-----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, TCkVqM/rbucEr/xmpdGbY8MM60Jrwc88T9dcK4hwkaCbJCn5a+HgAYjuXf0oOVCO SjWgvd+0061LReIT0TcgRQ== 0001047469-99-003745.txt : 19990209 0001047469-99-003745.hdr.sgml : 19990209 ACCESSION NUMBER: 0001047469-99-003745 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981225 FILED AS OF DATE: 19990208 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: 99523727 BUSINESS ADDRESS: STREET 1: 199 JEFFERSON DR CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 4154733100 MAIL ADDRESS: STREET 1: 199 JEFFERSON DR CITY: MENLO PARK STATE: CA ZIP: 94025 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 DECEMBER 25, 1998 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ____________ to ____________. Commission File Number 0-26890 ------------------------ PERCLOSE, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-3154669 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 199 JEFFERSON DRIVE, MENLO PARK, CA 94025-1114 (Address of principal executive (Zip Code) offices) Registrant's telephone, including area code: (650) 473-3100 ------------------------ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes [X] No [ ] As of January 22, 1999, there were 10,848,410 shares of the Registrant's Common Stock outstanding. - -------------------------------------------------------------------------------- PERCLOSE, INC. TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of December 31, 1998 and March 31, 1998. . . . . . . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Statements of Operations for the three months and nine months ended December 31, 1998 and 1997 . . . . 4 Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 1998 and 1997 . . . . . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements. . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . .10 PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . .21 INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
2 PERCLOSE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, expect per share amounts)
December 31, March 31, 1998 1998 -------------------- ---------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents.................................... $ 7,008 $ 13,232 Short-term investments....................................... 20,740 18,349 Accounts receivable, net..................................... 5,947 3,455 Inventories.................................................. 2,131 1,619 Prepaid expenses............................................. 799 628 -------------------- ---------------- Total current assets...................................... 36,625 37,283 Equipment and leasehold improvements, net...................... 4,095 2,277 Officer notes receivable....................................... 600 600 Other assets................................................... 2,386 291 -------------------- ---------------- Total assets................................................... $ 43,706 $ 40,451 -------------------- ---------------- -------------------- ---------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................................. $ 776 $ 782 Accrued compensation......................................... 1,542 1,202 Accrued warranty............................................. 191 191 Other accrued expenses....................................... 1,197 955 Notes payable................................................ 70 379 -------------------- ---------------- Total current liabilities................................. 3,776 3,509 Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value............................ -- -- Common stock, $0.001 par value............................... 11 11 Additional paid-in capital................................... 79,410 79,433 Deferred compensation........................................ (466) (739) Accumulated deficit and other comprehensive income (loss).... (39,025) (41,763) -------------------- ---------------- Total stockholders' equity..................................... 39,930 36,942 -------------------- ---------------- Total liabilities and stockholders' equity..................... $ 43,706 $ 40,451 -------------------- ---------------- -------------------- ----------------
See accompanying notes. 3 PERCLOSE, INC CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended December 31, December 31, -------------------------------- ------------------------------ 1998 1997 1998 1997 -------------- -------------- ------------- ------------- Net revenues............................................... $ 11,564 $ 2,412 $ 29,051 $ 4,792 Cost of goods sold......................................... 3,334 2,133 9,794 5,383 -------------- -------------- ------------- ------------- Gross profit (loss)........................................ 8,230 279 19,257 (591) Operating expenses: Research and development................................ 2,125 1,377 5,637 3,902 Selling, general and administrative..................... 4,684 3,025 11,946 8,606 -------------- -------------- ------------- ------------- Total operating expenses............................. 6,809 4,402 17,583 12,508 -------------- -------------- ------------- ------------- Income (loss) from operations.............................. 1,421 (4,123) 1,674 (13,099) Other income (expense) Interest income, net.................................... 403 290 1,253 956 Other income (expense).................................. (44) 6 (55) (47) -------------- -------------- ------------- ------------- Total other income................................... 359 296 1,198 909 Income (loss) before income taxes.......................... 1,780 (3,827) 2,872 (12,190) Provision for income taxes................................. 89 -- 143 -- -------------- -------------- ------------- ------------- Net income (loss).......................................... $ 1,691 $ (3,827) $ 2,729 $ (12,190) -------------- -------------- ------------- ------------- -------------- -------------- ------------- ------------- Basic earnings (loss) per common share..................... $ 0.16 $ (0.38) $ 0.25 $ (1.25) -------------- -------------- ------------- ------------- -------------- -------------- ------------- ------------- Diluted earnings (loss) per common share................... $ 0.14 $ (0.38) $ 0.24 $ (1.25) -------------- -------------- ------------- ------------- -------------- -------------- ------------- ------------- Shares used in computing basic earnings (loss) per share................................................ 10,810 9,980 10,793 9,726 -------------- -------------- ------------- ------------- -------------- -------------- ------------- ------------- Shares used in computing diluted earnings (loss) per share................................................ 11,761 9,980 11,487 9,726 -------------- -------------- ------------- ------------- -------------- -------------- ------------- -------------
See accompanying notes. 4
PERCLOSE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended December 31, ------------------------------------- 1998 1997 --------------- ----------- OPERATING ACTIVITIES Net income (loss).................................................... $ 2,729 $ (12,190) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization..................................... 1,085 770 Deferred compensation amortization................................ 394 237 Changes in operating assets and liabilities: Accounts receivable............................................ (2,492) (333) Inventories.................................................... (512) (344) Prepaid expenses............................................... (171) (960) Accounts payable............................................... (6) 91 Other accrued expenses......................................... 582 169 --------------- ----------- Net cash provided by (used in) operating activities........... 1,609 (12,560) INVESTING ACTIVITIES Purchases of short-term investments.................................. (13,708) (17,119) Proceeds from sales and maturities of short-term investments......... 11,326 18,360 Purchases of equipment and leasehold improvements.................... (2,634) (1,391) Other assets......................................................... (2,364) 91 --------------- ----------- Net cash provided by (used in) investing activities (7,380) (59) FINANCING ACTIVITIES Payments under notes payable......................................... (309) (291) Proceeds from issuance of common stock............................... 713 20,151 Repurchase of common stock........................................... (857) - Proceeds from and (issuance of ) officer notes receivable............ - (200) --------------- ----------- Net cash provided by (used in) financing activities........... (453) 19,660 --------------- ----------- Net increase (decrease) in cash and cash equivalents................ (6,224) 7,041 Cash and cash equivalents at beginning of period.................... 13,232 2,677 --------------- ----------- Cash and cash equivalents at end of period.......................... $ 7,008 $ 9,718 --------------- ----------- --------------- -----------
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 intercompany balances and transactions have been eliminated in consolidation. The operating results of the interim periods presented are not necessarily indicative of the results for the year ending March 31, 1999 or for any future interim period. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended March 31, 1998 included in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The accompanying balance sheet at March 31, 1998 is derived from audited financial statements at that date. The Company's fiscal year ends on the last Friday in March. The Company's fiscal quarters end on the Friday closest to the end of each calendar quarter. The three and nine month periods shown as having ended December 31, 1998 and 1997 actually ended on December 25, 1998 and December 26, 1997, respectively. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar month. NOTE 2. INVENTORIES Inventories consist of the following (in thousands):
December 31, March 31, 1998 1998 ------------ ------------ Raw materials.............................. $ 509 $ 409 Work-in-process............................ 1,268 552 Finished goods............................. 354 658 ------------ ------------ $ 2,131 $ 1,619 ------------ ------------ ------------ ------------
6 NOTE 3. PER SHARE DATA The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for the three and nine months ended December 31, 1998 and 1997 (in thousands).
