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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1996
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 0-28266
HEARTPORT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3222307
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 CHESAPEAKE DRIVE
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices)
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(415) 306-7900
(Registrant's telephone number, including area code)
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Indicate by check /X/ whether the registrant (1) has filed all reports
required to be filed by Sections 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
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As of June 30, 1996 there were 24,106,576 shares of the Registrant's
Common Stock outstanding.
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HEARTPORT, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Balance Sheets at June 30, 1996 and December 31, 1995.... 3
Condensed Statements of Operations for the three and six months
ended June 30, 1996 and June 30, 1995.............................. 4
Condensed Statements of Cash Flows for the six months ended
June 30, 1996 and June 30, 1995.................................... 5
Notes to Condensed Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................ 18
Item 5. Other Information.................................................. 18
Item 6. Exhibits and Reports on Form 8-K................................... 18
SIGNATURES.................................................................. 19
__________________________________________________________________
Heartport, Port-Access, and endoCPB are trademarks of the Company.
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTPORT, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
June 30, December 31,
1996 1995(1)
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 43,454,470 $ 7,411,902
Short-term investments 70,280,499 5,198,274
Prepaid expenses and other 1,215,170 81,665
------------ ------------
Total current assets 114,950,139 12,691,841
Property and equipment, net 2,947,115 1,367,726
Deposits, intangibles and other assets,
net 178,351 206,926
------------ ------------
Total assets $118,075,605 $ 14,266,493
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 905,081 $ 618,014
Accrued expenses 597,562 273,548
Accrued compensation and related
benefits 739,300 172,750
Current portion of long-term debt 643,873 393,542
------------ ------------
Total current liabilities 2,885,816 1,457,854
Noncurrent liabilities:
Long-term debt, less current portion 3,957,666 3,912,758
Other long-term liabilities 267,780 121,312
Deferred revenue 500,000 --
------------ ------------
Total long-term liabilities 4,725,446 4,034,070
Stockholders' equity:
Convertible preferred stock -- 9,237
Common stock, $0.001 par value 24,107 9,084
Additional paid-in capital 137,687,248 26,394,926
Notes receivable from stockholders (1,002,100) (1,093,000)
Deficit accumulated during the
development stage (26,244,912) (16,545,678)
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Total stockholders' equity 110,464,343 8,774,569
------------ ------------
Total liabilities and stockholders'
equity $118,075,605 $ 14,266,493
------------ ------------
------------ ------------
(1) DERIVED FROM THE AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1995.
SEE ACCOMPANYING NOTES.
3
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HEARTPORT, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Period From
Three Months Ended Six Months Ended May 17, 1991
June 30, June 30, (Inception) to
------------------------ ------------------------ June 30,
1996 1995 1996 1995 1996
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Costs and expenses:
Research and development $ 4,785,564 $ 1,985,754 $ 8,188,238 $ 3,504,684 $ 22,793,749
General and administrative 1,673,724 365,391 2,450,521 563,878 4,987,664
----------- ----------- ----------- ----------- ------------
Loss from operations 6,459,288 2,351,145 10,638,759 4,068,562 27,781,413
Interest income 1,005,895 125,607 1,163,728 142,654 1,950,042
Interest expense (117,801) (26,583) (224,203) (34,625) (413,541)
----------- ----------- ----------- ----------- ------------
Net loss $(5,571,194) $(2,252,121) $(9,699,234) $(3,960,533) $(26,244,912)
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Pro forma net loss per share $ (0.25) $ (0.11) $ (0.46) $ (0.20)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares used in calculation of
pro forma net loss per share 22,684,000 19,783,000 21,233,000 19,783,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
4
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HEARTPORT, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
---------------------------
1996 1995
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Operating activities:
Net loss $ (9,699,234) $(3,960,533)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 415,088 137,274
Forgiveness of note receivable 50,000 --
Acceleration of stock option vesting 183,450 --
Changes in operating assets and
liabilities:
Prepaid expenses and other (1,133,505) 202,436
Accounts payable and accrued
expenses 1,324,099 (13,864)
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Net cash used in operating activities (8,860,102) (3,634,687)
Investing activities:
Purchase of short-term investments (76,080,499) (4,200,000)
Sales and maturities of short-term
investments 10,998,274 1,092,025
Purchase of property and equipment (1,981,823) (332,395)
(Increase) decrease in deposits,
intangibles and other assets (34,079) (9,523)
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Net cash used in investing activities (67,098,127) (3,449,893)
Financing activities:
Proceeds from issuance of preferred stock -- 10,895,740
Proceeds from issuance of common stock 111,183,708 1,540
Proceeds from payment of stockholders'
notes receivable 21,850 --
Proceeds from long-term borrowings 1,043,113 1,178,785
Repayment of long-term borrowings (247,874) (92,219)
------------ -----------
Net cash provided by financing activities 112,000,797 11,983,846
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Net increase in cash and cash equivalents 36,042,568 4,899,266
Cash and cash equivalents at beginning
of period 7,411,902 365,152
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Cash and cash equivalents at end of
period $ 43,454,470 $ 5,264,418
------------ -----------
------------ -----------
SEE ACCOMPANYING NOTES.
5
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HEARTPORT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited condensed 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 financial information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included.
The operating results of the interim periods presented are not
necessarily indicative of the results for the year ending December 31, 1996
or for any other interim period. The accompanying condensed financial
statements should be read in conjunction with the unaudited financial
statements for the three months ended March 31, 1996 and the audited
financial statements and notes thereto for the year ended December 31, 1995
included in the Company's Registration Statement on Form S-1 (No. 333-1906)
filed with the Securities and Exchange Commission.
Note 2. Available-for-Sale Securities
At June 30, 1996 and December 31, 1995, all short-term investments
were designated as available-for-sale. Available-for-sale securities are
carried at fair value with unrealized gains and losses, net of tax, reported
in a separate component of stockholders' equity. 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 investment income. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities
classified as available-for-sale are included in interest income.
The following is a summary of the fair value of short-term
investments:
June 30, December 31,
1996 1995
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Obligations of U.S. federal
government agencies $14,422,425 $ --
Obligations of foreign
governments -- 998,274
U.S. and foreign corporate notes 37,891,049 --
Auction rate preferred 12,000,000 4,200,000
Corporate bonds 7,043,000 --
Corporate commercial paper 3,928,525 --
Certificates of deposit 2,001,600 --
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$77,286,599 $5,198,274
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Amounts included in short-term
investments $70,280,499 $5,198,274
Amounts included in cash and
cash equivalents 7,006,100 --
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$77,286,599 $5,198,274
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----------- ----------
At June 30, 1996 and December 31, 1995, the cost of securities approximated
fair value, and the amount of unrealized gains or losses was not significant.
