-----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, VXhGzW2ArLf4k6HtrViS8Ju8Qgf6HBbRTxRrhpdRcIBsN8HRKAf2NNLu45FdfVrr NQah4x5NUhJTL8NORYYvxQ== 0001047469-99-031056.txt : 19990812 0001047469-99-031056.hdr.sgml : 19990812 ACCESSION NUMBER: 0001047469-99-031056 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PERCLOSE INC CENTRAL INDEX KEY: 0000934438 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 943154669 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26890 FILM NUMBER: 99684349 BUSINESS ADDRESS: STREET 1: 400 SAGINAW DRIVE CITY: REDWOOD CITY STATE: CA ZIP: 94063- BUSINESS PHONE: 4154733100 MAIL ADDRESS: STREET 1: 400 SAGINAW DRIVE CITY: REDWOOD CITY STATE: CA ZIP: 94063 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ________ to ________ . Commission File Number 0-26890 ----------- PERCLOSE, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-3154669 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 SAGINAW DRIVE, REDWOOD CITY, CA 94063-4749 (Address of principal executive offices) (Zip Code) Registrant's telephone, including area code: (650) 473-3100 ----------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes [X] No [ ] As of June 30, 1999, there were 11,174,966 shares of the Registrant's Common Stock outstanding. - -------------------------------------------------------------------------------- PERCLOSE, INC. TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1999 and March 31, 1999...................................................... 3 Condensed Consolidated Statements of Income for the three months ended June 30, 1999 and 1998............................................ 4 Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 1999 and 1998............................................ 5 Notes to Condensed Consolidated Financial Statements.................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............. 19a PART II. OTHER INFORMATION................................................................. 20 INDEX TO EXHIBITS.......................................................................... 20 SIGNATURES................................................................................. 21
2 PERCLOSE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value data)
June 30, March 31, 1999 1999 ------- ------- (Unaudited) ASSETS Current assets: Cash and cash equivalents........................................... $ 5,913 $ 7,333 Short-term investments ............................................. 25,128 22,864 Accounts receivable, net ........................................... 9,937 7,762 Inventories ........................................................ 3,701 2,549 Prepaid expenses ................................................... 874 689 ------- -------- Total current assets ............................................ 45,553 41,197 Equipment and leasehold improvements, net ............................ 6,259 5,767 Officer notes receivable ............................................. 200 200 Other assets ......................................................... 2,402 2,426 ------- -------- Total assets.......................................................... $ 54,414 $ 49,590 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................................... $ 1,008 $ 1,717 Accrued compensation ............................................... 1,469 1,886 Accrued warranty ................................................... 977 45 Other accrued expenses ............................................. 1,434 995 Notes payable ...................................................... 24 32 -------- -------- Total current liabilities ....................................... 4,912 4,675 Commitments and contingencies: Deferred rent ........................................................ 82 -- Stockholders' equity: Preferred stock, $0.001 par value .................................. -- -- Common stock, $0.001 par value ..................................... 11 11 Additional paid-in capital ......................................... 82,967 81,427 Accumulated other comprehensive income (loss) ...................... (84) (31) Accumulated deficit ................................................ (33,326) (36,219) Deferred compensation .............................................. (148) (273) -------- -------- Total stockholders' equity ........................................... 49,420 44,915 -------- -------- Total liabilities and stockholders' equity ........................... $ 54,414 $ 49,590 ======== ========
See accompanying notes. 3 PERCLOSE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited)
