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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 SEPTEMBER 30, 1997
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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(650) 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 September 30, 1997 there were 24,787,991 shares of the Registrant's
Common Stock outstanding.
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1
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HEARTPORT, INC.
FORM 10-Q
INDEX
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PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1997
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1997 and September 30, 1996 . . . 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and September 30, 1996.. . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . 24
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
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Heartport and the Heartport logo are registered trademarks of the Company.
Port-Access and EndoCPB are trademarks of the Company.
Port-Access Partnership is a service mark of the Company.
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTPORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996 (1)
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . $ 62,983 $ 33,445
Short-term investments.... . . . . . . . . . . 63,343 56,407
Accounts receivable, net . . . . . . . . . . . 5,450 550
Inventories. . . . . . . . . . . . . . . . . . 3,465 2,107
Prepaid expenses and other.... . . . . . . . . 2,092 1,717
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Total current assets . . . . . . . . . . . . . . 137,333 94,226
Property and equipment, net. . . . . . . . . . . 13,232 6,395
Deposits, intangibles and other assets, net. . . 4,412 1,231
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Total assets . . . . . . . . . . . . . . . . . . $ 154,977 $ 101,852
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . $ 4,049 $ 4,570
Accrued compensation and related benefits. . 4,550 1,433
Accrued interest payable . . . . . . . . . . 2,831 --
Current portion of long-term debt. . . . . . 855 662
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Total current liabilities. . . . . . . . . . . . 12,285 6,665
Noncurrent liabilities:
Long-term debt, less current portion . . . . . 86,930 1,334
Other long-term liabilities. . . . . . . . . . 46 383
Deferred royalty income. . . . . . . . . . . . 2,971 3,000
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Total noncurrent liabilities . . . . . . . . . . 89,947 4,717
Stockholders' equity:
Common stock, $0.001 par value . . . . . . . . 25 24
Additional paid-in capital . . . . . . . . . . 143,771 142,018
Notes receivable from stockholders . . . . . . (973) (973)
Accumulated deficit. . . . . . . . . . . . . . (90,078) (50,599)
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Total stockholders' equity.. . . . . . . . . . . 52,745 90,470
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Total liabilities and stockholders' equity . . . $ 154,977 $ 101,852
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</TABLE>
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(1) DERIVED FROM THE AUDITED FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 1996.
SEE ACCOMPANYING NOTES.
3
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HEARTPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . $ 7,151 $ -- $ 15,019 $ --
Cost of goods sold . . . . . . . . . . . . . . . 4,849 -- 11,191 --
----------- ----------- ----------- -----------
Gross profit . . . . . . . . . . . . . . . . . . 2,302 -- 3,828 --
Operating expenses:
Research and development.. . . . . . . . . . . 4,053 6,312 14,231 14,500
Selling, general and administrative. . . . . . 11,232 3,273 30,913 5,724
Patent acquisition.... . . . . . . . . . . . . -- 5,216 -- 5,216
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Total operating expenses.. . . . . . . . . . . . 15,285 14,801 45,144 25,440
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Loss from operations.. . . . . . . . . . . . . . (12,983) (14,801) (41,316) (25,440)
Interest income. . . . . . . . . . . . . . . . . 1,851 1,485 4,837 2,649
Interest expense.. . . . . . . . . . . . . . . . (1,797) (120) (3,000) (344)
----------- ----------- ----------- -----------
Net loss.. . . . . . . . . . . . . . . . . . . . $ (12,929) $ (13,436) $ (39,479) $ (23,135)
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Net loss per share.. . . . . . . . . . . . . . . $ (0.52) $ (0.55) $ (1.60) $ (1.04)
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Shares used in calculation of net loss per share 24,747 24,252 24,630 22,239
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</TABLE>
SEE ACCOMPANYING NOTES.
