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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, 2000
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 June 30, 2000, there, were 26,344,421 shares of the Registrant's Common
Stock outstanding.
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1
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HEARTPORT, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at June 30, 2000
and December 31, 1999 ................................................................................ 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2000 and June 30, 1999............................................ 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and June 30, 1999...................................................... 5
Notes to Condensed Consolidated Financial Statements.................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 26
PART II. OTHER INFORMATION
Item 5. Other information..................................................................................... 27
Item 6. Exhibits and Reports on Form 8-K...................................................................... 27
SIGNATURES .................................................................................................... 27
</TABLE>
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Heartport, the Heartport logo and EndoCPB are registered trademarks of the
Company. Port-Access and EndoDirect are trademarks of the Company. Port-Access
Partnership is a service mark of the Company.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTPORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,442 $ 5,288
Short-term investments 4,671 36,611
Accounts receivable, net 4,121 3,881
Inventories 2,493 1,644
Other current assets 1,857 1,259
------------ ------------
Total current assets 24,584 48,683
Property and equipment, net 9,771 10,263
Other assets 2,161 1,867
------------ ------------
Total assets $ 36,516 $ 60,813
============ ============
LIABILITIES & NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable $ 1,586 $ 1,757
Accrued compensation and related benefits 2,141 2,960
Accrued interest 578 639
Short-term borrowings -- 16,900
Current portion of long-term debt 16 134
Accrued restructure expenses 446 603
Other current liabilities 243 784
------------ ------------
Total current liabilities 5,010 23,777
------------ ------------
Noncurrent liabilities:
Long-term debt, less current portion 48,020 52,891
Other long-term liabilities 882 620
Deferred royalty income 1,422 1,922
------------ ------------
Total noncurrent liabilities 50,324 55,433
------------ ------------
Net capital deficiency:
Common stock 26 25
Additional paid-in capital 150,095 146,460
Notes receivable from stockholders (781) (781)
Accumulated deficit (168,153) (163,987)
Accumulated other comprehensive income (loss) (5) (114)
------------ ------------
Total net capital deficiency (18,818) (18,397)
------------ ------------
Total liabilities and net capital deficiency $ 36,516 $ 60,813
============ ============
</TABLE>
(1) DERIVED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 1999.
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,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 3,526 $ 4,121 $ 7,828 $ 9,714
License revenue 3,466 -- 3,466 --
-------- -------- -------- --------
Total revenue 6,992 4,121 11,294 9,714
Cost of sales 2,060 2,749 4,219 5,971
-------- -------- -------- --------
Gross profit 4,932 1,372 7,075 3,743
Operating expenses:
Research and development 1,438 2,246 3,032 4,177
Selling, general and administrative 3,621 5,652 7,370 11,105
Restructuring charge 1,275 2,907 1,275 2,907
-------- -------- -------- --------
Total operating expenses 6,334 10,805 11,677 18,189
-------- -------- -------- --------
Loss from operations (1,402) (9,433) (4,602) (14,446)
Interest income and other, net 350 1,264 1,074 2,365
Interest expense (1,079) (1,247) (2,387) (2,519)
-------- -------- -------- --------
Loss before extraordinary item (2,131) (9,416) (5,915) (14,600)
Extraordinary item--gain on repurchase of debt 1,750 -- 1,750 --
-------- -------- -------- --------
Net loss $ (381) $ (9,416) $ (4,165) $(14,600)
======== ======== ======== ========
Basic and diluted net loss per share
before extraordinary item $ (0.08) $ (0.39) $ (0.24) $ (0.61)
Extraordinary income per share 0.07 -- 0.07 --
-------- -------- -------- --------
Basic and diluted net loss per share $ (0.01) $ (0.39) $ (0.17) $ (0.61)
======== ======== ======== ========
Shares used in calculation of basic and
diluted net loss per share 25,486 24,197 25,093 24,089
======== ======== ======== ========
</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,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (4,165) $(14,600)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,194 1,265
Compensation related to stock options -- 102
Loss on sales and disposals of equipment 409 14
Extraordinary gain from the repurchase of debt (1,750) --
Non-cash restructuring expenses -- 225
Changes in operating assets and liabilities:
Accounts receivable (240) (240)
Inventories (849) 107
Other assets (598) 260
Accrued restructure expenses (157) 2,003
Accounts payable, accrued expenses and other liabilities (1,831) (4,136)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (7,987) (15,000)
--------- ---------
INVESTING ACTIVITIES
Purchases of short-term investments (18,021) (9,838)
Maturities of short-term investments 4,971 10,345
Sales of short-term investments 44,633 11,500
Purchases of property and equipment (810) (1,013)
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 30,773 10,994
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 386 315
Proceeds from short-term borrowings -- 3
Repayment of long-term borrowings (17,018) (245)
--------- ---------
NET PROVIDED BY FINANCING ACTIVITIES (16,632) 73
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,154 (3,933)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,288 10,479
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,442 $ 6,546
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 3,255 $ 2,356
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
ACQUISITION OF EQUIPMENT UNDER CAPITAL LEASE $ 129 $ --
========= =========
</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.
