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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 MARCH 31, 1998
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 May 12, 1998, there were 25,041,185 shares of the Registrant's
Common Stock outstanding.
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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 March 31, 1998
and December 31, 1997 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1998 and March 31, 1997 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and March 31, 1997 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 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 22
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Heartport, the Heartport logo and EndoCPB are registered trademarks of the
Company.
Port-Access is a trademark 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)
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<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997 (1)
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(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents $ 15,107 $ 35,805
Short-term investments 86,637 76,780
Accounts receivable, net 5,962 5,925
Inventories 4,131 4,878
Prepaid expenses and other 1,627 1,460
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Total current assets 113,464 124,848
Property and equipment, net 12,995 13,408
Deposits, intangibles and other assets, net 4,389 4,554
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Total assets $ 130,848 $ 142,810
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LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,746 $ 4,752
Accrued compensation and related benefits 4,891 4,324
Accrued interest payable 2,605 1,042
Current portion of long-term debt 748 807
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Total current liabilities 11,990 10,925
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Noncurrent liabilities:
Long-term debt, less current portion 86,720 86,842
Other long-term liabilities 67 65
Deferred royalty income 2,945 2,961
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Total noncurrent liabilities 89,732 89,868
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Stockholders' equity:
Common stock, $0.001 par value 25 25
Additional paid-in capital 145,034 144,824
Notes receivable from stockholders (902) (902)
Accumulated deficit (115,031) (101,930)
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Total stockholders' equity 29,126 42,017
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Total liabilities and stockholders' equity $ 130,848 $ 142,810
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</TABLE>
(1) DERIVED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEAR ENDED DECEMBER 31, 1997.
SEE ACCOMPANYING NOTES
3
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HEARTPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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1998 1997
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Net sales $ 7,455 $ 3,216
Cost of sales 4,200 2,721
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Gross profit 3,255 495
Operating expenses:
Research and development 4,494 4,332
Selling, general and administrative 11,550 9,219
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Total operating expenses 16,044 13,551
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Loss from operations (12,789) (13,056)
Interest income 1,486 1,189
Interest expense and other (1,798) (81)
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Net loss $ (13,101) $ (11,948)
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Basic and diluted net loss per share $ (0.56) $ (0.54)
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</TABLE>
SEE ACCOMPANYING NOTES
4
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HEARTPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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1998 1997
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OPERATING ACTIVITIES:
Net loss $ (13,101) $ (11,948)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,121 547
Compensation related to stock options 110 -
Changes in operating assets and liabilities:
Accounts receivable (37) (2,053)
Inventories 747 (804)
Other assets (125) 311
Accounts payable, accrued expenses and other liabilities 1,110 (518)
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NET CASH USED IN OPERATING ACTIVITIES (10,175) (14,465)
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INVESTING ACTIVITIES
Purchases of short-term investments (40,402) (16,596)
Maturities and sales of short-term investments 30,545 21,419
Purchases of property and equipment (585) (1,481)
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NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (10,442) 3,342
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FINANCING ACTIVITIES
Proceeds from issuances of common stock 100 210
Repayment of long-term borrowings (181) (162)
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NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (81) 48
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NET DECREASE IN CASH AND CASH EQUIVALENTS (20,698) (11,075)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 35,805 33,445
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,107 $ 22,370
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 41 $ 60
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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 preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The operating results of the interim periods presented are not necessarily
indicative of the results for the year ending December 31, 1998 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, 1997 included in
the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
Certain amounts for the period ended March 31, 1997 have been reclassified
to conform to the March 31, 1998 financial statement presentation.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventories at March 31, 1998 and December 31,
1997 were as follows:
<TABLE>
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MARCH 31, DECEMBER 31,
1998 1997
(UNAUDITED)
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(in thousands)
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Materials and purchased parts $2,848 $2,235
Work in process 214 456
Finished goods 1,069 2,187
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Total inventories $4,131 $4,878
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NOTE 3. NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
EARNINGS PER SHARE. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary and fully diluted earnings per share, outstanding nonvested
shares are not included in the computations of basic and diluted earnings per
share until the time-based vesting restriction has lapsed. However, for the
purposes of computing diluted earnings per share in periods with a profit,
the dilutive effect of outstanding nonvested shares is included using the
treasury stock method. For periods with a profit, basic earnings per share
excludes the dilutive effect of options, warrants, and convertible securities
that would have been included in the primary earnings per share calculation.