4
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HEARTPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
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1997 1996
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Operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (39,479) $ (23,135)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 1,868 608
Issuance of common stock for patents . . . . . . . . . . . . . . . . . 310 4,174
Forgiveness of note receivable . . . . . . . . . . . . . . . . . . . . -- 50
Acceleration of stock option vesting . . . . . . . . . . . . . . . . . -- 183
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . (4,900) --
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,358) --
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . (375) (2,125)
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . 5,061 3,352
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Net cash used in operating activities. . . . . . . . . . . . . . . . . . . (38,873) (16,893)
Investing activities:
Purchase of short-term investments . . . . . . . . . . . . . . . . . . . . (31,474) (111,579)
Sales and maturities of short-term investments . . . . . . . . . . . . . . 24,538 28,000
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . (8,701) (4,097)
(Increase) decrease in deposits, intangibles and other assets. . . . . . . 9 (67)
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Net cash used in investing activities. . . . . . . . . . . . . . . . . . . (15,628) (87,743)
Financing activities:
Proceeds from issuances of common stock. . . . . . . . . . . . . . . . . 1,444 110,801
Proceeds from payment of stockholders' notes receivable. . . . . . . . . . -- 40
Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . 83,089 1,043
Repayment of long-term borrowings. . . . . . . . . . . . . . . . . . . . . (494) (403)
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Net cash provided by financing activities. . . . . . . . . . . . . . . . . 84,039 111,481
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Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . 29,538 6,845
Cash and cash equivalents at beginning of period.. . . . . . . . . . . . . 33,445 7,412
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Cash and cash equivalents at end of period.. . . . . . . . . . . . . . . . $ 62,983 $ 14,257
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</TABLE>
SEE ACCOMPANYING NOTES
5
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HEARTPORT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 statements 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, 1997 or for any other
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 December 31, 1996 included in the Company's Annual
Report on Form 10-K, as amended, filed with the Securities and Exchange
Commission.
Note 2. Net Loss Per Share
Net loss per share for the three and nine months ended September 30, 1997
is computed using the weighted average number of common shares outstanding in
each period. Common equivalent shares from stock options, warrants, and
convertible notes are excluded from the computation as their effect is
antidilutive.
Net loss per share for the three and nine months ended September 30,
1996 is computed using the weighted average number of common shares
outstanding in each period. Common equivalent shares from stock options and
warrants 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 (using the treasury
stock method at the initial public offering price for stock options and
warrants) for all the periods prior to the initial public offering. Net loss
per share for the nine months ended September 30, 1996 also includes the
effect of convertible preferred shares from their respective dates of
issuance.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
(SFAS 128), which the Company will be required to adopt on December 31, 1997.
Under the requirements of SFAS 128, the dilutive effect of stock options,
warrants and convertible notes are excluded from the calculation of primary
earnings per share. Earnings per share, as calculated under SFAS 128, will not
change the Company's net loss per share for the three and nine months ended
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September 30, 1997 and September 30, 1996 presented herein, since the impact
of stock options, warrants and convertible notes on these calculations is
antidilutive.
Note 3. Convertible Subordinated Notes
In April 1997, the Company issued an aggregate principal amount of $86.25
million of convertible subordinated notes. The notes are due in 2004, bear
annual interest at 7.25%, and are convertible at the option of the holder into
the Company's common stock at a price of $28.958 per share. Issuance costs of
approximately $3.4 million are included in other assets and are being amortized
over the life of the notes. Net proceeds to the Company from the issuance of
these notes were approximately $82.8 million.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations as of September 30, 1997 and for the three and nine months
ended September 30, 1997 and September 30, 1996 should be read in conjunction
with the Management's Discussion and Analysis of Financial Condition and Results
of Operations included in the Company's 1996 Annual Report on Form 10-K, as
amended, filed with the Securities and Exchange Commission.
OVERVIEW
Since its inception in May 1991, the Company has been engaged in the
research and development of Port-Access minimally invasive cardiac surgery
systems and related technology. In December 1996, the Company commercially
introduced its Port-Access systems and is now engaged in extensive surgical team
training and selling activities. Through its "Port-Access Partnership" program,
the Company has adopted a sales model in which the Company trains a center's
surgical team, supplies patient and referring physician educational materials,
supports local market media efforts and furnishes proprietary reusable devices
for Port-Access procedures in exchange for a purchase order for Port-Access
disposable products necessary to perform Port-Access cardiac surgery. To date,
a significant portion of the Company's product sales have been in connection
with initial purchase orders for disposable products from centers participating
in the Port-Access Partnership program.
The Company has hired a significant number of employees to conduct and
support its research and development and product commercialization activities.
At September 30, 1997 and December 31, 1996, the Company had 378 and 275
employees, respectively. The Company anticipates that its work force will
continue to grow rapidly in the next several years to support product
development, clinical affairs and training, manufacturing, and sales and
marketing.
The Company has only been generating revenue from the sale of products
since December 1996, and it has been unprofitable since inception. For the
period from inception to September 30, 1997, the Company has incurred cumulative
net losses of approximately $90.1 million. For at least the next 18 months, the
Company expects to continue to incur significant losses, and expects to incur
losses in 1997 in excess of those incurred in 1996.
