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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, 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 June 30, 1997 there were 24,703,816 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 Consolidated Balance Sheets at June 30, 1997
and December 31, 1996.......................................... 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1997 and June 30, 1996..... 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and June 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 4. Submission of Matters to a Vote of Security Holders.......... 21
Item 5. Other Information........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................. 21
SIGNATURES............................................................ 22
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Heartport is a registered trademark 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)
JUNE 30, DECEMBER 31,
1997 1996 (1)
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(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents......................... $ 59,353 $ 33,445
Short-term investments............................ 79,061 56,407
Accounts receivable............................... 3,686 550
Inventories....................................... 4,212 2,107
Prepaid expenses and other........................ 2,848 1,717
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Total current assets................................ 149,160 94,226
Property and equipment, net......................... 9,778 6,395
Deposits, intangibles and other assets, net......... 4,346 1,231
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Total assets........................................ $ 163,284 $ 101,852
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 2,900 $ 4,570
Accrued compensation and related benefits......... 2,605 1,433
Accrued interest.................................. 1,268 --
Current portion of long-term debt................. 711 662
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Total current liabilities........................... 7,484 6,665
Noncurrent liabilities:
Long-term debt, less current portion.............. 87,248 1,334
Other long-term liabilities....................... 47 383
Deferred royalty income........................... 2,971 3,000
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Total noncurrent liabilities....................... 90,266 4,717
Stockholders' equity:
Convertible preferred stock....................... -- --
Common stock, $0.001 par value.................... 25 24
Additional paid-in capital........................ 143,631 142,018
Notes receivable from stockholders................ (973) (973)
Accumulated deficit............................... (77,149) (50,599)
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Total stockholders' equity.......................... 65,534 90,470
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Total liabilities and stockholders' equity.......... $ 163,284 $ 101,852
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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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net sales............................................ $ 4,652 $ -- $ 7,868 $ --
Cost of goods sold................................... 3,621 -- 6,342 --
---------- --------- ---------- ---------
Gross profit......................................... 1,031 -- 1,526 --
Operating expenses:
Research and development........................... 5,846 4,785 10,178 8,188
Selling, general and administrative................ 10,462 1,674 19,681 2,451
---------- --------- ---------- ---------
Total operating expenses............................. 16,308 6,459 29,859 10,639
---------- --------- ---------- ---------
Loss from operations................................. (15,277) (6,459) (28,333) (10,639)
Interest income...................................... 1,797 1,006 2,986 1,164
Interest expense..................................... (1,122) (118) (1,203) (224)
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Net loss............................................. $ (14,602) $ (5,571) $ (26,550) $ (9,699)
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Net loss per share................................... $ (0.59) $ (0.25) $ (1.08) $ (0.46)
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Shares used in calculation of net loss per share..... 24,646 22,684 24,572 21,233
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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>
SIX MONTHS ENDED
JUNE 30,
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1997 1996
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<S> <C> <C>
Operating activities:
Net loss................................................................ $ (26,550) $ (9,699)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization....................................... 1,174 415
Issuance of common stock for acquisition of patent.................. 310 --
Forgiveness of note receivable...................................... -- 50
Acceleration of stock option vesting................................ -- 183
Changes in operating assets and liabilities:
Accounts receivable............................................... (3,136) --
Inventories....................................................... (2,105) --
Prepaid expenses and other........................................ (1,131) (1,134)
Accounts payable and accrued expenses............................. 405 1,324
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Net cash used in operating activities................................... (31,033) (8,861)
Investing activities:
Purchase of short-term investments...................................... (56,477) (76,080)
Sales and maturities of short-term investments.......................... 33,823 10,998
Purchase of property and equipment...................................... (4,555) (1,982)
(Increase) decrease in deposits, intangibles and other assets........... 45 (34)
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Net cash used in investing activities................................... (27,164) (67,098)
Financing activities:
Proceeds from issuances of common stock................................. 1,304 111,184
Proceeds from payment of stockholders' notes receivable................. -- 22
Proceeds from long-term borrowings...................................... 83,121 1,043
Repayment of long-term borrowings....................................... (320) (248)
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Net cash provided by financing activities............................... 84,105 112,001
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Net increase in cash and cash equivalents............................... 25,908 36,042
Cash and cash equivalents at beginning of period........................ 33,445 7,412
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Cash and cash equivalents at end of period.............................. $ 59,353 $ 43,454
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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 six months ended June 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 six months ended June 30, 1996 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, 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 three and six months ended June 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 six months ended
June 30, 1997 and June 30, 1996 presented herein, since the impact of stock
options and convertible notes on these calculations is antidilutive.
