<PAGE>
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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, 1999
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)
700 BAY ROAD
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 9, 1999, there were 25,453,082 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 (unaudited)
Condensed Consolidated Balance Sheets at September 30, 1999
and December 31, 1998 ................................................................. 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and September 30, 1998.................. 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and September 30, 1998............................ 5
Notes to Condensed Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................ 26
SIGNATURES....................................................................................... 26
</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,
1999 1998 (1)
------------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,575 $ 10,479
Short-term investments 36,392 59,591
Accounts receivable, net 2,348 1,933
Inventories 1,327 1,452
Other current assets 947 1,306
------------------- -----------------
Total current assets 52,589 74,761
Property and equipment, net 10,210 10,619
Other assets 2,156 2,157
------------------- -----------------
Total assets $ 64,955 $ 87,537
=================== =================
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,411 $ 4,093
Accrued compensation and related benefits 2,811 4,099
Accrued interest 1,597 639
Short-term borrowings 16,900 16,900
Current portion of long-term debt 208 447
Accrued restructure expenses 1,416 1,150
Other current liabilities 894 1,263
------------------- -----------------
Total current liabilities 25,237 28,591
------------------- -----------------
Noncurrent liabilities:
Long-term debt, less current portion 52,901 53,013
Other long-term liabilities 506 163
Deferred royalty income 2,172 2,922
------------------- -----------------
Total noncurrent liabilities 55,579 56,098
------------------- -----------------
Stockholders' equity (deficit):
Common stock, $0.001 par value 25 25
Additional paid-in capital 146,351 145,929
Notes receivable from stockholders (874) (901)
Accumulated deficit (161,360) (142,588)
Accumulated other comprehensive income (loss) (3) 383
------------------- -----------------
Total stockholders' equity (deficit) (15,861) 2,848
------------------- -----------------
Total liabilities and stockholders' equity (deficit) $ 64,955 $ 87,537
=================== =================
</TABLE>
(1) DERIVED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 1998.
SEE ACCOMPANYING NOTES
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,
---------------------------------- ---------------------------------
1999 1998 1999 1998
---------------- --------------- --------------- ---------------
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 3,818 $ 3,407 $ 13,532 $ 13,773
Cost of sales 2,310 4,248 8,281 13,433
---------------- --------------- --------------- ---------------
Gross profit 1,508 (841) 5,251 340
Operating expenses:
Research and development 1,553 1,695 5,730 9,279
Selling, general and administrative 3,765 5,513 14,870 27,432
Restructuring charge - - 2,907 14,374
---------------- --------------- --------------- ---------------
Total operating expenses 5,318 7,208 23,507 51,085
---------------- --------------- --------------- ---------------
Loss from operations (3,810) (8,049) (18,256) (50,745)
Interest income and other, net 895 1,202 3,260 3,917
Interest expense (1,256) (1,744) (3,775) (5,243)
---------------- --------------- --------------- ---------------
Net loss $ (4,171) $ (8,591) $ (18,771) $ (52,071)
================ =============== =============== ===============
Basic and diluted net loss per share $ (0.17) $ (0.36) $ (0.78) $ (2.22)
================ =============== =============== ===============
Shares used in calculation of net loss per share 24,352 23,603 24,177 23,405
================ =============== =============== ===============
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE>
HEARTPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (18,771) $ (52,071)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,905 3,854
Compensation related to stock options 102 218
(Gain) loss on sales and disposals of equipment (37) 437
Non-cash restructuring expenses 234 6,957
Changes in operating assets and liabilities:
Accounts receivable (415) 4,186
Inventories 125 2,839
Other assets 152 240
Accrued restructure expenses 266 4,769
Accounts payable, accrued expenses and other liabilities (3,788) 670
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (20,227) (27,901)
------------- -------------
INVESTING ACTIVITIES
Purchases of short-term investments (20,156) (83,513)
Maturities of short-term investments 13,828 35,998
Sales of short-term investments 29,141 53,623
Purchases of property and equipment (1,486) (3,750)
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NET CASH PROVIDED BY INVESTING ACTIVITIES 21,327 2,358
------------- -------------
FINANCING ACTIVITIES
Proceeds from issuances of common stock 320 188
Proceeds from payments of stockholders' notes receivable 27 -
Repayment of long-term borrowings (351) (676)
------------- -------------
.
