Cash and cash equivalents at end of period ................. $ 9,314 $ 13,337 ======== ========
See accompanying notes. 5 PERCLOSE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated financial statements include the accounts of Perclose, Inc. and its wholly owned subsidiary, Perclose Deutschland, GmbH formed in June 1998. All significant intercompany balances and transactions have been eliminated in consolidation. The operating results of the interim periods presented are not necessarily indicative of the results for the year ending March 31, 2000 or for any future interim period. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended March 31, 1999 included in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The accompanying balance sheet at March 31, 1999 is derived from audited financial statements at that date. The Company's fiscal year ends on the last Friday in March and consists of four 13 week quarters. The Company's fiscal quarters end on the Friday closest to the end of the corresponding calendar quarter. In order to keep the quarters ending at approximately the end of the calendar month, the first three months, the quarter ended July 2, 1999, had 14 weeks. The three month periods shown as having ended September 30, 1999 and 1998 actually ended on October 1, 1999 and September 25, 1998, respectively. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar month. NOTE 2. INVENTORIES Inventories consist of the following (in thousands):
September 30, March 31, 1999 1999 ------------------- ------------------- Raw materials.................... $ 1,356 $ 700 Work-in-process.................. 1,206 967 Finished goods................... 863 882 ------------------- ------------------- $ 3,425 $ 2,549 =================== ===================
6 NOTE 3. EARNINGS PER SHARE DATA The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for the three months and six months ended September 30, 1999 and 1998 (in thousands).
Three Months Ended Six Months Ended September 30, September 30, ------------------- --------------------- 1999 1998 1999 1998 ------- ------ ------- ------- Numerator: Net income numerator for basic and diluted EPS: ...................... $ 2,441 $ 755 $ 5,334 $ 1,038 ------- ------- ------- ------- Denominator: Denominator for basic EPS-- Weighted-average shares ........... 11,204 10,817 11,161 10,785 Effect of dilutive securities: Stock options ..................... 1,270 454 1,209 554 ------- ------- ------- ------- Denominator for diluted EPS-- Adjusted weighted-average shares Outstanding and assumed conversions 12,474 11,271 12,370 11,339 ======= ======= ======= =======
NOTE 4. COMPREHENSIVE INCOME Accumulated other comprehensive income presented in the accompanying consolidated balance sheet consists of the accumulated net unrealized gains and losses on available-for-sale marketable securities as well as net unrealized gains and losses on foreign currency translation, net of the related tax effect. The tax effects for other comprehensive income were immaterial for all periods presented. The components of comprehensive income, net of related tax, for the three and six months ended September 30, 1999 and 1998 are as follows (in thousands):
Three Months Ended Six Months Ended September 30, September 30, ----------------- --------------------------- 1999 1998 1999 1998 ------- ------- ------- ------- Net income ............................... $ 2,441 $ 755 $ 5,334 $ 1,038 Other comprehensive income: Change in unrealized gain (loss) on available-for-sale investments..... 5 58 (48) 75 Change in unrealized gain (loss) on foreign currency translation ...... 2 -- -- -- ------- ------- ------- ------- Comprehensive income ..................... $ 2,448 $ 813 $ 5,286 $ 1,113 ======= ======= ======= =======
7 NOTE 5. SEGMENT INFORMATION The Company operates as one segment, the sale of Percutaneous Vascular Surgery products and sells these products primarily to hospitals and medical device distributors. The Company only reports profit and loss information on an aggregate basis to the chief operating decision maker of the Company. The Company markets its products outside the United States (mainly Europe and Japan) through its sales organizations and distributors. NOTE 6. RECENT ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal years commencing after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company currently does not make use of derivatives and management anticipates that the adoption of SFAS No. 133 will not have a significant effect on earnings or the financial position of the Company. NOTE 7. LEGAL PROCEEDINGS In March 1998, the Company received a patent infringement complaint stating that it is being sued by Kensey Nash Corporation of Exton, Pennsylvania, and Sherwood Medical Company of St. Louis, Missouri. Sherwood Medical Company was Kensey Nash's marketing partner for its Angioseal product at the time the suit was filed and is a subsidiary of Tyco International, Ltd. The suit, filed in U.S. District Court for the Eastern District of Pennsylvania, asserts that Perclose PVS devices infringe a 1997 Kensey Nash patent. The Company has responded to the patent infringement complaint filed by Kensey Nash Corporation and Sherwood Medical Company. In its response in May 1998 to the complaint, Perclose denies that its Prostar and Techstar devices infringe the Kensey Nash patent. In addition, Perclose seeks a declaration from the Court that Perclose does not infringe the Kensey Nash patent, and that the patent is both invalid and unenforceable. At the same time, the Company countersued Kensey Nash Corporation, Sherwood Medical Company and Tyco claiming the patent on which Kensey Nash Corporation and Sherwood Medical Company sued is invalid and not infringed and also claiming counterdefendants have engaged in antitrust and unfair competition violations. In March 1999, Tyco sold the marketing rights to Kensey Nash's Angio Seal product to St. Jude Medical, Inc. The case's trial date is unscheduled at the current time. Management believes the patent infringement complaint is without merit and intends to defend itself and its intellectual property rights vigorously. 