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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______to______
Commission file number 0-28266
HEARTPORT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3222307
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
700 BAY ROAD
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices)
-------------
(650) 306-7900
(Registrant's telephone number, including area code)
-------------
Indicate by check /X/ whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes /X/ No
------ ------
As of September 30, 2000, there, were 26,340,155 shares of the Registrant's
Common Stock outstanding.
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HEARTPORT, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (unaudited)
<S> <C> <C>
Condensed Consolidated Balance Sheets at September 30, 2000
and December 31, 1999.................................................. 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2000 and September 30, 1999... 4
Condensed Consolidated Statements of Cash Flows for the
Nine months ended September 30, 2000 and September 30, 1999............. 5
Notes to Condensed Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 25
PART II. OTHER INFORMATION
Item 5. Other information........................................................ 26
Item 6. Exhibits and Reports on Form 8-K......................................... 26
SIGNATURES........................................................................ 26
</TABLE>
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Heartport, the Heartport logo and EndoCPB are registered trademarks of the
Company. Port-Access and EndoDirect are trademarks of the Company. Port-Access
Partnership is a service mark of the Company.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HEARTPORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------------------- ---------------------
(UNAUDITED) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,310 $ 5,288
Short-term investments 5,527 36,611
Accounts receivable, net 4,010 3,881
Inventories 2,289 1,644
Other current assets 2,119 1,259
----------------------- ---------------------
Total current assets 23,255 48,683
Property and equipment, net 9,704 10,263
Other assets 2,001 1,867
----------------------- ---------------------
Total assets $ 34,960 $ 60,813
======================= =====================
LIABILITIES & NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable $ 1,817 $ 1,757
Accrued compensation and related benefits 1,238 2,960
Accrued interest 1,445 639
Short-term borrowings - 16,900
Current portion of long-term debt 8 134
Accrued restructure expenses 277 603
Other current liabilities 62 784
----------------------- ---------------------
Total current liabilities 4,847 23,777
----------------------- ---------------------
Noncurrent liabilities:
Long-term debt, less current portion 48,020 52,891
Other long-term liabilities 775 620
Deferred royalty income 1,371 1,922
----------------------- ---------------------
Total noncurrent liabilities 50,166 55,433
----------------------- ---------------------
Net capital deficiency:
Common stock 26 25
Additional paid-in capital 150,141 146,460
Treasury stock (16) -
Notes receivable from stockholders (444) (781)
Accumulated deficit (169,761) (163,987)
Accumulated other comprehensive income (loss) 1 (144)
----------------------- ---------------------
Total net capital deficiency (20,053) (18,397)
----------------------- ---------------------
Total liabilities and net capital deficiency $ 34,960 $ 60,813
======================= =====================
</TABLE>
(1) DERIVED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEAR ENDED DECEMBER 31, 1999.
SEE ACCOMPANYING NOTES
3
<PAGE>
HEARTPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ --------------------------
2000 1999 2000 1999
------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Net sales $ 4,121 $ 3,818 $ 11,949 $ 13,532
License revenue -- -- 3,466 --
-------- -------- -------- --------
Total revenue 4,121 3,818 15,415 13,532
Cost of sales 2,101 2,310 6,320 8,281
-------- -------- -------- --------
Gross profit 2,020 1,508 9,095 5,251
Operating expenses:
Research and development 841 1,553 3,873 5,730
Selling, general and administrative 1,995 3,765 9,365 14,870
Restructuring charge -- -- 1,275 2,907
-------- -------- -------- --------
Total operating expenses 2,836 5,318 14,513 23,507
-------- -------- -------- --------
Loss from operations (816) (3,810) (5,418) (18,256)
Interest income and other, net 148 895 1,222 3,260
Interest expense (941) (1,256) (3,328) (3,775)
-------- -------- -------- --------
Loss before extraordinary item (1,609) (4,171) (7,524) (18,771)
Extraordinary item--gain on repurchase of debt -- -- 1,750 --
-------- -------- -------- --------
Net loss $ (1,609) $ (4,171) $ (5,774) $(18,771)
======== ======== ======== ========
Basic and diluted net loss per share
before extraordinary item $ (0.06) $ (0.17) $ (0.30) $ (0.78)
Extraordinary income per share -- -- 0.07 --
-------- -------- -------- --------
Basic and diluted net loss per share $ (0.06) $ (0.17) $ (0.23) $ (0.78)
======== ======== ======== ========
Shares used in calculation of basic and