Three Months Ended Nine Months Ended December 31, December 31, ----------------------------------------- 1998 1997 1998 1997 ------- --------- -------- --------- Numerator: Net income (loss) for basic and diluted EPS:..................... $ 1,691 $ (3,827) $ 2,729 $(12,190) ------- --------- -------- --------- Denominator for basic EPS -- Weighted-average shares......... 10,810 9,980 10,793 9,726 Effect of dilutive securities: Stock options................... 951 -- 694 -- ------- --------- -------- --------- Denominator for diluted EPS -- Adjusted weighted-average shares outstanding and assumed conversions..................... 11,761 9,980 11,487 9,726 ------- --------- -------- --------- ------- --------- -------- ---------
For the three and nine months ended December 31, 1997 the effect of the assumed exercise of stock options was antidilutive, therefore basic and diluted loss per share as presented on the statements of operations are the same. NOTE 4. CASH, CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES CASH AND CASH EQUIVALENTS. The Company invests its excess cash in government and corporate securities. Highly liquid investments with maturities of three months or less at the date of acquisition are considered by the Company to be cash equivalents. Investments with maturities beyond three months at the date of acquisition are considered to be short-term investments. The Company maintains its cash, cash equivalents and short-term investments in a range of fixed income securities from various issuers with original maturities not exceeding twenty four months and S&P credit ratings not lower than A . This diversification of risk is consistent with the Company's investment policy, which is to maintain liquidity and to ensure the safety of principal. AVAILABLE-FOR-SALE SECURITIES. All short-term investments are designated as available-for-sale. Available-for-sale securities are carried at fair value with unrealized gains and losses, net of tax, reported in accumulated deficit. The amortized cost of available-for-sale debt securities is adjusted for the amortization of premiums and the accretion of discounts to maturity. Such amortization is included in interest income. 7 Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. NOTE 5. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income" (FASB 130). FASB 130 establishes rules for the reporting and display of comprehensive income and its components. Specifically, FASB 130 requires unrealized gains and losses on the Company's available-for-sale securities which are currently reported separately in stockholders' equity to be included in other comprehensive income and the disclosure of total comprehensive income. Beginning April 1, 1998, the Company adopted FASB 130, however, the adoption of the Statement had no impact on the Company's net income or stockholders' equity. The components of comprehensive income, net of related tax, for the three and nine months ended December 31, 1998 and 1997 are as follows (in thousands):
Three Months Ended Nine Months Ended December 31, December 31, -------------------- ----------------- 1998 1997 1998 1997 -------- --------- ------- -------- Net income (loss)................. $ 1,691 $ (3,827) $ 2,729 $(12,190) Other comprehensive income: Change in unrealized gain (loss) on available-for-sale investments....................... (67) (3) (9) 76 -------- --------- ------- -------- Comprehensive income (loss)....... $ 1,624 $ (3,830) $ 2,720 $(12,114) -------- --------- ------- -------- -------- --------- ------- --------
NOTE 6. COMMITMENTS In June 1998, the Company entered into a new facility lease agreement for approximately 80,000 square feet of office, laboratory, cleanroom and manufacturing space which it expects to occupy in early 1999. The base rent is approximately $173,000 per month and commenced August 1, 1998. Additionally, the Company has established a $518,000 security deposit and a $1.0 million letter of credit in connection with the new facility lease. NOTE 7. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" (FASB 131). FASB 131 will require the Company to use the "management approach" in disclosing financial information on operating segments. This statement is effective for the Company beginning fiscal year 1999. While the Company does not anticipate that FASB 131 will have a material impact on its financial reporting and disclosures, changes, if any, will first be reflected in the Company's 1999 Annual Report on Form 10-K. 8 NOTE 8. STOCK REPURCHASE PLAN In September 1998, the Company's Board of Directors authorized the repurchase of up to 500,000 shares of the Company's Common Stock. During September and October 1998 the Company repurchased 56,800 shares at a cost of $857,000 under this repurchase program. All of the repurchased shares were subsequently canceled and returned to the status of authorized, unissued shares. NOTE 9. LEGAL PROCEEDINGS In March 1998, the Company was sued by Kensey Nash Corporation, and such company's distributor, Sherwood Medical (a subsidiary of Tyco International, Ltd.) for patent infringement. In May 1998, the Company countersued Kensey Nash Corporation, Sherwood Medical and Tyco International (U.S.) Inc. (dba The Kendall Company) claiming the patent on which Kensey Nash Corporation and Sherwood Medical sued is invalid and not infringed and also claiming counterdefendants have engaged in antitrust and unfair competition violations. There were no material developments with respect to this litigation during the quarter ended December 31, 1998. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT ON FORM 10-Q (THIS "REPORT") AND IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, CERTAIN STATEMENTS IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE FORWARD LOOKING STATEMENTS. WHEN USED IN THIS REPORT, THE WORD "EXPECTS," "ANTICIPATES," "ESTIMATES," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THOSE RISKS SET FORTH BELOW UNDER "FACTORS AFFECTING FUTURE OPERATING RESULTS," IN PARTICULAR, THOSE RELATING TO THE COMPANY'S DEPENDENCE ON THE PROSTAR-Registered Trademark- AND TECHSTAR-Registered Trademark- PRODUCTS, UNCERTAINTY OF MARKET ACCEPTANCE, HISTORY OF LOSSES AND RISK OF INABILITY TO SUSTAIN PROFITABILITY, FLUCTUATIONS IN OPERATING RESULTS, GOVERNMENT REGULATION, COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE, LIMITED MANUFACTURING EXPERIENCE AND SCALE-UP RISK, UNCERTAINTY RELATING TO NEW PRODUCT DEVELOPMENT, LIMITED SALES AND MARKETING EXPERIENCE, RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY AND UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. OVERVIEW Perclose designs, manufactures and markets less invasive medical devices that automate the surgical closure or connection of blood vessels. The Company's first product family, the Prostar and Techstar products, which are marketed worldwide, surgically close the arterial access site in the femoral artery after catheterization procedures such as angioplasty, stenting, atherectomy and diagnostic angiography. A second group of products, The Heartflo-TM- System, is under development and is designed to automate the surgical connection of blood vessels in conventional and minimally invasive coronary artery bypass surgery. During fiscal year 1998, the Company received several FDA premarket approvals ("PMA") and PMA supplement approvals for commercial sale in the United States of various versions of its Prostar and Techstar Percutaneous Vascular Surgery ("PVS") products. The Company's fiscal year ends on the last Friday in March. The Company's fiscal quarters end on the Friday closest to the end of each calendar quarter. The three and nine month periods shown as having ended December 31, 1998 and 1997 actually ended on December 25, 1998 and December 26, 1997, respectively. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar month. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 REVENUES. The Company's net revenues increased to $11.6 million for the three months ended December 31, 1998 from $2.4 million for the three months ended December 31, 1997. The increase in revenues is primarily attributable to the introduction of the latest generation of the Company's Prostar and Techstar products in the United States. Combined shipments of Prostar and Techstar units increased to approximately 49,000 units for the three months ended December 31, 1998 from 13,000 units for the three months ended December 31, 1997. Domestic 10 sales as a percentage of total revenue for the three months ended December 31, 1998 increased to 91% from 80% for the three months ended December 31, 1997. Sales of Prostar and Techstar products accounted for 74% and 26%, respectively, of the net revenues for the three months ended December 31, 1998. GROSS PROFIT. Gross profit increased to $8.2 million for the three months ended December 31, 1998 from $279,000 for the three months ended December 31, 1997. Gross profit increased to 71% of net revenues for the quarter ended December 31, 1998 from 12% of net revenues for the quarter ended December 31, 1997. The increase in gross profit was primarily due to increases in sales and production volumes, which contributed to reductions in fixed overhead cost per unit and enabled the Company to achieve improvements in manufacturing efficiency. RESEARCH AND DEVELOPMENT. Research and development expenses increased 54% to $2.1 million for the three months ended December 31, 1998 from $1.4 million for the three months ended December 31, 1997. The increase in research and development costs was attributable to a significant increase in headcount resulting in higher payroll expenses. In addition, materials and services associated with prototype builds increased due to an accelerated development schedule for the Company's next generation PVS product. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased 55% to $4.7 million for the three months ended December 31, 1998 from $3.0 million for the three months ended December 31, 1997. The increase was primarily due to the expansion of the Company's domestic sales force which resulted in both higher payroll-related costs as well as increased travel expenses. Fifteen clinical specialists joined the sales force in the current quarter. These individuals facilitate training at the Company's larger accounts, thereby allowing the sales force to open new accounts. Additionally, the Company's marketing staff expanded from the year earlier period. Finally, general and administrative expenses increased as a result of hiring additional support personnel for the expanded sales force and to handle the larger sales volume. INTEREST INCOME, NET. Net interest income increased 39% to $403,000 for the three months ended December 31, 1998 from $290,000 for the three months ended December 31, 1997 primarily as a result of higher average balances for cash and short-term investments resulting from the Company's common stock offering in November 1997. NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997 REVENUES. Net revenues for the nine months ended December 31, 1998 increased to $29.1 million from $4.8 million for the nine months ended December 31, 1997. Combined shipments of Prostar and Techstar units increased to 127,000 units for the nine months ended December 31, 1998 from 27,000 units for the nine months ended December 31, 1997. Domestic sales as a percentage of total revenue for the nine months ended December 31,1998 increased to 90% from 72% for nine months ended December 31, 1997. Sales of Prostar and Techstar products accounted for 66% and 34%, respectively, of net revenues for the nine months ended December 31, 1998. 11 GROSS PROFIT. Gross profit increased to $19.3 million for the nine months ended December 31, 1998 from a negative gross profit of $591,000 for the nine months ended December 31, 1997. Gross profit increased to 66% of net revenues for the nine months ended December 31, 1998 from a negative gross profit of 12% of net revenues for the nine months ended December 31, 1997. The increase in gross profit was primarily due to increases in sales and production volumes, which contributed to reductions in fixed overhead cost per unit and enabled the Company to achieve improvements in manufacturing efficiency. RESEARCH AND DEVELOPMENT. Research and development expenses increased 44% to $5.6 million for the nine months ended December 31, 1998 from $3.9 million for the nine months ended December 31, 1997. The increase in research and development costs was attributable to a significant increase in headcount resulting in higher payroll expenses. The Company was working on the next generation PVS product at an accelerated development schedule, as well as continuing with the clinical testing models of the Heartflo-TM- device. The two projects required much higher spending levels for prototype supplies and outside services in the current nine-month period than that required in the nine months ended December 31, 1997. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased 39% to $11.9 million for the nine months ended December 31, 1998 from $8.6 million for the nine months ended December 31, 1997. The increase was primarily due to the expansion of the Company's domestic sales force which resulted in both higher payroll-related costs as well as increased travel expenses. The headcount for international sales has remained constant while management has focused on expanding the domestic sales force. Additionally, the marketing staff expanded from the year earlier period. Finally, general and administrative expenses increased as a result of hiring additional support personnel for the expanded sales force and to handle the larger sales volume. INTEREST INCOME, NET. Net interest income increased 31% to $1.3 million for the nine months ended December 31, 1998 from $1.0 million for the nine months ended December 31, 1997 primarily as a result of higher average balances for cash and short-term investments from the Company's common stock offering in November 1997. INCOME TAXES The income tax provision for the three and nine months ended December 31, 1998 of $89,000 and $143,000, respectively, is attributable to current income taxes and consists principally of state and federal minimum taxes. No income tax provision was recorded for the three and nine months ended December 31, 1997 as the Company did not have taxable income. As of March 31, 1998, the Company had net operating loss carryforwards for federal and state tax purposes of approximately $38.0 million and $15.0 million, respectively, which will expire from 1998 through 2013 if not utilized. The Company also had research and development tax credit carryforwards of approximately $250,000 and $130,000, respectively, for federal and state tax purposes expiring from 2007 through 2013 if not utilized. Utilization of the net operating loss and tax credit carryforwards may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. 12 QUARTERLY TREND ANALYSIS The following tables summarize certain statement of operations data, percent of net revenue and trends for the quarterly periods specified. Statement of operations data or trends from period to period, should not be considered as representative of results of operations for future periods. The Company's results of operations may fluctuate from period to period and may be affected by those risks and uncertainties set forth under "Factors Affecting Operating Results." Unaudited, in thousands except for percentage data
SELECTED QUARTERLY INCOME STATEMENT OF OPERATIONS DATA Dec 97 Mar 98 Jun 98 Sep 98 Dec 98 --------- --------- --------- --------- --------- Net revenues........................... $ 2,412 $ 5,839 $ 8,364 $ 9,123 $ 11,564 Gross profit........................... 279 3,439 5,174 5,853 8,230 Research and development............... 1,377 1,547 1,629 1,883 2,125 Selling, general and administrative.... 3,025 3,924 3,633 3,629 4,684 Income (loss) from operations.......... (4,123) (2,032) (88) 341 1,421 Net income (loss)...................... $ (3,827) $(1,606) $ 283 $ 755 $ 1,691 PERCENTAGE OF QUARTERLY NET REVENUE Dec 97 Mar 98 Jun 98 Sep 98 Dec 98 --------- --------- ---------- --------- --------- Net revenues........................... 100% 100% 100% 100% 100% Gross profit........................... 12 59 62 64 71 Research and development............... 57 26 19 21 18 Selling, general and administrative.... 125% 67% 43 40 41 Income from operations................. -- -- -- 4 12 Net income............................. -- -- 3% 8% 15% QUARTERLY PERCENTAGE CHANGE COMPARED AS A % OF THE PRECEDING QUARTER Mar 98 Jun 98 Sep 98 Dec 98 --------- ---------- --------- --------- Net revenues........................... 142% 43% 9% 27% Gross profit........................... 1,133 50 13 41 Research and development............... 2 5 16 13 Selling, general and administrative.... 30% (7%) 0 29 Income from operations................. -- -- -- 317 Net income............................. -- -- 167% 124%