Net loss per share for the three months ended March 31, 1997 has been
restated to conform to the Statement 128 requirements. The following table
sets forth the computation of net loss per share:
6
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THREE MONTHS ENDED
MARCH 31,
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1998 1997
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(UNAUDITED)
(in thousands, except per share amounts)
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Numerator for basic and diluted net loss per share:
Net loss ($13,101) ($11,948)
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Denominator:
Weighted-average common shares 24,962 24,498
Weighted-average nonvested shares subject to repurchase (1,748) (2,532)
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Denominator for basic and diluted net loss per share 23,214 21,966
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Basic and diluted net loss per share ($0.56) ($0.54)
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</TABLE>
NOTE 4. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, REPORTING COMPREHENSIVE INCOME. Statement 130 establishes new rules for
the reporting and display of comprehensive income and its components;
however, adoption in 1998 will have no impact on the Company's net loss or
shareholders' equity. Statement 130 requires unrealized gains or losses on
the Company's available-for-sale securities, which currently are reportable
in shareholders' equity, to be included in other comprehensive income and the
disclosure of total comprehensive income. There were no unrealized gains or
losses on the Company's available-for-sale securities as of December 31, 1997
or March 31, 1998. If the Company adopted Statement 130 for the three months
ended March 31, 1998, there would be no difference between comprehensive
income and the computation of net loss reported.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
which is effective for years beginning after December 15, 1997. Statement
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. Statement 131 is effective for financial statements for fiscal
years beginning after December 15, 1997, and therefore the Company will adopt
the new requirements retroactively in 1998. Management has not completed its
review of Statement 131, but does not anticipate that the adoption of this
statement will have a significant effect on the Company's reported segments.
NOTE 5. SUBSEQUENT EVENT
On May 7, 1998, the Company announced that it intends to significantly
reduce expenses and restructure its business operations to improve operating
efficiency and focus its resources on increasing usage of its Port-Access
minimally invasive cardiac surgery systems. The Company will scale back
manufacturing capacity and reduce general and administrative expenses in
several areas. The restructuring includes an approximate one-third reduction
of the Company's United States workforce. As a result, the Company expects
to take a restructuring charge in the second quarter of 1998. The Company
has not finalized the restructuring plan, and accordingly, the amount of the
charge has not been estimated.
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 March 31, 1998, and for the three months ended
March 31, 1998 and March 31, 1997, should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's 1997 Annual Report on Form 10-K, filed
with the Securities and Exchange Commission.
OVERVIEW
Since its inception in May 1991, Heartport, Inc. (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 marketing and selling activities, and continued research and
development. Through its "Port-Access Partnership" program, the Company has
adopted a procedural 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.
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 March 31, 1998, the Company has incurred cumulative
net losses of approximately $115.0 million. For at least the next 18 months,
the Company expects to continue to incur significant losses.
During 1997, the Company built up its manufacturing capacity and general
and administrative structure in anticipation of higher procedure volume and
net sales. The Company believes that procedure volume by trained cardiac
surgery teams has been negatively impacted by ease of use issues, the
significant physician learning curve, and longer procedure times associated
with Port-Access surgery. On May 7, 1998, the Company announced that it
intends to significantly reduce expenses and restructure its business
operations to improve operating efficiency and focus its resources on
increasing usage of its Port-Access minimally invasive cardiac surgery
systems. The Company will scale back manufacturing capacity and reduce
general and administrative expenses in several areas. The research and
development department will focus its resources on enhancing current products
and completing the development of new products that make Port-Access
procedures easier and faster to perform. The Company will augment its sales
organization by moving more clinical training specialists into the field to
work directly with surgical teams at their hospitals. The restructuring
includes an approximate one-third reduction of the Company's United States
workforce. As a result, the Company expects to take a restructuring charge,
which the Company plans to disclose when second quarter financial results are
announced in July 1998.
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," " -- Fluctuations in Operating Results,"
" -- Customer Concentration," " -- Risks Associated with New Surgical
Procedure; Extensive Training Requirements," and " -- Limited Manufacturing
Experience; Dependence on Key Suppliers."