NET CASH USED IN FINANCING ACTIVITIES (4) (488)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS 1,096 (26,031)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,479 35,805
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,575 $ 9,774
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 2,586 $ 3,231
============= =============
</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 charge) considered necessary for a fair presentation have been
included. Certain amounts in 1998 have been reclassified to conform to the 1999
financial statement presentation.
The operating results of the interim periods presented are not necessarily
indicative of the results for the year ending December 31, 1999 or for any other
interim period. The accompanying condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ended December 31, 1998 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, 1999 and December 31,
1998 were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED)
----------------- --------------------
<S> <C> <C>
Materials and purchased parts $ 915 $ 1,112
Work in process 192 264
Finished goods 220 76
----------------- --------------------
Total inventories $ 1,327 $ 1,452
================= ====================
</TABLE>
6
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NOTE 3. NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted
average number of common shares outstanding during the period, less outstanding
nonvested shares. Outstanding nonvested shares are not included in the
computations of basic and diluted net loss per share until the time-based
vesting restriction has lapsed. The Company has other securities outstanding
that could dilute basic earnings per share in the future that were not included
in the computation of diluted net loss per share in the periods presented as
their effect is antidilutive.
The following table sets forth the computation of basic and diluted net
loss per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Numerator for basic and diluted net loss per share:
Net loss $ (4,171) $ (8,591) $ (18,771) $ (52,071)
------------- ------------ ------------ ------------
Denominator:
Weighted-average common shares outstanding 25,430 25,133 25,378 25,044
Weighted-average nonvested shares subject to repurchase (1,078) (1,530) (1,201) (1,639)
------------- ------------ ------------ ------------
Denominator for basic and diluted net loss per share 24,352 23,603 24,177 23,405
------------- ------------ ------------ ------------
Basic and diluted net loss per share $ (0.17) $ (0.36) $ (0.78) $ (2.22)
============= ============ ============ ============
</TABLE>
NOTE 4. COMPREHENSIVE LOSS
For the three- and nine-month periods ended September 30, 1999, comprehensive
loss was $4.2 million and $19.2 million, respectively. Accumulated other
comprehensive income (loss) presented in the accompanying consolidated balance
sheets consists solely of the accumulated net unrealized gain (loss) on
available-for-sale investments. There is no related tax effect for the
unrealized gain (loss) on available-for-sale investments.
7
<PAGE>
NOTE 5. 1999 RESTRUCTURING CHARGE
In June 1999, the Company adopted a restructuring plan to reduce
expenses and improve operating efficiency. Under the restructuring plan, the
Company reduced its United States workforce by approximately 26%. The planned
restructuring activities resulted in a charge of $2.9 million, of which
approximately $2.4 million related to severance and other employee-related
costs associated with approximately 55 terminated employees, and $0.5 million
related to excess facilities and the disposal of assets. The following table
summarizes the Company's 1999 restructuring charge activity for the nine
months ended September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Severance & Facilities & Lease
Benefits Equipment Commitments Total
--------------- -------------- ---------------- -----------
<S> <C> <C> <C> <C>
Restructuring charge,
June 1999 $ 2,416 $ 225 $ 266 $ 2,907
Write-offs - (227) - (227)
Cash payments (1,471) - (177) (1,648)
Reallocation (248) 100 148 -
--------------- -------------- ---------------- -----------
Restructuring liability
as of September 30, 1999 $ 697 $ 98 $ 237 $ 1,032
=============== ============== ================ ===========
</TABLE>
The remaining liability relates primarily to estimated cash expenditures in
connection with severance and other employee-related costs, and excess
facilities.