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, 2000 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, 1999 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, 2000 and December 31, 1999
were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
Materials and purchased parts $ 1,920 $ 1,240
Work in process 48 68
Finished goods 525 336
--------- ---------
Total inventories $ 2,493 $ 1,644
========= =========
</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. We have 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,
------------------ ----------------
2000 1999 2000 1999
------- ------ ------- ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Numerator for basic and diluted net loss per share:
Net loss $ (381) $ (9,416) $ (4,165) $(14,600)
-------- -------- -------- --------
Denominator:
Weighted-average common shares outstanding 26,231 25,408 25,890 25,352
Weighted-average nonvested shares subject to repurchase (745) (1,211) (797) (1,263)
-------- -------- -------- --------
Denominator for basic and diluted net loss per share 25,486 24,197 25,093 24,089
-------- -------- -------- --------
Basic and diluted net loss per share $ (0.01) $ (0.39) $ (0.17) $ (0.61)
======== ======== ======== ========
</TABLE>
NOTE 4. COMPREHENSIVE LOSS
For the three- and six-month periods ended June 30, 2000, comprehensive loss was
$0.4 million and $4.2 million, respectively compared to $9.4 million and $14.6
million for the three and six month periods ended June 30, 1999, respectively.
There was no other comprehensive loss for the three- and six-month periods ended
June 30, 2000. Accumulated other comprehensive loss presented in the
accompanying consolidated balance sheets consists solely of the accumulated net
unrealized loss on available-for-sale investments. There is no related tax
effect for the unrealized loss on available-for-sale investments.
7
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NOTE 5. 2000 RESTRUCTURING CHARGE
In April 2000, the company adopted a restructuring plan to reduce expenses
and improve operating efficiency. Under the restructuring plan, we reduced our
United States workforce by approximately 32%. The planned restructuring
activities resulted in a charge of $1.4 million, all of which related to
severance and other employee related costs associated with approximately 43
terminated employees of which 41 were terminated as of June 30, 2000. The
following table summarizes our 2000 restructuring charge activity for the six
months ended June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
ACCRUED
RESTRUCTURING CASH PAYMENTS RESTRUCTURING
CHARGE MADE IN CHARGE AT
Q2 2000 Q2 2000 JUNE 30, 2000
------------- ------------- -------------
<S> <C> <C> <C>
Severance and benefits 1,385 (1,111) 274
------------- ------------- -------------
Total $ 1,385 $ (1,111) $ 274
============= ============ =============
</TABLE>
The remaining liability relates primarily to estimated cash expenditures in
connection with severance and other employee-related costs. These liabilities
are expected to be satisfied by the end of August, 2000.
NOTE 6. 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 55 employees primarily in
manufacturing and administration. The restructuring activities resulted in an
original charge of $2.9 million which was reduced by $0.4 million in the fourth
quarter of 1999 and $ 0.1 million in the six month period ended June 30, 2000
due primarily to a reduction in certain employee-related expenses. The following
table summarizes our 1999 restructuring charge activity for the six months ended
June 30, 2000 (in thousands):
8
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<TABLE>
<CAPTION>
ACCRUED ACCRUED
RESTRUCTURING CASH PAYMENTS RESTRUCTURING
CHARGE AT MADE IN CHANGE IN CHARGE AT
DECEMBER 31, 1999 2000 RESERVE ESTIMATE JUNE 30, 2000
----------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C>
Severance and benefits 356 (253) (103) --
Sublease excess facilities 129 (56) (7) 66
----------------- -------------- ---------------- -------------
Total $ 485 $ (309) $ (110) $ 66
================= ============== ================ =============
</TABLE>
The remaining liability relates primarily to estimated cash expenditures in
connection with excess facilities.
