-----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, VI7pdPsPFvAwieK5Zn3jkYFRgWdQgudr/rsrmceYzHWUeB8aoc0LEABdH/NmMFfg UCdE1ziKMg4+vD2kzBIhUw== 0001047469-99-025168.txt : 19990625 0001047469-99-025168.hdr.sgml : 19990625 ACCESSION NUMBER: 0001047469-99-025168 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990326 FILED AS OF DATE: 19990624 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-K SEC ACT: SEC FILE NUMBER: 000-26890 FILM NUMBER: 99651765 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-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-K (MARK ONE) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED MARCH 26, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 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 Identification No.) incorporation or organization) 400 SAGINAW DRIVE, REDWOOD CITY, CA 94063 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (650) 473-3100 ----------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value (Title of class) Preferred Share Purchase Rights (Title of class) ----------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [ X ] No [ ] The aggregate value of voting stock held by non-affiliates of the registrant was approximately $293,296.00 as of April 30, 1999, based upon the closing price of the Registrant's Common Stock reported for such date on the Nasdaq Stock Market. Shares of Common Stock held by each executive officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes. As of April 30, 1999, the registrant had outstanding 11,074,101 shares of Common Stock. TABLE OF CONTENTS
PAGE NUMBER ------- PART I......................................................................................................... 3 Item 1. BUSINESS....................................................................................... 3 Company Overview............................................................................... 3 Industry Overview.............................................................................. 4 Arterial Access Site Management................................................................ 5 Perclose Solution.............................................................................. 6 Minimally Invasive CABG Surgery Products....................................................... 6 Business Strategy.............................................................................. 7 Products and Technology........................................................................ 8 Clinical and Regulatory Status................................................................. 9 Marketing and Distribution..................................................................... 9 Research and Development....................................................................... 10 Manufacturing.................................................................................. 10 Competition.................................................................................... 11 Patents and Proprietary Rights................................................................. 12 Government Regulation.......................................................................... 13 Third-Party Reimbursement...................................................................... 16 Product Liability and Insurance................................................................ 17 Employees...................................................................................... 17 Item 2. PROPERTIES..................................................................................... 17 Item 3. LEGAL PROCEEDINGS.............................................................................. 17 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................ 18 PART II........................................................................................................ 18 Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................... 18 Item 6. SELECTED FINANCIAL DATA........................................................................ 19 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 19 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................... 29 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........... 29 PART III....................................................................................................... 29 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................. 29 Item 11. EXECUTIVE COMPENSATION......................................................................... 32 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................. 38 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................. 40 PART IV........................................................................................................ 41 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................... 41 SIGNATURES..................................................................................... 43
2 PART 1 ITEM 1. BUSINESS COMPANY OVERVIEW Perclose, Inc. ("Perclose" or the "Company") 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-Registered Trademark- and Techstar-Registered Trademark- 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. The Prostar and Techstar percutaneous vascular surgery ("PVS") products are designed to provide routine, definitive closure that replicates results previously obtainable only through open surgery, without the associated risks and costs. Randomized clinical trials of the Prostar and Techstar products have demonstrated significant clinical and economic advantages over conventional compression methods of arterial access site closure. These advantages include achieving rapid hemostasis (the cessation of bleeding), reducing nursing time required to monitor patients, allowing earlier patient ambulation, enabling more efficient use of the catheterization laboratory, reducing overall treatment costs and improving patient comfort. In addition, for certain high risk patients, such as those who have experienced a heart attack, the Company's products allow continuation of aggressive anticoagulation, thrombolytic or anti-restenosis drug therapy without an increased risk of bleeding complications at the arterial access site. The Company commenced international shipments of its Prostar and Techstar products in 1994 and 1995, respectively. During fiscal 1998, the Company received a FDA premarket approval ("PMA") and several PMA supplement approvals for commercial sale in the United States of versions of its Prostar and Techstar PVS products. The Company is developing a new generation of PVS product trademarked as the Closer-TM-. The Company has recently completed a 200 patient, randomized multi-center 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 Company is developing the Heartflo Anastomosis System to allow cardiac surgeons to automate the rapid placement of sutures in blood vessels during coronary artery bypass graft ("CABG") surgery. The success of a coronary artery bypass surgery procedure is largely determined by the quality of the anastomosis (attachment), which dictates the long-term patency, or blood flow, through the vein graft to the coronary arteries. While cardiac surgeons have developed effective surgical techniques to perform hand-sewn anastomoses of coronary blood vessels in conventional CABG surgeries, the recent emergence of minimally invasive CABG procedures introduces additional challenges for performing hand-sewn anastomoses during such procedures. Since the opening to the chest cavity created by ports or mini-thoracotomies used in minimally invasive CABG procedures is small, accessing and suturing the bypass graft to the coronary artery is more difficult, may take longer to perform and may not achieve the same therapeutic results as in conventional open chest CABG surgery. The Heartflo Anastomosis System is being designed to deploy an ideal suture pattern in a rapid, consistent and automated fashion while still allowing the surgeon ultimate control over the tensioning and tying of the sutures to complete attachment of the bypass graft. The Heartflo Anastomosis System is being designed for use with conventional, open chest CABG procedures and the newer, minimally invasive, beating heart and stopped heart procedures. The Heartflo system is currently undergoing human clinical testing. This Report on Form 10-K contains certain forward-looking statements regarding future events with respect to the Company. Actual events and/or future results of operations may differ materially as a result of 3 the factors described herein and in the documents incorporated herein by reference, including, in particular those factors described under "Business--Manufacturing", "--Competition," "--Patents and Proprietary Rights", "--Government Regulations", "--Third Party Reimbursement" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Factors Affecting Future Operating Results." INDUSTRY OVERVIEW THERAPEUTIC INTERVENTIONAL CARDIOLOGY MARKET CORONARY ARTERY DISEASE. More than 6 million people in the United States have been diagnosed with coronary artery disease, which is a formation of atherosclerotic plaque that causes blood flow restrictions, or blockages, within the coronary arteries. These blockages can occur anywhere within the complex network of arteries that provide blood to the heart muscle. If left untreated, coronary artery disease can cause severe chest pain and lead to heart attacks. The principal means of treating coronary artery disease when diet, exercise or drug therapy fail to achieve therapeutic results include CABG, a highly invasive open surgical procedure, and percutaneous transluminal coronary angioplasty ("balloon angioplasty") as well as other percutaneous catheter-based procedures including stenting and atherectomy. Prior to the late 1970's, CABG was the only alternative for treating coronary artery disease that did not respond to non-invasive therapy. Since its clinical introduction in 1978, balloon angioplasty, either alone or in conjunction with stents, has emerged as the principal less invasive alternative to CABG. Industry estimates in 1997 indicate that there are approximately 540,000 CABG procedures performed annually worldwide, with approximately 320,000 of those occurring in the United States. Industry sources estimate that there are approximately 675,000 balloon angioplasty, stenting and atherectomy procedures performed annually worldwide, including approximately 425,000 such procedures in the United States. In addition, minimally invasive forms of CABG have been recently introduced and continue to be developed. These procedures attempt to reduce the invasiveness of CABG by minimizing the size of the incisions required. BALLOON ANGIOPLASTY AND STENTING PROCEDURES. At the beginning of a balloon angioplasty procedure, the physician initiates anticoagulation drug therapy to prevent formation of blood clots, which can cause arterial blockages. Anticoagulation therapy is typically continued throughout the procedure. A local anesthetic is administered and a small incision is made in the groin area to gain access to the femoral artery, which is punctured to create an access site for catheterization devices. The cardiologist inserts an introducer sheath into the femoral artery and places a guiding catheter through the introducer sheath to create a path from outside the patient to the arteries of the heart. The cardiologist advances a small guidewire through the inside of the guiding catheter, into the coronary artery and across the site of the blockage. A balloon catheter is delivered over the guidewire through the inside of the guiding catheter into the artery and across the site of the blockage. The balloon is inflated to compress the blockage against the walls of the artery, thereby enlarging the diameter of the arterial lumen and increasing blood flow to the heart muscle. During this procedure, anticoagulation drug therapy is ordinarily used to prevent clot formation in the coronary arteries. At the conclusion of the procedure, the cardiologist decides if the benefits of continued anticoagulation therapy outweigh the increased risk of bleeding at the femoral artery access site. This decision influences the level of post-procedure nursing observation and the length of the hospital stay, which is typically one to three days. Other catheter-based therapeutic coronary procedures include stenting and atherectomy. Stents are implantable, metal, tube shaped devices delivered on a balloon catheter and permanently deployed at a blockage site to maintain increased lumen diameter by mechanically supporting the artery. Stenting procedures have been reported to reduce the risk of abrupt coronary artery closure, thereby creating the possibility for outpatient stenting due to a reduced need to keep patients under post-procedure nursing observation. The current potential for outpatient stenting is, however, limited by the inability to achieve predictable, sustained hemostasis of the arterial access site. Atherectomy encompasses several types of devices that are designed to remove atherosclerotic plaque that blocks blood flow in the arteries. 4 DIAGNOSTIC ANGIOGRAPHY AND OTHER PERCUTANEOUS VASCULAR PROCEDURES Patients believed to have coronary artery disease typically undergo diagnostic angiography to determine the extent and location of their arterial blockages. Angiography is a procedure in which radiopaque dye visible under x-ray is delivered through a catheter directly into the coronary arteries, allowing real-time visualization with an x-ray imaging system. Like therapeutic angioplasty, angiography is also performed using a catheter placed into the vascular system through a puncture in the femoral artery. Industry estimates in 1997 indicated that angiography is performed annually on approximately 2.9 million patients worldwide including approximately 1.7 million patients in the United States. Angiography procedures represent a significant market opportunity for arterial closure devices because under conventional treatment protocols many of these patients are kept under nursing observation for several hours following the procedure primarily to confirm achievement of hemostasis. Many other catheterization procedures rely on percutaneous access to the vascular system through a puncture in the femoral artery. These procedures include peripheral vascular therapeutic and diagnostic procedures, of which approximately 1.0 million and 1.3 million, respectively, are performed annually worldwide. These procedures may represent a significant market opportunity for arterial closure devices because under conventional treatment protocols, many of these patients are kept under nursing observation following the procedure primarily to confirm achievement of hemostasis. Therefore, the availability of reliable arterial access site closure devices could facilitate early discharge of these patients. Percutaneous vascular surgery devices could also be used to close femoral artery access sites in interventional neuroradiology catheterization procedures, electrophysiology procedures to map and ablate cardiac arrhythmias and intra-aortic balloon pump procedures. In addition, emerging percutaneous catheterization procedures and other new interventional procedures, including catheter-based vascular grafts, cardiopulmonary support procedures and percutaneous treatment of abdominal aortic aneurysms may also represent new market opportunities for larger versions of the Company's PVS products. ARTERIAL ACCESS SITE MANAGEMENT Following catheter-based coronary procedures such as balloon angioplasty, stenting, atherectomy or angiography, the physician or nursing staff must close the arterial access site. With procedures relying on conventional compression closure techniques, anticoagulation therapy (which is used in all interventional cases) is discontinued for up to four hours prior to closure of the access site to allow the patient's clotting function to normalize. During this period, the introducer sheath is left in place and the patient must remain immobile in bed to prevent bleeding at the access site. Once the introducer sheath is removed, intense direct pressure is applied to the puncture site for a period of time ranging from 15 minutes to over one hour to facilitate formation of a blood clot in order to seal the arterial access site. This pressure is applied either manually or with a large C-clamp or other pressure device placed around the patient's leg. A dislodged clot can result in internal or external bleeding, which may necessitate transfusions or result in other vascular complications if not immediately controlled. Because any movement may dislodge the clot, the patient is required to remain immobile under close nursing observation in a coronary care unit for an additional four to 24 hours after the procedure, depending on the amount of anticoagulation drug therapy used and the type of procedure performed. Conventional closure methods may result in substantial costs, limit operating efficiencies and constrain the scheduling and usage of the catheterization laboratory by the number of beds and nursing staff in the coronary care unit. The arterial access site can be affected by other complications associated with conventional compression methods, including a hematoma in which a coagulated blood mass forms at the access site, a pseudoaneurysm in which blood continues to flow from the artery into the coagulated blood mass at the access site, femoral nerve damage from extended compression and a vagal response characterized by a sharp drop in blood pressure. Patients often experience significant pain and discomfort during compression of the artery and in the period in which they are required to be immobile, and may require pain medication. Many patients report that the pain associated with compression of the artery and immobilization is the most uncomfortable and difficult aspect of the catheterization procedure. 5 In addition to the anticoagulation therapy administered during routine coronary catheterization procedures, post-procedure anticoagulation or antiplatelet therapy is necessary in certain patients who are at an elevated risk of formation of a life-threatening blood clot in the coronary arteries. The Company believes that this group may represent up to 30% of therapeutic coronary catheterization patients and includes patients who have experienced a heart attack or undergone complicated balloon angioplasty characterized by dissection of the arterial wall during expansion of the balloon. For these patients, optimal treatment usually requires continued anticoagulation therapy to keep blood clots from forming, new drugs to reduce the risk of restenosis or thrombolytic drugs to dissolve existing clots. With conventional arterial access site closure therapies, the interventional cardiologist is faced with the choice of discontinuing anticoagulation therapy and closing the arterial access site using compression or continuing drug therapy and leaving the sheath in place overnight, which requires the patient to remain immobile and extends the hospital stay. The cardiologist must therefore manage the difficult balance of preventing clot formation in the coronary arteries while encouraging a clot formation to close the arterial access site. In high clinical need patients, conventional arterial access site management options may lead to a greater risk of heart attack, higher vascular complication rates, significant patient discomfort during clamping and immobilization, intensive nursing monitoring, extended hospitalization and increased costs of care. PERCLOSE SOLUTION The Company believes that its PVS products, which achieve rapid closure of arterial access sites following percutaneous catheterization procedures, overcome the clinical disadvantages of conventional closure methods and enable catheterization laboratories to achieve increased operating efficiencies and cost savings. The Company's PVS products enable the physician to suture arterial access sites percutaneously, providing a means of closure that has previously been possible only through open vascular surgery. Since the introduction of catheterization procedures, vascular surgery has been the definitive method used to close arterial access sites that do not respond to conventional compression therapy. Open surgery requires a long incision in the patient's groin area, involves a significant recovery period and increases overall treatment costs. While surgeons can close the arterial access site with one or two sutures, the invasive nature of open surgery makes it unsuitable for routine use in catheterization patients. Perclose PVS products are designed to provide routine, definitive closure that replicates, through a minimally invasive procedure, the results previously obtainable only through open surgery without the associated risks and costs. The products are designed to be easy to use, relying on standard techniques that are familiar to physicians performing these procedures. Perclose PVS products are used in the catheterization laboratory to close the arterial access site as the final step in the catheterization procedure. By achieving rapid hemostasis, PVS products reduce the need for the patient to remain immobile under close observation in the coronary care unit. This minimizes the patient's pain and discomfort and allows the patient to ambulate shortly after the catheterization procedure. Early ambulation of patients can also improve utilization of hospital resources. For example, in conventional practice, angiography is usually performed in the morning to permit same-day discharge following observation and confirmation of hemostasis. Earlier ambulation and discharge of these patients may contribute to more efficient usage of the of catheterization laboratory by allowing scheduling of diagnostic procedures throughout the day. MINIMALLY INVASIVE CABG SURGERY PRODUCTS The Company's first application of its core technology and technical competency outside of the PVS area is the Heartflo Anastomosis System for use in conventional, open chest CABG procedures and the newer minimally invasive beating heart and stopped heart procedures. The success of a CABG procedure is largely determined by the quality of the anastomosis (attachment), which dictates the long-term patency, or blood flow, through the vein graft to the coronary arteries. While effective surgical techniques which enable cardiac surgeons to perform hand-sewn anastomoses of coronary blood vessels in conventional CABG surgeries exist, the recent emergence of minimally invasive CABG procedures introduces additional 6 challenges for hand-sewn anastomoses during such procedures. Since the opening to the chest cavity created by ports or mini-thoracotomies used in minimally invasive CABG procedures is small, accessing and suturing the bypass graft to the coronary artery is more difficult, may take longer to perform and may not achieve the same therapeutic results as in conventional open chest CABG surgery. The Heartflo system is being designed to consistently replicate the ideal, hand-sewn pattern used by cardiac surgeons during a CABG procedure by automatically deploying needles and sutures in a precise pattern in both the bypass vein graft and the coronary artery while still allowing the cardiac surgeon to maintain control over the joining of the bypass grafts to the coronary artery. When using the Heartflo system, the surgeon would first deploy needles and sutures through the bypass graft vessel and then through the coronary artery. Once the sutures have been deployed by the system, the cardiac surgeon would then tie the two vessels together using standard surgical knots. The Company believes that by automating the placement of the sutures, the pattern and positioning of the sutures will be more precise, consistent and reliable, leading to more clinically efficacious attachments of vein grafts to coronary arteries (i.e. higher patency rates). In addition, the Company believes that by automating the suture placement process, the Heartflo system may reduce the time needed to perform an anastomosis, especially in minimally invasive CABG procedures. Finally, this procedure also allows the cardiac surgeon to maintain control of the final suture tensioning and tying which enables the surgeon to make clinical decisions based upon the anatomy, thickness and calcification of the vessels to be joined. Most of the recent product development announcements and introductions for minimally invasive CABG procedures have focused on improving access to the chest cavity by reducing the need to perform a medial sternotomy during the CABG procedure. One of the limitations of minimally invasive CABG is the inability to bypass all blockages of the arteries of the heart. During these procedures, the surgeon has a difficult time rotating the heart to access to all coronary vessels and is often unable to reach the aorta in order to attach the proximal end of the graft. The Heartflo system is being designed to facilitate the attachment of bypass grafts for these more difficult attachments in the smaller working spaces used in minimally invasive CABG procedures. The Company believes that the Heartflo system will enable surgeons using the newer minimally invasive CABG procedures to obtain a quality of anastomosis similar to that obtained in conventional CABG procedures, whether surgeons perform these newer procedures through ports or mini-thoracotomies and whether on still or beating hearts. The Company believes that the availability of tools for improving the quality of the anastomosis for minimally invasive CABG procedures could encourage the adoption and enhance the long-term effectiveness of these procedures. The Company plans to develop three types of anastomosis devices: a proximal device which would attach one end of the graft to the aorta, a distal end-to-side device which would attach the distal end of the graft to the coronary artery and a distal side-to-side device that would attach the middle of the graft to a coronary artery. BUSINESS STRATEGY The Company's objective is to be a leader in the development, manufacture and marketing of minimally invasive medical devices that automate the delivery of needles and sutures in cardiovascular surgical procedures. Key elements of the Company's strategy include: EMPHASIZE CLINICAL UTILITY AND COST-EFFECTIVENESS. In six randomized trials with over 2,200 patients enrolled, the Company has established that percutaneous vascular surgical repair of the arterial access site decreases time to hemostasis and time to ambulation and improves patient comfort. The Company uses data collected from clinical trials to demonstrate the clinical and cost advantages of its products to physicians, administrators and health care payors. APPLY FOCUSED MARKETING, SALES AND PHYSICIAN TRAINING. The Company's approved products are currently marketed to interventional cardiologists, radiologists and catheterization laboratory administrators. 7 These products are currently marketed in the United States through a direct sales organization and internationally through distributors in Germany, France, Japan and other major countries, under regulatory approvals where required. The Company believes that the majority of interventional catheterization procedures in the United States are performed in high volume catheterization laboratories that can be served effectively by a relatively small, focused sales force. Perclose develops and maintains close working relationships with its customers to address their needs for products and services and to receive input regarding the Company's product development plans. The Company builds these relationships through focused physician training, which the Company believes will also be an important factor in encouraging cardiologists to use the Company's products. Perclose provides a standardized, in-the-field training course in the markets it enters. EXTEND THE TECHNOLOGY PLATFORM. The Company applies its core technology to other high value cardiovascular surgical areas in which remote and precise delivery of needles and sutures would improve clinical outcomes and reduce health care costs. Anastomosis of coronary blood vessels during CABG procedures represents the first application of the Company's core technology beyond arterial access site closure. The Company intends to develop new applications for its technology in other minimally invasive surgical procedures. EXPAND MARKETS FOR EXISTING PRODUCTS. The Company believes that several other minimally invasive catheterization procedures, both currently used and under development, will be candidates for application of its existing PVS products. The Company intends to expand its product marketing efforts into these new clinical applications, including electrophysiology, interventional neuroradiology and intra-aortic balloon pump procedures, where percutaneous surgical closure of arterial access sites can meet significant clinical needs and achieve cost reductions. MAINTAIN TECHNOLOGICAL LEADERSHIP. The Company continually evaluates new developments in percutaneous catheterization procedures and will seek to expand its product development efforts to address access site closure following these new procedures, including catheter-based vascular grafts, treatment of abdominal aortic aneurysms and cardiac pulmonary support procedures. Because the large diameter catheter devices required for these procedures make closure of the arterial access site difficult using conventional compression methods, open surgical procedures are ordinarily used to close the access sites. The Company believes that larger diameter versions of its current PVS products could be used to close the arterial access sites in these procedures, making it feasible to perform such procedures in a less invasive manner. The Company also focuses on improving the performance and ease of use and reducing the manufacturing costs of its PVS products. PRODUCTS AND TECHNOLOGY The Company has introduced two PVS product families, the Prostar and Techstar. Prostar products provide two sutures for closing arterial access sites ranging in diameter from 7 French ("F") to 11F. Techstar products are single-suture devices for suturing 6F and 7F arterial access sites. PROSTAR PRODUCTS. The Prostar products are single-use, hand-held medical devices which consist of a four-needle, two-suture Prostar PVS device and a Perclose Knot Pusher. Prostar products are currently marketed worldwide in the 8F and 10F sizes and used to close arterial access sites following balloon angioplasty, stenting and atherectomy procedures. At the end of the catheterization procedure, the introducer sheath used in the procedure is removed utilizing a standard over-the-wire exchange technique. Next, the flexible sheath of the PVS device is inserted in the artery over a guidewire. The unique design of the device allows the physician to maintain hemostasis throughout the procedure. Properly positioned, the pull handle is drawn away from the patient, deploying the needles and sutures. As the needles advance toward the artery wall, they are guided by a ramp that precisely positions the needles around the arterial access site. The needles are captured in the barrel of the device which also positions the needles for removal. Two needles, each attached to the end of a single suture, will 8 create one surgical stitch. The needles are removed from the device and detached from the sutures, which are then tied in a standard surgical square knot. The device is removed and the knots are advanced to the arterial access site with the Perclose Knot Pusher. The knots can be further secured with additional throws, which are also advanced with the Knot Pusher. TECHSTAR PRODUCTS. Techstar products consist of a two-needle, single-suture Techstar PVS device and a Perclose Knot Pusher. Techstar products are currently marketed worldwide in 6F, 7F and 6FS (short) sizes. The Techstar 6F product is suitable for closure of arterial access sites in therapeutic and diagnostic procedures having puncture sites dilated by 6F or smaller introducer sheaths while the 7F diameter product is suitable for closure of puncture sites dilated by 7F interventional and diagnostic introducer sheaths. The Techstar 6FS is shorter in length than the Techstar 6F and is suitable for use after peripheral diagnostic and interventional procedures for vascular disease of the lower legs. CLINICAL AND REGULATORY STATUS In April 1997, the Company received PMA approval for commercial sale in the United States of its Prostar 9F and 11F products. In November 1997, the Company received PMA supplement approval for commercial sale in the United States of its Techstar 6F and Techstar XL 6F products. In January 1998 the Company received PMA supplement approval for the Prostar Plus 8F and 10F and Prostar XL 8F products for commercial sale in the United States. In September 1998, the Company received PMA supplement approval for commercial sale in the United States of its Prostar XL 10F product. In May 1999, the Company filed a PMA supplement application for the Closer 6F for use after diagnostic angiograms to the FDA for commercial sale in the United States. Perclose PVS products are currently marketed internationally in Germany, France, Japan and other major countries under regulatory approvals where required. The Company obtained CE mark certification in 1996, allowing it to market its products in all member countries of the European Union and to ship its products to European Union countries directly from its United States manufacturing facility. The Company has received regulatory approval to market the Prostar and Techstar products in Japan and has completed a clinical trial in Japan that will form the basis for an application for reimbursement approvals in the Japanese health care system. There can be no assurance that such reimbursement approvals will be obtained in a timely manner or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors Affecting Future Operating Results--Government Regulation." MARKETING AND DISTRIBUTION The Company markets its PVS products in the United States through a direct sales organization. The Company believes that the majority of interventional catheterization procedures in the United States are performed in high volume catheterization laboratories, and that these institutions can be effectively served by a relatively small, focused sales force. The Company develops and maintains close working relationships with its customers to address their needs for products and services and to receive input regarding the Company's product development plans. The Company builds these relationships through focused physician training, which the Company believes will also be a key factor in encouraging physicians to use the Company's products. The Company provides a standardized, in-the-field training course in the markets it enters. The Company's international sales and marketing strategy for PVS products focuses on interventional cardiologists and radiologists through established distributors in major international markets, subject to required regulatory approvals. The Company generally operates under written distribution agreements with its distributors, although the Company does not have written agreements with certain distributors, typically those in smaller markets. Distributors with which the Company has distribution agreements generally have the exclusive right to sell the Company's products within a defined territory. 