There were no realized gains or losses for the six month periods ending June
30, 1996 or 1995. Securities mature through July 1998.
Note 3. Stockholders' Equity
The Company sold 5,750,000 shares of common stock at $21.00 per share through
an initial public offering in April 1996. Net proceeds (after underwriters'
commissions and fees along with other costs associated with the offering)
totaled approximately $111,157,000.
Note 4. Net Loss Per Share
Except as noted below, net loss per share is computed using the weighted
average number of common shares outstanding. Common equivalent shares from
stock options, warrants and convertible preferred stock are excluded from the
computation as their effect is antidilutive, except that pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and
common equivalent shares issued during the twelve-month period prior to the
Company's April 1996 initial public offering at prices substantially below
the initial public offering price have been included in the calculation as if
they were outstanding for all periods presented (using the treasury stock
method at the initial public offering price for stock options and warrants
and the if-converted method for convertible preferred stock).
Pro forma net loss per share for the three and six months ended June 30, 1996
and 1995 has been computed as described above and also gives effect to the
conversion of convertible preferred shares not included above that
automatically converted upon completion of the Company's initial public
offering from the original date of issuance.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This report contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ materially due to
factors that include, but are not limited to, the risks discussed in "Risk
Factors That May Affect Future Results" as well as those discussed in the
following overview section, and the risks discussed in the "Risk Factors"
section of the Company's Registration Statement on Form S-1, as amended,
filed with the Securities and Exchange Commission (No. 333-1906).
OVERVIEW
Since its inception in May 1991, the Company has been engaged in the
research and development of minimally invasive cardiac surgery systems and
related technology. The Company's systems for minimally invasive cardiac
surgery consist of a common platform, the endovascular cardiopulmonary bypass
("endoCPB") system, and procedure-specific application systems comprising
proprietary reusable and disposable devices and visualization systems. Using
the Company's endoCPB platform and application systems, the surgeon is able
to place the patient on cardiopulmonary bypass, stop and protect the
patient's heart, and operate on the heart via a series of small ports between
the patient's ribs. The Company has developed systems for Port-Access
coronary artery bypass graft ("CABG") and Port-Access mitral valve repair and
mitral valve replacement (collectively, "MVR") procedures. The Company
believes that its endoCPB platform and procedure-specific Port-Access
application systems can be applied to a broad range of cardiac diseases,
while offering the safety and efficacy of conventional cardiac surgery.
To date, the Company has generated no revenues from the sale of
products, and it has been unprofitable since inception. For the period from
incorporation to June 30, 1996, the Company has incurred cumulative net
losses of approximately $26.2 million. The Company expects its expenses in
all categories to continue to increase significantly and expects to continue
to incur substantial and increasing losses.
The Company has hired a significant number of employees to conduct
and support its research and development activities. At December 31, 1995,
and June 30, 1996, the Company had 73 and 148 employees, respectively. The
Company anticipates that its workforce will continue to grow rapidly to
support product development, clinical trials, commercialization, and initial
sales and marketing of its products.
The research and development, manufacture, sale, and distribution of
the endoCPB, Port-Access CABG, Port-Access MVR, and other Port-Access systems
are subject to numerous regulations imposed by governmental authorities,
principally the Food and Drug Administration (the "FDA") and corresponding
state and foreign agencies. The regulatory process is lengthy, expensive, and
uncertain. Prior to commercial sale in the United States, most medical
devices, including the Company's endoCPB, Port-Access CABG, and Port-Access
MVR systems, must be approved or cleared by the FDA. Securing FDA approvals
and clearances will require submission to the FDA of extensive technical
information and may require submission of extensive clinical data. Many
foreign governments and the European Union also have review processes for
medical devices.
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There can be no assurance that the Company's research and development
efforts will be successfully completed, and there can be no assurance that
the endoCPB, Port-Access CABG, and Port-Access MVR systems will prove to be
safe and effective. There can be no assurance that the Company's products
will be cleared or approved for marketing by the FDA or any foreign
government agency or that the endoCPB, Port-Access CABG, or Port-Access MVR
systems or any other product developed by the Company will be successfully
introduced or achieve market acceptance. There can be no assurance that the
Company will ever achieve significant revenues from sales of the endoCPB,
Port-Access CABG, or Port-Access MVR systems or any other potential products,
or will ever achieve profitability.
9
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RESULTS OF OPERATIONS
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of personnel costs, consulting fees and other costs in
support of product development, clinical trials, physician training, and
regulatory submissions, costs incurred in producing products for research and
development activities and clinical trials, and expenses associated with
building the Company's infrastructure, including prosecuting United States and
foreign patent applications relating to the Company's technology. Research and
development expenses increased to $4.8 million in the second quarter of 1996
from $2.0 million in the second quarter of 1995, and increased to $8.2 million
for the first six months of 1996 from $3.5 million during the corresponding
period of 1995. The increase in spending in both periods was primarily
attributable to the hiring of additional personnel required to support expanded
clinical trials, physician training, and product development activities, and to
the cost of producing products for clinical trials, physician training, and
research and development activities. The Company anticipates that it will
continue to devote substantial resources to research and development and that
research and development expenses will continue to increase substantially.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses consist primarily of costs for both administrative and sales and
marketing personnel, as well as legal, accounting and other professional
fees. General and administrative expenses increased to $1.7 million in the
second quarter of 1996 from $365,000 in the second quarter of 1995, and
increased to $2.5 million for the first six months of 1996 from $564,000 for
the corresponding period of 1995. These increases were primarily due to
increased staffing and associated expenses necessary to manage and support
the Company's increased scale of operations and to prepare for
commercialization of certain products. The Company believes that its general
and administrative expenses will continue to increase as a result of an
expansion of the Company's administrative staff to support its growing
operations and as a result of increases in expenses associated with being a
public company. In this regard, the Company has leased an additional 25,000
square feet of office space adjacent to its present facilities and plans to
occupy this new facility in the Fall of 1996. In addition, the Company
expects that its expenditures will increase substantially as the Company
builds its sales force and marketing staff in connection with
commercialization of its products.