13 LIQUIDITY AND CAPITAL RESOURCES The Company's net cash provided by operating activities was $1.6 million for the nine months ended December 31, 1998, compared to net cash used of $12.6 million for the nine months ended December 31, 1997. The Company's transition to profitability in the current nine month period, which resulted in net income of $2.7 million compared to a net loss of $12.2 million for the nine months ended December 31, 1997, was the main reason for the generation of cash provided by operating activities in the current nine month period. The Company's net cash used by investing activities was $7.4 million for the nine months ended December 31, 1998 compared to net cash used by investing activities of $59,000 for the nine months ended December 31, 1997. For the nine months ended December 31, 1998 net purchases of short-term investments used $2.4 million in cash as compared to $1.2 million of net proceeds for the same period in 1997. Equipment and leasehold improvement purchases for the nine months ended December 31, 1998 were $2.6 million, as compared to $1.4 million for the nine months ended December 31, 1997. The major equipment and leasehold improvement purchases for the current nine month period were related to the build out of a new headquarters and manufacturing facility, as well as the acquisition of machinery and tooling for both manufacturing and R&D products. Other assets increased by $2.4 million for the nine months ended December 31, 1998 primarily as a result of a $518,000 security deposit and the establishment of a $1.0 million letter of credit made in connection with the new facility lease. The letter of credit designates the landlord as beneficiary and provides that the landlord may draw down the letter of credit in the amount equal to any default under the lease. The letter of credit will be released after eighteen months upon the Company meeting certain financial criteria. The standard security deposit of $518,000 is held by the lessor for the term of the lease. The Company entered into the lease agreement for an 80,000 square foot headquarters, research and manufacturing facility in June 1998, which it expects to occupy beginning in early 1999 after completion of certain construction activities. Lease payments on the new building commenced in August 1998. The Company's net cash used by financing activities was $453,000 for the nine months ended December 31, 1998, compared to cash generated of $19.7 million for the nine months ended December 31, 1997 primarily as a result of the Company's common stock offering in November 1997. In September 1998, the Company's Board of Directors authorized the repurchase of up to 500,000 shares of the Company's Common Stock. During September and October 1998 the Company repurchased 56,800 shares at a cost of $857,000 under this repurchase program. The Company's principal source of liquidity at December 31, 1998 consisted of cash, cash equivalents and short-term investments of $27.7 million versus $31.6 million at March 31, 1998. 14 Although Perclose believes that current cash balances and short-term investments along with cash generated from the future sales of products will be sufficient to meet the Company's operating and capital requirements, there can be no assurance that the Company will not require additional financing. There can be no assurance that additional financing, if required, will be available on satisfactory terms or at all. In any event, Perclose may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Perclose's future liquidity and capital requirements will depend on numerous factors including the extent to which the Company's products gain market acceptance, actions relating to regulatory and reimbursement matters, the costs and timing of expansion of marketing, sales, manufacturing and product development activities and competitive developments. Due to these and other factors there can be no assurance that the Company will sustain profitability beyond the current quarter. YEAR 2000 COMPLIANCE STATUS OF PLAN, COSTS AND CONTINGENCY PLAN The Company is aware of the software compatibility issues associated with existing computer systems as the year 2000 approaches. The "year 2000 problem" is pervasive and complex, as virtually every computer operation will be affected in some way by the rollover of the two-digit year value from 99 to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company recognizes the importance of the Year 2000 issue and assigned a project leader to supervise an assessment of the Company's Year 2000 readiness. The scope of the Year 2000 readiness effort includes software, hardware, electronic data interchange, manufacturing and lab equipment, facilities, utilities, as well as supplier and customer readiness. Management does not anticipate that the Company will incur significant operating expenses or be required to invest heavily in computer systems improvements to be Year 2000 compliant since the Company primarily uses packaged computer software in its business, and has already obtained certifications of Year 2000 compliance from its software vendors. As of December 31, 1998, the Company had not incurred any expenses outside of ordinary operating expenses in connection with its Year 2000 assessment. In addition to internal Year 2000 software and equipment assessment and remediation activities, the Company has contacted its critical suppliers in order to assess their compliance. As of December 31, 1998 two thirds of those suppliers contacted have responded. All responses indicate that the supplier is aware of the Year 2000 issue and intends to be compliant. With regard to those suppliers who have not yet responded, if there is any question as to a supplier's ability to provide product after December 31, 1999 a joint effort will be made between quality assurance and the materials group to assist that supplier in achieving compliance or qualify another supplier. There can be no assurance that there will not be a material adverse effect on the Company if third parties do not convert their systems in a timely manner and in a way that is compatible with the Company's systems. Any Year 2000 compliance problem of either the Company, its suppliers, or customers could materially adversely affect the Company's business, results of operations, cash flows, financial condition and prospects. 15 FACTORS AFFECTING OPERATING RESULTS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's future results of operations could vary significantly from those anticipated in such forward-looking statements as a result of the factors described in this section. DEPENDENCE UPON PROSTAR AND TECHSTAR PRODUCTS. The Prostar and Techstar products for percutaneous closure of arterial access sites following catheterization procedures are currently the Company's only marketed products. There can be no assurance as to when or whether the Company will receive FDA clearance or approval for sale of other PVS products or any other products in the United States. There can be no assurance that the Company's development efforts will be successful or that any further PVS products or any other product developed by the Company will be safe or effective, capable of being manufactured in commercial quantities at acceptable costs, approved by appropriate regulatory and reimbursement authorities or successfully marketed. UNCERTAINTY OF MARKET ACCEPTANCE. The Company's Prostar and Techstar products represent a new method of closing arterial access sites and there can be no assurance that these products will gain any significant degree of sustained market acceptance among physicians, patients and health care payors. Physicians will not use the Prostar and Techstar products unless they determine, based on clinical data and other factors, that these products are an attractive alternative to other means of closing arterial access sites and that the clinical benefits to the patient and cost savings achieved through use of these products outweigh the cost of the products. Such determinations will depend, in part, on the ability of the Company's products to reduce the time to ambulation and the length of hospital stays associated with coronary catheterization procedures. Failure of the Company's products to achieve significant market acceptance could have a material adverse effect on the Company's business, financial condition and results of operations. HISTORY OF LOSSES AND LIMITED HISTORY OF PROFITABILITY. The