RESULTS OF OPERATIONS
NET SALES. Net sales were $7.5 million and $3.2 million for the three
months ended March 31, 1998 and 1997, respectively. The increase is due to
growth in the number of surgical teams trained and actively performing Port-
Access cardiac surgery. Net sales consist primarily of sales of the Company's
disposable devices in its EndoCPB, Port-Access CABG and Port-Access MVR
systems. The Company estimates that approximately one-fourth to one-third of
net sales in the three months ended March 31, 1998, represented shipments that
remained in end-customer stock at March 31,
8
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1998. Revenue from product sales is recognized upon product shipment.
International net sales represented 8% and 14% of net sales in the three
months ended March 31, 1998 and 1997, respectively.
COST OF SALES. Cost of sales was $4.2 million and $2.7 million in the
three months ended March 31, 1998 and 1997, respectively. Cost of sales
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. Cost of sales increased due to
higher unit sales in the first quarter 1998, but decreased as a percentage of
sales due to manufacturing efficiencies. Gross margin improved to 44% for
the three months ended March 31, 1998, compared to 15% for the same period in
1997.
As cost of sales 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. The gross margin may also be adversely affected by
excess manufacturing capacity as a result of the unpredictable nature of
product shipment and production schedules in this early stage of adoption.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$4.5 million in the three months ended March 31, 1998, a 4% increase over
$4.3 million in the same period of 1997. The Company continues to maintain 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.
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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $11.6 million in the three months ended
March 31, 1998, from $9.2 million in the same period of 1997. The increase
was primarily due to the hiring of additional sales, marketing and
administrative personnel, increased expenses necessary to support the growing
customer base and other ongoing sales activities, and higher expenses
necessary to manage and support the Company's increased scale of operations.
Use of the Company's products requires a substantial training curriculum both
at the Heartport Research and Training Center and at each customer's
hospital. These costs are accounted for as sales and marketing expenses.
Selling, general and administrative expenses consist primarily of costs for
sales, marketing and administrative 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.
INTEREST INCOME. Interest income increased to $1.5 million in the three
months ended March 31, 1998, compared with $1.2 million in the same period of
1997. The increase is primarily due to the Company's higher average
investment balances resulting from the issuance of convertible subordinated
notes in April 1997.
9
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INTEREST EXPENSE AND OTHER. Interest expense and other increased to $1.8
million in the three months ended March 31, 1998, compared with $81,000 in
the same period of 1997. The increase is primarily attributable to interest
expense related to the Company's convertible subordinated notes that were
issued in April 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, 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.
The Company also has a $25.0 million debt facility with a commercial bank.
No amount was outstanding under this facility at March 31, 1998. At March
31, 1998, the Company had approximately $101.7 million in cash, cash
equivalents, and short-term investments and approximately $101.5 million in
working capital.
Net cash used in operating activities was approximately $10.2 million
and $14.5 million in the three months ended March 31, 1998 and 1997,
respectively, and resulted primarily from net losses in each period. For the
three months ended March 31, 1998, net losses, adjusted for depreciation and
amortization, were partly offset by a decrease in inventories due to lower
manufacturing production rates. For the three months ended March 31, 1997,
additional operating cash was required to support an increase in accounts
receivable resulting from the Company's first full quarter of product sales.
Net cash used in investing activities was approximately $10.4 million for the
three months ended March 31, 1998, compared with net cash provided by
investing activities of approximately $3.3 million for the three months ended
March 31, 1997. The net cash used in investing activities for the three
months ended March 31, 1998, reflects the reinvestment of cash equivalent
investment maturities during the period as short-term investments.
Capital expenditures for equipment and leasehold improvements to support
the Company's operations were approximately $0.6 million and $1.5 million in
the three months ended March 31, 1998 and 1997, respectively. The decrease
in expenditures in the three months ended March 31, 1998, was primarily due
to the timing of facility improvements. The Company expects that its capital
expenditures in 1998 will be higher than 1997 primarily due to the cost of
leasehold improvements for the Company's new building, which is currently
under construction. The Company believes that it has the financial resources
through its current level of liquid assets and credit facilities to meet
business requirements in 1998.