INTEREST INCOME. Interest income primarily represents interest
earned by the Company on its cash and short-term investments. Interest income
increased to $1.0 million in the second quarter of 1996 and $1.2 million for
the first six months of 1996 from $126,000 in the second quarter of 1995 and
$143,000 for the first six months of 1995. The increases in each period were
primarily due to the Company's higher average investment balances resulting
from cash received in the Company's initial public offering.
INTEREST EXPENSE. Interest expense represents interest expense on
long-term debt. Interest expense increased to $118,000 in the second quarter
of 1996 and $224,000 for the first six months of 1996 from $27,000 in the
second quarter of 1995 and $35,000 for the first six months of 1995. The
increases in each period were due to additional borrowings under the
Company's equipment financing agreement.
INCOME TAXES. The Company has not generated any net income to date
and therefore has not paid any federal income taxes since its inception. The
provision for income taxes consists solely of state minimum taxes.
10
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Realization of deferred tax assets is dependent on future earnings, if any,
the amount and timing of which are uncertain. Accordingly, a valuation
allowance has been established in an amount equal to the net deferred tax
assets of the Company to reflect these uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
From inception through early 1996, the Company funded its operations
and investments in property and equipment through the private sale of
preferred stock, totaling approximately $25.1 million, a long-term loan from
St. Jude Medical of $3.0 million, and borrowings under an equipment financing
agreement. On April 25, 1996, the Company completed an initial public
offering, selling 5,750,000 shares of Common Stock and raising net proceeds
of $111.2 million.
During the six month periods ended June 30, 1996 and June 30, 1995,
net cash used in operating activities was $8.9 million and $3.6 million,
respectively. For such periods, net cash used in operating activities
resulted primarily from increasing net losses. Net cash used in investing
activities was $67.1 million and $3.4 million for the first six months of
1996 and 1995, respectively. The net cash used in investing activities was
primarily attributable to the purchase of short-term investments and the
purchase of property and equipment. Net cash provided by financing activities
was $112.0 million and $12.0 million during the six month periods ended June
30, 1996 and June 30, 1995, respectively. The net cash provided by financing
activities in 1996 was primarily attributable to proceeds from the Company's
initial public offering, while the net cash provided in 1995 was primarily
attributable to the sale of preferred stock and proceeds from long-term
borrowings.
The Company expects to continue to incur substantial expenses in
support of additional research and development activities, clinical trials,
physician training, manufacturing expansion, building a sales and marketing
organization, and ongoing administrative activities. The Company believes
that its existing cash, cash equivalents, and short-term investments will be
adequate to meet its cash needs for at least the next 18 months. Thereafter,
the Company may require additional funds to support its operating
requirements or for other purposes and may seek to raise such additional
funds through public or private equity financings or from other sources.
There can be no assurance that additional financing will be available at all
or that, if available, such financing would be obtainable on terms favorable
to the Company.
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RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves
a number of risks, some of which are beyond the Company's control. The
following discussion highlights some of these risks. These risks could
affect the Company's actual future results and could cause them to differ
materially from any forward-looking statements made by the Company. These
risks should be read in conjunction with the "Risk Factors" section included
in the Company's Registration Statement on Form S-1, as amended, filed with
the Securities and Exchange Commission (No. 333-1906).
NO ASSURANCE OF REGULATORY CLEARANCE OR APPROVAL; SIGNIFICANT
DOMESTIC AND INTERNATIONAL REGULATION. The Company's individual devices are
subject to regulatory clearances or approvals by the FDA. Based upon
discussions with the FDA, the Company believes that its devices and systems
will be subject to United States regulatory clearance through the 510(k)
premarket notification process rather than a more extensive pre-market
approval ("PMA") submission. Although the Company has recently received
510(k) clearance from the FDA for key components of its Port-Access
technology, additional clearances are required before the Port-Access CABG
system and Port-Access MVR system will be ready for full scale market launch,
and there can be no assurances that these clearances will be received. Based
upon discussions with the FDA, the Company
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believes that in order to label its endoCPB and Port-Access systems for
minimally invasive use, the Company must obtain regulatory approval or
clearance for such labeling. There can be no assurance that the FDA will act
favorably or quickly on the Company's 510(k) or other submissions, and
significant difficulties and costs may be encountered by the Company in its
efforts to obtain FDA clearance that could delay or preclude the Company from
marketing and selling its products in the United States. Furthermore, there
can be no assurance that the FDA will not request additional data, require
that the Company conduct further clinical studies, or require a more
extensive PMA submission, causing the Company to incur substantial costs and
delays. There can be no assurance whether or when the Company will
successfully complete clinical trials of any of its systems or obtain
regulatory clearance or approval from the FDA to market, sell, and train
physicians to use its devices and systems. The Company's business, financial
condition, and results of operation are critically dependent upon FDA
clearance or approval of the Company's systems. Failure to obtain such
clearance or approval, or to obtain such clearance or approval on a timely
basis, would have a material adverse effect on the Company's business,
financial condition, and results of operations, and could result in
postponement of the commercialization of the Company's products or even
cessation of the Company's business in the United States.
Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approval for sale in foreign countries may be longer
or shorter than that required for FDA clearance or approval, and the
requirements may differ. In addition, if the FDA were to require a PMA
submission for the Company's products, the Company would be required to
obtain FDA approval to export such devices and systems to international
markets prior to their approval by the FDA for commercialization in the
United States. In Europe, the Company must obtain certifications necessary to
enable the "CE" mark to be affixed to its systems, which will allow the
Company to market the systems throughout Europe. Although the Company is
seeking regulatory approval to begin marketing of its systems in Europe by
early 1997, there can be no assurance that such approval will be received on
a timely basis, or at all. Most other countries in which the Company intends
to operate either do not currently regulate medical systems or have minimal
regulatory requirements, although these countries may adopt more extensive
regulations in the future that could impact the Company's ability to market
its systems. In addition, significant costs and requests for additional
information may be encountered by the Company in its efforts to obtain
regulatory approvals. Any such events could substantially delay or preclude
the Company from marketing its systems internationally.
In addition, the FDA and certain foreign regulatory authorities impose
numerous other requirements with which medical device manufacturers must comply.
Product approvals can be withdrawn for failure to comply with regulatory
standards or the occurrence of unforeseen problems following initial marketing.