NOTE 7. 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 a net charge of $12.1 million. The following
table summarizes our 1998 restructuring charge activity for the six months ended
June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
ACCRUED ACCRUED
RESTRUCTURING CASH PAYMENTS RESTRUCTURING
CHARGE AT MADE IN CHARGE AT
DECEMBER 31, 1999 2000 JUNE 30, 2000
----------------- ------------- -------------
<S> <C> <C> <C>
Exit facility leases 118 (12) 106
----------------- ------------- -------------
Total $ 118 $ (12) $ 106
================= ============ =============
</TABLE>
NOTE 8. GAIN ON REPURCHASE OF DEBT
During the three month period ended June 30, 2000 we exchanged $5.0
million of principal of our convertible subordinated long term notes and rights
to any accrued interest for 754,018 shares of our common stock, worth $3.25
million on the date of the exchange, and payment of $0.1 million in cash. We
realized a gain of $1.75 million, which is recorded as an extraordinary item.
9
<PAGE>
NOTE 9. DISTRIBUTION AGREEMENT WITH U.S. SURGICAL
We have entered into a five year agreement with United States Surgical, a
unit of Tyco International Ltd. (a diversified manufacturing and service
company, with 1999 revenues in excess of $22 billion) granting U.S. Surgical
exclusive world-wide distribution rights, excluding Japan, to our Precision-OP
minimally invasive beating-heart surgery system.
NOTE 10. LICENSING AGREEMENT WITH INTUITIVE SURGICAL
We have entered into an exclusive licensing agreement with Intuitive
Surgical, Inc., a leading developer of robotic surgery technology. We have
granted Intuitive exclusive rights to certain patents, restricted to surgical
procedures in which a robot is utilized to perform surgery in the patient's
body. We have received an up-front cash payment of $3.0 million and warrants for
common stock, and will receive royalties if Intuitive develops certain products
under the license. The company received warrants to purchase Intuitive Surgical
common stock which was valued at approximately $466,000 using the Black-Scholes
option valuation model. The stock underlying the warrants is restricted until
2001. The warrants are carried at $466,000, with an estimated fair value of
approximately $1.7 million as of June 30, 2000. The payments and warrants
totaling $3.5 million have been recorded as license revenue.
10
<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, 2000, and for the three and six months
ended June 30, 2000 and June 30, 1999, should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in our 1999 Annual Report on Form 10-K, filed with the
Securities and Exchange Commission (the "SEC").
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements are
based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical facts may be
deemed to be forward-looking statements. For example, words such as "may",
"will", "should", "estimates", "predicts", "potential", "continue", "strategy",
"believes", "anticipates", "plans", "expects", "intends", and similar
expressions are intended to identify forward-looking statements. Our actual
results and the timing of certain events may differ significantly from the
results discussed in the forward-looking statement. Factors that might cause or
contribute to such a discrepancy include, but are not limited to, those
discussed under the heading "Risk Factors" as well as the risks discussed in our
other SEC filings, including our Annual Report on Form 10-K filed March 29, 2000
with the SEC.
OVERVIEW
Since our inception in May 1991, we have been engaged in the research and
development of Port-Access minimally invasive cardiac surgery systems and
related technology. In December 1996, we commercially introduced our EndoCPB
System and other Port-Access systems for minimally invasive cardiac surgery
performed on a stopped heart. During the third quarter of 1998 we began selling
our EndoDirect system, a direct aortic cannulation system for stopped heart
minimally invasive cardiac surgery. In 1999 we commercially introduced several
new cardiac surgery products, including our PrecisionOP system for surgery
performed on a beating heart. We are now engaged in extensive marketing and
selling activities as well as continued research and development.
We have never had a profit from our operations. For the period from
inception to June 30, 2000, we have incurred cumulative net losses of
approximately $168 million. For at least the next six months, we expect to
continue to incur losses.
RESULTS OF OPERATIONS
TOTAL REVENUE. Total revenue consists of net sales of our EndoCPB and
EndoDirect systems, and of license revenue from the licensing of some of our
technology to third parties. Revenue from net sales is recognized upon transfer
of title, which is generally upon product shipment. The license revenue,
received in the quarter ended June
11
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30, 2000, of $3.5 million was recognized as revenue as there is no
significant continuing involvement under the license agreement. Net sales
were $3.5 million in the three months ended June 30, 2000, compared with $4.1
million in the three months ended June 30, 1999. The decrease in net sales is
primarily the result of the transition of one of our product lines from
direct sales to a third party distribution channel. Licensing revenues were
$3.5 million in the three months ended June 30, 2000. The licensing revenues
were primarily associated with the granting of a license to Intuitive
Surgical to certain patents restricted to surgical procedures in which a
robot is utilized in the patient's body. For the six months ended June 30,
2000 and 1999, net sales were $7.8 million and $9.7 million, respectively.
