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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
1999
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OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-28266
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HEARTPORT, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 94-3222307
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
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700 BAY ROAD, REDWOOD CITY, CA 94063
(Address of Principal Executive Offices) (Zip Code)
(650) 306-7900
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes / / No /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 2000: approximately $95,309,000 (based on the last
reported sale price of $5.75 per share on March 20, 2000 on The Nasdaq Stock
Market).
The number of shares of Common Stock outstanding as of March 20, 2000 was
25,573,433.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT FORM 10
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Proxy Statement for Registrant's Annual Meeting to be held
on June 7, 2000 Part III, Items 11-13
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TABLE OF CONTENTS
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PAGE
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Part I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 26
Item 3. Legal Proceedings........................................... 26
Item 4. Submission of Matters to a Vote of Security Holders......... 26
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 27
Item 6. Selected Financial Data..................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29
Item 7a. Quantitative and Qualitative Disclosures about Market
Risks..................................................... 33
Item 8. Financial Statements and Supplementary Data................. F-1
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. F-19
Part III
Item 10. Directors and Executive Officers of the Registrant.......... III-1
Item 11. Executive Compensation...................................... III-3
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ III-3
Item 13. Certain Relationships and Related Transactions.............. III-3
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................. IV-1
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Heartport, the Heartport logo, EndoCPB, EndoVent, QuickDraw and EndoReturn
are registered trademarks of the Company. Port-Access, EndoDirect, EndoClamp,
DirectFlow, EndoPlege, Precision-OP, OPTrac, StillSite, InSite AVR and
StraightShot are trademarks of the Company.
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PART I
ITEM 1. BUSINESS.
The discussion in this Item and elsewhere in this Annual Report on
Form 10-K contains 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."
INTRODUCTION
Heartport, Inc. ("Heartport" or the "Company") is a cardiovascular device
company that develops, manufactures and markets proprietary products designed to
make cardiac surgery less invasive for patients. The Company's technologies
allow surgeons to perform a wide range of less invasive open-chest and minimally
invasive heart operations, including stopped heart and beating heart procedures.
The Company's Port-Access-TM- systems for stopped heart surgeries are designed
to enable surgeons to perform several types of cardiac surgeries in a minimally
invasive manner through small incisions, or "ports," between the ribs without
the need to crack open the chest as required in conventional heart surgery.
While fundamentally changing access to the heart, procedures performed with the
Company's Port-Access products closely parallel the conventional procedures that
have been used in heart surgery since the mid-1950s. Studies based on the
limited clinical experience to date indicate that Port-Access products offer
efficacy equal to that of conventional heart surgery, but with the benefits of
reduced trauma and complications, reduced pain and suffering, shorter hospital
stays and reduced convalescence time. In 1999, the Company introduced several
new cardiac surgery products, including its Precision-OP-TM- system for cardiac
surgery performed on a beating heart. The Precision-OP system allows cardiac
surgeons to perform coronary artery bypass grafting without stopping the heart
and placing the patient on a cardiopulmonary bypass machine. The Company
believes that procedures performed with its Precision-OP system may have a
reduced rate of neurological and other complications as compared to conventional
cardiac procedures.
In 1999, the Company implemented a restructuring plan designed to reduce
expenses and improve operating efficiency. As a result of the restructuring, the
Company has reduced its United States workforce by approximately 55 employees
and has subleased excess facilities. During the year, the Company also completed
the majority of activities associated with a restructuring plan that it began
implementing in 1998. The two restructuring plans resulted in a combined charge
of $2.4 million in 1999.
BACKGROUND
Cardiovascular disease is the leading cause of death in the United States
and many other developed countries. Two of the principal types of cardiovascular
disease are coronary artery disease ("CAD") and valvular heart disease ("VHD").
In CAD, one or more coronary arteries are narrowed, resulting in the risk of
insufficient blood flow to the heart muscle. In VHD, one or more heart valves
are dysfunctional, resulting in suboptimal pumping of blood. Conventional
open-chest heart surgery (commonly referred to as "open-heart" surgery) is one
of the leading methods of treating CAD, VHD, and other types of cardiovascular
disease.
Heart surgery is widely regarded as one of the most important medical
advances of the twentieth century. This field of surgery was made possible
during the 1950s by the development of technology that enabled physicians to
perform cardiopulmonary bypass ("CPB") and stop the heart during surgery. CPB
protects the patient by taking over the function of the heart in circulating
oxygenated blood throughout the patient's organs and tissues, thereby permitting
the heart to be safely stopped. The procedure of placing the patient on CPB and
stopping the heart offers several advantages. First, stopping the heart creates
a motionless surgical field, which allows the surgeon to achieve a high degree
of surgical accuracy and precision. Second, stopping the heart protects the
heart muscle during surgery. Third, in valve repair and replacement, the heart
itself must be opened to repair or replace the diseased valve since the valves
are
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located inside the heart. Placing the patient on CPB and stopping the heart is
necessary to enable surgeons to safely and accurately operate in the interior of
the heart.
Since heart surgery was pioneered in the mid-1950s, remarkable advances have
occurred in the surgical treatment of cardiovascular disease. CAD is most
effectively treated by coronary artery bypass grafting ("CABG") procedures, in
which an artery or vein is used to bypass the narrowing in a coronary artery and
restore blood flow downstream of the narrowing. The treatment for VHD involves
either repairing the diseased heart valve, most commonly with the implantation
of a prosthetic annuloplasty ring, or replacing it with a prosthetic mechanical
or tissue valve. Until the introduction of Heartport's technology, CABG and
valve repair and replacement procedures were virtually always performed in a
highly invasive surgery in which the patient's chest is opened widely to gain
access to the heart, the patient is placed on CPB, and the patient's heart is
stopped. Worldwide, approximately 800,000 CABG and valve procedures are
performed each year in this manner.
Although highly efficacious, open-chest heart surgery is traumatic and
painful, typically requires a lengthy period of convalescence, and is expensive.
The heart sits in the middle of the chest, protected by skeletal armor
consisting of the sternum or "breast bone," the rib cage, and the spine. In
conventional heart surgery, the heart is accessed by means of a sternotomy,
whereby a surgeon makes an incision of approximately 12 inches in the patient's
chest, the sternum is cut in half with a bone saw, and the rib cage is then
spread open with a steel retractor. The procedure is highly traumatic, resulting
in a lengthy and painful recovery period. In 1995, open-chest heart surgery
patients in the United States remained in the hospital for an average of ten
days and required a significant period of convalescence following discharge.
Conventional cardiac surgery is also expensive. Average charges for a CABG
procedure and for a valve procedure are approximately $45,000 and $55,000 per
patient, respectively. In addition, substantial costs are incurred during
convalescence. With approximately 500,000 open-chest heart surgeries performed
in the United States each year, the total cost to the U.S. healthcare system is
substantial.
The development and widespread adoption of minimally invasive surgical
approaches have revolutionized many surgical fields, including general surgery,
orthopedics, gynecology, urology and neurosurgery. Notable examples include
laparoscopic procedures in the field of general surgery and arthroscopic
procedures in the field of orthopedic surgery. Such procedures are designed to
be as efficacious as conventional surgery, but with substantially reduced
trauma, thereby decreasing complications, reducing pain and suffering, speeding
recovery, and decreasing costs associated with many aspects of patient care.
This movement toward minimally invasive surgery has been driven by advances in
both device technology and surgical technique. A minimally invasive approach is
most advantageous in cases in which significant trauma results from gaining
surgical access to an affected organ or site. Cardiac surgery represents a
particularly significant opportunity for a minimally invasive approach due to
the trauma associated with opening the chest. Heartport has demonstrated that
its Port-Access minimally invasive surgical approach has the potential to
significantly reduce complications, pain and suffering, convalescence and
expense, while maintaining the high efficacy of conventional open-chest surgery.
Less-invasive alternatives to conventional heart surgery began to emerge in
the early 1980s. For example, percutaneous transluminal coronary angioplasty
("PTCA"), or balloon angioplasty, was developed as an alternative to CABG
surgery. In a PTCA procedure, the cardiologist inserts a small balloon catheter
into the narrowed coronary artery and inflates the balloon to expand the
narrowed section, thereby increasing the internal diameter of the vessel to
increase blood flow. A PTCA procedure is less traumatic, requires less time in
the hospital, and involves a shorter recuperation period than a conventional
open-chest CABG procedure. As a result, a PTCA procedure in the United States is
less expensive on a per-procedure basis, with costs of approximately $20,000 in
1995. In 1996, approximately 480,000 PTCA procedures were performed in the
United States.
Although PTCA is less invasive than conventional CABG, a major drawback of
PTCA is the high rate of restenosis, or renarrowing of the blood vessel at the
treatment site. Restenosis within six months
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following a PTCA procedure occurs at rates ranging from 15% to 50%. The majority
of PTCA patients eventually undergo another PTCA procedure or require CABG
surgery. Although the cost of a single PTCA procedure may be substantially less
than a conventional CABG procedure, a recent study indicated that three years
after the procedure, PTCA has no cost advantage over conventional open-chest
CABG due to the need for subsequent interventions. Furthermore, another recent
study concluded that the quality of life, post intervention, is higher for
conventional open-heart surgery patients because of the follow-up interventions
required in PTCA. More recently, clinicians have begun to employ mechanical
coronary artery stents, metal prostheses designed to hold open arteries, as a
means of preventing restenosis. Although long-term clinical data is not yet
available, stents appear to reduce but not eliminate the problem of restenosis
associated with non-surgical treatment of CAD.
Restenosis rates for conventional open-chest CABG are significantly lower
than those for non-surgical approaches. Studies indicate that open-chest
coronary artery bypass grafts have 17-year patency rates (the maintenance of
sufficient blood flow through the affected artery) of 92% when the left internal
mammary artery ("IMA") graft is used, 85% when the right IMA graft is used, and
10-year patency rates of approximately 60% when a saphenous vein graft from the
patient's leg is used. In addition, a Duke University study suggests that
patients with three-vessel CAD and patients with severe two-vessel CAD have
improved survival after conventional open-chest CABG surgery in comparison to
PTCA and other medical treatments. Thus, conventional open-chest CABG remains
the preferred treatment for severe CAD because of these higher long-term success
rates.
The most recent development in less invasive alternatives to conventional
cardiac surgery is the Off Pump Coronary Artery Bypass Grafting ("OPCABG")
procedure performed on a beating heart. In an OPCABG procedure, surgeons use
specially-designed tools to reduce or eliminate motion in the area surrounding a
diseased coronary artery so that bypass grafting can be performed safely and
effectively while the heart remains beating. Such surgery eliminates the need to
stop the heart and place the patient on a CPB machine. Although CPB offers
several advantages in performing cardiac surgery, it is also associated with
neurological and other complications. OPCABG procedures are performed through a
mid-line incision in the chest wall (sternotomy or mini-sternotomy), providing
maximum visualization and enabling the surgeon to manipulate the heart to gain
access to vascular beds on the back and sides of the heart. OPCABG tools and
techniques have evolved such that the procedure is currently used for multi-
vessel CABG procedures.
THE HEARTPORT SOLUTION
STOPPED HEART SURGERY
Heartport has developed proprietary systems and products for performing
several different types of minimally invasive heart surgery on a stopped heart.
These systems and devices have been cleared or exempted by the Food and Drug
Administration ("FDA") for commercial sale in the United States and by a
Notified Body in Europe. Heartport's core platforms are an endovascular
cardiopulmonary bypass ("EndoCPB") system and a direct cannulation
cardiopulmonary bypass ("EndoDirect") system. Each platform allows surgeons to
place the patient on CPB and stop and protect the patient's heart without the
need for a sternotomy. Using the Company's EndoCPB or EndoDirect platform and
procedure-specific systems, the surgeon is able to perform cardiac surgery by
accessing the heart through small incisions, or "ports," placed between the
patient's ribs. The Company's systems include reusable and disposable devices
for Port-Access CABG, Port-Access mitral valve repair and mitral valve
replacement (collectively, "MVR"), and Port-Access aortic valve replacement
("AVR") surgeries. While fundamentally changing access to the heart, Port-Access
surgical procedures closely parallel the conventional procedures that have been
used in heart surgery since the mid-1950s. Clinical studies indicate that
Port-Access products offer efficacy equal to that of conventional open-chest
surgery, but with the benefits of reduced trauma and complications, reduced pain
and suffering, shorter hospital stays, reduced convalescence time, and lower
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overall cost. See "Risk Factors--No Assurance of Market Acceptance" and "--No
Assurance of Regulatory Clearance or Approval; Significant Domestic and
International Regulation."
BEATING HEART SURGERY
The Company has also developed the Precision-OP system, a proprietary system
for performing coronary artery bypass grafting procedures on a beating heart.
This system has been exempted by the FDA for commercial sale in the United
States. In March 2000, the Company obtained Conformite Europeene ("CE") Mark
approval for the Precision-OP system, enabling the Company to market the system
in Europe. With the Precision-OP platform, surgeons can perform multi-vessel
CABG without stopping the heart and placing the patient on a CPB machine. The
Company believes that procedures performed with its Precision-OP system may have
a reduced rate of neurological and other complications as compared to
conventional cardiac procedures. See "Risk Factors--No Assurance of Market
Acceptance" and "--No Assurance of Regulatory Clearance or Approval; Significant
Domestic and International Regulation."
MARKETS AND APPLICATIONS
Cardiovascular disease is the leading cause of death in the United States
and other developed countries. In the United States, it causes approximately one
million deaths per year, which represents over 40% of all deaths. CAD is one of
the most common forms of cardiovascular disease, affecting approximately
12 million people in the United States. If untreated, CAD can cause a myocardial
infarction or "heart attack." Each year, approximately 1.0 million people
experience heart attacks in the United States, and each year approximately
500,000 deaths result from CAD. Each year on a worldwide basis, approximately
600,000 CAD patients undergo conventional open-chest CABG surgery, over 800,000
CAD patients undergo PTCA or other non-surgical interventions, and approximately
200,000 VHD patients undergo open-chest valve repair or replacement procedures.
MVRs represent approximately 40% and AVRs represent approximately 60% of valve
surgery procedures. Per-patient charges of these heart surgery procedures in the
United States average approximately $20,000 for PTCA, $45,000 for conventional
CABG, and $55,000 for conventional valve surgery. The Company has demonstrated
that its products provide less invasive surgical alternatives for CABG, MVR, AVR
and other procedures.
CORONARY ARTERY BYPASS GRAFTING--CABG
Currently, the most efficacious treatment for CAD is conventional open-chest
CABG surgery. In a conventional open-chest CABG, an incision of approximately 12
inches is made in the patient's chest, the patient's sternum is cut in half with
a bone saw, and the rib cage is spread open with a steel retractor. Blood is
re-routed past a narrowing in one or more coronary arteries by either grafting
an artery from the chest wall to the coronary artery below the narrowing, or
grafting a section of artery or vein from another part of the body both to the
aorta (which serves as a source of oxygenated blood) and to a point below the
narrowed segment on the affected coronary artery, or both. Using the internal
mammary artery from the chest wall is the most efficacious procedure given its
long term patency in such open-chest procedures. The IMA is dissected free from
the chest wall and prepared for grafting to the coronary artery. Large tubes, or
cannulae, are inserted directly through the walls of the heart and the aorta in
order to place the patient on CPB, the aorta is compressed closed with an
external cross-clamp, and a catheter is used to administer the cardioplegic
solution that stops the heart. The IMA is then sutured in place on the affected
coronary artery, which sits motionless atop the stopped heart. The patient's
chest is closed and the sternum is held together with steel wire. Afterward, the
patient has a long and painful recovery. In the United States, open-chest CABG
patients spend an average of eight days in the hospital, and the Company
estimates that up to two or more days are spent in the intensive care unit
("ICU"). For some period following surgery, a ventilator breathes for the
patient because the trauma to the rib cage and sternum makes unassisted
breathing extremely painful.
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Each step in the Company's Port-Access CABG procedure parallels a
corresponding step in conventional CABG. Instead of accessing the heart through
a large opening in the chest, however, the procedure is accomplished through
small incisions, or "ports" between the patient's ribs. During the procedure,
the Company's EndoCPB system or EndoDirect system, a series of proprietary
catheters inserted via certain of the patient's vessels, circulates oxygenated
blood throughout the body and stops and protects the heart. The Company's
Port-Access CABG system is designed to enable the surgeon to access the heart
and its associated vessels, visualize the interior of the thoracic cavity,
access and prepare the arterial or venous grafts, attach the grafts to the
diseased coronary arteries resting motionless atop the stopped heart, and do
various other supporting activities. Upon completion of the surgical procedure,
the heart is allowed to spontaneously resume normal activity and CPB is
discontinued. The patient leaves the operating room with the heart
revascularized in the same manner as in a conventional open-chest CABG
procedure, but with the port incisions sutured closed rather than with the chest
held together with steel wire.
In an OPCABG procedure using the Company's Precision-OP system, a sternotomy
or mini-sternotomy is performed to create access to the heart, and the Company's
OPTrac-TM- Retractor is used to spread the ribs apart and assist the surgical
team in performing other activities. The StillSite-TM-Stabilizer is connected to
the retractor and positioned over the diseased coronary artery to render it
motionless while the heart remains beating. The surgeon then attaches the graft
vessel beyond the blockage in the coronary artery using standard techniques. The
surgeon can manipulate the heart to reach coronary arteries on the back and
sides of the heart, and thus perform multi-vessel bypass grafting on all
coronary vascular beds. After grafting is complete, the chest incision is closed
in the same manner as in a conventional cardiac procedure.
VALVE REPAIR AND REPLACEMENT
A leading treatment for VHD is the surgical replacement or repair of the
diseased heart valve. In conventional open-chest MVR surgery, the heart is
accessed via a sternotomy, the patient is placed on CPB, the patient's heart is
stopped, and the heart is drained of blood. The diseased valve is then accessed
through an incision in the left atrium, one of the upper chambers of the heart,
and the valve is either repaired, most commonly with the implantation of a
prosthetic annuloplasty ring, or is removed and replaced with a mechanical or
tissue prosthetic valve.
Similar to Port-Access CABG, each step in a Port-Access MVR procedure
closely parallels the corresponding step in a conventional MVR procedure, but no
sternotomy is required. The Company's EndoCPB system or the EndoDirect system is
used to place the patient on CPB, stop and protect the heart, and empty the
heart of blood. The Company's Port-Access MVR system is designed to permit the
surgeon to visualize the interior of the thoracic cavity, open the left atrium
of the heart to gain access to the mitral valve, visualize the interior of the
heart, assess valve function, repair or remove the diseased valve, size the
prosthesis (either a prosthetic heart valve or annuloplasty ring), deliver and
attach the prosthesis, close the heart, allow the heart to spontaneously resume
normal activity, and then discontinue CPB. The patient leaves the operating room
with the heart valve repaired or replaced in the same manner as in a
conventional, open-chest MVR procedure, but with the port incisions sutured
closed rather than the chest held together with steel wire.
An aortic valve replacement procedure is performed with the Company's InSite
AVR-TM- system in much the same way as a Port-Access MVR surgery, except that
the aortic valve is accessed through the aorta rather than through the left
atrium. A variety of incisions can be used with the InSite AVR system to gain
access to the heart, allowing significant flexibility in surgical technique. The
InSite AVR system is used along with a conventional surgical cross-clamp to
place the patient on CPB. The diseased aortic valve is replaced with a
prosthesis using standard techniques, and the chest is closed once the procedure
is complete.
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STRATEGY
The Company's objective is to become the global leader in research,
development and commercialization of systems for less invasive and minimally
invasive cardiac surgery. Key elements of the Company's strategy include:
PROVIDE CARDIAC SURGEONS WITH A WIDE RANGE OF PRODUCTS FOR BOTH STOPPED
HEART AND BEATING HEART SURGERY. In 1999, the Company expanded its product
offering substantially, introducing several new cardiac surgery products and
systems including systems for aortic valve replacement and beating heart
coronary artery bypass grafting. Additional new products are under development,
with market launches planned in 2000. The Company believes that its expanded
product line will increase sales force efficiency and will result in a growing
customer base.
ESTABLISH PORT-ACCESS MINIMALLY INVASIVE CARDIAC SURGERY AS A STANDARD OF
CARE FOR CAD AND VHD. The Company believes that it is the first to design,
develop and receive FDA-clearance of products for the minimally invasive
surgical treatment of CAD and VHD. The Company is currently marketing its
products to leading cardiac surgery centers in the United States and Europe. In
addition, the Company intends to support clinically driven research efforts to
prove the efficacy and benefits of Port-Access minimally invasive cardiac
surgery. In this regard, in 1997 the Company established the Port-Access
International Registry, a multi-center registry designed to improve patient
outcomes and advance Port-Access minimally invasive cardiac surgery by sharing
aggregate knowledge maintained in the registry database.
MARKET TO HIGH VOLUME CARDIAC SURGERY CENTERS. The cardiac surgery market
in the United States and Europe is highly concentrated, with 300 centers
responsible for over 50% of the more than 500,000 open-chest surgeries performed
annually in the two geographies. The Company has targeted many of these centers
with its direct sales force. As of March 20, 2000 the Company had 23 field sales
specialists in the United States and 4 field sales specialists in Europe with
extensive experience selling cardiac surgery and cardiology products. As of
March 20, 2000 the Company also had 5 clinical education specialists in the
United States and 1 clinical education specialist in Europe who work closely
with the field sales specialists.
PROTECT AND ENHANCE PROPRIETARY POSITION. The Company currently holds
issued and allowed patents covering a number of fundamental aspects of the
Company's EndoCPB system, EndoDirect system, procedure-specific Port-Access
products and beating heart products. As of March 20, 2000, the Company owns 111
issued or allowed United States patent and 16 issued foreign patents. In
addition, as of March 20, 2000, the Company has 72 pending United States patent
applications and has filed 39 patent applications that are currently pending in
Europe, Japan, Australia and Canada. The Company intends to continue to pursue
its patent filing strategy and to vigorously defend its intellectual property
position against infringement. See "Risk Factors--Uncertainty Regarding Patents
and Protection of Proprietary Technology; Risks of Future Litigation."
TARGET INTERNATIONAL MARKETS. The Company intends to continue to devote
resources to penetrate international markets. The Company has received the
necessary regulatory approvals in Europe and is pursuing approvals in Canada,
Australia and Asia to market its EndoCPB, EndoDirect, Port-Access and
Precision-OP systems. In addition, the Company has trained surgical teams from
centers in several countries, including England, Scotland, Germany, France,
Spain, Belgium, Italy, Canada, Australia, India, Japan and Israel. In
December 1997 the Company entered into a distribution, training and supply
agreement with Getz Bros. Co., Ltd. ("Getz") under which Getz is the Company's
exclusive distributor of Port-Access minimally invasive cardiac surgery systems
in Japan. See "Strategic Relationships."
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TECHNOLOGY
STOPPED HEART SURGERY
The Company's systems for stopped heart minimally invasive cardiac surgical
procedures consist of a common platform, either the EndoCPB system or the
EndoDirect system, and procedure-specific systems comprising proprietary
reusable and disposable devices.
ENDOVASCULAR AND DIRECT CANNULATION CARDIOPULMONARY BYPASS. The EndoCPB
system and the EndoDirect system are a series of proprietary catheters used to
place the patient on CPB and to stop and protect the heart during cardiac
surgery without performing a sternotomy. There are five key components:
- the EndoClamp-TM- aortic occlusion catheter, a saline-filled balloon
catheter, occludes the ascending aorta, stops and cools the heart via
delivery of cardioplegic solution, monitors aortic root pressures, and
drains excess blood from the heart;
- the QuickDraw-Registered Trademark- venous drainage cannula removes
deoxygenated blood from the body;
- the EndoReturn-Registered Trademark- arterial return cannula and the
DirectFlow-TM- arterial return cannula return oxygenated blood to the
body;
- the EndoVent-Registered Trademark- pulmonary venting catheter drains
excess blood from the heart via the pulmonary artery; and
- the EndoPlege-TM- sinus catheter provides an alternative route for
delivery of cardioplegic solution.