8 NOTE 8. PENDING MERGER On July 8, 1999 Abbott Laboratories, Inc. and Perclose announced that the companies had entered into a definitive agreement for Abbott to acquire Perclose in a stock-for-stock merger for $54 per share subject to a minimum of 1.1 Abbott shares and a maximum of 1.35 Abbott shares. The merger is intended to be accounted for as a pooling of interests, tax-free to Perclose shareholders, and is expected to close in the fourth quarter of calendar 1999, subject to the approval of Perclose stockholders, regulatory agencies and other customary closing conditions. NOTE 9. PRODUCT RECALL In early July 1999 Perclose announced a voluntary, lot specific recall of the Techstar 6XL product. The recall was due to a manufacturing process variation that led to difficulty in a small number of instances with deploying the needles featured in the Company's suture-based technology. Perclose replaced the recalled units with product in inventory. Activities associated with the recall are proceeding according to plan. The Company has an insurance policy covering the costs associated with product recalls due to, among other things, design specifications, design controls and product performance. A formal claim under this insurance policy has not yet been made for the Techstar 6XL products. The Company has accrued for the estimated costs of the product recall and recorded a receivable for the anticipated insurance proceeds during the quarter ended June 30, 1999. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT ON FORM 10-Q (THIS "REPORT") AND IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, CERTAIN STATEMENTS IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE FORWARD LOOKING STATEMENTS. WHEN USED IN THIS REPORT, THE WORD "EXPECTS," "ANTICIPATES," "ESTIMATES," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THOSE RISKS SET FORTH BELOW UNDER "FACTORS AFFECTING FUTURE OPERATING RESULTS," IN PARTICULAR, THOSE RELATING TO THE COMPANY'S DEPENDENCE ON THE PROSTAR-Registered Trademark- AND TECHSTAR-Registered Trademark- PRODUCTS, UNCERTAINTY OF MARKET ACCEPTANCE, HISTORY OF LOSSES AND RISK OF INABILITY TO SUSTAIN PROFITABILITY, FLUCTUATIONS IN OPERATING RESULTS, GOVERNMENT REGULATION, COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE, LIMITED MANUFACTURING EXPERIENCE AND SCALE-UP RISK, UNCERTAINTY RELATING TO NEW PRODUCT DEVELOPMENT, LIMITED SALES AND MARKETING EXPERIENCE, RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY AND UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. OVERVIEW Perclose, Inc. (the "Company") designs, manufactures and markets less invasive medical devices that automate the surgical closure or connection of blood vessels. The Prostar-Registered Trademark- products, which are marketed in the U.S. and internationally, surgically close the arterial access site in the femoral artery after catheterization procedures such as angioplasty, stenting, atherectomy and diagnostic angiography. The Techstar-Registered Trademark- products are available worldwide to surgically close the arterial access site in the femoral artery following diagnostic catheterization procedures. Outside the U.S., the Techstar products are also available for use following interventional catheterization procedures. A second group of products, the Heartflo-TM- System, is under development and is designed to automate the surgical connection of blood vessels in conventional and minimally invasive coronary artery bypass surgery. The Company commenced international shipments of its first Prostar and Techstar Percutaneous Vascular Surgery ("PVS") products in December 1994 and July 1995, respectively. During fiscal year 1998, the Company received several FDA pre-market approvals ("PMA") and PMA supplement approvals for commercial sale in the United States of various versions of its Prostar and Techstar products. A pre-market approval supplement (PMAS) application has been submitted for the new generation of PVS product, the Closer-TM- 6F, for use following diagnostic catheterization procedures. Data from a 200 patient clinical trial, conducted at five cardiovascular centers, were submitted to support the PMAS. The PMAS application is currently under review. The Company's fiscal year ends on the last Friday in March and consists of four 13 week quarters. The Company's fiscal quarters end on the Friday closest to the end of the corresponding calendar quarter. In order to keep the quarters ending at approximately the end of the calendar month, the first three months, the quarter ended July 2, 1999, had 14 weeks. The three month periods shown as having ended September 30, 1999 and 1998 actually ended on October 1, 1999 and September 25, 1998, respectively. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar month. 10 On July 8, 1999 Abbott Laboratories, Inc. and Perclose announced that the companies had entered into a definitive agreement for Abbott to acquire Perclose in a stock-for-stock merger for $54 per share subject to a minimum of 1.1 Abbott shares and a maximum of 1.35 Abbott shares. The merger is intended to be accounted for as a pooling of interests, tax-free to Perclose shareholders, and is expected to close in the fourth quarter of calendar 1999, subject to the approval of Perclose stockholders, regulatory agencies and other customary closing conditions. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30,1999 AND 1998 REVENUES. The Company's net revenues increased 81% to $16.5 million for the three months ended September 30, 1999 from $9.1 million for the three months ended September 30, 1998. The increase in revenues was primarily a result of increased shipments of the Techstar 6F XL systems in the United States. Domestic sales as a percentage of total revenue for the three months ended September 30, 1999 increased to 92% from 90% for the three months ended September 30, 1998. Sales of Prostar and Techstar products accounted for 27% and 72%, respectively, of the net revenues for the three months ended September 30, 1999. GROSS PROFIT. Gross profit increased to $11.0 million for the three months ended September 30, 1999 from $5.9 million for the three months ended September 30, 1998. Gross profit increased to 67% of net revenues for the quarter ended September 30, 1999 from 64% of net revenues for the quarter ended September 30, 1998. The increase in gross profit was primarily due to increases in sales and production volumes, which contributed to reductions in overhead cost per unit and enabled the Company to achieve improvements in manufacturing efficiency. Production volume of Techstar and Prostar devices increased 99% to 80,000 units for the quarter ending September 30, 1999 from 40,000 units produced during the quarter ending September 30, 1998. RESEARCH AND DEVELOPMENT. Research and development expenses increased 31% to $2.5 million for the three months ended September 30, 1999 from $1.9 million for the three months ended September 30, 1998. Most of the increase in research and development costs was attributable to a significant increase in headcount resulting in higher payroll expenses. In addition, due to the additional operating costs of the Company's new facility, research and development's portion of the facility allocation increased 118% for the three months ended September 30, 1999 compared to the three months ended September 30, 1998. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased 71% to $6.2 million for the three months ended September 30, 1999 from $3.6 million for the three months ended September 30, 1998. The increase was primarily due to the expansion of the Company's domestic sales force which resulted in both higher payroll-related costs as well as increased travel expenses. In addition, administrative expenses in the three months ended September 30, 1999 increased significantly as a result of one time expenses related to the acquisition by Abbott Laboratories and from litigation costs associated with a patent infringement suit with a competitor. OTHER INCOME (EXPENSE). Other income decreased slightly to $391,000 for the three 11 months ended September 30, 1999 from $453,000 for the three months ended September 30, 1998. Although the amount of cash and short term investments did not change significantly between the two periods, interest income decreased due to a number of the higher yielding securities that have matured, thereby reducing the average yield during the three months ended September 30, 1999. SIX MONTHS ENDED SEPTEMBER 30,1999 AND 1998 REVENUES. The Company's net revenues increased 86% to $32.5 million for the six months ended September 30, 1999 from $17.5 million for the six months ended September 30, 1998. The increase in revenues was primarily a result of increased shipments of the Techstar 6F XL systems in the United States. Domestic sales as a percentage of total revenue for the six months ended September 30, 1999 increased to 92% from 89% for the six months ended September 30, 1998. Sales of Prostar and Techstar products accounted for 27% and 72%, respectively, of the net revenues for the six months ended September 30, 1999. GROSS PROFIT. Gross profit increased to $22.8 million for the six months ended September 30, 1999 from $11.0 million for the six months ended September 30, 1998. Gross profit increased to 70% of net revenues for the six months ended September 30, 1999 from 63% of net revenues for the six months ended September 30, 1998. The increase in gross profit was primarily due to increases in sales and production volumes, which contributed to reductions in overhead cost per unit and enabled the Company to achieve improvements in manufacturing efficiency. Production volume of Techstar and Prostar devices increased 110% to 176,000 units for the six months ended September 30, 1999 from 84,000 units produced during the six months ended September 30, 1998. RESEARCH AND DEVELOPMENT. Research and development expenses increased 55% to $5.4 million for the six months ended September 30, 1999 from $3.5 million for the six months ended September 30, 1998. Most of the increase in research and development costs was attributable to a significant increase in headcount resulting in higher payroll expenses. In addition, materials and manufacturing labor associated with prototype builds for the Company's next generation PVS product, the Closer, were substantially higher in the six months ended September 30, 1999 as compared to the comparable period ended September 30, 1998. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased 67% to $12.1 million for the six months ended September 30, 1999 from $7.3 million for the six months ended September 30, 1998. The increase was primarily due to the expansion of the Company's domestic sales force which resulted in both higher payroll-related costs as well as increased travel expenses. In addition, administrative expenses in the six months ended September 30, 1999 increased significantly as a result of one time expenses related to the acquisition by Abbott Laboratories and from litigation costs associated with a patent infringement suit with a competitor. OTHER INCOME (EXPENSE). Net other income decreased to $703,000 for the six months ended September 30, 1999 from $839,000 for the six months ended September 30, 1998. Interest income decreased slightly due to a lower average yield during the six months ended September 30, 1999. In addition, rent and operating expenses exceeded rental income for a facility that was not fully sub-leased during the 1999 period. 