For the three months ended June 30, 2000 and 1999, international net sales
represented 18% and 25% respectively. For the six months ended at the same
dates, international net sales represented 18% and 19% of net sales,
respectively.
COST OF SALES. Cost of sales consist primarily of material, labor and
overhead costs associated with manufacturing our EndoCPB and EndoDirect systems
and related disposable and reusable devices. Cost of sales was $2.1 million in
the three months ended June 30, 2000 compared to $2.7 million in the three
months ended June 30, 1999. Cost of sales was $4.2 million in the six months
ended June 30, 2000 compared to $6.0 million in the six months ended June 30,
1999. Cost of sales decreased in these periods as a result of improved
manufacturing efficiency and reduced product shipments, offset by one time
expenses associated with the reorganization of business activities and employee
retention implemented during the second quarter of fiscal year 2000. Gross
margin on product sales was 42% in the three months ended June 30, 2000 compared
to 33% in the three months ended June 30, 1999. For the six months period ended
June 30, 2000 and 1999, gross margin on product sales was 46% and 39%,
respectively.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consisted primarily of personnel and other costs in support of product
development, clinical evaluations, and regulatory submissions, as well as costs
incurred in producing products for research and development activities. Research
and development expenses were $1.4 million in the three months ended June 30,
2000 compared to $2.2 million in the three months ended June 30, 1999. Research
and development expenses in the six months ended June 30, 2000 and 1999 were
$3.0 million and $4.2 million, respectively. These decreases were primarily due
to a reduction in headcount in 2000 related to our restructuring. We expect to
maintain a significant level of research and development spending to facilitate
product improvements and new product development, and anticipate that we will
continue to devote substantial resources to research and development activities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of costs for sales, marketing and
administrative personnel, as well as physician training costs and professional
fees. Selling, general and administrative
12
<PAGE>
expenses decreased to $3.6 million in the three months ended June 30, 2000,
from $5.7 million in the three months ended June 30, 1999. In the six months
ended June 30, 2000 and 1999 selling, general and administrative expenses
were $7.4 million and $11.1 million respectively These decreases were
primarily due to a reduction in headcount primarily related to our
distribution agreement with United States Surgical, a unit of Tyco
International, Ltd., as well as a continued focus on reducing general
operating expenses, offset by one-time expenses associated with employee
retention.
RESTRUCTURING CHARGE. The restructuring plan implemented beginning in
April 2000 resulted in a charge of $1.4 million, offset by a $0.1 million change
in estimate on the 1999 restructuring liability. The charge was for severance
and other employee-related costs associated with the termination of
approximately 43 employees.
INTEREST INCOME AND OTHER, NET. Interest income and other, net was $0.4
million in the three months ended June 30, 2000 and $1.3 million in the three
months ended June 30, 1999. The decrease is primarily due to our lower average
investment balances. In the six months ended June 30, 2000 and 1999 interest
income and other, net, was $1.0 million and $2.4 million respectively.
INTEREST EXPENSE. Interest expense was $1.1 million in the three month
period ended June 30, 2000 and $1.3 million in the three month period ended June
30, 1999. The decrease is primarily attributable to the repayment of $16.9
million of short term debt and $5.0 million of long term debt during the three
month period ended June 30, 2000. In the six month periods ended June 30, 2000
and 1999 interest expense was $2.4 million and $2.5 million respectively.
LIQUIDITY AND CAPITAL RESOURCES.
At June 30, 2000, we had approximately $16.1 million in cash and
investments and approximately $19.6 million in working capital. Approximately
$3.7 million of our cash and investments secure a letter of credit related to
our facilities, and is therefore not available for operations. We also have a
$10.0 million credit facility with a commercial bank. At June 30, 2000 no amount
was outstanding under this facility. During the three month period ended June
30, 2000 we repaid $16.9 million of short term debt and exchanged $5.0 million
of long term debt principal and rights to any accrued interests for 754,018
shares of our common stock, with a value on the date of exchange of
approximately $3.25 million, and payment of $0.1 million in cash.
Net cash used in operating activities was approximately $8.0 million in
the six months ended June 30, 2000 and $15.0 million in the six months ended
June 30, 1999, and resulted primarily from net losses in each period.