The Company will also be required to adhere to applicable FDA regulations
setting forth current Good Manufacturing Practices ("GMP") requirements, which
include testing, control, and documentation requirements. Ongoing compliance
with GMP
13
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and other applicable regulatory requirements is monitored through periodic
inspections by state and federal agencies, including the FDA, and by
comparable agencies in other countries. Failure to comply with applicable
regulatory requirements can result in fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
denial or withdrawal of premarket clearance or premarket approval for
devices, and criminal prosecution. Furthermore, changes in existing
regulations or adoption of new regulations or policies could delay or even
prevent the Company from obtaining future regulatory approvals or clearances.
For example, the FDA is currently considering major revisions to its GMP
regulations. Such revisions could have a material adverse effect on the
Company's business, financial condition, and results of operations.
NO ASSURANCE OF MARKET ACCEPTANCE. There can be no assurance that the
Company's endoCPB and Port-Access systems will gain any significant degree of
market acceptance among physicians, patients, and health care payors, even if
necessary regulatory and reimbursement clearances and approvals are obtained.
The Company believes that physicians' acceptance and healthcare payors'
reimbursement of Port-Access procedures will be essential for market
acceptance of its systems, and there can be no assurance that any such
recommendations or approvals will be obtained. Physicians will not recommend
Port-Access procedures unless they conclude, based on clinical data and other
factors, that Port-Access procedures are an attractive alternative to
traditional treatments for cardiovascular disease. Most patients with
cardiovascular disease first consult with a cardiologist, who may treat the
patient with pharmaceuticals or non-surgical interventions such as
percutaneous transluminal coronary angioplasty ("PTCA") and intravascular
stents, or may refer the patient to a cardiac surgeon for open-chest CABG
surgery. Cardiologists may not recommend Port-Access procedures until such
time, if any, as Port-Access CABG can be successfully demonstrated to be as
safe and cost-effective as other accepted treatments. In addition, cardiac
surgeons may elect not to recommend Port-Access procedures until such time,
if any, as the efficacy of the Company's Port-Access procedures can be
successfully demonstrated as compared to conventional, open-chest surgery
methods, which have become widely adopted by cardiac surgeons since the
initial use of such surgery in the mid-1950s. Even if the clinical efficacy
of Port-Access procedures is established, cardiologists, cardiac surgeons,
and other physicians may elect not to recommend the procedures for any number
of other reasons. Failure of the Company's products to achieve significant
market acceptance would have a material adverse effect on the Company's
business, financial condition, and results of operations.
RISKS ASSOCIATED WITH NEW SURGICAL PROCEDURE. Clinical trials of the
Company's endoCPB, Port-Access CABG systems, and Port-Access MVR systems
conducted to date have shown that, as with any novel surgical procedure,
there is a learning process involved for surgeons and other members of the
cardiac surgery team to become proficient. Broad use of the Company's
systems will require training of numerous physicians, and the time required
to begin and complete such training could adversely affect market acceptance.
In addition, the Company has not yet conducted any multi-vessel Port-Access
CABG procedures.
FLUCTUATIONS IN OPERATING RESULTS. Results of operations may vary
significantly from quarter to quarter depending upon numerous factors,
including the following: timing and results of clinical trials; delays
associated with the FDA and other regulatory approval processes; health care
reform and reimbursement policies; demand for the Company's products; changes
in pricing policies by the Company or its competitors; the number, timing,
and significance of product enhancements and new product announcements by the
Company and its competitors; the ability of the Company to develop,
introduce, and market its initial and enhanced versions of the Company's
products on a timely basis; customer order deferrals in anticipation of
enhancements or new products offered by the Company or its competitors;
product quality problems; personnel changes; and the level of international
sales. In addition, the Company intends to develop both a domestic and an
international direct sales force. The timing of such development and the rate
at which new sales people become productive could also cause material
fluctuations in the Company's quarterly operating results.
Operating results have been and will continue to be difficult to
forecast. Future revenue, if any, is also difficult to forecast because the
Company has not yet received all clearances or approvals that may be required
from the FDA for its Port-Access systems, the market for minimally invasive
cardiac surgery systems is rapidly evolving, and the inherent risks
associated with new medical device technology. Accordingly, the Company
believes that period-to-period comparisons of its operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance. Failure by the Company, for any reason, to achieve additional
regulatory approvals and to begin to generate and increase revenue from sales
of its products would have a material adverse effect on the Company's
business, operating results, and financial condition. Due to the foregoing
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would
likely be materially adversely affected.
SIGNIFICANT COMPETITION; RAPID TECHNOLOGICAL CHANGE. The Company
expects that the market for minimally invasive cardiac surgery, which is
currently in the early stages of development, will be
14
<PAGE>
intensely competitive. Competitors are likely to include a variety of
different companies that currently specialize in devices for conventional
cardiac surgery, as well as those that specialize in non-cardiac minimally
invasive surgery. The Company believes that a number of large companies,
including the Ethicon Endosurgery division of Johnson & Johnson, United
States Surgical Corporation, Medtronic, and others with significantly greater
financial, manufacturing, marketing, distribution, and technical resources
and experience than the Company, may be focusing on the development of
minimally invasive cardiac surgery technology. In addition, new companies
have been and will continue to be started to pursue opportunities in this
market. Several companies have announced interest in and development of
products for the minimally invasive cardiac surgery field. For example, there
are companies pursuing minimally invasive cardiac surgery on a beating heart,
which, if successful, could materially adversely affect the Company's ability
to establish a market for its technology. In addition, some of these
companies may be able to market their products sooner than the Company if
they are able to achieve regulatory approval or clearance earlier than the
Company.
Cardiovascular diseases that can be treated with the Company's
Port-Access systems can also be treated by pharmaceuticals or other medical
devices and procedures including PTCA, intravascular stents, atherectomy
catheters and lasers. Many of these alternative treatments are widely
accepted in the medical community and have a long history of use. In
addition, technological advances with other therapies for heart disease such
as drugs or future innovations in cardiac surgery techniques could make such
other therapies more effective or lower in cost than the Company's
Port-Access procedures and could render the Company's technology obsolete.
There can be no assurance that physicians will use Port-Access procedures to
replace or supplement established treatments, such as conventional open-chest
heart surgery, PTCA, or intravascular stents, or that the Company's
Port-Access systems will be competitive with current or future technologies.
