<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 JUNE 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)
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(650) 306-7900
(Registrant's telephone number, including area code)
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Indicate by check /X/ whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes /X/ No
------ ------
As of August 6, 1999, there were 25,430,112 shares of the Registrant's
Common Stock outstanding.
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<PAGE>
HEARTPORT, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at June 30, 1999
and December 31, 1998 ............................................... 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1999 and June 30, 1998........... 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and June 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........... 25
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>
JUNE 30, DECEMBER 31,
1999 1998(1)
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,546 $ 10,479
Short-term investments 47,255 59,591
Accounts receivable, net 2,173 1,933
Inventories 1,345 1,452
Other current assets 1,048 1,306
--------- ---------
Total current assets 58,367 74,761
Property and equipment, net 10,370 10,619
Other assets 2,016 2,157
--------- ---------
Total assets $ 70,753 $ 87,537
--------- ---------
--------- ---------
LIABILITIES & STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Account payable $ 2,147 $ 4,093
Accrued compensation and related benefits 2,599 4,099
Accrued interest 639 639
Short-term borrowings 16,900 16,900
Current portion of long-term debt 304 447
Accrued restructure expenses 3,153 1,150
Other current liabilities 948 1,263
--------- ---------
Total current liabilities 26,690 28,591
--------- ---------
Noncurrent liabilities:
Long-term debt, less current portion 52,911 53,013
Other long-term liabilities 392 163
Deferred royalty income 2,421 2,922
--------- ---------
Total noncurrent liabilities 55,724 56,098
--------- ---------
Stockholders' (deficit) equity:
Common stock, $0.001 par value 25 25
Additional paid-in capital 146,346 145,929
Notes receivable from stockholders (898) (901)
Accumulated deficit (157,188) (142,588)
Accumulated other comprehensive income 54 383
--------- ---------
Total stockholders' (deficit) equity (11,661) 2,848
--------- ---------
Total liabilities and stockholders' (deficit) equity $ 70,753 $ 87,537
--------- ---------
--------- ---------
</TABLE>
(1) DERIVED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 1998.
SEE ACCOMPANYING NOTES
3
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HEARTPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
1999 1998 1999 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales $ 4,121 $ 2,911 $ 9,714 $ 10,366
Cost of sales 2,749 4,985 5,971 9,185
--------- --------- --------- ---------
Gross profit 1,372 (2,074) 3,743 1,181
Operating expenses:
Research and development 2,246 3,090 4,177 7,584
Selling, general and administrative 5,652 10,369 11,105 21,919
Restructuring charge 2,907 14,374 2,907 14,374
--------- --------- --------- ---------
Total operating expenses 10,805 27,833 18,189 43,877
--------- --------- --------- ---------
Loss from operations (9,433) (29,907) (14,446) (42,696)
Interest income and other, net 1,264 1,222 2,365 2,700
Interest expense (1,247) (1,694) (2,519) (3,484)
--------- --------- --------- ---------
Net loss $ (9,416) $ (30,379) $ (14,600) $ (43,480)
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic and diluted net loss per share $ (0.39) $ (1.30) $ (0.61) (1.87)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in calculation of net loss per share 24,197 23,398 24,089 23,306
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES
4
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HEARTPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (14,600) $ (43,480)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,265 2,680
Compensation related to stock options 102 173
Loss on sales and disposals of equipment 14 348
Non-cash restructuring expenses 225 6,914
Changes in operating assets and liabilities:
Accounts receivable (240) 4,142
Inventories 107 2,238
Other assets 260 13
Accrued restructure expenses 2,003 6,020
Accounts payable, accrued expenses and other liabilities (4,136) (1,218)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (15,000) (22,170)
---------- ----------
INVESTING ACTIVITIES
Purchases of short-term investments (9,838) (58,984)
Maturities of short-term investments 10,345 27,764
Sales of short-term investments 11,500 32,515
Purchases of property and equipment (1,013) (1,435)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 10,994 (140)
---------- ----------
FINANCING ACTIVITIES
Proceeds from issuances of common stock 315 185
Proceeds from payments of stockholders' notes receivable 3 -
Repayment of long-term borrowings (245) (365)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 73 (180)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,933) (22,490)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,479 35,805
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,546 $ 13,315
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 2,356 $ 3,203
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES
5
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HEARTPORT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial statements and in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the financial information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments and the
restructuring 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 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, 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 June 30, 1999 and December 31, 1998
were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED)
----------- ------------
<S> <C> <C>
Materials and purchased parts $ 831 $ 1,112
Work in process 102 264
Finished goods 412 76
----------- ------------
Total inventories $ 1,345 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Numerator for basic and diluted net loss per share:
Net loss $ (9,416) $ (30,379) $ (14,600) $ (43,480)
--------- --------- --------- ---------
Denominator:
Weighted-average common shares outstanding 25,408 25,038 25,352 25,000
Weighted-average nonvested shares subject to repurchase (1,211) (1,640) (1,263) (1,694)
--------- --------- --------- ---------
Denominator for basic and diluted net loss per share 24,197 23,398 24,089 23,306
--------- --------- --------- ---------
Basic and diluted net loss per share $ (0.39) $ (1.30) $ (0.61) $ (1.87)
--------- --------- --------- ---------
</TABLE>
NOTE 4. COMPREHENSIVE LOSS
For the three- and six-month periods ended June 30, 1999, comprehensive loss
was $9.6 million and $14.9 million, respectively. There was no other
comprehensive income for the three- and six-month periods ended June 30,
1999. Accumulated other comprehensive income presented in the accompanying
consolidated balance sheets consists solely of the accumulated net unrealized
gain on available-for-sale investments. There is no related tax effect for
the unrealized gain on available-for-sale investments.