The foregoing and the discussion appearing elsewhere in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contain forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "Risk Factors - Early Stage
of Utilization; No Assurance of Safety and Efficacy," "- No Assurance of Market
Acceptance," " - Risks Associated with New Surgical Procedure; Extensive
Training Requirements," "-Customer Concentration, " " -Fluctuations in Operating
Results," and " - Limited Manufacturing Experience; Dependence on Key
Suppliers."
8
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RESULTS OF OPERATIONS
NET SALES. Net sales were $7.2 million and $15.0 million for the three and
nine months ended September 30, 1997, respectively. There were no comparable
sales in the previous year as the Company commenced product sales in December
1996. Net sales consist primarily of sales of the Company's disposable devices
in its EndoCPB, Port-Access CABG and Port-Access MVR systems. International
net sales represented 10% and 12% of net sales in the three and nine months
ended September 30, 1997, respectively. Revenue is recognized upon product
shipment.
COST OF GOODS SOLD. Cost of goods sold were $4.8 million and $11.2 million
in the three and nine months ended September 30, 1997, respectively. Cost of
goods sold consists primarily of material, labor and overhead costs associated
with manufacturing the Company's disposable and reusable devices in its EndoCPB,
Port-Access CABG and Port-Access MVR systems.
As cost of goods sold includes the cost of the Company's reusable devices
for which the Company receives no corresponding revenue under the Company's
Port-Access Partnership sales model, the Company's gross margin may vary
significantly based upon the mix of reusable and disposable devices shipped.
During periods where net sales to new centers in the Port-Access Partnership
program constitute a significant percentage of total net sales, and as a result,
reusable devices shipped by the Company account for a significant percentage of
total devices shipped, the Company's gross margin will be adversely impacted.
Gross margin for the three and nine months ended September 30, 1997 was 32% and
25%, respectively.
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, and regulatory submissions, as well as
costs incurred in producing products for research and development activities,
the cost of acquiring patents, and the cost of prosecuting United States and
foreign patent applications relating to the Company's technology. In addition,
prior to commercialization of the Company's products, costs incurred in
physician training were included in the Company's research and development
expenses.
Research and development expenses decreased to $4.1 million in the three
months ended September 30, 1997, from $6.3 million in the same period of
1996, primarily due to manufacturing development costs incurred in 1996 to
prepare for initial product release and production. Research and development
expenses decreased slightly to $14.2 million in the nine months ended
September 30, 1997, from $14.5 million in the same period of 1996. The
Company has maintained a significant level of research and development
spending to facilitate product improvements and new product development, and
anticipates that it will continue to devote substantial resources to research
and development activities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of costs for sales, marketing and
administrative personnel, as well as legal, accounting and other
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professional fees. Since commercialization of the Company's products,
physician training costs have also been included in the Company's selling,
general and administrative expenses. Selling, general and administrative
expenses increased to $11.2 million in the three months ended September 30,
1997 from $3.3 million in the same period of 1996, and increased to $30.9
million in the nine months ended September 30, 1997 from $5.7 million in the
same period of 1996. The increase in both periods was primarily due to the
hiring of additional sales, marketing and administrative personnel, higher
physician training costs, increased expenses necessary to support the
Company's product launch and ongoing sales activities, and higher expenses
necessary to manage and support the Company's increased scale of operations.
The Company believes that its selling, general and administrative expenses
will continue to increase substantially as it expands its physician training
activities, builds its sales force, marketing staff and administrative staff,
and incurs other costs in connection with commercialization of its products
and the support of its growing operations.
PATENT ACQUISITION EXPENSES. Patent acquisition expenses consist of the
cost to acquire a United States patent, several pending U.S. patent
applications, and related rights from Endosurgical Development Corporation in
July 1996 for consideration of shares of Common Stock and cash.
INTEREST INCOME. Interest income primarily represents interest earned by
the Company on its cash and short-term investments. Interest income increased
to $1.9 million in the three months ended September 30, 1997 from $1.5 million
in the same period of 1996, and increased to $4.8 million in the nine months
ended September 30, 1997 from $2.6 million in the same period of 1996. The
increases were primarily due to the Company's higher average investment balances
resulting from the Company's initial public offering in 1996 and the Company's
issuance of convertible subordinated notes in April 1997.