NOTE 6. 1998 RESTRUCTURING CHARGE
In May 1998, the Company adopted a restructuring plan, whereby the Company
reduced its United States workforce and closed its training facility in Utah.
The restructuring plan resulted in an original charge of $14.4 million and
included reducing headcount by approximately 140 employees, vacating leased
facilities, and disposing of assets. The original charge of $14.4 million was
reduced by $2.2 million in the fourth quarter of 1998 due to the favorable
resolution of lease commitments. The following table summarizes the Company's
1998 restructuring charge activity for the nine months ended September 30, 1999
(in thousands):
<TABLE>
<CAPTION>
Severance & Lease
Benefits Commitments Total
--------------- -------------- ----------------
<S> <C> <C> <C>
Restructuring liability
as of December 31, 1998 $ 152 $ 998 $ 1,150
Cash payments (137) (629) (766)
--------------- -------------- ----------------
Restructuring liability
as of September 30, 1999 $ 15 $ 369 $ 384
=============== ============== ================
</TABLE>
The remaining liability relates primarily to estimated cash expenditures in
connection with excess facilities.
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, 1999, and for the three and nine
months ended September 30, 1999 and September 30, 1998, should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's 1998 Annual Report on Form 10-K,
filed with the Securities and Exchange Commission.
OVERVIEW
Since its inception in May 1991, the Company has been engaged in the
research and development of Port-Access minimally invasive cardiac surgery
systems and related technology. In December 1996, the Company commercially
introduced its Port-Access systems and is now engaged in extensive marketing and
selling activities as well as continued research and development. Sales of the
Company's EndoCPB and EndoDirect systems for stopped-heart minimally invasive
cardiac surgery comprise the majority of its net sales. In April 1999, the
Company introduced five new systems comprising 12 new products designed for a
wide range of cardiac procedures, including less invasive open-chest surgery,
aortic valve replacement, and stopped- and beating-heart minimally invasive
cardiac surgery. Commercial release of these products has begun, and is expected
to continue into the fourth quarter of 1999.
The Company has never had a profit from operations. For the period from
inception to September 30, 1999, the Company has incurred cumulative net losses
of approximately $161.4 million. For at least the next twelve months, the
Company expects to continue to incur losses.
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 Procedures; Extensive
Training Requirements," and " -- Limited Manufacturing Experience; Dependence on
Key Suppliers."
RESULTS OF OPERATIONS
NET SALES. Net sales were $3.8 million for the three months ended September
30, 1999, compared with $3.4 million in the same period last year. For the nine
months ended September 30, 1999 and 1998, net sales were $13.5 million and $13.8
million, respectively.
For the three months ended September 30, 1999 and 1998, international net
sales represented 17% and 7% of net sales in those
9
<PAGE>
periods, respectively. For the nine months ended September 30, 1999 and 1998,
international net sales represented 19% and 10% of net sales, respectively.
COST OF SALES. Cost of sales was $2.3 million and $4.2 million in the three
months ended September 30, 1999 and 1998, respectively. Cost of sales declined
in 1999 due to decreases in manufacturing overhead and increased production
efficiencies. In 1998, cost of sales included approximately $1.2 million related
to inventory write downs and the write-off of certain assets. Gross margin was
40% in the three months ended September 30, 1999 compared to (25%) in the three
months ended September 30, 1998. For the nine months ended September 30, 1999
and 1998, gross margin was 39% and 2%, 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
$1.6 million and $1.7 million in the three months ended September 30, 1999 and
1998, respectively. Research and development expenses for the nine months ended
September 30, 1999 and 1998 were $5.7 million and $9.3 million, respectively.
The decrease is primarily due to a reduction in headcount in 1998. The Company
has maintained a significant level of research and development spending to
facilitate product improvements and new product development, and anticipates
that it will continue to devote substantial resources to research and
development activities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $3.8 million in the three months ended
September 30, 1999, from $5.5 million in the same period of 1998. For the nine
months ended September 30, 1999, selling, general and administrative expenses
decreased to $14.9 million from $27.4 million in the same period of 1998. The
decrease was primarily due to closing the Company's training facility in Utah
and reducing headcount, as well as a continued focus on reducing general
operating expenses.