diluted net loss per share 25,590 24,352 25,258 24,117
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES
4
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HEARTPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5,774) $ (18,771)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,638 1,905
Compensation related to stock options - 102
(Gain) loss on sales and disposals of property and equipment 414 (37)
Extraordinary gain from the repurchase of debt (1,750) -
Non-cash restructuring expenses - 234
Changes in operating assets and liabilities:
Accounts receivable (net) (129) (415)
Inventories (645) 125
Other assets (700) 152
Accrued restructure expenses (326) 266
Accounts payable, accrued expenses and other liabilities (1,974) (3,788)
--------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (9,246) (20,227)
--------------- ----------------
INVESTING ACTIVITIES
Purchases of short-term investments (26,370) (20,156)
Maturities of short-term investments 11,471 13,828
Sales of short-term investments 45,633 29,141
Purchases of property and equipment (1,192) (1,486)
--------------- ----------------
NET CASH USED BY INVESTING ACTIVITIES 29,542 21,327
--------------- ----------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 431 320
Proceeds from payments of stockholders' notes receivable 337 27
Repurchase of treasury stock (16) -
Repayment of short-term borrowings (16,900) -
Repayment of long-term borrowings (126) (351)
--------------- ----------------
NET CASH USED BY FINANCING ACTIVITIES (16,274) (4)
--------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,022 1,096
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,288 10,479
--------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,310 $ 11,575
=============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 3,260 $ 2,586
=============== ================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
ACQUISITION OF EQUIPMENT UNDER CAPITAL LEASE $ 129 $ -
=============== ================
STOCK ISSUED IN EXCHANGE OF DEBT $ 3,250 $ -
=============== ================
</TABLE>
SEE ACCOMPANYING NOTES
5
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HEARTPORT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial statements and in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the financial information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments and the
restructuring charge) considered necessary for a fair presentation have been
included. Heartport 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 preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The operating results of the interim periods presented are not necessarily
indicative of the results for the year ending December 31, 2000 or for any other
interim period. The accompanying condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ended December 31, 1999 included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Inventories at September 30, 2000 and December 31,
1999 were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED)
--------------------- ------------------------
<S> <C> <C>
Materials and purchased parts $ 1,709 $ 1,240
Work in process 19 68
Finished goods 561 336
--------------------- ------------------------
Total inventories $ 2,289 $ 1,644
===================== ========================
</TABLE>
6
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NOTE 3. NET LOSS PER SHARE
Basic and diluted net loss per share are computed using the weighted average
number of common shares outstanding during the period, less outstanding
nonvested shares. Outstanding nonvested shares are not included in the
computations of basic and diluted net loss per share until the time-based
vesting restriction has lapsed. We have other securities outstanding that could
dilute basic earnings per share in the future that were not included in the
computation of diluted net loss per share in the periods presented as their
effect is antidilutive.
The following table sets forth the computation of basic and diluted net loss
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Numerator for basic and diluted net loss per share:
Net loss $ (1,608) $ (4,171) $ (5,773) $ (18,771)
-------- -------- -------- ----------
Denominator:
Weighted-average common shares outstanding 26,201 25,430 25,993 25,378
Weighted-average nonvested shares subject to repurchase (611) (1,078) (735) (1,201)
-------- -------- -------- ----------
Denominator for basic and diluted net loss per share 25,590 24,352 25,258 24,177
-------- -------- -------- ----------
Basic and diluted net loss per share $ (0.06) $ (0.17) $ (0.23) $ (0.78)
======== ======== ======== ==========
</TABLE>
NOTE 4. COMPREHENSIVE LOSS AND GAIN
For the three- and nine-month periods ended September 30, 2000, comprehensive
loss was $1.6 million and $5.8 million, respectively compared to $4.2 million
and $18.8 million for the three and nine-month periods ended September 30, 1999,
respectively. Accumulated other comprehensive loss and gain presented in the
accompanying consolidated balance sheets consists solely of the accumulated net
unrealized loss and gain on available-for-sale investments. There is no related
tax effect for the unrealized loss and gain on available-for-sale investments.