9 These distributors also typically market other medical products, although the Company generally seeks to obtain covenants from its distributors prohibiting them from marketing medical devices that compete directly with the Company's products. The Company's distributors typically purchase the Company's products at a discount from the end user list price and resell the products to hospitals and clinics. Sales to international distributors are denominated in U.S. dollars, except to the Company's German and French distributors. The distributor and end-user price varies from country to country. Because international sales comprise only a relatively small percentage of the Company's net revenues, foreign currency exchange risks are not material to the Company's business. For fiscal years 1999 and 1998, no single customer contributed 10% or more of the Company's net revenues. RESEARCH AND DEVELOPMENT The Company's research and development activities are performed by an internal research and development staff. The Company has a three-part strategy in research and development. First, the Company continues to enhance its existing PVS products to maintain its technological leadership in percutaneous vascular surgery. Second, the Company plans to apply its core technology to the closure of other arterial access sites including those for vascular grafts, treatment of abdominal aortic aneurysms and cardiac pulmonary support procedures. Third, the Company is applying its core technology to other high value surgical areas such as coronary anastomosis with its Heartflo system. Research and development expenses for fiscal 1997, 1998 and 1999 were $4.7 million, $5.4 million and $8.0 million, respectively. The Company is developing a new generation of PVS product trademarked as the Closer-TM-. The Company has recently completed a 200 patient, randomized multi-center 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. MANUFACTURING The Company currently manufactures its PVS products in a Class 10,000 clean room facility in Redwood City, California. The Company purchases components from various suppliers and relies on single sources for several parts. To date, the Company has not experienced any significant adverse affects resulting from shortages of components. Delays associated with any future part shortages, particularly as the Company scales up its manufacturing activities in support of commercial sales in the United States and for international distributor orders, would have a material adverse effect on the Company's business, financial condition and results of operations. Manufacturers often encounter difficulties in scaling up production of new products, including problems involving production yields, quality control and assurance, component supply and lack of qualified personnel. Difficulties encountered by the Company in manufacturing scale-up could have a material adverse effect on its business, financial condition and results of operations. The Company has only recently begun manufacturing its products in large-scale commercial quantities. The Company is also required to register as a medical device manufacturer with the FDA and to list its products with the FDA. As such, the Company is subject to inspections by the FDA for compliance with the FDA's good manufacturing practices ("GMP") and other applicable regulations. In addition, in connection with international sales, the Company is required to comply with GMP requirements and ISO 9001 standards. These standards require that the Company maintain processes and documentation in a prescribed manner with respect to manufacturing, testing and quality control activities. Failure to either attain or maintain compliance with the applicable regulatory requirements or standards of various regulatory agencies would have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors Affecting Future Operating Results--Manufacturing Experience and Scale-Up Risk." 10 In November 1997, Perclose undertook a voluntary manufacturer's recall of specific lots of Techstar XL 6F 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 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. COMPETITION Competition in the emerging market for arterial access site closure devices is intense and is expected to continue to increase. The Company believes its principal competition will come from conventional manual compression devices, mechanical compression devices and collagen plug closure devices. Conventional compression products are marketed by several companies that supply C-clamp closure devices. C.R. Bard markets the Femostop compression arch, a cuff that imposes pressure on the access site. Several new collagen-based closure devices have been developed in response to the need for improved methods of arterial access site closure following catheterization procedures. These collagen plug devices are delivered through a sheath and placed at the site of the femoral artery puncture. These collagen plugs rely on the body's clotting function, which is enhanced by the presence of collagen, and may still require external pressure to achieve closure of the arterial access site. In contrast, the Company's percutaneous vascular surgery products provide a mechanical suture closure which aids in the natural healing process and, like open surgical repair, do not rely on the body's clotting function. Datascope and Kensey Nash Corporation have received PMA approval from the FDA for products that use collagen plugs to achieve hemostasis. A subsidiary of St. Jude Medical, Inc. has exclusive worldwide distribution rights to the Kensey Nash device. Several other companies are reported to be developing or have tried to develop arterial closure devices, some of which have an established presence in the field of interventional cardiology, including Boston Scientific Corporation, C.R. Bard, United States Surgical Corporation and Guidant Corporation. In addition, several companies are developing fibrin sealants for use as arterial access site closure devices. The Company believes that the primary competitive factors in the market for arterial closure devices are clinical need, complication rates, efficacy, time to patient ambulation and discharge, ease of use and price. In addition, the length of time required for products to be developed and to receive regulatory and, in some cases, reimbursement approvals are important competitive factors. Competition in the market for conventional and emerging minimally invasive CABG surgical devices is also intense and is expected to increase. In September 1997 United States Surgical Corporation received FDA approval to market an anastomosis device. The Company believes that other companies, including major cardiovascular device companies focused on both the conventional and minimally invasive CABG markets, are currently attempting to develop anastomosis devices. Many of the Company's competitors have substantially greater name recognition and financial resources than the Company and also have greater resources and expertise in the areas of research and development, manufacturing, marketing and regulatory affairs. There can be no assurance that the Company's competitors will not succeed in developing and marketing technologies and products that are more effective than those developed and marketed by the Company or that would render the Company's technology and products obsolete or noncompetitive. Additionally, there is no assurance that the Company will be able to compete effectively against such competitors in terms of manufacturing, marketing and sales. Also, there can be no assurance that the Company's products will be able to demonstrate clinical efficacy or cost effectiveness advantages over competing products, or that clinical trials will demonstrate such advantages. In addition, the medical device market is generally characterized by rapid and significant technological change and frequent emergence of new technologies, products and procedures. There can be no assurance that any such new technologies, products or procedures will not reduce the number of coronary 11 catheterization or CABG procedures performed. The Company's success will also depend in part on its ability to respond quickly to medical and technological changes through the development and introduction of new products. Product development involves a high degree of risk and there can be no assurance that the Company's new product development efforts will result in any commercially successful products. The Company believes it competes favorably with respect to these factors, although there is no assurance that it will be able to continue to do so. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors Affecting Future Operating Results--Competition and Risk of Technological Obsolescence." PATENTS AND PROPRIETARY RIGHTS Perclose's policy is to protect its proprietary position by, among other methods, filing United States and foreign patent applications to protect technology, inventions and improvements that are important to its business. The Company has nine issued United States patents covering certain aspects of the percutaneous suturing technology used in the Company's PVS products and has exclusive licenses under four additional issued patents relating to a different method of percutaneous suturing. The Company has nine United States patent applications pending in the areas of device design, percutaneous suturing for vascular puncture sites and accessory devices. The Company has also licensed, on a nonexclusive basis, certain coating technology used in its products. Under the license, the Company is obligated to pay royalties on sales of products using this coating technology. The Company has filed two United States patent applications covering its anastomosis products and intends to file additional patents in the future. The Company has also filed several international patent applications corresponding to certain of its United States patent applications. The patent positions of medical device companies, including those of the Company, are uncertain and involve complex and evolving legal and factual questions. The coverage sought in a patent application either can be denied or significantly reduced before or after the patent is issued. Consequently, there can be no assurance that any patent applications will result in the issuance of patents, or that the Company's issued or any future patents will provide significant protection or commercial advantage or will not be circumvented by others. Since patent applications are secret until patents are issued in the United States or corresponding applications are published in international countries, and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, the Company cannot be certain that it was the first to make the inventions covered by each of its pending patent applications or that it was the first to file patent applications for such inventions. There can be no assurance that patents held by or licensed to the Company or any patents that may be issued as a result of the Company's pending or future patent applications will be of commercial benefit, afford the Company adequate protection from competing products or technologies or will not be challenged by competitors or others or declared invalid. Also, there can be no assurance that the Company will have the financial resources to defend its patents from infringement or claims of invalidity. In 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 countersued 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 not infringed and also claiming that these counterdefendants 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 is presently set for trial in September 1999. The Company believes that the case is without merit and intends to defend itself and its intellectual property rights vigorously. Based on currently available information, the Company believes that the resolution of this matter will not have a material adverse effect on the business, financial condition or results of operations of the Company. However, there can be no assurance that this matter will not be determined adversely to the Company and any adverse determination could have such a material adverse effect on the Company's business, financial condition 12 and results of operations. For information regarding this lawsuit, see "Legal Proceedings." In the event a third party has filed a patent application relating to an invention claimed in a Company patent application, the Company may be required to participate in an interference proceeding declared by the USPTO to determine priority of invention, which could result in substantial uncertainties and costs to the Company, even if the eventual outcome is favorable to the Company. There can be no assurance that any patents issued to the Company would be held valid by a court of competent jurisdiction. The Company relies upon trade secret protection for certain unpatented aspects of other proprietary technology. There is no assurance that others will not independently develop or otherwise acquire substantially equivalent proprietary information or techniques, others will not otherwise gain access to the Company's proprietary technology or disclose such technology, or the Company can meaningfully protect its trade secrets. The Company typically requires its employees and consultants to execute appropriate confidentiality and proprietary information agreements upon the commencement of an employment or a consulting relationship with the Company. These agreements generally provide that all confidential information developed or made known to the individual by the Company during the course of the individual's relationship with the Company is to be kept confidential and not disclosed to third parties, except in specific circumstances. The agreements generally provide that all inventions conceived by the individual in the course of rendering services to the Company shall be the exclusive property of the Company; however, certain of the Company's agreements with consultants, who typically are employed on a full-time basis by academic institutions or hospitals, do not contain assignment of invention provisions. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for the Company in the event of unauthorized use, transfer or disclosure of such information or inventions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors Affecting Future Operating Results--Reliance on Patents and Protection of Proprietary Technology." GOVERNMENT REGULATION UNITED STATES REGULATION The Company's products are regulated in the United States as "medical devices" by the FDA under the Federal Food, Drug, and Cosmetic Act ("FDC Act") and require premarket clearance or approval by the FDA prior to commercialization. In addition, certain material changes or modifications to medical devices also are subject to FDA review and clearance or approval. Pursuant to the FDC Act, the FDA regulates the research, testing, manufacture, safety, labeling, storage, record keeping, advertising, distribution and production of medical devices in the United States. Noncompliance with applicable requirements can result in warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, and criminal prosecution. Medical devices are classified into one of three classes, Class I, II or III, on the basis of the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices are subject to general controls (e.g., labeling, premarket notification and adherence to GMPs). Class II devices are subject to general controls and to special controls (e.g., performance standards, postmarket surveillance, patient registries and FDA guidelines). Generally, Class III devices are those which must receive premarket approval by the FDA to ensure their safety and effectiveness (e.g., life-sustaining, life-supporting and implantable devices, or new devices which have not been found substantially equivalent to legally marketed devices), and require clinical testing to ensure safety and effectiveness and FDA approval prior to marketing and distribution. The FDA also has the authority to require clinical testing of Class I and Class II devices. A PMA application must be filed if the proposed device is not substantially equivalent to a legally marketed predicate device or if it is a preamendment Class III device (i.e. one that has been in commercial distribution since before May 28, 1976) for which the FDA has called for such applications. If human clinical trials of a device are required and if the device presents a "significant risk," the 13 manufacturer or the distributor of the device is required to file an investigational device exemption ("IDE") application prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and, possibly, mechanical testing. If the IDE application is approved by the FDA, human clinical trials may begin at a specific number of investigational sites with a maximum number of patients, as approved by the agency. Sponsors of clinical trials are permitted to sell those devices distributed in the course of the study provided such costs do not exceed recovery of the costs of manufacture, research, development and handling. The clinical trials must be conducted under the auspices of an independent institutional review board ("IRB") established pursuant to FDA regulations. Generally, before a new device can be introduced into the market in the United States, the manufacturer or distributor must obtain FDA clearance of a 510(k) notification or approval of a PMA application. If a medical device manufacturer or distributor can establish that a device is "substantially equivalent" to a "predicate device" which is a legally marketed Class I or Class II device or to a preamendment Class III device for which the FDA has not called for PMAs, the manufacturer or distributor may seek clearance from the FDA to market the device by submitting a 510(k) notification. The 510(k) notification may need to be supported by appropriate data, including clinical data, establishing the claim of substantial equivalence to the satisfaction of the FDA. The FDA recently has been requiring a more rigorous demonstration of substantial equivalence. Following submission of the 510(k) notification, the manufacturer or distributor may not place the device into commercial distribution until an order is issued by the FDA. No law or regulation specifies the time limit by which the FDA must respond to a 510(k) notification. At this time, the Company believes that the FDA typically responds to the submission of a 510(k) notification within 90 to 120 days, although it can take longer. An FDA order may declare that the device is substantially equivalent to another legally marketed device and allow the proposed device to be marketed in the United States. The FDA, however, may determine that the proposed device is not substantially equivalent or require further information, including clinical data, to make a determination regarding substantial equivalence. Such determination or request for additional information could delay market introduction of the products that are the subject of the 510(k) notification. If a manufacturer or distributor of medical devices cannot establish that a proposed device is substantially equivalent to a predicate device, the manufacturer or distributor must seek premarket approval of the proposed device through submission of a PMA application. A PMA application must be supported by extensive data, including preclinical and clinical trial data, as well as extensive literature to prove the safety and effectiveness of the device. Following receipt of a PMA application, if the FDA determines that the application is sufficiently complete to permit a substantive review, the FDA will "file" the application. Under the FDC Act, the FDA has 180 days to review a PMA application, although the review of such an application more often occurs over a protracted time period, and generally takes more than one year or more from the date of filing to complete. The PMA application approval process can be expensive, uncertain and lengthy. A number of devices for which premarket approval has been sought have never been approved for marketing. The review time is often significantly extended by the FDA, which may require more information or clarification of information already provided in the submission. During the review period, an advisory committee likely will be convened to review and evaluate the application and provide recommendations to the FDA as to whether the device should be approved. In addition, the FDA will inspect the manufacturing facility to ensure compliance with the FDA's GMP requirements prior to approval of an application. If granted, the approval of the PMA application may include significant limitations on the indicated uses for which a product may be marketed. In April 1997, the Company received PMA approval for commercial sale in the United States of its Prostar 9F and 11F products. In November 1997, the Company received PMA supplement approval for commercial sale in the United States of its Techstar 6F and Techstar XL 6F products. In January 1998 the Company received PMA supplement approval for the Prostar Plus 8F and 10F and Prostar XL 8F products 14 for commercial sale in the United States. There can be no assurance that the Company will be able to obtain further PMA application or PMA supplement approvals to market its products, or any other products, on a timely basis, if at all, and delays in receipt or failure to receive such approvals, the loss of previously received approvals, or failure to comply with existing or future regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is also required to register as a medical device manufacturer with the FDA and state agencies, such as the CDHS, and to list its products with the FDA. The Company has been inspected by both the FDA, the CDHS and international regulatory authorities for compliance with the FDA's QS Reg. and other applicable regulations that require the Company to manufacture its products according to elaborate testing, control activities documentation and other quality assurance procedures. Further, the Company is required to comply with various FDA requirements for design, safety, advertising and labeling. In March 1999, the Company moved to a new manufacturing and headquarters facility in Redwood City, California and has received all federal, state and international certifications and authorizations to manufacture products from this facility. The Company is required to provide information to the FDA on death or serious injuries alleged to have been associated with the use of its medical devices, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur. In addition, the FDA prohibits an approved device from being marketed for unapproved applications. If the FDA believes that a company is not in compliance with the law, it can institute proceedings to detain or seize products, issue a recall, enjoin future violations and assess civil and criminal penalties against the company, its officers and its employees. Failure to comply with the regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. The advertising of most FDA-regulated products is subject to both FDA and Federal Trade Commission jurisdiction. The Company also is subject to regulation by the Occupational Safety and Health Administration and by other governmental entities. Regulations regarding the manufacture and sale of the Company's products are subject change. The Company cannot predict what impact, if any, such changes might have on its business, financial condition or results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors Affecting Future Operating Results--Government Regulation." INTERNATIONAL REGULATION International sales of the Company's products are subject to the regulatory agency product registration requirements of each country. The regulatory review process varies from country to country. The Company's distributors have obtained regulatory approval in several international markets. At this time, Prostar and Techstar products are being marketed in Germany, France, Japan and other major countries under regulatory approvals where required. Commercial sales of medical devices, including the Company's PVS products, in member countries of the European Union require the manufacturer to obtain the right to affix the CE mark, an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. In July 1996, the Company received CE mark certification for its Techstar and Prostar PVS products. In connection with CE mark certification, the Company received ISO 9001 qualification of its manufacturing and quality assurance processes. Certification under the ISO 9000 series of standards is one of the CE mark certification requirements. 15 The Company, through its Japanese distributor, has received regulatory approval for commercial sale of its products in Japan and has completed 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 such approvals will be obtained in a timely manner or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors Affecting Future Operating Results--Government Regulation." THIRD-PARTY REIMBURSEMENT In the United States, health care providers, such as hospitals and physicians that purchase medical devices such as the Company's products, generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or part of the cost of therapeutic and diagnostic catheterization procedures. Reimbursement for catheterization procedures performed using devices that have received FDA approval has generally been available in the United States. The Company anticipates that in a prospective payment system, such as the DRG system utilized by Medicare, and in many managed care systems used by private health care payors, the cost of the Company's products will be incorporated into the overall cost of the procedure and that there will be no separate, additional reimbursement for the Company's products. The Company anticipates that hospital administrators and physicians will justify the additional cost of an arterial access site closure device by the attendant cost savings and clinical benefits derived from the use of the Company's products. Separate reimbursement for the Company's products is not expected to be available in the United States and there can be no assurance that reimbursement for the Company's products will be available in international markets under either governmental or private reimbursement systems. Furthermore, the Company could be adversely affected by changes in reimbursement policies of governmental or private health care payors, particularly to the extent any such changes affect reimbursement for therapeutic or diagnostic catheterization procedures in which the Company's products are used. Failure by physicians, hospitals and other users of the Company's products to obtain sufficient reimbursement from health care payors for procedures in which the Company's products are used or adverse changes in governmental and private third-party payors' policies toward reimbursement for such procedures could 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. However, in general, hospitals using the Company's products do not receive specific, cost-based, direct reimbursement for the use of Perclose PVS products. Reimbursement and health care payment systems in international markets vary significantly by country. The main types of health care payment systems in international markets are government sponsored health care and private insurance. Although not as prevalent as in the United States, health maintenance organizations are emerging in certain European countries. In Japan, the Company has completed a clinical study to support governmental reimbursement approvals. The application for reimbursement has been submitted to the Japanese government, however, the Company may not receive reimbursement approvals in Japan in a timely manner, or at all. The Company may seek additional international reimbursement approvals, although there can be no assurance that any such approvals will be obtained in a timely manner, or at all, and failure to receive additional international reimbursement approvals could have an adverse effect on market acceptance of the Company's products in the international markets in which such approvals are sought. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Factors Affecting Future Operating Results--Uncertainty of Third Party Reimbursement." 16 PRODUCT LIABILITY AND INSURANCE The Company's business involves the risk of product liability claims. Although the Company maintains product liability insurance, there can be no assurance that product liability claims will not exceed such insurance coverage limits, which could have a material adverse effect on the Company, or that such insurance will be available on commercially reasonable terms or at all. EMPLOYEES As of March 26, 1999, the Company had 274 full-time employees. Approximately 30 persons were engaged in research and development activities, 120 persons were engaged in manufacturing and manufacturing engineering, 28 persons were engaged in quality assurance and regulatory affairs, 76 persons were engaged in sales and marketing and 20 persons were engaged in general and administrative functions. No employees are covered by collective bargaining agreements, and the Company believes it maintains good relations with its employees. The Company is dependent upon a number of key management and technical personnel, and the loss of services of one or more key employees could have a material adverse effect on the Company. ITEM 2. PROPERTIES The Company leases an approximately 80,000 square foot, two-building facility in Redwood City, California. This facility includes an environmentally controlled, Class 10,000 clean room for device assembly together with warehouse, laboratory and office space. The lease will expire in 2008. Additionally, several leases for approximately 31,000 square feet of space are in effect through September 1999 relating to the Company's prior facilities in Menlo Park, California. ITEM 3. 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 conterdefendants 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 is presently set for trial in September 1999. Management believes the patent infringement complaint is without merit and intends to defend itself and its intellectual property rights vigorously. Based on currently available information, the Company believes that the resolution of this matter will not have a material adverse effect on the business, financial condition or results of operations of the Company. However, there can be no assurance that this matter will not be determined adversely to the Company and any adverse determination could have such a material adverse effect on the Company's business, financial condition and results of operations. See --"Factors Affecting Future Operations Results--Reliance on Patents and Protection of Proprietory Technology." 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq Stock Market under the symbol PERC. The number of record holders of the Company's Common Stock at May 24, 1999 was approximately 198. The approximate number of beneficial owners at May 24, 1999 was 4,062. The Company has not paid any dividends since its inception and does not intend to pay any dividends in the foreseeable future. The following table sets forth, for each quarterly period indicated, the high and low sales price for the Common Stock as reported by the Nasdaq Stock Market.