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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
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 $3.2 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 $83.1 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 June 30, 1997 and for the three and six months
ended June 30, 1997 and June 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 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.
The Company has hired a significant number of employees to conduct and
support its research and development and product commercialization activities.
At June 30, 1997 and December 31, 1996, the Company had 357 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 only recently began to generate revenue from the sale of
products, and it has been unprofitable since inception. For the period from
inception to June 30, 1997, the Company has incurred cumulative net losses of
approximately $77.1 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 $4.7 million and $7.9 million in the three and
six months ended June 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 in the three and six months ended June 30, 1997, were $0.6 million
and $1.1 million, respectively, or 14% of net sales in each period. Revenues
are recognized upon product shipment.
COST OF GOODS SOLD. Cost of goods sold were $3.6 million and $6.3
million in the three and six months ended June 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 six months ended
June 30, 1997 was 22% and 19%, 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 and clinical trials, 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 increased to $5.8 million in the three
months ended June 30, 1997, from $4.8 million in the same period of 1996,
primarily due to $0.8 million paid for the acquisition of certain patents, of
which $0.5 million was paid in cash and $0.3 million was paid through the
issuance of common stock. Research and development expenses increased to
$10.2 million in the six months ended June 30, 1997 from $8.2 million in the
same period of 1996. In addition to the patent acquisition costs, this
increase was also primarily attributable to an increase in research and
development staffing. The Company anticipates that it will continue to devote
substantial resources to research and development. However, the Company
anticipates that research and development expenses will not change
significantly in 1997 as start-up costs for manufacturing and physician
training incurred during the Company's development phase will not recur in
1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of costs for administrative, sales
and marketing personnel, as well as legal, accounting and other 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 $10.5 million in the three months ended June 30, 1997 from $1.7
million in the same period of 1996, and increased to $19.7 million in the six
months ended June 30, 1997 from $2.5 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, physician training costs, expenses
necessary to support the Company's product launch and ongoing sales
activities, and 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.
9
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INTEREST INCOME. Interest income primarily represents interest earned by
the Company on its cash and short-term investments. Interest income increased
to $1.8 million in the three months ended June 30, 1997 from $1.0 million in
the same period of 1996, and increased to $3.0 million in the six months ended
June 30, 1997 from $1.2 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 $1.1 million in the three months ended
June 30, 1997 from $0.1 million in the same period of 1996, and increased to
$1.2 million in the six months ended June 30, 1997 from $0.2 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 June 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 $83.1 million. At June 30,1997, the Company had
approximately $138.4 million in cash, cash equivalents, and short-term
investments and approximately $141.7 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 June 30, 1997.
Net cash used in operating activities was approximately $31.0 million and
$8.9 million in the six months ended June 30, 1997 and June 30, 1996,
respectively. For such periods, net cash used in operating activities
resulted primarily from increasing net losses. For the six months ended June
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 $27.2
million and $67.1 million for the six months ended June 30, 1997 and June 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 $4.6 million and $2.0
million in the six months ended June 30, 1997 and June 30, 1996, respectively.
The Company expects that its capital expenditures will continue to grow as
the Company's employee base and manufacturing operations expand.
10
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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 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.