INTEREST EXPENSE. Interest expense represents interest on long-term
debt. Interest expense increased to $1.8 million in the three months ended
September 30, 1997 from $0.1 million in the same period of 1996, and
increased to $3.0 million in the nine months ended September 30, 1997 from
$0.3 million in the same period of 1996. The increases were primarily
attributable to interest payable on the Company's convertible subordinated
notes that were issued in April 1997.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 1997, the Company has funded its
operations and investments in property and equipment primarily through the
private sale of preferred stock, totaling approximately $25.1 million, through
an initial public offering of common stock in April 1996, totaling approximately
$110.8 million, and through a private placement of convertible subordinated
notes to qualified institutional investors in April 1997, totaling approximately
$82.8 million. At September 30, 1997, the Company had approximately $126.3
million in cash, cash equivalents, and short-term investments and approximately
$125.0 million in working capital. The Company also has a $15.0 million credit
facility with a commercial bank. No amount was outstanding under this facility
at September 30, 1997.
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Net cash used in operating activities was approximately $38.9 million and
$16.9 million in the nine months ended September 30, 1997 and September 30,
1996, respectively. For such periods, net cash used in operating activities
resulted primarily from increasing net losses. For the nine months ended
September 30, 1997, net cash used in operating activities also resulted from
increases in accounts receivable and inventories which reflect the Company's
increasing product sales. Net cash used in investing activities was
approximately $15.6 million and $87.7 million for the nine months ended
September 30, 1997 and September 30, 1996, respectively. The net cash used in
investing activities was primarily attributable to purchases and maturities of
short-term investments and purchases of property and equipment.
Capital expenditures for equipment and leasehold improvements to support
the Company's expanded operations were approximately $8.7 million and $4.1
million in the nine months ended September 30, 1997 and September 30, 1996,
respectively. The Company expects that its capital expenditures will continue
to grow as the Company's employee base and manufacturing operations expand.
RISK FACTORS
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 1996
Annual Report on Form 10-K, as amended, filed with the Securities and Exchange
Commission.
EARLY STAGE OF UTILIZATION; NO ASSURANCE OF SAFETY AND EFFICACY. The
Company's EndoCPB System, Port-Access CABG System, and Port-Access MVR System
and related devices are at an early stage of clinical utilization, and there can
be no assurance as to their clinical safety and efficacy. Port-Access minimally
invasive cardiac surgery has many of the risks of conventional open-chest heart
surgery, including bleeding from the wound or internal organs, irregular
heartbeat, formation of blood clots and related complications, infection, heart
attack, heart failure, stroke, and death. Port-Access minimally invasive cardiac
surgery also has additional risks compared to conventional open-chest surgery,
including tearing or splitting of major blood vessels, damage to blood vessels
in the groin, and groin pain. Although there can be no assurance in this regard,
the Company believes, based on the limited clinical experience to date, that
mortality and morbidity rates associated with Port-Access surgical procedures
are comparable to mortality and morbidity rates experienced with conventional
open-chest procedures. If, with further experience, any of the Company's systems
do not prove to be safe and effective or if the Company is otherwise unable to
commercialize them successfully, the Company's business, financial condition,
and results of operations will be materially adversely affected and the
Company's business could cease.
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
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approvals are obtained. The Company believes that physicians' acceptance and
health care 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 other 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 conventional
open-chest surgery. Cardiologists may not recommend Port-Access procedures
until such time, if any, as Port-Access procedures 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; EXTENSIVE TRAINING
REQUIREMENTS. Use of the Company's EndoCPB System, Port-Access CABG System, and
Port-Access MVR System to date has shown that, as with any novel surgical
procedure, there is a significant learning process involved for surgeons and
other members of the cardiac surgery team to become proficient. In addition,
certain patients requiring heart surgery cannot be treated with the present
Port-Access systems, depending upon their anatomy, what kind of condition they
have and how severe it is. These patients may include people with severe
peripheral vascular disease (arteriosclerosis), a poorly functioning aortic
valve, an enlarged heart, or certain types of chest scarring. Broad use of the
Company's systems will require extensive training of numerous physicians, and
the time required to begin and complete such training could adversely affect
market acceptance. There can be no assurance that the Company will be able to
rapidly train physicians in numbers sufficient to generate adequate demand for
the Company's products and systems. Any delay in training would have a material
adverse effect on the demand for the Company's products and systems and,
therefore, a material adverse effect on its business, financial condition, and
results of operations.
CUSTOMER CONCENTRATION. Approximately 38% of the Company's net sales in the
nine months ended September 30, 1997 were derived from sales to 20 customers.
However, the Company believes that these customers performed a substantially
higher percentage of Port-Access procedures during the nine months ended
September 30, 1997. The Company believes that during the balance of 1997 this
customer concentration will continue as the Company focuses on strengthening its
relationships with active customers. There can be no assurance that the
Company's principal customers will continue to purchase products from the
Company at current levels, if at all. The loss of, or a significant adverse
change in, the relationship between the Company and any
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major customer would have a material adverse effect on the Company's
business, financial condition and results of operations.