HIGH LOW ---- --- FISCAL YEAR ENDED MARCH 1997 Quarter Ended June 1996........................... $ 24 3/4 $ 20 1/2 Quarter Ended September 1996...................... 23 1/4 13 Quarter Ended December 1996....................... 24 1/4 16 Quarter Ended March 1997.......................... 27 1/2 19 FISCAL YEAR ENDED MARCH 1998 Quarter Ended June 1997........................... 27 1/4 20 Quarter Ended September 1997...................... 27 3/8 21 Quarter Ended December 1997....................... 27 1/2 18 Quarter Ended March 1998.......................... 32 3/8 17 3/4 FISCAL YEAR ENDED MARCH 1999 Quarter Ended June 1998........................... 31 15/16 22 21/32 Quarter Ended September 1998...................... 30 1/4 9 3/8 Quarter Ended December 1998....................... 38 1/16 13 3/8 Quarter Ended March 1999.......................... 50 31 3/8
18 ITEM 6. SELECTED FINANCIAL DATA PERCLOSE, INC. SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except per share data)
YEARS ENDED MARCH 31, --------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- STATEMENTS OF OPERATIONS DATA: Net revenues................................ $ 178 $ 2,457 $ 4,456 $ 10,631 $43,340 Gross profit (loss)......................... (1,971) (2,315) (247) 2,848 29,361 Income (loss) from operations............... (7,192) (8,860) (11,293) (15,131) 4,251 Net income (loss)........................... $ (6,993) $(8,084) $ (9,658) $(13,796) $ 5,544 Basic earnings (loss) per common share...... $(5.13) (1) $ (1.76) $ (1.02) $ (1.38) $ 0.51 Diluted earnings (loss) per common share.... $(5.13) (1) $ (1.76) $ (1.02) $ (1.38) $ 0.47 Shares used in computing basic earnings (loss) per share.......................... 1,362 4,584 9,471 9,967 10,829 Shares used in computing diluted earnings (loss) per share................. 1,362 4,584 9,471 9,967 11,725 MARCH 31, --------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments............................... $8,127 $37,857 $27,672 $31,581 $30,197 Total assets................................ 10,949 40,916 32,514 40,451 49,590 Current liabilities......................... 1,315 1,905 2,903 3,509 4,675 Long-term obligations....................... 593 511 228 -- -- Total stockholders' equity.................. $9,041 $38,500 $29,383 $36,942 $44,915
(1) Pro forma net loss per share for 1995 was $(1.56) computed assuming the conversion of preferred stock outstanding. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Perclose, Inc. (the "Company") 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 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 19 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. 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. Fiscal years 1999, 1998 and 1997 ended on March 26, 1999, March 27, 1998 and March 28, 1997, respectively. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements that involve risks and uncertainties. Discussions containing forward-looking statements may be found in the preceding material as well as in the material set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations". We use words such as believes, intends, expects, anticipates, plans and similar expressions to identify forward-looking statements. You should not place undo reliance on these forward-looking statements. Our actual results can differ materially from those anticipated in the forward-looking statements for many reasons including the risks described under the "Factors Affecting Operating Results" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations". RESULTS OF OPERATIONS FISCAL YEARS 1999 AND 1998 REVENUES. Net revenues for fiscal year 1999 increased 308% to $43.3 million from $10.6 million for fiscal year 1998. The increase in revenues was primarily due to significant increased penetration of the domestic market following receipt of FDA pre-market approval of the Company's Prostar and Techstar families of products during fiscal 1998. Introductions of new generations of these products also contributed to the sales increase. New account growth was the primary factor, however, higher sales volume among previously established domestic accounts also played an important role. Domestic revenues for fiscal year 1999 increased 331% to $38.9 million from $9.0 million for fiscal year 1998. Domestic sales as a percentage of total net revenue for fiscal year 1999 increased to 90% from 85% for fiscal year 1998. International sales as a percentage of total net revenue for fiscal year 1999 decreased to 10% from 15% for fiscal year 1998. Prices remained relatively stable throughout the year in both international and domestic markets. Combined shipments of Prostar and Techstar units increased to approximately 190,000 units for fiscal year 1999 from 54,000 units for fiscal year 1998. Sales of Prostar and Techstar products accounted for 33% and 67%, respectively, of net revenues for fiscal year 1999; and 46% and 54%, respectively, of net revenues for fiscal year 1998. GROSS PROFIT. Cost of goods sold for fiscal year 1999 increased 80% to $14.0 million from $7.8 million for fiscal year 1998. Gross profit as a percentage of net revenue for fiscal year 1999 increased to 68% from 27% for fiscal year 1998. The increase was primarily the result of a decrease in the unit cost of product shipped from approximately $144 per unit in fiscal year 1998 to approximately $72 per unit in fiscal year 1999. Fiscal year 1998 was a transitional year for the Company as new products were transferred from research and development to manufacturing. Cost of goods included material, labor and overhead costs to set up new production lines and train manufacturing employees. During fiscal year 1999, the manufacturing process experienced less transition in its production activity and had higher volumes to absorb manufacturing overhead. The volume of units produced increased to 206,000 for fiscal year 1999 from 76,000 in fiscal year 1998, an increase of 171%. These increased volumes, together with improvements in manufacturing process efficiencies, were responsible for the reduction in per unit costs. RESEARCH AND DEVELOPMENT. Research and development expenses increased 46% to $8.0 million for fiscal year 1999 from $5.4 million for fiscal year 1998. The increase in research and development costs was attributable to a 57% increase in headcount resulting in higher payroll expense. In addition, materials and services associated with prototype builds increased significantly due to an accelerated development schedule for the Company's next generation of PVS product, known as the Closer. The 20 Company recently completed a clinical trial for this product and has submitted a PMA supplement application to the FDA to obtain approval to market this product for certain indications in the United States. FDA approval of a PMA supplement will be required for U.S. commercial sales of this product. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased 37% to $17.2 million for fiscal year 1999 from $12.5 million for fiscal year 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-related expenses and increased spending on promotional support and training materials to assist the sales force in acquiring and training new accounts. Total selling, general and administrative expenses are expected to increase significantly during fiscal 2000 as a result of further increases in field training personnel and from anticipated increases in legal costs associated with the Company's defense of a patent infringement suit. INTEREST INCOME AND EXPENSE. Interest income increased 13% to $1.7 million for fiscal year 1999 from $1.5 million for fiscal year 1998. The increase was attributable to a higher average balance of cash and short-term investments in fiscal year 1999 as compared to the prior year. Interest expense decreased 91% to $17,000 for fiscal year 1999 from $186,000 for fiscal year 1998. The decrease was primarily attributable to the expiration of most of the Company's equipment leases during fiscal year 1999. FISCAL YEARS 1998 AND 1997 REVENUES. Net revenues for fiscal year 1998 increased 139% to $10.6 million from $4.5 million in fiscal year 1997. Domestic sales comprised 85% of net revenue for fiscal year 1998. There were no domestic sales in fiscal year 1997. International sales for fiscal year 1998 decreased 64% from fiscal year ended 1997 primarily as a result of an increased emphasis by the Company on the commercial launch of the Company's PVS products in the United States. This involved a diversion of several international sales employees to the United States sales efforts, a reorganization and termination of sales personnel in Europe and changes in international sales management. The above factors resulted in lower sales volume in Europe. COST OF GOODS SOLD. Cost of goods sold for fiscal year 1998 increased 65% to $7.8 million for fiscal year 1998 from $4.7 million for fiscal year 1997. Gross profit increased to $2.8 million for fiscal year 1998 from a negative gross profit of $200,000 for fiscal year 1997. Gross profit increased to 27% of net revenues for fiscal year 1998 from a negative gross profit for fiscal year 1997. The increase in gross profit resulted primarily from higher average selling prices from direct sales to U.S. customers in fiscal year 1998. All sales in fiscal year 1997 were to international distributors at lower prices than direct customer prices in the U.S. In addition, the increase in sales and production volumes 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 15% to $5.4 million for fiscal year 1998 from $4.7 million for fiscal year 1997. The increase in research and development costs resulted primarily from a higher allocation of expenses related to engineers shared by the manufacturing and research departments. This increase was partially offset by a decrease in clinical trial expense, which was $1.3 million for fiscal year 1997 and $64,000 for fiscal year 1998. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased 99% to $12.5 million for fiscal year 1998 from $6.3 million for fiscal year 1997. The increase was primarily due to the hiring of a sales force in the United States just prior to the start of fiscal year 1998. INTEREST INCOME AND EXPENSE. Interest income decreased 16% to $1.5 million for fiscal year 1998 from $1.7 million for fiscal year 1997 primarily due to the lower average cash and short-term investments balances in fiscal year 1998. The proceeds of the Company's common stock offering, which closed in November 1997, provided the Company with a higher level of interest income for the remaining 21 four months of fiscal year 1998. Interest expense increased 56% to $186,000 for fiscal year 1998 from $118,000 for fiscal year 1997 primarily as the result of higher interest payments on equipment leases during fiscal 1998. INCOME TAXES The income tax provision for fiscal year 1999 of $292,000 is attributable to current income taxes and consists principally of state and federal minimum taxes. No income tax provision was recorded for fiscal years 1998 and 1997 as the Company did not have taxable income. No income tax benefit has been recorded for the net operating losses or other deferred tax assets in fiscal years 1999, 1998 and 1997. As of fiscal year end 1999, the Company had net operating loss carryforwards for federal and state tax purposes of approximately $31.0 million and $7.0 million, respectively, which will expire from 1999 through 2012 if not utilized. At March 31, 1999, the Company also had research and development tax credit carryforwards of approximately $400,000 and $350,000, respectively, for federal and state tax purposes expiring from 2007 through 2014 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. The following table sets forth unaudited selected consolidated quarterly statement of operations data. The financial statements from which these data have been derived were prepared on substantially the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, that are considered necessary for a fair presentation of the Company's results of operations for each quarter. The quarterly statement of operations data include the same adjustments that are reflected in the financial statements included in this Report on Form 10-K. Results of operations for any quarter are not necessarily indicative of the results of operations to be expected in any future period. PERCLOSE, INC. UNAUDITED SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
QUARTERS ENDED: QUARTERS ENDED: -------------------------------------------------- ----------------------------------------- JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, 1998 1998 1998 1999 1998 1998 1998 1999 ---- ---- ---- ---- ---- ---- ---- ---- (In thousands, except per share data) (As a percentage of net revenues) STATEMENTS OF OPERATIONS DATA: Net revenues ......................... $ 8,364 $ 9,123 $ 11,564 $ 14,289 100% 100% 100% 100% Gross profit ......................... 5,174 5,853 8,230 10,104 62% 64% 71% 71% Research and development ............. 1,629 1,883 2,125 2,320 19% 21% 18% 16% Selling, general and administrative .. 3,633 3,629 4,684 5,207 43% 40% 41% 36% Income (loss) from operations ........ (88) 341 1,421 2,577 (1)% 4% 12% 18% Net income ........................... $ 283 $ 755 $ 1,691 $ 2,815 3% 8% 15% 20% Basic earnings per common share ....... $ 0.03 $ 0.07 $ 0.16 $ 0.26 Diluted earnings per common share .............................. $ 0.02 $ 0.07 $ 0.14 $ 0.23 Shares used in computing basic earnings per share ................. 10,752 10,817 10,810 10,938 Shares used in computing diluted earnings per share ................. 11,425 11,271 11,761 12,221
22 LIQUIDITY AND CAPITAL RESOURCES The Company's net cash provided by operating activities was $3.8 million for fiscal year 1999 compared to net cash used in operating activities of $15.0 million and $8.5 million for fiscal years 1998 and 1997, respectively. The Company became profitable during fiscal year 1999 which resulted in net income of $5.5 million compared to losses during fiscal years 1998 and 1997 of $13.8 million and $9.7 million, respectively. This current year profitability was the primary factor resulting in the generation of cash provided by operating activities for fiscal year 1999. The Company's net cash used by investing activities was $11.6 million in fiscal year 1999 compared to net cash provided by investing activities of $5.3 million and $1.9 million in fiscal years 1998 and 1997, respectively. In fiscal year 1999, net purchases of short-term investments were $4.5 million compared to net proceeds from short-term investments of $6.7 million in fiscal year 1998 and $3.1 million in fiscal year 1997. In fiscal 1999, the Company generated cash from its operating activities and therefore was able to reinvest the cash from maturing securities. Additions to property, plant and equipment totaled $4.6 million for fiscal year 1999 of which $2.4 million related to building improvements for the Company's new facility. The balance of the cash spent on capital equipment was used primarily to purchase machinery required to support the increased manufacturing and prototyping volume of the Company. Capital equipment purchases were $1.7 million and $1.3 million for fiscal years 1998 and 1997, respectively. Other assets increased by $2.4 million for fiscal year 1999 primarily as a result of a $518,000 security deposit and a $1.0 million certificate of deposit for the establishment of a $1.0 million letter of credit made in connection with the Company's new facility lease which was entered into in June 1998. The new lease has a ten year term. 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 required for a minimum of eighteen months; upon the Company's achievement of certain financial criteria, the letter of credit and related certificate of deposit will be released. The facility lease agreement also requires the security deposit of $518,000 to be held by the lessor for the term of the lease. In March 1999, the Company subleased to a third party approximately 13,000 square feet of space in its new facility. The term of the lease is for one year and includes a renewal option. Net cash provided by financing activities was $1.9 million in fiscal year 1999 compared to $20.3 million in fiscal year 1998 and net cash used of $538,000 in fiscal year 1997. During fiscal year 1999, proceeds of $2.7 million resulting from the issuance of common stock were partially offset by the Company's stock repurchase of 56,800 shares of its common stock at a cost of $857,000. Net cash generated by financing activities during fiscal year 1998 was primarily attributable to net proceeds of $19.4 million from a common stock offering and $1.5 million from other issuances of common stock. The Company's principal source of liquidity as of fiscal year ended March 1999 consisted of cash, cash equivalents and short-term investments of $30.2 million. The Company believes that its cash resources at fiscal year ended March 1999 in addition to the cash the Company expects to generate from operations, should be sufficient to meet the Company's capital needs for the foreseeable future. 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. 23 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 and utilities, as well as 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 is in the process of replacing most of its hardware, specifically system servers and desktop work stations. The new equipment will facilitate Year 2000 readiness, however, the equipment is being acquired for the purpose of replacing older computers. These expenditures would have been required even if the Year 2000 issue were not a concern. All hardware and software are currently being internally tested by the Company's internal computer staff. Final testing is expected to be completed by July 1999. The Company is relying on the certification of its suppliers and internal confirmatory testing 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. As of fiscal year ended March 1999, the Company had not incurred any expenses outside of ordinary operating expenses in connection with its Year 2000 assessment and compliance plan. 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 year ended March 1999 all but one of these 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 the one supplier who has not yet responded, if there is any question as to a supplier's ability to provide product after December 31, 1999, then 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 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company is exposed to financial market risks, including changes in interest rates and foreign currency fluctuations. INTEREST RATE RISK. The Company's cash equivalents and short-term investments are subject to market risk, primarily interest-rate and credit risk. The Company's investments are managed by outside professional managers within investment guidelines set by the Company. Such guidelines include security 24 type, credit quality and maturity and are intended to limit market risk by restricting the Company's investments to high quality debt instruments with relatively short-term maturities. Based upon the weighted average duration of the Company's investments at fiscal year end 1999, a 1% (100 basis points) increase in short-term interest rates would result in a decrease in market value of the Company's investments totaling approximately $180,000. However, because the Company's debt securities are carried as available for sale, no gains or losses are recognized by the Company due to changes in interest rates unless such securities are sold prior to maturity. The Company generally holds securities until maturity and carries the securities at amortized cost, which approximates fair market value. FOREIGN CURRENCY RISK. International revenues from the Company's foreign distributors comprised 10% of total revenues for the fiscal year 1999. With the exception of the German and French distributors, sales are denominated in U.S. dollars. Combined French and German sales for fiscal year 1999 comprised 7% of the Company's net revenue. The Company experienced an immaterial amount of transaction gains and losses through fiscal year 1999. The Company is also exposed to foreign exchange rate fluctuations as the financial results of its German subsidiary are translated into U.S. dollars in consolidation. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall expected profitability. The net effect of foreign exchange rate fluctuations on the Company during fiscal year 1999 was not material. 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 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 25 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 has an accumulated deficit of approximately $36.2 million as of fiscal year end 1999. Although the Company recorded net income for each of the four quarters 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. 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. 26 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 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. 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. 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 not infringed and also claiming counter-defendants 27 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 is presently set for trial in September 1999. 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 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 28 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Report of Independent Auditors and the Consolidated Financial Statements and Notes to the Consolidated Financial Statements of Perclose, Inc. that are filed as part of this Report are listed under Item 14, "Exhibits, Financial Statement Schedules, and Reports on Form 8-K" and are set forth on pages F-1 through F-19 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the directors and executive officers of the Company:
NAME AGE PRINCIPAL OCCUPATION DIRECTOR - ---- --- -------------------- SINCE ----- John B. Simpson, Ph.D., M.D. 55 Chairman, Perclose, Inc. 1992 Professor, Stanford University Henry A. Plain, Jr............... 41 President and Chief Executive Officer, Perclose, Inc. 1993 Coy F. Blevins................... 51 Vice President of U.S. Sales -- Randolph E. Campbell............. 42 Vice President of Operations -- Kenneth E. Ludlum................ 46 Vice President of Finance and Administration -- Chief Financial Officer John G. McCutcheon............... 38 Vice President of Marketing and International Sales -- Ronald W. Songer................. 42 Vice President of Product Development -- Vaughn D. Bryson................. 61 President, Life Science Advisors, LLC 1995 Michael L. Eagle................. 52 Vice President, Manufacturing, 1996 Eli Lilly and Company Serge Lashutka................... 52 Manager of Organizational Development, Unocal 1996 Corporation James W. Vetter, M.D............. 42 Staff Cardiologist, Sequoia Hospital Associate 1992 Professor, Stanford University Mark A. Wan...................... 34 General Partner, Three Arch Partners 1992