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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. Although the Company has begun physician training at its
Utah facility and a facility in Sweden, 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 40% of the Company's net sales in
the six months ended June 30, 1997 were derived from sales to 20 customers.
However, the Company believes that only ten customers were responsible for
approximately 60% of the Port-Access procedures performed during the six
months ended June 30, 1997. The Company believes that during the balance of
1997 this customer procedural concentration will continue and may increase 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 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
due to 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 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 limited quantities of products for
use in laboratory testing, clinical trials, and initial low-volume 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
12
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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 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. While 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. While 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. As a result, there is a risk of excess or inadequate inventory if
orders do not match forecasts.
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. 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.
13
<PAGE>
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.
The Company only recently began to generate revenue from the sale of
products and has been unprofitable since inception. For the period from
inception to June 30, 1997, the Company has incurred cumulative net losses of
approximately $77.1 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
14
<PAGE>
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 June 30, 1997,
the Company owns 25 issued United States patents. In addition, as of June 30,
1997, the Company has filed 93 patent applications in the U.S., 38 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.
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.
15
<PAGE>
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
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
126 new employees in the first half of 1997, and expects to continue hiring
substantial numbers of additional personnel in the second half of 1997. 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
16
<PAGE>
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
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.
17
<PAGE>
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) premarket 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 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 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,
18
<PAGE>
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
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.
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 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.
19
<PAGE>
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 51.2% 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 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.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 28,
1997, and the following matters were considered and approved by the votes
indicated:
(i) Election of Petri T. Vainio, M.D., Ph.D. to the Board of Directors.
Votes For: 21,735,323
Votes Against: 79,603
(ii) Amendment to the Company's 1996 Stock Option Plan.
Votes For: 16,168,855
Votes Against: 2,740,050
Abstentions: 19,498
Broker Non-Votes: 2,886,523
(iii) Amendment to the Company's Employee Stock Purchase Plan.
Votes For: 20,924,812
Votes Against: 389,159
Abstentions: 18,908
Broker Non-Votes: 482,047
(iv) Selection of Ernst & Young LLP as independent auditors.
Votes For: 21,797,123
Votes Against: 5,033
Abstentions: 12,770
Broker Non-Votes: 0
ITEM 5. Not applicable.
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
During the three months ended June 30, 1997 the Company
filed the following reports on Form 8-K:
Date Item Reported
----- -------------
April 30, 1997 Consummation of a previously
announced offering of convertible
subordinated notes pursuant to Rule 144A.
May 5, 1997 Consummation of the over-
allotment option closing for the
previously announced offering
of convertible subordinated notes pursuant
to Rule 144A.
21
<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, 1997 HEARTPORT, INC.
-----------------------
By: /s/ David B. Singer
----------------------------------
David B. Singer
Senior Vice President, Finance and
Chief Financial Officer
22
<PAGE>
HEARTPORT, INC.
FORM 10-Q
EXHIBIT INDEX
Exhibit
Number Exhibit Description Page
- ------- ------------------- ----
11.1 Computation of Net Loss Per Share................ 24
27.1 Financial Data Schedule.......................... 25
23
<PAGE>
Exhibit 11.1
HEARTPORT, INC.
STATEMENT RE: COMPUTATION OF PER SHARE LOSSES
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Pro Forma Pro Forma
<S> <C> <C> <C> <C>
Net Loss $(14,602) $(5,571) $(26,550) $(9,699)
--------- -------- --------- --------
--------- -------- --------- --------
Weighted average common shares outstanding 24,646 13,446 24,572 9,714
Convertible preferred shares outstanding -- 9,238 -- 9,238
Shares related to SAB No. 55, 64 and 83 -- -- -- 2,281
--------- -------- --------- --------
Total weighted average common shares
outstanding 24,646 22,684 24,572 21,233
--------- -------- --------- --------
--------- -------- --------- --------
Net loss per share $ (0.59) $ (0.25) $ (1.08) $ (0.46)
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
24
<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>
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0
0
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