<PAGE>
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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, 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
------ ------
As of August 7, 1998, there were 25,131,626 shares of the Registrant's
Common Stock outstanding.
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<PAGE>
HEARTPORT, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1998
and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1998 and June 30, 1997. . . . 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and June 30, 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 . . . . . . . . . . . . 23
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 24
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 24
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
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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 1. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
HEARTPORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997(1)
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,315 $ 35,805
Short-term investments 75,485 76,780
Accounts receivable, net 1,783 5,925
Inventories 2,430 4,878
Prepaid expenses and other 1,542 1,460
----------- -----------
Total current assets 94,555 124,848
Property and equipment, net 5,917 13,408
Deposits, intangibles and other assets, net 3,329 4,554
----------- -----------
Total assets $ 103,801 $ 142,810
----------- -----------
----------- -----------
LIABILITIES & STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 3,888 $ 4,752
Accrued compensation and related benefits 3,995 4,324
Restructuring provision 2,906 --
Accrued interest payable 1,042 1,042
Current portion of long-term debt 686 807
----------- -----------
Total current liabilities 12,517 10,925
----------- -----------
Noncurrent liabilities:
Long-term debt, less current portion 86,598 86,842
Other long-term liabilities 40 65
Restructuring provision 2,817 --
Deferred royalty income 2,934 2,961
----------- -----------
Total noncurrent liabilities 92,389 89,868
----------- -----------
Stockholders' (deficit) equity:
Common stock, $0.001 par value 25 25
Additional paid-in capital 145,182 144,824
Notes receivable from stockholders (902) (902)
Accumulated deficit (145,410) (101,930)
----------- -----------
Total stockholders' (deficit) equity (1,105) 42,017
----------- -----------
Total liabilities and stockholders' (deficit) equity $ 103,801 $ 142,810
----------- -----------
----------- -----------
</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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 2,911 $ 4,652 $ 10,366 $ 7,868
Cost of sales 4,985 3,621 9,185 6,342
---------- ---------- ---------- ----------
Gross profit (2,074) 1,031 1,181 1,526
Operating expenses:
Research and development 3,090 5,846 7,584 10,178
Selling, general and administrative 10,369 10,462 21,919 19,681
Restructuring charge 14,374 -- 14,374 --
---------- ---------- ---------- ----------
Total operating expenses 27,833 16,308 43,877 29,859
---------- ---------- ---------- ----------
Loss from operations (29,907) (15,277) (42,696) (28,333)
Interest income 1,229 1,797 2,715 2,986
Interest expense and other (1,701) (1,122) (3,499) (1,203)
---------- ---------- ---------- ----------
Net loss $ (30,379) $ (14,602) $ (43,480) $ (26,550)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic and diluted net loss per share $ (1.30) $ (0.66) $ (1.87) $ (1.20)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (43,480) $ (26,550)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,680 1,174
Compensation related to stock options 173 --
Issuance of common stock for patents -- 310
Loss on sales and disposals of equipment 348 --
Restructuring charge 12,934 --
Changes in operating assets and liabilities:
Accounts receivable 4,142 (3,136)
Inventories 2,238 (2,105)
Other assets 13 (1,086)
Accounts payable, accrued expenses and other liabilities (1,218) 405
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (22,170) (30,988)
---------- ----------
INVESTING ACTIVITIES
Purchases of short-term investments (58,984) (56,477)
Maturities and sales of short-term investments 60,279 33,823
Purchases of property and equipment (1,435) (4,555)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (140) (27,209)
---------- ----------
FINANCING ACTIVITIES
Proceeds from issuances of common stock 185 1,304
Proceeds from long-term borrowings -- 83,121
Repayment of long-term borrowings (365) (320)
---------- ----------
NET CASH (USED IN) PROVIDED IN FINANCING ACTIVITIES (180) 84,105
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (22,490) 25,908
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 35,805 33,445
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,315 $ 59,353
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 3,203 $ 115
---------- ----------
---------- ----------
</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 and the restructuring provision) 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.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventories at June 30, 1998 and December 31,
1997 were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
(UNAUDITED)
----------- ------------
(in thousands)
<S> <C> <C>
Materials and purchased parts $1,572 $2,235
Work in process 279 456
Finished goods 579 2,187
------ ------
Total inventories $2,430 $4,878
------ ------
------ ------
</TABLE>
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 and six months ended
June 30, 1997 has been restated to conform to the Statement
6
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128 requirements. The following table sets forth the computation of net loss
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator for basic and diluted net loss per share:
Net loss $(30,379) $(14,602) $(43,480) $(26,550)
--------- --------- --------- ---------
Denominator:
Weighted-average common shares 25,038 24,646 25,000 24,572
Weighted-average nonvested shares subject to repurchase (1,640) (2,355) (1,694) (2,443)
--------- --------- --------- ---------
Denominator for basic and diluted net loss per share 23,398 22,291 23,306 22,129
--------- --------- --------- ---------
Basic and diluted net loss per share $ (1.30) $ (0.66) $ (1.87) $ (1.20)
--------- --------- --------- ---------
--------- --------- --------- ---------
</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
stockholders' equity. Statement 130 requires unrealized gains or losses on
the Company's available-for-sale securities, which currently are reportable
in stockholders' 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 June 30, 1998.