Such competition could have a material adverse effect on the Company's
business, financial condition, and results of operations. Any product
developed by the Company that gains regulatory clearance or approval will
have to compete for market acceptance and market share. An important factor
in such competition may be the timing of market introduction of competitive
products. Accordingly, the relative speeds with which the Company can develop
products, complete clinical testing and regulatory approval processes, gain
reimbursement acceptance, and supply commercial quantities of the product to
the market are expected to be important competitive factors. There can be no
assurance that the Company will be able to compete successfully against
current and future competitors. Failure to do so would have a material
adverse effect upon the Company's business, financial condition, and results
of operations.
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY
TECHNOLOGY; RISKS OF FUTURE LITIGATION. The Company believes that its
competitive position will be dependent in significant part on its ability to
protect its intellectual property. The Company's policy is to seek to protect
its proprietary position by, among other methods, filing United States and
foreign patent applications related to its technology, inventions, and
improvements that are important to the development of its business. As of
August 9, 1996, the Company owns 18 issued or allowed United States patents,
and owns an exclusive field of use license on one issued United States patent
and on one issued foreign patent. In addition, as of August 9, 1996, the
Company has 83 pending United States patent applications and has filed 23
patent applications that are currently pending in Europe, Japan,
15
<PAGE>
Australia, and Canada. There can be no assurance that the Company's issued
United States patents, or any patents that may be issued in the future, will
effectively protect the Company's technology or provide a competitive
advantage. There can be no assurance that any of the Company's patents or
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 substantially more resources than the Company 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
internationally.
The Company also relies upon trade secrets, technical know-how, and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute confidentiality and assignment of inventions agreements
in connection with their employment, consulting, or advisory relationships
with the Company. There can be no assurance, however, that these agreements
will not be breached or that the Company will have adequate remedies for any
breach. Furthermore, no assurance can be given that competitors will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's proprietary technology,
or that the Company can meaningfully protect its rights in unpatented
proprietary technology.
Patent applications in the United States are maintained in secrecy
until patents issue, and patent applications in foreign countries are
maintained in secrecy for a period after filing. Publication of discoveries
in the scientific or patent literature tends to lag behind actual discoveries
and the filing of related patent applications. Patents issued and patent
applications filed relating to medical devices are numerous and there can be
no assurance that current and potential competitors and other third parties
have not filed or in the future will not file applications for, or have not
received or in the future will not receive, patents or obtain additional
proprietary rights relating to products or processes used or proposed to be
used by the Company. The Company is aware of patents issued to third parties
that contain subject matter related to the Company's technology. Based, in
part, on advice of its patent counsel, the Company believes that the
technologies employed by the Company in its devices and systems do not
infringe the claims of any such patents. There can be no assurance, however,
that third parties will not seek to assert that the Company's devices and
systems infringe their patents or seek to expand their patent claims to cover
aspects of the Company's technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
have been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. Any such claims, whether with
or without merit, could be time-consuming and expensive to respond to and
could divert the Company's technical and management personnel. The Company
may be involved in litigation to defend against claims of infringement by the
Company, to enforce patents issued to the Company, or to protect trade
secrets of the Company. If any relevant claims of third-party patents are
upheld as valid and enforceable in any litigation or administrative
proceeding, the Company could be prevented from practicing the subject matter
claimed in such patents, or would be required to obtain licenses from the
patent owners of each such patent, or to redesign its products or processes
to avoid infringement. There can be no assurance that such licenses would be
available
16
<PAGE>
or, if available, would be available on terms acceptable to the Company or
that the Company would be successful in any attempt to redesign its products
or processes to avoid infringement. Accordingly, an adverse determination in
a judicial or administrative proceeding 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. The Company intends
to vigorously protect and defend its intellectual property. Costly and
time-consuming litigation brought by the Company may be necessary to enforce
patents issued to the Company, to protect trade secrets or know-how owned by
the Company, or to determine the enforceability, scope, and validity of the
proprietary rights of others.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON KEY SUPPLIERS. To
date, the Company's manufacturing activities have consisted primarily of
manufacturing limited quantities of products for use in laboratory testing
and clinical trials. The manufacture of the Company's products is a complex
operation, involving a number of separate processes and components. Certain
manufacturing processes are labor-intensive, and achieving significant cost
reductions will depend in part upon reducing the time required to complete
these processes. The Company does not have experience in manufacturing its
products in commercial quantities that might be required if the Company
receives all necessary regulatory approvals for its Port-Access systems. The
Company believes that substantial cost reductions in its manufacturing
operations will be required for it to commercialize its systems on a
profitable basis. Manufacturers often encounter difficulties in scaling up
manufacturing of new products, including problems involving product yields,
quality control and assurance, component and service availability, adequacy
of control policies and procedures, lack of qualified personnel, compliance
with FDA regulations, and the need for further FDA approval of new
manufacturing processes and facilities. The Company has and will continue to
consider as appropriate the internal manufacture of components currently
provided by third parties, as well as the implementation of new production
processes. There can be no assurance that manufacturing yields or costs will
not be adversely affected by the transition to in-house production or to new
production processes when such efforts are undertaken, or that FDA GMP
requirements can be met, and that such a transition would not materially and
adversely affect the Company's business, financial condition, and results of
operations.
The Company uses or relies on certain components and services used in
its devices that are provided by sole source suppliers. The qualification of
additional or replacement vendors for certain components or services is a
lengthy process. Any significant supply interruption would have a material
adverse effect on the Company's ability to manufacture its products and,
therefore, a material adverse effect on its business, financial condition,
and results of operations.
The Company expects to manufacture its products based on forecasted
product orders, and intends to purchase subassemblies and components prior to
receipt of purchase orders from customers. Lead times for materials and
components ordered by the Company vary significantly, and depend on factors
such as the business practices of the specific supplier, contract terms, and
general demand for a component at a given time. Certain components used in
the Company's products have long lead times. As a result, there is a risk of
excess or inadequate inventory if orders do not match forecasts.
NEED TO MANAGE A CHANGING BUSINESS. In order to compete effectively
against current and future competitors, prepare additional products for
clinical trials, and develop future products, the Company believes that it
must continue to expand its operations, particularly in the areas of research
and development and manufacturing. If the Company were to experience
significant growth in the future, such growth would likely result in new and
increased responsibilities for management personnel and place significant
strain upon the Company's management, operating, and financial systems and
resources. To accommodate such growth and compete effectively, the Company
must continue to implement and improve information systems, procedures, and
controls, and to expand, train, motivate, and manage its work force. The
Company is currently in the process of implementing an integrated financial,
manufacturing, and inventory information system. Implementing such a system
can be time-consuming and expensive and requires significant management
resources. There can be no assurance that such system will be implemented on
a timely basis. Although the Company has recently hired several new members
of management, all of the foregoing demands will require additional
management personnel as well. The Company's future success will depend to a
significant extent on the ability of its current and future management
personnel to operate effectively, both independently and as a group. There
can be no assurance that the Company's personnel, systems, procedures, and
controls will be adequate to support the Company's future operations. Any
failure to implement and improve the Company's operational, financial, and
management systems or to expand, train, motivate, or manage employees could
have a material adverse effect on the Company's business, financial
condition, and results of operations.
