<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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)
-------------
(650) 306-7900
(Registrant's telephone number, including area code)
-------------
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 November 5, 1998, there were 25,198,358 shares of the Registrant's
Common Stock outstanding.
- --------------------------------------------------------------------------------
<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 September 30, 1998
and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1998 and September 30, 1997 . 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and September 30, 1997 . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 27
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
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Heartport, the Heartport logo and EndoCPB are registered trademarks of the
Company. Port-Access and EndoDirect are trademarks of the Company.
Port-Access Partnership is a service mark of the Company.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTPORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997 (1)
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,774 $ 35,805
Short-term investments 71,284 76,780
Accounts receivable, net 1,739 5,925
Inventories 1,829 4,878
Prepaid expenses and other 1,322 1,460
--------- ----------
Total current assets 85,948 124,848
Property and equipment, net 7,032 13,408
Deposits, intangibles and other assets, net 3,207 4,554
--------- ----------
Total assets $ 96,187 $ 142,810
--------- ----------
--------- ----------
LIABILITIES & STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 3,787 $ 4,752
Accrued compensation and related benefits 3,349 3,917
Accrued warranty expense 1,082 407
Restructuring provision 1,746 -
Accrued interest payable 2,605 1,042
Current portion of long-term debt 491 807
--------- ----------
Total current liabilities 13,060 10,925
--------- ----------
Noncurrent liabilities:
Long-term debt, less current portion 86,482 86,842
Other long-term liabilities 39 65
Restructuring provision 2,717 -
Deferred royalty income 2,925 2,961
--------- ----------
Total noncurrent liabilities 92,163 89,868
--------- ----------
Stockholders' (deficit) equity:
Common stock, $0.001 par value 25 25
Additional paid-in capital 145,230 144,824
Accumulated other comprehensive income 612 -
Notes receivable from stockholders (902) (902)
Accumulated deficit (154,001) (101,930)
--------- ----------
Total stockholders' (deficit) equity (9,036) 42,017
--------- ----------
Total liabilities and stockholders' (deficit) equity $ 96,187 $ 142,810
--------- ----------
--------- ----------
</TABLE>
(1) DERIVED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 1997.
3
<PAGE>
HEARTPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1998 1997 1998 1997
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 3,407 $ 7,151 $ 13,773 $ 15,019
Cost of sales 4,248 4,849 13,433 11,191
-------- -------- --------- ---------
Gross profit (loss) (841) 2,302 340 3,828
Operating expenses:
Research and development 1,695 4,053 9,279 14,231
Selling, general and administrative 5,513 11,232 27,432 30,913
Restructuring charge - - 14,374 -
-------- -------- --------- ---------
Total operating expenses 7,208 15,285 51,085 45,144
-------- -------- --------- ---------
Loss from operations (8,049) (12,983) (50,745) (41,316)
Interest income 1,202 1,851 3,917 4,837
Interest expense and other (1,744) (1,797) (5,243) (3,000)
-------- -------- --------- ---------
Net loss $ (8,591) $(12,929) $ (52,071) $ (39,479)
-------- -------- --------- ---------
-------- -------- --------- ---------
Basic and diluted net loss per share $ (0.36) $ (0.57) $ (2.22) $ (1.77)
-------- -------- --------- ---------
-------- -------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE>
HEARTPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (52,071) $ (39,479)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,854 1,868
Compensation related to stock options 218 -
Issuance of common stock for patents - 310
Loss on sales and disposals of equipment 437 -
Restructuring charge 11,726 -
Changes in operating assets and liabilities:
Accounts receivable 4,186 (4,900)
Inventories 2,839 (1,358)
Other assets 240 (366)
Accounts payable, accrued expenses and other liabilities 670 5,061
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (27,901) (38,864)
---------- ----------
INVESTING ACTIVITIES
Purchases of short-term investments (83,513) (31,474)
Maturities and sales of short-term investments 89,621 24,538
Purchases of property and equipment (3,750) (8,701)
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,358 (15,637)
---------- ----------
FINANCING ACTIVITIES
Proceeds from issuances of common stock 188 1,444
Proceeds from long-term borrowings - 83,089
Repayment of long-term borrowings (676) (494)
---------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (488) 84,039
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (26,031) 29,538
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 35,805 33,445
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,774 $ 62,983
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 3,231 $ 170
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
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 September 30, 1998 and December
31, 1997 were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
------------- ------------
(in thousands)
<S> <C> <C>
Materials and purchased parts $1,235 $2,235
Work in process 295 456
Finished goods 299 2,187
------ ------
Total inventories $1,829 $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
6
<PAGE>
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 nine months ended
September 30, 1997 has been restated to conform to the Statement 128
requirements. The following table sets forth the computation of net loss per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1998 1997 1998 1997
--------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Numerator for basic and diluted net loss per share:
Net loss $ (8,591) $ (12,929) $ (52,071) $ (39,479)
--------- ---------- ---------- ----------
Denominator:
Weighted-average common shares outstanding 25,133 24,747 25,044 24,630
Weighted-average nonvested shares subject to repurchase (1,530) (2,178) (1,639) (2,355)
--------- ---------- ---------- ----------
Denominator for basic and diluted net loss per share 23,603 22,569 23,405 22,275
--------- ---------- ---------- ----------
Basic and diluted net loss per share $ (0.36) $ (0.57) $ (2.22) $ (1.77)
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
NOTE 4. NEW ACCOUNTING STANDARDS
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "REPORTING COMPREHENSIVE INCOME," as of the first quarter
of 1998. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components, however it has no impact on the
Company's net income or total stockholders' equity.