RESTRUCTURING CHARGE. The restructuring plan adopted in June 1999 resulted
in a charge of $2.9 million. The restructuring charge included $2.4 million in
severance and other employee-related costs associated with approximately 55
terminated employees and $0.5 million in excess facilities and asset disposition
costs.
INTEREST INCOME AND OTHER, NET. Interest income and other, net was $0.9
million and $1.2 million in the three months ended September 30, 1999 and 1998,
respectively. For the nine months ended September 30, 1999 and 1998, interest
income and other, net decreased to $3.3 million from $3.9 million. The decrease
is primarily due to the Company's lower average investment balances.
INTEREST EXPENSE. Interest expense was $1.3 million and $1.7 million in the
three months ended September 30, 1999 and 1998, respectively. For the nine
months ended September 30, 1999 and 1998, interest expense was $3.8 million and
$5.2 million, respectively. The decrease is
10
<PAGE>
primarily attributable to the purchase of $33.4 million principal amount
of the Company's outstanding subordinated notes in the fourth quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had approximately $48.0 million in cash
and investments and approximately $27.4 million in working capital. The Company
also has a $10.0 million credit facility with a commercial bank. At September
30, 1999, no amount was outstanding under this facility.
Net cash used in operating activities was approximately $20.2 million and
$27.9 million in the nine months ended September 30, 1999 and 1998,
respectively, and resulted primarily from net losses in each period.
Net cash provided by investing activities was approximately $21.3 million
and $2.4 million for the nine months ended September 30, 1999 and 1998,
respectively. The net cash provided by investing activities in each year was
primarily the result of net maturities and sales of short-term investments of
$22.8 million and $6.1 million in the nine months ended September 30, 1999 and
1998, respectively, offset partly by capital expenditures in each period.
Capital expenditures for equipment and leasehold improvements to support
the Company's operations were approximately $1.5 million and $3.8 million in the
nine months ended September 30, 1999 and 1998, respectively.
Approximately $20.6 million of the Company's available-for-sale investments
secures the Company's short-term borrowings and a letter of credit related to
the Company's facilities, and is therefore not available for operations. The
Company believes that it has the financial resources through its current level
of liquid assets and credit facilities to meet business requirements through at
least the next twelve months.
YEAR 2000
The Year 2000 issue arose because many existing computer programs use only
the last two digits to refer to a year. Therefore, these computer programs do
not properly recognize a year that begins with 20 instead of 19. If not
corrected, many computer applications could fail or create erroneous results.
The Company has reviewed the Year 2000 issue as it may affect the Company's
business activities. The Company has purchased its internal manufacturing and
financial information systems within the last three years and installs, on an
ongoing basis, all updates and patches as they are released by the vendors to
ensure that the Company's systems and software are up-to-date and Year 2000
compliant according to vendor representations.
11
<PAGE>
Management has also initiated a program to test its key software and
hardware systems by creating a parallel test environment to identify and resolve
any problems as a result of the date change on January 1, 2000. The Company has
been testing its business systems and the operating systems and hardware that
run the Company's corporate servers, and will continue this testing procedure
into the fourth quarter of 1999.
The Company has developed a contingency plan in the event that one or more
internal systems or key external parties that support the Company's business
fails as a result of the Year 2000. This plan incorporates manual processes to
carry out operating functions in the event that computer systems fail. The
Company has also developed an inventory stocking plan to address possible
failures related to third-party suppliers.
Costs to address the Company's Year 2000 issue are not expected to exceed
$30,000 in 1999, and will consist primarily of the cost of certain hardware,
software, and consultants to complete testing and upgrade activities.
Approximately $25,000 has been incurred as of September 30, 1999.