RELIANCE ON STRATEGIC RELATIONSHIPS. The Company intends to pursue
strategic relationships with corporations and research institutions with
respect to the research, development, regulatory approval, and marketing of
certain of its potential products and procedures. The Company's future
success may depend, in part, on its relationships with third parties,
including, for example, the Company's relationship with St. Jude Medical,
Inc., their strategic interest in the potential products or procedures under
development and, eventually, their success in marketing such product or
procedure or willingness to purchase any such products. The Company
anticipates that these third parties may have the unilateral right to
terminate any such relationship without significant penalty. There can be no
assurance that the Company will be successful in establishing or maintaining
any such strategic relationships in the future or that any such relationship
will be successful.
RISK OF PRODUCT LIABILITY. The Company faces an inherent and
significant business risk of exposure to product liability claims in the
event that the use of its products results in personal injury or death and
there can be no assurance that the Company will not experience any material
product liability losses in the future. Also, in the event that any of the
Company's products prove to be defective, the Company may be required to
recall or redesign such products. The Company maintains insurance against
product liability claims in the amount of $5,000,000 per occurrence and
$5,000,000 in the aggregate, but there can be no assurance that such coverage
will continue to be available on terms acceptable to the Company or that such
coverage will be adequate for liabilities actually incurred. A successful
claim brought against the Company in excess of available insurance coverage,
or any claim or product recall that results in significant adverse publicity
against the Company, may have a material adverse effect on the Company's
business, financial condition, and results of operations.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 10, 1996 (prior to the Company's initial public offering),
stockholders of the Company holding approximately 72% of the then outstanding
voting stock of the Company, approved the following matters by written consent:
(i) a split of the Company's outstanding capital stock so that
each share of Preferred Stock and Common Stock would be exchanged for 1.6
shares of Preferred Stock and Common Stock, respectively (the "Stock Split");
(ii) an amendment and restatement of the Certificate of
Incorporation of the Company filed in connection with the closing of the
Company's initial public offering to, among other things, increase the
authorized number of shares of capital stock of the Company, eliminate the
right of stockholders to take actions by written consent, and divide the
members of the Company's Board of Directors into three separate classes and
provide that the member or members of each such class serve staggered
three-year terms;
(iii) effective upon the closing of the initial public offering,
an amendment and restatement of the Company's Bylaws to, among other things,
require the affirmative vote of 75% of the Company's voting stock to amend
the bylaws and to eliminate the right of stockholders to call special
meetings;
(iv) the 1996 Stock Option Plan and Employee Stock Purchase Plan;
and
(v) form of indemnification agreements for the officers and
directors of the Company.
ITEM 5. OTHER INFORMATION.
On July 29, 1996, the Company acquired a United States patent and
related rights from Endosurgical Development Corporation for
consideration consisting of shares of Heartport Common Stock and cash.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits listed on the accompanying Exhibit Index are filed
as a part hereof and are incorporated by reference.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended June
30, 1996.
18
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Date: August 13, 1996 HEARTPORT, INC.
By: /s/ David B. Singer
----------------------------------
David B. Singer
Senior Vice President, Finance and
Chief Financial Officer
19
<PAGE>
HEARTPORT, INC.
FORM 10-Q
EXHIBIT INDEX
Exhibit
Number Exhibit Description Page
- ------- ------------------- ----
10.1 Real Property Sublease between the
Registrant and Next Software, Inc.
dated May 1, 1996..............................
11.1 Computation of per share losses................
27.1 Financial Data Schedule........................
20
<PAGE>
SUBLEASE
This Sublease (the "SUBLEASE"), is made as of May 1, 1996, by and
between NeXT Software, Inc. ("SUBLESSOR"), and Heartport ("SUBLESSEE"), in
the following factual context:
A. Metropolitan Life Insurance Company (the "MASTER LESSOR"), and
Sublessor entered into that certain Seaport Centre Standard Lease dated
November 9, 1988 (together with Addendum I and Construction Addendum), and as
amended by (i) that certain First Amendment to Lease dated March 20, 1990,
(ii) that certain Second Amendment to Seaport Centre Standard Lease dated
August 29, 1990, (iii) that certain Third Amendment to Seaport Centre
Standard Lease dated February 28, 1992, (iv) that certain Fourth Amendment
to Seaport Centre Standard Lease dated September 21, 1992, (v) that certain
Fifth Amendment to Seaport Centre Standard Lease dated April 22, 1993, and
(vi) that certain Sixth Amendment to Seaport Centre Standard Lease dated as
of December 23, 1993 (collectively, the "MASTER LEASE"), covering that
certain building known as "Building 19" of Seaport Centre, which is located
at 700 Chesapeake Drive, Redwood City, and contains 25,000 net rentable
square feet of space (the "PREMISES"). The Master Lease has been delivered to
Sublessee prior to or concurrently with the execution of this Sublease and is
incorporated herein by this reference.
B. Sublessor now desires to sublease the Premises to Sublessee and
Sublessee desires to sublease the Premises from Sublessor on the terms and
conditions set forth in this Sublease.
NOW THEREFORE, the parties agree as follows:
1. SUBLEASE. Sublessor hereby subleases the Premises to Sublessee and
Sublessee hereby subleases the Premises from Sublessor on the terms and
conditions set forth in the Master Lease and in this Sublease. Lessee shall
have the use of eighty-two (82) undesignated parking spaces in Phase III of
the Project.
2. INCORPORATION OF MASTER LEASE. Except as to provisions which are
specifically superseded by this Sublease, and as to Sections 1, 2 and 4 of
the Master Lease, each and every term, condition and covenant contained in the
Master Lease is incorporated by reference into this Sublease as if fully set
forth herein. As between Sublessor and Sublessee only, Sublessee hereby
assumes and agrees to perform each and every term, condition and covenant
which is an obligation of the Sublessee under the Master Lease and Sublessor
shall have each of the rights and remedies of the Master Lessor under the
Market Lease. All capitalized terms not defined in this Sublease shall have
the meaning set forth in the Master Lease.