Three Months Ended June 30, --------------------------- 1999 1998 ------------- ----------- Net revenues ....................................................... $ 16,045 $ 8,364 Cost of goods sold ................................................. 4,246 3,190 -------- -------- Gross profit........................................................ 11,799 5,174 Operating expenses: Research and development ........................................ 2,959 1,629 Selling, general and administrative ............................. 5,937 3,633 -------- -------- Total operating expenses ..................................... 8,896 5,262 -------- -------- Income (loss) from operations ...................................... 2,903 (88) Other income (expense): Interest income, net ............................................ 440 426 Other income (expense) .......................................... (128) (40) -------- -------- Total other income ........................................... 312 386 -------- -------- Income before income taxes ......................................... 3,215 298 Provision for income taxes ......................................... 322 15 -------- -------- Net income ......................................................... $ 2,893 $ 283 ======== ======== Basic earnings per common share .................................... $ 0.26 $ 0.03 ======== ======== Diluted earnings per common share .................................. $ 0.24 $ 0.02 ======== ======== Shares used in computing basic earnings per share .................. 11,118 10,752 ======== ======== Shares used in computing diluted earnings per share ................ 12,256 11,425 ======== ========
See accompanying notes. 4 PERCLOSE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended June 30, --------------------------- 1999 1998 ----------- ----------- OPERATING ACTIVITIES Net income ........................................................ $ 2,893 $ 283 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization .................................. 505 377 Deferred compensation amortization ............................. 125 84 Compensation expense related to consultants' stock options ..... 132 -- Changes in operating assets and liabilities: Accounts receivable ......................................... (2,175) (694) Inventories ................................................. (1,152) (507) Prepaid expenses ............................................ (286) 104 Accounts payable ............................................ (709) 124 Accrued compensation ........................................ (417) (12) Accrued warranty ............................................ 932 -- Other accrued expenses ...................................... 521 (5) ---------- ---------- Net cash provided by (used in) operating activities ........ 369 (246) INVESTING ACTIVITIES Purchases of short-term investments ............................... (5,473) (4,464) Proceeds from sales and maturities of short-term investments ...... 3,156 3,583 Purchases of equipment and leasehold improvements ................. (974) (513) Proceeds from sale of fixed assets ................................ 78 -- Other assets ...................................................... 24 (690) ---------- ---------- Net cash used in investing activities ...................... (3,189) (2,084) FINANCING ACTIVITIES Payments under notes payable ...................................... (8) (207) Proceeds from issuance of common stock ............................ 1,408 197 Repayment of officer notes receivable ............................. -- 200 ---------- ---------- Net cash provided by financing activities ................. 1,400 190 ---------- ---------- Net (decrease) in cash and cash equivalents ..................... (1,420) (2,140) Cash and cash equivalents at beginning of period ................. 7,333 13,232 ---------- ---------- Cash and cash equivalents at end of period ....................... $ 5,913 $ 11,092 ========== ==========
See accompanying notes. 5 PERCLOSE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated financial statements include the accounts of Perclose, Inc. and its wholly owned subsidiary, Perclose Deutschland, GmbH formed in June 1998. All significant intercompany balances and transactions have been eliminated in consolidation. The operating results of the interim periods presented are not necessarily indicative of the results for the year ending March 31, 2000 or for any future interim period. The accompanying condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended March 31, 1999 included in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The accompanying balance sheet at March 31, 1999 is derived from audited financial statements at that date. The Company's fiscal year ends on the last Friday in March and consists of four 13 week quarters. The Company's fiscal quarters end on the Friday closest to the end of the corresponding calendar quarter. In order to keep the quarters ending at approximately the end of the calendar month, the quarter ended July 2, 1999 had 14 weeks. The three month periods shown as having ended June 30, 1999 and 1998 actually ended on July 2, 1999 and June 26, 1998, respectively. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar month. NOTE 2. INVENTORIES Inventories consist of the following (in thousands):
June 30, March 31, 1999 1999 ---------- ---------- Raw materials .............................................. $ 900 $ 700 Work-in-process ............................................ 1,099 967 Finished goods ............................................. 1,702 882 ---------- ---------- $ 3,701 $ 2,549 ========== ==========
6 NOTE 3. EARNINGS PER SHARE DATA The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for the three months ended June 30, 1999 and 1998 (in thousands).