The Company is in the process of contacting all third parties with which it
has significant relationships to determine the extent to which the Company could
be vulnerable to failure by any of them to obtain Year 2000 compliance. To date,
the Company is not aware of any significant third parties with a Year 2000 issue
that could materially impact the Company's operations, liquidity or capital
resources. However, the Company has no means of ensuring that third parties will
be Year 2000 ready and the potential effect of third-party non-compliance is
currently not determinable.
The Company has devoted and will continue to devote the resources necessary
to ensure that all Year 2000 issues are properly addressed. However, there can
be no assurance that all Year 2000 problems are detected. Further, there can be
no assurance that the Company's assessment of its third party vendors and
suppliers will be accurate. Some of the potential worst-case scenarios that
could occur include: (1) delayed product shipments or inability to produce
product; (2) corruption of data in the Company's internal systems; (3) failure
of infrastructure services provided by government agencies; and (4) health,
environmental and safety issues relating to the Company's facilities. If any of
these situations were to occur, the Company's operations could be temporarily
interrupted.
12
<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 June 1999, the Company began implementing a restructuring plan to reduce
expenses and improve operating efficiency. 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.
WALL STREET JOURNAL ARTICLE
On May 5, 1999, THE WALL STREET JOURNAL published a highly unfavorable
article about the Company. Among other things, the article implied that the
Company's Port-Access products were not safe and that the U.S. Food and Drug
Administration ("FDA") is considering regulatory action. The article did not
reflect the excellent clinical outcomes surgeons have achieved with Port-Access
minimally invasive cardiac surgery. With regard to the FDA, the Company has a
long-standing working relationship with the agency, and in late 1998, as part of
a routine inspection, the FDA conducted a comprehensive review of the Company's
facility and quality systems, including complaint and adverse events. The
inspection was satisfactorily concluded with no formal observations.
THE WALL STREET JOURNAL article had an immediate and material adverse
impact on the Company's customers and, consequently, the Company's business. A
significant number of the Company's customers have reduced the number of
Port-Access procedures they are performing, stopped the Port-Access program at
their hospitals or indicated that they are not comfortable continuing to perform
Port-Access surgery until they have a better understanding of the issues raised
in the article. There can be no assurance that the Company will be able to
convince these customers to begin using its products again, or to increase the
number of Port-Access procedures they are performing. The Company also
anticipates that the article will make it very difficult to convince potential
new customers to become interested in Port-Access surgery. The Company believes
that the article may continue to have a material adverse impact on its net sales
and results of operations in future periods.
13
<PAGE>
EARLY STAGE OF UTILIZATION; NO ASSURANCE OF SAFETY AND EFFICACY
The Company's EndoCPB system, EndoDirect system and other products 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 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. The Company has little or no clinical experience with its
recently introduced products designed for less invasive open-chest surgery,
aortic valve replacement and stopped- and beating-heart minimally invasive
cardiac surgery. Accordingly, there can be no assurance as to their clinical
safety and efficacy. If, with further experience, any of the Company's products
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 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 minimally invasive and less invasive cardiac surgery
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 minimally invasive or less invasive cardiac
surgical procedures unless they conclude, based on clinical data, ease of use,
operative time and other factors, that such 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 minimally invasive or less invasive surgical procedures until such
time, if any, as such 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 minimally invasive or less invasive surgical
procedures until such time, if any, as the efficacy of such 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 minimally
invasive and less invasive cardiac surgical procedures is established,
cardiologists, cardiac surgeons, and other
14
<PAGE>
physicians may elect not to recommend the procedures for any number of other
reasons. The Company believes that its Port-Access 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 is focusing its
training and sales efforts on addressing these issues, there can be no
assurance that it will be successful in increasing Port-Access procedure
volume, or that any of its products will obtain any significant degree of
market acceptance. Failure of the Company to increase Port-Access procedure
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 products and enhanced versions of the Company's existing 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
the third and fourth quarters due to summer vacation, reduced surgical activity
during the summer months (particularly in Europe), fewer operating days during
the holidays and fewer elective cardiovascular surgeries scheduled over the
holidays.