Net cash provided by investing activities was approximately $30.8 million
in the six months ended June 30, 2000 and $11.0 million in the six months ended
June 30, 1999. The increase in the net cash provided by investing activities in
the six month ended June 30, 2000
13
<PAGE>
resulted primarily of the sale of short-term investments to repay the $16.9
million short term debt, offset partly by capital expenditures.
Capital expenditures for equipment and leasehold improvements to support
our operations were approximately $0.8 million in the six months ended June 30,
2000 and $1.0 million in the six months ended June 30, 1999.
We believe that we have the financial resources through our current level
of liquid assets and credit to meet business requirements through at least the
next twelve months.
RISK FACTORS
In addition to other information in this Form 10-Q, the following risk
factors should be carefully considered in evaluating Heartport and its business
because such factors currently may have a significant impact on our business,
operating results and financial condition. As a result of the risk factors set
forth below and elsewhere in this Form 10-Q, and the risks discussed in our
other SEC filings, actual results could differ materially from those projected
in any forward-looking statements.
OUR RESTRUCTURING OF OPERATIONS MAY NOT RESULT IN A REDUCTION IN COSTS OR NET
LOSSES AND MAY HARM OUR BUSINESS.
In April 2000 we began implementing a restructuring plan to reduce
expenses and improve operating efficiency. Although management believes that the
actions it is taking in connection with the restructuring should help align our
expense structure with our business prospects, we can not be sure that such
actions will enable us to achieve our objectives of reducing costs and reducing
net losses. For example, it is possible that we may experience attrition beyond
our planned reduction in workforce. Our future operations, operating results and
financial condition will be harmed if we encounter difficulty in managing the
restructuring.
OUR PRODUCTS ARE IN AN EARLY STAGE OF UTILIZATION AND IF THEY DO NOT PROVE SAFE
OR EFFECTIVE, OUR BUSINESS WILL FAIL.
Our 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. We believe, 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. We have little or no clinical experience
with our recently introduced products designed for less invasive open-chest
surgery, aortic valve
14
<PAGE>
replacement and stopped- and beating-heart minimally invasive cardiac
surgery. Accordingly, we cannot be sure of their clinical safety and
efficacy. If, with further experience, any of our products do not prove to be
safe and effective or if we are otherwise unable to commercialize them
successfully, our business will fail.
IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE OUR BUSINESS WILL FAIL.
Our products may not gain any significant degree of market acceptance
among physicians, patients, and health care payors. If our products do not
obtain physicians' acceptance and health care payors' reimbursement of minimally
invasive and less invasive cardiac surgery procedures, it is unlikely that our
products will achieve market acceptance. 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 physicians
may elect not to recommend the procedures for any number of other reasons. We
believe that our 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 we are focusing our training and sales efforts on addressing these
issues, we may not be successful in increasing Port-Access procedure volume, and
our products may not obtain any significant degree of market acceptance. In
addition, broad use of our 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. We may not be able to train
physicians quickly enough or in numbers sufficient to generate adequate demand
for our products. If our products fail to achieve significant market acceptance
our business will fail.
YOU SHOULD NOT RELY ON QUARTERLY RESULTS OF OPERATIONS AS AN INDICATION OF OUR
FUTURE RESULTS BECAUSE THEY FLUCTUATE SIGNIFICANTLY AND ARE DIFFICULT TO
FORECAST.
Our results of operations may vary significantly from quarter to quarter
and year to year depending upon numerous factors, including:
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- demand for our products;
- the number of cardiac surgery teams trained in the use of our systems
and the number of procedures performed by those teams;
- the number of hospitals that begin using our products; our ability to
manufacture, test and deliver our products in commercial volumes;
- health care reform and reimbursement policies;
- delays associated with the FDA and other regulatory approval
processes;
- changes in ours or our competitors' pricing policies;
- the number, timing, and significance of product enhancements and new
product announcements by us and our competitors;
- our ability to develop, introduce, and market new products and
enhanced versions of our existing products on a timely basis;
- customer order deferrals in anticipation of enhancements or new
products offered by us or our competitors;
- product quality problems;
- personnel changes; and
- the level of international sales.
In addition, our 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 our efforts to increase Port-Access procedure
volume by trained cardiac surgery teams will be successful. Accordingly, we
believe that period-to-period comparisons of our operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance. If we fail, for any reason, to increase revenue from sales of our
products, our business, operating results, and financial condition would be
adversely affected and it is likely that our stock price would decline. In
addition, it is likely that in some future quarter our operating results will be
below the expectations of public market analysts and investors. In such event,
the price of our Common Stock would likely decline.