DR. SIMPSON co-founded Perclose in March 1992 and has served as Chairman of the Board since the Company's inception. Dr. Simpson is a professor of clinical medicine at Stanford University. He has served as a Staff Cardiologist at Sequoia Hospital in Redwood City, California since 1981. Dr. Simpson founded Advanced Cardiovascular Systems, Inc. ("ACS") in 1978 and Devices for Vascular Intervention, Inc. ("DVI") in 1984, each of which are currently divisions of Guidant Corporation. 29 Dr. Simpson is a director of several privately held companies. Dr. Simpson holds a B.S. in Agriculture for Ohio State University, a Ph.D. in Biomedical Sciences from the University of Texas at Houston and an M.D. from Duke University. MR. PLAIN joined Perclose in February 1993 as President and Chief Executive Officer and a member of the Company's board of directors. Prior to joining Perclose, Mr. Plain was with Eli Lilly and Company ("Lilly") for twelve years where he held various management positions in Lilly's pharmaceutical and medical device units in a variety of functional areas including marketing, sales, finance, human resources, manufacturing and international operations. Mr. Plain is a director of several private companies. MR. BLEVINS joined Perclose as Director of U.S. Sales in January 1994 and was promoted to Vice President, U.S. Sales in July 1996. From 1990 through 1993, Mr. Blevins was a Regional Sales Manager with DVI. Prior to 1990, Mr. Blevins held various sales and sales management positions at Baxter Healthcare, Inc. Mr. Blevins holds a B.S. in Accounting from Baylor University. MR. CAMPBELL joined Perclose in January 1994 as Vice President of Operations. From 1986 until joining the Company, Mr. Campbell held various management positions at DVI, serving most recently as Director of Manufacturing Engineering from 1992 to 1994 and previously as Director of Product Development from 1990 to 1992. Mr. Campbell holds a B.S. in Chemical Engineering from the University of California at Berkeley. MR. LUDLUM joined Perclose as Vice President of Finance and Administration and Chief Financial Officer in May 1996. From 1995 until joining Perclose, Mr. Ludlum was an independent business and financial consultant to health care and high growth companies. From 1993 to 1995, Mr. Ludlum was Vice President, Finance & Administration and Chief Financial Officer of RiboGene, Inc., a private biopharmaceutical company. From 1985 to 1991, Mr. Ludlum held various positions with Montgomery Securities in the health care finance group, most recently as Partner. Mr. Ludlum holds a B.S. in business from Lehigh University and an M.B.A. from Columbia Business School. MR. MCCUTCHEON joined Perclose in January 1994 as Director of Marketing. In July 1996, Mr. McCutcheon was promoted to Vice President, Marketing and in July 1997 was promoted to Vice President of Marketing and International Sales. From 1992 until joining the Company, Mr. McCutcheon was a Marketing Manager at DVI. From 1985 to 1992, Mr. McCutcheon held positions in sales and marketing with the Bentley Laboratories Division of Baxter Healthcare Corporation. Mr. McCutcheon holds a B.A. in Economics and in Psychology and an M.B.A., both from the University of California, Los Angeles. MR. SONGER joined Perclose in April 1993 as Vice President of Research and Development. From 1990 until joining Perclose, Mr. Songer was Director of Catheter Systems Research and Development for the Spectranetics Corporation, a manufacturer of laser atherectomy systems. Prior to joining Spectranetics, Mr. Songer was Manager of Research and Development for the movable wire systems unit of ACS. Mr. Songer holds a B.S. in Nuclear Engineering from the University of California at Santa Barbara and an M.S. in Mechanical Engineering from the University of California at Berkeley. MR. BRYSON has served as a Director of Perclose since January 1995. Mr. Bryson is currently President of Life Science Advisors, LLC. Mr. Bryson was a thirty-two year employee of Lilly and served as President and Chief Executive Officer of Lilly from 1991 to 1993. He was Executive Vice President from 1986 until 1991. He served as a member of Lilly's Board of Directors from 1984 until his retirement in 1993. Mr. Bryson was Vice Chairman of Vector Securities International from April 1994 to December 1996. Mr. Bryson is also a Director of Ariad Pharmaceuticals, Chiron Corporation, Fusion Medical Technologies and Quintiles Transnational Corporation. Mr. Bryson received a B.S. degree in Pharmacy from the University of North Carolina and completed the Sloan Program at Stanford University Graduate School of Business. 30 MR. EAGLE has served as a Director of Perclose since September 1996. He has held various management positions in Lilly's pharmaceutical and medical device units since 1983, and currently serves as Vice President, Manufacturing. From June 1993 until January 1994, he served as Vice President of Pharmaceutical Manufacturing for Lilly, and from January 1991 until June 1993, he served as Vice President of the vascular intervention component of the Medical Devices and Diagnostics Division of Lilly. From 1988 to 1991, Mr. Eagle was President and Chief Executive Officer of IVAC Corporation, a Lilly subsidiary. From 1983 to 1988, he held various positions with ACS, a former Lilly subsidiary, serving most recently as Senior Vice President of Manufacturing from 1985 to 1988. Mr. Eagle is also a Director of Cardiac Pathways, Inc. Mr. Eagle holds a B.S. in Mechanical Engineering from Kettering University and an M.S. in Industrial Administration from Purdue University. MR. LASHUTKA has served as a Director of Perclose since September 1996. He is currently a Manager of Organizational Development of Unocal Corporation, a major oil, gas and chemical company. From 1993 to 1996, Mr. Lashutka was Director, Organization Development and Senior Consultant of Pacific Health Systems, Inc., a managed health care organization. From 1979 to 1993, he to was Manager of the Organization Effectiveness Department at the Kaiser Permanente Medical Care Program, a major managed health care organization operating in California. Mr. Lashutka holds a B.A. from Ohio State University, an M.A. in Psychology from the United States International University and an M.B.A. from the University of California at Berkeley. DR. VETTER is a co-founder of the Company and has served as a director of the Company and as a consultant and medical advisor to the Company since its inception. Since 1989, Dr. Vetter has served as a Physician-Partner at Cardiovascular Medicine and Coronary Interventions, Inc. and as a Staff Cardiologist at Sequoia Hospital in Redwood City, California. Dr Vetter is an associate professor of clinical medicine at Stanford University. MR. WAN has served as a Director of Perclose since September 1992. He has been a General Partner of Three Arch Partners, a venture capital firm specializing in health care investments since October 1993. From 1987 to 1993, Mr. Wan held various positions at Brentwood Associates, a venture capital firm, most recently as a General Partner. Mr. Wan has been involved in the formation of several privately held venture capital-backed health care companies and serves as a director of several privately held companies. Mr. Wan holds a B.S. in Electrical Engineering, and a B.A. in Economics from Yale University and an M.B.A. from Stanford University. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") requires the Company's executive officers and directors and persons who own more than ten percent of a registered class of the Company's equity securities to file an initial report of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the Securities and Exchange Commission (the "SEC") and the National Associates of Securities Dealers, Inc. Executive officers, directors and greater than ten percent stockholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons, the Company believes that with respect to fiscal year 1999, all filing requirements applicable to its officers, directors and ten percent stockholders were complied with except that the Company failed to file on behalf of Mark A. Wan, a timely Form 4 with respect to one disposition transaction. 31 ITEM 11. EXECUTIVE COMPENSATION COMPENSATION TABLES SUMMARY COMPENSATION TABLE. The following table sets forth certain compensation paid by the Company to the Chief Executive Officer and the four other most highly compensated executive officers of the Company for services rendered during each of the fiscal years 1997, 1998 and 1999: SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ------------ SECURITIES UNDERLYING FISCAL ANNUAL COMPENSATION OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS (# OF SHARES COMPENSATION --------------------------- ---- ---------- ----- ------------ ------------ Henry A. Plain, Jr..................... 1999 $ 282,596 $ -- 101,000 $ 659 (1) President and Chief 1998 243,846 21,000 62 ,000 733 (1) Executive Officer 1997 215,000 19,250 9,000 770 (1) Coy F. Blevins......................... 1999 169,558 $ -- 55,891 6,950 (2) Vice President of Sales 1998 140,640 20,000 21,000 20,671 (3) 1997 107,246 11,000 24,500 51,412 (4) Kenneth E. Ludlum...................... 1999 176,615 $ -- 120,500 659 (1) Vice President of Finance and 1998 158,404 12,000 36,000 759 (1) Administration, 1997 127,154 11,000 84,500 1,260 (1) Chief Financial Officer John G. McCutcheon..................... 1999 169,558 $ -- 73,500 650 (1) Vice President of 1998 146,521 20,000 31,000 733 (1) International Sales and Marketing 1997 113,090 11,000 34,500 736 (1) Ronald W. Songer....................... 1999 158,500 $ -- 60,500 650 (1) Vice President of 1998 142,616 12,000 21,000 692 (1) Product Development 1997 125,577 11,000 24,500 770 (1) - ------------------------
(1) Consists of life insurance premiums paid by the Company. (2) Consists of automobile allowance totaling $6,300 and life insurance premiums totaling $650, all paid by the Company. (3) Consists of commissions totaling $15,092, automobile allowance totaling $4,846, and life insurance premiums totaling $733, all paid by the Company. (4) Consists of commissions totaling $43,600, automobile allowance totaling $6,300 and life insurance premiums totaling $1,512, all paid by the Company. 32 OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth information with respect to each grant of stock options made during the fiscal year ended March 26, 1999 to each executive officer named in the Summary Compensation Table above. All of the option grants set forth below were made in connection with the Company's September 1998 stock option repricing whereby the original options were canceled and replaced by the grant of new options. OPTION GRANTS IN FISCAL 1999
% OF TOTAL NUMBER OPTIONS POTENTIAL REALIZABLE OF SECURITIES GRANTED TO EXERCISE VALUE AT ASSUMED UNDERLYING EMPLOYEES OR BASE PRICE APPRECIATION OPTIONS IN FISCAL PRICE (1) EXPIRATION FOR OPTION TERM (2) NAME GRANTED (1)(3) YEAR ($/SH) DATE 5% ($) 10% ($) - ---- -------------- ---- ------ ---- ------ ------- Henry A. Plain, Jr............. 2,625 0.2 11.50 02/18/07 15,359 37,230 3,881 0.2 11.50 07/15/07 24,044 58,944 6,119 0.4 11.50 07/15/07 37,910 92,935 6,375 0.4 11.50 02/18/07 37,301 90,416 11,530 0.7 11.50 01/31/06 57,478 135,346 3,890 0.2 11.50 01/21/08 25,871 64,362 46,110 2.8 11.50 01/21/08 306,658 762,907 18,470 1.1 11.50 01/31/06 92,075 216,812 709 0.0 11.50 05/05/07 4,274 10,421 1,291 0.1 11.50 05/05/07 7,782 18,975 Coy F. Blevins................. 105 0.0 11.50 05/05/07 633 1,543 15,378 1.0 11.50 01/21/08 102,273 254,435 2,515 0.2 11.50 02/18/07 14,715 35,670 7,109 0.4 11.50 07/22/06 38,165 91,039 4,622 0.3 11.50 01/21/08 30,739 76,473 7,500 0.5 11.50 01/31/06 37,388 88,039 1,751 0.1 11.50 02/18/07 10,245 24,834 2,749 0.2 11.50 02/18/07 16,085 38,989 2,891 0.2 11.50 07/22/06 15,520 37,022 7,485 0.5 11.50 02/18/07 43,795 106,159 895 0.0 11.50 05/05/07 5,395 13,154 2,500 0.2 11.50 09/14/08 18,081 45,820 391 0.0 11.50 09/14/08 2,828 7,166 Kenneth E. Ludlum.............. 14,797 0.9 11.50 01/21/08 98,409 244,822 18,388 1.1 11.50 05/08/06 95,623 226,811 61,612 3.8 11.50 05/08/06 320,399 759,967 188 0.0 11.50 02/18/07 1,100 2,666 1,000 0.1 11.50 05/05/07 6,028 14,698 15,000 0.9 11.50 05/05/07 90,424 220,465 5,203 0.3 11.50 01/21/08 34,603 86,086 4,312 0.3 11.50 02/18/07 25,230 61,157
33 OPTION GRANTS IN FISCAL 1999-CONTINUED
% OF TOTAL NUMBER OPTIONS POTENTIAL REALIZABLE OF SECURITIES GRANTED TO EXERCISE VALUE AT ASSUMED UNDERLYING EMPLOYEES OR BASE PRICE APPRECIATION OPTIONS IN FISCAL PRICE (1) EXPIRATION FOR OPTION TERM (2) NAME GRANTED (1)(3) YEAR ($/SH) DATE 5% ($) 10% ($) - ---- -------------- ---- ------ ---- ------ ------- John G. McCutcheon ............ 15,818 1.0 11.50 02/18/07 92,552 224,345 4,182 0.3 11.50 02/18/07 24,469 59,313 7,300 0.4 11.50 01/31/06 36,391 85,692 2,084 0.1 11.50 10/06/07 13,323 32,870 7,916 0.5 11.50 10/06/07 50,606 124,856 895 0.0 11.50 05/05/07 5,395 13,154 6,410 0.4 11.50 07/22/06 34,412 82,087 105 0.0 11.50 05/05/07 633 1,543 3,022 0.2 11.50 02/18/07 17,682 42,861 3,590 0.2 11.50 07/22/06 19,273 45,974 200 0.0 11.50 01/31/06 997 2,348 1,699 0.1 11.50 01/21/08 11,299 28,111 18,301 1.1 11.50 01/21/08 121,712 302,797 1,478 0.1 11.50 02/18/07 8,648 20,962 500 0.0 16.94 09/22/08 5,326 13,497 Ronald W. Songer............... 16,219 1.0 11.50 02/18/07 94,899 230,032 15,852 1.0 11.50 01/21/08 105,425 262,277 4,148 0.3 11.50 01/21/08 27,587 68,630 893 0.0 11.50 05/05/07 5,383 13,125 11,972 0.7 11.50 01/31/06 59,682 140,534 3,028 0.2 11.50 01/31/06 15,095 35,544 3,781 0.2 11.50 02/18/07 22,123 53,626 2,145 0.1 11.50 02/18/07 12,551 30,422 107 0.0 11.50 05/05/07 645 1,573 2,355 0.1 11.50 02/18/07 13,779 33,401
(1) The exercise price and tax withholding obligations related to exercise may in some cases be paid by delivery of other shares or by offset of the shares subject to the options. (2) The dollar amounts under these columns are the result of calculations at the 5% and 10% rates set by the SEC and therefore are not intended to forecast possible future appreciation, if any, of the Company's stock price. The Company did not use an alternative formula for a grant date valuation, as the Company does not believe that any formula will determine with reasonable accuracy a present value based on future unknown or volatile factors. (3) Options generally become exercisable as to 25% of the option shares on the first anniversary of the vesting commencement date and thereafter ratably on a monthly basis, with full vesting occurring on the fourth anniversary of the vesting commencement date. 34 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES. The following table sets forth, for each of the executive officers named in the Summary Compensation Table above, information with respect to each exercise of stock options during the fiscal year ended March 26, 1999 and the value of unexercised options at March 26, 1999: AGGREGATED OPTION EXERCISES IN FISCAL 1999 AND YEAR-END VALUES
VALUE OF UNEXERCISED NUMBER OF SECURITIES IN-THE-MONEY SHARES UNDERLYING UNEXERCISED OPTIONS AT FISCAL ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR END YEAR-END (2) EXERCISE REALIZED (1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE --------------- ------------- ---------------------------- -------------------------- (#) ($) (#) ($) Henry A. Plain, Jr.... -- -- 45,393 / 55,607 1,344,768 / 1,647,357 Coy F. Blevins........ 21,700 312,578 26,124 / 27,676 810,471 / 819,902 Kenneth E. Ludlum..... -- -- 71,341 / 49,159 2,113,477 / 1,456,335 John G. McCutcheon ... 6,000 227,104 35,702 / 39,298 1,065,922 / 1,161,484 Ronald W. Songer -- -- 29,203 / 31,297 865,139 / 927,174
(1) Based on the last reported sale price of the Company's Common Stock on the date of exercise. (2) Based on a fair market value of $41.125, which was the last reported sale price of the Company's Stock on March 26, 1999. REPRICING OF STOCK OPTIONS. In September 1998, the Company offered employees, including executive officers, the option to exchange stock options to purchase 1,342,168 shares of common stock with exercise prices ranging from $13.75 to $30.25 per share and an aggregate exercise price of $28.6 million, for new options to purchase 1,342,168 shares with an exercise price of $11.50 per share and an aggregate exercise price of $15.4 million. All of the repriced options have vesting provisions consistent with the terms of the original option grant. In exchange for the offer to reprice stock options, employees and executive officers agreed to a moratorium on exercising repriced options until March 16, 1999. The following table sets forth, for the period commencing November 7, 1995 (the date of the Company's initial public offering) and ending March 26, 1999, certain information concerning the re-pricing of options held by the named executive officers and any person who was an executive officer of the Company at the time of such repricing: 35 OPTION REPRICINGS
LENGTH OF NUMBER OF EXERCISE ORIGINAL SECURITIES MARKET PRICE PRICE AT OPTION TERM UNDERLYING OF STOCK AT TIME OF REMAINING AT OPTIONS TIME OF REPRICING OR DATE OF DATE OF REPRICED REPRICING AMENDMENT REPRICING OR NAME REPRICING (#) ($) ($) AMENDMENT ------------------------ ------------ -------------- ------------- --------------- ---------------- Henry A. Plain, Jr..... 9/11/98 11,530 11.50 23.50 139 days 9/11/98 18,470 11.50 23.50 139 days 9/11/98 2,625 11.50 22.75 8 yrs. 157 days 9/11/98 6,375 11.50 22.75 8 yrs. 157 days 9/11/98 709 11.50 20.25 8 yrs. 233 days 9/11/98 1,291 11.50 20.25 8 yrs. 233 days 9/11/98 3,881 11.50 24.63 8 yrs. 304 days 9/11/98 6,119 11.50 24.63 8 yrs. 304 days 9/11/98 3,890 11.50 19.75 9 yrs. 129 days 9/11/98 46,110 11.50 19.75 9 yrs. 129 days Coy F. Blevins......... 9/11/98 7,500 11.50 23.50 7 yrs. 139 days 9/11/98 7,109 11.50 15.75 7 yrs. 311 days 9/11/98 2,891 11.50 15.75 7 yrs. 311 days 9/11/98 2,749 11.50 22.75 8 yrs. 157 days 9/11/98 1,751 11.50 22.75 8 yrs. 157 days 9/11/98 2,515 11.50 22.75 8 yrs. 157 days 9/11/98 7,785 11.50 22.75 8 yrs. 157 days 9/11/98 105 11.50 20.25 8 yrs. 233 days 9/11/98 895 11.50 20.25 8 yrs. 233 days 9/11/98 4,622 11.50 19.75 9 yrs. 129 days 9/11/98 15,378 11.50 19.75 9 yrs. 129 days Randolph E. Campbell... 9/11/98 11,842 11.50 23.50 7 yrs. 139 days 9/11/98 3,158 11.50 23.50 7 yrs. 139 days 9/11/98 2,336 11.50 22.75 8 yrs. 157 days 9/11/98 2,164 11.50 22.75 8 yrs. 157 days 9/11/98 356 11.50 20.25 8 yrs. 233 days 9/11/98 644 11.50 20.25 8 yrs. 233 days 9/11/98 8,195 11.50 19.75 9 yrs. 129 days 9/11/98 11,805 11.50 19.75 9 yrs. 129 days Kenneth E. Ludlum...... 9/11/98 18,388 11.50 21.75 7 yrs. 236 days 9/11/98 61,612 11.50 21.75 7 yrs. 236 days 9/11/98 188 11.50 22.75 8 yrs. 157 days 9/11/98 4,312 11.50 22.75 8 yrs. 157 days 9/11/98 1,000 11.50 20.25 8 yrs. 233 days
36 OPTION REPRICINGS-CONTINUED
LENGTH OF NUMBER OF EXERCISE ORIGINAL SECURITIES MARKET PRICE PRICE AT OPTION TERM UNDERLYING OF STOCK AT TIME OF REMAINING AT OPTIONS TIME OF REPRICING OR DATE OF DATE OF REPRICED REPRICING AMENDMENT REPRICING OR NAME REPRICING (#) ($) ($) AMENDMENT ------------------------ ------------ -------------- ------------ --------------- ---------------- Kenneth E. Ludlum continued.............. 9/11/98 15,000 11.50 20.25 8 yrs. 233 days 9/11/98 5,203 11.50 19.75 9 yrs. 129 days 9/11/98 14,797 11.50 19.75 9 yrs. 129 days John G. McCutcheon ...........9/11/98 7,300 11.50 23.50 7 yrs. 139 days 9/11/98 200 11.50 23.50 7 yrs. 139 days 9/11/98 6,410 11.50 15.75 7 yrs. 311 days 9/11/98 3,590 11.50 15.75 7 yrs. 311 days 9/11/98 1,478 11.50 22.75 8 yrs. 157 days 9/11/98 3,022 11.50 22.75 8 yrs. 157 days 9/11/98 4,182 11.50 22.75 8 yrs. 157 days 9/11/98 15,818 11.50 22.75 8 yrs. 157 days 9/11/98 105 11.50 20.25 8 yrs. 233 days 9/11/98 895 11.50 20.25 8 yrs. 233 days 9/11/98 2,084 11.50 22.63 9 yrs. 22 days 9/11/98 7,916 11.50 22.63 9 yrs. 22 days 9/11/98 1,699 11.50 19.75 9 yrs. 129 days 9/11/98 18,301 11.50 19.75 9 yrs. 129 days Ronald W. Songer .............9/11/98 11,972 11.50 23.50 7 yrs. 139 days 9/11/98 3,028 11.50 23.50 7 yrs. 139 days 9/11/98 2,355 11.50 22.75 8 yrs. 157 days 9/11/98 2,145 11.50 22.75 8 yrs. 157 days 9/11/98 3,781 11.50 22.75 8 yrs. 157 days 9/11/98 16,219 11.50 22.75 8 yrs. 157 days 9/11/98 107 11.50 20.25 8 yrs. 233 days 9/11/98 893 11.50 20.25 8 yrs. 233 days 9/11/98 4,148 11.50 19.75 9 yrs. 129 days 9/11/98 15,852 11.50 19.75 9 yrs. 129 days
37 EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS The Company has an employment agreement with Kenneth E. Ludlum, its Vice President, Finance and Administration and Chief Financial Officer. The agreement provides that in the event of a change in control of the Company, all of Mr. Ludlum's then unvested stock options will become fully vested and that, if Mr. Ludlum's employment were terminated voluntarily or involuntarily within twelve months following such change in control, he will be entitled to receive six months severance pay in the event of voluntary termination and twelve months severance pay in the event of involuntary termination. The agreement does not provide for any specified term of employment. No payments have been made to Mr. Ludlum under such agreement. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS During the year ended March 26, 1999, Messrs. Simpson, Bryson and Wan served as the Compensation Committee of the Company's board of directors. Dr. Simpson holds options to purchase up to 60,000 shares of Common Stock of the Company. Mr. Bryson holds options to purchase up to 63,155 shares of Common Stock of the Company. Mr. Wan holds options to purchase up to 21,875 shares of Common Stock of the Company. During fiscal year 1999, the Company entered into a consulting agreement with Life Science Advisors, LLC ("LSA"). Mr. Bryson also serves as the President of LSA. During fiscal year 1999, a total of 8,155 stock options were granted to Mr. Bryson in connection with the consulting agreement. For the fiscal year ended March 31, 1999, the Company has made no payments to either LSA or the Director in connection with the consulting agreement. No member of the Compensation Committee has a relationship that would constitute an interlocking relationship with executive officers or directors of another entity. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information known to the Company with respect to the beneficial ownership of the Common Stock of the Company as of April 30, 1999, by (i) each person who is known to the Company to beneficially own more than five percent of the outstanding shares of its Common Stock, (ii) each director of the Company, (iii) each officer named in the Summary Compensation Table and (iv) all directors and executive officers as a group. Unless otherwise indicated, the address of each executive officer and director is the address of the Company's principal executive offices. A total of 11,074,101 shares of the Company's Common Stock were issued and outstanding as of April 30, 1999. 38
SHARES APPROXIMATE BENEFICIALLY PERCENT NAME AND ADDRESS OWNED (1) OWNED (2) - ---------------- --------- --------- John B. Simpson, Ph.D., M.D. (3)........................................... 1,648,884 14.8% Putnam Investment Management, Inc. ........................................ 1,197,697 10.8% One Post Office Square Boston, MA 02109 TCW Asset Management....................................................... 759,993 6.9% One Post Office Square 865 South Figueroa Street Suite 1800 Los Angeles, CA 90017 Deerfield Management ...................................................... 600,000 5.4% One Post Office Square 450 Lexington Avenue Suite 1450 New York, NY 10017 Henry A. Plain, Jr. (4).................................................... 241,072 2.2% James W. Vetter (5)........................................................ 225,302 2.0% Vaughn D. Bryson (6)....................................................... 75,965 * 800 Pembroke Court Vero Beach, FL 32963 Serge Lashutka (7) ........................................................ 19,395 * Unocal Corporation 2141 Rosecrans Avenue, Suite 4000 El Segundo, CA 90245 Michael L. Eagle (8)....................................................... 17,395 * Eli Lilly and Company Lilly Corporate Center Indianapolis, IN 46285 Mark A. Wan (9)............................................................ 5,318 * Three Arch Partners 2800 Sand Hill Road, Suite 270 Menlo Park, CA 94025 Ronald W. Songer (10)...................................................... 97,901 * Coy F. Blevins (11)........................................................ 56,912 * John G. McCutcheon (12).................................................... 45,093 * Kenneth E. Ludlum (13)..................................................... 77,621 * All directors and executive officers as a group (Includes 12 persons) (14) 2,560,865 23.1% - --------------------------