12 INCOME TAXES The income tax provision for the three and six months ended September 30, 1999 and 1998 is based on a projected effective tax rate of 10% and 5%, respectively. The tax rates differ from the statutory rate of 35% primarily due to the benefits of the use of tax net operating loss forwards. The income tax provision anticipated is attributable to current foreign, state, and federal minimum income taxes. As of fiscal year end 1999, the Company had net operating loss carryforwards for federal and state tax purposes of approximately $39.0 million and $14.0 million, respectively, which will expire from 2000 through 2012 if not utilized. As of fiscal year end 1999 the future use of the net operating loss and tax credit carryforwards are not subject to material limitations resulting from the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. LIQUIDITY AND CAPITAL RESOURCES The Company's net cash provided by operating activities was $2.3 million for the six months ended September 30, 1999, compared to $949,000 for the six months ended September 30, 1998. The Company's increased profitability in the six months ended September 30, 1999, which resulted in net income of $5.3 million compared to net income of $1.0 million for the six months ended September 30, 1998, was the main reason for the increased generation of cash in the current six month period. A higher sales volume in the six months ended September 30, 1999 resulted in $876,000 of cash being used to increase inventory levels, and $2.9 million additional cash being used to support accounts receivable. The Company's net cash used by investing activities was $2.3 million for the six months ended September 30, 1999 compared to net cash used by investing activities of $925,000 for the six months ended September 30, 1998. For the six months ended September 30, 1999 net purchases of short-term investments used $240,000 in cash as compared to $1.9 million of net proceeds for the same period in 1998. Equipment and leasehold improvement purchases for the six months ended September 30, 1999 were $2.2 million, as compared to $1.1 million for the six months ended September 30, 1998. The larger equipment purchases related to tooling for the Closer (the new generation Techstar) as well as machinery for the machine shop, which will provide additional capacity to maintain the quick turn around needed for new product development. In addition, final invoices were paid related to the build out of the Company's new headquarters and manufacturing facility. The Company's net cash generated by financing activities was $2.0 million for the six months ended September 30, 1999, compared to cash generated of $81,000 for the six months ended September 30, 1998. Proceeds from the issuance of common stock relating to option exercises provided $1.9 million for the current period compared to $643,000 for the period ended September 30, 1998. The Company's principal source of liquidity at September 30, 1999 consisted of cash, 13 cash equivalents and short-term investments of $32.4 million versus $30.2 million at March 31, 1999. Although Perclose believes that current cash balances and short-term investments along with cash generated from the future sales of products will be sufficient to meet the Company's operating and capital requirements, there can be no assurance that the Company will not require additional financing. There can be no assurance that additional financing, if required, will be available on satisfactory terms or at all. In any event, Perclose may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Perclose's future liquidity and capital requirements will depend on numerous factors including the extent to which the Company's products gain market acceptance, actions relating to regulatory and reimbursement matters, the costs and timing of expansion of marketing, sales, manufacturing and product development activities and competitive developments. YEAR 2000 COMPLIANCE STATUS OF PLAN, COSTS AND CONTINGENCY PLAN The Company is aware of software compatibility issues associated with existing computer systems as the year 2000 approaches. The "year 2000 problem" is pervasive and complex, as virtually every computer operation will be affected in some way by the rollover of the two-digit year value from 99 to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company recognizes the importance of the Year 2000 issue and has assigned a project leader to supervise an assessment of the Company's Year 2000 readiness. The scope of the Year 2000 readiness effort includes computer software and hardware, electronic data interchange, manufacturing and lab equipment, facilities systems, utility reliability and supplier readiness. The Company has reviewed the Year 2000 issue as it may affect the Company's business activities. The Company has purchased its internal manufacturing and financial information systems, and installs on an ongoing basis all updates and patches as they are released by the suppliers to make certain that the Company's systems and software are up-to-date and Year 2000 compliant according to supplier representations. The Company has received Year 2000 compliance certifications from all software vendors from whom the Company has purchased software. The Company has completed the replacement of its system servers and 90% of its desktop work stations. The remaining 10% of the desktop work stations will be replaced by November 30, 1999. The new equipment will facilitate Year 2000 readiness, however, the equipment is being acquired for the purpose of replacing older computers. In addition to relying on the certification of its suppliers, the Company has completed testing by its internal computer