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 does not anticipate
that the adoption of this statement will have a significant effect on the
Company's financial statements.
NOTE 5. RESTRUCTURING CHARGE
In May 1998, the Company implemented a restructuring plan to improve
operating efficiency and increase usage of its Port-Access minimally invasive
cardiac surgery systems. Under the restructuring plan, the Company reduced
its United States workforce and will close its training facility in Utah.
The planned restructuring activities resulted in a charge of $14.4 million
and included reducing headcount, vacating leased facilities, and disposing of
assets. The restructuring charge included approximately $6.5 million for the
write-off of capital assets and leasehold improvements, approximately $4.6
million in facility expenses relating primarily to the closure of the Utah
facility, and approximately $2.8 million in severance costs associated with
approximately 140 terminated employees. As of June 30, 1998, approximately
$1.5 million had been paid, primarily for severance and other
employee-related costs for approximately 110 terminated employees.
7
<PAGE>
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, 1998, and for the six months ended June
30, 1998 and June 30, 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 been generating revenue from the sale of products since
December 1996, and it has been unprofitable since inception. For the period
from inception to June 30, 1998, the Company has incurred cumulative net
losses of approximately $145.4 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.
In May 1998, the Company began implementing a plan to significantly
reduce expenses and restructure its business operations to improve
operating efficiency and increase usage of its Port-Access minimally
invasive cardiac surgery systems. As a result of the restructuring
plan, the Company has taken steps to scale back manufacturing capacity,
reduce research and development expenses, and reduce general and
administrative expenses in several areas, including marketing and
physician training. The research and development department has focused
its resources on enhancing current products and completing the
development of new products that are intended to make Port-Access
procedures easier and faster to perform. The Company has decided to
close its Utah training facility and is augmenting its sales
organization by moving more clinical training specialists into the field
to work directly with surgical teams at their hospitals. The planned
restructuring actions resulted in a charge of $14.4 million and included
reducing headcount by approximately 140 employees, vacating leased
facilities, and disposing of assets.
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,
8
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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 $2.9 million for the three months ended June
30, 1998, compared with $4.7 million in the same period last year. The
decrease is a result of the Company's efforts to reduce existing customer
inventories of its Port-Access minimally invasive cardiac surgery systems by
focusing on customer usage of the systems. The Company estimates that
customer inventories decreased by approximately 22 percent (or approximately
$2.8 million) in the three months ended June 30, 1998. For the six months
ended June 30, 1998 and 1997, net sales were $10.4 million and $7.9 million,
respectively. The Company anticipates that net sales in the remaining
quarters of 1998 will be lower than the comparable quarters in 1997 as the
Company continues to focus on increasing procedure rates and reducing
customer inventories.
Net sales consist primarily of sales of the Company's disposable devices
in its EndoCPB, Port-Access CABG and Port-Access MVR systems. Revenue from
product sales is recognized upon product shipment. For the three months
ended June 30, 1998 and 1997, international net sales were $0.7 million and
$0.6 million, respectively, and represented 24% and 14% of net sales in those
periods, respectively. For the six months ended June 30, 1998 and 1997,
international net sales represented 12% and 14% of net sales, respectively.