RISK FACTORS
This Quarterly Report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may
differ materially from those discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
the following:
RESTRUCTURING OF OPERATIONS
On May 7, 1998, the Company announced that it intends to restructure its
business operations. Implementation of this restructuring involves several
risks, including the risk that there will be further attrition of key
personnel beyond that planned in the reduction in force. Although the Company
believes that the actions it is taking in connection with the restructuring
should help align the Company's expense structure with its business
prospects, there can be no assurance that such actions will enable the
Company to achieve its objectives of reducing costs and reducing its net
losses. In addition, there can be no assurance that the Company's future
operating results and financial condition will not be adversely affected
should it encounter difficulty in managing the restructuring.
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
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
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
10
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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. The Company believes that
physicians' acceptance and healthcare payors' reimbursement of Port-Access
procedures will be essential for market acceptance of its systems, and there
can be no assurance that any such recommendations or approvals will be
obtained. Physicians will not recommend Port-Access procedures unless they
conclude, based on clinical data, ease of use, operative time 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 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. The Company believes that procedure volume by trained cardiac
surgery teams has been negatively impacted by ease of use issues, the
significant physician learning curve, and longer procedure times associated
with Port-Access surgery. Although the Company has recently re-focused its
training and sales efforts on addressing these issues, there can be no
assurance that it will be successful in increasing procedure volume or that
the products will obtain any significant degree of market acceptance.
Failure of the Company to increase procedural volume by trained teams or
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.
FLUCTUATIONS IN OPERATING RESULTS
Results of operations may vary significantly from quarter to quarter and
year to year 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 and the number of procedures performed by
those teams; 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's operating results are affected by seasonality
(principally during each fourth quarter due to fewer operating days and fewer
elective cardiovascular surgeries scheduled over the holidays). Furthermore,
the Company is continuing to develop its 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.
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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,
because of the inherent risks associated with new medical device technology,
and due to the uncertainty as to whether the Company's efforts to increase
procedure volume by trained cardiac surgery teams will be successful.
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 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.
CUSTOMER CONCENTRATION
Approximately 39% of the Company's net sales in the three months ended
March 31, 1998, were derived from sales to 20 customers. However, the
Company believes that these customers actually performed a substantially
higher percentage of the Port-Access procedures performed during the quarter,
and that this customer concentration will continue during the remainder of
1998 as the Company focuses on strengthening its relationships with active,
higher volume 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.
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 substantial learning process involved for surgeons and
other members of the cardiac surgery team. Typically, a significant amount
of time and effort spent in training as well as completion of a number of
Port-Access procedures is required before a cardiac surgery team becomes
proficient with the Company's products. 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 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 or delay in
trained surgical teams' ability to become proficient with the Company's
products 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.
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 has
limited 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
12
<PAGE>
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. Although the
Company has received ISO 9001 certification, to date, the FDA has not
inspected the Company's compliance with 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.
The Company plans to move its present Redwood City, California
operations, including its manufacturing operations, to a new Redwood City
facility in late 1998. Although the Company is preparing to make this move
in a manner designed to mitigate the impact on its manufacturing operations,
there can be no assurance that it will be able to successfully transition its
manufacturing process to the new facility in a manner that does not
materially and adversely affect its business, financial condition, and
results of operations.
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 Baxter International Inc., the Ethicon Endosurgery division of
Johnson & Johnson, Genzyme Corporation, Guidant Corporation, Medtronic, Inc.,
United States Surgical 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
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<PAGE>
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.
The Company has only generated revenue from the sale of products since
December 1996, and it has been unprofitable since inception. For the period
from inception to March 31, 1998, the Company has incurred cumulative net
losses of approximately $115.0 million. For at least the next 18 months, the
Company expects to continue to incur significant losses. 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 trails required
for any future products; the timing and costs of filing future regulatory
14
<PAGE>
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.