staff to ensure Year 2000 compliance relating to computer hardware and software. The product which the Company manufactures is a mechanical device which does not contain software components. Therefore date sensitivity is not an issue. The Company believes that it has no material exposure to contingencies directly related to the Year 2000 issue for the products it has sold or will sell in the future. The Company has not incurred any expenses outside of ordinary operating expenses in connection with its Year 2000 assessment and compliance plan. 14 The majority of the Company's production and manufacturing equipment is non-date dependent table top equipment. The manufacturing equipment that has date dependent functions have been certified by their vendors as Year 2000 compliant. The Company recently leased an office and manufacturing headquarters facility and has installed new building systems throughout the facility. All such building systems were Year 2000 compliant as certified by the manufacturer prior to installation. In addition to internal Year 2000 software and equipment assessment and remediation activities, the Company has contacted its critical suppliers in order to assess their compliance. As of fiscal quarter ended September 1999 all suppliers of the Company's Techstar and Prostar products have been contacted and have responded. Responses indicate that the suppliers are aware of the Year 2000 issue and intend to be compliant. During October 1999 additional suppliers associated with the Company's new Closer-TM- product were contacted. The majority of the responses have yet to be returned. There can be no absolute assurances that there will not be a material adverse effect on the Company if third parties do not convert their systems in a timely manner and in a way that is compatible with the Company's systems. Any Year 2000 compliance problem of either the Company, its suppliers, or customers could materially adversely affect the Company's business, results of operations, cash flows, financial condition and prospects. However, based on currently available information, the Company does not believe that the Year 2000 matters discussed above related to internal systems or products sold to customers will have a material adverse impact on the Company's business, financial condition or results of operations. FACTORS AFFECTING FUTURE OPERATING RESULTS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's future results of operations could vary significantly as a result of the factors described in this section. DEPENDENCE UPON PROSTAR AND TECHSTAR PRODUCTS. The Prostar and Techstar products for percutaneous closure of arterial access sites following catheterization procedures are currently the Company's only marketed products. There can be no assurance as to when or whether the Company will receive FDA clearance or approval for sale of other PVS products or any other products in the United States. There can be no assurance that the Company's development efforts will be successful or that any further PVS products or any other product developed by the Company will be safe or effective, capable of being manufactured in commercial quantities at acceptable costs, approved by appropriate regulatory and reimbursement authorities or successfully marketed. UNCERTAINTY OF MARKET ACCEPTANCE. The Company's Prostar and Techstar products represent a new method of closing arterial access sites and there can be no assurance that these products will gain any significant degree of sustained market acceptance among physicians, patients and health care payors. Physicians will not use the Prostar and Techstar products unless they determine, based on clinical data and other factors, that these products are an attractive alternative to other means of closing arterial access sites and that the clinical benefits to the patient and cost savings 15 achieved through use of these products outweigh the cost of the products. Such determinations will depend, in part, on the ability of the Company's products to reduce the time to ambulation and the length of hospital stays associated with coronary catheterization procedures. Failure of the Company's products to achieve significant market acceptance could have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTY RELATING TO NEW PRODUCT DEVELOPMENT. The markets in which the Company participates are characterized by rapid innovation and development and introduction of new products. Accordingly, the Company must innovate and develop new products to maintain and enhance its market position. The Company is currently developing the Heartflo System, which is designed to enable cardiac surgeons to automate the rapid placement of sutures in blood vessels during coronary artery bypass graft surgery. This product is currently under development and has not yet entered human clinical trials. The Company is also developing a new generation PVS product, known as the Closer. The Company has recently completed a clinical trial for this product and has submitted a PMA supplement application to the FDA for the purpose of obtaining approval to market this product in the United States. The product development process is time-consuming and costly, and there can be no assurance that product development will be successfully completed, that necessary regulatory clearances or approvals will be granted by the FDA on a timely basis, or at all, or that the potential products will achieve market acceptance. Failure by the Company to develop, obtain necessary regulatory clearances or approvals for, or successfully market potential new products could have a material adverse effect on the Company's business, financial condition and results of operations. HISTORY OF LOSSES AND LIMITED HISTORY OF PROFITABILITY. The Company has a limited history of profitability. The Company experienced