COST OF SALES. Cost of sales exceeded net sales by $2.1 million,
resulting in a gross margin of (71%) for the three months ended June 30,
1998, compared to a gross margin of 22% for the same period in 1997. The
negative gross margin in 1998 was attributable to the decreased net sales
resulting from the Company's efforts to reduce existing customer inventories
and focus on customer usage, as well as $1.3 million in one-time charges
relating to inventory write downs and the write-off of certain assets. The
Company expects gross margins to be adversely impacted during the balance of
1998 as it continues to focus on increasing procedure rates and reducing
customer inventories. For the six months ended June 30, 1998 and 1997, gross
margin was 11% and 19%, respectively.
The Company's gross margin may 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 $3.1 million and $5.8 million in the three months ended June 30, 1998
and 1997, respectively. The decrease is primarily due to a reduction in
headcount and the cancellation of several projects in order to focus
research and development efforts on specific product enhancements and new
product developments that are intended to make Port-Access procedures easier
and faster to perform. Research and development expenses for the six months
ended June 30, 1998 and 1997 were $7.6 million and $10.2 million,
respectively. 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.
9
<PAGE>
Research and development expenses consist primarily of personnel and
other costs in support of product development, clinical evaluations, 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 were $10.4 million and $10.5 million in the three
months ended June 30, 1998 and 1997, respectively. For the six months ended
June 30, 1998, selling, general and administrative expenses increased to
$21.9 million from $19.7 million in the same period of 1997. The increase
was primarily due to the hiring of additional sales, marketing and
administrative personnel and increased expenses necessary to support the
growing customer base and other ongoing sales and customer training
activities. The restructuring plan that was implemented starting in May 1998
is expected to reduce significantly the previous level of selling, general
and administrative expenses.
Selling, general and administrative expenses consist primarily of costs
for sales, marketing and administrative personnel, as well as physician
training costs, legal, accounting and other professional fees.
RESTRUCTURING CHARGE. The restructuring plan implemented beginning in
May 1998 resulted in a charge of $14.4 million in the three months ended June
30, 1998. The restructuring charge included approximately $6.5 million for
the write-off of capital assets and leasehold improvements, approximately
$4.6 million in facility expenses relating primarily to the closure of the
Utah facility, and approximately $2.8 million in severance costs associated
with approximately 140 terminated employees. See Note 5 in Notes to Condensed
Consolidated Financial Statements.
INTEREST INCOME. Interest income decreased to $1.2 million from $1.8
million in the three months ended June 30, 1998 and 1997, respectively, and
decreased to $2.7 million from $3.0 million in the six months ended June 30,
1998 and 1997, respectively. The decreases are due to the Company's lower
average investment balances.
INTEREST EXPENSE AND OTHER. Interest expense and other increased to
$1.7 million from $1.1 million in the three months ended June 30, 1998 and
1997, respectively, and increased to $3.5 million from $1.2 million in the
six months ended June 30, 1998 and 1997, respectively. 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 $83.1
million. The Company also has a $25.0 million debt facility with a
commercial bank. No amount was outstanding under this facility at June 30,
1998. At June 30, 1998, the Company had approximately $88.8 million in cash,
cash equivalents, and short-term investments and approximately $82.0 million
in working capital.
10
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Net cash used in operating activities was approximately $22.2 million
and $31.0 million in the six months ended June 30, 1998 and 1997,
respectively, and resulted primarily from net losses in each period. For the
six months ended June 30, 1998, net losses, adjusted for depreciation and
amortization, were partly offset by leasehold, capital asset and inventory
disposals of approximately $12.9 million relating to the restructuring plan,
the collection of $4.1 million in cash for receivables, and a reduction of
$2.2 million in inventories. For the six months ended June 30, 1997,
additional operating cash was required to support an increase in accounts
receivable and inventories resulting from the Company's first six months of
product sales and anticipated product demand. Net cash used in investing
activities was approximately $0.1 million for the six months ended June 30,
1998, compared with net cash used in investing activities of approximately
$27.2 million for the six months ended June 30, 1997. The net cash used in
investing activities for the six months ended June 30, 1997, reflects the
investment of cash received from issuance of the convertible subordinated
notes in April 1997.