Each component of the EndoCPB system is positioned within the vascular
system via peripheral vascular access. Each component of the EndoDirect system
also is positioned within the vascular system via peripheral vascular access
except the arterial return cannula and the aortic occlusion catheter, which
access the aorta directly through a port in the chest.
PORT-ACCESS CORONARY ARTERY BYPASS GRAFTING. The Port-Access CABG system
currently consists of 25-30 reusable and disposable devices designed for
performing the entire CABG procedure in a minimally invasive manner. The system
includes devices for accessing the heart and its associated vessels, visualizing
the interior of the thoracic cavity, accessing and preparing the arterial and
venous grafts, attaching the grafts to the diseased coronary artery and various
other supporting activities. The devices are designed to permit the surgeon to
operate through ports with the same surgical precision and accuracy as is
possible using conventional cardiac surgical instruments through a sternotomy.
PORT-ACCESS MITRAL VALVE REPAIR AND MITRAL VALVE REPLACEMENT. The
Port-Access MVR system currently consists of 25-30 reusable and disposable
devices. This system is designed to be compatible with existing implantable
prosthetic heart valves and prosthetic annuloplasty rings. They permit the
surgeon to perform mitral valve surgery in a minimally invasive manner, and
offer the surgeon the ability to visualize the interior of the thoracic cavity,
open the left atrium of the heart to gain access to the mitral valve, visualize
the interior of the heart, assess valve function, repair or remove the diseased
valve, size the prosthesis (either a prosthetic heart valve or annuloplasty
ring), deliver and attach the prosthesis and close the heart. The Port-Access
MVR system is designed to permit precise and accurate surgery to be performed
through small ports.
AORTIC VALVE REPLACEMENT. The InSite AVR system includes the following four
proprietary catheters, which are used to place the patient on CPB and to stop
and protect the heart during cardiac surgery:
- the QuickDraw venous drainage cannula;
- the StraightShot-TM- arterial return cannula with Incising Introducer for
single-step aortotomy;
- the EndoVent pulmonary venting catheter; and
- the EndoPlege sinus catheter.
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Disposable and reusable products included in the Port-Access MVR system are
also used for performing AVR surgery along with the Company's InSite AVR system.
BEATING HEART SURGERY
The Precision-OP system for performing coronary artery bypass grafting on a
beating heart is used to stabilize the diseased coronary artery so that grafting
can be performed with accuracy and precision. It comprises the following
components:
- the OPTrac Retractor separates the ribs and maximizes access to the chest
cavity through a sternotomy or mini-sternotomy;
- the StillSite Stabilizer attaches to the OPTrac Retractor and applies
light pressure to the blocked coronary artery to minimize motion at the
grafting site; and
- the SutureStays secure pericardial sutures to optimally position the heart
for the procedure and to provide an unobstructed surgical field.
The OPTrac Retractor is a fully reusable device that can be used for
conventional open-chest cardiac surgeries as well as beating heart procedures.
In January 2000, the Company introduced the StillSite II, designed for
improved access to coronary arteries on the back and sides of the heart that are
more difficult to reach than those on the front of the heart. The Company
expects to begin shipping this system early in the second quarter of 2000.
REGULATORY STATUS
UNITED STATES
In October 1996, the Company received 510(k) clearance from the FDA to
market its EndoCPB system and several proprietary Class II disposable surgical
devices for its Port-Access surgery systems. In addition, the Company received
premarket notification exemptions clearing its core reusable and disposable
surgical devices to be labeled and used for minimally invasive cardiovascular
surgery. These clearances and exemptions allowed the Company to commercially
launch its EndoCPB, Port-Access CABG and Port-Access MVR systems in early 1997.
Since that time the Company has received additional clearances and exemptions
from the FDA for other devices and enhancements to its systems. In July 1998,
the Company received 510(k) clearance to market its EndoDirect system. The
Company's Precision-OP system is a Class I device that is exempt from FDA
premarket notification requirements.
The Company continues to submit 510(k) notifications for enhancements to its
EndoCPB and EndoDirect systems and for additional specialty disposable devices
to enhance performance of Port-Access CABG and MVR procedures. There can be no
assurance that the FDA will act favorably or quickly on the Company's 510(k)
submissions, and significant difficulties and costs may be encountered by the
Company in its efforts to obtain these additional FDA clearances that could
delay or preclude the Company from marketing and selling products for additional
procedures. See "Risk Factors--No Assurance of Regulatory Clearance or Approval;
Significant Domestic and International Regulations," and "Government
Regulation."
INTERNATIONAL
In January 1997, the Company received CE Mark clearance for its EndoCPB
system, which allows the sale of its Port-Access CABG and MVR systems in all
countries of the European Union. The Company has also submitted amendments to
its Product Dossiers for enhancements to its EndoCPB system to further enhance
performance of Port-Access CABG and MVR procedures. In March 1999, the Company
received CE Mark clearance for its EndoDirect System. In March 2000, the Company
received CE Mark clearance
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for its Precision-OP system. See "Risk Factors--No Assurance of Regulatory
Clearance or Approval; Significant Domestic and International Regulations," and
"Government Regulation."
STRATEGIC RELATIONSHIPS
The Company intends to pursue strategic relationships with corporations and
research institutions with respect to the research, development, regulatory
approval, manufacturing and marketing of certain of its products. In
December 1997, the Company entered into a distribution, training and supply
agreement with Getz Bros. Co., Ltd. ("Getz") under which Getz is the Company's
exclusive distributor of Port-Access minimally invasive cardiac surgery systems
in Japan. Pursuant to the agreement, Getz is responsible for obtaining
regulatory approvals and government reimbursement in Japan for the Company's
products. Getz is also responsible for marketing and sales, which will be
overseen by a committee of Heartport and Getz representatives.
Although the Company intends to pursue additional strategic relationships in
the future, there can be no assurance that the Company will be successful in
establishing or maintaining any such relationships or that any such relationship
will be successful. See "Risk Factors--Reliance on Strategic Relationships."
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend in large part on
its ability to develop and introduce clinically advanced Port-Access and
Precision-OP products that are effective, easy to use, safe and reliable. The
Company's research and development department focuses on the continued
development and refinement of its existing products as well as on the
development of new products for treating cardiac diseases. Research and
development expenses were $7.0 million, $11.0 million and $18.0 million in 1999,
1998 and 1997, respectively. The Company intends to introduce new products in
2000 that are currently under development. There can be no assurance that the
Company will be successful in developing such products or that such products
will be granted required regulatory clearances or approvals, or achieve any
significant level of market acceptance. See "Risk Factors--No Assurance of
Market Acceptance" and "--Significant Competition; Rapid Technological Change."
MANUFACTURING
The Company manufactures the majority of its products at its Redwood City,
California, facility. The Company believes that its facility has sufficient
capacity to meet the Company's anticipated manufacturing needs through at least
the end of 2000. See "Item 2 Properties."
To date, the Company's manufacturing activities have primarily consisted of
manufacturing low volume quantities for early commercial sales. The Company has
no experience in manufacturing its products in the higher volumes that would be
necessary to achieve profitability. Medical device manufacturers often encounter
difficulties in scaling up manufacturing, 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. Difficulties in increasing manufacturing
volumes could have a material adverse effect on the Company's business,
financial condition, and results of operations. See "Risk Factors--Limited
Manufacturing Experience; Dependence on Key Suppliers."
The Company has received ISO 9001 certification, and in 1998 the Company
passed a FDA inspection of its compliance with Quality System Regulation ("QSR")
requirements, which include testing, control and documentation requirements.
There can be no assurance that the Company will continue to meet ISO 9001
requirements or that FDA QSR requirements will continue to be met. See "Risk
Factors--No Assurance of Regulatory Clearance or Approval; Significant Domestic
and International Regulation."
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Currently, the Company contracts with independent suppliers for the
manufacture of certain products and product components. Any significant supply
interruption could have a material adverse effect on the Company's business,
financial condition, and results of operations. The Company has considered and
will continue to consider the internal manufacture of products and product
components provided by third parties. There can be no assurance that
manufacturing yields or costs would not be adversely affected by the transition
to in-house production, if undertaken, and that such transition would not
materially and adversely affect the Company's business, financial condition, and
results of operations. See "Risk Factors--Limited Manufacturing Experience;
Dependence on Key Suppliers."
SALES, MARKETING, TRAINING AND DISTRIBUTION
In the United States and Europe the Company's products are marketed both to
cardiac surgeons and to cardiac surgery centers. In the United States, there are
approximately 900 cardiac surgery centers and approximately 2,500 cardiac
surgeons. Outside the United States, there are approximately 2,500 cardiac
surgeons. The Company currently markets products in the United States and Europe
with a moderately sized direct sales organization. In Japan, the Company intends
to market and sell its products through its exclusive distribution, training and
supply agreement with Getz. In other geographic regions the Company will
evaluate direct and indirect sales channels as appropriate.
The Company has established a field-based training program designed to
educate surgical teams in the use of Heartport's systems at their own hospitals.
The Company also plans to work with selected cardiac surgery centers to enhance
the Company's technology and broaden its applicability to treat CAD, VHD and
other cardiovascular diseases. In addition, the Company intends to support
rigorous, clinically driven research efforts to prove the efficacy and benefits
of its systems and products. In this regard, in 1997 the Company established the
Port-Access International Registry, a multi-center registry designed to improve
patient outcomes and advance Port-Access minimally invasive cardiac surgery by
sharing aggregate knowledge maintained in the registry database. In its
January 2000 Clinical Report, the registry reported that data for 3,210 patients
were submitted to the registry from 113 centers between June 1997 and
August 1999. Clinical outcomes data, for events occurring postoperatively, were
collected for all patients. The January 2000 Clinical Report concluded that the
data demonstrate broad applicability of the Port-Access platform to patients
undergoing a variety of cardiac surgery procedures.
The Company's sales and marketing strategy includes developing and
maintaining a close working relationship with its customers in order to assess
and satisfy their needs for products and services. The Company meets with
clinicians periodically to share ideas regarding the marketplace, existing
products, products under development, and existing or proposed research
projects.
COMPETITION
The Company expects that the market for minimally invasive and less invasive
cardiac surgery, which is currently in the early stages of development, will
become 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 are likely to continue to be formed to pursue
opportunities in this field.
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
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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 procedures using 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 and PTCA, 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 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 speed
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. In addition, the
Company believes that the primary competitive factors in the market for
minimally invasive and less invasive cardiac surgery products will be safety,
efficacy, ease of use, quality and reliability, cost-effectiveness, training
support, innovation, breadth of product line, and price. The Company also
believes that physician relationships and customer support are important
competitive factors. The Company has experienced delays in completing the
development and introduction of new products, product variations and product
features, and there can be no assurance that such delays will not continue or
recur in the future. Such delays could result in a loss of market acceptance and
market share. There can be no assurance that the Company will be able to compete
successfully against current and future competitors. Failure to do so would have
a material adverse effect on the Company's business, financial condition, and
results of operations. See "Risk Factors--Significant Competition; Rapid
Technological Change."
GOVERNMENT REGULATION
UNITED STATES
The Company's products are regulated in the United States as medical
devices. As such, the Company is subject to extensive regulation by the FDA.
Pursuant to the Federal Food, Drug, and Cosmetic Act of 1938, as amended, and
the regulations promulgated thereunder (the "FDC Act"), the FDA regulates the
clinical testing, manufacture, labeling, distribution and promotion of medical
devices. Noncompliance with applicable requirements can result in, among other
things, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the government to grant
premarket clearance or premarket approval for devices, withdrawal of marketing
approvals, a recommendation by the FDA that the Company not be permitted to
enter into government contracts, and criminal prosecution. The FDA also has the
authority to request repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.
In the United States, medical devices are classified into one of three
classes, Class I, II or III, on the basis of the controls deemed by the FDA to
be necessary to reasonably ensure their safety and effectiveness. Class I
devices are subject to general controls (e.g., labeling, adherence to QSRs, and
premarket notification for non-exempt devices). Class II devices are subject to
general controls and to special controls (e.g., performance standards,
postmarket surveillance, patient registries and FDA guidelines). Generally,
Class III devices are those that must receive premarket approval by the FDA to
ensure their safety and effectiveness (e.g., life-sustaining, life-supporting
and implantable devices, or new devices which have not been found substantially
equivalent to legally marketed devices), and require clinical testing to ensure
safety and effectiveness and FDA approval prior to marketing and distribution. A
premarket approval ("PMA") application usually must be filed if the proposed
device is not substantially equivalent to a legally marketed predicate device or
if it is a Class III device (or a pre-1976 Class III device for which the FDA
has called for such applications).
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Before a new device can be introduced into the market, the manufacturer must
generally obtain marketing clearance through a premarket notification under
Section 510(k) of the FDC Act or a PMA application under Section 515 of the FDC
Act. A 510(k) clearance typically will be granted if the submitted information
establishes that the device is "substantially equivalent" to a legally marketed
Class I or II medical device or to a Class III medical device for which the FDA
has not called for PMAs. A 510(k) notification must contain information to
support a claim of substantial equivalence, which may include laboratory test
results or the results of clinical studies of the device in humans. Commercial
distribution of a device for which a 510(k) notification is required can begin
only after the FDA issues an order finding the device to be "substantially
equivalent" to a predicate device. Generally, devices will be considered
"substantially equivalent" if they have the same intended use, and they have
either the same technological characteristics or different technological
characteristics but the new device does not present different questions of
safety or effectiveness. The FDA has recently been requiring a more rigorous
demonstration of substantial equivalence than in the past and is more likely to
require the submission of human clinical trial data. It generally takes from
four to twelve months from the date of submission to obtain FDA clearance of a
510(k) notification, but it may take longer. The FDA may determine that a
proposed device is not substantially equivalent to a legally marketed device, or
that additional information is needed before a substantial equivalence
determination can be made. A PMA application usually must be filed for new
Class III devices, or if a proposed device is not substantially equivalent to a
legally marketed Class I or Class II device. A PMA application must be supported
by valid scientific evidence that typically includes extensive data, including
preclinical and human clinical trial data to demonstrate the safety and efficacy
of the device. Under recent amendments to the FDC Act, a person who obtains a
"not substantially equivalent" determination after submitting a 510(k)
notification has the option of requesting a review of that automatic Class III
classification, and must provide data and information to the FDA to support the
requested classification of the device into Class I or Class II. If the FDA
determines the device should remain in Class III, a PMA will be required. A "not
substantially equivalent" determination, or a request for additional
information, could delay the market introduction of new products that fall into
this category. See "Risk Factors--No Assurance of Regulatory Clearance or
Approval; Significant Domestic and International Regulation."
If human clinical trials of a device are required in support of either a
510(k) notification or a PMA application, and the device presents a "significant
risk," the sponsor of the trial (usually the manufacturer or the distributor of
the device) is required to file an investigational device exemption ("IDE")
application with the FDA prior to commencing human clinical trials. A
"significant risk" device is defined to include a device that is an implant, is
life-supporting or life-sustaining, or is of substantial importance in
diagnosing or treating disease or preventing impairment of human health, and
that presents a potential for serious risk to the health, safety, or welfare of
the patient. The IDE application must be supported by data, typically including
the results of animal and laboratory testing. If the IDE application is approved
by the FDA and one or more appropriate institutional review boards ("IRBs"),
human clinical trials may begin at a specific number of investigational sites
with a specific number of patients, as approved by the FDA. If the device
presents a "nonsignificant risk" to the patient, a sponsor may begin the
clinical trial after obtaining approval for the study by one or more appropriate
IRBs, but not the FDA. Sponsors of clinical trials are permitted to charge for
those devices distributed in the course of the study provided such compensation
does not exceed recovery of the costs of manufacture, research, development and
handling. An IDE supplement must be submitted to and approved by the FDA before
a sponsor or an investigator may make a change to the investigational plan that
may affect its scientific soundness or the rights, safety or welfare of human
subjects.
A PMA application must also contain the results of all relevant bench tests,
laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling, advertising literature and training methods (if required).
Upon receipt of a PMA application, the FDA makes a threshold determination as to
whether the application is sufficiently
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complete to permit a substantive review. If the FDA determines that the PMA
application is sufficiently complete to permit a substantive review, the FDA
will accept the application for filing. Once the submission is accepted for
filing, the FDA begins an in-depth review of the PMA application. An FDA review
of a PMA application generally takes one to three years from the date the PMA
application is accepted for filing, but may take significantly longer. The
review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee, typically a panel of
clinicians, will likely be convened to review and evaluate the application and
provide recommendations to the FDA as to whether the device should be approved.
The FDA is not bound by the recommendations of the advisory panel. Toward the
end of the PMA application review process, the FDA generally will conduct an
inspection of the manufacturer's facilities to ensure that the facilities are in
compliance with the applicable QSR requirements.
If the FDA's evaluations of both the PMA application and the manufacturing
facilities are favorable, the FDA will either issue an approval letter or an
"approvable letter" containing a number of conditions which must be met in order
to secure final approval of the PMA application. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue an
approval of the PMA application, authorizing commercial marketing of the device
for certain indications. If the FDA's evaluation of the PMA application or
manufacturing facilities is not favorable, the FDA will deny approval of the PMA
application or issue a "not approvable letter." The FDA may also determine that
additional clinical trials are necessary, in which case the PMA could be delayed
for several years while additional clinical trials are conducted and submitted
in an amendment to the PMA application. The PMA process can be expensive,
uncertain and lengthy, and a number of devices for which FDA approval has been
sought by other companies have never been approved for marketing.
Use of a medical device for applications not covered in a 510(k)
notification or a PMA, or modifications to a device that has been cleared to
market through a 510(k) notification or an approved PMA, its labeling, or its
manufacturing process, may require submission of a new 510(k) notification, a
new PMA application or a PMA application supplement. New 510(k) notifications,
PMA applications or PMA supplements often require the submission of the same
type of information required for the original submission except that it is
generally limited to that information needed to support the proposed change from
the product covered by the original submission.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including record-keeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their establishments and list their devices with the FDA and certain
state agencies, and are subject to periodic inspections by the FDA and certain
state agencies. The FDC Act requires devices to be manufactured in accordance
with QSRs that impose certain procedural and documentation requirements upon the
Company with respect to manufacturing and quality assurance activities. Toward
the end of the clearance or approval process, the FDA generally will conduct an
inspection of the manufacturer's facilities to ensure that the facilities are in
compliance with the applicable QSR requirements.
Labeling and promotion activities are subject to scrutiny by the FDA and in
certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for unapproved uses. The Company
and its products are also subject to a variety of state laws and regulations in
those states or localities where its products are or will be marketed. Any
applicable state or local regulations may hinder the Company's ability to market
its products in those states or localities. The Company is also subject to
numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control, and disposal of hazardous or potentially hazardous substances. There
can be no assurance that the Company will not be required to incur significant
costs to comply with such laws and regulations now or in the future.
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Changes in existing requirements or adoption of new requirements or policies
could adversely affect the ability of the Company to comply with regulatory
requirements. Failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition, and
results of operations. There can be no assurance that the Company will not be
required to incur significant costs to comply with laws and regulations in the
future. See "Risk Factors--No Assurance of Regulatory Clearance or Approval;
Significant Domestic and International Regulation."
INTERNATIONAL
In order for the Company to market its systems and products in Europe, Japan
and certain other foreign jurisdictions, the Company must obtain required
regulatory approvals and clearances and otherwise comply with extensive
regulations regarding safety and manufacturing processes and quality. These
regulations, including the requirements for approvals or clearance to market and
the time required for regulatory review, vary from country to country. There can
be no assurance that the Company will obtain regulatory approvals in such
countries or that it will not be required to incur significant costs in
obtaining or maintaining its foreign regulatory approvals. Delays in receipt of
approvals to market the Company's products, failure to receive these approvals
or future loss of previously received approvals could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
The time required to obtain approval for sale in foreign countries may be
longer or shorter than that required for FDA approval, and the requirements may
differ. In addition, there may be foreign regulatory barriers other than
premarket approval, and the FDA generally must approve exports of devices that
require a PMA but are not yet approved domestically. To obtain FDA export
approval, the Company must provide the FDA with documentation from the medical
device regulatory authority of the importing country stating that the import of
the device is not a violation of that country's medical device laws.
The European Community requires that a medical product receive the right to
affix the CE Mark, an international symbol of adherence to quality assurance
standards and compliance with applicable European medical device directives, as
a condition to selling such product in member countries of the European Union.
In January 1997, the Company received the CE Mark for its EndoCPB system,
Port-Access CABG system and Port-Access MVR system. The Company received the CE
Mark in March 1999 and March 2000 for its EndoDirect system and Precision-OP
system, respectively. Although the European directives are intended to insure
free movement within the European Union of medical devices that bear the CE
Mark, some European countries have imposed additional requirements for approvals
or premarket notifications. In addition, regulatory authorities in European
countries can demand evidence on which conformity assessments for CE-Marked
devices are based and in certain circumstances can prohibit the marketing of
products that bear the CE Mark. Many European countries maintain systems to
control the purchase and reimbursement of medical equipment under national
health care programs, and the CE Mark does not affect these systems.
The Company's products have not received regulatory approval in Japan, nor
have they been approved for government reimbursement in Japan.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
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 March 20, 2000, the Company owns 111 issued or allowed
United States patents and 16 issued foreign patents. In addition, as of
March 20, 2000 the Company has 72 pending United States patent applications, and
has filed 39 patent applications that are currently pending in Europe, Japan,
Australia and Canada. There can be no assurance that the Company's issued
patents, or any patents that may be issued in the future, will
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effectively protect the Company's technology or provide a competitive advantage.
There can be no assurance that any of the Company's patents or patent
applications will not be challenged, invalidated or circumvented in the future.
In addition, there can be no assurance that competitors, many of which have
substantially more resources than the Company and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents that will prevent, limit or interfere with the Company's ability to
make, use or sell its products either in the United States or internationally.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and advisors
to execute confidentiality and assignment of inventions agreements in connection
with their employment, consulting or advisory relationships with the Company.
There can be no assurance, however, that these agreements will not be breached
or that the Company will have adequate remedies for any breach. Furthermore, no
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's proprietary technology, or that the Company can
meaningfully protect its rights in unpatented proprietary technology.
Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed or in
the future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights relating to
products or processes used or proposed to be used by the Company. The Company is
aware of patents issued to third parties that contain subject matter related to
the Company's technology. Based, in part, on advice of its patent counsel, the
Company believes that the technologies employed by the Company in its devices
and systems do not infringe the claims of any such patents. There can be no
assurance, however, that third parties will not seek to assert that the
Company's devices and systems infringe their patents or seek to expand their
patent claims to cover aspects of the Company's technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular, has
been characterized by substantial competition and litigation regarding patent
and other intellectual property rights. Any such claims, whether with or without
merit, could be time-consuming and expensive to respond to and could divert the
Company's technical and management personnel. The Company may be involved in
litigation to defend against claims of infringement by other patent holders, to
enforce patents issued to the Company, or to protect trade secrets of the
Company. If any relevant claims of third-party patents are upheld as valid and
enforceable in any litigation or administrative proceeding, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses from the patent owners of each such patent, or to
redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be
available on terms acceptable to the Company or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
the Company from manufacturing and selling its products, which would have a
material adverse effect on the Company's business, financial condition, and
results of operations. The Company intends to vigorously protect and defend its
intellectual property. Costly and time-consuming litigation brought by the
Company may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of the proprietary rights of others. See
"Risk Factors--Uncertainty Regarding Patents and Protection of Proprietary
Technology; Risks of Future Litigation."
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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 typically are purchased by clinics, hospitals and other
users, which bill various third-party payors, such as governmental programs and
private insurance plans, for the healthcare services provided to their patients.