7
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NOTE 5. 1999 RESTRUCTURING CHARGE
In June 1999, the Company began implementing 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 $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 six
months ended June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Severance & Lease
Benefits Equipment Commitments Total
------------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Restructuring charge,
June 1999 $ 2,416 $ 225 $ 266 $ 2,907
Write-offs - (225) - (225)
Cash payments (124) - - (124)
------------- ----------- ------------- ----------
Restructuring liability
as of June 30, 1999 $ 2,292 $ - $ 266 $ 2,558
------------- ----------- ------------- ----------
------------- ----------- ------------- ----------
</TABLE>
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 six
months ended June 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 (116) (439) (555)
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Restructuring liability
as of June 30, 1999 $ 36 $ 559 $ 595
------------- ------------- ----------
------------- ------------- ----------
</TABLE>
The remaining liability relates primarily to estimated cash expenditures in
connection with excess facilities. The restructuring is expected to be
substantially complete by the third quarter of 1999.
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 June 30, 1999, and for the three and six months
ended June 30, 1999 and June 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. 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. 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. These products are expected to be commercially released in
the third and fourth quarters of 1999.
The Company has never had a profit from operations. For the period from
inception to June 30, 1999, the Company has incurred cumulative net losses of
approximately $157.2 million. For at least the next eighteen 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 $4.1 million for the three months ended June
30, 1999, compared with $2.9 million in the same period last year. In 1998,
the relatively low net sales were the result of the Company's
9
<PAGE>
efforts to reduce customer inventories of its Port-Access minimally invasive
cardiac surgery systems. In 1999, net sales increased as a result of customer
order patterns that are more aligned with product usage. For the six months
ended June 30, 1999 and 1998, net sales were $9.7 million and $10.4 million,
respectively.
Revenue from product sales is recognized upon product shipment. For the
three months ended June 30, 1999 and 1998, international net sales
represented 25% and 22% of net sales in those periods, respectively. For the
six months ended June 30, 1999 and 1998, international net sales represented
19% and 12% of net sales, respectively.
COST OF SALES. Cost of sales was $2.7 million and $5.0 million in the
three months ended June 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 $1.3 million
relating to inventory write downs and the write-off of certain assets. Gross
margin was 33% in the three months ended June 30, 1999 compared to (71%) in
the three months ended June 30, 1998. For the six months ended June 30, 1999
and 1998, gross margin was 39% and 11%, 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 $2.2 million and $3.1 million in the three months ended June 30, 1999
and 1998, respectively. The decrease is primarily due to a reduction in
headcount as the Company has shifted its focus to specific product
enhancements and new products for less invasive and minimally invasive
cardiac surgery. Research and development expenses for the six months ended
June 30, 1999 and 1998 were $4.2 million and $7.6 million, respectively. 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 $5.7 million in the three months ended
June 30, 1999, from $10.4 million in the same period of 1998. For the six
months ended June 30, 1999, selling, general and administrative expenses
decreased to $11.1 million from $21.9 million in the same period of 1998. The
decrease was primarily due to closing the Company's training facility in Utah
and reducing headcount.
RESTRUCTURING CHARGE. The restructuring plan implemented beginning 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 $1.3
million and $1.2 million in the three months ended June 30, 1999
10
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and 1998, respectively. In the three months ended June 30, 1999, interest
income and other, net included a $0.4 million gain from the sale of fixed
assets. For the six months ended June 30, 1999 and 1998, interest income and
other, net decreased to $2.4 million from $2.7 million in 1998. The decrease
is primarily due to the Company's lower average investment balances.
INTEREST EXPENSE. Interest expense was $1.2 million and $1.7 million in
the three months ended June 30, 1999 and 1998, respectively. For the six
months ended June 30, 1999 and 1998, interest expense was $2.5 million and
$3.5 million, respectively. The decrease is 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 June 30, 1999, the Company had approximately $53.8 million in cash
and investments and approximately $31.7 million in working capital. The
Company also has a $10.0 million credit facility with a commercial bank. At
June 30, 1999, no amount was outstanding under this facility.