significant operating losses through fiscal year 1998 and, as of September 30,1999, had an accumulated deficit of approximately $30.9 million. Although the Company has recorded net income for each quarter since the first quarter in fiscal year 1999, there can be no assurance that the Company will be able to increase its level of profitability or to sustain profitability. Failure to increase or sustain the level of profitability could have a material adverse effect on the Company's future operating results. FLUCTUATIONS IN OPERATING RESULTS. The Company anticipates that its results of operations will fluctuate significantly from quarter to quarter and will depend upon numerous factors, including the extent to which the Company's products gain market acceptance, introduction of alternative means for arterial access site closure and competitive developments, actions relating to regulatory and reimbursement matters, and progress and results of clinical trials. Due to the elective nature of many coronary catheterization procedures, patients may defer such procedures during the summer vacation season. As a result, the Company may experience seasonal fluctuations in its results of operations, particularly in the second fiscal quarter. Results of operations will also be affected by the timing of orders received from distributors and the extent to which the Company is able to expand its manufacturing capabilities. In addition, depending upon the timing of new product introductions, warranty claims and product returns, the Company may need to make allowances for product obsolescence, excess inventory, warranty claims and product returns. While the Company is currently and will likely continue to make such allowances, there can be no assurance that such allowances will be adequate to cover all costs associated with such items. 16 GOVERNMENT REGULATION. Clinical testing, manufacture, promotion and sale of the Company's products and the certification of its manufacturing facility are subject to extensive regulation by numerous governmental authorities in the United States, principally the FDA, and corresponding foreign regulatory agencies. The Federal Food, Drug, and Cosmetic Act ("FDC Act"), and other federal and state statutes and regulations govern or influence the testing, manufacture, manufacturing process, labeling, advertising, distribution and promotion of drugs and devices. Noncompliance with applicable requirements can result in fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to authorize the marketing of new products or to allow the Company to enter into government supply contracts, and criminal prosecution. The Company's Prostar and Techstar PVS products are regulated as Class III medical devices and its manufacturing facility is subject to FDA regulations. Sales of medical devices outside of the United States are subject to international regulatory requirements that vary from country to country. The time required to obtain approval for sale internationally may be longer or shorter than that required for FDA approval, and the requirements may differ. The Company has obtained the certifications necessary to enable the CE mark to be affixed to the Company's Prostar and Techstar products for commercial sales in member countries of the European Union. The Company has not obtained all other such international certifications and there can be no assurance it will be able to do so in a timely manner. The Company has received regulatory approval to market the Prostar and Techstar products in Japan. The Company, through its Japanese distributor has completed a clinical trial in Japan that will form the basis of an application for reimbursement approvals in the Japanese health care system. There can be no assurance Japanese reimbursement approvals will be obtained in a timely manner or at all. COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE. Competition in the emerging market for arterial access site closure devices is intense and is expected to increase. Most of the Company's competitors have significantly greater name recognition, experience, financial, technical, research, marketing, sales, distribution and other resources than the Company. There can be no assurance that the Company's competitors will not succeed in developing or marketing technologies and products that are technologically superior, more effective or commercially attractive than any that are being developed by the Company, or that such competitors will not succeed in obtaining regulatory approval, introducing or commercializing any such products prior to the Company. Such developments could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the medical device market is generally characterized by rapid and significant technological change and frequent emergence of new technologies, products and procedures. Accordingly, the Company's success will also depend in part on its ability to respond quickly to medical and technological changes. MANUFACTURING AND SCALE-UP RISK. The Company currently manufactures the Prostar and Techstar products for domestic and international commercial sales. There can be no assurance that future manufacturing difficulties, which could have a material adverse effect on the Company's business, financial condition and results of operations, will not occur. In November 1997, Perclose voluntarily recalled specific lots of Techstar XL 6 french ("F") PVS products. The Company traced the problem resulting in the recall to a defective mold. The problem was not attributable to a design defect. The Company is not aware of any adverse 17 patient consequences resulting from these product performance issues. The recall and replacement had only an immaterial effect on its results of operations during the third and fourth quarters of fiscal year 1998. In early July 1999 Perclose announced