* Less than 1%. (1) Except as indicated in the footnotes to this table, the persons or entities named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable. (2) Percent of the outstanding shares of Common Stock, treating as outstanding all shares issuable on exercise of options held by the particular beneficial owner that are included in the first column. 39 (3) Includes (i) 1,202,143 shares held by the Simpson Family Trust over which Dr. Simpson and his wife hold voting and dispositive control, (ii) 49,200 shares held by the John David Simpson Trust over which Dr. Simpson and his wife hold voting and dispositive control and (iii) 356,294 shares held by Fox Hollow, Ltd. Also includes 41,247 shares issuable upon exercise of stock options exercisable within 60 days after April 30, 1999. (4) Includes (i) 95,349 shares held by the Plain Family Trust over which Mr. Plain and his wife hold voting and dispositive control, (ii) 20,000 shares held by the Alexandra Marie Plain Trust, (iii) 20,000 shares held by the Henry Albert Plain III Trust. Also includes 48,580 shares issuable upon exercise of stock options exercisable within 60 days after April 30, 1999. (5) Includes 30,310 shares issuable upon exercise of stock options exercisable within 60 days after April 30, 1999. (6) Includes 30,000 shares held by the Vaughn D. Bryson Irrevocable Trust. Also includes of 45,965 shares issuable upon exercise of stock options exercisable within 60 days after April 30, 1999. (7) Includes 17,395 shares issuable upon exercise of stock options exercisable within 60 days after April 30, 1999. (8) Consists of 17,395 shares issuable upon exercise of stock options exercisable within 60 days after April 30, 1999. (9) Includes 4,685 shares issuable upon exercise of stock options exercisable within 60 days after April 30, 1999. (10) Includes 31,716 shares issuable upon exercise of stock options exercisable within 60 days after April 30, 1999. (11) Includes 28,212 shares issuable upon exercise of stock options exercisable within 60 days after April 30, 1999. (12) Includes 39,015 shares issuable upon exercise of stock options exercisable within 60 days after April 30, 1999. (13) Consists of 77,621 shares issuable upon exercise of stock options exercisable within 60 days after April 30, 1999. (14) Includes 402,783 shares issuable upon exercise of stock options exercisable within 60 days after April 30, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the fiscal year ended March 26, 1999, the Company made payments to the following members of its Board of Directors pursuant to consulting arrangements between the Company and such directors: John B. Simpson, Ph.D., M.D., $43,333.33 and James W. Vetter, M.D., $65,000.00. On August 31, 1998, the Company loaned to Ronald W. Songer, the Vice President of Product Development, the principal amount of $200,000, with interest to accrue at a rate of 5.57% per annum. The loan was subsequently paid in full in February 1999. In December 1998, the Company entered into a consulting agreement with Life Science Advisors, LLC ("LSA"). Vaughn D. Bryson, a member of the Company's Board of Directors, serves as President of LSA. A total of 8,155 stock options have been granted to Mr. Bryson in connection with the consulting agreement. During the fiscal year 1999, the Company made no payments to either LSA or Mr. Bryson in connection with the consulting agreement. 40 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Report of Ernst & Young LLP, Independent Auditors....................................................... F-1 Consolidated Balance Sheets, March 31, 1999 and 1998........... F-2 Consolidated Statements of Operations, Years Ended March 31, 1999, 1998 and 1997............................................ F-3 Consolidated Statements of Cash Flows, Years Ended March 31, 1999, 1998 and 1997.................................. F-4 Consolidated Statements of Stockholders' Equity, Years Ended March 31, 1999, 1998 and 1997.................................. F-5 Notes to Consolidated Financial Statements..................... F-6
2. FINANCIAL STATEMENT SCHEDULES Schedule II--Valuation and Qualifying Accounts is listed on page F-19 of this Annual Report on Form 10-K. All other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the notes thereto. 3. INDEX TO EXHIBITS See Index to Exhibits on page 42. (b) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the fourth quarter of the fiscal year ended March 1999. 41 INDEX TO EXHIBITS
INCORPORATING EXHIBIT REFERENCE NO. DESCRIPTION IF APPLICABLE - ------- ----------- ------------- 3.1 Restated Certificate of Incorporation. [A] 3.2 Bylaws of the Registrant, as amended. 3.3 Certificate of Designations of Rights, Preferences and Privileges of Series A Participating [B] Preferred Stock. 3.4 Preferred Shares Rights Agreement, dated as of January 27, 1997. [B] 4.1 Specimen Common Stock Certificate. [A] 10.1 Form of Indemnification Agreement between the Company and each of its directors and officers. [A] 10.2 1992 Stock Plan and form of Stock Option Agreement thereunder. [A] 10.3 1995 Director Option Plan. [A] 10.4 1995 Employee Stock Purchase Plan and forms of agreements thereunder. [A] 10.9 Shareholder Rights Agreement dated August 23, 1995 between the Registrant and certain holders [A] of the Registrant's securities. 10.10 Employment Agreement dated May 8, 1996 between the Registrant and Kenneth E. Ludlum. [C] 10.11 Agreement dated March 30, 1993 between the Registrant and LocalMed, Inc. [A] 10.12 Promissory Note between the Registrant and John G. McCutcheon dated January 31, 1997. [C] 10.13 Promissory Note between the Registrant and Kenneth E. Ludlum and Judy M. Wong dated June 26, 1997. [D] 10.14 1997 Stock plan and Form of Stock Option Agreement. [E] 10.15 1995 Director Option Plan, as amended to date. [I] 10.17 Lease Agreement dated June 24, 1998 between Registrant and Seaport Centre Associates, LLC for [G] facility located at 300 & 400 Saginaw Drive, Redwood City, California. 10.18 Promissory Note between the Registrant and Ronald W. Songer dated August 31, 1998 [H] 10.19 Standby Letter of Credit dated July 14, 1998. [H] 10.20 Sublease Agreement dated March 18, 1999 between Registrant and Ventis, Inc. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 24.1 Power of Attorney-(see page 44). 27.1 Financial Data Schedule (Edgar version only). - -------------
[A] Filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (File No. 33-97128) and incorporated herein by reference. [B] Filed as an Exhibit to the Registrant's Registration Statement of Form 8-A filed with the Securities and Exchange Commission on January 28, 1997, and incorporated herein by reference. [C] Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 28, 1997 and incorporated herein by reference. [D] Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 27, 1997 and incorporated herein by reference. [E] Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 19, 1997 and incorporated herein by reference. [F] Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-K for the fiscal year ended March 27, 1998 and incorporated herein by reference. [G] Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 26, 1998 and incorporated herein by reference. [H] Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 25, 1998 and incorporated herein by reference. [I] Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 25, 1998 and incorporated herein by reference. 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PERCLOSE, INC. By: ---------------------------------------- Henry A. Plain, Jr. PRESIDENT AND CHIEF EXECUTIVE OFFICER KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Henry A. Plain, Jr. and Kenneth E. Ludlum, jointly and severally, his or her attorneys-in-fact, and each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- Henry A. Plain, Jr. President, Chief Executive Officer and Director June 24, 1999 (Principal Executive Officer) Kenneth E. Ludlum Vice President, Finance and Administration and Chief Financial Officer June 24, 1999 (Principal Financial and Accounting Officer) Michael L. Eagle Director June 24, 1999 Vaughn D. Bryson Director June 24, 1999 Serge Lashutka Director June 24, 1999 John B. Simpson, Ph.D., M.D. Director June 24, 1999 James W. Vetter, M.D. Director June 24, 1999 Mark A. Wan Director June 24, 1999
43 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Perclose, Inc. We have audited the accompanying consolidated balance sheets of Perclose, Inc. as of March 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1999. Our audits also included financial statements schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Perclose, Inc. at March 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. San Jose, California April 28, 1999 F-1 PERCLOSE, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and par value data)
MARCH 31, -------------------------- 1999 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents.................................................... $ 7,333 $ 13,232 Short-term investments....................................................... 22,864 18,349 Accounts receivable, net of allowance for returns and doubtful accounts of $301 in 1999 and 1998 .......................................... 7,762 3,455 Inventories.................................................................. 2,549 1,619 Prepaid expenses............................................................. 689 628 ------------ ------------ Total current assets...................................................... 41,197 37,283 Equipment and leasehold improvements, net....................................... 5,767 2,277 Officer notes receivable........................................................ 200 600 Other assets.................................................................... 2,426 291 ------------ ------------ Total assets.................................................................... $ 49,590 $ 40,451 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................................................. $ 1,717 $ 782 Accrued compensation......................................................... 1,886 1,202 Accrued warranty............................................................. 45 191 Other accrued expenses....................................................... 995 955 Notes payable................................................................ 32 379 ------------ ------------ Total current liabilities................................................. 4,675 3,509 Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value: Authorized shares: 5,000,000 -- -- Common stock, $0.001 par value Authorized shares: 30,000,000 Issued and outstanding shares: 11,035,422 in 1999 and 10,731,089 in 1998.. 11 11 Additional paid-in capital................................................... 81,427 79,433 Accumulated other comprehensive income (loss)................................ (31) -- Accumulated deficit.......................................................... (36,219) (41,763) Deferred compensation........................................................ (273) (739) ------------ ------------ Total stockholders' equity...................................................... 44,915 36,942 ------------ ------------ Total liabilities and stockholders' equity...................................... $ 49,590 $ 40,451 ============ ============
See accompanying notes. F-2 PERCLOSE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
YEARS ENDED MARCH 31, ---------------------------------------------- 1999 1998 1997 -------------- -------------- -------------- Net revenues.......................................................... $ 43,340 $ 10,631 $ 4,456 Cost of goods sold.................................................... 13,979 7,783 4,703 -------------- -------------- -------------- Gross profit (loss)................................................... 29,361 2,848 (247) Operating expenses: Research and development........................................... 7,957 5,449 4,745 Selling, general and administrative................................ 17,153 12,530 6,301 -------------- -------------- -------------- Total operating expenses........................................ 25,110 17,979 11,046 -------------- -------------- -------------- Income (loss) from operations......................................... 4,251 (15,131) (11,293) Other income (expense): Interest income ................................................... 1,662 1,466 1,747 Interest expense................................................... (17) (186) (118) Other income (expense)............................................. (60) 55 6 -------------- -------------- -------------- Total other income.............................................. 1,585 1,335 1,635 -------------- -------------- -------------- Income (loss) before income taxes..................................... 5,836 (13,796) (9,658) Provision for income taxes............................................ 292 -- -- -------------- -------------- -------------- Net income (loss)..................................................... $ 5,544 $(13,796) $(9,658) ============== ============== ============== Basic earnings (loss) per common share................................ $ 0.51 $ (1.38) $ (1.02) ============== ============== ============== Diluted earnings (loss) per common share.............................. $ 0.47 $ (1.38) $ (1.02) ============== ============== ============== Shares used in computing basic earnings (loss) per share.............. 10,829 9,967 9,471 ============== ============== ============== Shares used in computing diluted earnings (loss) per share............ 11,725 9,967 9,471 ============== ============== ==============
See accompanying notes. F-3 PERCLOSE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEARS ENDED MARCH 31, ------------------------------------------------- 1999 1998 1997 -------------- --------------- --------------- OPERATING ACTIVITIES Net income (loss)....................................................... $ 5,544 $ (13,796) $ (9,658) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization........................................ 1,519 1,523 668 Deferred compensation amortization................................... 466 324 262 Compensation expense related to consultants' stock options......... 147 -- -- Changes in operating assets and liabilities: Accounts receivable.................................................. (4,307) (1,925) (606) Inventories.......................................................... (930) (875) (214) Prepaid expenses..................................................... (196) (1,078) (5) Accounts payable..................................................... 935 359 105 Accrued compensation................................................ 684 350 438 Accrued warranty..................................................... (146) (133) 245 Accrued clinical trial costs......................................... -- (310) 310 Other accrued expenses............................................... 40 537 (18) -------------- --------------- --------------- Net cash provided by (used in) operating activities................ 3,756 (15,024) (8,473) INVESTING ACTIVITIES Purchases of short-term investments..................................... (16,869) (17,864) (22,443) Proceeds from sales and maturities of short-term investments............ 12,323 24,587 25,551 Purchases of equipment and leasehold improvements....................... (4,604) (1,690) (1,333) Other assets............................................................ (2,405) 217 109 -------------- --------------- --------------- Net cash provided by (used in) investing activities................ (11,555) 5,250 1,884 FINANCING ACTIVITIES Payments under notes payable............................................ (347) (377) (365) Proceeds from issuance of common stock, net of issuance costs........... 2,704 20,906 227 Repurchase of common stock.............................................. (857) -- -- Repayment of and (issuance of) officer notes receivable................. 400 (200) (400) -------------- --------------- --------------- Net cash provided by (used in) financing activities................ 1,900 20,329 (538) -------------- --------------- --------------- Net increase (decrease) in cash and cash equivalents.................... (5,899) 10,555 (7,127) Cash and cash equivalents at beginning of year.......................... 13,232 2,677 9,804 -------------- --------------- --------------- Cash and cash equivalents at end of year................................ $ 7,333 $ 13,232 $ 2,677 ============== =============== =============== Supplemental disclosures of cash flow information: Cash paid for interest.................................................. $ 251 $ 32 $ 68 Cash paid for income taxes.............................................. $ 200 $ -- $ -- Non-cash financing activities: Issuance of common stock for license agreement.......................... $ -- $ 48 $ --
See accompanying notes. F-4 PERCLOSE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
ACCUMULATED COMMON STOCK ADDITIONAL OTHER TOTAL ------------ PAID-IN COMPREHENSIVE ACCUMULATED DEFERRED STOCKHOLDERS' SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT COMPENSATION EQUITY ------ ------ ------- ------------- ------- ------------ ------ Balance at April 1, 1996 ............. 9,502 $ 10 $57,372 $ (128) $(18,309) $ (445) $ 38,500 Net loss ............................. -- -- -- -- (9,658) -- (9,658) Unrealized gain on short-term ........ -- -- -- 51 -- -- 51 investments -------- Comprehensive income (loss) .......... (9,607) -------- Issuance of common stock under employee stock purchase and option plans, net of repurchases ......... 64 -- 227 -- -- -- 227 Deferred compensation related to cancellation of stock options ..... -- -- (193) -- -- 193 -- Deferred compensation related to consultants' stock options ........ -- -- 903 -- -- (903) -- Amortization of deferred compensation related to stock options .......... -- -- -- -- -- 263 263 --------------------------------------------------------------------------------------- Balance at March 31, 1997 ............ 9,566 10 58,309 (77) (27,967) (892) 29,383 Net loss ............................. -- -- -- (13,796) -- (13,796) Unrealized gain on short-term ........ -- -- -- 77 -- -- 77 investments -------- Comprehensive income (loss) .......... (13,719) -------- Issuance of common stock under employee stock purchase and option plans ............................. 163 -- 1,489 -- -- -- 1,489 Issuance of common stock in connection with a public offering, net of issuance costs of $1,583 .......... 1,000 1 19,416 -- -- -- 19,417 Issuance of common stock for payment of license ........................ 2 -- 48 -- -- -- 48 Deferred compensation related to consultants' stock options ........ -- -- 171 -- -- (171) -- Amortization of deferred compensation related to stock options .......... -- -- -- -- -- 324 324 --------------------------------------------------------------------------------------- Balance at March 31, 1998 ............ 10,731 11 79,433 -- (41,763) (739) 36,942 Net income ........................... -- -- -- -- 5,544 -- 5,544 Unrealized loss on short-term investments........................ -- -- -- (31) -- (31) -------- Comprehensive income (loss) .......... 5,513 -------- Issuance of common stock under employee stock purchase and option plans ............................. 361 -- 2,704 -- -- -- 2,704 Repurchase of common stock ........... (57) -- (857) -- -- -- (857) Compensation expense related to consultants' stock options ........ -- -- 147 -- -- -- 147 Amortization of deferred compensation related to stock options .......... -- -- -- -- -- 466 466 --------------------------------------------------------------------------------------- Balance at March 31, 1999 ............ 11,035 $ 11 $81,427 $ (31) $(36,219) $ (273) $ 44,915 =======================================================================================
See accompanying notes. F-5 PERCLOSE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION. Perclose, Inc. (the "Company") was incorporated in California in March 1992 and was reincorporated in Delaware in October 1995. The Company is a medical device company which designs, manufactures and markets less invasive vascular surgical devices for closing femoral artery access sites following angioplasty and angiography procedures. The Company commenced initial sales of its products to customers in Europe and Canada during the fourth quarter of fiscal year 1995. Sales in the United States began in the first quarter of fiscal year 1998. The Company's first product family, the Prostar-Registered Trademark- and Techstar-Registered Trademark- 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. BASIS OF PRESENTATION The Company's fiscal year ends on the last Friday in March. For ease of presentation, the accompanying financial statements have been shown as ending on March 31 of each year. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The 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. CURRENCY TRANSLATION The financial statements of the Company's non-U.S. subsidiary are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." Assets and liabilities of this subsidiary are translated at the rates of exchange in effect at the end of the period. Revenues and expenses are translated using the average exchange rates in effect during the period. Gains and losses from currency translation are included in stockholders' equity and were not material for fiscal year 1999. Foreign currency transaction gains or losses on customer accounts receivable are recognized in current operations and have not been significant to the Company's operating results. F-6 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 a minimum S&P rating of 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. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the balance sheet for cash, cash equivalents and short-term investments approximate fair value. The fair value of short-term investments is based on quoted market prices. The carrying amount of the Company's notes payable approximates their fair value. The fair values of the Company's notes payable are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. AVAILABLE-FOR-SALE SECURITIES At March 31, 1999 and 1998, 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 other comprehensive income. The amortized cost of available-for-sale debt securities is adjusted for the amortization of premiums and the accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in other income and expense. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. The following is a summary of available-for-sale securities at March 31, 1999 (in thousands):
GROSS AMORTIZED UNREALIZED ESTIMATED FAIR COST LOSSES VALUE ---------------- ---------------- ----------------- Corporate obligations, principally commercial paper and corporate notes............................... $ 22,895 $ (31) $ 22,864 Money market accounts................................ 4,431 -- 4,431 ---------------- ---------------- ----------------- Total............................................. $ 27,326 $ (31) $ 27,295 ================ ================ ================= Amounts included in short-term investments........... $ 22,895 $ (31) $ 22,864 Amounts included in cash and cash equivalents........ 4,431 -- 4,431 ---------------- ---------------- ----------------- Total............................................. $ 27,326 $ (31) $ 27,295 ================ ================ =================
F-7 The following is a summary of available-for-sale securities as of March 31, 1998 (in thousands):
GROSS UNREALIZED AMORTIZED GAINS ESTIMATED FAIR COST (LOSSES) VALUE ---------------- ---------------- ----------------- Obligations of federal government agencies........... $ 2,442 $ 2 $ 2,444 Corporate obligations, principally commercial paper and corporate notes............................... 16,905 (2) 16,903 Money market accounts................................ 11,010 11,010 ---------------- ---------------- ----------------- Total............................................. $ 30,357 $ -- $ 30,357 ================ ================ ================= Amounts included in short-term investments........... $ 18,349 $ -- $ 18,349 Amounts included in cash and cash equivalents........ 12,008 -- 12,008 ================ ================ ================= Total............................................. $ 30,357 $ -- $ 30,357 ================ ================ =================
Available-for-sale securities at March 31, by contractual maturity, are shown below (in thousands):
ESTIMATED FAIR VALUE 1999 1998 ------------- ------------ Due in one year or less........................................................ $13,759 $ 24,134 Due between one and two years.................................................. 13,536 6,223 ------------- ------------ Total....................................................................... $27,295 $ 30,357 ============= ============
INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market and are comprised of the following at March 31 (in thousands):