Company has a limited history of profitability. The Company has experienced significant operating losses since inception and has incurred a cumulative net loss of approximately $39.0 million as of December 31, 1998. Although the Company recorded net income for each of the three quarters in the nine months ended December 31, 1998, there can be no assurance that the Company will be able to increase its level of profitability or to sustain profitability. Failure to increase or sustain the level of profitability could have a material adverse effect on the Company's future operating results. FLUCTUATIONS IN OPERATING RESULTS. The Company anticipates that its results of operations will fluctuate significantly from quarter to quarter and will depend upon numerous factors, including the extent to which the Company's products gain market acceptance, introduction of alternative means for arterial access site closure and competitive developments, actions relating to regulatory and reimbursement matters, and progress and results of clinical trials. Due to the elective nature of many coronary catheterization procedures, patients may defer such procedures during the summer vacation season. As a result, the Company may experience seasonal fluctuations in its results of operations, particularly in the second fiscal quarter. Results of operations will also be affected by the timing of orders received from distributors and the extent to which the Company is able to expand its manufacturing capabilities. In addition, depending upon the timing of new product introductions, warranty claims and product returns, the Company may need to make allowances for product obsolescence, excess inventory, warranty claims and product returns. While the Company 16 is currently and will likely continue to make such allowances, there can be no assurance that such allowances will be adequate to cover all costs associated with such items. GOVERNMENT REGULATION. Clinical testing, manufacture, promotion and sale of the Company's products and the certification of its manufacturing facility are subject to extensive regulation by numerous governmental authorities in the United States, principally the FDA, and corresponding foreign regulatory agencies. The Federal Food, Drug, and Cosmetic Act ("FDC Act"), and other federal and state statutes and regulations govern or influence the testing, manufacture, manufacturing process, labeling, advertising, distribution and promotion of drugs and devices. Noncompliance with applicable requirements can result in fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to authorize the marketing of new products or to allow the Company to enter into government supply contracts, and criminal prosecution. The Company's Prostar and Techstar PVS products are regulated as Class III medical devices and its manufacturing facility is subject to FDA regulations. The Company plans to move to a new headquarters and manufacturing facility in the March 1999 quarter and will require FDA approval of the manufacturing facility in order to ship approved product from the new facility to U.S. customers. Sales of medical devices outside of the United States are subject to international regulatory requirements that vary from country to country. The time required to obtain approval for sale internationally may be longer or shorter than that required for FDA approval, and the requirements may differ. The Company has obtained the certifications necessary to enable the CE mark to be affixed to the Company's Prostar and Techstar products for commercial sales in member countries of the European Union. The Company has not obtained all other such international certifications and there can be no assurance it will be able to do so in a timely manner. The Company has received regulatory approval to market the Prostar and Techstar products in Japan. The Company, through its Japanese distributor, commenced clinical trials in Japan that will form the basis of an application for reimbursement approvals in the Japanese health care system. There can be no assurance Japanese reimbursement approvals will be obtained in a timely manner or at all. COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE. Competition in the emerging market for arterial access site closure devices is intense and is expected to increase. Most of the Company's competitors have significantly greater name recognition, experience, financial, technical, research, marketing, sales, distribution and other resources than the Company. There can be no assurance that the Company's competitors will not succeed in developing or marketing technologies and products that are technologically superior, more effective or commercially attractive than any that are being developed by the Company, or that such competitors will not succeed in obtaining regulatory approval, introducing or commercializing any such products prior to the Company. Such developments could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the medical device market is generally characterized by rapid and significant technological change and frequent emergence of new technologies, products and procedures. Accordingly, the Company's success will also depend in part on its ability to respond quickly to medical and technological changes. MANUFACTURING AND SCALE-UP RISK. The Company currently manufactures the Prostar and Techstar products for domestic and international commercial sales. There can be no assurance that future manufacturing difficulties, which could have a material adverse effect on the Company's business, financial condition and results of operations, will not occur. 17 In November 1997, Perclose voluntarily recalled specific lots of Techstar XL 6 french ("F") PVS products. The Company traced the problem resulting in the recall to a defective mold. The problem was not attributable to a design defect. The Company is not aware of any adverse patient consequences resulting from these product performance issues. The recall and replacement had only an immaterial effect on its results of operations during the third and fourth quarters of fiscal 1998. However, there can be no assurance that future product problems necessitating recalls will not arise in the future, and any such future recall could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE UPON KEY SUPPLIERS. Perclose purchases components used in its products from various suppliers and relies on single sources for several components. For certain of these components, there are relatively few alternative sources of supply. Establishing additional or replacement suppliers for any of the components used in the Company's products, if required, may not be accomplished quickly and could involve significant additional costs. Any supply interruption from vendors or failure of the Company to obtain alternative vendors, if required, for any of the components used to manufacture the Company's products would limit the Company's ability to manufacture its products and could therefore have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTY RELATING TO NEW PRODUCT DEVELOPMENT. The Company's product development strategy involves the design and development of the Heartflo system, designed to allow cardiac surgeons to automate the rapid placement of sutures in blood vessels during coronary artery bypass graft ("CABG") surgery. The product development process is time-consuming and costly, and there can be no assurance that product development will be successfully completed, that necessary regulatory clearances or approvals will be granted by the FDA on a timely basis, or at all, or that the potential products will achieve market acceptance. Failure by the Company to develop, obtain necessary regulatory clearances or approvals for, or successfully market potential new products could have a material adverse effect on the Company's business, financial condition and results of operations. RELIANCE ON PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY. The Company's ability to compete effectively will depend in part on its ability to develop and maintain proprietary aspects of its technology. There can be no assurance that the Company's issued patents, any patents that may be issued as a result of the Company's U.S. or international patent applications, or the patent under which the Company has license rights, will offer any degree of protection. There can be no assurance that any patents that may be issued or licensed to the Company or any of the Company's patent applications will not be challenged, invalidated or circumvented in the future. In addition, there can be no assurance that competitors, many of which have substantial resources and have made substantial investments in competing technologies, will not seek to apply for and obtain patents that will prevent, limit or interfere with the Company's ability to make, use or sell its products either in the United States or in international markets. In March 1998, the Company was sued for patent infringement by a competitor, Kensey Nash Corporation, and that competitor's distributor, Sherwood Medical, a subsidiary of Tyco International Ltd. In May 1998, the Company countersued Kensey Nash Corporation, Sherwood Medical and Tyco International (U.S.) Inc. (dba The Kendall Company) claiming the patent on which Kensey Nash Corporation and Sherwood Medical sued is invalid and not infringed and also claiming counterdefendants have engaged in antitrust and unfair competition violations. 