a voluntary, lot specific recall of the Techstar 6XL product. The recall was due to a manufacturing process variation that led to difficulty in a number of instances with deploying the needles featured in the Company's suture-based technology. Perclose replaced the recalled units with product in inventory. Activities associated with the recall are proceeding according to plan. The Company has an insurance policy covering the costs associated with product recalls due to, among other things, design specifications, design controls and product performance. A formal claim under this insurance policy has not yet been made for the Techstar 6XL products. The Company has accrued for the estimated costs of the product recall and recorded a receivable for the anticipated insurance proceeds during the quarter ended June 30, 1999. There can be no assurance that future product problems necessitating recalls will not arise in the future, and any such future recall could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE UPON KEY SUPPLIERS. Perclose purchases components used in its products from various suppliers and relies on single sources for several components. For certain of these components, there are relatively few alternative sources of supply. Establishing additional or replacement suppliers for any of the components used in the Company's products, if required, may not be accomplished quickly and could involve significant additional costs. Any supply interruption from vendors or failure of the Company to obtain alternative vendors, if required, for any of the components used to manufacture the Company's products would limit the Company's ability to manufacture its products and could therefore have a material adverse effect on the Company's business, financial condition and results of operations. RELIANCE ON PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY. The Company's ability to compete effectively will depend in part on its ability to develop and maintain proprietary aspects of its technology. There can be no assurance that the Company's issued patents, any patents that may be issued as a result of the Company's U.S. or international patent applications, or the patent under which the Company has license rights, will offer any degree of protection. There can be no assurance that any patents that may be issued or licensed to the Company or any of the Company's patent applications will not be challenged, invalidated or circumvented in the future. In addition, there can be no assurance that competitors, many of which have substantial resources and have made substantial investments in competing technologies, will not seek to apply for and obtain patents that will prevent, limit or interfere with the Company's ability to make, use or sell its products either in the United States or in international markets. In March 1998, the Company was sued for patent infringement by a competitor, Kensey Nash Corporation and that competitor's marketing partner at the time, Sherwood Medical Company (a subsidiary of Tyco International, Ltd.). The suit, filed in U.S. District Court for the Eastern District of Pennsylvania, asserts that Perclose PVS devices infringe a 1997 Kensey Nash patent. In May 1998, the Company counter-sued Kensey Nash Corporation, Sherwood Medical Company and Tyco International (U.S.) Inc. ("Tyco") (dba The Kendall Company) claiming the patent on which Kensey Nash Corporation and Sherwood Medical Company sued is invalid and 18 not infringed and also claiming counter-defendants have engaged in antitrust and unfair competition violations. In March 1999, Tyco sold the marketing rights to the competitive product to St. Jude Medical, Inc. The case's trial date is unscheduled at the current time. The Company believes that the case is without merit and intends to defend itself and its intellectual property rights vigorously. The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights. Any litigation or interference proceedings, including the proceeding currently pending against the Company, will result in substantial expense to the Company and significant diversion of effort by the Company's technical and management personnel. An adverse determination in the current pending litigation or interference proceedings to which the Company may become a party could subject the Company to significant liabilities to third parties or require the Company to seek licenses from third parties. Although patent and intellectual property disputes in the medical device area have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. Furthermore, there can be no assurance that necessary licenses would be available to the Company on satisfactory terms if at all. Adverse determinations in a judicial or administrative proceeding, including the currently pending proceedings, or failure to obtain necessary licenses could prevent the Company from manufacturing and selling its products, which would have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. In the United States, health care providers, such as hospitals and physicians that purchase the Company's products, generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or part of the cost of therapeutic and diagnostic catheterization procedures. Reimbursement for catheterization procedures performed using devices that have received FDA approval has generally been available in the United States. The Company anticipates that in a prospective payment system, such as the diagnostic related group ("DRG") system utilized by Medicare, and in many managed care systems used by private health care payors, the cost of the Company's products will be incorporated into the overall cost of the procedure and that there will be no separate, additional reimbursement for the Company's products. Failure by physicians, hospitals and other users of the Company's