7
<PAGE>
NOTE 5. 2000 RESTRUCTURING CHARGE
In April 2000, the company adopted a restructuring plan to reduce expenses
and improve operating efficiency. Under the restructuring plan, we reduced our
United States workforce by approximately 32%. The planned restructuring
activities resulted in a charge of $1.4 million, all of which related to
severance and other employee related costs associated with approximately 43
terminated employees primarily in sales and manufacturing. The following table
summarizes our 2000 restructuring charge activity for the nine months ended
September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
ACCRUED
RESTRUCTURING CASH PAYMENTS RESTRUCTURING
CHARGE MADE IN CHARGE AT
Q2 2000 2000 SEPTEMBER 30, 2000
---------------------- ----------------- -------------------
<S> <C> <C> <C>
Severance and benefits 1,385 (1,255) 130
---------------------- ----------------- -------------------
Total $ 1,385 $ (1,255) $ 130
====================== ================= ===================
</TABLE>
The remaining liability relates primarily to estimated cash expenditures in
connection with severance and other employee-related costs. These liabilities
are expected to be satisfied by the end of October 2000.
NOTE 6. 1999 RESTRUCTURING CHARGE
In June 1999, the Company adopted a restructuring plan to reduce expenses
and improve operating efficiency. Under the restructuring plan, the Company
reduced its United States workforce by approximately 55 employees primarily in
manufacturing and administration. The restructuring activities resulted in an
original charge of $2.9 million which was reduced by $0.4 million in the fourth
quarter of 1999 and $ 0.1 million in the nine month period ended September 30,
2000 due primarily to a reduction in certain employee-related expenses. The
following table summarizes our 1999 restructuring charge activity for the nine
months ended September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
ACCRUED ACCRUED
RESTRUCTURING CASH PAYMENTS RESTRUCTURING
CHARGE AT MADE IN CHANGE IN CHARGE AT
DECEMBER 31, 1999 2000 RESERVE ESTIMATE SEPTEMBER 30, 2000
---------------------- ----------------- ------------------- ----------------------
<S> <C> <C> <C> <C>
Severance and benefits 356 (253) (103) -
Sublease excess facilities 129 (56) (14) 59
---------------------- ----------------- ------------------- ----------------------
Total $ 485 $ (309) $ (117) $ 59
====================== ================= =================== ======================
</TABLE>
8
<PAGE>
The remaining liability relates primarily to estimated cash expenditures in
connection with excess facilities.
NOTE 7. 1998 RESTRUCTURING CHARGE
In May 1998, the Company adopted a restructuring plan whereby the Company
reduced its United States workforce by 140 employees (primarily in manufacturing
and in its Utah training facility) and closed its training facility in Utah. The
restructuring plan resulted in a net charge of $12.1 million. The following
table summarizes our 1998 restructuring charge activity for the nine months
ended September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
ACCRUED ACCRUED
RESTRUCTURING CASH PAYMENTS RESTRUCTURING
CHARGE AT MADE IN CHARGE AT
DECEMBER 31, 1999 2000 SEPTEMBER 30, 2000
---------------------- ----------------- ----------------------
<S> <C> <C> <C>
Exit facility leases 118 (30) 88
---------------------- ----------------- -------------------
Total $ 118 $ (30) $ 88
====================== ================= ===================
</TABLE>
The remaining liability relates primarily to estimated cash expenditures in
connection with facility leases.
NOTE 8. GAIN ON REPURCHASE OF DEBT
During the nine month period ended September 30, 2000 we exchanged $5.0
million of principal of our convertible subordinated long term notes for 754,018
shares of our common stock, worth $3.25 million on the date of the exchange, and
payment of $0.1 million in cash for rights to all accrued interest. We realized
a gain of $1.75 million, which is recorded as an extraordinary item.
NOTE 9. DISTRIBUTION AGREEMENT WITH U.S. SURGICAL
In April 2000, we entered into a five year agreement with United States
Surgical, a unit of Tyco International Ltd. (a diversified manufacturing and
service company, with 1999 revenues in excess of $22 billion) granting U.S.
Surgical exclusive world-wide distribution rights, excluding Japan, to our
Precision-OP minimally invasive beating-heart surgery system.
NOTE 10. LICENSING AGREEMENT WITH INTUITIVE SURGICAL
We have entered into an exclusive licensing agreement with Intuitive
Surgical, Inc., a leading developer of robotic surgery technology, in April
2000. We have granted Intuitive exclusive rights
9
<PAGE>
to certain patents, restricted to surgical procedures in which a robot is
utilized to perform surgery in the patient's body. We have received a cash
payment of $3.0 million and warrants for common stock, and will receive
royalties if Intuitive develops certain products under the license. We received
warrants to purchase Intuitive Surgical common stock which was valued at
approximately $466,000 using the Black-Scholes option valuation model. The stock
underlying the warrants is restricted until 2001. The warrants are carried at
$466,000, with an estimated fair value of approximately $1.7 million as of
September 30, 2000. The payments and warrants totaling $3.5 million have been
recorded as license revenue.