1999 1998 -------------- --------------- Raw materials............................................................... $ 700 $ 409 Work-in-process............................................................. 967 552 Finished goods.............................................................. 882 658 ============== =============== Total Inventory.......................................................... $ 2,549 $ 1,619 ============== ===============
EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are stated at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, ranging from one to five years, or over the term of the lease, if shorter. Equipment and leasehold improvements are comprised of the following at March 31 (in thousands):
1999 1998 -------------- -------------- Equipment..................................................................... $ 5,520 $ 3,924 Furniture and fixtures........................................................ 1,069 626 Leasehold improvements........................................................ 2,636 193 -------------- -------------- 9,225 4,743 Less accumulated depreciation and amortization................................ (3,458) (2,466) -------------- -------------- Equipment and leasehold improvements, net.................................. $ 5,767 $ 2,277 ============== ==============
F-8 OTHER ASSETS At March 31, 1999, the Company had approximately $1.5 million of restricted deposits associated with a lease agreement and related letter of credit for the Company's facility in Redwood City, California. At March 31, 1998, there was $108,000 of restricted deposits supporting leasehold improvements related to the Company's former facility in Menlo Park, California. REVENUE RECOGNITION Revenues from sales of products are recognized at the time of shipment with allowances provided for estimated returns and warranty costs. ADVERTISING EXPENSES The Company expenses the costs of advertising as incurred. Advertising expense was approximately $239,000, $132,000 and $156,000 for the fiscal years ended March 31, 1999, 1998 and 1997, respectively. RESEARCH AND DEVELOPMENT Research and development costs, which include clinical testing and regulatory costs, are expensed as incurred. ACCOUNTING FOR INCOME TAXES The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, the liability method is used in accounting for income taxes. NET INCOME (LOSS) PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share ("EPS") computations (in thousands):
FISCAL YEAR ENDED MARCH 31, --------------------------------------- 1999 1998 1997 ----------- ------------ ----------- Numerator: Net income (loss) for basic and diluted EPS............... $5,544 $(13,796) $ (9,658) ----------- ------------ ----------- Denominator for basic EPS -- Weighted-average shares........ 10,829 9,967 9,471 Effect of dilutive securities -- Stock options............... 896 -- -- ----------- ----------- ------------ Denominator for diluted EPS -- Adjusted weighted-average shares outstanding and assumed conversions....................................... 11,725 9,967 9,471 =========== ============ ===========
For the fiscal years ended March 31, 1998 and 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. For additional disclosures regarding potential dilutive stock options, see Note 5. F-9 COMPREHENSIVE INCOME The Company has adopted SFAS No. 130, "Reporting Comprehensive Income" effective for the 1999 fiscal year. SFAS No. 130 establishes rules for the reporting and display of comprehensive income and its components. Specifically, SFAS No. 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. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. The tax effects for other comprehensive income were immaterial for all periods presented. SEGMENT INFORMATION In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures About Segments of An Enterprise and Related Information." SFAS No. 131 requires the Company to use the "management approach" and establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its revenues by product, revenues by geographic area and revenues by major customer. Under SFAS No. 131, the Company operates as one segment defined as Percutaneous Vascular Surgery ("PVS") products and sells its products primarily to hospitals and medical device distributors. During fiscal 1998 the Company received FDA approvals for commercial sale in the United States for the Prostar and Techstar family of products. The Company markets its products outside the United States (mainly Europe and Japan) through its sales organizations and distributors. The Company only reports profit and loss information on an aggregate basis to chief operating decision makers of the Company. Geographic sources of net revenues based on the location of customers are as follows (in thousands):
FISCAL YEAR ENDED MARCH 31, --------------------------------------------------- 1999 1998 1997 ---------------- --------------- --------------- United States net revenues....................... $ 38,948 $ 9,035 $ -- Foreign net revenues............................. 4,392 1,596 4,456 ================ =============== =============== Total net revenues............................... $ 43,340 $ 10,631 $ 4,456 ================ =============== ===============
During the fiscal year ended March 31, 1997, sales to major customers as a percentage of total revenues were 59% to a German distributor, 15% to a Japanese distributor and 15% to a French distributor. In the fiscal years ended March 31, 1999 and March 31, 1998 no single customer contributed 10% or more of the Company's net revenues. 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. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current year presentation. F-10 2. 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 in Redwood City, California. The new lease expires in 2008. In addition to the base rent, the lease agreement requires the Company to pay taxes, insurance and maintenance expenses. Occupation of the new facility commenced in March 1999. In addition, the Company will continue to incur rent on a portion of its prior facilities through September 1999. Rental expense was approximately $1,000,000, $514,000 and $397,000 in fiscal years 1999, 1998 and 1997, respectively. A $1.0 million certificate of deposit for the establishment of a $1.0 million letter of credit was made in connection with the Company's 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 required for a minimum of eighteen months; upon the Company's achievement of certain financial criteria, the letter of credit and certificate of deposit will be released. As of March 31, 1999, no amounts have been advanced to the lessor from the letter of credit. In March 1999, the Company entered into an agreement to sublease to a third party approximately 13,000 square feet of space in its new facility. Rental income under the sublease will total approximately $418,000 for fiscal year 2000. The annual minimum rental commitments under all noncancelable operating lease arrangements, exclusive of sublease income, are as follows at March 31, 1999 (in thousands): 2000......................................................... $ 2,384 2001......................................................... 2,176 2002......................................................... 2,241 2003......................................................... 2,308 2004......................................................... 2,377 Thereafter................................................... 11,145 ---------------- Total.................................................... $ 22,631 ================
3. FINANCING ARRANGEMENTS The Company had a $1,750,000 equipment credit and loan agreement with a bank that expired on March 31, 1996. Loans under the agreement bear interest ranging from 9.07% to 10.60% and are secured by the equipment purchased. The final maturities under the financing arrangements are $32,000 in the year ended March 31, 2000. The total value of the lease maturities has been included in current liabilities. 4. STOCKHOLDERS' EQUITY 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 the fiscal year ended March 31, 1999 the Company repurchased 56,800 shares at an aggregate 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. F-11 PUBLIC OFFERING OF COMMON STOCK In November 1997, the Company sold a total of 1,000,000 shares of common stock at $21.00 per share. The net proceeds (after underwriters' commissions and other expenses associated with the offering) totaled approximately $19,417,000. PREFERRED STOCK The Company is authorized to issue 5,000,000 shares of undesignated preferred stock. Preferred stock may be issued from time to time in one or more series. The Board of Directors is authorized to determine the rights, preferences, privileges, and restrictions granted to and imposed upon any wholly unissued series of preferred stock and to fix the number of shares of any series of preferred stock and the designation of any such series without any vote or action by the Company's stockholders. There were no shares of preferred stock issued or outstanding at March 31, 1999. COMMON STOCK Shares of common stock reserved for future issuance under the Company's stock compensation plans are as follows at March 31, 1999 (in thousands): Stock option plans: Options outstanding.......................................................... 1,809 Option shares reserved for future option grants.............................. 543 -------------- Total shares of common stock reserved under stock option plans............... 2,352 Shares of common stock reserved under the employee stock purchase plan....... 77 -------------- Total shares of common stock reserved for future issuance.................... 2,429 ==============
5. STOCK PLANS STOCK OPTION PLANS The Company currently has three stock option plans for employees, directors and others-- the 1992 Stock Plan, the 1995 Director Option Plan and the 1997 Stock Plan. Under the Company's 1992 Stock Plan, the Board of Directors may grant options for the purchase of up to 2,100,000 shares of common stock by directors, employees and others. Nonqualified stock options are generally granted with an exercise price equal to the fair market value of the common stock on the date of grant but may be granted at a lower price as determined by the plan administrator. Options are exercisable at such times and under such conditions as determined by the Board of Directors. Options granted under this plan generally become exercisable over a four-year period and generally expire ten years from the date of grant. Unexercised options are canceled upon termination of employment and become available under the plan. Under the Company's 1995 Director Option Plan (the "1995 Plan") directors who are not employees of the Company receive options to purchase up to 15,000 shares of common stock upon joining the Board of Directors. Subsequent to receiving initial grants under the 1995 Plan, directors are eligible to receive additional discretionary grants. A total of 400,000 shares may be granted over the term of the plan. Options may only be granted at the estimated fair value of the common stock at the date of grant. Options under this plan generally become exercisable over a four-year period and generally expire ten years from the date of grant. Unexercised options are canceled upon the director leaving the Board. F-12 The Company's 1997 Stock Plan (the "1997 Plan") was approved by the stockholders in July 1997 and provides for awards of incentive stock options, nonqualified stock options and stock rights to employees, directors and consultants of the Company. The 1992 Plan remains in effect until it expires on its own terms and the Company will continue to grant options available thereunder. An aggregate of 500,000 shares of common stock were reserved for issuance under the 1997 Plan. The 1997 Plan provides for an annual increase on each anniversary date of the adoption of the plan of 5% of the Company's outstanding shares or such lesser amount as determined by the Board of Directors. A total of 1,040,227 shares have been reserved for issuance under the 1997 Plan. A maximum of 15,000,000 shares may be issued under the 1997 Plan over its ten year term. Nonqualified stock options are generally granted with an exercise price equal to the fair market value of the common stock on the date of grant but may be granted at a lower price as determined by the plan administrator. Options granted under this plan generally become exercisable over a four-year period and generally expire ten years from the date of grant. Unexercised options are canceled upon termination of relationship as a service provider. Stock purchase rights may be issued alone, in addition to, or in tandem with other awards granted under this plan. REPRICING In January 1998, the Company offered employees, excluding executive officers, the option to exchange options to purchase 376,255 shares of common stock with an aggregate exercise price of $8,747,000 million for new options to purchase 376,255 shares with an exercise price of $19.31 per share and an aggregate exercise price of $7,267,000 million. All of the repriced options continue to vest under the original terms of the option grant. In exchange for the offer to reprice stock options, employees agreed to a moratorium on exercising repriced options until July 1, 1998. To the extent an employee voluntarily terminated employment with the Company prior to July 1, 1998, all vested shares at the date of termination relating to repriced stock options were canceled and forfeited. In September 1998, the Company offered employees and executive officers the option to exchange stock options to purchase 1,342,168 shares of common stock with an aggregate exercise price of $28,643,000 million for new options to purchase 1,342,168 shares with an exercise price of $11.50 per share and an aggregate exercise price of $15,435,000 million. All of the repriced options have vesting provisions consistent with the terms of the original option grant. In exchange for the offer to reprice stock options, employees agreed to a moratorium on exercising re-priced options until March 16, 1999. To the extent an employee voluntarily terminated employment with the Company prior to March 16, 1999, all vested shares at the date of termination relating to repriced stock options were canceled and forfeited. F-13 The following table summarizes all stock option activity for the three years ended March 31, 1999:
OUTSTANDING OPTIONS --------------------------- SHARES WEIGHTED AVAILABLE NUMBER AVERAGE FOR OF EXERCISE GRANT SHARES PRICE ------------- ------------ ------------- (000'S) (000'S) Balance at April 1, 1996................... 338 842 $ 8.57 Shares authorized....................... 450 -- -- Options granted......................... (681) 681 $21.06 Options exercised....................... 47 (95) $ 0.78 Options canceled........................ 32 (32) $18.38 ------------- ------------ Balance at March 31, 1997.................. 186 1,396 $14.83 Shares authorized....................... 700 -- -- Options granted......................... (1,021) 1,021 $20.54 Options exercised....................... -- (139) $ 8.23 Options canceled........................ 493 (493) $22.67 ------------- ------------ Balance at March 31,1998................... 358 1,785 $16.45 Shares authorized....................... 540 -- -- Options granted......................... (1,803) 1,803 $15.84 Options exercised....................... -- (331) $ 6.56 Options canceled........................ 1,448 (1,448) $21.08 ------------- ------------ Balance at March 31,1999................... 543 1,809 $13.93 ============= ============
The following table summarizes information about stock options outstanding at March 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- --------------------------------------- WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE AS OF CONTRACTUAL EXERCISE AS OF EXERCISE PRICES 3/31/99 LIFE PRICE 3/31/99 PRICE - ------ --------------- -------------- ----------------- ------------------ ------------------ (000's) (years) (000's) $ 0.10 - $ 6.00........ 136 4.90 $ 1.28 131 $1.08 $11.50 ................ 1,206 8.21 $11.50 434 $11.50 $13.00 -$25.00......... 263 7.72 $17.92 151 $16.91 $26.50 -$43.75......... 199 8.88 $31.26 40 $26.63 $44.66 -$49.62......... 5 9.95 $47.44 -- -- =============== ================== $0.10 - $49.62......... 1,809 7.97 $13.93 756 $11.58 =============== ==================
At March 31, 1998 and 1997, 636,514 and 355,581 shares were exercisable at weighted average exercise prices of $11.02 and $5.87, respectively. 1995 EMPLOYEE STOCK PURCHASE PLAN In September 1995, the 1995 Employee Stock Purchase Plan (the "ESPP") was adopted by the Company. An aggregate of 150,000 shares of the Company's common stock have been reserved for issuance under this plan. In accordance with Section 423 of the Internal Revenue Code, this plan permits eligible employees to authorize payroll deductions of up to 15% of their base compensation to purchase shares of the Company's common stock at the lower of 85% of the fair market value of the common stock F-14 on first day of the offering period or the purchase date. For the years ended March 31, 1999, 1998 and 1997, 30,753, 23,699 and 16,689 shares, respectively, were issued under the ESPP. DEFERRED COMPENSATION During the fiscal years ended March 31, 1998 and 1997 the Company recorded deferred compensation with respect to stock options granted to consultants of $171,000 and $903,000, respectively. Additionally, during fiscal 1997, the Company repurchased 47,396 shares of common stock resulting from the exercise of unvested stock options and reduced related unamortized deferred compensation by $193,000. Deferred compensation is amortized ratably over the period that the options vest and is adjusted for options which have been cancelled. Deferred compensation expense was $466,000, $324,000, and $263,000 for the years ended March 31, 1999, 1998 and 1997, respectively. During fiscal year 1999, the Company granted 35,000 options in connection with consulting agreements. The stock options were valued using the Black-Scholes option valuation model and the Company recorded $93,000 of compensation expense for fiscal year 1999. The Company expects to record compensation expense of $247,000, $247,000 and $165,000 for fiscal years 2000, 2001 and 2002, respectively. STOCK-BASED COMPENSATION As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation", the Company has elected to follow Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for stock-based awards to employees and directors. Under APB No. 25, the Company generally recognizes no compensation expense with respect to such awards. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 for awards granted after March 31, 1995 as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS No. 123. The fair value of the Company's stock-based awards to employees was estimated using the minimum value model for awards prior to the Company's initial public offering on November 7, 1995 and the Black-Scholes model subsequent to the initial public offering. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The fair value of the Company's stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:
OPTIONS ESPP ------------------------- ------------------------- 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- Expected life (years)..................... 5.00 5.00 5.00 .50 .50 .50 Expected volatility....................... .67 .62 .70 .94 .45 .77 Risk-free interest rate %................. 4.66 5.52 6.49 5.40 5.40 5.47
For pro forma purposes, the estimated fair value of the Company's stock-based awards to employees is amortized over the options' vesting period (for options) and the purchase period (for stock purchases under the ESPP). The Company's pro forma information is as follows (in thousands, except for per share information): F-15
1999 1998 1997 ------------ ------------- ------------- Pro forma net loss............................................ $(3,494) $(17,662) $(11,538) Pro forma basic and diluted net loss per share................ $ (0.32) $ (1.77) $ (1.22)
The weighted average fair value of options granted during 1999, 1998 and 1997 was $9.43, $11.96 and $13.50 per share, respectively. The weighted average fair value of shares issued under the ESPP during 1999, 1998 and 1997 was $16.74, $8.49 and $10.79 per share, respectively. 6. INCOME TAXES The components of the provision for income taxes were as follows (in thousands):
1999 1998 1997 ------------ ------------ ------------- Federal................................. $ 171 $ -- $ -- State................................... 86 -- -- Foreign................................. 35 -- -- ------------ ------------ ------------- Total................................ $ 292 $ -- $ -- ============ ============ =============
The reconciliation of income tax expense (benefit) attributable to continuing operations computed at the U.S. federal statutory rates to income tax expense (benefit) is as follows (in thousands):
1999 1998 1997 ------------ ------------ ------------- Tax provision (benefit) at U.S. statutory rates................. $ 2,043 $ (4,828) $ (3,284) State taxes..................................................... 56 -- -- Loss for which no tax benefit is currently recognizable......... -- 4,828 3,284 Benefit of net operating losses................................. (1,807) -- -- ------------ ------------ ------------- $ 292 $ -- $ -- ============ ============ =============
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets for federal and state income taxes are as follows (in thousands):
YEARS ENDED MARCH 31, ----------------------------- 1999 1998 -------------- ------------- Deferred tax assets: Net operating loss carryforwards............. $ 14,000 $ 13,700 Tax credit carryforwards..................... 700 370 Other, net................................... 2,200 2,100 ----------------------------- Total..................................... 16,900 16,170 Valuation allowance.......................... (16,900) (16,170) ----------------------------- Net....................................... $ -- $ -- ============== =============
Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain. Accordingly, a valuation allowance, in an amount equal to the net deferred tax asset at March 31, 1999 and 1998, has been established to reflect these uncertainties. The change in the valuation allowance was a net increase of $730,000, $5,280,000 and $3,660,000 for the fiscal years 1999, 1998 and 1997, respectively. F-16 At March 31, 1999 the Company had net operating loss carryforwards for federal and California tax purposes of approximately $39,000,000 and $14,000,000, respectively, which will expire from 2000 through 2012, if not utilized. At March 31, 1999, the Company also had research and development tax credit carryforwards of approximately $400,000 and $350,000, respectively, for federal and state tax purposes expiring from 2007 through 2019, if not utilized. As of March 31,1999 the future use of 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 and similar state provisions. Included in the valuation allowance is $3,000,000 related to the exercise of stock options which are not reflected as an expense for financial reporting purposes. Accordingly, any future reduction in the valuation allowance related to this amount will be credited directly to equity and not reflected as an income tax benefit in the statement of operations. 7. EMPLOYEE BENEFIT PLAN The Company adopted the Perclose 401(k) Retirement Plan to provide retirement benefits for its employees in December 1994. As allowed under Section 401(k) of the Internal Revenue Code, the plan provides tax-deferred salary deductions for eligible employees. Full time employees who are at least 21 years of age are eligible to participate in the next quarter enrollment period. Participants may make voluntary contributions to the plan up to 15% of their compensation, subject to certain Internal Revenue Service restrictions. The Company does not provide a matching contribution at this time. 8. CONCENTRATIONS OF CREDIT AND OTHER RISKS The Company operates in a single industry segment and sells its products primarily to hospitals and medical device distributors. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. There have been no material losses on customer receivables. DEPENDENCE ON PROSTAR AND TECHSTAR PRODUCTS The Prostar and Techstar products 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 products in the United States. There can be no assurance that the Company's development efforts will be successful or that any further products 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. DEPENDENCE ON KEY SUPPLIERS The Company purchases certain key components from single source suppliers. Any significant component supply delay or interruption could require the Company to qualify new sources of supply, if available, and could have a material adverse effect on the Company's financial condition and results of operations. 9. LEGAL PROCEEDINGS 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 not infringed and also claiming counter-defendants have engaged in antitrust F-17 and unfair competition violations. In March 1999, Tyco sold the marketing rights to the competitive product to St. Jude Medical, Inc. The case is presently set for trial in September 1999. The Company believes that the case is without merit and intends to defend itself and its intellectual property rights vigorously. 10. RELATED PARTY TRANSACTIONS In December 1998, the Company entered into a consulting agreement with Life Science Advisors ("LSA"). A member of the Company's Board of Directors also serves as the President of LSA. A total of 8,155 stock options have been granted to the director in connection with the consulting agreement. For the fiscal year ended March 31, 1999, the Company has made no payments to either LSA or the director in connection with the consulting agreement. F-18 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT BEGINNING OF BALANCE AT PERIOD ADDITIONS DEDUCTIONS END OF PERIOD ------------ --------- ---------- ------------- (Year Ended March 31) 1997................................ $ 20,000 $ 761,000 $ 605,000 $ 176,000 1998................................ $ 176,000 $ 683,000 $ 558,000 $ 301,000 1999................................ $ 301,000 $ 29,000 $ 29,000 $ 301,000