FLUCTUATIONS IN OPERATING RESULTS. Results of operations may vary
significantly from quarter to quarter depending upon numerous factors, including
the following: demand for the Company's products; the number of cardiac surgery
teams trained in the use of the Company's systems; the number of hospitals that
begin using the Company's products; the ability of the Company to manufacture,
test and deliver its products in commercial volumes; health care reform and
reimbursement policies; delays associated with the FDA and other regulatory
approval processes; 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 new 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 has begun 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 market for
minimally invasive cardiac surgery systems is rapidly evolving and there are
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 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE ON KEY SUPPLIERS. To meet
anticipated demand, the Company must increase the rate by which it
manufactures its products. To date, the Company's manufacturing activities
have consisted primarily of manufacturing low-volume quantities for initial
commercial sales. The manufacture of the Company's products is complex,
involving a number of separate processes and components. The Company does not
have experience in manufacturing its products in higher volume commercial
quantities. Although the Company is scaling up its capability to produce
products in higher volume, there can be no assurance that it will be able to
successfully scale-up its production to meet commercial demand for its
products in a timely manner. In addition, the Company believes that cost
reductions in its manufacturing operations will be required for it to
commercialize its systems on a profitable basis. Certain manufacturing
processes are labor-intensive, and achieving significant cost reductions will
depend, in part, upon reducing the
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time required to complete these processes. Medical device 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. To date, the Company has experienced variable yields in scaling
up manufacturing of certain of its product components, and there can be no
assurance that such variability will not continue or will not adversely
impact the Company's ability to meet demand for its products. The Company has
considered 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, and that such a transition would not materially and
adversely affect the Company's business, financial condition, and results of
operations. Although the Company has received ISO 9001 certification, to
date, the FDA has not inspected the Company's compliance with Good
Manufacturing Practices ("GMP") requirements, which include testing, control,
and documentation requirements, although the Company expects such inspections
to be made in the near future. There can be no assurance that FDA GMP
requirements will be met.
The Company uses or relies on a number of components and services used in
its devices that are provided by sole source suppliers. Although the Company is
in the process of identifying alternative sources for certain of such components
and services, 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 manufactures its products based on forecasted product orders,
and purchases 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 or
must be ordered on non-cancelable terms. As a result, there is a risk of excess
or inadequate inventory if orders do not match forecasts, as well as potential
costs from non-cancelable orders.
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 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, Inc., Baxter
International Inc., Genzyme Corporation, Guidant Corporation 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.
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In addition, new companies have been and will continue to be formed 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.
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.
The Company's current products and any future products developed by the
Company that gain 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, train physicians in the use of its
products, gain reimbursement acceptance, and supply commercial quantities of the
product to the market are expected to be important competitive factors. The
Company has in the past experienced delays in completing the development and
introduction of new products, product variations and product features, and there
can be no assurance that such delays will not continue or recur in the future.
Such delays could result in a loss of market acceptance and market share. 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.
SUBSTANTIAL FUTURE LOSSES AND FUTURE CAPITAL REQUIREMENTS. 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. In December 1996, the Company commercially introduced its
Port-Access systems and is now engaged in extensive physician training and
selling activities. Through its "Port-Access Partnership" program, the Company
has adopted a sales model in which the Company trains a center's surgical team,
supplies patient and referring physician educational materials, supports local
market media efforts and furnishes proprietary reusable devices for Port-Access
procedures in exchange for a purchase order for Port-Access disposable products
necessary to perform Port-Access cardiac surgery. To date, a significant portion
of the Company's product sales have been in connection with initial purchase
orders for disposable products from centers participating in the Port-Access
Partnership program.