NOTE 11. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133"), which provides a
comprehensive and consistent standard for the recognition and measurement of
derivative and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and is not anticipated to have a significant
impact on our results of operations or financial condition when adopted.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No 101 ("SAB 101"). SAB 101 summarizes the SEC's views in
applying generally accepted accounting principles to revenue recognition. The
adoption of SAB 101 is not expected to have a significant impact on our revenue
recognition policy or results of operations.
In March 2000, the FASB issued interpretation No. 44, ("FIN 44"), "Accounting
for Certain Transactions Involving Stock Compensation - an Interpretation of APB
25." This interpretation clarifies (a) the definition of employee for purposes
of applying opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998 or January 12, 2000. To the extent that this Interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000, but before the effective date of July 1, 2000, the effects of applying
this interpretation are recognized on a prospective basis from July 1, 2000. The
adoption of FIN 44 does not have a material impact on our financial statements.
NOTE 12. RESTRICTED CASH
As of September 30, 2000, approximately $3.7 million of our cash and
investments secures a letter of credit related to our facilities, and is
therefore not available for operations.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations as of September 30, 2000, and for the three and nine
months ended September 30, 2000 and September 30, 1999, should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations included in our 1999 Annual Report on Form 10-K, filed
with the Securities and Exchange Commission (the "SEC").
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements are
based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical facts may be
deemed to be forward-looking statements. For example, words such as "may",
"will", "should", "estimates", "predicts", "potential", "continue", "strategy",
"believes", "anticipates", "plans", "expects", "intends", and similar
expressions are intended to identify forward-looking statements. Our actual
results and the timing of certain events may differ significantly from the
results discussed in the forward-looking statement. Factors that might cause or
contribute to such a discrepancy include, but are not limited to, those
discussed under the heading "Risk Factors" as well as the risks discussed in our
other SEC filings, including our Annual Report on Form 10-K filed March 29, 2000
with the SEC.
OVERVIEW
Since our inception in May 1991, we have been engaged in the research and
development of Port-Access minimally invasive cardiac surgery systems and
related technology. In December 1996, we commercially introduced our EndoCPB
System and other Port-Access systems for minimally invasive cardiac surgery
performed on a stopped heart. During the third quarter of 1998 we began selling
our EndoDirect system, a direct aortic cannulation system for stopped heart
minimally invasive cardiac surgery. In 1999 we commercially introduced several
new cardiac surgery products, including our PrecisionOP system for surgery
performed on a beating heart. We are now engaged in extensive marketing and
selling activities as well as continued research and development.
We have never had a profit from our operations. For the period from inception
to September 30, 2000, we have incurred cumulative net losses of approximately
$169.7 million. For at least the next three months, we expect to continue to
incur losses.
RESULTS OF OPERATIONS
TOTAL REVENUE. Total revenue consists of net sales of our EndoCPB and
EndoDirect systems, and of license revenue from the licensing of some of our
technology to third parties. Revenue from net sales is recognized upon transfer
of title, which is upon product shipment.
11
<PAGE>
Net sales were $4.1 million in the three months ended September 30, 2000,
compared with $3.8 million in the three months ended September 30, 1999. The
increase in net sales is primarily the result of the successful transition of
one of our product lines from direct sales to a third party distribution
channel. For the nine months ended September 30, 2000 and 1999, net sales were
$11.9 million and $13.5 million, respectively. Licensing revenues were $3.5
million in the nine months ended September 30, 2000. The licensing revenues were
primarily associated with the granting of a license to Intuitive Surgical to
certain patents restricted to surgical procedures in which a robot is utilized
in the patient's body.
For the three months ended September 30, 2000 and 1999, international net
sales represented 15% and 17% respectively. For the nine months ended at the
same dates, international net sales represented 17% and 19% of net sales,
respectively.
COST OF SALES. Cost of sales consist primarily of material, labor and
overhead costs associated with manufacturing our EndoCPB and EndoDirect systems
and related disposable and reusable devices. Cost of sales was $2.1 million in
the three months ended September 30, 2000 compared to $2.3 million in the three
months ended September 30, 1999. Cost of sales was $6.3 million in the nine
months ended September 30, 2000 compared to $8.3 million in the nine months
ended September 30, 1999. Cost of sales decreased in these periods as a result
of improved manufacturing efficiency, reflected by increased yield and unit
produced per hour, and reduced product shipments, offset by one time expenses
associated with the April 2000 restructuring and employee retention implemented
during the second quarter of fiscal year 2000. Gross margin on product sales was
49% in the three months ended September 30, 2000 compared to 40% in the three
months ended September 30, 1999. For the nine months period ended September 30,
2000 and 1999, gross margin on product sales was 47% and 39%, respectively.