Three Months Ended June 30, ---------------------------- 1999 1998 ------------ ------------ Numerator: Net income for basic and diluted EPS....................... $ 2,893 $ 283 ------------ ------------ Denominator for basic EPS-- Weighted-average shares......... 11,118 10,752 Effect of dilutive securities-- Stock options.................. 1,138 673 ------------ ------------ Denominator for diluted EPS-- Adjusted weighted-average shares outstanding and assumed conversions.......................................... 12,256 11,425 ============ ============
NOTE 4. COMPREHENSIVE INCOME Accumulated other comprehensive income presented in the accompanying consolidated balance sheet consists of the accumulated net unrealized gains and losses on available-for-sale marketable securities as well as net unrealized gains and losses on foreign currency translation, net of the related tax effect. The tax effects for other comprehensive income were immaterial for all periods presented. The components of comprehensive income, net of related tax, for the three months ended June 30, 1999 and June 30, 1998 are as follows (in thousands):
Three Months Ended June 30, ------------------------------ 1999 1998 -------------- -------------- Net income ..................................... $ 2,893 $ 283 Other comprehensive income: Change in unrealized gain (loss) on available-for-sale investments............. (51) 16 Change in unrealized gain (loss) on foreign currency translation....................... (2) - -------------- -------------- Comprehensive income ........................... $ 2,840 $ 299 ============== ==============
NOTE 5. SEGMENT INFORMATION The Company operates as one segment, the sale of Percutaneous Vascular Surgery products and sells these products primarily to hospitals and medical device distributors. The Company only 7 reports profit and loss information on an aggregate basis to the chief operating decision maker of the Company. The Company markets its products outside the United States (mainly Europe and Japan) through its sales organizations and distributors. Geographic sources of net revenues based on the location of customers are as follows (in thousands) for the three months ended June 30, 1999 and 1998:
Three Months Ended June 30, -------------------------- 1999 1998 ----------- ---------- United States net revenues ................................. $ 14,827 $ 7,354 Foreign net revenues ....................................... 1,218 1,010 ---------- ---------- Total net revenues ......................................... $ 16,045 $ 8,364 ========== ==========
During the three months ended June 30, 1999 and 1998, no single customer contributed 10% or more of the Company's net revenues. NOTE 6. RECENT ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal years commencing after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company currently does not make use of derivatives and management anticipates that the adoption of SFAS No. 133 will not have a significant effect on earnings or the financial position of the Company. NOTE 7. LEGAL PROCEEDINGS In March 1998, the Company received a patent infringement complaint stating that it is being sued by Kensey Nash Corporation of Exton, Pennsylvania, and Sherwood Medical Company of St. Louis, Missouri. Sherwood Medical Company was Kensey Nash's marketing partner for its Angioseal product at the time the suit was filed and is a subsidiary of Tyco International, Ltd. The suit, filed in U.S. District Court for the Eastern District of Pennsylvania, asserts that Perclose PVS devices infringe a 1997 Kensey Nash patent. The Company has responded to the patent infringement complaint filed by Kensey Nash Corporation and Sherwood Medical Company. In its response in May 1998 to the complaint, Perclose denies that its Prostar and Techstar devices infringe the Kensey Nash patent. In addition, Perclose seeks a declaration from the Court that Perclose does not infringe the Kensey Nash patent, and that the patent is both invalid and unenforceable. At the same time, the Company countersued Kensey Nash Corporation, Sherwood Medical Company and Tyco claiming the patent on which Kensey Nash Corporation and Sherwood Medical Company sued is invalid and not infringed and also claiming counterdefendants have engaged in antitrust and unfair competition violations. In March 1999, Tyco sold the marketing rights to Kensey Nash's Angio Seal product to St. Jude Medical, Inc. The case's trial date is unscheduled at the current time. Management believes the patent infringement complaint is without merit and intends to defend itself and its intellectual property rights vigorously. 8 NOTE 8. SUBSEQUENT EVENTS On July 8, 1999 Abbott Laboratories, Inc. and Perclose announced that the companies had entered into a definitive agreement for Abbott to acquire Perclose in a stock-for-stock merger for $54 per share subject to a minimum of 1.1 Abbott shares and a maximum of 1.35 Abbott shares. The merger is intended to be accounted for as a pooling of interests, tax-free to Perclose shareholders, and is expected to close in the fourth quarter of calendar 1999, subject to the approval of Perclose stockholders, regulatory agencies and other customary closing conditions. The number of shares to be issued to Perclose stockholders is designed to provide $54 worth of Abbott stock for each Perclose share at the time of the merger, subject to a minimum of 1.1 and a maximum of 1.35 Abbott shares. In early July 1999 Perclose also announced a voluntary, lot specific recall of the Techstar 