IF WE FAIL TO MAINTAIN OUR RELATIONSHIP WITH ANY ONE OR MORE OF OUR PRINCIPAL
CUSTOMERS, OUR REVENUES WILL DECLINE.
Approximately 54% of our net sales in the six months ended June 30, 2000,
were derived from sales to twenty customers. Our principal customers may not
continue to purchase products from us at current levels, if at all. The loss of,
or a significant adverse change in, the relationship between us and any major
customer would cause our revenues to decline.
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WE MAY NOT HAVE THE MANUFACTURING CAPABILITIES TO TIMELY MEET DEMAND FOR OUR
PRODUCTS
To date, our manufacturing activities have consisted primarily of
manufacturing low volume quantities for initial commercial sales. The
manufacture of our products is complex, involving a number of separate processes
and components. We have limited experience in manufacturing our Port-Access
products in higher volume commercial quantities, and we have very little
experience manufacturing our recently introduced products designed for less
invasive open-chest surgery, aortic valve replacement and stopped- and
beating-heart minimally invasive cardiac surgery. We have contracted with third
parties to manufacture certain of our products and product components. These
suppliers may not be able to successfully scale-up production to meet commercial
demand for our products in a timely manner. In addition, we believe that cost
reductions in its manufacturing operations will be required for us to
commercialize our 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, we have experienced variable yields in manufacturing certain of our
product components, and such variability may continue or may adversely impact
our ability to meet demand for its products. We have 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. Manufacturing yields or costs may be adversely affected by
the transition to in-house production or to new production processes when such
efforts are undertaken, and such a transition may materially and adversely
affect our business, financial condition, and results of operations. We have
received ISO 9001 certification and in 1998 we passed an FDA inspection of our
compliance with Quality System Regulations ("QSR"), which include testing,
control, and documentation requirements. There can be no assurance that we will
continue to meet ISO 9001 requirements or FDA QSR requirements.
We use or rely on a number of components and services used in our 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 our
ability to manufacture our products and, therefore, a material adverse effect on
our business, financial condition, and results of operations.
We manufacture our products based on forecasted product orders, and
purchase subassemblies and components prior to receipt
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of purchase orders from customers. Lead times for materials and components
ordered by us 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 our 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.
WE MAY NOT BE ABLE TO COMPETE IN OUR RAPIDLY CHANGING MARKET.
We expect 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. We
believe 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 we do, 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 our 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
our products and could render our technology obsolete. Physicians may not use
our products to replace or supplement established treatments, such as
conventional open-chest heart surgery, PTCA, or intravascular stents, and our
products may not be competitive with current or future technologies.
Our current products and any future products developed by us 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 we 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. We have 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. If we are unable to compete successfully
against
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current and future competitors, our business, financial condition, and
results of operations will suffer.
WE EXPECT TO INCUR SUBSTANTIAL FUTURE LOSSES AND REQUIRE ADDITIONAL CAPITAL IN
THE FUTURE.
We have never had a profit from operations. For the period from inception
to June 30, 2000, we have incurred cumulative net losses of approximately $168.2
million. For at least the next six months, we expect to continue to incur
losses. We may never achieve or sustain profitability.
We believe our current capital will be sufficient to meet our
anticipated cash needs for at least the next twelve months. We may need to raise
additional funds after this period or, if we expand more rapidly than expected,
during this period. Our future liquidity and capital requirements will depend
upon numerous factors, including but not limited to the following:
- the extent to which our products gain market acceptance;
- the timing and costs of future product introductions;
- the extent of our ongoing research and development programs;
- the costs of training physicians to become proficient in the use of our
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 our intellectual property.
Issuance of additional equity or convertible debt securities could result in
substantial dilution to stockholders. Additional financing may not be available
on terms acceptable to us, if at all. Our inability to fund our capital
requirements would have a material adverse effect on our business, financial
condition, and results of operations.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AND WE ARE
VULNERABLE TO CLAIMS THAT OUR PRODUCTS INFRINGE THIRD-PARTY INTELLECTUAL
PROPERTY RIGHTS.