Gross margin increased as a result of the decrease in cost of sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consisted primarily of personnel and other costs in support of product
development, clinical evaluations, and regulatory submissions, as well as costs
incurred in producing products for research and development activities. Research
and development expenses were $0.8 million in the three months ended September
30, 2000 compared to $1.6 million in the three months ended September 30, 1999.
Research and development expenses in the nine months ended September 30, 2000
and 1999 were $3.9 million and $5.7 million, respectively. These decreases were
primarily due to a reduction in headcount in 2000 related to our restructuring.
We expect to maintain a significant level of research and development spending
to facilitate product improvements and new product development, and anticipate
that we will continue to devote substantial resources to research and
development activities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of costs for sales, marketing and
administrative personnel, as well as physician training costs and professional
fees. Selling, general and administrative expenses
12
<PAGE>
decreased to $2.0 million in the three months ended September 30, 2000, from
$3.8 million in the three months ended September 30, 1999. In the nine months
ended September 30, 2000 and 1999 selling, general and administrative expenses
were $9.4 million and $14.9 million respectively. These decreases were primarily
due to a reduction in headcount primarily related to our distribution agreement
with United States Surgical, a unit of Tyco International, Ltd., as well as a
continued focus on reducing general operating expenses, offset by one-time
expenses associated with employee retention.
RESTRUCTURING CHARGE. The restructuring plan implemented beginning in April
2000 resulted in a charge in the second quarter of fiscal year 2000 of $1.4
million, offset by a $0.1 million change in estimate on the 1999 restructuring
liability. The charge was for severance and other employee-related costs
associated with the termination of approximately 43 employees.
INTEREST INCOME AND OTHER, NET. Interest income and other, net was $0.2
million in the three months ended September 30, 2000 and $0.9 million in the
three months ended September 30, 1999. The decrease is primarily due to a
reduction in our average investment balances resulting from the repayment of $
16.9 million of short-term debt in May 2000 and the support of our continuing
operations. In the nine months ended September 30, 2000 and 1999 interest income
and other, net, was $1.2 million and $3.3 million respectively.
INTEREST EXPENSE. Interest expense was $0.9 million in the three month period
ended September 30, 2000 and $1.3 million in the three month period ended
September 30, 1999. In the nine-month periods ended September 30, 2000 and 1999
interest expense was $3.3 million and $3.8 million respectively. The decrease is
primarily attributable to the repayment of $16.9 million of short term debt and
$5.0 million of long term debt during the nine month period ended September 30,
2000.
LIQUIDITY AND CAPITAL RESOURCES.
At September 30, 2000, we had approximately $14.8 million in cash and
investments and approximately $18.4 million in working capital. Approximately
$3.7 million of our cash and investments secure a letter of credit related to
our facilities, and is therefore not available for operations. We also have a
$10.0 million credit facility with a commercial bank. At September 30, 2000
no amount was outstanding under this facility. We repaid $16.9 million of
short term debt in May 2000. In addition, in April 2000 we exchanged $5.0
million of long term debt principal and rights to any accrued interests for
754,018 shares of our common stock, with a value on the date of exchange of
approximately $3.25 million, and payment of $0.1 million in cash.
Net cash used in operating activities was approximately $9.2 million in the
nine months ended September 30, 2000 and $20.2 million in the nine months ended
September 30, 1999. The decrease in the net cash used by operating activities in
the three month ended September 30, 2000 resulted primarily from the decrease in
net loss
13
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from $ 18.8 million in the nine month period ended September 30, 1999 to $ 5.8
million in the nine month period ended September 30, 2000.
Net cash provided by investing activities was approximately $29.5 million in
the nine months ended September 30, 2000 and $21.3 million in the nine months
ended September 30, 1999. The increase in the net cash provided by investing
activities in the nine month ended September 30, 2000 resulted primarily of the
sale of short-term investments to repay the $16.9 million short term debt,
offset partly by capital expenditures.
Capital expenditures for equipment and leasehold improvements to support our
operations were approximately $1.2 million in the nine months ended September
30, 2000 and $1.5 million in the nine months ended September 30, 1999.
We believe that we have the financial resources through our current level of
liquid assets and credit to meet business requirements through at least the next
twelve months.