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1998 1997 1998 1997
--------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
(in thousands)
<S> <C> <C> <C> <C>
Net loss $ (8,591) $ (12,929) $ (52,071) $ (39,479)
Change in unrealized gain (loss) on
available-for-sale investments 612 - 612 -
--------- ---------- ---------- ----------
Total comprehensive income (loss) $ (7,979) $ (12,929) $ (51,459) $ (39,479)
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
Accumulated other comprehensive income presented on the accompanying
consolidated condensed balance sheets consists of the accumulated net
unrealized gain on available-for-sale investments.
7
<PAGE>
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 has
reduced its United States workforce and is closing 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
September 30, 1998, approximately $2.7 million had been paid, primarily for
severance and other employee-related costs. The remaining charge relates
primarily to estimated expenditures in connection with disposition of the
Utah facility. Actual expenditures may differ from those estimates.
NOTE 6. SUBSEQUENT EVENT
In October 1998, the Company announced that it intends to spend up to
$25.0 million to purchase a portion of its outstanding 7 1/4 percent
Convertible Subordinated Notes due 2004 (the "Notes"). The purchase of the
Notes will be carried out, from time to time, in open market and privately
negotiated transactions. The timing and amount will depend on market
conditions.
8
<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 September 30, 1998, and for the three and nine
months ended September 30, 1998 and September 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. During the three months ended September 30, 1998, the Company began
selling its new EndoDirect System, a direct aortic cannulation system for
minimally invasive cardiac surgery. The Company currently plans a controlled
release of this new system over the next two quarters.
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 September 30, 1998, the Company has incurred cumulative net
losses of approximately $154.0 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.
9
<PAGE>
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 closed
its Utah training facility and has augmented 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 in the three month period ended June 30, 1998,
and included reducing headcount by approximately 140 employees, vacating
leased facilities, and disposing of assets.
The Company has reviewed the Year 2000 issue as it may affect the
Company's business activities. The Company does not manufacture computer
hardware or software, and its internal manufacturing and financial systems
software is supported by third-party vendors. The Company believes that the
risks of significant interruption to its key business processes as a result
of the Year 2000 issue is relatively low, and that the costs to address these
issues will not be material. The Company intends to make minor system
upgrades, test hardware and software capability, and develop a contingency
plan in the event the Company or other significant third parties fail to
adequately address Year 2000 issues.
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."
10
<PAGE>
RESULTS OF OPERATIONS
NET SALES. Net sales were $3.4 million for the three months ended
September 30, 1998, compared with $7.2 million in the same period last year.
The decrease is a result of the Company's continued efforts to reduce
existing customer inventories of its Port-Access minimally invasive cardiac
surgery systems by focusing on customer usage of the systems. In the three
months ended September 30, 1998, product usage exceeded net sales by
approximately $1.6 million, reducing customer inventory by an estimated 17
percent compared with the previous quarter. For the nine months ended
September 30, 1998 and 1997, net sales were $13.8 million and $15.0 million,
respectively. The Company anticipates that net sales in the last quarter of
1998 will be lower than the comparable quarter 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 and EndoDirect systems. Revenue from product sales is
recognized upon product shipment. For the three months ended September 30,
1998 and 1997, international net sales represented 7% and 10% of net sales,
respectively. For the nine months ended September 30, 1998 and 1997,
international net sales represented 10% and 12% of net sales, respectively.