Third-party payors carefully review and increasingly challenge the prices
charged for medical products and services. Reimbursement rates from private
companies vary depending on the procedure performed, the third-party payor, the
insurance plan, and other factors. Medicare reimburses hospitals a prospectively
determined fixed amount for the costs associated with an in-patient
hospitalization based on the patient's discharge diagnosis, and reimburses
physicians a prospectively determined fixed amount based on the procedure
performed, regardless of the actual costs incurred by the hospital or physician
in furnishing the care and unrelated to the specific devices used in that
procedure. Medicare and other third-party payors are increasingly scrutinizing
whether to cover new products and the level of reimbursement for covered
products.
In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the United States, health maintenance organizations are emerging in certain
European countries. The Company may need to seek international reimbursement
approvals, although there can be no assurance that any such approvals will be
obtained in a timely manner or at all. Failure to receive international
reimbursement approvals could have an adverse effect on market acceptance of the
Company's products in the international markets in which such approvals are
sought.
The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United States
and in foreign markets. The Company believes that the overall escalating cost of
medical products and services has led to and will continue to lead to increased
pressures on the health care industry, both foreign and domestic, to reduce the
cost of products and services, including products offered by the Company. The
Company is aware that certain third-party payors have challenged or refused to
provide reimbursement for Port-Access procedures. There can be no assurance as
to either United States or foreign markets that third-party reimbursement and
coverage will be available or adequate, that current reimbursement amounts will
not be decreased in the future or that future legislation, regulation or
reimbursement policies of third-party payors will not otherwise adversely affect
the demand for the Company's products or its ability to sell its products on a
profitable basis, particularly if the Company's systems are more expensive than
competing cardiac surgery procedures. If third-party payor coverage or
reimbursement is unavailable or inadequate, the Company's business, financial
condition, and results of operations could be materially adversely affected. See
"Risk Factors--Limitations on Third-Party Reimbursement."
EMPLOYEES
As of December 31, 1999, the Company had approximately 140 employees. The
Company maintains compensation, benefit, equity participation and work
environment policies intended to assist in attracting and retaining qualified
personnel. The Company believes that the success of its business will depend, in
significant part, on its ability to attract and retain such personnel. None of
the Company's employees is represented by a collective bargaining agreement, nor
has the Company experienced any work stoppage. The Company considers its
relations with its employees to be good.
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RISK FACTORS
This Annual Report on Form 10-K 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. As a result of the restructuring, the
Company has reduced its United States workforce by approximately 55 employees
and has subleased excess facilities. Implementation of the restructuring
involves several risks, including the risk that there will be further attrition
of key personnel beyond that which occurred in the reduction in force. Although
the Company believes that the actions taken in connection with the restructuring
have helped 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 objective of further reducing its net losses.
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 FDA was considering
regulatory action. The article did not reflect the excellent clinical outcomes
surgeons have achieved with Port-Access minimally invasive cardiac surgery. With
regard to the FDA, the Company has a long-standing working relationship with the
agency, and in late 1998, as part of a routine inspection, the FDA conducted a
comprehensive review of the Company's facility and quality systems, including
complaint and adverse events. The inspection was satisfactorily concluded with
no formal observations.
THE WALL STREET JOURNAL article had an immediate and material adverse impact
on the Company's customers and, consequently, the Company's business. A
significant number of the Company's customers have reduced the number of
Port-Access procedures they are performing, stopped the Port-Access program at
their hospitals or indicated that they are not comfortable continuing to perform
Port-Access surgery until they have a better understanding of the issues raised
in the article. There can be no assurance that the Company will be able to
convince these customers to begin using its products again or to increase the
number of Port-Access procedures they are performing. The Company also
anticipates that the article will make it 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, EndoDirect and Precision-OP systems and other
products are at an early stage of clinical utilization, and there can be no
assurance as to their clinical safety and efficacy. Port-Access and OPCABG
surgery have many of the risks of conventional 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 clinical experience with its
recently introduced products, including the Precision-OP system. Accordingly,
there can be no assurance as to their clinical safety and
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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 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. The
Company believes that its Port-Access procedure volume by trained cardiac
surgery teams has been negatively impacted by ease of use issues, the
significant physician learning curve, and longer procedure times associated with
Port-Access surgery. Although the Company is focusing its training and sales
efforts on addressing these issues, there can be no assurance that it will be
successful in increasing Port-Access procedure volume, or that any of its
products will obtain any significant degree of market acceptance. Failure of the
Company to increase Port-Access procedure volume by trained teams or failure of
the Company's products to achieve significant market acceptance would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
FLUCTUATIONS IN OPERATING RESULTS
Results of operations may vary significantly from quarter to quarter and
year to year depending upon numerous factors, including the following: demand
for the Company's products; the number of cardiac surgery teams trained in the
use of the Company's systems and the number of procedures performed by those
teams; the number of hospitals that begin using the Company's products; the
ability of the Company to manufacture, test and deliver its products in
commercial volumes; health care reform and reimbursement policies; delays
associated with the FDA and other regulatory approval processes; changes in
pricing policies by the Company or its competitors; the number, timing, and
significance of product enhancements and new product announcements by the
Company and its competitors; the ability of the Company to develop, introduce
and market new products and enhanced versions of the Company's existing products
on a timely basis; customer order deferrals in anticipation of enhancements or
new products offered by the Company or its competitors; product quality
problems; personnel changes; restructuring activities; 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.
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Operating results have been and will continue to be difficult to forecast.
Future revenue is also difficult to forecast because the market for minimally
invasive and less invasive cardiac surgery systems is rapidly evolving, because
of the inherent risks associated with new medical device technology, and due to
the uncertainty as to whether the Company's efforts to increase Port-Access
procedure volume by trained cardiac surgery teams will be successful.
Accordingly, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. Failure by the Company, for any reason, to
increase revenue from sales of its products would have a material adverse effect
on the Company's business, operating results, and financial condition. Due to
the foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
CUSTOMER CONCENTRATION
Approximately 55% of the Company's net sales in 1999 were derived from sales
to twenty customers. The Company believes that this customer concentration will
continue during 2000. 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 training facility in Utah and has implemented a field-based
training program. In addition, the Company has limited training experience with
its recently introduced products designed for less invasive open-chest surgery,
aortic valve replacement and stopped heart 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 early commercial sales. The manufacture
of the Company's products is complex, involving a number of separate processes
and components. The Company has limited experience in manufacturing its
Port-Access products in higher volume commercial quantities, and the Company has
very little experience in manufacturing its recently introduced products
designed for less invasive open-chest surgery, aortic valve replacement and
stopped heart and beating heart minimally invasive cardiac surgery. Certain
products and product components are manufactured by third parties. There can be
no assurance that the Company and its suppliers will be able to successfully
scale-up production to meet commercial
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demand for the Company's products in a timely manner. In addition, the Company
believes that cost reductions in its manufacturing operations will be required
for it to commercialize its systems on a profitable basis. Certain manufacturing
processes are labor-intensive, and achieving significant cost reductions will
depend, in part, upon reducing the time required to complete these processes.
Medical device manufacturers often encounter difficulties in scaling up
manufacturing of new products, including problems involving product yields,
quality control and assurance, component and service availability, adequacy of
control policies and procedures, lack of qualified personnel, compliance with
FDA regulations, and the need for further FDA approval of new manufacturing
processes and facilities. To date, the Company has experienced variable yields
in manufacturing certain of its products, 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 products and
product 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, which
include testing, control, and documentation requirements. There can be no
assurance that the Company will continue to meet ISO 9001 requirements or FDA
QSR requirements.
The Company uses or relies on a number of components and services used in
its devices that are provided by sole source suppliers. The qualification of
additional or replacement vendors for certain components or services is a
lengthy process. Any significant supply interruption would have a material
adverse effect on the Company's ability to manufacture its products and,
therefore, a material adverse effect on its business, financial condition, and
results of operations.
The Company manufactures its products based on forecasted product orders,
and purchases subassemblies and components prior to receipt of purchase orders
from customers. Lead times for materials and components ordered by the Company
vary significantly, and depend on factors such as the business practices of the
specific supplier, contract terms, and general demand for a component at a given
time. Certain components used in the Company's products have long lead times or
must be ordered on non-cancelable terms. As a result, there is a risk of excess
or inadequate inventory if orders do not match forecasts, as well as potential
costs from non-cancelable orders.
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 this field.
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
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heart disease such as drugs or future innovations in cardiac surgery techniques
could make such other therapies more effective or lower in cost than procedures
using 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 speed with which the Company can develop products, complete clinical
testing and regulatory approval processes, train physicians in the use of its
products, gain reimbursement acceptance, and supply commercial quantities of the
product to the market are expected to be important competitive factors. The
Company has experienced delays in completing the development and introduction of
new products, product variations and product features, and there can be no
assurance that such delays will not continue or recur in the future. Such delays
could result in a loss of market acceptance and market share. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors. Failure to do so would have a material adverse effect
upon the Company's business, financial condition, and results of operations.
SUBSTANTIAL FUTURE LOSSES AND FUTURE CAPITAL REQUIREMENTS
The Company has never had a profit from operations. For the period from
inception to December 31, 1999, the Company has incurred cumulative net losses
of approximately $164.0 million. For at least the next twelve months, the
Company expects to continue to incur losses. There can be no assurance that the
Company will achieve or sustain profitability in the future. Failure to achieve
significant commercial revenues or profitability would have a material adverse
effect on the Company's business, financial condition, and results of
operations.
The Company believes that it may require additional debt and/or equity
financing. The Company's future liquidity and capital requirements will depend
upon numerous factors, including but not limited to the following: the extent to
which the Company's products gain market acceptance; the timing and costs of
future product introductions; the extent of the Company's ongoing research and
development programs; the costs of training physicians to become proficient in
the use of the Company's products; 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 March 20, 2000, the Company owns 111 issued or allowed
United States patents and 16 issued foreign patents. In addition, as of
March 20, 2000, the Company has 72 pending United States patent applications and
has filed 39 patent applications that are currently pending in Europe, Japan,
Australia and Canada. There can be no
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assurance that the Company's issued patents, or any patents that may be issued
in the future, will effectively protect the Company's technology or provide a
competitive advantage. There can be no assurance that any of the Company's
patents or patent applications will not be challenged, invalidated or
circumvented in the future. In addition, there can be no assurance that
competitors, many of which have substantially more resources than the Company
and have made substantial investments in competing technologies, will not seek
to apply for and obtain patents that will prevent, limit or interfere with the
Company's ability to make, use or sell its products either in the United States
or internationally.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and advisors
to execute confidentiality and assignment of inventions agreements in connection
with their employment, consulting or advisory relationships with the Company.
There can be no assurance, however, that these agreements will not be breached
or that the Company will have adequate remedies for any breach. Furthermore, no
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's proprietary technology, or that the Company can
meaningfully protect its rights in unpatented proprietary technology.
Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed or in
the future will not file applications for, or have not received or in the future
will not receive, patents or obtain additional proprietary rights relating to
products or processes used or proposed to be used by the Company. The Company is
aware of patents issued to third parties that contain subject matter related to
the Company's technology. Based, in part, on advice of its patent counsel, the
Company believes that the technologies employed by the Company in its devices
and systems do not infringe the claims of any such patents. There can be no
assurance, however, that third parties will not seek to assert that the
Company's devices and systems infringe their patents or seek to expand their
patent claims to cover aspects of the Company's technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular, has
been characterized by substantial competition and litigation regarding patent
and other intellectual property rights. Any such claims, whether with or without
merit, could be time-consuming and expensive to respond to and could divert the
Company's technical and management personnel. The Company may be involved in
litigation to defend against claims of infringement by other patent holders, to
enforce patents issued to the Company, or to protect trade secrets of the
Company. If any relevant claims of third-party patents are upheld as valid and
enforceable in any litigation or administrative proceeding, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses from the patent owners of each such patent, or to
redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be
available on terms acceptable to the Company or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
the Company from manufacturing and selling its products, which would have a
material adverse effect on the Company's business, financial condition, and
results of operations. The Company intends to vigorously protect and defend its
intellectual property. Costly and time-consuming litigation brought by the
Company may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company, or to determine the
enforceability, scope and validity of the proprietary rights of others. There
can be no assurance that such litigation, if commenced by the Company, would be
successful.
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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 significantly depend upon its ability
to attract and retain qualified management, manufacturing, technical, marketing,
and sales and support personnel for its operations. Competition for such
personnel is intense, particularly in the geographic region of California where
the Company's principal office is located, and there can be no assurance that
the Company will be successful in attracting or retaining such personnel. The
loss of any key employee, the failure of any key employee to perform in his or
her current position, or the Company's inability to attract and retain skilled
employees, as needed, could materially adversely affect the Company's business,
financial condition, and results of operations.
NO ASSURANCE OF REGULATORY CLEARANCE OR APPROVAL; SIGNIFICANT DOMESTIC AND
INTERNATIONAL REGULATION
The Company's devices are subject to regulatory clearances or approvals by
the FDA. The Company believes that most of its devices and systems under
development 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 or exemption from the
FDA to market the EndoCPB, EndoDirect and Precision-OP systems 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 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
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differ. Although the Company's EndoCPB, EndoDirect, Port-Access CABG,
Port-Access MVR and Precision-OP systems bear the CE Mark under the European
Community medical device directive, some European countries may impose
additional requirements for commercialization of those products. The Company's
products under development will require additional approvals or assessments, and
there can be no assurance that these approvals or assessments will be received
on a timely basis, if at all. Most other countries either do not currently
regulate medical systems or have minimal regulatory requirements, although these
countries may adopt more extensive regulations in the future that could impact
the Company's ability to market its systems. In addition, significant costs and
requests for additional information may be encountered by the Company in its
efforts to obtain regulatory approvals. Any such events could substantially
delay or preclude the Company from marketing its systems internationally.
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
Company's products in the international markets in which such approvals are
sought.
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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 March 20, 2000 the price of the Company's
Common Stock was $5.75. 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 result; 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.
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 products. 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 42% 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
25
<PAGE>
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 2. PROPERTIES.
The Company's administrative, sales, manufacturing, and research and
development facility occupies approximately 133,000 square feet in Redwood City,
California pursuant to a lease that expires in 2010. The Company has subleased
approximately 71,000 square feet of this space to other entities. The Company
terminated the lease of its former training facility in Salt Lake City, Utah
effective April 30, 1999.
ITEM 3. LEGAL PROCEEDINGS.
Claims related to product liability are a regular and ongoing aspect of the
medical device industry. At any one time, the Company is subject to claims
asserted against it and is involved in product liability litigation. The Company
maintains limited insurance against certain product liability claims. This
insurance is subject to certain limits, exclusions and deductibles. See "Risk
Factors--Risk of Product Liability."
In addition, in the ordinary course of its business the Company experiences
various other types of claims which sometimes result in litigation or other
legal proceedings. The Company does not anticipate that any of these proceedings
will have a material adverse affect on its business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
26
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has traded publicly on The Nasdaq Stock Market
under the symbol "HPRT" since April 26, 1996. The Company's initial public
offering price was $21.00 per share. The following table sets forth, for the
periods indicated, the high and low closing sale prices for the Company's Common
Stock as reported by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
First Quarter............................................. $23.75 $11.00
Second Quarter............................................ 13.50 5.25
Third Quarter............................................. 6.50 3.00
Fourth Quarter............................................ 7.38 2.94
YEAR ENDED DECEMBER 31, 1999:
First Quarter............................................. $ 8.44 $ 4.44
Second Quarter............................................ 6.00 2.38
Third Quarter............................................. 4.56 1.88
Fourth Quarter............................................ 6.06 3.00
</TABLE>
On March 20, 2000, the last sale price of the Company's Common Stock as
reported by The Nasdaq Stock Market was $5.75 per share. There were 316 holders
of record of the Company's Common Stock as of March 20, 2000. See "Risk
Factors--Price Volatility of Common Stock."
The Company has never declared or paid cash dividends on its Common Stock
and currently does not anticipate paying cash dividends in the foreseeable
future. In addition, the Company's credit facility restricts the ability to pay
cash dividends.
27
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein. The statement of operations data for each of the
three years in the period ended December 31, 1999, and the balance sheet data at
December 31, 1999 and 1998 are derived from the audited financial statements
included elsewhere herein. The statement of operations data for each of the
years ended December 31, 1996 and 1995, and the balance sheet data at
December 31, 1997, 1996 and 1995 are derived from audited financial statements
not included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................... $ 18,090 $ 18,611 $ 23,421 $ 624 $ --
Cost of sales............................... 10,634 16,846 15,395 561 --
-------- -------- -------- -------- -------
Gross profit................................ 7,456 1,765 8,026 63 --
Operating expenses:
Research and development.................. 7,039 10,985 18,005 21,059 8,477
Selling, general and administrative....... 18,520 33,151 43,005 11,223 1,229
Patent acquisition........................ -- -- -- 5,216 --
Restructuring charges..................... 2,363 12,158 -- -- --
-------- -------- -------- -------- -------
Loss from operations........................ (20,466) (54,529) (52,984) (37,435) (9,706)
Interest and other, net..................... (933) (1,692) 1,653 3,381 353
-------- -------- -------- -------- -------
Loss before extraordinary item.............. (21,399) (56,221) (51,331) (34,054) (9,353)
Extraordinary item--gain on repurchase of
debt...................................... -- 15,563 -- -- --
-------- -------- -------- -------- -------
Net loss.................................... $(21,399) $(40,658) $(51,331) $(34,054) $(9,353)
======== ======== ======== ======== =======
Basic and diluted net loss per share........ $ (0.88) $ (1.73) $ (2.29) $ (2.11) $ (2.52)
======== ======== ======== ======== =======
Extraordinary income per share.............. $ 0.66
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Current assets.......................... $ 48,683 $ 74,761 $ 124,848 $ 94,226 $ 12,692
Working capital......................... 24,906 46,170 113,923 87,561 11,234
Total assets............................ 60,813 87,537 142,810 101,852 14,266
Long-term obligations, less current
portion............................... 55,433 56,098 89,868 4,717 4,034
Accumulated deficit..................... (163,987) (142,588) (101,930) (50,599) (16,545)
Total stockholders' equity (net capital
deficiency)........................... (18,397) 2,848 42,017 90,470 8,775
</TABLE>
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Since its inception in May 1991, Heartport, Inc. (the "Company") has been
engaged in the research and development of Port-Access minimally invasive
cardiac surgery systems and related technology. In December 1996, the Company
commercially introduced its EndoCPB system and other Port-Access systems for
minimally invasive cardiac surgery performed on a stopped heart. During the
third quarter of 1998 the Company began selling its EndoDirect system, a direct
aortic cannulation system for stopped heart minimally invasive cardiac surgery.
In 1999, the Company commercially introduced several new cardiac surgery
products, including its Precision-OP system for cardiac surgery performed on a
beating heart. The Company is now engaged in extensive marketing and selling
activities as well as continued research and development. Sales of the EndoCPB
and EndoDirect systems comprise the majority of its net sales.
The Company has never had a profit from operations. For the period from
inception to December 31, 1999, the Company has incurred cumulative net losses
of approximately $164 million. For at least the next 12 months, the Company
expects to continue to incur losses.
In early 1998, the Company determined that procedure volume by trained
cardiac surgery teams had been negatively impacted by ease of use issues, the
significant physician learning curve, and longer procedure times associated with
Port-Access surgery. In May 1998, the Company began implementing a plan to
significantly reduce expenses and restructure its business operations to improve
operating efficiency. As a result of this restructuring plan, the Company scaled
back manufacturing capacity, reduced research and development expenses, and
reduced selling, general and administrative expenses in several areas, including
marketing and physician training. The Company closed its training facility in
Utah and augmented its sales organization by moving more clinical training
specialists into the field to work directly with surgical teams at their
hospitals. The restructuring plan resulted in a charge of $12.2 million for the
year ended December 31, 1998, and included reducing headcount by approximately
140 employees, vacating leased facilities, and disposing of assets.
In June 1999, the Company adopted a second restructuring plan to further
reduce expenses and improve operating efficiency. Under the 1999 restructuring
plan, the Company reduced its United States workforce by approximately 55
employees and subleased excess facilities. During the year, the Company also
completed the majority of the restructuring activities that it began in 1998.
The two restructuring plans resulted in a combined charge of $2.4 million for
the year ended December 31, 1999.
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," "--Risks Associated with New Surgical Procedure; Extensive Training
Requirements," "--Customer Concentration," "--Fluctuations in Operating
Results," and "--Limited Manufacturing Experience; Dependence on Key Suppliers."
RESULTS OF OPERATIONS
NET SALES. Net sales were $18.1 million, $18.6 million and $23.4 million in
1999, 1998 and 1997, respectively. Net sales consist primarily of sales of the
Company's EndoCPB and EndoDirect systems. Revenue from product sales is
recognized upon transfer of title, which is generally upon product shipment.
International net sales represented approximately 19% and 13% of net sales in
1999 and 1998, respectively. In 1999, approximately 10% of the Company's total
net sales was to New York University Medical Center. The decrease in 1999 net
sales was partly attributable to an unfavorable article about the Company in THE
29
<PAGE>
WALL STREET JOURNAL in May 1999. The decrease in net sales in 1998 compared with
1997 was due to the Company's efforts to reduce customer inventories of its
Port-Access minimally invasive cardiac surgery systems in 1998.
COST OF SALES. Cost of sales was $10.6 million, $16.8 million and
$15.4 million in 1999, 1998 and 1997, respectively. Cost of sales consists
primarily of material, labor and overhead costs associated with manufacturing
the Company's EndoCPB and EndoDirect systems and related disposable and reusable
devices.
Gross margin was 41%, 9% and 34% in 1999, 1998 and 1997, respectively. The
1999 gross margin increase resulted from a decrease in manufacturing overhead
and an increase in production efficiency following the June 1999 restructuring.
The gross margin in 1998 was adversely impacted by excess manufacturing capacity
from decreased net sales, the effect of inventory and asset write-downs as a
result of product design changes and revised production forecasts, and increased
reserves related to product expiration risks. 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
$7.0 million, $11.0 million and $18.0 million in 1999, 1998 and 1997,
respectively. The decrease in expenses between 1999 and 1998 was primarily due
to a reduction in headcount, and the decrease between 1998 and 1997 was
primarily due to a reduction in headcount and the cancellation of several
projects. 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.
Research and development expenses consist primarily of personnel and other
costs in support of product development, clinical evaluations, and regulatory
submissions, as well as costs incurred in producing products for research and
development activities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $18.5 million, $33.2 million and $43.0 million in
1999, 1998 and 1997, respectively. The decrease in 1999 from 1998 resulting
primarily from the implementation of the restructuring plans that were initiated
in June 1999 and May 1998. The decrease in 1998 from 1997 was primarily due to
the restructuring plan that was implemented starting in May 1998.
Selling, general and administrative expenses consist primarily of costs for
sales, marketing and administrative personnel, as well as physician training
costs and professional fees.
RESTRUCTURING CHARGES. The restructuring plan adopted in June 1999 resulted
in a charge of $2.5 million for the year ended December 31, 1999. The
restructuring charge included approximately $1.9 million in severance and
employee-related costs and approximately $0.6 million related to excess
facilities and the disposal of assets. Approximately 55 employees in the United
States were terminated as a result of the plan. The Company also completed the
majority of the restructuring activities begun in 1998, which resulted in a
$0.1 million decrease in the restructuring charge in 1999.
The restructuring plan implemented beginning in May 1998 resulted in a
charge of $12.2 million for the year ended December 31, 1998. The restructuring
charge included approximately $6.6 million for the write-off of capital assets
and leasehold improvements, and approximately $3.0 million in facility expenses
and other costs related primarily to the closure of the Company's Utah facility.
The charge also included approximately $2.6 million in severance costs
associated with approximately 140 terminated employees.
INTEREST INCOME AND OTHER, NET. Interest income and other, net was
$4.1 million, $4.9 million and $6.4 million in 1999, 1998 and 1997,
respectively. The decrease in each year was primarily attributable to the
Company's lower average investment balances.