Net cash used in operating activities was approximately $15.0 million
and $22.2 million in the six months ended June 30, 1999 and 1998,
respectively, and resulted primarily from net losses in each period.
Net cash provided by investing activities was approximately $11.0
million for the six months ended June 30, 1999, compared with net cash used
in investing activities of approximately $140 thousand for the six months
ended June 30, 1998. The net cash provided by investing activities for the
six months ended June 30, 1999 was primarily the result of $12.0 million in
net maturities and sales of short-term investments. The net cash used in
investing activities for the six months ended June 30, 1998, reflects net
maturities and sales of short-term investments of approximately $1.3 million
offset by approximately $1.4 million in purchases of property and equipment.
Capital expenditures for equipment and leasehold improvements to support
the Company's operations were approximately $1.0 million and $1.4 million in
the six months ended June 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.
11
<PAGE>
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.
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 will test its business systems and the operating systems and hardware
that run the Company's corporate servers. The testing procedure is expected
to be substantially complete during the third 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 and software to perform testing functions and the cost of internal
resources that will be applied to this effort. Approximately $20,000 has been
incurred as of June 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)
12
<PAGE>
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.
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.
RECENT 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
13
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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.
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
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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 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 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 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
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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 58% of the Company's net sales in the six months ended
June 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
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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
manufacturing 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
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. 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
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or inadequate inventory if orders do not match forecasts, as well as
potential costs from non-cancelable orders.
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
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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 never had a profit from operations. For the period from
inception to June 30, 1999, the Company has incurred cumulative net losses of
approximately $157.2 million. For at least the next eighteen 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 June 30, 1999, the Company owns 105 issued
or allowed United States patents, and 14 issued foreign patents. In addition,
as of June 30, 1999, the Company has 64 pending United States patent
applications and has filed 38 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
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substantially more resources than the Company and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents that will prevent, limit, or interfere with the Company's ability to
make, use, or sell its products either in the United States or
internationally.
The Company also relies upon trade secrets, technical know-how, and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants, and
advisors to execute confidentiality and assignment of inventions agreements
in connection with their employment, consulting, or advisory relationships
with the Company. There can be no assurance, however, that these agreements
will not be breached or that the Company will have adequate remedies for any
breach. Furthermore, no assurance can be given that competitors will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's proprietary technology,
or that the Company can meaningfully protect its rights in unpatented
proprietary technology.
Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries and
the filing of related patent applications. Patents issued and patent
applications filed relating to medical devices are numerous and there can be
no assurance that current and potential competitors and other third parties
have not filed or in the future will not file applications for, or have not
received or in the future will not receive, patents or obtain additional
proprietary rights relating to products or processes used or proposed to be
used by the Company. The Company is aware of patents issued to third parties
that contain subject matter related to the Company's technology. Based, in
part, on advice of its patent counsel, the Company believes that the
technologies employed by the Company in its devices and systems do not
infringe the claims of any such patents. There can be no assurance, however,
that third parties will not seek to assert that the Company's devices and
systems infringe their patents or seek to expand their patent claims to cover
aspects of the Company's technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
has been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. Any such claims, whether with
or without merit, could be time-consuming and expensive to respond to and
could 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
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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. 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 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.
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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 August 6, 1999 the
price of the Company's Common Stock was $2.06. The market price of the shares
of Common Stock may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or
its competitors, developments with respect to patents or proprietary rights,
conditions and trends in the medical device and other technology industries,
adoption of new accounting standards affecting the medical device industry,
changes in financial estimates by securities analysts, general market
conditions, and other factors. In addition, the stock market has experienced
extreme price and volume fluctuations that have particularly affected the
market price for many high technology companies and that have often been
unrelated to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock, and there can be no assurance that the market price of the Common
Stock will not decline. In the past, following periods of volatility in the
market price of a particular company's securities, securities class action
litigation has often been brought against that company. Such litigation, if
brought against the Company, could result in substantial costs and a
diversion of management's attention and resources.
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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 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.
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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 six months ended
June 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: August 13, 1999 HEARTPORT, INC.
---------------------------
By: /s/ Frank M. Fischer
----------------------------------
Chairman,
Chief Executive Officer
and Acting Chief Financial Officer
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,546
<SECURITIES> 47,255
<RECEIVABLES> 2,831
<ALLOWANCES> 658
<INVENTORY> 1,345
<CURRENT-ASSETS> 58,367
<PP&E> 15,568
<DEPRECIATION> 5,198
<TOTAL-ASSETS> 70,753
<CURRENT-LIABILITIES> 26,690
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> (11,661)
<TOTAL-LIABILITY-AND-EQUITY> 70,753
<SALES> 9,714
<TOTAL-REVENUES> 9,714
<CGS> 5,971
<TOTAL-COSTS> 5,971
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,519
<INCOME-PRETAX> (14,600)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,600)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,600)
<EPS-BASIC> (.61)
<EPS-DILUTED> (.61)
</TABLE>