COST OF SALES. Cost of sales exceeded net sales by $0.8 million,
resulting in a negative gross margin of 25% for the three months ended
September 30, 1998, compared to a gross margin of 32% for the same period in
1997. The gross margin in 1998 was adversely impacted by the decreased net
sales resulting from the Company's efforts to reduce existing customer
inventories and focus on customer usage, as well as approximately $1.2
million in charges to increase reserves and write down certain assets. For
the nine months ended September 30, 1998 and 1997, gross margin was 2% and
25%, respectively.
The Company's gross margin may be adversely affected by excess
manufacturing capacity as a result of the unpredictable nature of product
shipments and production schedules in this early stage of adoption.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $1.7 million and $4.1 million in the three months ended September 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 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 nine months ended September 30, 1998 and 1997
were $9.3 million and $14.2 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.
11
<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 decreased to $5.5 million in the three months ended
September 30, 1998, from $11.2 million in the same period of 1997. For the
nine months ended September 30, 1998, selling, general and administrative
expenses decreased to $27.4 million from $30.9 million in the same period of
1997. The decrease was primarily due to the restructuring plan that was
implemented starting in May 1998.
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.
INTEREST INCOME. Interest income decreased to $1.2 million from $1.9
million in the three months ended September 30, 1998 and 1997, respectively,
and decreased to $3.9 million from $4.8 million in the nine months ended
September 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 was $1.7 million
and $1.8 million in the three months ended September 30, 1998 and 1997,
respectively. For the nine months ended September 30, 1998 and 1997,
interest expense and other increased to $5.2 million from $3.0 million,
respectively, primarily due 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. At September 30, 1998, the Company also had a $25.0 million debt
facility with a commercial bank, under which no amount was outstanding. This
facility was amended in October 1998 to reduce the amount available to $10.0
million. At September 30, 1998, the Company had approximately $81.1 million
in cash, cash equivalents, and short-term investments and approximately $72.9
million in working capital.
12
<PAGE>
Net cash used in operating activities was approximately $27.9 million
and $38.9 million in the nine months ended September 30, 1998 and 1997,
respectively, and resulted primarily from net losses in each period. For the
nine months ended September 30, 1998, net losses, adjusted for depreciation
and amortization, were partly offset by non cash restructuring charges of
approximately $11.7 million, accounts receivable collections of $4.2 million,
and a reduction in inventories of $2.8 million.
Net cash provided by investing activities was approximately $2.4 million
for the nine months ended September 30, 1998, compared with net cash used in
investing activities of approximately $15.6 million for the nine months ended
September 30, 1997. The net cash provided by investing activities for the
nine months ended September 30, 1998 was primarily the result of net
maturities and sales of short-term investments of $6.1 million, reduced by
$3.8 million of capital acquisitions. The net cash used in investing
activities for the nine months ended September 30, 1997, reflects the net
investment of $6.9 million in cash, as well as the purchase of $8.7 million
in property and equipment.
Capital expenditures for equipment and leasehold improvements to support
the Company's operations were approximately $3.8 million and $8.7 million in
the nine months ended September 30, 1998 and 1997, respectively. The
decrease in expenditures in the nine months ended September 30, 1998, was
primarily due to the timing of facility improvements.
Net cash used in financing activities was $0.5 million for the nine
months ended September 30, 1998, primarily the result of repayment of
long-term borrowings. Cash provided by financing activities amounted to
$84.0 million for the nine months ended September 30, 1997. Approximately
$83.1 million of the cash provided by financing activities was the result of
the Company's private placement of convertible subordinated notes in April
1997.
The Company believes that it has the financial resources through its
current level of liquid assets and credit facilities to meet business
requirements through 1999.
13
<PAGE>
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 which occurred in the reduction in force. Although the
Company believes that the actions taken in connection with the restructuring
aligned the Company's expense structure with its business prospects, there
can be no assurance that the Company will be able to continue 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, EndoDirect 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. 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.
14
<PAGE>
NO ASSURANCE OF MARKET ACCEPTANCE
There can be no assurance that the Company's products 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 products, 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.
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
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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 49% of the Company's net sales in the nine months ended
September 30, 1998, were derived from sales to 20 customers. The Company
believes that this customer concentration will continue during the remainder
of 1998 and into 1999 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 and EndoDirect 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 a poorly functioning
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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 closed 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.
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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.
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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 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 September 30, 1998, the Company has incurred cumulative net
losses of approximately $154.0 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
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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.