F-19 EX-3.2 2 EXHIBIT 3.2 EXHIBIT 3.2 BYLAWS OF PERCLOSE, INC. (A DELAWARE CORPORATION) BYLAWS OF PERCLOSE, INC. (a Delaware corporation) TABLE OF CONTENTS
Page ARTICLE I CORPORATE OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 REGISTERED OFFICE. . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 OTHER OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II MEETINGS OF STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . 1 2.1 PLACE OF MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.3 SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.4 NOTICE OF STOCKHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . 2 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS. . 2 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE . . . . . . . . . . . 4 2.7 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.8 ADJOURNED MEETING; NOTICE. . . . . . . . . . . . . . . . . . . . . 4 2.9 VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . . . . . . . . . . . . . . . . . . . .5 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING . . . . . . . . . . . . 5 2.12 PROXIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.13 ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE. . . . . . . . . . . . . . . 6 2.15 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE III DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.1 POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.2 NUMBER OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . 7 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS . . . . . . . . . . . . . 8 -i- TABLE OF CONTENTS (Continued) Page ---- 3.4 RESIGNATION AND VACANCIES. . . . . . . . . . . . . . . . . . . . . 8 3.5 REMOVAL OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . 9 3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE . . . . . . . . . . . . . 9 3.7 FIRST MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.8 REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . .10 3.9 SPECIAL MEETINGS; NOTICE . . . . . . . . . . . . . . . . . . . . .10 3.10 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 3.11 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . .10 3.12 ADJOURNMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . .11 3.13 NOTICE OF ADJOURNMENT. . . . . . . . . . . . . . . . . . . . . . .11 3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. . . . . . . . .11 3.15 FEES AND COMPENSATION OF DIRECTORS . . . . . . . . . . . . . . . .11 3.16 APPROVAL OF LOANS TO OFFICERS. . . . . . . . . . . . . . . . . . .11 3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION . . . . . .12 ARTICLE IV COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 4.1 COMMITTEES OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . .12 4.2 MEETINGS AND ACTION OF COMMITTEES. . . . . . . . . . . . . . . . .12 4.3 COMMITTEE MINUTES. . . . . . . . . . . . . . . . . . . . . . . . .13 ARTICLE V OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 5.1 OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 5.2 ELECTION OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . .13 5.3 SUBORDINATE OFFICERS . . . . . . . . . . . . . . . . . . . . . . .14 5.4 REMOVAL AND RESIGNATION OF OFFICERS. . . . . . . . . . . . . . . .14 5.5 VACANCIES IN OFFICES . . . . . . . . . . . . . . . . . . . . . . .14 5.6 CHAIRMAN OF THE BOARD. . . . . . . . . . . . . . . . . . . . . . .14 5.7 PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 5.8 VICE PRESIDENTS. . . . . . . . . . . . . . . . . . . . . . . . . .15 5.9 SECRETARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 5.10 CHIEF FINANCIAL OFFICER. . . . . . . . . . . . . . . . . . . . . .15 -ii- TABLE OF CONTENTS (Continued) Page ---- 5.11 ASSISTANT SECRETARY. . . . . . . . . . . . . . . . . . . . . . . .16 5.12 ADMINISTRATIVE OFFICERS. . . . . . . . . . . . . . . . . . . . . .16 5.13 AUTHORITY AND DUTIES OF OFFICERS . . . . . . . . . . . . . . . . .16 ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. . . . . . . . . . . . .18 6.2 INDEMNIFICATION OF OTHERS. . . . . . . . . . . . . . . . . . . . .19 6.3 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 ARTICLE VII RECORDS AND REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . .19 7.1 MAINTENANCE AND INSPECTION OF RECORDS. . . . . . . . . . . . . . .19 7.2 INSPECTION BY DIRECTORS. . . . . . . . . . . . . . . . . . . . . .20 7.3 ANNUAL STATEMENT TO STOCKHOLDERS . . . . . . . . . . . . . . . . .20 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS . . . . . . . . . .20 7.5 CERTIFICATION AND INSPECTION OF BYLAWS . . . . . . . . . . . . . .20 ARTICLE VIII GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS. . . . . . . . . . . . .21 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED . . . . . . . .21 8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES . . . . . . . . .21 8.5 SPECIAL DESIGNATION ON CERTIFICATES. . . . . . . . . . . . . . . .22 8.6 LOST CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . . .22 8.7 TRANSFER AGENTS AND REGISTRARS . . . . . . . . . . . . . . . . . .23 8.8 CONSTRUCTION; DEFINITIONS. . . . . . . . . . . . . . . . . . . . .23 -iii- TABLE OF CONTENTS (Continued) Page ---- ARTICLE IX AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
-iv- BYLAWS OF PERCLOSE, INC. (a Delaware corporation) ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be fixed in the certificate of incorporation of the corporation. 1.2 OTHER OFFICES The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place within or outside the State of Delaware designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the principal executive office of the corporation. 2.2 ANNUAL MEETING The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of stockholders shall be held on the third Tuesday in May in each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. No other person or persons are permitted to call a special meeting. If a special meeting is called by any person or persons other than the board of directors, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.6 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of stockholders called by action of the board of directors may be held. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS All notices of meetings of stockholders shall be sent or otherwise given in accordance with Section 2.6 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the purpose or purposes for which the meeting is called (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the stockholders (but any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS Subject to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, (a) nominations for the election of directors, and (b) business proposed to be brought before any stockholder meeting -2- may be made by the board of directors or proxy committee appointed by the board of directors or by any stockholder entitled to vote in the election of directors generally if such nomination or business proposed is otherwise proper business before such meeting. However, any such stockholder may nominate one or more persons for election as directors at a meeting or propose business to be brought before a meeting, or both, only if such stockholder has given timely notice in proper written form of their intent to make such nomination or nominations or to propose such business. To be timely, such stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than one hundred twenty (120) calendar days in advance of the date specified in the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made. To be in proper form, a stockholder's notice to the secretary shall set forth: (i) the name and address of the stockholder who intends to make the nominations or propose the business and, as the case may be, of the person or persons to be nominated or of the business to be proposed; (ii) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and, if applicable, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) if applicable, a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (iv) such other information regarding each nominee or each matter of business to be proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, or the matter been proposed, or intended to be proposed by the board of directors; and (v) if applicable, the consent of each nominee to serve as director of the corporation if so elected. The chairman of the meeting shall refuse to acknowledge the nomination of any person or the proposal of any business not made in compliance with the foregoing procedure. -3- 2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders shall be given either personally or by first-class mail or by telegraphic or other written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the stockholder at the address of that stockholder appearing on the books of the corporation or given by the stockholder to the corporation for the purpose of notice. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. 2.7 QUORUM The holders of a majority in voting power of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (i) the chairman of the meeting or (ii) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting in accordance with Section 2.7 of these bylaws. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the laws of the State of Delaware or of the certificate of incorporation or these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of the question. If a quorum be initially present, the stockholders may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken is approved by a majority of the stockholders initially constituting the quorum. 2.8 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time and place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. -4- 2.9 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners, and to voting trusts and other voting agreements). Except as may be otherwise provided in the certificate of incorporation or these bylaws, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder and stockholders shall not be entitled to cumulate their votes in the election of directors or with respect to any matter submitted to a vote of the stockholders. Notwithstanding the foregoing, if the stockholders of the corporation are entitled, pursuant to Sections 2115 and 301.5 of the California Corporations Code, to cumulate their votes in the election of directors, each such stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes that such stockholder normally is entitled to cast) only if the candidates' names have been properly placed in nomination (in accordance with these bylaws) prior to commencement of the voting, and the stockholder requesting cumulative voting has given notice prior to commencement of the voting of the stockholder's intention to cumulate votes. If cumulative voting is properly requested, each holder of stock, or of any class or classes or of a series or series thereof, who elects to cumulate votes shall be entitled to as many votes as equals the number of votes that (absent this provision as to cumulative voting) he or she would be entitled to cast for the election of directors with respect to his or her shares of stock multiplied by the number of directors to be elected by him, and he or she may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them, as he or she may see fit. 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise provided in the Certificate of Incorporation, any action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Such consents shall be delivered to the corporation by delivery to it registered office in the state of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING -5- For purposes of determining the stockholders entitled to notice of any meeting or to vote thereat, the board of directors may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors and which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting, and in such event only stockholders of record on the date so fixed are entitled to notice and to vote, notwithstanding any transfer of any shares on the books of the corporation after the record date. If the board of directors does not so fix a record date, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the board of directors fixes a new record date for the adjourned meeting, but the board of directors shall fix a new record date if the meeting is adjourned for more than thirty (30) days from the date set for the original meeting. The record date for any other purpose shall be as provided in Section 8.1 of these bylaws. 2.12 PROXIES Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, telefacsimile or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware. 2.13 ORGANIZATION The president, or in the absence of the president, the chairman of the board, or, in the absence of the president and the chairman of the board, one of the corporation's vice presidents, shall call the meeting of the stockholders to order, and shall act as chairman of the meeting. In the absence of the president, the chairman of the board, and all of the vice presidents, the stockholders shall appoint a chairman for such meeting. The chairman of any meeting of stockholders shall determine the order of business and the procedures at the meeting, including such matters as the regulation of the manner of voting and the conduct of business. The secretary of the corporation shall act as secretary of all meetings of the stockholders, but in the absence of the secretary at any meeting of the stockholders, the chairman of the meeting may appoint any person to act as secretary of the meeting. -6- 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 2.15 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and to any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The board of directors shall consist of seven (7) members. The number of directors may be changed by an amendment to this bylaw, duly adopted by the board of directors or by the stockholders, or by a duly adopted amendment to the certificate of incorporation. Upon the closing -7- of the first sale of the corporation's common stock pursuant to a firmly underwritten registered public offering (the "IPO"), the directors shall be divided into three classes, with the term of office of the first class, which class shall initially consist of two directors, to expire at the first annual meeting of stockholders held after the IPO; the term of office of the second class, which class shall initially consist of two directors, to expire at the second annual meeting of stockholders held after the IPO; the term of office of the third class, which class shall initially consist of three directors, to expire at the third annual meeting of stockholders held after the IPO; and thereafter for each such term to expire at each third succeeding annual meeting of stockholders held after such election. 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these bylaws, directors shall be elected at each annual meeting of stockholders to hold office as provided in Section 3.2 of these bylaws. Each director, including a director elected or appointed to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 RESIGNATION AND VACANCIES Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of a director by the vote of the stockholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum). Each director so elected shall hold office for a term expiring at the next annual meeting of the stockholders at which the term of office of the class to which such director has been elected expires. Unless otherwise provided in the certificate of incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the -8- directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that, if and so long as stockholders of the corporation are entitled to cumulative voting, if less than the entire board is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire board of directors. 3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE Regular meetings of the board of directors may be held at any place within or outside the State of Delaware that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of Delaware that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting of the board, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such participating directors shall be deemed to be present in person at the meeting. -9- 3.7 FIRST MEETINGS The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. 3.8 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice at such time as shall from time to time be determined by the board of directors. If any regular meeting day shall fall on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. 3.9 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail, telecopy or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone, telecopy or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.10 QUORUM A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.12 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of the certificate of incorporation and applicable law. -10- A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the quorum for that meeting. 3.11 WAIVER OF NOTICE Notice of a meeting need not be given to any director (i) who signs a waiver of notice, whether before or after the meeting, or (ii) who attends the meeting other than for the express purposed of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. All such waivers shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 3.12 ADJOURNMENT A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting of the board to another time and place. 3.13 NOTICE OF ADJOURNMENT Notice of the time and place of holding an adjourned meeting of the board need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.9 of these bylaws, to the directors who were not present at the time of the adjournment. 3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board of directors. 3.15 FEES AND COMPENSATION OF DIRECTORS Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.15 shall not be construed to preclude any director from serving the -11- corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 3.16 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or any of its subsidiaries, including any officer or employee who is a director of the corporation or any of its subsidiaries, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION In the event only one director is required by these bylaws or the certificate of incorporation, then any reference herein to notices, waivers, consents, meetings or other actions by a majority or quorum of the directors shall be deemed to refer to such notice, waiver, etc., by such sole director, who shall have all the rights and duties and shall be entitled to exercise all of the powers and shall assume all the responsibilities otherwise herein described as given to the board of directors. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have and may exercise all the powers and authority of the board, but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the -12- issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, the bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the following provisions of Article III of these bylaws: Section 3.6 (place of meetings; meetings by telephone), Section 3.8 (regular meetings), Section 3.9 (special meetings; notice), Section 3.10 (quorum), Section 3.11 (waiver of notice), Section 3.12 (adjournment), Section 3.13 (notice of adjournment) and Section 3.14 (board action by written consent without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. 4.3 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. -13- ARTICLE V OFFICERS 5.1 OFFICERS The Corporate Officers of the corporation shall be a president, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents (however denominated), one or more assistant secretaries, a treasurer and one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. In addition to the Corporate Officers of the Company described above, there may also be such Administrative Officers of the corporation as may be designated and appointed from time to time by the president of the corporation in accordance with the provisions of Section 5.12 of these bylaws. 5.2 ELECTION OF OFFICERS The Corporate Officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board of directors, subject to the rights, if any, of an officer under any contract of employment, and shall hold their respective offices for such terms as the board of directors may from time to time determine. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or may empower the president to appoint, such other Corporate Officers as the business of the corporation may require, each of whom shall hold office for such period, have such power and authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. The president may from time to time designate and appoint Administrative Officers of the corporation in accordance with the provisions of Section 5.12 of these bylaws. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of a Corporate Officer under any contract of employment, any Corporate Officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of a Corporate Officer chosen by the board -14- of directors, by any Corporate Officer upon whom such power of removal may be conferred by the board of directors. Any Corporate Officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the Corporate Officer is a party. Any Administrative Officer designated and appointed by the president may be removed, either with or without cause, at any time by the president. Any Administrative Officer may resign at any time by giving written notice to the president or to the secretary of the corporation. 5.5 VACANCIES IN OFFICES A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise such other powers and perform such other duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction and control of the business and the officers of the corporation. He or she shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. He or she shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 5.8 VICE PRESIDENTS In the absence or disability of the president, and if there is no chairman of the board, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when -15- so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of the board of directors, committees of directors and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these bylaws. He or she shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director for a purpose reasonably related to his position as a director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He or she shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. -16- 5.11 ASSISTANT SECRETARY The assistant secretary, if any, or, if there is more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. 