Operating results have been and will continue to be difficult to forecast.
Future revenue is also difficult to forecast because the market for minimally
invasive and less 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 Port-Access
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
15
<PAGE>
market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected.
CUSTOMER CONCENTRATION
Approximately 58% of the Company's net sales in the nine months ended
September 30, 1999, were derived from sales to twenty customers. The Company
believes that during 1999 this customer concentration will continue 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 PROCEDURES; EXTENSIVE TRAINING REQUIREMENTS
Use of the Company's Port-Access products to date has shown that, as with
any novel surgical procedure, there is a substantial learning process involved
for surgeons and other members of the cardiac surgery team. Typically, a
significant amount of time and effort spent in training as well as completion of
a number of Port-Access procedures is required before a cardiac surgery team
becomes proficient with the Company's Port-Access products. In addition, certain
patients requiring heart surgery cannot be treated with the present Port-Access
products, depending upon their anatomy, what kind of condition they have and how
severe it is. These patients include people with a poorly functioning aortic
valve or certain types of chest scarring. Broad use of the Company's Port-Access
products 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 implemented in 1998, the Company
has closed its Utah training facility and has implemented a field-based training
program. In addition, the Company has little or no training experience with its
recently introduced products designed for less invasive open-chest surgery,
aortic valve replacement and stopped- and beating-heart minimally invasive
cardiac surgery. There can be no assurance that the Company will be able to
train physicians in numbers sufficient to generate adequate demand for the
Company's products. Delays in training or delays in trained surgical teams'
ability to become proficient with any of 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 Port-Access products in higher volume commercial quantities, and the Company
has very little experience
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<PAGE>
manufacturing its recently introduced products designed for less invasive
open-chest surgery, aortic valve replacement and stopped- and beating-heart
minimally invasive cardiac surgery. Certain products and product components
are manufactured by third parties. There can be no assurance that the Company
and its suppliers will be able to successfully scale-up production to meet
commercial demand for the Company's 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. The Company has received ISO
9001 certification and in 1998 the Company passed a FDA inspection of its
compliance with Quality System Regulations ("QSR"), which include testing,
control, and documentation requirements. There can be no assurance that the
Company will continue to meet ISO 9001 requirements or FDA QSR requirements.
The Company uses or relies on a number of components and services used in
its devices that are provided by sole source suppliers. 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.
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SIGNIFICANT COMPETITION; RAPID TECHNOLOGICAL CHANGE
The Company expects that the market for minimally invasive and less
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 and
less invasive cardiac surgery technology. In addition, new companies have been
and will continue to be formed to pursue opportunities in the minimally invasive
and less invasive cardiac surgery fields.
Cardiovascular diseases that can be treated with the Company's products 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 products and could render the Company's technology
obsolete. There can be no assurance that physicians will use the Company's
products to replace or supplement established treatments, such as conventional
open-chest heart surgery, PTCA, or intravascular stents, or that the Company's
products 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.
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SUBSTANTIAL FUTURE LOSSES AND FUTURE CAPITAL REQUIREMENTS
The Company has never had a profit from operations. For the period from
inception to September 30, 1999, the Company has incurred cumulative net losses
of approximately $161.4 million. For at least the next twelve months, the
Company expects to continue to incur losses. There can be no assurance that the
Company will achieve or sustain profitability in the future. Failure to achieve
significant commercial revenues or profitability would have a material adverse
effect on the Company's business, financial condition, and results of
operations.
The Company believes that it may require additional debt and/or equity
financing. The Company's future liquidity and capital requirements will depend
upon numerous factors, including but not limited to the following: the extent to
which the Company's products gain market acceptance; the timing and costs of
future product introductions; the extent of the Company's ongoing research and
development programs; the costs of training physicians to become proficient in
the use of the Company's products and procedures; the costs of expanding
manufacturing capacity; the costs of developing marketing and distribution
capabilities; the progress and scope of clinical 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 substantial 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 November 9, 1999, the Company owns 107 issued or allowed
United States patents, and 14 issued foreign patents. In addition, as of
November 9, 1999, the Company has 73 pending United States patent applications
and has filed 39 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
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Company's ability to make, use, or sell its products either in the United
States or internationally.