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The Company has only been generating revenue from the sale of products
since December 1996, and it has been unprofitable since inception. For the
period from inception to September 30, 1997, the Company has incurred cumulative
net losses of approximately $90.1 million. For at least the next 18 months, the
Company expects to continue to incur significant losses and expects to incur
losses in 1997 in excess of those incurred in 1996. There can be no assurance
that the Company will achieve or sustain profitability in the future. Failure to
achieve significant commercial revenues or profitability would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
The Company believes that it may require additional debt and/or equity
financing. The Company's future liquidity and capital requirements will depend
upon numerous factors, including but not limited to the following: the extent to
which the Company's products gain market acceptance; the timing and costs of
future product introductions; the extent of the Company's ongoing research and
development programs; the costs of training physicians to become proficient in
the use of the Company's products and procedures; the costs of expanding
manufacturing capacity; the costs of developing marketing and distribution
capabilities; the progress and scope of clinical trials required for any future
products; the timing and costs of filing future regulatory submissions; the
timing and costs required to receive both domestic and international
governmental approvals for any future products; and the costs of protecting and
defending its intellectual property. Issuance of additional equity or
convertible debt securities could result in dilution to stockholders. There can
be no assurance that additional financing will be available on terms acceptable
to the Company, or at all. The Company's inability to fund its capital
requirements would have a material adverse effect on the Company's business,
financial condition, and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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 September 30, 1997, the Company owns 26
issued United States patents. In addition, as of September 30, 1997, the Company
has filed 105 patent applications in the U.S., 42 of which have also been filed
in Canada, Europe, and Asia. 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.
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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, has
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 other patent holders, 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 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
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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. There can be no assurance that such litigation,
if commenced by the Company, would be successful.
MANAGEMENT OF EXPANDING OPERATIONS; ACQUISITIONS. The Company has recently
experienced rapid expansion of its operations, which has placed, and is expected
to continue to place, significant demands on the Company's administrative,
operational and financial personnel, and systems. In this respect, the Company
hired 127 new employees in the second half of 1996 and 164 new employees in the
first nine months of 1997, and expects to continue hiring substantial numbers of
additional personnel. In order to compete effectively against current and
future competitors, the Company believes that it must continue to expand its
operations, particularly in the areas of research and development, clinical
affairs, manufacturing, and sales and marketing. 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 has recently installed an integrated financial, manufacturing, and
inventory information system. There can be no assurance that such system will be
adequate to meet the Company's requirements. 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company may make acquisitions of complementary businesses, products and
technology in the future, and regularly evaluates such opportunities. Product
and technology acquisitions entail numerous risks, including difficulties in the
assimilation of acquired operations and products, diversion of management's
attention to other business concerns, amortization of acquired intangible
assets, and potential loss of key employees of acquired companies. The Company's
management has had limited experience in assimilating acquired organizations and
products into the Company's operations. No assurance can be given as to the
ability of the Company to integrate successfully any operations, personnel or
products that might be acquired in the future, and the failure of the Company to
do so could have a material adverse effect on the Company's results of
operations.
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
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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 limited insurance against certain product
liability claims, 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 any 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.
LIMITED SALES, MARKETING, AND DISTRIBUTION EXPERIENCE. The Company
currently has a limited sales and marketing organization in the United States
and Europe and believes that it must expand its direct sales force to
effectively market its products. Establishment of a sales force capable of
effectively commercializing the Company's EndoCPB and Port-Access systems will
require substantial efforts and require significant management and financial
resources. There can be no assurance that the Company will be able to establish
such a sales capability on a timely basis, if at all.
DEPENDENCE ON KEY PERSONNEL. The Company's future business and operating
results depend in significant part upon the continued contributions of its key
technical and senior management personnel, many of whom would be difficult to
replace and certain of whom perform important functions for the Company beyond
those functions suggested by their respective job titles or descriptions. The
Company's business and future operating results also depend in significant part
upon its ability to attract and retain qualified management, manufacturing,
technical, marketing, and sales and support personnel for its operations.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting or retaining such personnel. The
loss of any key employee, the failure of any key employee to perform in his or
her current position, or the Company's inability to attract and retain skilled
employees, as needed, could materially adversely affect the Company's business,
financial condition, and results of operations.
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. The Company believes that most of
its devices and systems will be subject to United States regulatory clearance
through the 510(k) pre-market notification process rather than a more extensive
pre-market approval ("PMA") submission. Although the Company has received 510(k)
clearance from the FDA to market the EndoCPB System and several proprietary
Class II disposable surgical devices for its Port-Access CABG and MVR surgery
systems in the United States, securing FDA approvals and clearances for
additional Port-Access devices and other products under development by the
Company, including the Port-Access AVR procedure, will require submission to the
FDA of extensive technical information and may require submission of extensive
clinical data. There can be no assurance that the FDA will act favorably or
quickly on the Company's future 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 additional products in the United States. Furthermore, there can be no
assurance that the FDA will not request additional data, require that the
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Company conduct further clinical studies, or require a more extensive PMA
submission for future products developed by the Company, causing the Company
to incur substantial costs and delays. The Company's business, financial
condition, and results of operations are critically dependent upon FDA
clearance or approval of the Company's systems. Failure to obtain additional
clearances or approvals, or to obtain such clearances or approvals on a
timely basis, could 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. Although the Company has received approval to market the EndoCPB
System and its Port-Access CABG and MVR systems in Europe, commercialization of
additional Port-Access devices and other products under development by the
Company will require additional approvals and there can be no assurance that
such approvals will be received on a timely basis, if 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 because of the occurrence of unforeseen problems following initial
marketing. The Company is also required to adhere to applicable FDA regulations
setting forth current GMP requirements, which include testing, control, and
documentation requirements. Ongoing compliance with GMP 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. To date, the FDA has not inspected the Company's compliance with GMP
requirements, although the Company expects such inspections to be made in the
near future. 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 pre-market
clearance or pre-market 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
implementing major revisions to its GMP regulations that, among other things,
require design controls and maintenance of service records, and will likely
increase the cost of complying with GMP requirements. Such revisions could have
a material adverse effect on the Company's business, financial condition, and
results of operations.