3. TERM. The term of this Sublease (the "TERM") shall commence on the
date first written above and shall expire on April 30, 1999, unless sooner
terminated pursuant to this Sublease or the Master Lease. Sublessor and
Sublessee acknowledge that although Sublessor does not have a right to extend
the term of the Master Lease, it may at its sole option elect to negotiate an
extension of the Master Lease term with the Master Lessor. Sublessor agrees
that if
<PAGE>
it negotiates an extension of the term of the Master Lease, Sublessor will
either (a) extend the term of this Sublease for ten (10) additional months at
the rent negotiated with the Master Lessor as applicable to the Premises
(subject to Master Lessor's approval), or (b) if Sublessor desires not to
extend the term of this Sublease, pay to Sublessee at the expiration of the
original Term of this Sublease the sum of One Hundred Fifty Thousand Dollars
($150,000) as reimbursement for improvements to the Premises made by
Sublessee during the Term.
4. RENT. Commencing on July 1, 1996, Sublessee shall pay to Sublessor
the sum of $1.00 per square foot per month as rent for the Premises in
advance on the first day of each calendar month during the Term, without
deduction or offset. In addition, commencing on July 1, 1996, Sublessee shall
pay to Sublessor concurrently with each monthly payment of rent Sublessee's
pro rata share of all operating expenses, taxes, insurance, utilities and
other charges assessed by the Master Lessor pursuant to the Master Lease. All
sums due to Sublessor shall be deemed rent for the purposes of enforcing this
Sublease.
5. USE. The Premises is to be used for office and warehouse uses and
for no other purpose without the prior written consent of Sublessor and
subject to the Master Lease. Sublessee shall have no right to use, store,
handle, or otherwise allow to be brought onto the Premises any Hazardous
Materials, as that term is defined in Section 11.2.1 of the Master Lease,
except for those Hazardous Materials described in Exhibit "D" of the Second
Amendment of Addendum I of the Master Lease.
6. ALTERATIONS.
a. Sublessee shall not make or permit any alterations,
installations, additions or improvements, structural or otherwise in or to the
Premises (collectively, "ALTERATIONS") that require a permit or other
governmental approval or that require the approval of the Master Lessor,
without the prior written consent of Sublessor, which consent shall not be
unreasonably withheld or delayed (subject to approval by the Master Lessor).
Sublessor agrees not to withhold Sublessor's consent to any Alteration which
has been consented to by the Master Lessor. All Alterations shall be done at
Sublessee's expense, in accordance with plans and specifications approved by
Sublessor and the Master Lessor, only by contractors or mechanics approved by
Sublessor and the Master Lessor, and subject to all other reasonable
conditions which Sublessor and the Master Lessor may impose.
b. Except as provided in Section 6.c, all appurtenances, fixtures,
improvements, equipment, additions and other property attached to or
installed in the Premises at the commencement of or during the Term, whether
temporary or permanent in nature, shall be and remain the property of
Sublessee during the Term, but shall be surrendered with the Premises at the
end of the Term without compensation to Sublessee.
c. All furniture, furnishings and articles of movable personal
property installed in the Premises by or for the account of Sublessee,
without expense to Sublessor, and which can be removed without structural or
other material damage to the Premises ("SUBLESSEE'S PROPERTY") shall be and
remain the property of Sublessee and may be
2
<PAGE>
removed by it at any time during the Term. Prior to the expiration or
termination of the Term, Sublessee shall remove from the Premises all of
Sublessee's Property except such items as the parties shall have agreed are
to remain and to become the property of Sublessor or the Master Lessor.
Sublessee shall repair or pay the cost of repairing any damage to the
Premises resulting from such removal. Sublessee's obligations under this
Section 6.c shall survive the expiration or earlier termination of this Lease.
7. MAINTENANCE AND REPAIR. Sublessee shall keep in good order, condition
and repair the Premises (as provided in Section 12 of the Master Lease);
provided, however that Sublessor shall make any repairs which affect portions
of the Premises beyond the Premises, and Sublessee shall reimburse Sublessor
for the cost of such repair (prorated in the event the repair can equitably
be charged to other occupants of the Premises) within thirty (30) days after
receipt of written demand therefor. Sublessee shall pay all costs for
improvements, additions or alterations to the Premises, as provided for in
Section 12 of the Master Lease.
8. ASSIGNMENT OR SUBLEASING. Sublessee shall have no right to assign
this Lease or further sublease the Premises without the written consent of
Sublessor (and subject to the Master Lessor's approval and the terms of the
Master Lease), which consent shall not be unreasonably withheld.
9. INSURANCE. Sublessee shall, at its sole cost and expense, procure and
maintain during the Term comprehensive general liability insurance with a
combined single limit for bodily injury, property damage and personal injury
liability of not less than $3,000,000 each occurrence and $3,000,000 general
aggregate, and from insurance companies reasonably satisfactory to Sublessor.
Sublessor and the Master Lessor shall be named as additional insureds on all
such insurance policies. Sublessee shall also procure and maintain during the
Term at its sole cost and expense workers' compensation and employers'
liability insurance in amounts not less than $1,000,000 per accident for
bodily injury by accident, $1,000,000 policy limit for bodily injury by
disease, and $1,000,000 for each employee suffering from bodily injury by
disease.
10. TERMINATION OF MASTER LEASE. This Sublease shall immediately
terminate if the Master Lease is terminated for any reason, whether voluntary
or involuntary. Notwithstanding anything to the contrary herein, or in the
Master Lease, Sublessee shall have the same rights as Sublessor under the
Master Lease to terminate this Sublease in the event of damage or destruction
to the Premises. Therefore, if Sublessor has the option to terminate the
Master Lease due to an event of damage or destruction to the Premises, then
Sublessee shall have a similar right to terminated this Sublease
notwithstanding the fact that Sublessor elects not to exercise such option
with respect to any other space subject to the Master Lease.
11. RIGHT TO CURE. If Sublessee shall at any time during the Term fail
to perform any of the obligations, conditions or covenants of this Sublease
or the Master Lease, Sublessor shall have the right, but not the obligation,
to immediately perform any such obligation, condition or covenant in order to
protect Sublessor's leasehold interest. In the event Sublessor suffers any
cost or expense as a result of such performance, Sublessee shall
3
<PAGE>
immediately reimburse Sublessor for all such cost or expense, and any sum not
paid within ten (10) days after Sublessee receives written demand for
reimbursement shall bear interest at the highest interest rate allowed by law
from the date of expenditure by Sublessor to the date of reimbursement by
Sublessee.