The Company also relies upon trade secrets, technical know-how, and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute confidentiality and assignment of inventions agreements in
connection with their employment, consulting, or advisory relationships with the
Company. There can be no assurance, however, that these agreements will not be
breached or that the Company will have adequate remedies for any breach.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's proprietary technology, or that the
Company can meaningfully protect its rights in unpatented proprietary
technology.
Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed or in
the future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights relating to
products or processes used or proposed to be used by the Company. The Company is
aware of patents issued to third parties that contain subject matter related to
the Company's technology. Based, in part, on advice of its patent counsel, the
Company believes that the technologies employed by the Company in its devices
and systems do not infringe the claims of any such patents. There can be no
assurance, however, that third parties will not seek to assert that the
Company's devices and systems infringe their patents or seek to expand their
patent claims to cover aspects of the Company's technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular, has
been characterized by substantial competition and litigation regarding patent
and other intellectual property rights. Any such claims, whether with or without
merit, could be time-consuming and expensive to respond to and could 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
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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. Claims related to product liability are a regular and
ongoing aspect of the medical device industry, and at any one time the Company
is subject to claims asserted against it and is involved in product liability
litigation. There can be no assurance that the Company will not experience any
material product liability losses in the future. 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. 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. 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. 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.
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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 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, EndoDirect 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 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.
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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 requirements, 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 revisions could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT
The Company expects that sales volumes and prices of the Company's products
will be heavily dependent on the availability of reimbursement from third-party
payors and that individuals seldom, if ever, will be willing or able to pay
directly for the costs associated with the use of the Company's products. The
Company's products are typically purchased by clinics, hospitals, and other
users, which bill various third-party payors, such as governmental programs and
private insurance plans, for the healthcare services provided to their patients.
Third-party payors carefully review and increasingly challenge the prices
charged for medical products and services. Reimbursement rates from private
companies vary depending on the procedure performed, the third-party payor, the
insurance plan, and other factors. Medicare reimburses hospitals a prospectively
determined fixed amount for the costs associated with an in-patient
hospitalization based on the patient's discharge diagnosis, and reimburses
physicians a prospectively determined fixed amount based on the procedure
performed, regardless of the actual costs incurred by the hospital or physician
in furnishing the care and unrelated to the specific devices used in that
procedure. Medicare and other third-party payors are increasingly scrutinizing
whether to cover new products and the level of reimbursement for covered
products.
In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans, and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the United States, health maintenance organizations are emerging in certain
European countries. The Company may need to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner or at all. Failure to receive international
reimbursement approvals could have an adverse effect on market acceptance of the
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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 $1.88 on July 29, 1999. On November 9, 1999 the
price of the Company's Common Stock was $3.75. As a result of the current
trading price of the Company's common stock, the Company does not meet the
continued listing requirements for inclusion on the Nasdaq National Market.
The Company has had discussions with representatives of the Nasdaq National
Market with regard to maintaining its listing. The Company's inability to
satisfy the continued listing requirements of the Nasdaq National Market
could have a material adverse effect on the trading price and liquidity of
its stock. 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
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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.
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 and their success in marketing the Company's products or willingness to
purchase 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
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more difficult a merger, tender offer, or proxy contest involving the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7.A., Quantitative and Qualitative
Disclosures About Market Risk, in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998.
PART II. OTHER INFORMATION
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 nine months ended
September 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1999 HEARTPORT, INC.
------------------
By: /s/ Rebecca L. Kuhn
------------------------
Treasurer
26
<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-31-1999
<PERIOD-END> SEP-30-1999
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0
0
<COMMON> 25
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<CGS> 8,281
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<NET-INCOME> (18,771)
<EPS-BASIC> (.78)
<EPS-DILUTED> (.78)
</TABLE>