products to obtain sufficient reimbursement from health care payors for procedures in which the Company's products are used or adverse changes in governmental and private third-party payors' policies toward reimbursement for such procedures would have a material adverse effect on the Company's business, financial condition and results of operations. In international markets, market acceptance of the Company's products may be dependent in part upon the availability of reimbursement within prevailing health care payment systems. Failure of the Company to receive international reimbursement approvals could have an adverse effect on market acceptance of the Company's products in the international markets in which such approvals are sought. PRODUCT LIABILITY AND RECALL RISK; LIMITED INSURANCE COVERAGE. The manufacture and sale of medical products entail significant risk of product liability claims or product recalls. There can be no assurance that the Company's existing insurance coverage limits are adequate to protect the Company from any liabilities it might incur in connection with the clinical trials or sales of 19 its products. In addition, the Company may require increased product liability coverage as its products are further commercialized. Such insurance is expensive and in the future may not be available on acceptable terms, if at all. A successful product liability claim or series of claims brought against the Company in excess of its insurance coverage, or a recall of the Company's products, could have a material adverse effect on the Company's business, financial condition and results of operations. POSSIBLE VOLATILITY OF STOCK PRICE. The stock market from time to time experiences significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of the Company's common stock. In addition, the market price of the Company's common stock is likely to be highly volatile. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new products by the Company or its competitors, FDA and international regulatory actions, actions with respect to reimbursement matters, developments with respect to patents or proprietary rights and related litigation to which the Company is or may become a party, public concern as to the safety of products developed by the Company or others, changes in health care policy in the United States and internationally, changes in stock market analyst recommendations regarding the Company, other medical device companies or the medical device industry generally and general market conditions may have a significant effect on the market price of the common stock. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company's market risk disclosures set forth in Item 7A of its Annual Report on Form 10-K for the year ended March 31, 1999 have not changed significantly. 20 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In March 1998, the Company received a patent infringement complaint stating that it is being sued by Kensey Nash Corporation of Exton, Pennsylvania, and Sherwood Medical Company of St. Louis, Missouri. Sherwood Medical Company was Kensey Nash's marketing partner for its Angioseal product at the time the suit was filed and is a subsidiary of Tyco International, Ltd. The suit, filed in U.S. District Court for the Eastern District of Pennsylvania, asserts that Perclose PVS devices infringe a 1997 Kensey Nash patent. The Company has responded to the patent infringement complaint filed by Kensey Nash Corporation and Sherwood Medical Company. In its response in May 1998 to the complaint, Perclose denies that its Prostar and Techstar devices infringe the Kensey Nash patent. In addition, Perclose seeks a declaration from the Court that Perclose does not infringe the Kensey Nash patent, and that the patent is both invalid and unenforceable. At the same time, the Company countersued Kensey Nash Corporation, Sherwood Medical Company and Tyco claiming the patent on which Kensey Nash Corporation and Sherwood Medical Company sued is invalid and not infringed and also claiming counterdefendants have engaged in antitrust and unfair competition violations. In March 1999, Tyco sold the marketing rights to Kensey Nash's Angio Seal product to St. Jude Medical, Inc. The case's trial date is unscheduled at the current time. Management believes the patent infringement complaint is without merit and intends to defend itself and its intellectual property rights vigorously. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..................... NONE ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................... NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... NONE ITEM 5. OTHER INFORMATION.............................................. NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits The exhibits listed in the Index to Exhibits are filed as a part hereof and are incorporated by reference. b) Reports on Form 8-K: The Company did not file any reports on Form 8-K for the three months ended October 1, 1999. INDEX TO EXHIBITS
Exhibit No. Description 27.1 Financial Data Schedule (Edgar version only).
21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this 10-Q report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 8, 1999 PERCLOSE, INC. /S/ HENRY A. PLAIN, JR. ------------------------------------------ Henry A. Plain, Jr. PRESIDENT AND CHIEF EXECUTIVE OFFICER /S/ KENNETH E. LUDLUM ------------------------------------------ Kenneth E. Ludlum VICE PRESIDENT FINANCE AND ADMINISTRATION, CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) 22 EX-27.1 2 EXHIBIT 27.1
5 0000934438 PERCLOSE, INC. 1,000 6-MOS MAR-31-2000 APR-01-1999 SEP-30-1999 9,314 23,056 10,636 0 3,425 48,445 7,073 0 58,098 5,303 0 0 0 11 52,554 58,098 32,541 32,541 9,759 17,558 703 0 0 5,927 593 5,334 0 0 0 5,334 .48 .43
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