30
<PAGE>
INTEREST EXPENSE. Interest expense was $5.1 million in 1999, $6.6 million
in 1998 and $4.7 million in 1997. The decrease in 1999 was primarily due to the
purchase of $33.4 million in principal amount of the Company's outstanding
convertible subordinated notes in the fourth quarter of 1998. The increase in
1998 was due to the issuance of the convertible subordinated notes in
April 1997.
INCOME TAXES. Due to operating losses and the inability to recognize the
benefits therefrom, there are no provisions for income taxes in 1999, 1998 or
1997.
Realization of deferred tax assets is dependent upon future earnings, the
amount and timing of which are uncertain. Accordingly, a valuation allowance in
an amount equal to the net deferred tax assets as of December 31, 1999 and 1998
has been established to reflect these uncertainties.
At December 31, 1999, the Company had net operating loss carryforwards for
federal and California tax purposes of approximately $146.0 million and
$58.0 million, respectively, which will expire on various dates from 2000
through 2019 if not utilized. As of December 31, 1999, the Company also had
research and development tax credit carryforwards of approximately $1.8 million
and $1.7 million respectively, for federal and California tax purposes, which
will expire in the years 2007 through 2014 if not used. Utilization of net
operating loss and credit carryforwards may be subject to an annual limitation
due to the ownership change limitations provided by the Internal Revenue Code of
1986 and similar state provisions.
EXTRAORDINARY ITEM. In the fourth quarter of 1998, the Company purchased
$33.4 million in principal amount of its outstanding subordinated notes at a
discount from face value. The transaction resulted in a net gain of
$15.6 million, consisting of a gain of $16.6 million due to the discount, offset
by the write-off of $1.0 million in issue costs associated with the original
issuance of the notes in April 1997. The Company financed this purchase through
$16.9 million in short-term borrowings.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had approximately $41.9 million in cash
and investments and approximately $24.9 million in working capital.
Approximately $20.6 million of the Company's cash and investments secures the
Company's short-term borrowings and a letter of credit related to its facility,
and is therefore not available for operations. The Company also has a
$10.0 million credit facility with a commercial bank. No amount was outstanding
under this facility at December 31, 1999. As of December 31, 1999, the Company
had a net capital deficiency of $18.4 million.
Net cash used in operating activities was approximately $25.7 million,
$34.6 million and $51.8 million in 1999, 1998 and 1997, respectively and
resulted primarily from net losses in each period. For the year ended
December 31, 1999, net cash used in operating activities was also attributable
to an increase in accounts receivable resulting primarily from higher net sales
in December 1999 compared to December 1998 and a reduction in liabilities due
primarily to the Company's reduced expenses. In 1998, net losses, adjusted for
depreciation and amortization, were partly offset by a non-cash extraordinary
gain on the purchase of a portion of the Company's convertible subordinated
notes of $15.6 million, non-cash restructuring expenses of approximately
$7.5 million, net accounts receivable collections of $4.0 million, and a
reduction of inventories of $3.2 million.
Net cash provided by investing activities was approximately $20.4 million
and $9.3 million for the years ended December 31, 1999 and 1998, respectively,
compared with net cash used in investing activities of approximately
$30.5 million for the year ended December 31, 1997. The net cash provided in
1999 and 1998 was primarily the result of net maturities and sales of short-term
investments of $22.5 million and $17.6 million, respectively, offset partially
by capital expenditures in each year. In 1997, net cash used in investing
activities reflects the net purchases of short-term investments of
$20.4 million and purchases of property and equipment of $10.2 million.
31
<PAGE>
Capital expenditures for equipment and leasehold improvements to support the
Company's operations were $2.1 million, $8.3 million and $10.2 million in 1999,
1998 and 1997, respectively. The expenditures in 1999 were primarily related to
leasehold improvements to the Company's facility to accommodate subleasing of
excess space. In 1998, the expenditures were primarily related to leasehold
improvements associated with the Company's corporate headquarters, which was
occupied in the fourth quarter of 1998. The expenditures in 1997 were primarily
related to training facility improvements, acquisition of equipment for research
and development and the expansion of the Company's manufacturing capacity and
facilities.
Net cash provided by financing activities was approximately $114,000 in
1999, compared with net cash used of $18,000 in 1998 and net cash provided of
$84.7 million in 1997. In 1999, the net cash provided resulted primarily from
the issuance of $429,000 of common stock, offset by the repayment of $435,000 of
long term borrowings. The net cash used in financing activities in 1998 included
payments of $16.9 million to repurchase the Company's convertible subordinated
notes, offset by $16.9 million in proceeds from borrowings under a reverse
repurchase agreement. Net cash provided by financing activities in 1997 was
primarily attributable to net proceeds of $82.8 million from the sale of
convertible subordinated notes.
The Company believes that it has the financial resources through its current
level of liquid assets and credit facilities to meet business requirements
through the year 2000.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company spent
approximately $30,000 during 1999 in connection with remediating its systems.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties that impact the Company's products. The Company will
continue to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
32
<PAGE>
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to financial market risks, including changes in
interest rates. The fair value of the Company's convertible subordinated notes
and available-for-sale investments can be adversely affected by changes in
market interest rates. The convertible subordinated notes are due in 2004 and
bear interest at a fixed rate of 7.25%. The market interest rate exposure of the
Company's convertible subordinated notes is partially offset by the market
interest rate exposure of the Company's available-for-sale investments. The
primary objective of the Company's investment activities is to preserve
principal while at the same time maximizing yields without incurring significant
risk. To achieve this objective, the Company primarily invests in U.S.
government or high-grade corporate debt securities. The weighted-average
maturity of the Company's available-for-sale investments was approximately
9 months at December 31, 1999. The Company has estimated the impact of potential
interest rate risk exposures using a sensitivity analysis. For 1999 as well as
1998, a hypothetical 1% decrease in interest rates would result in an
approximate $0.7 million net adverse change in the net present value of all
interest rate sensitive financial instruments outstanding at December 31.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEARTPORT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Cash Flows....................... F-5
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency)............................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Heartport, Inc.
We have audited the accompanying consolidated balance sheets of
Heartport, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity (net capital deficiency), and
cash flows for each of the three years in the period ended December 31, 1999.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Heartport, Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with auditing standards generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Palo Alto, California
January 21, 2000
F-2
<PAGE>
HEARTPORT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,288 $ 10,479
Short-term investments.................................... 36,611 59,591
Accounts receivable, net of allowances of $507 in 1999
($709 in 1998).......................................... 3,881 1,933
Inventories............................................... 1,644 1,452
Other current assets...................................... 1,259 1,306
--------- ---------
Total current assets........................................ 48,683 74,761
--------- ---------
Property and equipment:
Equipment................................................. 5,409 5,272
Furniture and fixtures.................................... 1,788 1,694
Leasehold improvements.................................... 9,171 10,204
--------- ---------
16,368 17,170
Accumulated depreciation and amortization................. 6,105 6,551
--------- ---------
Property and equipment, net............................... 10,263 10,619
--------- ---------
Other assets................................................ 1,867 2,157
--------- ---------
Total assets................................................ $ 60,813 $ 87,537
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable.......................................... $ 1,757 $ 4,093
Accrued compensation and related benefits................. 2,960 4,099
Accrued interest.......................................... 639 639
Short-term borrowings..................................... 16,900 16,900
Current portion of long-term debt......................... 134 447
Other current liabilities................................. 1,387 2,413
--------- ---------
Total current liabilities................................... 23,777 28,591
--------- ---------
Noncurrent liabilities:
Long-term debt, less current portion...................... 52,891 53,013
Other long-term liabilities............................... 620 163
Deferred royalty income................................... 1,922 2,922
--------- ---------
Total noncurrent liabilities................................ 55,433 56,098
--------- ---------
Commitments and contingencies
Stockholders' equity (net capital deficiency):
Preferred stock, $0.001 par value; 20,000 shares
authorized, none issued and outstanding................. -- --
Common stock, $0.001 par value:
Authorized shares--100,000
Issued and outstanding shares--25,492 in 1999 (25,232 in
1998) 25 25
Additional paid-in capital................................ 146,460 145,929
Notes receivable from stockholders........................ (781) (901)
Accumulated deficit....................................... (163,987) (142,588)
Accumulated other comprehensive income (loss)............. (114) 383
--------- ---------
Total stockholders' equity (net capital deficiency)......... (18,397) 2,848
--------- ---------
Total liabilities and stockholders' equity.................. $ 60,813 $ 87,537
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
HEARTPORT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... $ 18,090 $ 18,611 $ 23,421
Cost of sales............................................... 10,634 16,846 15,395
-------- -------- --------
Gross profit................................................ 7,456 1,765 8,026
Operating expenses:
Research and development.................................. 7,039 10,985 18,005
Selling, general and administrative....................... 18,520 33,151 43,005
Restructuring charges..................................... 2,363 12,158 --
-------- -------- --------
Loss from operations........................................ (20,466) (54,529) (52,984)
Interest income and other, net.............................. 4,126 4,865 6,352
Interest expense............................................ (5,059) (6,557) (4,699)
-------- -------- --------
Loss before extraordinary item.............................. (21,399) (56,221) (51,331)
-------- -------- --------
Extraordinary item--gain on repurchase of debt.............. -- 15,563 --
-------- -------- --------
Net loss.................................................... $(21,399) $(40,658) $(51,331)
======== ======== ========
Basic and diluted loss per share before extraordinary
item...................................................... $ (0.88) $ (2.39) $ (2.29)
Extraordinary income per share.............................. -- 0.66 --
-------- -------- --------
Basic and diluted net loss per share........................ $ (0.88) $ (1.73) $ (2.29)
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
HEARTPORT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(21,399) $(40,658) $(51,331)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 2,507 4,433 2,896
Extraordinary gain from repurchase of debt................ -- (15,563) --
Common stock and warrants issued for services rendered and
certain technology...................................... -- -- 459
Compensation related to stock options..................... 102 368 303
Loss (gain) on sales and disposals of equipment........... (24) 443 262
Non-cash restructuring expenses........................... 225 7,540 --
Changes in operating assets and liabilities:
Accounts receivable..................................... (1,948) 3,992 (5,375)
Inventories............................................. (192) 3,216 (2,771)
Other assets............................................ 56 336 --
Accounts payable, accrued expenses, and other
liabilities........................................... (5,043) 1,318 3,758
-------- -------- --------
Net cash used in operating activities....................... (25,716) (34,575) (51,799)
-------- -------- --------
INVESTING ACTIVITIES
Purchases of short-term investments......................... (23,116) (85,758) (90,166)
Maturities of short-term investments........................ 14,515 48,062 60,654
Sales of short-term investments............................. 31,084 55,268 9,139
Purchases of property and equipment......................... (2,072) (8,305) (10,165)
-------- -------- --------
Net cash provided by (used in) investing activities......... 20,411 9,267 (30,538)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from issuances of common stock..................... 429 737 2,045
Proceeds from short-term borrowings......................... -- 16,900 --
Repurchase of long-term borrowings.......................... -- (16,867) --
Proceeds from payments of stockholders' notes receivable.... 120 1 71
Proceeds from long-term borrowings.......................... -- -- 83,240
Repayment of long-term borrowings........................... (435) (789) (659)
-------- -------- --------
Net cash provided by (used in) financing activities......... 114 (18) 84,697
-------- -------- --------
Net (decrease) increase in cash and cash equivalents........ (5,191) (25,326) 2,360
Cash and cash equivalents at beginning of year.............. 10,479 35,805 33,445
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 5,288 $ 10,479 $ 35,805
======== ======== ========
Supplemental disclosures of cash information
Cash paid for interest.................................... $ 4,711 $ 6,418 $ 3,573
</TABLE>
See accompanying notes.
F-5
<PAGE>
HEARTPORT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
COMMON STOCK ADDITIONAL OTHER EQUITY
------------------- PAID-IN NOTES ACCUMULATED COMPREHENSIVE (NET CAPITAL
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT INCOME (LOSS) DEFICIENCY)
-------- -------- ---------- ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 24,415 $ 24 $142,018 $ (973) $ (50,599) $ -- $ 90,470
Net loss and
comprehensive loss... -- -- -- -- (51,331) -- (51,331)
Payments of
stockholders' notes
receivable........... -- -- -- 71 -- -- 71
Exercises of common
stock options........ 413 -- 940 -- -- -- 940
Issuances of common
stock................ 74 1 1,563 -- -- -- 1,564
Issuances of stock
options to non-
employees............ -- -- 303 -- -- -- 303
------- ----- -------- -------- --------- --------- --------
Balance at December 31,
1997................... 24,902 25 144,824 (902) (101,930) -- 42,017
--------
Net loss -- -- -- -- (40,658) -- (40,658)
Change in unrealized
gain (loss) on
investments.......... -- -- -- -- -- 383 383
--------
Comprehensive loss... -- -- -- -- -- -- (40,275)
Repurchases of common
stock................ (54) -- (20) -- -- -- (20)
Payments of
stockholders' notes
receivable........... -- -- -- 1 -- -- 1
Exercises of common
stock options........ 293 -- 178 -- -- -- 178
Issuances of common
stock................ 91 -- 579 -- -- -- 579
Compensation related to
stock options........ -- -- 368 -- -- -- 368
------- ----- -------- -------- --------- --------- --------
Balance at December 31,
1998................... 25,232 25 145,929 (901) (142,588) 383 2,848
Net loss............... -- -- -- -- (21,399) -- (21,399)
Change in unrealized
gain (loss) on
investments.......... -- -- -- -- -- (497) (497)
--------
Comprehensive loss... -- -- -- -- -- -- (21,896)
Repurchase of common
stock................ (10) -- (3) -- -- -- (3)
Payments of
stockholders' notes
receivable........... -- -- -- 120 -- -- 120
Exercises of common
stock options........ 205 -- 210 -- -- -- 210
Issuances of common
stock................ 65 -- 222 -- -- -- 222
Compensation related to
stock options........ -- -- 102 -- -- -- 102
------- ----- -------- -------- --------- --------- --------
Balance at December 31,
1999................... 25,492 $ 25 $146,460 $ (781) $(163,987) $ (114) $(18,397)
======= ===== ======== ======== ========= ========= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Heartport, Inc. (the Company) operates in one business segment which is
engaged principally in the research, development, manufacturing and sale of
minimally invasive and less invasive cardiac surgery systems and related
technology. The Company's customers are primarily cardiac surgery centers in the
United States and Europe. The consolidated accounts include the accounts of
Heartport, Inc. and its wholly owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with insignificant
interest rate risk and with an original maturity of three months or less when
purchased to be cash equivalents.
REVENUE RECOGNITION
The Company recognizes product revenue upon transfer of title, which is
generally upon shipment. The Company's product revenue is primarily derived from
sales of Port-Access disposable products necessary to perform Port-Access
cardiac surgery. Deferred royalty income includes advances received but
unrecognized under an agreement with St. Jude Medical, Inc. Fees from
distribution right agreements are recognized as relevant contractual milestones
are attained.
During 1999 and 1998, sales to international customers were approximately
19% and 13% of net sales, respectively. All sales are denominated in U.S.
dollars. No international country represented more than 10% of the Company's net
sales in 1999 or 1998.
ADVERTISING
The Company expenses advertising costs as incurred. For the years ended
December 31, 1999, 1998 and 1997 advertising expenses were $19,000, $394,000,
and $504,000 respectively.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to credit risk consist
principally of investments and accounts receivable. By policy, the Company
places its investments only with high credit quality financial institutions and
corporations and, other than its investments in U.S. Government Treasury
instruments, limits the amounts invested in any one institution or type of
investment vehicle. In addition, the Company performs credit evaluations of its
customers' financial condition and generally requires no collateral. At
December 31, 1999, one customer represented 22% of the total accounts receivable
balance. No other individual customer represented more than 3% of the total
accounts receivable balance.
F-7
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of investments and long-term debt is based on quoted market
prices or pricing models using current market rates. The fair value of short
term borrowings approximates cost due to the short term to maturity.
INVESTMENTS
All investments are designated as available-for-sale. Available-for-sale
securities are carried at fair value with unrealized gains and losses reported
in a separate component of stockholders' equity. The amortized cost of
available-for-sale debt securities is adjusted for the amortization of premiums
and the accretion of discounts to maturity. Such amortization is included in
interest income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in investment
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in interest income.
OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net loss and other comprehensive
income (loss). Accumulated other comprehensive income (loss) presented in the
accompanying consolidated balance sheets consists solely of the accumulated net
unrealized gain (loss) on available-for-sale investments. There is no related
tax effect for the unrealized gain (loss) on available-for-sale investments.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventories at December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Materials and purchased parts............................... $1,240 $1,112
Work in process............................................. 68 264
Finished goods.............................................. 336 76
------ ------
Total inventories........................................... $1,644 $1,452
====== ======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets, ranging from
one to twelve years or over the term of the lease, if shorter. Amortization of
assets recorded under capital leases is included in depreciation expense.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options using the intrinsic value
method in accordance with APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES." Under APB 25, when the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. In accordance with SFAS No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION," the Company has adopted the pro forma
disclosure of accounting for employee
F-8
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
options under the fair value method. For options or other stock based
compensation issued to non-employees, the Company recognizes compensation
expense under the fair value method.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," which
is required to be adopted in years beginning after June 15, 2000. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of the Company.
2. COMMITMENTS
The Company leases its facility under a noncancelable operating lease that
expires in the year 2010. Rental expense was $1,825,000 (net of sublease income
of $1,036,000), $2,068,000, and $1,937,000, for the years ended December 31,
1999, 1998 and 1997, respectively.
The future minimum lease payments as of December 31, 1999 were as follows
(in thousands):
<TABLE>
<CAPTION>
MINIMUM NET
LEASE SUBLEASE LEASE
PAYMENTS INCOME PAYMENTS
-------- -------- --------
<S> <C> <C> <C>
2000............................................. $ 2,738 $2,174 $ 564
2001............................................. 3,100 2,061 1,039
2002............................................. 3,193 746 2,447
2003............................................. 3,288 - 3,288
2004............................................. 3,387 - 3,387
Thereafter....................................... 22,559 - 22,559
------- ------ -------
$38,265 $4,981 $33,284
======= ====== =======
</TABLE>
3. INVESTMENTS
Investments, including cash equivalents and short-term investments, as of
December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------------------------- ----------------------------------
AMORTIZED GROSS ESTIMATED AMORTIZED GROSS ESTIMATED
COST UNREALIZED FAIR COST UNREALIZED FAIR
BASIS GAINS (LOSSES) VALUE BASIS GAINS VALUE
--------- -------------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Money market funds............. $ 1,018 $ -- $ 1,018 $ 1,013 $ -- $ 1,013
U.S. government securities..... 22,441 (123) 22,318 38,946 302 39,248
Corporate notes................ 10,021 (14) 10,007 15,579 74 15,653
Mortgage backed securities..... 4,263 23 4,286 8,146 7 8,153
------- ----- ------- ------- ---- -------
Total available-for-sale
investments.................. 37,743 (114) 37,629 63,684 383 64,067
Amounts classified as cash
equivalents.................. (1,018) -- (1,018) (4,476) -- (4,476)
------- ----- ------- ------- ---- -------
Short-term investments......... $36,725 $(114) $36,611 $59,208 $383 $59,591
======= ===== ======= ======= ==== =======
</TABLE>
F-9
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
There were no material realized gains or losses on sales of
available-for-sale investments in 1999, 1998 or 1997.
The estimated fair value of investments in debt securities at December 31,
1999, by contractual maturity, were as follows (in thousands):
<TABLE>
<S> <C>
Due in 1 year or less....................................... $25,388
Due in 1-2 years............................................ 7,955
-------
33,343
Mortgage-backed securities.................................. 4,286
-------
Total investments in debt securities........................ $37,629
=======
</TABLE>
Approximately $20.6 million of the Company's cash and investments secures
the Company's short-term borrowings and a letter of credit related to its
facility, and is therefore not available for operations.
4. DEBT
Long-term debt at December 31 was as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Convertible subordinated notes, due in 2004 at 7.25%...... $52,850 $52,850
Equipment financing and other debt........................ 175 610
------- -------
Total long-term debt...................................... 53,025 53,460
Current portion of long-term debt......................... (134) (447)
------- -------
Long-term debt, less current portion...................... $52,891 $53,013
======= =======
</TABLE>
In April 1997, the Company issued an aggregate principal amount of
$86.3 million of convertible subordinated notes. The notes are due in 2004, bear
annual interest at 7.25%, and are convertible at the option of the holder into
the Company's common stock at a price of $28.958 per share. Original issuance
costs were approximately $3.4 million and are being amortized to interest
expense over the life of the notes. At December 31, 1999, unamortized issue
costs included in other assets were approximately $1.2 million. At December 31,
1999, the fair value of the Company's long-term debt is approximately 50% of its
carrying value.
In the fourth quarter of 1998, the Company purchased $33.4 million in
principal amount of its outstanding subordinated notes at a discount from face
value. The transaction resulted in a gain of $15.6 million, consisting of a gain
of $16.6 million due to the discount, offset by the write-off of $1.0 million in
issue costs associated with the original issuance of the notes in April 1997.
The Company financed this purchase through $16.9 million in short-term
borrowings, which are secured by approximately $16.9 million of the Company's
available-for-sale investments. At December 31, 1999, the interest rate on the
short-term borrowings was 5.45%.
F-10
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DEBT (CONTINUED)
As of December 31, 1999, aggregate maturities of long-term debt were as
follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 134
2001........................................................ 32
2002........................................................ 9
2003........................................................ --
2004........................................................ 52,850
-------
$53,025
=======
</TABLE>
As of December 31, 1999, the Company has an unused credit facility with a
commercial bank of $10.0 million. The annual commitment fee is 0.25% for the
unused portion of the line of credit.
5. 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. However, for the purposes of computing diluted
earnings per share in periods with a profit, the dilutive effect of outstanding
nonvested shares is included using the treasury stock method. 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. For additional
disclosures regarding potentially dilutive stock options, warrants, nonvested
shares, convertible debentures and convertible preferred stock, see Notes 4 and
7.
The following table sets forth the computation of basic and diluted net loss
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Numerator for basic and diluted net loss per share:
Net loss.................................................. $(21,399) $(40,658) $(51,331)
======== ======== ========
Denominator:
Weighted-average common shares............................ 25,403 25,082 24,687
Weighted-average nonvested shares subject to repurchase... (1,142) (1,585) (2,266)
-------- -------- --------
Denominator for basic and diluted net loss per share........ 24,261 23,497 22,421
======== ======== ========
Basic and diluted net loss per share........................ $ (0.88) $ (1.73) $ (2.29)
======== ======== ========
</TABLE>
6. STOCKHOLDERS' EQUITY
NONVESTED SHARES
At December 31, 1999, 963,000 shares of outstanding common stock owned by
employees of and consultants to the Company were subject to repurchase, at the
option of the Company, at the original purchase price in the event of the
termination of their employment or consulting relationship.
F-11
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS
Under the 1993 Stock Option Plan (the 1993 Plan), the Company may grant
incentive and nonstatutory stock options to purchase up to 6,720,000 shares of
common stock to directors, employees and consultants. Options may be granted at
an exercise price of not less than 85% of the fair value of the stock at the
date of grant for nonstatutory stock options and 100% of the fair value of the
stock at the date of grant for incentive stock options as determined by the
Board of Directors. Generally, options vest under such conditions as determined
by the Board of Directors, typically over a two or four year period, and expire
after ten years. During 1996, the Company adopted the 1996 Stock Option Plan
(the 1996 Plan), under which the Company reserved 2,110,000 shares of common
stock for issuance to employees, consultants and directors in addition to the
3,390,000 shares incorporated from the 1993 Plan. In 1999, the Company adopted
the 1999 Supplemental Stock Option Plan, under which the Company may grant
nonstatutory stock options to purchase up to 1,500,000 shares of common stock to
directors, consultants and employees who are not officers. The Company had
664,000 shares available for grant under the plans as of December 31, 1999.