We believe that our competitive position depends in significant part on
our ability to protect our intellectual property. Our policy is to seek to
protect our 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, 2000, we own 117 issued or allowed United States patents, and 18 issued
foreign patents. In addition, as of June 30, 2000, we have 75 pending United
States patent applications and we filed 40 patent applications that are
currently pending in Europe, Japan, Australia, and Canada. Our issued patents,
or any patents that may be issued in the future, may
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not effectively protect our technology or provide us a competitive advantage.
Our patents or patent applications may be challenged, invalidated, or
circumvented in the future. In addition, our competitors, many of which have
substantially more resources than we do and have made substantial investments
in competing technologies, may seek to apply for and obtain patents that will
prevent, limit, or interfere with our ability to make, use, or sell our
products either in the United States or internationally.
We also rely upon trade secrets, technical know-how, and continuing
technological innovation to develop and maintain our competitive position. We
typically require our employees, consultants, and advisors to execute
confidentiality and assignment of inventions agreements in connection with their
employment, consulting, or advisory relationships with us. These agreements may
be breached and we may not have adequate remedies for any such breach.
Furthermore, our competitors may independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our
proprietary technology, and we may not be able to meaningfully protect our
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 current and potential competitors
and other third parties may have filed or received or in the future may file
applications for, or receive, patents or obtain additional proprietary rights
relating to products or processes used or proposed to be used by us. We are
aware of patents issued to third parties that contain subject matter related to
our technology. Based, in part, on advice of our patent counsel, we believe that
the technologies employed by us in our devices and systems do not infringe the
claims of any such patents. Third parties may, however, seek to assert that our
devices and systems infringe their patents or seek to expand their patent claims
to cover aspects of our 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 our
technical and management personnel. We may be involved in litigation to defend
against claims of infringement by other patent holders, to enforce patents
issued to us, or to protect our trade secrets. If any relevant claims of
third-party patents are upheld as valid and enforceable in any litigation or
administrative proceeding, we 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. Such licenses may not be available or, if available, may not
be available on terms acceptable to us or at all. We may not be
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successful in any attempt to redesign our products or processes to avoid
infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could
prevent us from manufacturing and selling our products. We intend to
vigorously protect and defend our intellectual property. Costly and
time-consuming litigation brought by us may be necessary to enforce patents
issued to us, to protect trade secrets or know-how owned by us, or to
determine the enforceability, scope, and validity of the proprietary rights
of others. Any such litigation, if commenced by us, may not be successful.
PRODUCT LIABILITY LAWSUITS COULD DIVERT OUR RESOURCES, RESULT IN SUBSTANTIAL
LIABILITIES AND REDUCE THE COMMERCIAL POTENTIAL OF OUR PRODUCTS.
We face an inherent and significant business risk of exposure to product
liability claims in the event that the use of our 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 we may be subject to
claims asserted against us and are involved in product liability litigation. We
maintain limited insurance against certain product liability claims, such
coverage may not continue to be available on terms acceptable to us or such
coverage may not be adequate for any liabilities actually incurred. Also, in the
event that any of our products prove to be defective, we may be required to
recall or redesign such products. A successful claim brought against us in
excess of available insurance coverage, or any claim or product recall that
results in significant adverse publicity against us, may have a material adverse
effect on our business, financial condition, and results of operations.
WE COULD LOSE CERTAIN KEY PERSONNEL, WHICH COULD PREVENT US FROM EXECUTING OUR
BUSINESS STRATEGIES.
Our future business and operating results depend in significant part upon
the continued contributions of our key sales, technical and senior management
personnel, many of whom would be difficult to replace. Our business and future
operating results also depend in significant part upon our ability to attract
and retain qualified management, manufacturing, technical, marketing, and sales
and support personnel for our operations. Competition for such personnel is
intense, particularly in the geographic region of California where our principal
office is located, we may not 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 our inability to attract and retain
skilled employees, as needed, could prevent us from successfully pursuing our
business.
IF OUR PRODUCTS ARE NOT APPROVED BY REGULATORY AGENCIES, WE WILL BE UNABLE TO
COMMERCIALIZE THEM.