6XL product. The recall is due to a manufacturing process variation that led to difficulty in deploying the needles featured in the Company's suture-based technology. Perclose plans to replace the recalled units with product in inventory. Activities associated with the recall are proceeding according to plan. The Company has an insurance policy covering the costs associated with product recalls due to, among other things, design specifications, design controls and product performance. A formal claim under this insurance policy has not yet been made for the Techstar 6XL products. The Company has accrued for the estimated costs of the product recall and recorded a receivable for the anticipated insurance proceeds for the quarter ended June 30, 1999. In early July 1999 the Perclose Board of Directors voted to terminate the open market share repurchase program initiated in September 1998. No shares have been repurchased under this program since October 1998. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT ON FORM 10-Q (THIS "REPORT") AND IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, CERTAIN STATEMENTS IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE FORWARD LOOKING STATEMENTS. WHEN USED IN THIS REPORT, THE WORD "EXPECTS," "ANTICIPATES," "ESTIMATES," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THOSE RISKS SET FORTH BELOW UNDER "FACTORS AFFECTING FUTURE OPERATING RESULTS," IN PARTICULAR, THOSE RELATING TO THE COMPANY'S DEPENDENCE ON THE PROSTAR-Registered Trademark- AND TECHSTAR-Registered Trademark- PRODUCTS, UNCERTAINTY OF MARKET ACCEPTANCE, HISTORY OF LOSSES AND RISK OF INABILITY TO SUSTAIN PROFITABILITY, FLUCTUATIONS IN OPERATING RESULTS, GOVERNMENT REGULATION, COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE, LIMITED MANUFACTURING EXPERIENCE AND SCALE-UP RISK, UNCERTAINTY RELATING TO NEW PRODUCT DEVELOPMENT, LIMITED SALES AND MARKETING EXPERIENCE, RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY AND UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. OVERVIEW Perclose, 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 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 and consists of four 13 week quarters. The Company's fiscal quarters end on the Friday closest to the end of the corresponding calendar quarter. In order to keep the quarters ending at approximately the end of the calendar month, the quarter ended July 2, 1999 had 14 weeks. The three month periods shown as having ended June 30, 1999 and 1998 actually ended on July 2, 1999 and June 26, 1998, respectively. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar month. On July 8, 1999 Abbott Laboratories, Inc. and Perclose announced that the companies had entered into a definitive agreement for Abbott to acquire Perclose. Under the terms of the agreement Abbott will acquire Perclose in a stock-for-stock merger for $54 per share. The merger is intended to be accounted for as a pooling of interests, tax-free to Perclose stockholders, and is expected to close in the fourth quarter of 1999, subject to the approval of Perclose stockholders, regulatory agencies and other customary closing conditions. The number of shares 10 to be issued to Perclose stockholders is designed to provide $54 worth of Abbott stock for each Perclose share, subject to a minimum of 1.1 Abbott shares and a maximum of 1.35 Abbott shares. RESULTS OF OPERATIONS REVENUES. The Company's net revenues increased 92% to $16.0 million for the three months ended June 30, 1999 from $8.4 million for the three months ended June 30, 1998. Revenue shipments of Prostar and Techstar units increased by 98% to approximately 73,000 units for the three months ended June 30, 1999 from 37,000 units for the three months ended June 30, 1998. Domestic sales as a percentage of total revenue for the three months ended June 30, 1999 increased to 92% from 88% for the three months ended June 30, 1998. Sales of Prostar and Techstar products accounted for 29% and 71%, respectively, of the net revenues for the three months ended June 30, 1999. The increase in the revenues for the first quarter of fiscal 2000 was due primarily to an increase in sales of Techstar 6F XL systems in the United States. GROSS PROFIT. Gross profit increased to $11.8 million for the three months ended June 30, 1999 from $5.2 million for the three months ended June 30, 1998. Gross profit increased to 74% of net revenues for the quarter ended June 30, 1999 from 62% of net revenues for the quarter ended June 30, 1998. The increase in gross profit was primarily due to increases in sales and production volumes, which contributed to reductions in fixed overhead cost per unit and enabled the Company to achieve improvements in manufacturing efficiency. Production volume of Techstar and Prostar devices increased 120% to 97,000 units for the quarter ending June 30, 1999 from 44,000 units produced during the quarter ending June 30, 1998. In addition, manufacturing process changes were implemented which resulted in a reduction of variable overhead costs. Despite the significant increase in volume, switching to a new supplier of sterilization services resulted in a cost savings in the quarter ended June 30, 1999 as compared to the quarter ended June 30, 1998. Freight costs on outgoing shipments also decreased as a result of a change in the customer shipping policy. Lastly, effective July 1, 1998 the royalty payments on shipments of Prostar were lowered. RESEARCH AND DEVELOPMENT. Research and development expenses increased 82% to $3.0 million for the three months ended June 30, 1999 from $1.6 million for the three months ended June 30, 1998. The increase in research and development costs was attributable to a significant increase in headcount resulting in higher payroll expenses. In addition, materials and services associated with prototype builds for the Company's next generation PVS product, the Closer occurred in the 1999 period that did not occur in the 1998 period. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased 63% to $5.9 million for the three months ended June 30, 1999 from $3.6 million for the three months ended June 30, 1998. The increase was primarily due to the expansion of the Company's domestic sales force which resulted in both higher payroll-related costs as well as increased travel expenses. Headcount of the domestic sales force, including clinical specialists, almost doubled from 36 as of June 30, 1998 to 71 as of June 30, 1999. General and administrative expenses increased as a result of hiring additional support personnel for the expanded sales force and to handle the larger sales volume. INTEREST INCOME, NET. Net interest income increased slightly to $440,000 for the three months ended June 30, 1999 from $426,000 for the three months ended June 30, 1998. The 11 amount of cash and short term investments and related yields did not change significantly between the two periods. OTHER INCOME (EXPENSE). Other expense increased to $128,000 for the three months ended June 30, 1999 from $40,000 for the three months ended June 30, 1998, primarily as a result of exchange rate losses on outstanding accounts receivable balances for the Company's German and French customers. INCOME TAXES The income tax provision for the three months ended June 30, 1999 of $322,000 is attributable to current income taxes and consists of foreign taxes, state income taxes, and federal alternative minimum taxes. The income tax provision for the three months ended June 30, 1998 of $15,000 is attributable to current income taxes and consists primarily of state and federal minimum taxes. 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 2000 through 2012 if not utilized. As of fiscal year end 1999 the future use of the net operating loss and tax credit carryforwards are not subject to material limitations resulting from the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. LIQUIDITY AND CAPITAL RESOURCES The Company's net cash provided by operating activities was $369,000 for the three months ended June 30, 1999, compared to net cash used of $246,000 for the three months ended June 30, 1998. The Company's increased profitability in the current quarter, which resulted in net income of $2.9 million compared to net income of $283,000 for the quarter ended June 30, 1998, was the main reason for the generation of cash provided by operating activities in the current three month period. The Company's net cash used by investing activities was $3.2 million for the three months ended June 30, 1999 compared to net cash used by investing activities of $2.1 million for the three months ended June 30, 1998. For the three months ended June 30, 1999 net purchases of short-term investments used $2.3 million in cash as compared to $881,000 of net purchases for the same period in 1998. Equipment and leasehold improvement purchases for the three months ended June 30, 1999 were $974,000, as compared to $513,000 for the three months ended June 30, 1998. The major equipment and leasehold improvement purchases for the current three month period were related to final invoices for the build out of the Company's new headquarters and manufacturing facility, as well as the acquisition of tooling for the next generation PVS product. 12 The Company's net cash generated by financing activities was $1.4 million for the three months ended June 30, 1999, compared to cash generated of $190,000 for the three months ended June 30, 1998. Proceeds from the issuance of common stock relating to option exercises provided $1.4 million for the current quarter compared to $197,000 for the quarter ended June 30, 1998. The Company's principal source of liquidity at June 30, 1999 consisted of cash, cash equivalents and short-term investments of $31.0 million versus $30.2 million at March 31, 1999. Although Perclose believes that current cash balances and short-term investments along with cash generated from the future sales of products will be sufficient to meet the Company's operating and capital requirements, there can be no assurance that the Company will not require additional financing. There can be no assurance that additional financing, if required, will be available on satisfactory terms or at all. In any event, Perclose may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Perclose's future liquidity and capital requirements will depend on numerous factors including the extent to which the Company's products gain market acceptance, actions relating to regulatory and reimbursement matters, the costs and timing of expansion of marketing, sales, manufacturing and product development activities and competitive developments. YEAR 2000 COMPLIANCE STATUS OF PLAN, COSTS AND CONTINGENCY PLAN The Company is aware of software compatibility issues associated with existing computer systems as the year 2000 approaches. The "year 2000 problem" is pervasive and complex, as virtually every computer operation will be affected in some way by the rollover of the two-digit year value from 99 to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company recognizes the importance of the Year 2000 issue and has assigned a project leader to supervise an assessment of the Company's Year 2000 readiness. The scope of the Year 2000 readiness effort includes computer software and hardware, electronic data interchange, manufacturing and lab equipment, facilities systems 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 September 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. 