In the second quarter of 1998, the Company's Board of Directors approved the
cancellation and reissuance of outstanding options. Generally, under the
program, employees with outstanding options at exercise prices in excess of
$5.25 per share were given the choice of retaining these options or of obtaining
in substitution new options for the same number of shares. The new options are
exercisable at a price of $5.25 per share, the fair market value of the stock on
the reissue date. The new options have a four year vesting schedule, subject to
a one-year blackout period on exercise which expired on June 23, 1999. If an
employee voluntarily terminated his or her employment prior to the end of the
blackout period, the replacement options were forfeited. The number of options
shown as granted and canceled in the table below includes the reissuance of
options.
F-12
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of stock option transactions is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------------
NUMBER WEIGHTED
OF SHARES AVERAGE
(IN THOUSANDS) EXERCISE PRICE
-------------- --------------
<S> <C> <C>
December 31, 1996.................................. 4,377 $12.02
Options granted.................................. 1,933 $20.64
Options exercised................................ (413) $ 2.26
Options canceled................................. (629) $10.84
------
December 31, 1997.................................. 5,268 $16.08
Options granted.................................. 4,646 $ 5.99
Options exercised................................ (293) $ 0.61
Options canceled................................. (3,823) $19.40
------
December 31, 1998.................................. 5,798 $ 6.56
Options granted.................................. 3,086 $ 2.44
Options exercised................................ (205) $ 1.03
Options canceled................................. (2,298) $ 7.01
------
December 31, 1999.................................. 6,381 $ 4.58
======
</TABLE>
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OF SHARES AVERAGE
(IN THOUSANDS) EXERCISE PRICE
-------------- --------------
<S> <C> <C>
Options exercisable at:
December 31, 1997................................ 1,530 $9.88
December 31, 1998................................ 1,286 $7.87
December 31, 1999................................ 2,215 $5.11
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER OF CONTRACTUAL AVERAGE NUMBER OF AVERAGE
RANGE OF SHARES LIFE EXERCISE SHARES EXERCISE
EXERCISE PRICES (IN THOUSANDS) (IN YEARS) PRICE (IN THOUSANDS) PRICE
- -------------------------------------- --------------- ----------- -------- --------------- --------
<S> <C> <C> <C> <C> <C>
$ 0.06 - $ 1.88....................... 2,186 9.1 $ 1.73 474 $ 1.26
$ 2.00 - $ 5.00....................... 1,521 9.5 $ 3.79 405 $ 4.36
$ 5.13 - $ 5.50....................... 2,145 8.5 $ 5.25 1,149 $ 5.25
$ 6.00 - $12.50....................... 115 8.0 $ 9.05 42 $ 9.66
$16.50 - $24.00....................... 414 7.5 $17.86 145 $17.37
----- -----
6,381 8.9 $ 4.58 2,215 $ 5.11
===== =====
</TABLE>
F-13
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK BASED COMPENSATION
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which also requires that the information be determined as if the
Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expected dividend yield........................... 0% 0% 0%
Expected stock price volatility................... 65% 65% 65%
Risk-free interest rate........................... 6.00% 5.00% 5.35%
Expected life of options.......................... 3 years 3 years 3 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had the
Company elected to recognize compensation expense based on the fair value of the
options granted at grant dates as prescribed by SFAS No. 123, net loss and net
loss per share would have been increased to the pro forma amounts indicated in
the table below (in thousands except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss--as reported.......................... $(21,399) $(40,658) $(51,331)
Net loss--pro forma............................ $(25,677) $(51,559) $(62,112)
Net loss per share--as reported................ $ (0.88) $ (1.73) $ (2.29)
Net loss per share--pro forma.................. $ (1.06) $ (2.19) $ (2.77)
</TABLE>
The weighted average fair value of options granted in 1999, 1998 and 1997
was $1.16, $2.81 and $9.75 per share, respectively.
The effects on pro forma disclosures of applying SFAS No. 123 are not likely
to be representative of the effects on pro forma disclosures of future years.
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, the pro forma effect will not be fully reflected until 2000.
STOCK PURCHASE PLAN
Under the 1996 Employee Stock Purchase Plan (the Purchase Plan), employees
may purchase common stock at the lower of 85% of the fair market value of the
common stock at the beginning or end of each offering period of up to an
aggregate total of 366,000 shares of the Company's common stock as of
December 31, 1999. In 1999, the Purchase Plan was amended to provide for an
automatic increase in the number of shares authorized for purchase under the
plan on January 1st of each year equal to the lesser of
F-14
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
(i)0.5% of the outstanding shares of the Company's common stock or (ii) 150,000
shares. During the years ended December 31, 1999, 1998 and 1997, shares issued
under the Purchase Plan were 65,000, 92,000 and 53,000, respectively.
SHAREHOLDER RIGHTS PLAN
On March 26, 1996, the Board of Directors of the Company declared a dividend
of one preferred share purchase right ("Right") for each outstanding share of
common stock outstanding on the effective date of the Offering. Each Right will
entitle stockholders to purchase 1/1000 of a share of Series A Junior
participating preferred stock of the Company, a designated series of preferred
stock for which each 1/1000 of a share has economic attributes and voting rights
equivalent to one share of the Company's common stock, at an exercise price of
$0.001 per share. The Rights only become exercisable in certain limited
circumstances involving acquisitions of or tender offers for 20% or more of the
Company's capital stock. At any time prior to the announcement of any such
acquisition or offer, the Rights are redeemable by the Company at a price of
$0.001 per Right. For a limited period of time after the announcement of any
such acquisition or offer, each Right becomes exercisable or, at the discretion
of the Board, may be exchanged for one share of common stock per Right. The
Rights expire in the year 2006.
COMMON STOCK RESERVED
At December 31, 1999, the Company has reserved shares of common stock for
future issuances as follows (in thousands):
<TABLE>
<S> <C>
Stock options............................................... 7,045
Stock purchase plan......................................... 138
Stock warrants.............................................. 18
-----
Total................................................... 7,201
=====
</TABLE>
7. INCOME TAXES
Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for 1999, 1998 or 1997.
F-15
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31, 1999 and 1998 are as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 53,000 $ 44,200
Tax credit carryforwards.................................. 2,300 2,300
Capitalized research and development...................... 1,100 1,000
Acquired patent........................................... 2,300 2,200
Other temporary differences............................... 7,600 7,900
-------- --------
Total deferred tax assets................................... 66,300 57,600
Valuation allowance......................................... (66,300) (57,600)
-------- --------
Net deferred tax assets..................................... $ -- $ --
======== ========
</TABLE>
Approximately $4.0 million of the valuation allowance is attributable to tax
deductions, the benefit of which will be credited to additional paid in capital
when realized.
Realization of deferred tax assets is dependent upon future earnings, the
amount and timing of which are uncertain. Accordingly, a valuation allowance, in
the amount equal to the net deferred tax assets as of December 31, 1999 and 1998
has been established to reflect these uncertainties. The increases in the
valuation allowance were $8.7 million, $16.0 million and $20.9 million for the
fiscal years 1999, 1998 and 1997 respectively.
At December 31, 1999, the Company had net operating loss carryforwards for
federal and California tax purposes of approximately $146.0 million and
$58.0 million, respectively, which will expire in the years 2000 through 2019 if
not utilized. As of December 31, 1999, the Company also had research and
development tax credit carryforwards of approximately $1.8 million and
$1.7 million respectively, for federal and California tax purposes, which will
expire in years 2007 through 2014 if not used.
Utilization of net operating loss and credit carryforwards may be subject to
an annual limitation due to the ownership change limitations provided by
Internal Revenue Code of 1986 and similar state provisions.
8. RESTRUCTURING CHARGE--1999
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 due primarily to a reduction in certain employee-related
expenses. The net charge of $2.5 million includes approximately $1.9 million
related to severance and other employee-related costs, and $0.6 million related
to excess facilities and the disposal of assets.
F-16
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RESTRUCTURING CHARGE--1999 (CONTINUED)
The following table summarizes the Company's restructuring activity for the
1999 restructuring charge (in thousands):
<TABLE>
<CAPTION>
NON-CASH
WRITE OFFS ACCRUED
RESTRUCTURING AND RESTRUCTURING
CHARGE WRITE CASH CHANGE IN CHARGE AT
JUNE 1999 DOWNS PAYMENTS RESERVE ESTIMATE DECEMBER 31, 1999
------------- ---------- -------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
Severance and benefits......... 2,416 -- (1,576) (484) 356
Write off of assets............ 225 (225) -- -- --
Sublease excess facilities..... 266 -- (187) 50 129
------ ----- ------- ----- ----
Total restructuring charge... $2,907 $(225) $(1,763) $(434) $485
====== ===== ======= ===== ====
</TABLE>
The remaining liability relates primarily to estimated cash expenditures in
connection with excess facilities and severance and other employee-related
costs.
9. RESTRUCTURING CHARGE--1998
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 (primarily related to
manufacturing and the Company's training facility in Utah), 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 and $0.1 million in 1999
due to the favorable resolution of lease commitments.
The following tables summarize the Company's restructuring activity for the
1998 restructuring charge (in thousands):
<TABLE>
<CAPTION>
NON-CASH
WRITE OFFS ACCRUED
RESTRUCTURING AND RESTRUCTURING
CHARGE WRITE CASH CHANGE IN CHARGE AT
JUNE 1998 DOWNS PAYMENTS RESERVE ESTIMATE DECEMBER 31, 1998
------------- ---------- -------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
Severance and benefits......... $ 2,842 $ -- $2,428 $ (262) $ 152
Write off of assets............ 6,151 6,682 (65) 466 --
Exit facility leases........... 4,705 646 595 (2,466) 998
Other.......................... 676 212 510 46 -
------- ------ ------ ------- ------
Total restructuring charge... $14,374 $7,540 $3,468 $(2,216) $1,150
======= ====== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
ACCRUED ACCRUED
RESTRUCTURING RESTRUCTURING
CHARGE AT CASH CHANGE IN CHARGE AT
DECEMBER 31, 1998 PAYMENTS RESERVE ESTIMATE DECEMBER 31, 1999
------------------- -------- ---------------- -------------------
<S> <C> <C> <C> <C>
Severance and benefits................ $ 152 $(137) $ (15) $ --
Exit facility leases.................. 998 (785) (95) 118
------ ----- ----- ----
Total restructuring charge.......... $1,150 $(922) $(110) $118
====== ===== ===== ====
</TABLE>
F-17
<PAGE>
HEARTPORT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RESTRUCTURING CHARGE--1998 (CONTINUED)
The remaining liability relates primarily to estimated cash expenditures in
connection with excess facilities.
10. EMPLOYEE BENEFIT PLAN
The Company has a savings plan which qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, participating employees may defer up to
20% of their pre-tax salary, up to statutory limits. All regular U.S. employees
are eligible to participate. In 1999 the Company began matching employee
contributions made to the savings plan up to $125 per employee per quarter. The
total matching contributions in 1999 were $52,000.
F-18
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
F-19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company, and their ages as of
December 31, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ -------- -----------------------------------
<S> <C> <C>
Casey M. Tansey 42 President, Chief Executive Officer
and Director
Jeffry J. Grainger 37 Vice President, Legal Affairs,
General Counsel and Secretary
Christopher A. Hubbard 41 Vice President, Sales
Steven E. Johnson 41 Senior Vice President, Operations
Lawrence C. Siegel, M.D. 42 Chief Technical Officer
Frank M. Fischer 58 Chairman of the Board of Directors
Robert V. Gunderson, Jr.(2) 48 Director
Joseph S. Lacob(2) 44 Director
Wesley D. Sterman, M.D. 39 Director and Co-Founder
John H. Stevens, M.D.(1) 39 Director and Co-Founder
Steven C. Wheelwright, Ph.D.(1)(2) 56 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
CASEY M. TANSEY has been President and Chief Executive Officer and a
director of the Company since September 1999. Prior to that, he was the
Company's President and Chief Operating Officer from June 1999 to
September 1999, Senior Vice President, Sales and Marketing from January 1998 to
June 1999 and Vice President, Sales and Marketing from December 1995 to
January 1998. From 1988 until joining the Company in 1995, Mr. Tansey served in
various capacities with the Edwards C.V.S. Division of Baxter. Mr. Tansey's most
recent position at Baxter/Edwards was Vice President, North American Sales.
Mr. Tansey earned a B.S. in Business Administration and an M.B.A. from the
College of Notre Dame.
JEFFRY J. GRAINGER has been the Company's Vice President, Legal Affairs and
General Counsel since June 1999 and Secretary since September 1999.
Mr. Grainger was Chief Patent Counsel of the Company from July 1996 to
June 1999 and Patent Counsel of the Company from June 1993 to July 1996. Before
joining Heartport in 1993, Mr. Grainger was an attorney specializing in patents,
copyrights and trademarks at Townsend and Townsend since 1991. He received a B.S
in Mechanical Engineering from Stanford University and a J.D. from the
University of Washington School of Law.
CHRISTOPHER A. HUBBARD has been Vice President, Sales of the Company since
June 1999. Prior to that, he was the Company's Senior Director, U.S. Sales from
September 1997 to June 1999, Director, U.S. Sales from January 1997 to
September 1997 and Regional Sales Manager from March 1996 to January 1997.
Before joining the Company in 1996, Mr. Hubbard was Regional Sales Manager at
Devices for Vascular Intervention, formerly a subsidiary of Guidant Corporation,
since 1990. Mr. Hubbard holds a B.S. in Marketing from the University of
Illinois.
STEVEN E. JOHNSON has been Senior Vice President, Operations of the Company
since June 1999 and was the Company's Senior Vice President, Manufacturing from
January 1998 to June 1999. Prior to that, he was Vice President, Manufacturing
of the Company since August 1994. Before joining the Company,
III-1
<PAGE>
Mr. Johnson served in various capacities with Advanced Cardiovascular
Systems, Inc., a medical device company, from 1983 to 1994, most recently as
Vice President, Manufacturing. Mr. Johnson earned a B.S. in Industrial
Engineering from Kettering University.
LAWRENCE C. SIEGEL, M.D. has been Chief Technical Officer of the Company
since November 1999. Prior to that, Dr. Siegel was the Company's Senior Vice
President, Research and Development and Clinical and Regulatory Affairs from
June 1999 to November 1999 and Vice President, Clinical Affairs from
November 1996 to June 1999. Prior to joining the Company, Dr. Siegel served in
various capacities with the Stanford University School of Medicine from 1986 to
1996, most recently as Associate Professor of Anesthesia and Chief of
Cardiovascular Anesthesiology. Dr. Siegel earned a B.S. in Electrical
Engineering from Massachusetts Institute of Technology and a M.D. from Harvard
Medical School. Dr. Siegel is a board certified anesthesiologist.
FRANK M. FISCHER has been Chairman of the Board of Directors of the Company
since June 1999 and a director since May 1998. He was the Company's Chief
Executive Officer from June 1999 to September 1999 and was President and Chief
Executive Officer of the Company from May 1998 to June 1999. Mr. Fischer was
also a director of the Company from October 1992 until May 1997. Mr. Fischer was
the President and Chief Executive Officer and a director of Ventritex, Inc., a
manufacturer of implantable cardiac defibrillators from 1987 until 1997. From
May 1977 until joining Ventritex, Mr. Fischer held various positions with Cordis
Corporation, a manufacturer of medical products, serving most recently as
President of the Implantable Products Division. Mr. Fischer holds an M.S. in
Management from Rensselaer Polytechnic Institute.
ROBERT V. GUNDERSON, JR. has been a director of the Company since May, 1995.
Mr. Gunderson has been a partner of the law firm of Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, since its formation in September 1995.
From May 1988 until September 1995, Mr. Gunderson was a partner of the law firm
of Brobeck, Phleger & Harrison, LLP. Mr. Gunderson holds an M.A. from Stanford
University, an M.B.A. in finance from the Wharton School, University of
Pennsylvania and a J.D. from the University of Chicago.
JOSEPH S. LACOB has been a director of the Company since April 1992.
Mr. Lacob is a general partner of Kleiner Perkins Caufield & Byers ("Kleiner
Perkins"), a venture capital firm he joined in 1987. Prior to joining Kleiner
Perkins, he was Marketing Manager for Cetus Corporation, a biotechnology
company. Mr. Lacob is a director of Corixa Corporation, Pharmacyclics, Inc.,
Sportsline USA, Inc., and several privately held companies. Mr. Lacob holds a
B.S. in Biochemistry from the University of California at Irvine, a Masters in
Public Health from the University of California at Los Angeles, and an M.B.A.
from the Graduate School of Business at Stanford University.
WESLEY D. STERMAN, M.D. founded the Company with Dr. Stevens in May 1991,
and has served as a director since that time. Dr. Sterman was Chairman of the
Board of Directors from May 1998 to June 1999 and was the Company's President
and Chief Executive Officer from May 1991 until May 1998. Prior to founding the
Company, Dr. Sterman was founder, President and Chief Executive Officer of
EndoVascular Technologies, Inc., a medical device manufacturer, from July 1989
to September 1991. Dr. Sterman has B.S. degrees both in Biology and in Chemistry
from Stanford University. Dr. Sterman received an M.D. from the Stanford
University School of Medicine and an M.B.A. from the Graduate School of Business
at Stanford University, where he was an Arjay Miller Scholar.
JOHN H. STEVENS, M.D. founded the Company with Dr. Sterman in May 1991, and
has been a director of the Company since that time. Dr. Stevens was Heartport's
Chief Technology Officer from July 1997 to December 31, 1998. From August 1996
until July 1997 Dr. Stevens was Assistant Professor of Cardiothoracic Surgery at
Stanford University School of Medicine and prior to that he served as Chief
Resident of the Department of Cardiothoracic Surgery at Stanford, and as Senior
Registrar in Cardiothoracic Surgery at the Great Ormond Street Hospital for Sick
Children in London, England from July 1995 to
III-2
<PAGE>
March 1996. Dr. Stevens earned B.U.S. and B.S. degrees in Communications and
Psychology from the University of Utah and an M.D. from Stanford University.
STEVEN C. WHEELWRIGHT, PH.D. has been a director of the Company since
January 1995. Dr. Wheelwright currently serves as a senior associate dean at the
Graduate School of Business, Harvard University, where he has been a professor
since July 1988. Dr. Wheelwright also served as a professor of the Graduate
School of Business, Harvard University, from August 1985 to August 1986. From
August 1986 to August 1988, Dr. Wheelwright served as a professor at the
Graduate School of Business at Stanford University. Dr. Wheelwright is also a
member of the Board of Directors of Quantum Corporation, a mass storage device
company, Franklin Covey, an organizational tools company, and Millennium
Pharmaceuticals, a biotechnology company.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the
Proxy Statement for the Registrant's Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
Proxy Statement for the Registrant's Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference to the
Proxy Statement for the Registrant's Annual Meeting of Stockholders.
III-3
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------------------- -----------
<C> <S>
2.1 + Agreement and Plan of Merger dated April 3, 1995, for the
reincorporation merger of Stanford Surgical Technology,
Inc., a California corporation, into Heartport, Inc., a
Delaware corporation.
3.1 + Restated Certificate of Incorporation.
3.2 # Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 + Specimen Common Stock certificate.
4.3 + Third Amended and Restated Rights Agreement among Registrant
and the Founders and Investors specified therein dated
April 17, 1995.
4.4 @ Rights Agreement between the Registrant and the First
National Bank of Boston dated April 25, 1996.
10.1 + Form of Indemnification Agreement entered into by and
between Registrant and its officers and directors.
10.2 + 1993 Stock Option Plan and forms of agreements thereunder.
10.3 1996 Stock Option Plan as amended and restated October 21,
1996 and May 7, 1999.
10.4 Employee Stock Purchase Plan, as amended and restated
October 21, 1996 and January 1, 1999.
10.5 + Real Property Lease between the Registrant and Metropolitan
Insurance Company dated September 21, 1992, as amended.
10.6 + Equipment Financing Agreement between the Registrant and
Lease Management Services, Inc. dated February 23, 1995.
10.7 +* Agreement between the Company and St. Jude Medical, Inc.
dated September 11, 1995.
10.8 @ Third Amendment to Lease Agreement between Heartport
Research and Training Center, Inc. and University of Utah
Research Foundation dated as of October 25, 1996.
10.9 @* Amendment to agreement between Registrant and St. Jude
Medical, Inc. dated January 31, 1997.
10.10# Amended and Restated Loan and Security Agreement dated
October 12, 1998 between the Registrant and Silicon Valley
Bank.
10.11X Industrial Build-To-Suit Lease dated September 19, 1997
between Registrant and Chestnut Bay LLC. (without
exhibits)
10.12X First Amendment to Industrial Build-To-Suit Lease dated
February 10, 1998 between Registrant and Chestnut Bay LLC.
10.13 1999 Supplemental Stock Option Plan
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Confidential treatment has been requested for certain portions of this
exhibit. Omitted portions have been filed separately with the Securities and
Exchange Commission.
IV-1
<PAGE>
+ Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 333-1906)
# Incorporated by reference to the Registrant's Form 10-K for the year ended
December 31, 1998.
X Incorporated by reference to the Registrant's Form 10-K for the year ended
December 31, 1997.
@ Incorporated by reference to the Registrant's Form 10-K for the year ended
December 31, 1996.
(a)(2) SCHEDULES
The following financial statement schedules required by Regulation S-X are
filed herewith:
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
- ------------ -----------
<S> <C>
II Valuation and Qualifying Accounts
</TABLE>
All other schedules are not applicable.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended
December 31, 1999.
(c) EXHIBITS
See paragraph (a).
IV-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, in Redwood City, California, on this 23rd day of March, 2000.
<TABLE>
<S> <C> <C>
HEARTPORT, INC.
By: /S/ REBECCA L. KUHN
-----------------------------------------
Rebecca L. Kuhn
TREASURER AND DIRECTOR OF FINANCE
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints, Casey M. Tansey and Rebecca L. Kuhn, and
each of them, his true and lawful attorneys-in-fact and agents with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and all documents in connection
therewith with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/S/ CASEY M. TANSEY President, Chief Executive
------------------------------------------- Officer and Director March 23, 2000
Casey M. Tansey (Principal Executive Officer)
/S/ REBECCA L. KUHN Treasurer and Director of
------------------------------------------- Finance (Principal Financial March 23, 2000
Rebecca L. Kuhn and Accounting Officer)
/S/ FRANK M. FISCHER
------------------------------------------- Director March 23, 2000
Frank M. Fischer
/S/ ROBERT V. GUNDERSON, JR.
------------------------------------------- Director March 23, 2000
Robert V. Gunderson, Jr.
</TABLE>
IV-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/S/ JOSEPH S. LACOB
------------------------------------------- Director March 23, 2000
Joseph S. Lacob
/S/ WESLEY D. STERMAN, M.D.
------------------------------------------- Director March 23, 2000
Wesley D. Sterman, M.D.
/S/ JOHN H. STEVENS, M.D.
------------------------------------------- Director March 23, 2000
John H. Stevens, M.D.
/S/ STEVEN C. WHEELWRIGHT, PH.D.
------------------------------------------- Director March 23, 2000
Steven C. Wheelwright, Ph.D.
</TABLE>
IV-4
<PAGE>
SCHEDULE II
HEARTPORT, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year Ended December 31, 1999
Allowance for doubtful accounts.................... $ 267 $ 50 $ -- $ 317
Allowance for sales returns........................ $ 442 $ -- $ 252 $ 190
Warranty reserves.................................. $1,225 $ -- $ 441 $ 784
Restructure provision.............................. $1,150 $ 2,907 $ 3,454 $ 603
Year Ended December 31, 1998
Allowance for doubtful accounts.................... $ 314 $ 53 $ 100 $ 267
Allowance for sales returns........................ $ 609 $ 441 $ 608 $ 442
Warranty reserves.................................. $ 407 $ 818 $ -- $1,225
Restructure provision.............................. $ -- $12,158 $11,008 $1,150
Year Ended December 31, 1997
Allowance for doubtful accounts.................... $ 33 $ 281 $ -- $ 314
Allowance for sales returns........................ $ 65 $ 589 $ 45 $ 609
Warranty reserves.................................. $ -- $ 407 $ -- $ 407
</TABLE>
IV-5
<PAGE>
HEARTPORT, INC.