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS
OF FUTURE LITIGATION
The Company believes that its competitive position will be dependent in
significant part on its ability to protect its intellectual property. The
Company's policy is to seek to protect its proprietary position by, among
other methods, filing United States and foreign patent applications related
to its technology, inventions, and improvements that are important to the
development of its business. As of September 30, 1998, the Company owns 82
issued or allowed United States patents, and 12 issued foreign patents. In
addition, as of September 30, 1998, the Company has 76 pending United States
patent applications and has filed 68 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.
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Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries and
the filing of related patent applications. Patents issued and patent
applications filed relating to medical devices are numerous and there can be
no assurance that current and potential competitors and other third parties
have not filed or in the future will not file applications for, or have not
received or in the future will not receive, patents or obtain additional
proprietary rights relating to products or processes used or proposed to be
used by the Company. The Company is aware of patents issued to third parties
that contain subject matter related to the Company's technology. Based, in
part, on advice of its patent counsel, the Company believes that the
technologies employed by the Company in its devices and systems do not
infringe the claims of any such patents. There can be no assurance, however,
that third parties will not seek to assert that the Company's devices and
systems infringe their patents or seek to expand their patent claims to cover
aspects of the Company's technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
has been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. Any such claims, whether with
or without merit, could be time-consuming and expensive to respond to and
could divert the Company's technical and management personnel. The Company
may be involved in litigation to defend against claims of infringement by
other patent holders, to enforce patents issued to the Company, or to protect
trade secrets of the Company. If any relevant claims of third-party patents
are upheld as valid and enforceable in any litigation or administrative
proceeding, the Company could be prevented from practicing the subject matter
claimed in such patents, or would be required to obtain licenses from the
patent owners of each such patent, or to redesign its products or processes
to avoid infringement. There can be no assurance that such licenses would be
available or, if available, would be available on terms acceptable to the
Company or that the Company would be successful in any attempt to redesign
its products or processes to avoid infringement. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling
its products, which would have a material adverse effect on the Company's
business, financial condition, and results of operations. The Company intends
to vigorously protect and defend its intellectual property. Costly and
time-consuming litigation brought by the Company may be necessary to enforce
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
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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.
DEPENDENCE ON KEY PERSONNEL
The Company's future business and operating results depend in
significant part upon the continued contributions of its key sales, 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, the EndoDirect 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
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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 withdrawn for failure to comply with
regulatory standards or because of the occurrence of unforeseen problems
following initial marketing. The Company is also required to adhere to
applicable FDA regulations as set forth in the current Quality System
Requirements ("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.
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.
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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. 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
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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 $2.938 on October 1, 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.
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RELIANCE ON STRATEGIC RELATIONSHIPS
The Company intends to pursue strategic relationships with corporations
and research institutions with respect to the research, development,
regulatory approval, and marketing of certain of its potential products and
procedures. The Company's future success may depend, in part, on its
relationships with third parties, including, for example, the Company's
relationship with 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 5. OTHER INFORMATION
Stockholder proposals intended to be considered at the 1999 Annual Meeting of
Stockholders must be received by the Company no later than December 2, 1998
in order to be included in next year's proxy statement. The proposal must be
mailed to the Company's principal offices, 700 Bay Road, Redwood City,
California 94063, Attention: Secretary. Such proposals only will be included
in next year's proxy statement if they comply with certain other rules and
regulations promulgated by the Securities and Exchange Commission. A
stockholder proposal may also be considered at the 1999 Annual Meeting, even
if not included in next year's proxy statement, if the proposal is delivered
to or mailed and received at the Company's principal executive offices no
later than February 21, 1999, subject to other terms and conditions set forth
in the Company's Bylaws.
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
September 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: November 13, 1998 HEARTPORT, INC.
----------------
By: /s/ Frank M. Fischer
----------------------------------
President,
Chief Executive Officer
and Acting Chief Financial Officer
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q
FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,774
<SECURITIES> 71,284
<RECEIVABLES> 2,673
<ALLOWANCES> 932
<INVENTORY> 1,829
<CURRENT-ASSETS> 85,948
<PP&E> 13,466
<DEPRECIATION> 6,434
<TOTAL-ASSETS> 96,187
<CURRENT-LIABILITIES> 13,060
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> (9,061)
<TOTAL-LIABILITY-AND-EQUITY> 96,187
<SALES> 13,773
<TOTAL-REVENUES> 13,773
<CGS> 13,433
<TOTAL-COSTS> 13,433
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 23
<INTEREST-EXPENSE> 5,222
<INCOME-PRETAX> (52,071)
<INCOME-TAX> 0
<INCOME-CONTINUING> (52,071)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52,071)
<EPS-PRIMARY> (2.22)
<EPS-DILUTED> (2.22)
</TABLE>