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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 products or
procedures 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 relationships
will be successful.
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT. The Company expects that sales
volumes and prices of the Company's products will be heavily dependent on the
availability of reimbursement from third-party payors and that individuals
seldom, if ever, will be willing or able to pay directly for the costs
associated with the use of the Company's products. The Company's products are
typically purchased by clinics, hospitals, and other users, which bill various
third-party payors, such as governmental programs and private insurance plans,
for the health care services provided to their patients. Third-party payors
carefully review and increasingly challenge the prices charged for medical
products and services. Reimbursement rates from private companies vary depending
on the procedure performed, the third-party payor, the insurance plan, and other
factors. Medicare reimburses hospitals a prospectively determined fixed amount
for the costs associated with an in-patient hospitalization based on the
patient's discharge diagnosis, and reimburses physicians a prospectively
determined fixed amount based on the procedure performed, regardless of the
actual costs incurred by the hospital or physician in furnishing the care and
unrelated to the specific devices used in that procedure. Medicare and other
third-party payors are increasingly scrutinizing whether to cover new products
and the level of reimbursement for covered products.
In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans, and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the United States, health maintenance organizations are emerging in certain
European countries. The Company may need to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner or at all. Failure 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.
The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets. The Company believes that the overall escalating cost of
medical products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce the
cost of products and services, including products offered by the Company. There
can be no assurance as to either United States or foreign markets that
third-party reimbursement and coverage will be available or adequate, that
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current reimbursement amounts will not be decreased in the future or that future
legislation, regulation, or reimbursement policies of third-party payors will
not otherwise adversely affect the demand for the Company's products or its
ability to sell its products on a profitable basis, particularly if the
Company's systems are more expensive than competing cardiac surgery procedures.
If third-party payor coverage or reimbursement is unavailable or inadequate, the
Company's business, financial condition, and results of operations could be
materially adversely affected.
POSSIBLE PRICE VOLATILITY OF COMMON STOCK. The market prices for
securities of medical device technology companies have been highly volatile. The
market price of the Company's Common Stock may be significantly affected by
factors such as actual or anticipated fluctuations in the Company's operating
results, announcements of technological innovations, new products or new
contracts by the Company or its competitors, developments with respect to
patents or proprietary rights, conditions and trends in the medical device and
other technology industries, adoption of new accounting standards affecting the
medical device industry, changes in financial estimates by securities analysts,
general market conditions, and other factors. In addition, the stock market has
experienced extreme price and volume fluctuations that have particularly
affected the market price for many high technology companies and that have often
been unrelated to the operating performance of these companies. The Company's
stock price has been, and is likely to continue to be, highly volatile. The
market price of the Company's Common Stock has fluctuated substantially in
recent periods, rising from $21.00 at the Company's initial public offering on
April 25, 1996 to a high of $43.75 on May 15, 1996 and to a low of $16.63 on
July 2, 1997. These broad market fluctuations may adversely affect the market
price of the Common Stock, and there can be no assurance that the market price
of the Common Stock will not decline. In the past, following periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against that company. Such
litigation, if brought against the Company, could result in substantial costs
and a diversion of management's attention and resources.
CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS. The present
directors, executive officers, and principal stockholders of the Company and
their affiliates beneficially own approximately 51% of the outstanding Common
Stock. As a result, these stockholders will be able to continue to exert
significant influence over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions.