5.12 ADMINISTRATIVE OFFICERS In addition to the Corporate Officers of the corporation as provided in Section 5.1 of these bylaws and such subordinate Corporate Officers as may be appointed in accordance with Section 5.3 of these bylaws, there may also be such Administrative Officers of the corporation as may be designated and appointed from time to time by the president of the corporation. Administrative Officers shall perform such duties and have such powers as from time to time may be determined by the president or the board of directors in order to assist the Corporate Officers in the furtherance of their duties. In the performance of such duties and the exercise of such powers, however, such Administrative Officers shall have limited authority to act on behalf of the corporation as the board of directors shall establish, including but not limited to limitations on the dollar amount and on the scope of agreements or commitments that may be made by such Administrative Officers on behalf of the corporation, which limitations may not be exceeded by such individuals or altered by the president without further approval by the board of directors. 5.13 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing powers, authority and duties, all officers of the corporation shall respectively have such authority and powers and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, indemnify any person against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding in which such person was or is a party or is threatened to be made a party by reason -17- of the fact that such person is or was a director or officer of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation shall mean any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. The corporation shall be required to indemnify a director or officer in connection with an action, suit, or proceeding (or part thereof) initiated by such director or officer only if the initiation of such action, suit, or proceeding (or part thereof) by the director or officer was authorized by the Board of Directors of the corporation. The corporation shall pay the expenses (including attorney's fees) incurred by a director or officer of the corporation entitled to indemnification hereunder in defending any action, suit or proceeding referred to in this Section 6.1 in advance of its final disposition; provided, however, that payment of expenses incurred by a director or officer of the corporation in advance of the final disposition of such action, suit or proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should ultimately be determined that the director of officer is not entitled to be indemnified under this Section 6.1 or otherwise. The rights conferred on any person by this Article shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the corporation's Certificate of Incorporation, these bylaws, agreement, vote of the stockholders or disinterested directors or otherwise. Any repeal or modification of the foregoing provisions of this Article shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. 6.2 INDEMNIFICATION OF OTHERS The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, to indemnify any person (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding, in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was an employee or agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) shall mean any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was -18- an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 INSURANCE The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books and other records of its business and properties. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine (and to make copies of) the corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to his or her position as a director. -19- 7.3 ANNUAL STATEMENT TO STOCKHOLDERS The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, if any, the president, any vice president, the chief financial officer, the secretary or any assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of the stock of any other corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. 7.5 CERTIFICATION AND INSPECTION OF BYLAWS The original or a copy of these bylaws, as amended or otherwise altered to date, certified by the secretary, shall be kept at the corporation's principal executive office and shall be open to inspection by the stockholders of the corporation, at all reasonable times during office hours. ARTICLE VIII GENERAL MATTERS 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING For purposes of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not precede the date upon which the resolution fixing the record date is adopted and which shall not be more than sixty (60) days before any such action. In that case, only stockholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided by law. If the board of directors does not so fix a record date, then the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board of directors adopts the applicable resolution. -20- 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED The board of directors, except as otherwise provided in these bylaws, may authorize and empower any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such power and authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES The shares of the corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and, upon request, every holder of uncertificated shares, shall be entitled to have a certificate signed by, or in the name of the corporation by, the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. Certificates for shares shall be of such form and device as the board of directors may designate and shall state the name of the record holder of the shares represented thereby; its number; date of issuance; the number of shares for which it is issued; a summary statement or reference to the powers, designations, preferences or other special rights of such stock and the qualifications, limitations or restrictions of such preferences and/or rights, if any; a statement or summary of liens, if any; a conspicuous notice of restrictions upon transfer or registration of transfer, if any; a statement as to any applicable voting trust agreement; if the shares be assessable, or, if assessments are collectible by personal action, a plain statement of such facts. -21- Upon surrender to the secretary or transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, or upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.5 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.6 LOST CERTIFICATES Except as provided in this Section 8.6, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. -22- 8.7 TRANSFER AGENTS AND REGISTRARS The board of directors may appoint one or more transfer agents or transfer clerks, and one or more registrars, each of which shall be an incorporated bank or trust company -- either domestic or foreign, who shall be appointed at such times and places as the requirements of the corporation may necessitate and the board of directors may designate. 8.8 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction and definitions in the General Corporation Law of Delaware shall govern the construction of these bylaws. Without limiting the generality of this provision, as used in these bylaws, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both an entity and a natural person. ARTICLE IX AMENDMENTS The original or other bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote or by the board of directors of the corporation. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. Whenever an amendment or new bylaw is adopted, it shall be copied in the book of bylaws with the original bylaws, in the appropriate place. If any bylaw is repealed, the fact of repeal with the date of the meeting at which the repeal was enacted or the filing of the operative written consent(s) shall be stated in said book. -23- CERTIFICATE OF ADOPTION OF BYLAWS OF PERCLOSE, INC. ADOPTION BY INCORPORATOR The undersigned person appointed in the Certificate of Incorporation to act as the Incorporator of Perclose, Inc. hereby adopts the foregoing bylaws, comprising twenty-two (22) pages, as the Bylaws of the corporation. Effective as of September 1, 1995. /s/ Christopher J. Ozburn ------------------------------------------ Christopher J. Ozburn Incorporator CERTIFICATE BY SECRETARY OF ADOPTION BY INCORPORATOR The undersigned hereby certifies that he is the duly elected, qualified, and acting Secretary of Perclose, Inc. and that the foregoing Bylaws, comprising twenty-two (22) pages, were adopted as the Bylaws of the corporation effective as of September 1, 1995, by the person appointed in the Certificate of Incorporation to act as the Incorporator of the corporation. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this 11th day of September 1995. /s/ J. Casey McGlynn ------------------------------------------ J. Casey McGlynn Secretary -24- CERTIFICATE OF AMENDMENT OF BYLAWS OF PERCLOSE, INC. The undersigned, being the Secretary of Perclose, Inc., hereby certifies that Article II, Section 2.3 of the Bylaws of this corporation were amended, effective January 14, 1997, by the Board of Directors of the corporation to provide as follows: (1) SECTION 2.3 is hereby amended in its entirety to read as follows: "2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, or by the president. No other person or persons are permitted to call a special meeting. If a special meeting is called by any person or persons other than the board of directors, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.6 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of stockholders called by action of the board of directors may be held." Dated: January 14, 1997 /s/ J. Casey McGlynn ----------------------------------- J. Casey McGlynn, Secretary EX-10.20 3 EXHIBIT 10.20 EXHIBIT 10.20 SUBLEASE AGREEMENT 1. PARTIES. This Sublease, dated March 18, 1999, is made between Perclose, Inc. ("Sublessor"), and Ventis, Inc. ("Sublessee"). 2. MASTER LEASE. Sublessor is the lessee under a written lease dated April 16, 1998, wherein Seaport Centre Associates, LLC ("Lessor") leased to Perclose ("Sublessor") the real property located in the City of Redwood City, County of San Mateo, State of California, described as two buildings, a 60,841 square foot building at 400 Saginaw and a 19,483 square foot building at 300 Saginaw ("Master Premises"). Said lease is herein collectively referred to as the "Master Lease" and is attached hereto as Exhibit "A." 3. PREMISES. Sublessor hereby subleases to Sublessee on the terms and conditions set forth in this Sublease the portion of the Master Premises ("Premises") identified in Exhibit "B" attached hereto and comprising of approximately 12,908 square foot portion of 300 Saginaw, Redwood City, California. 4. WARRANTY BY SUBLESSOR. Sublessor warrants and represents to Sublessee that Sublessor's knowledge the Master Lease has not been amended or modified, that Sublessor is not now, and as of the commencement of the Term hereof will not be, in default or breach of any of the provisions of the Master Lease, and that Sublessor has no knowledge of any claim by Lessor that Sublessor is in default or breach of any of the provisions of the Master Lease. 5. TERM. The Term of this Sublease shall commence on April 1, 1999 ("Commencement Date"), or when Lessor consents to this Sublease (if such consent is required under the Master Lease), whichever shall last occur, and end on March 30, 2000 ("Termination Date"), unless otherwise sooner terminated in accordance with the provisions of this Sublease. In the event the Term commences on a date other than the Commencement Date, Sublessor and Sublessee shall execute a memorandum setting forth the actual date of commencement of the Term. If for any reason Sublessor does not deliver Possession to Sublessee on the commencement of the Term, Sublessor shall not be subject to any liability for such failure, the Termination Date shall not be extended by the delay, and the validity of this Sublease shall not be impaired, but rent shall abate until delivery of Possession. Notwithstanding the foregoing, if Sublessor has not delivered Possession to Sublessee within thirty (30) days after the Commencement Date, then at any time thereafter and before delivery of Possession, Sublessee may give written notice to Sublessor of Sublessee's intention of cancellation of this Sublease. If Sublessor fails to deliver Possession to Sublessee on or before such effective date, this Sublease shall be cancelled, in which case all consideration previously paid by Sublessee to Sublessor on account of this Sublease shall be returned to Sublessee, this Sublease shall be of no further force or effect, and Sublessor shall have no further liability to Sublessee. If Sublessor permits Sublessee to take Possession prior to the commencement of the Term, it shall not advance the Termination Date and shall be subject to the provisions of this Sublease. 6. RENT. 6.1 Sublessee shall pay to Sublessor as minimum rent, without deduction, setoff, notice, or demand, at 400 Saginaw, Redwood City, California or at such other place as Sublessor shall designate from time to time by notice to Sublessee, the sum of Two Dollars and 70/100 ($2.70) per square foot per month, in advance on the first day of each month of the Term. Sublessor and Sublessee agree that the Rent referenced in the previous sentence is a Full Service Rental Rate. This rate shall include the following: Base Rent, Additional Rent as indicated in Paragraph 3.2 of the Master Lease, Utilities for the Premises, and Janitorial Service not less than every other business day for the Premises. Sublessee shall pay to Sublessor upon execution of this Sublease the sum of $27,000 as rent for the first month. If the Term begins or ends on a day other than the first or last day of a month, the rent for the partial months shall be prorated on a per diem basis. 7. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution of this Sublease an amount equal to three (3) months rent $81,000 as security for Sublessee's faithful performance of Sublessee's obligations hereunder ("Security Deposit"). If Sublessee so chooses, it shall have the right to issue and deliver a Letter of Credit to Sublessor pursuant to the terms of Paragraph 36 of the Master Lease, except that "$81,000" shall be substituted for "$1,000,000, "Sublessee" shall be substituted for "Tenant", "Sublessor" shall be substituted for "Landlord", and Paragraphs 36. (b) and 36. (c) shall be deleted. Said Letter would replace the aforementioned Security -1- Deposit, and would be subject to all the terms and conditions referenced in this paragraph." If Sublessee fails to pay rent or other charges when due under this Sublease, or fails to perform any of its other obligations hereunder, Sublessor may use or apply all or any portion of the Security Deposit for the payment of any rent or other amount then due hereunder and unpaid, for the payment of any other sum for which Sublessor may become obligated by reason of Sublessee's default or breach, or for any loss or damage sustained by Sublessor as a result of Sublessee's default or breach. If Sublessor so uses any portion of the Security Deposit, Sublessee shall, within ten (10) days after written demand by Sublessor, restore the Security Deposit to the full amount originally deposited, and Sublessee's failure to do so shall constitute a default under this Sublease. Sublessor shall not be required to keep the Security Deposit separate from its general accounts, and shall have no obligation or liability for payment of interest on the Security Deposit. In the event Sublessor assigns its interest in this Sublease, Sublessor shall deliver to its assignee so much of the Security Deposit as is then held by Sublessor. Within ten (10) days after the Term has expired, or Sublessee has vacated the Premises, or any final adjustment pursuant to Subsection 6.2 hereof has been made, whichever shall last occur, and provided Sublessee is not then in default of any of its obligations hereunder, the Security Deposit, or so much thereof as had not theretofore been applied by Sublessor, shall be returned to Sublessee or to the last assignee, if any, of Sublessee's interest hereunder. 8. ASSIGNMENT AND SUBLETTING. Sublessee shall not assign this Sublease or further sublet all or part of the Premises without the prior written consent of Sublessor (and the consent of Lessor, if such is required under the terms of the Master Lease). 9. OTHER PROVISIONS OF SUBLEASE. All applicable terms and conditions of the Master Lease are incorporated into and made a part of this Sublease as if Sublessor were the lessor thereunder, Sublessee the lessee thereunder, and the Premises the Master Premises, EXCEPT for dollar amounts affecting prorata shares of the following: (1) premises, (2) term, (3) rent, (4) security deposit, (5) tenant improvements and alterations. Sublessee assumes and agrees to perform the lessee's obligations under the Master Lease during the Term to the extent that such obligations are applicable to the Premises, except that the obligation to pay rent to Lessor under the Master Lease shall be considered performed by Sublessee to the extent and in the amount rent is paid to Sublessor in accordance with Section 6 of this Sublease. Sublessee shall not commit or suffer any act or omission that will violate any of the provisions of the Master Lease. Sublessor shall exercise due diligence in attempting to cause Lessor to perform its obligations under the Master Lease for the benefit of Sublessee. If the Master Lease terminates, this Sublease shall terminate and the parties shall be relieved of any further liability or obligation under this Sublease, provided however, that if the Master Lease terminates as a result of a default or breach by Sublessor or Sublessee under this Sublease and/or the Master Lease, then the defaulting party shall be liable to the non-defaulting party for the damage suffered as a result of such termination. Notwithstanding the foregoing, if the Master Lease gives Sublessor any right to terminate the Master Lease in the event of the partial or total damage, destruction, or condemnation of the Master Premises or the building or project of which the Master Premises are a part, the exercise of such right by Sublessor shall not constitute a default or breach hereunder. 10. OPTION TO RENEW: Provided Sublessee is not in default of any provision of the Sublease Agreement, Sublessee shall have an option to extend the Sublease Term for three (3) consecutive terms of three (3) months each ("Extended Terms") following the expiration of the initial Sublease Term. The first two (2) options shall be exercised at Sublessee's sole discretion. The third option shall be exercised upon mutual agreement by Sublessor and Sublessee. Such option shall be exercised by Sublessee giving written notice to Sublessor not less than 120 days prior to the end of the initial Sublease Term or the applicable Extended Term. All terms and conditions of the original Sublease Agreement shall prevail during the Extended Term. If Sublessee is in default on the date the Extended Term is to commence, the Extended Term shall not commence and the Sublease shall expire at the end of the initial Sublease Term. The rent for this Extended Term shall be at the same rate as in the initial Sublease Term. 11. ATTORNEYS' FEES. If Sublessor, Sublessee, or Broker shall commence an action against the other arising out of or in connection with this Sublease, the prevailing party shall be entitled to recover its costs of suit and reasonable attorney's fees. 12 NOTICES. To Sublessor: Perclose, Inc. 400 Saginaw Drive Redwood City, CA 94063 Attention: Chief Financial Officer -2- To Sublessee: Ventis, Inc. 300 Saginaw Drive Redwood City, CA 94063 Attention: President/Warren Weiss 13. CONSENT BY LESSOR. THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO BY LESSOR WITHIN 10 DAYS AFTER EXECUTION HEREOF. 14. COMPLIANCE. The parties hereto agree to comply with all applicable federal, state and local laws, regulations, codes, ordinances and administrative orders having jurisdiction over the parties, property or the subject matter of this Agreement, including, but not limited to, the 1964 Civil Rights Act and all amendments thereto, the Foreign Investment in Real Property Tax Act, the Comprehensive Environmental Response Compensation and Liability Act, and The Americans With Disabilities Act. 15. BROKERS. Sublessee and Sublessor acknowledge that the BT Commercial is acting as Sublessor's representative in this transaction, and Trammell Crow Company is acting as Sublessee's representative. Trammell Crow Company shall be paid a Commission equal to 2 1/2 % of the total NNN rent payable throughout the term of the Sublease. The monthly rent shall be calculated by multiplying the $1.95 NNN lease rate by the 12,908 Rentable Square Feet in the Premises. BT Commercial shall be paid a Commission per a separate agreement with Sublessor. 16. MISCELLANEOUS 15.1 Signage. Sublessee shall then have the right to install a sign, at Sublessee's sole cost and expense, on the monument. 15.2 Tenant Improvements. Sublessor shall carpet the two large tiled rooms as indicted in Exhibit "A" of our proposal, remove the racks hanging from the ceiling in the large tiled room, and add a ceiling in the one large room, and demise the space in a manner agreeable to both Sublessee and Sublessor. Also, Sublessor shall cooperate fully with Sublessee on any other reasonable alterations that Sublessee shall require in the space. Sublessor: PERCLOSE, INC. Sublessee: VENTIS, INC. ----------------------- --------------------------- Signature: Signature: ----------------------- --------------------------- Title: PRESIDENT & CEO Title: --------------------------- ------------------------------- By: HANK PLAIN By: --------------------------- ---------------------------------- Date: Date: ---------------------------- -------------------------------- -3- LESSOR'S CONSENT TO SUBLEASE The undersigned ("Lessor"), lessor under the Master Lease, hereby consents to the foregoing Sublease without waiver of any restriction in the Master Lease concerning further assignment or subletting. Lessor certifies that, as of the date of Lessor's execution hereof, Sublessor is not in default or breach of any of the provisions of the Master Lease, and that the Master Lease has not been amended or modified except as expressly set forth in the foregoing Sublease. Lessor: ---------------------------- By: -------------------------------- Title: ----------------------------- By: -------------------------------- Title: ----------------------------- Date: ------------------------------ - -------------------------------------------------------------------------------- CONSULT YOUR ADVISERS - This document has been prepared for approval by your attorney. No representation or recommendation is made by any party as to the legal sufficiency or tax consequences of this document or the transaction to which it relates. These are questions for your attorney. In any real estate transaction, it is recommended that you consult with a professional, such as a civil engineer, industrial hygienist or other person, with experience in evaluating the condition of the property, including the possible presence of asbestos, hazardous materials and underground storage tanks. - -------------------------------------------------------------------------------- -4- EX-23.1 4 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-56, 333-17977, 333-45291, and 333-59933) pertaining to the 1992 Stock Plan, 1995 Employee Stock Purchase Plan, 1995 Director Option Plan, and the 1997 Stock Plan of Perclose, Inc., of our report dated April 28, 1999, with respect to the financial statements and schedule of Perclose, Inc. included in the Annual Report (Form 10-K) for the year ended March 31, 1999. /s/ ERNST & YOUNG San Jose, California June 22, 1999 EX-27.1 5 EXHIBIT 27.1
5 1,000 YEAR MAR-26-1999 MAR-27-1998 MAR-26-1999 7,333 22,864 7,990 301 2,549 41,197 9,225 3,458 49,590 4,675 0 0 0 11 44,904 49,590 43,340 43,340 13,979 13,979 142 0 17 5,836 292 5,544 0 0 0 5,544 0.51 0.47
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