1996 STOCK OPTION PLAN
(Restated October 21, 1996 and May 7, 1999)
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1996 Stock Option Plan is intended to promote the
interests of Heartport, Inc., a Delaware corporation, by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for
them to remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two separate equity programs:
(i) the Discretionary Option Grant Program
under which eligible persons may, at the discretion of the Plan
Administrator, be granted options to purchase shares of Common Stock,
and
(ii) the Automatic Option Grant Program
under which Eligible Directors shall automatically receive option
grants at periodic intervals to purchase shares of Common Stock.
B. The provisions of Articles One and Four shall apply to all
equity programs under the Plan and shall accordingly govern the interests of
all persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have authority to administer the
Discretionary Option Grant Program with respect to Section 16 Insiders.
Administration of the Discretionary Option Grant Program with respect to all
other persons eligible to participate in that program may, at the Board's
discretion, be vested in the Primary Committee or a Secondary Committee. In
addition, the Board may retain the power to administer the Plan with respect
to all persons. The members of the Secondary Committee may be Board members
who are Employees eligible to receive discretionary option grants under the
Plan or any stock option, stock appreciation, stock bonus or other stock plan
of the Corporation (or any Parent or Subsidiary).
<PAGE>
B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and shall be subject
to removal by the Board at any time. The Board may also at any time terminate
the functions of any committee and reassume all powers and authority
previously delegated to such committee.
C. The Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority to
establish such rules and regulations as it may deem appropriate for proper
administration of the Discretionary Option Grant Program and to make such
determinations under, and issue such interpretations of, the provisions of
such program and any outstanding options thereunder as it may deem necessary
or advisable. Decisions of the Plan Administrator within the scope of its
administrative functions under the Plan shall be final and binding on all
parties who have an interest in the Discretionary Option Grant Program under
its jurisdiction or any option thereunder.
D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee
shall accordingly be entitled to full indemnification and reimbursement as
Board members for their service on such committee. No member of the Primary
Committee or the Secondary Committee shall be liable for any act or omission
made in good faith with respect to the Plan or any option grants made under
the Plan.
E. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the terms of that program. However, the
Plan Administrator (other than the Secondary Committee) shall exercise any
discretionary functions with respect to option grants made thereunder as it
deems advisable.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant Program are as follows:
(i) Employees,
(ii) non-employee members of the Board or
of the board of directors of any Parent or Subsidiary, and
(iii) consultants and other independent
advisors who provide services to the Corporation (or any Subsidiary).
B. The Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority (subject to
the provisions of the Plan) to determine, with respect to the option grants
under the Discretionary Option Grant Program, which eligible persons are to
receive option grants, the time or times when such option grants are to be
made, the number of shares to be covered by each such grant, the status of
the granted option as either an Incentive Option or a Non-Statutory Option,
the time or times at which each option is to
2
<PAGE>
become exercisable and the vesting schedule (if any) applicable to the option
shares and the maximum term for which the option is to remain outstanding.
C. The individuals eligible to receive option grants under the
Automatic Option Grant Program shall be (i) those individuals who are serving
as non-employee Board members on the Automatic Option Grant Program Effective
Date or who are first elected or appointed as non-employee Board members
after such date, whether through appointment by the Board or election by the
Corporation's stockholders, and (ii) those individuals who continue to serve
as non-employee Board members after one or more Annual Stockholders Meetings
held after the Automatic Option Grant Program Effective Date. A non-employee
Board member who has previously been in the employ of the Corporation (or any
Parent or Subsidiary) shall not be eligible to receive an option grant under
the Automatic Option Grant Program on the Automatic Option Grant Program
Effective Date or at the time he or she first becomes a non-employee Board
member, but such individual shall be eligible to receive periodic option
grants under the Automatic Option Grant Program upon his or her continued
service as a non-employee Board member following one or more Annual
Stockholders Meetings. A non-employee Board member shall not be eligible for
an initial grant or annual grant if at the time a grant would be made
pursuant to the terms of the Automatic Option Grant Program he or she is
receiving remuneration from the Corporation. Such remuneration may take the
form of continued vesting of options previously granted by the Corporation
(excluding options granted pursuant to the Automatic Option Grant Program),
severance pay, or salary or consulting fees (excluding director fees).
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed 5,500,000
shares.
B. No one person participating in the Plan may receive options or
separately exercisable stock appreciation rights for more than One Million
(1,000,000) shares of Common Stock over the term of the Plan, exclusive of
any option grants received prior to January 1, 1996.
C. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the
options (including any options incorporated from the Predecessor Plan) expire
or terminate for any reason prior to exercise in full or (ii) the options are
canceled in accordance with the cancellation-regrant provisions of Article
Two. All shares issued under the Plan (including shares issued upon exercise
of options incorporated from the Predecessor Plan), whether or not those
shares are subsequently repurchased by the Corporation pursuant to its
repurchase rights under the Plan, shall reduce on a share-for-share basis the
number of shares of Common Stock available for subsequent issuance under the
Plan. In addition, should the exercise price of an option under the Plan
(including any option incorporated from the Predecessor Plan) be paid with
shares of Common Stock or should shares of Common Stock otherwise issuable
under the Plan be withheld by the Corporation in
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satisfaction of the withholding taxes incurred in connection with the
exercise of an option under the Plan, then the number of shares of Common
Stock available for issuance under the Plan shall be reduced by the gross
number of shares for which the option is exercised, and not by the net number
of shares of Common Stock issued to the holder of such option.
D. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as
a class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the number and/or class of
securities for which any one person may be granted options and separately
exercisable stock appreciation rights per calendar year or over the term of
the Plan, (iii) the number and/or class of securities for which automatic
option grants are to be subsequently made per Eligible Director under the
Automatic Option Grant Program and (iv) the number and/or class of securities
and the exercise price per share in effect under each outstanding option
(including any option incorporated from the Predecessor Plan) in order to
prevent the dilution or enlargement of benefits thereunder. The adjustments
determined by the Plan Administrator shall be final, binding and conclusive.
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ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; PROVIDED, however, that each such
document shall comply with the terms specified below. Each document
evidencing an Incentive Option shall, in addition, be subject to the
provisions of the Plan applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the
Fair Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in one or
more of the forms specified below:
(i) cash or check made payable to the
Corporation,
(ii) shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market
Value on the Exercise Date, or
(iii) to the extent the option is exercised for
vested shares, through a special sale and remittance procedure pursuant
to which the Optionee shall concurrently provide irrevocable written
instructions to (a) a Corporation-designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the
purchased shares plus all applicable Federal, state and local income
and employment taxes required to be withheld by the Corporation by
reason of such exercise and (b) the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm
in order to complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made
on the Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable
at such time or times, during such period and for such number of shares as
shall be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.
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C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of
the Optionee's cessation of Service for any reason shall remain
exercisable for such period of time thereafter as shall be determined
by the Plan Administrator and set forth in the documents evidencing the
option, but no such option shall be exercisable after the expiration of
the option term.
(ii) Any option exercisable in whole or in
part by the Optionee at the time of death may be subsequently exercised
by the personal representative of the Optionee's estate or by the
person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and
distribution.
(iii) During the applicable post-Service
exercise period, the option may not be exercised in the aggregate for
more than the number of vested shares for which the option is
exercisable on the date of the Optionee's cessation of Service. Upon
the expiration of the applicable exercise period or (if earlier) upon
the expiration of the option term, the option shall terminate and cease
to be outstanding for any vested shares for which the option has not
been exercised. However, the option shall, immediately upon the
Optionee's cessation of Service, terminate and cease to be outstanding
to the extent it is not exercisable for vested shares on the date of
such cessation of Service.
(iv) Should the Optionee's Service be
terminated for Misconduct, then all outstanding options held by the
Optionee shall terminate immediately and cease to be outstanding.
(v) In the event of a Corporate
Transaction, the provisions of Section III of this Article Two shall
govern the period for which the outstanding options are to remain
exercisable following the Optionee's cessation of Service and shall
supersede any provisions to the contrary in this section.
2. The Plan Administrator shall have the discretion, exercisable
either at the time an option is granted or at any time while the option
remains outstanding, to:
(i) extend the period of time for which the
option is to remain exercisable following the Optionee's cessation of
Service from the period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem
appropriate, but in no event beyond the expiration of the option term,
and/or
(ii) permit the option to be exercised,
during the applicable post-Service exercise period, not only with
respect to the number of vested shares of
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Common Stock for which such option is exercisable at the time of the
Optionee's cessation of Service but also with respect to one or more
additional installments in which the Optionee would have vested under
the option had the Optionee continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until
such person shall have exercised the option, paid the exercise price and
become a holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of
Common Stock. Should the Optionee cease Service while holding such unvested
shares, the Corporation shall have the right to repurchase, at the exercise
price paid per share, any or all of those unvested shares. The terms upon
which such repurchase right shall be exercisable (including the period and
procedure for exercise and the appropriate vesting schedule for the purchased
shares) shall be established by the Plan Administrator and set forth in the
document evidencing such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, the option shall be exercisable only by the Optionee and shall not
be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, a Non-Statutory
Option may be assigned (i) to a member of the immediate family of the
optionee or to a trust established for the benefit of one or more members of
the immediate family of the optionee, provided that the assignment shall not
be effective until written notice of the assignment is received by the Plan
Administrator, or (ii) in accordance with terms approved in advance by the
Plan Administrator. The terms applicable to the assigned option (or portion
thereof) shall be the same as those in effect for the option immediately
prior to such assignment and shall be set forth in such documents issued to
the assignee as the Plan Administrator may deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Four shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall NOT be subject to the terms of this Section II.
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
B. EXERCISE PRICE. The exercise price per share shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. DOLLAR LIMITATION. To the extent required by Code Section 422,
the aggregate Fair Market Value of the shares of Common Stock (determined as
of the respective date or dates of grant) for which one or more options
granted to any Employee under the Plan (or any other option plan of the
Corporation or any Parent or Subsidiary) may for the first time become
exercisable as Incentive Options during any one (1) calendar year shall not
exceed the sum of
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One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two
(2) or more such options which become exercisable for the first time in the
same calendar year, the foregoing limitation on the exercisability of such
options as Incentive Options shall be applied on the basis of the order in
which such options are granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, to the extent required by Code Section 422,
then the exercise price per share shall not be less than one hundred ten
percent (110%) of the Fair Market Value per share of Common Stock on the
option grant date, and the option term shall not exceed five (5) years
measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject
to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. However, an outstanding option shall NOT
so accelerate if and to the extent: (i) such option is, in connection with
the Corporate Transaction, either to be assumed by the successor corporation
(or parent thereof) or to be replaced with a comparable option to purchase
shares of the capital stock of the successor corporation (or parent thereof),
(ii) such option is to be replaced with a cash incentive program of the
successor corporation which preserves the spread existing on the unvested
option shares at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable to
such option or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option
grant. The determination of option comparability under clause (i) above shall
be made by the Plan Administrator, and its determination shall be final,
binding and conclusive.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated
rights shall immediately vest in full, in the event of any Corporate
Transaction, except to the extent: (i) those repurchase rights are to be
assigned to the successor corporation (or parent thereof) in connection with
such Corporate Transaction or (ii) such accelerated vesting is precluded by
other limitations imposed by the Plan Administrator at the time the
repurchase right is issued.
C. The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option
remains outstanding, to provide for the automatic acceleration of one or more
outstanding options (and the automatic termination of one or more outstanding
repurchase rights with the immediate vesting of the shares of Common Stock
subject to those rights) upon the occurrence of a Corporate Transaction,
whether or not those options are to be assumed or replaced (or those
repurchase rights are to be assigned) in the Corporate Transaction.
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D. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction
had the option been exercised immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to (i) the number and
class of securities available for issuance under the Plan on both an
aggregate and per Optionee basis following the consummation of such Corporate
Transaction and (ii) the exercise price payable per share under each
outstanding option, PROVIDED the aggregate exercise price payable for such
securities shall remain the same.
F. Any options which are assumed or replaced in the Corporate
Transaction and do not otherwise accelerate at that time, shall automatically
accelerate (and any of the Corporation's outstanding repurchase rights which
do not otherwise terminate at the time of the Corporate Transaction shall
automatically terminate and the shares of Common Stock subject to those
terminated rights shall vest) in the event the Optionee's Service should
subsequently terminate by reason of an Involuntary Termination within twelve
(12) months following the effective date of such Corporate Transaction. Any
options so accelerated (and any of the Corporation's outstanding repurchase
rights so terminated) shall vest, as if the Optionee's Service continued for
an additional twelve (12) months following the Involuntary Termination and
shall remain exercisable for all of the shares which are then exercisable
and/or vested until the EARLIER of (i) the expiration of the option term or
(ii) the expiration of the one (1)-year period measured from the effective
date of the Involuntary Termination.
G. The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option
remains outstanding, to (i) provide for the automatic acceleration of one or
more outstanding options (and the automatic termination of one or more
outstanding repurchase rights with the immediate vesting of the shares of
Common Stock subject to those rights) upon the occurrence of a Change in
Control or (ii) condition any such option acceleration (and the termination
of any outstanding repurchase rights) upon the subsequent Involuntary
Termination of the Optionee's Service within a specified period following the
effective date of such Change in Control. Any options accelerated in
connection with a Change in Control shall remain fully exercisable until the
expiration or sooner termination of the option term.
H. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as
an Incentive Option only to the extent the applicable One Hundred Thousand
Dollar limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Non-Statutory Option under the Federal tax laws.
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I. The grant of options under the Discretionary Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure
or to merge, consolidate, dissolve, liquidate or sell or transfer all or any
part of its business or assets.
IV. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights.
B. The following terms shall govern the grant and exercise of
tandem stock appreciation rights:
(i) One or more Optionees may be granted
the right, exercisable upon such terms as the Plan Administrator may
establish, to elect between the exercise of the underlying option for
shares of Common Stock and the surrender of that option in exchange for
a distribution from the Corporation in an amount equal to the excess of
(A) the Fair Market Value (on the option surrender date) of the number
of shares in which the Optionee is at the time vested under the
surrendered option (or surrendered portion thereof) over (B) the
aggregate exercise price payable for such shares.
(ii) No such option surrender shall be
effective unless it is approved by the Plan Administrator. If the
surrender is so approved, then the distribution to which the Optionee
shall be entitled may be made in shares of Common Stock valued at Fair
Market Value on the option surrender date, in cash, or partly in shares
and partly in cash, as the Plan Administrator shall in its sole
discretion deem appropriate.
(iii) If the surrender of an option is
rejected by the Plan Administrator, then the Optionee shall retain
whatever rights the Optionee had under the surrendered option (or
surrendered portion thereof) on the option surrender date and may
exercise such rights at any time prior to the LATER of (A) five (5)
business days after the receipt of the rejection notice or (B) the last
day on which the option is otherwise exercisable in accordance with the
terms of the documents evidencing such option, but in no event may such
rights be exercised more than ten (10) years after the option grant
date.
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ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made on the dates specified
below:
1. Each Eligible Director who is first elected or appointed as
a non-employee Board member after the Automatic Option Grant Program
Effective Date shall automatically be granted on the date of such initial
election or appointment (as the case may be), a Non-Statutory Option to
purchase thirty-two thousand (32,000) shares of Common Stock.
2. On the date of each Annual Stockholders Meeting, beginning
with the first Annual Meeting after the Corporation's initial public
offering, each individual who was an Eligible Director on the Automatic
Option Grant Program Effective Date and continues to serve as an Eligible
Director after such meeting, shall automatically be granted, whether or not
such individual is standing for re-election as a Board member at that Annual
Meeting, a Non-Statutory Option to purchase an additional six thousand four
hundred (6,400) shares of Common Stock. On the date of each Annual
Stockholders Meeting, each Eligible Director who is elected or appointed as a
non-employee Board member after the Automatic Option Grant Program Effective
Date and continues to serve as an Eligible Director after such meeting, shall
automatically be granted, whether or not such individual is standing for
re-election as a Board member at that Annual Meeting, a Non-Statutory Option
to purchase an additional six thousand four hundred (6,400) shares of Common
Stock, beginning on the first anniversary of the grant date of such Eligible
Director's initial automatic option grant. There shall be no limit on the
number of such 6,400-share option grants any one Eligible Director may
receive over his or her period of Board service.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the
option grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder
is utilized, payment of the exercise price for the purchased shares must be
made on the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each option granted under this
Article Three on or after May 7, 1999 shall become exercisable in full on the
fourth anniversary of the date on which such annual grant was made,
regardless of whether the optionee remains a Board member. Each initial
option granted after October 21, 1996 shall become exercisable in a series of
five (5)
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equal and successive annual installments over the Optionee's period of
continued service as a Board member, with the first such installment to
become exercisable upon the Optionee's completion of one (1) year of Board
service measured from the option grant date. Each subsequent annual automatic
option grant shall become fully exercisable on the fifth anniversary of the
date on which such annual grant was made.
E. EFFECT OF TERMINATION OF BOARD SERVICE. Each option granted
under this Article Three on or after May 7, 1999 shall remain outstanding and
exercisable in full until the date that is twelve (12) months following the
fourth anniversary of the date on which such annual grant was made,
regardless of whether the optionee remains a Board member. The provisions of
subsections (i) and (ii) shall govern the exercise of any options granted
before May 7, 1999 and held by the Optionee at the time the Optionee ceases
to serve as a Board member:
(i) The Optionee (or, in the event of
Optionee's death, the personal representative of the Optionee's estate
or the person or persons to whom the option is transferred pursuant to
the Optionee's will or in accordance with the laws of descent and
distribution) shall have a twelve (12)-month period following the date
of such cessation of Board service in which to exercise each such
option.
(ii) During the twelve (12)-month exercise
period, the option may not be exercised in the aggregate for more than
the number of vested shares of Common Stock for which the option is
exercisable at the time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a
Board member by reason of death or Permanent Disability, then each
option granted on or after May 7, 1999 shall become exercisable as if
twelve (12) additional months had elapsed from the date of grant.
Should the Optionee cease to serve as a Board member by reason of death
or Permanent Disability, then each option granted before May 7, 1999
shall become exercisable and shares at the time subject to the option
shall immediately vest as if the Optionee had continued to serve as a
Board member for an additional twelve (12) month period following the
Optionee's cessation of Board service, so that such option may, during
the twelve (12)-month exercise period following such cessation of Board
service, be exercised for all or any portion of such shares of Common
Stock to the extent so vested and exercisable.
(iv) In no event shall any option granted
under this Article Three remain exercisable after the expiration of the
option term. Upon the expiration of the twelve (12)-month exercise
period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, each
option granted before May 7, 1999 shall, immediately upon the
Optionee's cessation of Board service, terminate and cease to be
outstanding to the extent it is not exercisable for vested shares on
the date of such cessation of Board service.
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II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest so that each such option shall, immediately prior to
the effective date of the Corporate Transaction, be exercisable for an
additional number of vested shares of Common Stock subject to such option as
if the Board member continued to serve as a Board member for an additional
twelve (12) months and may be exercised for all or any portion of such shares
of Common Stock to the extent so vested. Immediately following the
consummation of the Corporate Transaction, each automatic option grant shall
terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof).
B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest so that each such option shall, immediately prior to
the effective date of the Change in Control, be exercisable for an additional
number of vested shares of Common Stock as if the Board member continued to
serve as a Board member for an additional twelve (12) months and may be
exercised for all or any portion of such shares of Common Stock to the extent
so vested. Each such option shall remain exercisable for such option shares
so vested until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, each automatic
option granted before October 21, 1996 and held by the Optionee for a period
of at least six (6) months shall be automatically canceled. The Optionee
shall in return be entitled to a cash distribution from the Corporation in an
amount equal to the excess of (i) the Take-Over Price of the shares of Common
Stock at the time subject to the canceled option (to the extent such option
is vested) over (ii) the aggregate exercise price payable for such shares.
Such cash distribution shall be paid within five (5) days following the
cancellation of the option by the Corporation. No approval or consent of the
Board shall be required in connection with such option cancellation and cash
distribution.
D. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option
grants made under the Discretionary Option Grant Program.
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ARTICLE FOUR
MISCELLANEOUS
I. FINANCING
A. The Plan Administrator may permit any Optionee to pay the option
exercise price under the Plan by delivering a promissory note payable in one
or more installments. The terms of any such promissory note (including the
interest rate and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion. Promissory notes may be authorized with
or without security or collateral. In all events, the maximum credit
available to the Optionee may not exceed the sum of (i) the aggregate option
exercise price payable for the purchased shares plus (ii) any Federal, state
and local income and employment tax liability incurred by the Optionee in
connection with the option exercise.
B. The Plan Administrator may, in its discretion, determine that
one or more such promissory notes shall be subject to forgiveness by the
Corporation in whole or in part upon such terms as the Plan Administrator may
deem appropriate.
II. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at
any time and from time to time, with the consent of the affected option
holders, the cancellation of any or all outstanding options under the Plan
(including outstanding options incorporated from the Predecessor Plan) and to
grant in substitution new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new option grant date.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or stock appreciation rights under the Plan
shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or
all holders of Non-Statutory Options under the Plan with the right to use
shares of Common Stock in satisfaction of all or part of the Taxes incurred
by such holders in connection with the exercise of their options. Such right
may be provided to any such holder in either or both of the following formats:
(i) STOCK WITHHOLDING: The election to have
the Corporation withhold, from the shares of Common Stock otherwise
issuable upon the exercise of such Non-Statutory Option, a portion of
those shares with an aggregate Fair Market Value equal to the
percentage of the Taxes (not to exceed one hundred percent (100%))
designated by the holder.
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(ii) STOCK DELIVERY: The election to deliver
to the Corporation, at the time the Non-Statutory Option is exercised,
one or more shares of Common Stock previously acquired by such holder
(other than in connection with the option exercise triggering the
Taxes) with an aggregate Fair Market Value equal to the percentage of
the Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
IV. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Discretionary Option Grant Program became effective on April
25, 1996, the Plan Effective Date and options may be granted under the
Discretionary Option Grant Program from and after the Plan Effective Date.
The Automatic Option Grant Program became effective on April 25, 1996, the
Automatic Option Grant Program Effective Date and the initial option grants
under the Automatic Option Grant Program shall be made to the Eligible
Directors at that time. On October 21, 1996, the Plan was amended to increase
the number of shares issuable thereunder to 5,500,000 shares and to make
certain other amendments and to delete provisions no longer required by
Section 16 of the 1934 Act as a result of the SEC's revision of Rule 16b-3.
The Plan was amended on May 7, 1999 to provide for the grant of fully-vested
options under the Automatic Option Grant Program subject to a deferral of
exercisability.
B. The Plan shall serve as the successor to the Predecessor Plan,
and no further option grants shall be made under the Predecessor Plan after
the Plan Effective Date. All options outstanding under the Predecessor Plan
as of such date shall, immediately upon approval of the Plan by the
Corporation's stockholders, be incorporated into the Plan and treated as
outstanding options under the Plan. However, each outstanding option so
incorporated shall continue to be governed solely by the terms of the
documents evidencing such option, and no provision of the Plan shall be
deemed to affect or otherwise modify the rights or obligations of the holders
of such incorporated options with respect to their acquisition of shares of
Common Stock.
C. The option/vesting acceleration provisions of Article Two
relating to Corporate Transactions and Changes in Control may, in the Plan
Administrator's discretion, be extended to one or more options incorporated
from the Predecessor Plan which do not otherwise provide for such
acceleration.
D. The Plan shall terminate upon the EARLIEST of (i) February 28,
2006, (ii) the date on which all shares available for issuance under the Plan
shall have been issued pursuant to the exercise of the options under the Plan
or (iii) the termination of all outstanding options in connection with a
Corporate Transaction. Upon such Plan termination, all options outstanding on
such date shall thereafter continue to have force and effect in accordance
with the provisions of the documents evidencing such options.
V. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such
amendment or modification shall adversely affect the rights and obligations
with respect to options or stock appreciation rights at
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the time outstanding under the Plan unless the Optionee consents to such
amendment or modification. Notwithstanding the foregoing clause, the Plan
Administrator may amend an outstanding option to reduce the number of option
shares previously granted to an optionee provided the reduction applies
solely to unvested shares or shares which have not yet become exercisable as
of the date of the amendment. In addition, the Board shall not, without the
approval of the Corporation's stockholders, (i) materially increase the
maximum number of shares issuable under the Plan, the number of shares for
which options may be granted under the Automatic Option Grant Program or the
maximum number of shares for which any one person may be granted options or
separately exercisable stock appreciation rights in the aggregate over the
term of the Plan, except for permissible adjustments in the event of certain
changes in the Corporation's capitalization, or (ii) materially modify the
eligibility requirements for Plan participation.
B. Options to purchase shares of Common Stock may be granted under
the Plan that are in excess of the number of shares then available for
issuance under the Plan, provided any excess shares actually issued under the
Plan are held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock
available for issuance under the Plan. If such stockholder approval is not
obtained within twelve (12) months after the date the first such excess
issuances are made, then (i) any unexercised options granted on the basis of
such excess shares shall terminate and cease to be outstanding and (ii) the
Corporation shall promptly refund to the Optionees the exercise price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the
shares were held in escrow, and such shares shall thereupon be automatically
canceled and cease to be outstanding.
VI. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
VII. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option or
stock appreciation right under the Plan and the issuance of any shares of
Common Stock upon the exercise of any option or stock appreciation right
shall be subject to the Corporation's procurement of all approvals and
permits required by regulatory authorities having jurisdiction over the Plan,
the options and stock appreciation rights granted under it and the shares of
Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance
with all applicable requirements of Federal and state securities laws,
including the filing and effectiveness of the Form S-8 registration statement
for the shares of Common Stock issuable under the Plan, and all applicable
listing requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which Common Stock is then listed for trading.
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VIII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining such person) or of the Optionee, which
rights are hereby expressly reserved by each, to terminate such person's
Service at any time for any reason, with or without cause.
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APPENDIX
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option
grant program in effect under the Plan.
B. AUTOMATIC OPTION GRANT PROGRAM EFFECTIVE DATE shall mean the
Section 12(g) Registration Date.
C. BOARD shall mean the Corporation's Board of Directors.
D. CHANGE IN CONTROL shall mean a change in ownership or control of
the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by
any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders which
the Board does not recommend such stockholders to accept, or
(ii) a change in the composition of the Board
over a period of thirty-six (36) consecutive months or less such that
a majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (A) who were still in office at
the time the Board approved such election or nomination.
E. CODE shall mean the Internal Revenue Code of 1986, as amended.
F. COMMON STOCK shall mean the Corporation's common stock.
G. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which
securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities are
transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction; or
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(ii) the sale, transfer or other disposition of
all or substantially all of the Corporation's assets in complete
liquidation or dissolution of the Corporation.
H. CORPORATION shall mean Heartport, Inc., a Delaware corporation.
I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary
option grant program in effect under the Plan.
J. ELIGIBLE DIRECTOR shall mean a non-employee Board member
eligible to participate in the Automatic Option Grant Program in accordance
with the eligibility provisions of Article One.
K. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance.
L. EXERCISE DATE shall mean the date on which the Corporation shall
have received written notice of the option exercise.
M. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded
on the Nasdaq National Market, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in
question, as such price is reported by the National Association of
Securities Dealers on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed
on any Stock Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question on the
Stock Exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) For purposes of option grants made on the
date the Underwriting Agreement is executed and the initial public
offering price of the Common Stock is established, the Fair Market
Value shall be deemed to be equal to the established initial offering
price per share. For purposes of option grants made prior to such date,
the Fair Market Value shall be determined by the Plan Administrator
after taking into account such factors as the Plan Administrator shall
deem appropriate.
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N. HOSTILE TAKE-OVER shall mean a change in ownership of the
Corporation effected through the following transaction:
(i) the acquisition, directly or indirectly, by
any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders which
the Board does not recommend such stockholders to accept, AND
(ii) more than fifty percent (50%) of the
securities so acquired are accepted from persons other than Section 16
Insiders.
O. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
P. INVOLUNTARY TERMINATION shall mean the termination of the
Service of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or
discharge by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation
following (A) a change in his or her position with the Corporation
which materially reduces his or her level of responsibility, (B) a
reduction in his or her level of compensation (including base salary,
fringe benefits and participation in corporate-performance based bonus
or incentive programs) by more than fifteen percent (15%) or (C) a
relocation of such individual's place of employment by more than fifty
(50) miles, provided and only if such change, reduction or relocation
is effected by the Corporation without the individual's consent.
Q. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee, any unauthorized use or
disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional
misconduct by such person adversely affecting the business or affairs of the
Corporation (or any Parent or Subsidiary) in a material manner. The foregoing
definition shall not be deemed to be inclusive of all the acts or omissions
which the Corporation (or any Parent or Subsidiary) may consider as grounds
for the dismissal or discharge of any Optionee or other person in the Service
of the Corporation (or any Parent or Subsidiary).
R. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.
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S. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.
T. OPTIONEE shall mean any person to whom an option is granted
under the Discretionary Option Grant or Automatic Option Grant Program.
U. PARENT shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations ending with the Corporation, provided
each corporation in the unbroken chain (other than the Corporation) owns, at
the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
V. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Optionee to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more.
W. PLAN shall mean the Corporation's 1996 Stock Option Plan, as set
forth in this document.
X. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized
to administer the Discretionary Option Grant Program with respect to one or
more classes of eligible persons, to the extent such entity is carrying out
its administrative functions under those programs with respect to the persons
under its jurisdiction.
Y. PLAN EFFECTIVE DATE shall mean the Section 12(g) Registration Date.
Z. PREDECESSOR PLAN shall mean the Corporation's existing 1993
Stock Option Plan.
AA. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant Program with respect to Section 16 Insiders.
BB. SECONDARY COMMITTEE shall mean a committee of one (1) or more
Board members appointed by the Board or Primary Committee to administer the
Discretionary Option Grant Program with respect to eligible persons other
than Section 16 Insiders.
CC. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of
the 1934 Act.
DD. SECTION 12(g) REGISTRATION DATE shall mean the first date on
which the Common Stock is registered under Section 12(g) of the 1934 Act.
EE. SERVICE shall mean the provision of services to the Corporation
(or any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of
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directors or a consultant or independent advisor, except to the extent
otherwise specifically provided in the documents evidencing the option grant.
FF. STOCK EXCHANGE shall mean either the American Stock Exchange or
the New York Stock Exchange.
GG. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in
the unbroken chain owns, at the time of the determination, stock possessing
fifty percent (50%) or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
HH. TAKE-OVER PRICE shall mean the GREATER of (i) the Fair Market
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest
reported price per share of Common Stock paid by the tender offeror in
effecting such Hostile Take-Over. However, if the surrendered option is an
Incentive Option, the Take-Over Price shall not exceed the clause (i) price
per share.
II. TAXES shall mean the Federal, state and local income and
employment tax liabilities incurred by the holder of Non-Statutory Options or
unvested shares of Common Stock in connection with the exercise of those
options or the vesting of those shares.
JJ. STOCKHOLDER shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any
Parent or Subsidiary).
KK. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
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HEARTPORT, INC.
EMPLOYEE STOCK PURCHASE PLAN
(Amended and Restated as of February 5, 1999)
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote
the interests of Heartport, Inc. by providing eligible employees with the
opportunity to acquire a proprietary interest in the Corporation through
participation in a payroll-deduction based employee stock purchase plan
designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned
to such terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to
interpret and construe any provision of the Plan and to adopt such rules and
regulations for administering the Plan as it may deem necessary in order to
comply with the requirements of Code Section 423. Decisions of the Plan
Administrator shall be final and binding on all parties having an interest in
the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of
Common Stock purchased on the open market. The maximum number of shares of
Common Stock which may be issued over the term of the Plan shall initially
not exceed Two Hundred Forty Thousand (240,000) shares. In addition, the
number of shares of Common Stock available for purchase under the Plan shall
automatically increase by the lesser of (i) 0.5% of the total number of
shares of Common Stock outstanding on the last day of the preceding calendar
year or (ii) 150,000 shares on January 1 each year beginning January 1, 1999.
B. Should any change be made to the Common Stock by reason
of any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as
a class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and class of securities
issuable under the Plan, (ii) the maximum number and class of securities
purchasable per Participant on any one Purchase Date and (iii) the number and
class of securities and the price per share in effect under each outstanding
Purchase Right in order to prevent the dilution or enlargement of benefits
thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase
under the Plan through a series of successive or overlapping Offering Periods
until such time as (i) the
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maximum number of shares of Common Stock available for issuance under the
Plan shall have been purchased or (ii) the Plan shall have been sooner
terminated.
B. Each Offering Period shall be of such duration (not to
exceed twenty-four (24) months) as determined by the Plan Administrator prior
to the start date. The initial Offering Period shall commence on November 1,
1996 and terminate on the last business day in October 1998. The next
Offering Period shall commence on June 1, 1997, the next Offering Period
shall commence on November 3, 1997 and subsequent Offering Periods shall
commence every six (6) months thereafter on the first business day in May and
November each year unless otherwise designated by the Plan Administrator. The
Plan Administrator shall have complete discretion to change the start date
and the duration of an Offering Period provided Eligible Employees are
notified prior to the start date of any Purchase Period within an Offering
Period for which such change is to be effective and provided, further, that
no Offering Period shall have a duration exceeding twenty-seven (27) months.
C. Each Offering Period shall be comprised of a series of
one or more successive Purchase Periods. Each Purchase Period shall be of
such duration (generally not to exceed six (6) months) as determined by the
Plan Administrator prior to the start date. However, the initial Purchase
Period shall commence on November 1, 1996 and terminate on May 30, 1997. The
next Purchase Period shall commence on June 1, 1997, and subsequent Purchase
Periods shall commence on the first business day of November and May each
calendar year thereafter unless otherwise designated by the Plan
Administrator.
V. ELIGIBILITY
A. Each Eligible Employee shall be eligible to participate
in the Plan in accordance with the following provisions:
- An individual who is an Eligible Employee on the start
date of any Offering Period under the Plan shall be eligible to commence
participation in that Offering Period on such start date.
- An individual who first becomes an Eligible Employee
after the start date of any Offering Period under the Plan may enter any
subsequent Offering Period on which he/she remains an Eligible Employee.
B. To participate in the Plan for a particular Offering
Period, the Eligible Employee must complete the enrollment forms prescribed
by the Plan Administrator (including a stock purchase agreement and a payroll
deduction authorization form) and file such forms with the Plan Administrator
(or its designate) on or before the start date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for
purposes of acquiring shares of Common Stock under the Plan may be any
multiple of one percent (1%) of
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the Cash Compensation paid to the Participant during each Purchase Period
within the Offering Period, up to a maximum of fifteen percent (15%).
However, if a Participant is participating in more than one Offering Period
at any one time, the maximum authorized payroll deduction remains fifteen
percent (15%). The deduction rate so authorized shall continue in effect for
the remainder of the Offering Period, except to the extent such rate is
changed in accordance with the following guidelines:
(i) The Participant may, at any time during the Ofering
Period, reduce his or her rate of payroll deduction to become
effective as soon as possible after filing the appropriate form with
the Plan Administrator. The Participant may not, however, effect more
than one (1) such reduction per Purchase Period.
(ii) The Participant may, prior to the commencement of
any new Purchase Period within the Offering Period, increase the rate
of his or her payroll deduction by filing the appropriate form with
the Plan Administrator. The new rate (which may not exceed the fifteen
percent (15%) maximum) shall become effective as of the start date of
the Purchase Period following the filing of such form.
B. Payroll deductions shall begin on the first pay day
following the start date for the Offering Period and shall (unless sooner
terminated by the Participant) continue through the pay day ending with or
immediately prior to the last day of that Offering Period. The amounts so
collected shall be credited to the Participant's book account under the Plan,
but no interest shall be paid on the balance from time to time outstanding in
such account. The amounts collected from the Participant shall not be held in
any segregated account or trust fund and may be commingled with the general
assets of the Corporation and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the
termination of the Participant's Purchase Right in accordance with the
provisions of the Plan.
D. The Participant's acquisition of Common Stock under the
Plan on any Purchase Date shall neither limit nor require the Participant's
acquisition of Common Stock on any subsequent Purchase Date, whether within
the same or a different Offering Period.
VII. PURCHASE RIGHTS
A. GRANT OF PURCHASE RIGHT. A Participant shall be granted
a separate Purchase Right for each Offering Period in which he or she
participates. The Purchase Right shall be granted on the start date of the
Offering Period and shall provide the Participant with the right to purchase
shares of Common Stock, in a series of successive installments over the
remainder of such Offering Period, upon the terms set forth below. Each
Participant may participate in more than one (1) Offering Period at any one
time. Accordingly, a Participant may continue to participate in one Offering
Period and also enroll in subsequent Offering Periods. The Purchase Right
shall be granted on the date such individual first joins an Offering Period,
shall continue until the end of the Offering Period, and shall be
automatically exercised in
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successive semi-annual installments on the last business day of the Purchase
Period each year (the last business day of April and October each year or
such other date selected by the Plan Administrator as the ending date for the
Purchase Period) until the Offering Period ends. Accordingly, each Purchase
Right may be exercised up to two (2) times each year it remains outstanding.
The Participant shall execute a stock purchase agreement embodying such terms
and such other provisions (not inconsistent with the Plan) as the Plan
Administrator may deem advisable
Under no circumstances shall Purchase Rights be granted
under the Plan to any Eligible Employee if such individual would, immediately
after the grant, own (within the meaning of Code Section 424(d)) or hold
outstanding options or other rights to purchase, stock possessing five
percent (5%) or more of the total combined voting power or value of all
classes of stock of the Corporation or any Corporate Affiliate.
B. EXERCISE OF THE PURCHASE RIGHT. Each Purchase Right
shall be automatically exercised in installments on each successive Purchase
Date within the Offering Period, and shares of Common Stock shall accordingly
be purchased on behalf of each Participant (other than any Participant whose
payroll deductions have previously been refunded in accordance with the
Termination of Purchase Right provisions below) on each such Purchase Date.
The purchase shall be effected by applying the Participant's payroll
deductions for the Purchase Period ending on such Purchase Date (together
with any carryover deductions from the preceding Purchase Period) to the
purchase of whole shares of Common Stock (subject to the limitation on the
maximum number of shares purchasable per Participant on any one Purchase
Date) at the purchase price in effect for the Participant for that Purchase
Date.
C. PURCHASE PRICE. The purchase price per share at which
Common Stock will be purchased on the Participant's behalf on each Purchase
Date within the Offering Period shall be equal to eighty-five percent (85%)
of the LOWER of (i) the Fair Market Value per share of Common Stock on the
start date for the Offering Period or (ii) the Fair Market Value per share of
Common Stock on that Purchase Date.
D. NUMBER OF PURCHASABLE SHARES. The number of shares of
Common Stock purchasable by a Participant on each Purchase Date during the
Offering Period shall be the number of shares obtained by dividing the amount
collected from the Participant through payroll deductions during the Purchase
Period ending with that Purchase Date (plus any carryover deductions from the
preceding Purchase Period) by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed ONE THOUSAND (1,000) shares, subject to periodic adjustments in the
event of certain changes in the Corporation's capitalization.
E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not
applied to the purchase of shares of Common Stock on any Purchase Date
because they are not sufficient to purchase a whole share of Common Stock
shall be held for the purchase of Common Stock on the next Purchase Date.
However, any payroll deductions not applied to the purchase of
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Common Stock by reason of the limitation on the maximum number of shares
purchasable by the Participant on the Purchase Date shall be promptly
refunded.
F. TERMINATION OF PURCHASE RIGHT. The following provisions
shall govern the termination of outstanding Purchase Rights:
(i) A Participant may, at any time prior to the next
Purchase Date within the Offering Period, terminate his or her
outstanding Purchase Right by filing the appropriate form with the
Plan Administrator (or its designate), and no further payroll
deductions shall be collected from the Participant with respect to the
terminated Purchase Right. Any payroll deductions collected during the
Purchase Period in which such termination occurs shall, at the
Participant's election, be immediately refunded or held for the
purchase of shares on the next Purchase Date. If no such election is
made at the time such Purchase Right is terminated, then the payroll
deductions collected with respect to the terminated right shall be
refunded as soon as possible.
(ii) The termination of such Purchase Right shall be
irrevocable, and the Participant may not subsequently rejoin the
Purchase Period for which the terminated Purchase Right was granted.
In order to resume participation in any subsequent Offering Period,
such individual must re-enroll in the Plan (by making a timely filing
of the prescribed enrollment forms) on or before the start date for
that Offering Period.
(iii) Should the Participant cease to remain an Eligible
Employee for any reason (including death, disability or change in
status) while his or her Purchase Right remains outstanding, then that
Purchase Right shall immediately terminate, and all of the
Participant's payroll deductions for the Purchase Period in which the
Purchase Right so terminates (plus any carryover amounts) shall be
immediately refunded. However, should the Participant cease to remain
in active service by reason of an approved unpaid leave of absence,
then the Participant shall have the election, exercisable up until the
last business day of the Purchase Period in which such leave
commences, to (a) withdraw all the funds in the Participant's payroll
account at the time of the commencement of such leave or (b) have such
funds held for the purchase of shares at the end of such Purchase
Period. In no event, however, shall any further payroll deductions be
added to the Participant's account during such leave. Upon the
Participant's return to active service, his or her payroll deductions
under the Plan shall automatically resume at the rate in effect at
the time the leave began, provided the Participant returns to service
prior to the expiration date of the offering period in which such
leave began.
G. CORPORATE TRANSACTION. Each outstanding Purchase Right
shall automatically be exercised, immediately prior to the effective date of
any Corporate Transaction, by applying the payroll deductions of each
Participant for the Purchase Period in which such Corporate Transaction
occurs to the purchase of shares of Common Stock at a purchase price per
share equal to eighty-five percent (85%) of the LOWER of (i) the Fair Market
Value per share of Common Stock on the start date for the Offering Period in
which such Corporate Transaction
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<PAGE>
occurs or (ii) the Fair Market Value per share of Common Stock immediately
prior to the effective date of such Corporate Transaction. However, the
applicable limitation on the number of shares of Common Stock purchasable per
Participant shall continue to apply to any such purchase.
The Corporation shall use its best efforts to provide at
least ten (10)-days prior written notice of the occurrence of any Corporate
Transaction, and Participants shall, following the receipt of such notice,
have the right to terminate their outstanding Purchase Rights prior to the
effective date of the Corporate Transaction.
H. PRORATION OF PURCHASE RIGHTS. Should the total number of
shares of Common Stock which are to be purchased pursuant to outstanding
Purchase Rights on any particular date exceed the number of shares then
available for issuance under the Plan, the Plan Administrator shall make a
pro-rata allocation of the available shares on a uniform and
nondiscriminatory basis, and the payroll deductions of each Participant, to
the extent in excess of the aggregate purchase price payable for the Common
Stock pro-rated to such individual, shall be refunded.
I. ASSIGNABILITY. During the Participant's lifetime, the
Purchase Right shall be exercisable only by the Participant and shall not be
assignable or transferable by the Participant.
J. STOCKHOLDER RIGHTS. A Participant shall have no
stockholder rights with respect to the shares subject to his or her
outstanding Purchase Right until the shares are purchased on the
Participant's behalf in accordance with the provisions of the Plan and the
Participant has become a holder of record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to
acquire Common Stock pursuant to any Purchase Right outstanding under this
Plan if and to the extent such accrual, when aggregated with (i) rights to
purchase Common Stock accrued under any other Purchase Right granted under
this Plan and (ii) similar rights accrued under other employee stock purchase
plans (within the meaning of Code Section 423) of the Corporation or any
Corporate Affiliate, would otherwise permit such Participant to purchase more
than Twenty-Five Thousand Dollars ($25,000) worth of stock of the Corporation
or any Corporate Affiliate (determined on the basis of the Fair Market Value
of such stock on the date or dates such rights are granted) for each calendar
year such rights are at any time outstanding.
B. For purposes of applying such accrual limitations, the
following provision shall be in effect:
(i) No right to acquire Common Stock under any
outstanding Purchase Right shall accrue to the extent the Participant
has already accrued in the same calendar year the right to acquire
Common Stock under one (1) or more other Purchase
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<PAGE>
Rights at a rate equal to Twenty-Five Thousand Dollars ($25,000) worth
of Common Stock (determined on the basis of the Fair Market Value of
such stock on the date or dates of grant) for each calendar year such
rights were at any time outstanding.
C. If by reason of such accrual limitations, any Purchase
Right of a Participant does not accrue for a particular Purchase Period, then
the payroll deductions which the Participant made during that Purchase Period
with respect to such Purchase Right shall be promptly refunded.
D. In the event there is any conflict between the
provisions of this Article and one or more provisions of the Plan or any
instrument issued thereunder, the provisions of this Article shall be
controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on February 26, 1996
and approved by the stockholders on April 10, 1996. The Plan was subsequently
amended and restated on October 21, 1996 to increase the maximum deduction
and to permit 24-month Offering Periods to become effective at the November
1, 1996 Offering Period, and the stockholders approved the amendment and
restatement at the 1997 Annual Meeting. The Plan was subsequently amended and
restated on February 5, 1999 to increase the provide for annual automatic
increases to the share reserve and the amendment and the stockholders
approved the amendment and restatement at the 1999 Annual Meeting. No
Purchase Rights shall be exercised and no shares of Common Stock shall be
issued hereunder until the Corporation shall have complied with all
applicable requirements of the 1933 Act (including the registration of the
shares of Common Stock issuable under the Plan on a Form S-8 registration
statement filed with the Securities and Exchange Commission), all applicable
listing requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock is listed for trading and all other
applicable requirements established by law or regulation.
B. Unless sooner terminated by the Board, the Plan shall
terminate upon the earliest of (i) the last business day in October, 2006,
(ii) the date on which all shares available for issuance under the Plan shall
have been sold pursuant to Purchase Rights exercised under the Plan or (iii)
the date on which all Purchase Rights are exercised in connection with a
Corporate Transaction. No further Purchase Rights shall be granted or
exercised, and no further payroll deductions shall be collected, under the
Plan following its termination.
X. AMENDMENT OF THE PLAN
The Board may alter, amend, suspend or discontinue the Plan
at any time to become effective immediately following the close of any
Purchase Period. However, the Board may not, without the approval of the
Corporation's stockholders, (i) materially increase the number of shares of
Common Stock issuable under the Plan or the maximum number of shares
purchasable per Participant on any one Purchase Date, except for permissible
adjustments in the event of certain changes in the Corporation's
capitalization, (ii) alter the purchase price formula
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so as to reduce the purchase price payable for the shares of Common Stock
purchasable under the Plan, or (iii) materially increase the benefits
accruing to Participants under the Plan or materially modify the requirements
for eligibility to participate in the Plan.
XI. GENERAL PROVISIONS
A. All costs and expenses incurred in the administration
of the Plan shall be paid by the Corporation.
B. Nothing in the Plan shall confer upon the Participant
any right to continue in the employ of the Corporation or any Corporate
Affiliate for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Corporation (or any Corporate Affiliate
employing such person) or of the Participant, which rights are hereby
expressly reserved by each, to terminate such person's employment at any time
for any reason, with or without cause.
C. The provisions of the Plan shall be governed by the laws
of the State of California without resort to that State's conflict-of-laws
rules.