Our individual devices are subject to regulatory clearances or approvals
by the FDA. We believe that most of our devices and systems will be subject to
United States regulatory clearance through the 510(k) premarket notification
process rather than a more
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extensive PMA submission. Although we have received clearance from the FDA to
market the EndoCPB system, the EndoDirect system and several proprietary
Class II disposable surgical devices for our 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 will
require submission to the FDA of extensive technical information and may
require submission of extensive clinical data. The FDA may not act favorably
or quickly on our 510(k) or other submissions, and we may encounter
significant difficulties and costs in our efforts to obtain FDA clearance
that could delay or preclude us from marketing and selling our products in
the United States. Furthermore, the FDA may request additional data, require
that we conduct further clinical studies, or require a more extensive PMA
submission, causing us to incur substantial costs and delays. Our business,
financial condition, and results of operations are critically dependent upon
FDA clearance or approval of our 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 our business, financial condition,
and results of operations, and could result in postponement of the
commercialization of our products or even cessation of our 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 our 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 will
require additional approvals or assessments, and these approvals or assessments
may not 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 our ability to market its systems. In addition, significant costs
and requests for additional information may be encountered by us in our efforts
to obtain regulatory approvals. Any such events could substantially delay or
preclude us from marketing our systems internationally.
In addition, the FDA and certain foreign regulatory authorities impose
numerous other requirements with which medical device manufacturers must comply.
Product approvals can be withdrawn for failure to comply with regulatory
standards or because of the occurrence of unforeseen problems following initial
marketing. We 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
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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 us from obtaining future regulatory approvals or clearances.
Such revisions could have a material adverse effect on our business, financial
condition, and results of operations.
HEALTHCARE REFORM AND RESTRICTIONS ON REIMBURSEMENTS MAY LIMIT OUR RETURNS ON
OUR PRODUCTS.
We expect that sales volumes and prices of our 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 our products. Our 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. We may need to seek international reimbursement approvals.
Such approvals may not be obtained in a timely manner or at all. Failure to
receive international reimbursement approvals could have an adverse effect on
market acceptance of our products in the international markets in which such
approvals are sought.
We believe 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. We believe 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 us. We are aware that certain
third-party payors have challenged or refused to provide reimbursement for
Port-Access procedures. Third-party reimbursement and coverage may not be
adequate or available in either United States or foreign markets. In addition,
current
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reimbursement amounts may be decreased in the future and future legislation,
regulation, or reimbursement policies of third-party payors may otherwise
adversely affect the demand for our products or our ability to sell our
products on a profitable basis, particularly if our systems are more
expensive than competing cardiac surgery procedures. If third-party payor
coverage or reimbursement is unavailable or inadequate, our business,
financial condition, and results of operations could be materially adversely
affected.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE AND YOU MAY NOT BE ABLE TO SELL YOUR
SHARES ABOVE THE PRICE YOU PURCHASED THEM.
Our stock price has been, and is likely to continue to be, highly
volatile. The market price of the shares of Common Stock may be significantly
affected by factors such as actual or anticipated fluctuations in our operating
results, announcements of technological innovations, new products or new
contracts by us or our 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 our 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 us, could result in substantial costs and a
diversion of management's attention and resources.
IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH CORPORATIONS
AND RESEARCH INSTITUTIONS, WE MAY NOT BE ABLE TO EFFECTIVELY COMMERCIALIZE OUR
PRODUCTS.
We intend to pursue strategic relationships with corporations and research
institutions with respect to the research, development, regulatory approval, and
marketing of certain of our potential products and procedures. Our future
success may depend, in part, on our relationships with third parties and their
success in marketing our products or willingness to purchase such products. We
anticipate that these third parties may have the unilateral right to terminate
any such relationship without significant penalty. We may not be successful in
establishing or maintaining any such strategic relationships in the future and
any such relationships may not be successful.
CONCENTRATION OF OWNERSHIP WILL LIMIT YOUR ABILITY TO INFLUENCE CORPORATE
MATTERS.
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The present directors, executive officers, and principal stockholders of
Heartport and their affiliates beneficially own approximately 47% 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 Heartport.
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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, 1999.
The company is exposed to equity market risks for changes in the fair value of
Intuitive Surgical common stock. As of June 30, 2000, the company holds a
warrant for the purchase of Intuitive Surgical common stock which as a carrying
value of $466,000 and an estimated fair value of approximately $1.7 million. As
of June 30, 2000, a hypothetical 20% decrease in the fair value of Intuitive
Surgical common stock would result in an adverse change in the fair value of the
warrants of approximately $0.3 million.
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On May 31, 2000 Robert V. Gunderson resigned from our Board of
Directors.
On June 15, 2000 Steven C. Wheelwright resigned from our Board of
Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months
ended June 30, 2000.
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 2, 2000 HEARTPORT, INC.
------------------------
By: /s/ Casey M. Tansey
--------------------------
President,
Chief Executive Officer
and Acting Chief Financial Officer
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