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 March 31, 1998, the Company owns 61 issued
or allowed United States patents, and one issued foreign patent. In addition,
as of March 31, 1998, the Company has 87 pending United States patent
applications and has filed 44 patent applications that are currently pending
in Europe, Japan, Australia, and Canada. There can be no assurance that the
Company's issued patents, or any patents that may be issued in the future,
will effectively protect the Company's technology or provide a competitive
advantage. There can be no assurance that any of the Company's patents or
patent applications will not be challenged, invalidated, or circumvented in
the future. In addition, there can be no assurance that competitors, many of
which have substantially more resources than the Company and have made
substantial investments in competing technologies, will not seek to apply for
and obtain patents that will prevent, limit, or interfere with the Company's
ability to make, use, or sell its products either in the United States or
internationally.
The Company also relies upon trade secrets, technical know-how, and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute confidentiality and assignment of inventions agreements
in connection with their employment, consulting, or advisory relationships
with the Company. There can be no assurance, however, that these agreements
will not be breached or that the Company will have adequate remedies for any
breach. Furthermore, no assurance can be given that competitors will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's proprietary technology,
or that the Company can meaningfully protect its rights in unpatented
proprietary technology.
Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries and
the filing of related patent applications. Patents issued and patent
applications filed relating to medical devices are numerous and there can be
no assurance that current and potential competitors and other third parties
have not filed or in the future will not file applications for, or have not
received or in the future will not receive, patents or obtain additional
proprietary rights relating to products or processes used or proposed to be
used by the Company. The Company is aware of patents issued to third parties
that contain subject matter related to the Company's technology. Based, in
part, on advice of its patent counsel, the Company believes that the
technologies employed by the Company in its devices and systems do not
infringe the claims of any such patents. There can be no assurance, however,
that third parties will not seek to assert that the Company's devices and
systems infringe their patents or seek to expand their patent claims to cover
aspects of the Company's technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
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
15
<PAGE>
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.
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
relationships with St. Jude Medical, Inc. and Getz Bros. Co., Ltd., 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.
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 and maintain such a sales capability on a
timely basis.
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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, particularly in the
geographic region of California where the Company's principal office is
located, 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) premarket notification process rather than a more extensive PMA
submission. Although the Company has received 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 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 510(k) or other
submissions, and significant difficulties and costs may be encountered by the
Company in its efforts to obtain FDA clearance that could delay or preclude
the Company from marketing and selling its products in the United States.
Furthermore, there can be no assurance that the FDA will not request
additional data, require that the Company conduct further clinical studies,
or require a more extensive PMA submission, causing the Company to incur
substantial costs and delays. 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 such clearances or
approvals, or to obtain such clearances or approvals on a timely basis, would
have a material adverse effect on the Company's business, financial
condition, and results of operations, and could result in postponement of the
commercialization of the Company's products or even cessation of the
Company's business in the United States.
Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approval for sale in foreign countries may be longer
or shorter than that required for FDA clearance or approval, and the
requirements may differ. Although the Company's EndoCPB System and
Port-Access CABG and MVR Systems bear the CE Mark under the European
Community medical device directive, some European countries may impose
additional requirements for commercialization of those products. Other
products under development by the Company will require additional approvals
or assessments, and there can be no assurance that these approvals or
assessments 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
17
<PAGE>
withdrawn for failure to comply with regulatory standards or because of the
occurrence of unforeseen problems following initial marketing. The Company
will also be 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 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 new quality system 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.
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 healthcare
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
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<PAGE>
unavailable or inadequate, the Company's business, financial condition, and
results of operations could be materially adversely affected.
PRICE VOLATILITY OF COMMON STOCK
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 $9.75 on May 5, 1998. The market price of the
shares of 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. These broad market fluctuations may adversely affect the market
price of the Company's 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.
POSSIBLE ACQUISITIONS
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.
CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS
The present directors, executive officers, and principal stockholders of
the Company and their affiliates beneficially own approximately 45% 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.
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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
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(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 March 31, 1998:
Construction of plant, building
and facilities $ 6,700
Purchase and installation of
machinery and equipment $ 8,609
Purchase of real estate $ 0
Acquisition of other businesses $ 0
Repayment of indebtedness $ 1,106
Working capital $ 82,396
Short-term investments $ 10,210
Money Market funds $ 1,780
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
March 31, 1998.
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: May 14, 1998 HEARTPORT, INC.
---------------------------
By: /s/ David B. Singer
-----------------------------
Senior Vice President and
Chief Financial Officer
22
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
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0
0
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