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SCHEDULE A
CORPORATIONS PARTICIPATING IN EMPLOYEE
STOCK PURCHASE PLAN AS OF THE EFFECTIVE TIME:
HEARTPORT, INC.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CASH COMPENSATION shall mean the (i) regular base salary paid to
a Participant by one or more Participating Companies during such individual's
period of participation in the Plan, plus (ii) any pre-tax contributions made
by the Participant to any Code Section 401(k) salary deferral plan or any
Code Section 125 cafeteria benefit program now or hereafter established by
the Corporation or any Corporate Affiliate, plus (iii) all of the following
amounts to the extent paid in cash: overtime payments, bonuses, commissions,
profit-sharing distributions and other incentive-type payments. However,
Eligible Earnings shall not include any contributions (other than Code
Section 401(k) or Code Section 125 contributions) made on the Participant's
behalf by the Corporation or any Corporate Affiliate to any deferred
compensation plan or welfare benefit program now or hereafter established.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
D. COMMON STOCK shall mean the Corporation's common stock.
E. CORPORATE AFFILIATE shall mean any parent or subsidiary
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
F. CORPORATE TRANSACTION shall mean either of the following
stockholder- approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all
or substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation.
G. CORPORATION shall mean Heartport, Inc., a Delaware corporation,
and any corporate successor to all or substantially all of the assets or
voting stock of Heartport, Inc. which shall by appropriate action adopt the
Plan.
H. EFFECTIVE TIME, for purposes of the initial purchase period,
shall mean the time at which the Underwriting Agreement is executed and
finally priced. Any Corporate Affiliate which becomes a Participating
Corporation after such Effective Time shall designate a
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subsequent Effective Time with respect to its employee-Participants. The
Effective Time for purposes of the restated Plan is November 1, 1996. Any
Corporate Affiliate which becomes a Participating Corporation after the
applicable Effective Time shall designate a subsequent Effective Time with
respect to its employee-Participants.
I. ELIGIBLE EMPLOYEE shall mean any person who is engaged, on a
regularlyscheduled basis of more than twenty (20) hours per week for more
than five (5) months per calendar year, in the rendition of personal services
to any Participating Corporation as an employee for earnings considered wages
under Code Section 3401(a).
J. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market or any successor system. If there
is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling price
on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) For purposes of the initial Purchase Period
which begins at the Effective Time, the Fair Market Value shall be
deemed to be equal to the price per share at which the Common Stock is
sold in the initial public offering pursuant to the Underwriting
Agreement.
K. 1933 ACT shall mean the Securities Act of 1933, as amended.
L. OFFERING PERIOD means a period of approximately twenty-four (24)
months that commences on the first business day following each semi-annual
Purchase Date, during which a Participant may be granted a Purchase Right.
M. PARTICIPANT shall mean any Eligible Employee of a Participating
Corporation who is actively participating in the Plan.
N. PARTICIPATING CORPORATION shall mean the Corporation and such
Corporate Affiliate or Affiliates as may be authorized from time to time by
the Board to extend the benefits
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of the Plan to their Eligible Employees. The Participating Corporations in
the Plan as of the Effective Time are listed in attached Schedule A.
O. PLAN shall mean the Corporation's Employee Stock Purchase Plan,
as set forth in this document.
P. PLAN ADMINISTRATOR shall mean the committee of two (2) or more
Boardmembers appointed by the Board to administer the Plan.
Q. PURCHASE DATE shall mean the last business day of each Purchase
Period. The initial Purchase Date shall be October 31, 1996.
R. PURCHASE PERIOD shall mean the approximately six (6) month
period commencing on the first business day after a Purchase Date and ending
with the next Purchase Date, except that the first Purchase Period shall
commence on the Effective Time and end on October 31, 1996.
S. PURCHASE RIGHT shall mean the right granted to each Participant
who enrolls on the start date for a Purchase Period and which provides the
Participant with the right to purchase shares of Common Stock on the Purchase
Date for such Purchase Period, upon the terms set forth herein.
T. STOCK EXCHANGE shall mean either the American Stock Exchange or the
New York Stock Exchange.
U. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
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HEARTPORT, INC.
1999 SUPPLEMENTAL STOCK OPTION PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1999 Supplemental Stock Option Plan is intended to
promote the interests of Heartport, Inc., a Delaware corporation, by providing
eligible persons who are not officers or directors of the Corporation with the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.
Capitalized terms shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
A. The Committee shall have authority to administer
the Plan. In addition, the Board may retain the power to administer the Plan
with respect to all persons.
B. Members of the Committee shall serve for such
period of time as the Board may determine and shall be subject to removal by
the Board at any time. The Board may also at any time terminate the functions
of any committee and reassume all powers and authority previously delegated
to such committee.
C. The Plan Administrator shall, within the scope of
its administrative functions under the Plan, have full power and authority to
establish such rules and regulations as it may deem appropriate for proper
administration of the Plan and to make such determinations under, and issue
such interpretations of, the provisions of such program and any outstanding
options thereunder as it may deem necessary or advisable. Decisions of the
Plan Administrator within the scope of its administrative functions under the
Plan shall be final and binding on all parties who have an interest in the
Plan under its jurisdiction or any option thereunder.
D. Service on the Committee shall constitute service
as a Board member, and members of each such committee shall accordingly be
entitled to full indemnification and reimbursement as Board members for their
service on such committee. No member of the Committee shall be liable for any
act or omission made in good faith with respect to the Plan or any option
grants made under the Plan.
III. ELIGIBILITY
A. The persons eligible to participate in the Plan
are as follows:
<PAGE>
(i) Employees, excluding officers of the
Corporation;
(ii) non-employee members of the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors
who provide services to the Corporation (or any Subsidiary).
B. The Plan Administrator shall, within the scope of
its administrative jurisdiction under the Plan, have full authority (subject
to the provisions of the Plan) to determine, with respect to the option
grants under the Plan, which eligible persons are to receive option grants,
the time or times when such option grants are to be made, the number of
shares to be covered by each such grant, the time or times at which each
option is to become exercisable and the vesting schedule (if any) applicable
to the option shares and the maximum term for which the option is to remain
outstanding.
IV. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares
of authorized but unissued or reacquired Common Stock, including shares
repurchased by the Corporation on the open market. The maximum number of
shares of Common Stock which may be issued over the term of the Plan shall
not exceed 1,500,000 shares.
B. Shares of Common Stock subject to outstanding
options shall be available for subsequent issuance under the Plan to the
extent (i) the options expire or terminate for any reason prior to exercise
in full or (ii) the options are canceled in accordance with the
cancellation-regrant provisions of Article Two. All shares issued under the
Plan, whether or not those shares are subsequently repurchased by the
Corporation pursuant to its repurchase rights under the Plan,shall reduce on
a share-for-share basis the number of shares of Common Stock available for
subsequent issuance under the Plan. In addition, should the exercise price of
an option under the Plan be paid with shares of Common Stock or should shares
of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection
with the exercise of an option under the Plan, then the number of shares of
Common Stock available for issuance under the Plan shall be reduced by the
net number of shares of Common Stock issued to the holder of such option.
C. Should any change be made to the Common Stock by
reason of any stock split,stock dividend, recapitalization, combination of
shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without the Corporation's receipt of consideration,
appropriate adjustments shall be made to (i) the maximum number and/or class
of securities issuable under the Plan and (ii) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option in order to prevent the dilution or enlargement of benefits
thereunder. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive.
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ARTICLE TWO
OPTION PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; PROVIDED, however, that each such
document shall comply with the terms specified below.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by
the Plan Administrator but shall not be less than eighty-five percent (85%)
of the Fair Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately
due upon exercise of the option and shall, subject to the provisions of
Section I of Article Three and the documents evidencing the option, be
payable in one or more of the forms specified below:
(i) cash or check made payable to the
Corporation,
(ii) shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation's earnings
for financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(iii) to the extent the option is exercised
for vested shares, through a special sale and remittance procedure pursuant
to which the Optionee shall concurrently provide irrevocable written
instructions to (a) a Corporation-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the Corporation, out of
the sale proceeds available on the settlement date, sufficient funds to cover
the aggregate exercise price payable for the purchased shares plus all
applicable Federal, state and local income and employment taxes required to
be withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly to
such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made
on the Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall
be exercisable at such time or times, during such period and for such number
of shares as shall be determined by the Plan Administrator and set forth in
the documents evidencing the option. However, no option shall have a term in
excess of ten (10) years measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the
exercise of any options held by the Optionee at the time of cessation of
Service or death:
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(i) Any option outstanding at the time of the
Optionee's cessation of Service for any reason shall remain exercisable for
such period of time thereafter as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option, but no
such option shall be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in
part by the Optionee at the time of death may be subsequently exercised by
the personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will or
in accordance with the laws of descent and distribution.
(iii) During the applicable post-Service
exercise period, the option may not be exercised in the aggregate for more
than the number of vested shares for which the option is exercisable on the
date of the Optionee's cessation of Service. Upon the expiration of the
applicable exercise period or (if earlier) upon the expiration of the option
term, the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Service, terminate and
cease to be outstanding to the extent it is not exercisable for vested shares
on the date of such cessation of Service.
(iv) Should the Optionee's Service be
terminated for Misconduct, then all outstanding options held by the Optionee
shall terminate immediately and cease to be outstanding.
(v) In the event of a Corporate Transaction,
the provisions of Section III of this Article Two shall govern the period for
which the outstanding options are to remain exercisable following the
Optionee's cessation of Service and shall supersede any provisions to the
contrary in this section.
2. The Plan Administrator shall have the
discretion, exercisable either at the time an option is granted or at any
time while the option remains outstanding,to:
(i) extend the period of time for which the
option is to remain exercisable following the Optionee's cessation of Service
from the period otherwise in effect for that option to such greater period of
time as the Plan Administrator shall deem appropriate, but in no event beyond
the expiration of the option term, and/or
(ii) permit the option to be exercised,
during the applicable post-Service exercise period, not only with respect to
the number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also with
respect to one or more additional installments in which the Optionee would
have vested under the option had the Optionee continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have
no stockholder rights with respect to the shares subject to the option until
such person shall have
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<PAGE>
exercised the option, paid the exercise price and become a holder of record of
the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of
Common Stock. Should the Optionee cease Service while holding such unvested
shares, the Corporation shall have the right to repurchase, at the exercise
price paid per share, any or all of those unvested shares. The terms upon
which such repurchase right shall be exercisable (including the period and
procedure for exercise and the appropriate vesting schedule for the purchased
shares) shall be established by the Plan Administrator and set forth in the
document evidencing such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime
of the Optionee, the option shall be exercisable only by the Optionee and
shall not be assignable or transferable other than by will or by the laws of
descent and distribution following the Optionee's death. However, a
Non-Statutory Option may be assigned (i) to a member of the immediate family
of the optionee or to a trust established for the benefit of one or more
members of the immediate family of the optionee, provided that the assignment
shall not be effective until written notice of the assignment is received by
the Plan Administrator, or (ii) in accordance with terms approved in advance
by the Plan Administrator. The terms applicable to the assigned option (or
portion thereof) shall be the same as those in effect for the option
immediately prior to such assignment and shall be set forth in such documents
issued to the assignee as the Plan Administrator may deem appropriate.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each
outstanding option shall automatically accelerate so that each such option
shall, immediately prior to the effective date of the Corporate Transaction,
become fully exercisable for all of the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. However, an outstanding option shall NOT
so accelerate if and to the extent: (i) such option is, in connection with the
Corporate Transaction, either to be assumed by the successor corporation (or
parent thereof) or to be replaced with a comparable option to purchase shares
of the capital stock of the successor corporation (or parent thereof), (ii) such
option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing on the unvested option shares
at the time of the Corporate Transaction and provides for subsequent payout in
accordance with the same vesting schedule applicable to such option or (iii) the
acceleration of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant. The determination of option
comparability under clause (i) above shall be made by the Plan Administrator,
and its determination shall be final, binding and conclusive.
B. All outstanding repurchase rights shall also
terminate automatically, and the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event of any Corporate
Transaction, except to the extent: (i) those repurchase rights are to be
assigned to the successor corporation (or parent thereof) in connection with
such Corporate Transaction or (ii) such accelerated vesting is precluded by
other limitations imposed by the Plan Administrator at the time the repurchase
right is issued.
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C. The Plan Administrator shall have the discretion,
exercisable either at the time the option is granted or at any time while the
option remains outstanding,to provide for the automatic acceleration of one or
more outstanding options (and the automatic termination of one or more
outstanding repurchase rights with the immediate vesting of the shares of Common
Stock subject to those rights) upon the occurrence of a Corporate Transaction,
whether or not those options are to be assumed or replaced (or those repurchase
rights are to be assigned) in the Corporate Transaction.
D. Immediately following the consummation of the
Corporate Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
E. Each option which is assumed in connection with a
Corporate Transaction shall be appropriately adjusted, immediately after such
Corporate Transaction, to apply to the number and class of securities which
would have been issuable to the Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to (i) the number and
class of securities available for issuance under the Plan on both an aggregate
and per Optionee basis following the consummation of such Corporate Transaction
and (ii) the exercise price payable per share under each outstanding option,
PROVIDED the aggregate exercise price payable for such securities shall remain
the same.
F. Any options which are assumed or replaced in the
Corporate Transaction and do not otherwise accelerate at that time, shall
automatically accelerate (and any of the Corporation's outstanding repurchase
rights which do not otherwise terminate at the time of the Corporate Transaction
shall automatically terminate and the shares of Common Stock subject to those
terminated rights shall vest) in the event the Optionee's Service should
subsequently terminate by reason of an Involuntary Termination within twelve
(12) months following the effective date of such Corporate Transaction. Any
options so accelerated (and any of the Corporation's outstanding repurchase
rights so terminated) shall vest, as if the Optionee's Service continued for an
additional twelve (12) months following the Involuntary Termination and shall
remain exercisable for all of the shares which are then exercisable and/or
vested until the EARLIER of (i) the expiration of the option term or (ii) the
expiration of the one (1)-year period measured from the effective date of the
Involuntary Termination.
G. The Plan Administrator shall have the discretion,
exercisable either at the time the option is granted or at any time while the
option remains outstanding,to (i) provide for the automatic acceleration of one
or more outstanding options (and the automatic termination of one or more
outstanding repurchase rights with the immediate vesting of the shares of Common
Stock subject to those rights) upon the occurrence of a Change in Control or
(ii) condition any such option acceleration (and the termination of any
outstanding repurchase rights) upon the subsequent Involuntary Termination of
the Optionee's Service within a specified period following the effective date
of such Change in Control. Any options accelerated in connection with a Change
in Control shall remain fully exercisable until the expiration or sooner
termination of the option term.
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H. The grant of options under the Plan shall in no
way affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
7
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ARTICLE THREE
MISCELLANEOUS
I. FINANCING
A. The Plan Administrator may permit any Optionee to
pay the option exercise price under the Plan by delivering a promissory note
payable in one or more installments. The terms of any such promissory note
(including the interest rate and the terms of repayment) shall be established
by the Plan Administrator in its sole discretion. Promissory notes may be
authorized with or without security or collateral. In all events, the maximum
credit available to the Optionee may not exceed the sum of (i) the aggregate
option exercise price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee in
connection with the option exercise.
B. The Plan Administrator may, in its discretion,
determine that one or more such promissory notes shall be subject to forgiveness
by the Corporation in whole or in part upon such terms as the Plan Administrator
may deem appropriate.
II. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at
any time and from time to time, with the consent of the affected option holders,
the cancellation of any or all outstanding options under the Plan and to grant
in substitution new options covering the same or different number of shares of
Common Stock but with an exercise price per share based on the Fair Market Value
per share of Common Stock on the new option grant date.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of
Common Stock upon the exercise of options under the Plan shall be subject to
the satisfaction of all applicable Federal, state and local income and
employment tax withholding requirements.
B. The Plan Administrator may, in its discretion,
provide any or all holders of Non-Statutory Options under the Plan with the
right to use shares of Common Stock in satisfaction of all or part of the
Taxes incurred by such holders in connection with the exercise of their
options. Such right may be provided to any such holder in either or both of
the following formats:
(i) STOCK WITHHOLDING: The election to have the
Corporation withhold, from the shares of Common Stock otherwise issuable upon
the exercise of such Non-Statutory Option, a portion of those shares with an
aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
(ii) STOCK DELIVERY: The election to deliver to
the Corporation, at the time the Non-Statutory Option is exercised, one or
more shares of Common Stock
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<PAGE>
previously acquired by such holder (other than in connection with the option
exercise triggering the Taxes) with an aggregate Fair Market Value equal to the
percentage of the Taxes (not to exceed one hundred percent (100%)) designated by
the holder.
IV. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective on July 29, 1999,
the Plan Effective Date and options may be granted under the Plan from and after
the Plan Effective Date.
B. The Plan shall terminate upon the EARLIEST of (i)
July 28, 2009, (ii) the date on which all shares available for issuance under
the Plan shall have been issued pursuant to the exercise of the options under
the Plan or (iii) the termination of all outstanding options in connection
with a Corporate Transaction. Upon such Plan termination, all options
outstanding on such date shall thereafter continue to have force and effect
in accordance with the provisions of the documents evidencing such options.
V. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power
and authority to amend or modify the Plan in any or all respects. However, no
such amendment or modification shall adversely affect the rights and
obligations with respect to options at the time outstanding under the Plan
unless the Optionee consents to such amendment or modification.
Notwithstanding the foregoing clause, the Plan Administrator may amend an
outstanding option to reduce the number of option shares previously granted
to an optionee provided the reduction applies solely to unvested shares or
shares which have not yet become exercisable as of the date of the amendment.
B. Options to purchase shares of Common Stock may be
granted under the Plan that are in excess of the number of shares then
available for issuance under the Plan.
VI. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale
of shares of Common Stock under the Plan shall be used for general corporate
purposes.
VII. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of
any option under the Plan and the issuance of any shares of Common Stock upon
the exercise of any option shall be subject to the Corporation's procurement
of all approvals and permits required by regulatory authorities having
jurisdiction over the Plan, the options granted under it and the shares of
Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall
be issued or delivered under the Plan unless and until there shall have been
compliance with all applicable requirements of Federal and state securities
laws, including the filing and effectiveness of the Form S-8 registration
statement for the shares of Common Stock issuable under the Plan, and all
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applicable listing requirements of any stock exchange (or the Nasdaq National
Market or Nasdaq Small Cap Market, if applicable) on which Common Stock is
then listed for trading.
VIII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee any
right to continue in Service for any period of specific duration or interfere
with or otherwise restrict in any way the rights of the Corporation (or any
Parent or Subsidiary employing or retaining such person) or of the Optionee,
which rights are hereby expressly reserved by each, to terminate such
person's Service at any time for any reason, with or without cause.
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APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CHANGE IN CONTROL shall mean a change in ownership or
control of the Corporation effected through either of the following
transactions:
(i) the acquisition, directly or indirectly, by any
person or related group of persons (other than the Corporation or a person
that directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders which the Board does not recommend such
stockholders to accept, or
(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a majority of
the Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period by
at least a majority of the Board members described in clause (A) who were
still in office at the time the Board approved such election or nomination.
C. CODE shall mean the Internal Revenue Code of 1986, as
amended.
D. COMMON STOCK shall mean the Corporation's common stock.
E. COMMITTEE shall mean a committee of one (1) or more
Board members appointed by the Board or Compensation Committee to administer
the Plan with respect to eligible persons.
F. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting power
of the Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately prior
to such transaction; or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
G. CORPORATION shall mean Heartport, Inc., a Delaware
corporation.
A-1
<PAGE>
H. EMPLOYEE shall mean an individual who is in the employ
of the Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance.
I. EXERCISE DATE shall mean the date on which the
Corporation shall have received written notice of the option exercise.
J. FAIR MARKET VALUE per share of Common Stock on any
relevant date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as such
price is reported by the National Association of Securities Dealers on the
Nasdaq National Market or any successor system. If there is no closing
selling price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding date
for which such quotation exists. If the Common Stock is at the time traded on
the Nasdaq Small Cap Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as such
price is reported by the National Association of Securities Dealers. If there
is no closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the Common
Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.
K. INVOLUNTARY TERMINATION shall mean the termination of
the Service of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or
discharge by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following
(A) a change in his or her position with the Corporation which materially
reduces his or her level of responsibility, (B) a reduction in his or her
level of compensation (including base salary, fringe benefits and
participation in corporate-performance based bonus or incentive programs) by
more than fifteen percent (15%) or (C) a relocation of such individual's
place of employment by more than fifty (50) miles, provided and only if such
change, reduction or relocation is effected by the Corporation without the
individual's consent.
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<PAGE>
L. MISCONDUCT shall mean the commission of any act of
fraud, embezzlement or dishonesty by the Optionee, any unauthorized use or
disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional
misconduct by such person adversely affecting the business or affairs of the
Corporation (or any Parent or Subsidiary) in a material manner. The foregoing
definition shall not be deemed to be inclusive of all the acts or omissions
which the Corporation (or any Parent or Subsidiary) may consider as grounds
for the dismissal or discharge of any Optionee or other person in the Service
of the Corporation (or any Parent or Subsidiary).
M. 1934 ACT shall mean the Securities Exchange Act of 1934,
as amended.
N. NON-STATUTORY OPTION shall mean an option not intended
to satisfy the requirements of Code Section 422.
O. OPTIONEE shall mean any person to whom an option is granted
under the Plan.
P. PARENT shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations ending with the
Corporation, provided each corporation in the unbroken chain (other than the
Corporation) owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
Q. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean
the inability of the Optionee to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment
expected to result in death or to be of continuous duration of twelve (12)
months or more.
R. PLAN shall mean the Corporation's 1999 Supplemental
Stock Option Plan, as set forth in this document.
S. PLAN ADMINISTRATOR shall mean the particular entity,
whether the Board or the Committee, which is authorized to administer the
Plan to the extent such entity is carrying out its administrative functions
under those programs with respect to the persons under its jurisdiction.
T. PLAN EFFECTIVE DATE shall mean July 29, 1999.
U. SERVICE shall mean the provision of services to the
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in
the documents evidencing the option grant.
V. STOCK EXCHANGE shall mean either the American Stock
Exchange or the New York Stock Exchange.
A-3
<PAGE>
W. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in
the unbroken chain owns, at the time of the determination, stock possessing
fifty percent (50%) or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
AA. TAXES shall mean the Federal, state and local income
and employment tax liabilities incurred by the holder of Non-Statutory
Options or unvested shares of Common Stock in connection with the exercise of
those options or the vesting of those shares.
BB. STOCKHOLDER shall mean the owner of stock (as
determined under Code Section 424(d)) possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of the Corporation
(or any Parent or Subsidiary).
A-4
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-92699 and 333-4030 and Form S-3 No. 333-31161) pertaining to
the Heartport, Inc. 1999 Supplemental Stock Option Plan and Employee Stock
Purchase Plan, the Heartport, Inc. 1996 Stock Option Plan and Employee Stock
Purchase Plan, and the convertible subordinated notes, of our report dated
January 21, 2000, with respect to the consolidated financial statements and
schedule of Heartport, Inc. included in the Annual Report (Form 10-K) for the
year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS ADN CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOUND ON PAGES F-3 AND F-4 OF THE COMPANY'S FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,228
<SECURITIES> 36,611
<RECEIVABLES> 4,388
<ALLOWANCES> 507
<INVENTORY> 1,644
<CURRENT-ASSETS> 48,683
<PP&E> 16,368
<DEPRECIATION> 6,105
<TOTAL-ASSETS> 60,813
<CURRENT-LIABILITIES> 23,777
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> (18,423)
<TOTAL-LIABILITY-AND-EQUITY> 60,813
<SALES> 18,090
<TOTAL-REVENUES> 18,090
<CGS> 10,634
<TOTAL-COSTS> 10,634
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 50
<INTEREST-EXPENSE> 5,059
<INCOME-PRETAX> (21,399)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,399)
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<EPS-BASIC> (0.88)
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