Capital expenditures for equipment and leasehold improvements to support
the Company's operations were approximately $1.4 million and $4.6 million in
the six months ended June 30, 1998 and 1997, respectively. The decrease in
expenditures in the six months ended June 30, 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
In May 1998, the Company began implementing a plan to significantly
reduce expenses and restructure its business operations to improve operating
efficiency and increase usage of its Port-Access minimally invasive cardiac
surgery systems. 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.
11
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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 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 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, 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 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.
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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 third and fourth quarter since fewer elective
cardiovascular surgeries are performed over vacations and the holidays).
Furthermore, the timing of development of the Company's sales force 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,
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 44% of the Company's net sales in the six months ended
June 30, 1998, were derived from sales to 20 customers. The Company believes
that these customers actually performed a substantially higher percentage of
the Port-Access procedures performed during the six month period, 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.
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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 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
efficient 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, 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.
As part of the restructuring plan announced in May 1998, the Company has
decided to close its Utah training facility and is implementing a field-based
training program. 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 efficient 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 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, and there
can be no assurance that it will be able to successfully scale-up its
production to meet commercial demand for its products in a timely manner. In
addition, the Company believes that cost reductions in its manufacturing
operations will be required for it to commercialize its systems on a
profitable basis. Certain manufacturing processes are labor-intensive, and
achieving significant cost reductions will depend, in part, upon reducing the
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 manufacturing 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 Quality System Requirements (QSR), which include
testing, control, and documentation requirements, although the Company expects
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such inspections to be made in the near future. There can be no assurance
that FDA QSR 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 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
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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
The Company has been generating revenue from the sale of products since
December 1996, and it has been unprofitable since inception. For the period
from inception to June 30, 1998, the Company has incurred cumulative net
losses of approximately $145.4 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 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.
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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, 1998, the Company owns 74 issued
or allowed United States patents, and one issued foreign patent. In addition,
as of June 30, 1998, the Company has 69 pending United States patent
applications and has filed 45 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
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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.
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.
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LIMITED SALES, MARKETING, AND DISTRIBUTION EXPERIENCE
The Company currently has a limited sales and marketing organization in
the United States and Europe. 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.
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.
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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 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 QSR, which include testing,
control, and documentation requirements. Ongoing compliance with QSR 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 QSR, 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.
Such delays 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.
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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. The Company is aware that certain third-party payors
have challenged or refused to provide reimbursement for Port-Access
procedures. 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.
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 $4.50 on July 27, 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.
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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.
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 Getz Bros. Co., Ltd., and its 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.
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.
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.
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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 June 30, 1998:
Construction of plant, building
and facilities $ 7,245
Purchase and installation of
machinery and equipment $ 8,913
Purchase of real estate $ 0
Acquisition of other businesses $ 0
Repayment of indebtedness $ 1,290
Working capital $ 93,353
Short-term investments $ 0
Money Market funds $ 0
23
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 7, 1998,
and the following matters were considered and approved by the votes indicated:
(i) Election of Joseph S. Lacob to the Board of Directors.
Votes For: 16,606,949
Votes Withheld: 427,600
(ii) Election of John H. Stevens, M.D. to the Board of Directors.
Votes For: 16,611,196
Votes Withheld: 423,353
(iii) Selection of Ernst & Young LLP as independent auditors.
Votes For: 16,958,002
Votes Against: 32,704
Abstentions: 43,843
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
June 30, 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: August 13, 1998 HEARTPORT, INC.
-----------------------
By: /s/ Frank M. Fischer
----------------------------------
President,
Chief Executive Officer
and Acting Chief Financial Officer
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>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,315
<SECURITIES> 75,485
<RECEIVABLES> 2,769
<ALLOWANCES> 986
<INVENTORY> 2,430
<CURRENT-ASSETS> 94,555
<PP&E> 11,447
<DEPRECIATION> 5,530
<TOTAL-ASSETS> 103,801
<CURRENT-LIABILITIES> 12,517
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> (1,130)
<TOTAL-LIABILITY-AND-EQUITY> 103,801
<SALES> 10,366
<TOTAL-REVENUES> 10,366
<CGS> 9,185
<TOTAL-COSTS> 9,185
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 23
<INTEREST-EXPENSE> 3,485
<INCOME-PRETAX> (43,480)
<INCOME-TAX> 0
<INCOME-CONTINUING> (43,480)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,480)
<EPS-PRIMARY> (1.87)
<EPS-DILUTED> (1.87)
</TABLE>