Such concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF RIGHTS PLAN,
CERTIFICATE OF INCORPORATION, BYLAWS, AND DELAWARE LAW. The Company's Board of
Directors has the authority to issue up to 20,000,000 shares of Preferred Stock
and to determine the price, rights, preferences, privileges and restrictions,
including voting and conversion rights of such shares, without any further vote
or action by the Company's stockholders. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock could have the effect of making it more difficult for a third
party to
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acquire a majority of the outstanding voting stock of the Company. Other than
the Series A Preferred Stock issuable under the stockholder rights plan, the
Company has no current plans to issue shares of Preferred Stock. In addition,
the Company's Certificate of Incorporation provides for a classified Board of
Directors such that approximately only one-third of the members of the Board
are elected at each annual meeting of stockholders. Classified Boards may
have the effect of delaying, deferring, or discouraging changes in control of
the Company. Further, the Company has adopted a stockholder rights plan that,
in conjunction with certain provisions of the Company's Certificate of
Incorporation and Bylaws and of Delaware law, could delay or make more
difficult a merger, tender offer, or proxy contest involving the Company.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) On August 26, 1997, the Registrant issued 7,500 shares of Common Stock
(valued at approximately $150,000) to an individual in exchange and
as payment for services rendered to Registrant. This issuance was
made without registration or reliance upon the exemption provided by
Section 4(2) of the Securities Act of 1933, as amended, since no
public offering was involved. The stock certificate representing such
shares bears a transfer restriction legend.
(d) As required by Rule 463, the Registrant provides the following
information with respect to the use of proceeds from the sale of its
Common Stock on April 25, 1996, pursuant to a registration statement
filed with and declared effective by the Commission ($ in thousands):
(i) The offering has terminated; the offering did not terminate
before the sale of all securities registered.
(ii) The managing underwriters of the offering were:
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Alex. Brown & Sons Incorporated
Cowen & Company
(iii) Class of securities registered: Common Stock
(iv) Amount registered: 5,750,000 Shares
Aggregate price of offering amount
registered: $120,750
Amount sold: 5,750,000 Shares
Aggregate offering price of amount sold: $120,750
(v) Estimated amount of expenses incurred
for the Issuers' account in connection
with the issuance and distribution of
the securities: $ 9,949
(vi) Estimated net offering proceeds: $110,801
(vii) Estimated use of net offering proceeds
through September 30, 1997:
Construction of plant, building
and facilities $ 5,584
Purchase and installation of
machinery and equipment $ 7,938
Purchase of real estate $ 0
Acquisition of other businesses $ 0
Repayment of indebtedness $ 760
Working capital $ 58,683
Short-term investments $ 18,972
Money Market funds $ 18,864
24
<PAGE>
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
September 30, 1997.
25
<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: NOVEMBER 12, 1997 HEARTPORT, INC.
-----------------
By: /s/ David B. Singer
----------------------------------
David B. Singer
Senior Vice President, Finance and
Chief Financial Officer
26
<PAGE>
HEARTPORT, INC.
FORM 10-Q
EXHIBIT INDEX
Exhibit
Number Exhibit Description Page
- ------- ------------------- ------
11.1 Computation of Net Loss Per Share . . . . . 28
27.1 Financial Data Schedule . . . . . . . . . . 29
27
<PAGE>
Exhibit 11.1
HEARTPORT, INC.
STATEMENT RE: COMPUTATION OF PER SHARE LOSSES
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Pro Forma Pro Forma
<S> <C> <C> <C> <C>
Net Loss $ (12,929) $ (13,436) $ (39,479) $ (23,135)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares outstanding 24,747 24,252 24,630 14,560
Convertible preferred shares outstanding -- -- -- 6,158
Shares related to SAB No. 55, 64 and 83 -- -- -- 1,521
---------- ---------- ---------- ----------
Total weighted average common shares
outstanding 24,747 24,252 24,630 22,239
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss per share $ (0.52) $ (0.55) $ (1.60) $ (1.04)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED 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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 62,983
<SECURITIES> 63,343
<RECEIVABLES> 6,298
<ALLOWANCES> 848
<INVENTORY> 3,465
<CURRENT-ASSETS> 137,333
<PP&E> 16,680
<DEPRECIATION> 3,448
<TOTAL-ASSETS> 154,977
<CURRENT-LIABILITIES> 12,285
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> 52,720
<TOTAL-LIABILITY-AND-EQUITY> 154,977
<SALES> 15,019
<TOTAL-REVENUES> 15,019
<CGS> 11,191
<TOTAL-COSTS> 11,191
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 282
<INTEREST-EXPENSE> 3,000
<INCOME-PRETAX> (39,479)
<INCOME-TAX> 0
<INCOME-CONTINUING> (39,479)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,479)
<EPS-PRIMARY> (1.60)
<EPS-DILUTED> (1.60)
</TABLE>