18 The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights. Any litigation or interference proceedings, including the proceeding currently pending against the Company, will result in substantial expense to the Company and significant diversion of effort by the Company's technical and management personnel. An adverse determination in the current pending or in litigation or interference proceedings to which the Company may become a party could subject the Company to significant liabilities to third parties or require the Company to seek licenses from third parties. Although patent and intellectual property disputes in the medical device area have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. Furthermore, there can be no assurance that necessary licenses would be available to the Company on satisfactory terms if at all. Adverse determinations in a judicial or administrative proceeding, including the currently pending proceedings, or failure to obtain necessary licenses could prevent the Company from manufacturing and selling its products, which would have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. In the United States, health care providers, such as hospitals and physicians that purchase the Company's products, generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or part of the cost of therapeutic and diagnostic catheterization procedures. Reimbursement for catheterization procedures performed using devices that have received FDA approval has generally been available in the United States. The Company anticipates that in a prospective payment system, such as the diagnostic related group ("DRG") system utilized by Medicare, and in many managed care systems used by private health care payors, the cost of the Company's products will be incorporated into the overall cost of the procedure and that there will be no separate, additional reimbursement for the Company's products. Failure by physicians, hospitals and other users of the Company's products to obtain sufficient reimbursement from health care payors for procedures in which the Company's products are used or adverse changes in governmental and private third-party payors' policies toward reimbursement for such procedures would have a material adverse effect on the Company's business, financial condition and results of operations. In international markets, market acceptance of the Company's products may be dependent in part upon the availability of reimbursement within prevailing health care payment systems. Failure of the Company to receive international reimbursement approvals could have an adverse effect on market acceptance of the Company's products in the international markets in which such approvals are sought. PRODUCT LIABILITY AND RECALL RISK; LIMITED INSURANCE COVERAGE. The manufacture and sale of medical products entail significant risk of product liability claims or product recalls. There can be no assurance that the Company's existing insurance coverage limits are adequate to protect the Company from any liabilities it might incur in connection with the clinical trials or sales of its products. In addition, the Company may require increased product liability coverage as its products are further commercialized. Such insurance is expensive and in the future may not be available on acceptable terms, if at all. A successful product liability claim or series of claims brought against the Company in excess of its insurance coverage, or a recall of the Company's products, could have a material adverse effect on the Company's business, financial condition and results of operations. 19 POSSIBLE VOLATILITY OF STOCK PRICE. The stock market has recently and from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of the Company's common stock. In addition, the market price of the Company's common stock is likely to be highly volatile. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new products by the Company or its competitors, FDA and international regulatory actions, actions with respect to reimbursement matters, developments with respect to patents or proprietary rights and related litigation to which the Company is or may become a party, public concern as to the safety of products developed by the Company or others, changes in health care policy in the United States and internationally, changes in stock market analyst recommendations regarding the Company, other medical device companies or the medical device industry generally and general market conditions may have a significant effect on the market price of the common stock. 20 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In March 1998, the Company was sued by Kensey Nash Corporation, and such company's distributor, Sherwood Medical (a subsidiary of Tyco International, Ltd.) for patent infringement. In May 1998, the Company countersued Kensey Nash Corporation, Sherwood Medical and Tyco International (U.S.) Inc. (dba The Kendall Company) claiming the patent on which Kensey Nash Corporation and Sherwood Medical sued is invalid and not infringed and also claiming counterdefendants have engaged in antitrust and unfair competition violations. There were no material developments with respect to this litigation during the quarter ended December 31, 1998. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS . . . . . . . . . . NONE ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . NONE ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits The exhibits listed in the Index to Exhibits are filed as a part hereof and are incorporated by reference. b) Reports on Form 8-K: The Company did not file any reports on Form 8-K for the three months ended December 31, 1998. INDEX TO EXHIBITS Exhibit No. Description - ------------ ----------- 10.15 1995 Director Option Plan, as amended to date and Form of Director Option Agreement thereunder. 27.1 Financial Data Schedule (Edgar version only). 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this 10-Q report to be signed on its behalf by the undersigned thereunto duly authorized. Date: February 8, 1999 PERCLOSE, INC. /S/ HENRY A. PLAIN, JR. ------------------------------------------------ Henry A. Plain, Jr. PRESIDENT AND CHIEF EXECUTIVE OFFICER /S/ KENNETH E. LUDLUM ------------------------------------------------ Kenneth E. Ludlum VICE PRESIDENT FINANCE AND ADMINISTRATION, CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) 22 EX-10.15 2 EXHIBIT 10.15 PERCLOSE, INC. 1995 DIRECTOR OPTION PLAN (AS AMENDED EFFECTIVE DECEMBER 11, 1998) 1. PURPOSES OF THE PLAN. The purposes of this 1995 Director Option Plan are to attract and retain the best available personnel for service as Outside Directors (as defined herein) of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be nonstatutory stock options. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "BOARD" means the Board of Directors of the Company. (b) "CODE" means the Internal Revenue Code of 1986, as amended. (c) "COMMON STOCK" means the Common Stock of the Company. (d) "COMPANY" means Perclose, Inc., a Delaware corporation. (e) "CONTINUOUS STATUS AS A DIRECTOR" means the absence of any interruption or termination of service as a Director. (f) "DIRECTOR" means a member of the Board. (g) "EMPLOYEE" means any person, including officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (i) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the day of determination, as reported in THE WALL STREET JOURNAL or such other source as the Board deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the day of determination, as reported in THE WALL STREET JOURNAL or such other source as the Board deems reliable, or; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board. (j) "NEW OUTSIDE DIRECTOR" means an Outside Director who becomes a Director after the effective date of this Plan. (k) "OPTION" means a stock option granted pursuant to the Plan. (l) "OPTIONED STOCK" means the Common Stock subject to an Option. (m) "OPTIONEE" means an Outside Director who receives an Option. (n) "OUTSIDE DIRECTOR" means a Director who is not an Employee. (o) "PARENT" means a "parent corporation", whether now or hereafter existing, as defined in Section 424(e) of the Code. (p) "PLAN" means this Perclose, Inc. 1995 Director Option Plan. (q) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan. (r) "SUBSIDIARY" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of 1986. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 10 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is four hundred thousand (400,000) Shares (the "Pool") of Common Stock. The Shares may be authorized but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan; provided, however, that Shares that have actually been issued under the Plan shall not be returned to the Plan and shall not become available for future distribution under the Plan. 4. ADMINISTRATION AND GRANTS OF OPTIONS UNDER THE PLAN. (a) PROCEDURE FOR GRANTS. The provisions set forth in this Section 4(a) shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. (i) Each New Outside Director shall be automatically granted an Option to purchase fifteen thousand (15,000) Shares (a "First Option") on the date on which such person first becomes a Director, whether through election by the stockholders of the Company or appointment by the Board to fill a vacancy. (ii) After a First Option has been granted to a New Outside Director or Outside Director, such individual shall thereafter be eligible for discretionary option grants (each a "Subsequent Option"), provided that on the date of any such Subsequent Option grant, such New Outside Director or Outside Director shall have served on the Board for at least six (6) months. The Board shall act as administrator of the Plan with respect to Subsequent Option grants. The grants of Subsequent Options shall be structured in a manner to satisfy the requirements for exemption under Securities and Exchange Commission Rule 16b-3. (iii) Notwithstanding the provisions of subsections (ii) and (iii) hereof, any exercise of an Option made before the Company has obtained stockholder approval of the Plan in accordance with Section 16 hereof shall be conditioned upon obtaining such stockholder approval of the Plan in accordance with Section 16 hereof. (iv) The terms of a First Option granted hereunder shall be as follows: (A)the term of the First Option shall be ten (10) years. (B)the First Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 8 hereof. (C)the exercise price per Share shall be 100% of the fair market value per Share on the date of grant of the First Option. In the event that the date of grant of the First Option is not a trading day, the exercise price per Share shall be the Fair Market Value on the next trading day immediately following the date of grant of the First Option. (D)the First Option shall become exercisable as to 1/48 of the Shares subject to the First Option at the end of each full month following the date of grant, subject to continued service as an Outside Director. (v) The terms of a Subsequent Option granted hereunder shall be as follows: (A)the term of the Subsequent Option shall be ten (10) years. (B)the Subsequent Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 8 hereof. (C)the exercise price per Share shall be 100% of the fair market value per Share on the date of grant of the Subsequent Option. In the event that the date of grant of the First Option is not a trading day, the exercise price per Share shall be the Fair Market Value on the next trading day immediately following the date of grant of the First Option. (D)each the Subsequent Option shall become exercisable on a vesting schedule determined by the Board at the date of grant. (vi) In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased under Options to exceed the Pool, then the remaining Shares available for Option grant shall be granted under Options to the Outside Directors on a pro rata basis. No further grants shall be made until such time, if any, as additional Shares become available for grant under the Plan through action of the stockholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. 5. ELIGIBILITY. Options may be granted only to Outside Directors. All Options shall be granted in accordance with the terms set forth in Section 4 hereof. An Outside Director who has been granted an Option may, if he is otherwise eligible, be granted an additional Option or Options in accordance with such provisions. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate his or her directorship at any time. 6. TERM OF PLAN. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the stockholders of the Company as described in Section 16 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 11 of the Plan. 7. FORM OF CONSIDERATION. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (iv) delivery of a properly executed exercise notice together with such other documentation as the Company and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price, or (v) any combination of the foregoing methods of payment. 8. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4 hereof; provided, however, that no Options shall be exercisable until stockholder approval of the Plan in accordance with Section 16 hereof has been obtained. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 7 of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) RULE 16b-3. Options granted to Outside Directors must comply with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act or any successor thereto and shall contain such additional conditions or restrictions as may be required thereunder to qualify Plan transactions, and other transactions by Outside Directors that otherwise could be matched with Plan transactions, for the maximum exemption from Section 16 of the Exchange Act. (c) TERMINATION OF CONTINUOUS STATUS AS A DIRECTOR. In the event an Optionee's Continuous Status as a Director terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option, but only within three (3) months from the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of such termination, and to the extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (d) DISABILITY OF OPTIONEE. In the event Optionee's Continuous Status as a Director terminates as a result of disability, the Optionee may exercise his or her Option, but only within twelve (12) months from the date of such termination, and only to the extent that the Optionee was entitled to exercise it on the date of such termination (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of termination, or if he or she does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. (e) DEATH OF OPTIONEE. In the event of an Optionee's death, the Optionee's estate or a person who acquired the right to exercise the Option by bequest or inheritance may exercise the Option, but only within twelve (12) months following the date of death, and only to the extent that the Optionee was entitled to exercise it on the date of death (but in no event later than the expiration of its ten (10) year term). To the extent that the Optionee was not entitled to exercise an Option on the date of death, and to the extent that the Optionee's estate or a person who acquired the right to exercise such Option does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. 9. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER, ASSET SALE OR CHANGE OF CONTROL. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the stockholders of the Company, the number of Shares covered by each outstanding Option, the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share covered by each such outstanding Option, and the number of Shares issuable pursuant to the automatic grant provisions of Section 4 hereof shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. (b) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option has not been previously exercised, it will terminate immediately prior to the consummation of such proposed action. (c) MERGER OR ASSET SALE. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option shall be assumed or an equivalent option shall be substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation does not agree to assume the Option or to substitute an equivalent option, each outstanding Option shall become fully vested and exercisable, including as to Shares as to which it would not otherwise be exercisable. If an Option becomes fully vested and exercisable in the event of a merger or sale of assets, the Board shall notify the Optionee that the Option shall be fully exercisable for a period of thirty (30) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase, for each Share of Optioned Stock subject to the Option immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares). 11. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. Except as set forth in Section 4, the Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act (or any other applicable law or regulation), the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required. (b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated. 12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all purposes, be the date determined in accordance with Section 4 hereof. 13. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 14. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 15. OPTION AGREEMENT. Options shall be evidenced by written option agreements in such form as the Board shall approve. 16. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to approval by the stockholders of the Company at or prior to the first annual meeting of stockholders held subsequent to the granting of an Option hereunder. Such stockholder approval shall be obtained in the degree and manner required under applicable state and federal law. PERCLOSE, INC. 1995 DIRECTOR OPTION PLAN DIRECTOR OPTION AGREEMENT Perclose, Inc., a Delaware corporation (the "Company"), has granted to __________( the Optionee"), an option to purchase a total of _________ shares (the "Shares") of the Company's Common Stock (the "Optioned Stock"), at the price determined as provided herein, and in all respects subject to the terms, definitions and provisions of the Company's 1995 Director Option Plan (the "Plan") adopted by the Company which is incorporated herein by reference. The terms defined in the Plan shall have the same defined meanings herein. 1. NATURE OF THE OPTION. This Option is a nonstatutory option and is not intended to qualify for any special tax benefits to the Optionee. 2. EXERCISE PRICE. The exercise price is ____________ for each share of Common Stock. 3. EXERCISE OF OPTION. This Option shall be exercisable during its term in accordance with the provisions of Section 8 of the Plan as follows: (i) RIGHT TO EXERCISE. (a) This Option shall be exercisable in accordance with the following schedule: [ ] (b) This Option may not be exercised for a fraction of a share. (c) In the event of Optionee's death, disability or other termination of service as a Director, the exercisability of the Option is governed by Section 8 of the Plan. (ii) METHOD OF EXERCISE. This Option shall be exercisable by written notice which shall state the election to exercise the Option and the number of Shares in respect of which the Option is being exercised. Such written notice, in the form attached hereto as Exhibit A, shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the exercise price. 4. METHOD OF PAYMENT. Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of the Optionee: (i) cash; (ii) check; or (iii) other shares which (x) in the case of shares acquired upon exercise of an Option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; or (iv) delivery of a properly executed exercise notice together with such other documentation as the Company and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price; or (v) any combination of the foregoing methods of payment. 5. RESTRICTIONS ON EXERCISE. This Option may not be exercised if the issuance of the Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulations, or if such issuance would not comply with the requirements of any stock exchange upon which the Shares may then be listed. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 6. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by the Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 7. TERM OF OPTION. This Option may not be exercised more than ten (10) years from the date of grant of this Option, and may be exercised during such period only in accordance with the Plan and the terms of this Option. 8. TAXATION UPON EXERCISE OF OPTION. Optionee understands that, upon exercise of this Option, he or she will recognize income for tax purposes in an amount equal to the excess of the then Fair Market Value of the Shares purchased over the exercise price paid for the Shares. Since the Optionee is subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, under certain limited circumstances the measurement and timing of such income (and the commencement of any capital gain holding period) may be deferred, and the Optionee is advised to contact a tax advisor concerning the application of Section 83 in general and the availability of an 83(b) election in particular in connection with the exercise of the Option. Upon a resale of the Shares by the Optionee, any difference between the sale price and the Fair Market Value of the Shares on the date of exercise of the Option, to the extent not included in income as described above, will be treated as capital gain or loss. DATE OF GRANT: ____________ PERCLOSE, INC. a Delaware corporation By: ------------------------------ Henry A. Plain, Jr. President & CEO Optionee acknowledges receipt of a copy of the Plan, a copy of which is attached hereto, and represents that he is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Plan. OPTIONEE: Dated: --------------------------- ------------------------------------ EXHIBIT A PERCLOSE, INC. 1995 DIRECTOR OPTION PLAN DIRECTOR STOCK OPTION EXERCISE NOTICE Perclose, Inc. 199 Jefferson Drive Menlo Park, CA 94025 Attention: Chief Financial Officer 1. EXERCISE OF OPTION. The undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase _________ shares of the Common Stock (the "Shares") of Perclose, Inc. (the "Company") under and pursuant to the Company's 1995 Director Stock Option Plan and the Director Stock Option Agreement dated ___________________ (the "Agreement"). 2. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee has received, read and understood the Agreement. 3. FEDERAL RESTRICTIONS ON TRANSFER. Optionee understands that the Shares must be held indefinitely unless they are registered under the Securities Act of 1933, as amended (the "1933 Act"), or unless an exemption from such registration is available, and that the certificate(s) representing the Shares may bear a legend to that effect. Optionee understands that the Company is under no obligation to register the Shares and that an exemption may not be available or may not permit Optionee to transfer Shares in the amounts or at the times proposed by Optionee. 4. TAX CONSEQUENCES. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee's purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultant(s) Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 5. DELIVERY OF PAYMENT. Optionee herewith delivers to the Company the aggregate purchase price for the Shares that Optionee has elected to purchase and has made provision for the payment of any federal or state withholding taxes required to be paid or withheld by the Company. 6. ENTIRE AGREEMENT. The Agreement is incorporated herein by reference. This Agreement and the Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof. This Exercise Notice and the Agreement are governed by California law except for that body of law pertaining to conflict of laws. Submitted by: Accepted by: OPTIONEE: PERCLOSE, INC. By: ----------------------- -------------------------- V.P. of Finance Address: ------------------------ Dated: Dated: ------------------------------ ---------------------- EX-27.1 3 EXHIBIT 27-1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOUND IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS MAR-31-1999 APR-01-1998 DEC-31-1998 7,008 20,740 6,208 400 2,131 36,625 7,257 3,162 43,706 3,776 0 0 0 11 39,919 43,706 29,051 29,051 9,794 9,794 55 0 16 2,872 143 2,729 0 0 0 2,729 0.25 0.24
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