12. SECURITY DEPOSIT. Concurrently with the execution of this Sublease,
Sublessee has delivered to Sublessor a security deposit in the amount of
Twenty-Five Thousand Dollars ($25,000)(the "SECURITY DEPOSIT") as security
for the full and faithful performance of Sublessee's obligations under this
Sublease. If at any time during the Term, Sublessee shall be in default in
the payment of rent or in default for any other reason, Sublessor may apply
all or part of the Security Deposit for such payment or to cure such default.
In such event, Sublessee shall on demand restore the Security Deposit to its
original amount. Upon expiration or earlier termination of this Lease, the
Security Deposit shall be returned to Sublessee, reduced by such amounts as
may be required by Sublessor to remedy defaults on the part of Sublessee in
the payment of rent, defaults in Sublessee's obligation to repair damage to
the Premises, and to clean the Premises if Sublessee has failed to do so. Any
portion of the Security Deposit not so required shall be paid over to
Sublessee after expiration of the Term or the earlier termination of this
Sublease. Sublessor shall have no obligation to segregate the Security
Deposit from its general funds or to pay interest on the Security Deposit.
13. SURRENDER. Sublessee shall, at the expiration of the Term or upon
sooner termination of this Sublease, surrender and return possession of the
Premises to Sublessor or the Master Lessor, as the case may be, in good
condition, broom clean, usual wear and tear excepted.
14. NO REPRESENTATIONS. Sublessee has examined and knows the condition
of the Premises and acknowledges that no representations or warranties have
been made regarding the Master Lease, the Premises or any other matter
relating to this Sublease and by taking possession of the Premises, Sublessee
accepts the Premises in its "AS IS" condition. Sublessee further acknowledges
and agrees that Sublessor shall have no obligation to prepare the Premises
for Sublessee's occupancy.
15. ATTORNEYS' FEES. If any legal action or any arbitration or other
proceeding is brought for the enforcement of this Sublease, or because of an
alleged dispute, breach, default or misrepresentation in connection with any
of the provisions of this Sublease, the successful or prevailing party shall
be entitled to recover reasonable attorneys' fees and other costs incurred in
that action or proceeding, in addition to any other relief to which it may be
entitled. For the purposes of this Sublease, the term "prevailing party"
shall mean the party who obtains substantially the relief desired, whether by
dismissal, default, summary judgment, settlement or otherwise.
16. NOTICES. All notices, requests, demands and other communications
under this Sublease shall be in writing and shall be personally delivered or
mailed by first class mail registered or certified, postage prepaid to the
party to whom the same is to be given at its address as follows:
4
<PAGE>
Sublessor: NeXT Software, Inc.
900 Chesapeake Drive
Redwood City, CA 94063
Attention: Director of Real Estate and Facilities
Copy to: NeXT Software, Inc.
900 Chesapeake Drive
Redwood City, CA 94063
Attention: Legal Department
Sublessee: Heartport
700 Chesapeake Drive
Redwood City, CA 94063
Attention: Mr. Wes Sterman
Notices, requests, demands and other communications under this Sublease shall
be effective only upon receipt. Either party may change its address for the
purposes of this Section 16 by giving the other party written notice of the
new address in the manner set forth above. Each party to this Sublease shall
send to the other party copies of any and all notices and other
communications it shall send to and received from the Master Lessor.
17. MISCELLANEOUS.
a. This Sublease is governed by the laws of the State of
California, and any question arising hereunder shall be construed
or determined according to such law.
b. Headings at the beginning of each numbered paragraph of this
Sublease are solely for the convenience of the parties and are not a part of
this Sublease.
c. All provisions, whether covenants or conditions on the part of
Sublessee shall be deemed both covenants and conditions.
d. This Sublease may be amended in whole or in part only by the
mutual written agreement of the parties and the Master Lessor.
e. This Sublease and the Master Lease as incorporated herein by
reference contain the entire agreement between the parties regarding the
sublease of the Premises and supersedes all prior agreements, whether written
or oral, between the parties regarding the same subject.
f. This Sublease may be signed in counterpart originals, each of
which shall be deemed an original and all of which shall, when executed,
constitute one and the same agreement.
5
<PAGE>
g. Subject to the limitations set forth in Section 8, this Sublease
shall be binding upon each of the parties and their respective successors and
assigns.
h. In any instance in which this Sublease or the Master Lease
requires the consent of either Sublessor or the Master Lessor, the consent of
both Sublessor and the Master Lessor shall be required.
IN WITNESS WHEREOF, the parties have executed this Sublease as of the
day and year first above written.
Sublessor:
NeXT SOFTWARE, INC.
By:________________________________
Its:_______________________________
Sublessee:
HEARTPORT
By:________________________________
Its:_______________________________
6
<PAGE>
Exhibit 11.1
HEARTPORT, INC.
STATEMENT RE: COMPUTATION OF PER SHARE LOSSES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRO FORMA
Net loss $(5,571,194) $(2,252,121) $(9,699,234) $(3,960,533)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average Common
Shares outstanding 13,446,000 5,983,000 9,714,000 5,983,000
Convertible preferred
shares outstanding 9,238,000 9,238,000 9,238,000 9,238,000
Shares related to SAB No.
55, 64 and 83 -- 4,562,000 2,281,000 4,562,000
----------- ----------- ----------- -----------
Total weighted average Common
Shares outstanding 22,684,000 19,783,000 21,233,000 19,783,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share $ (0.25) $ (0.11) $ (0.46) $ (0.20)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND CONDENSED STATEMENTS OF OPERATIONS FOUND ON PAGES 3
AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 43,454,470
<SECURITIES> 70,280,499
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 114,950,139
<PP&E> 3,769,469
<DEPRECIATION> 822,354
<TOTAL-ASSETS> 118,075,605
<CURRENT-LIABILITIES> 2,885,816
<BONDS> 0
0
0
<COMMON> 24,107
<OTHER-SE> 110,440,236
<TOTAL-LIABILITY-AND-EQUITY> 118,075,605
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 224,203
<INCOME-PRETAX> (9,699,234)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,699,234)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,699,234)
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
</TABLE>