13 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 quarter ended June 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 quarter ended June 1999 all of these suppliers contacted have responded. All responses indicate that the supplier is aware of the Year 2000 issue and intends to be compliant. There can be no absolute assurances that there will not be a material adverse effect on the Company if third parties do not convert their systems in a timely manner and in a way that is compatible with the Company's systems. Any Year 2000 compliance problem of either the Company, its suppliers, or customers could materially adversely affect the Company's business, results of operations, cash flows, financial condition and prospects. However, based on currently available information, the Company does not believe that the Year 2000 matters discussed above related to internal systems or products sold to customers will have a material adverse impact on the Company's business, financial condition or results of operations. FACTORS AFFECTING FUTURE OPERATING RESULTS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's future results of operations could vary significantly as a result of the factors described in this section. 14 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 the purpose of obtaining approval to market this product in the United States. The product development process is time-consuming and costly, and there can be no assurance that product development will be successfully completed, that necessary regulatory clearances or approvals will be granted by the FDA on a timely basis, or at all, or that the potential products will achieve market acceptance. Failure by the Company to develop, obtain necessary regulatory clearances or approvals for, or successfully market potential new products could have a material adverse effect on the Company's business, financial condition and results of operations. HISTORY OF LOSSES AND LIMITED HISTORY OF PROFITABILITY. The Company has a limited history of profitability. The Company experienced significant operating losses through fiscal year 1998 and, as of June 30, 1999, had an accumulated deficit of approximately $33.3 million. Although the Company recorded net income for each quarter beginning with the first quarter in fiscal year 1999, there can be no assurance that the Company will be able to increase its level of profitability or to sustain profitability. Failure to increase or sustain the level of profitability could have a material adverse effect on the Company's future operating results. 15 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. 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 16 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. In early July 1999 Perclose announced a voluntary, lot specific recall of the Techstar 6XL product. The recall is due to a manufacturing process variation that led to difficulty in deploying the needles featured in the Company's suture-based technology. Perclose plans to replace the recalled units with product in inventory. Activities associated with the recall are proceeding according to plan. The Company has an insurance policy covering the costs associated with product recalls due to, among other things, design specifications, design controls and product performance. A formal claim under this insurance policy has not yet been made for the Techstar 6XL products. The Company has accrued for the estimated costs of the product recall and recorded a receivable for the anticipated insurance proceeds for the quarter ended June 30, 1999. There can be no assurance that future product problems necessitating recalls will not arise in the future, and any such future recall could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE UPON KEY SUPPLIERS. Perclose purchases components used in its products from various suppliers and relies on single sources for several components. For certain of these components, there are relatively few alternative sources of supply. Establishing additional or replacement suppliers for any of the components used in the Company's products, if required, may not be accomplished quickly and could involve significant additional costs. Any supply interruption from vendors or failure of the Company to obtain alternative vendors, if required, for any of the components used to manufacture the Company's products would limit the Company's ability to manufacture its products and could therefore have a material adverse effect on the Company's business, financial condition and results of operations. RELIANCE ON PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY. The Company's ability to compete effectively will depend in part on its ability to develop and maintain proprietary aspects of its technology. There can be no assurance that the Company's issued patents, any patents that may be issued as a result of the Company's U.S. or international patent applications, or the patent 17 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 have engaged in antitrust and unfair competition violations. In March 1999, Tyco sold the marketing rights to the competitive product to St. Jude Medical, Inc. The case's trial date is unscheduled at the current time. The Company believes that the case is without merit and intends to defend itself and its intellectual property rights vigorously. The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights. Any litigation or interference proceedings, including the proceeding currently pending against the Company, will result in substantial expense to the Company and significant diversion of effort by the Company's technical and management personnel. An adverse determination in the current pending litigation or interference proceedings to which the Company may become a party could subject the Company to significant liabilities to third parties or require the Company to seek licenses from third parties. Although patent and intellectual property disputes in the medical device area have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. Furthermore, there can be no assurance that necessary licenses would be available to the Company on satisfactory terms if at all. Adverse determinations in a judicial or administrative proceeding, including the currently pending proceedings, or failure to obtain necessary licenses could prevent the Company from manufacturing and selling its products, which would have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT. In the United States, health care providers, such as hospitals and physicians that purchase the Company's products, generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or part of the cost of therapeutic and diagnostic catheterization procedures. Reimbursement for catheterization procedures performed using devices that have received FDA approval has generally been available in the United States. The Company anticipates that in a prospective payment system, such as the diagnostic related group ("DRG") system utilized by Medicare, and in many managed care systems used by private health care payors, the cost of the Company's products will be incorporated into the overall cost of the procedure and that there will be no separate, additional reimbursement for the Company's products. Failure by physicians, hospitals and other users of the Company's products to obtain sufficient reimbursement from 18 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 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. 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company's market risk disclosures set forth in Item 7A of its Annual Report on Form 10-K for the year ended March 31, 1999 have not changed significantly. 19A PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In March 1998, the Company received a patent infringement complaint stating that it is being sued by Kensey Nash Corporation of Exton, Pennsylvania, and Sherwood Medical Company of St. Louis, Missouri. Sherwood Medical Company was Kensey Nash's marketing partner for its Angioseal product at the time the suit was filed and is a subsidiary of Tyco International, Ltd. The suit, filed in U.S. District Court for the Eastern District of Pennsylvania, asserts that Perclose PVS devices infringe a 1997 Kensey Nash patent. The Company has responded to the patent infringement complaint filed by Kensey Nash Corporation and Sherwood Medical Company. In its response in May 1998, to the complaint, Perclose denies that its Prostar and Techstar devices infringe the Kensey Nash patent. In addition, Perclose seeks a declaration from the Court that Perclose does not infringe the Kensey Nash patent, and that the patent is both invalid and unenforceable. At the same time, the Company countersued Kensey Nash Corporation, Sherwood Medical Company and Tyco claiming the patent on which Kensey Nash Corporation and Sherwood Medical Company sued is invalid and not infringed and also claiming counterdefendants have engaged in antitrust and unfair competition violations. In March 1999, Tyco sold the marketing rights to Kensey Nash's Angio Seal product to St. Jude Medical, Inc. The case's trial date is unscheduled at the current time. Management believes the patent infringement complaint is without merit and intends to defend itself and its intellectual property rights vigorously. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................... NONE ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................... NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... NONE ITEM 5. OTHER INFORMATION.................................................. NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits The exhibits listed in the Index to Exhibits are filed as a part hereof and are incorporated by reference. b) Reports on Form 8-K: The Company did not file any reports on Form 8-K for the three months ended June 30, 1999. INDEX TO EXHIBITS
Exhibit No. Description - ---------- ----------- 27.1 Financial Data Schedule (Edgar version only).
20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this 10-Q report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 13 , 1999 PERCLOSE, INC. /s/ HENRY A. PLAIN, JR. ---------------------------------------- Henry A. Plain, Jr. PRESIDENT AND CHIEF EXECUTIVE OFFICER /s/ KENNETH E. LUDLUM ---------------------------------------- Kenneth E. Ludlum VICE PRESIDENT FINANCE AND ADMINISTRATION, CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) 21 EX-27.1 2 EXHIBIT 27.1
5 1,000 3-MOS MAR-31-2000 APR-01-1999 JUN-30-1999 5,913 25,128 9,937 0 3,701 45,553 6,259 0 54,414 4,912 0 0 0 11 49,409 54,414 16,045 16,045 4,246 8,896 312 0 0 3,215 322 2,893 0 0 0 2,893 .26 .24
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