RISK FACTORS
In addition to other information in this Form 10-Q, the following risk
factors should be carefully considered in evaluating Heartport and its business
because such factors currently may have a significant impact on our business,
operating results and financial condition. As a result of the risk factors set
forth below and elsewhere in this Form 10-Q, and the risks discussed in our
other SEC filings, actual results could differ materially from those projected
in any forward-looking statements.
OUR RESTRUCTURING OF OPERATIONS MAY NOT RESULT IN A REDUCTION IN COSTS OR NET
LOSSES AND MAY HARM OUR BUSINESS.
In April 2000 we began implementing a restructuring plan to reduce expenses
and improve operating efficiency. If we cannot reduce or manage our costs
through such actions, our net losses may increase. In addition, our
restructuring plan may yield unanticipated consequences, such as attrition
beyond our planned reduction in workforce. Such consequences may impair our
business beyond any benefits gained by the restructuring and we may encounter
difficulty in managing the restructuring.
OUR PRODUCTS ARE IN AN EARLY STAGE OF UTILIZATION AND IF THEY DO NOT PROVE SAFE
OR EFFECTIVE, OUR BUSINESS WILL FAIL.
Our EndoCPB system, EndoDirect system and other products and related devices
are at an early stage of clinical utilization and their clinical safety and
efficacy has not been proven. Port-Access minimally invasive cardiac surgery has
many of the risks of open-chest heart surgery, including:
- bleeding from the wound or internal organs;
- irregular heartbeat;
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- formation of blood clots and related complications;
- infection;
- heart attack;
- heart failure;
- stroke and death.
Port-Access minimally invasive cardiac surgery also has additional risks
compared to open-chest surgery, including tearing or splitting of major blood
vessels. We have little or no clinical experience with our recently introduced
products designed for less invasive open-chest surgery, aortic valve replacement
and stopped- and beating-heart minimally invasive cardiac surgery. Accordingly,
we cannot be sure of their clinical safety and efficacy. If, with further
experience, any of our products do not prove to be safe and effective or if we
are otherwise unable to commercialize them successfully, our business will fail.
IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE OUR BUSINESS WILL FAIL.
Our products may not gain acceptance among physicians, patients, and health
care payors as a modality of treatment. Most patients with cardiovascular
disease first consult with a cardiologist, who may treat the patient with
pharmaceuticals or non-surgical interventions such as percutaneous transluminal
coronary angioplasty ("PTCA") and intravascular stents, or may refer the patient
to a cardiac surgeon for open-chest surgery. Cardiologists may not recommend
minimally invasive or less invasive surgical procedures for safety, cost and
efficacy reasons or for other reasons beyond our control. If physicians do not
recommend surgical procedures that utilize our products, then our products may
not gain general market acceptance and health care payors may not provide
adequate reimbursement, if any. We believe that our Port-Access procedure volume
by trained cardiac surgery teams has been negatively impacted by ease of use
issues, the significant physician learning curve, and longer procedure times
associated with Port-Access surgery. In addition, broad use of our Port-Access
products will require extensive training of numerous physicians, and the time
required to begin and complete such training could adversely affect market
acceptance. We may not be able to train physicians quickly enough or in numbers
sufficient to generate adequate demand for our products. If our products fail to
achieve significant market acceptance our business will fail.
YOU SHOULD NOT RELY ON QUARTERLY RESULTS OF OPERATIONS AS AN INDICATION OF OUR
FUTURE RESULTS BECAUSE THEY FLUCTUATE SIGNIFICANTLY AND ARE DIFFICULT TO
FORECAST.
Our results of operations may vary significantly from quarter to quarter and
year to year depending upon numerous factors, including:
- demand for our products;
- the number of cardiac surgery teams trained in the use of our systems and
the number of procedures performed by those teams;
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- the number of hospitals that begin using our products; our ability to
manufacture, test and deliver our products in commercial volumes;
- health care reform and reimbursement policies;
- delays associated with the FDA and other regulatory approval processes;
- changes in ours or our competitors' pricing policies;
- the number, timing, and significance of product enhancements and new
product announcements by us and our competitors;
- our ability to develop, introduce, and market new products and enhanced
versions of our existing products on a timely basis;
- customer order deferrals in anticipation of enhancements or new products
offered by us or our competitors;
- product quality problems;
- personnel changes; and
- the level of international sales.
In addition, our operating results are affected by seasonality, principally
during the third and fourth quarters due to summer vacation, reduced surgical
activity during the summer months particularly in Europe, fewer operating days
during the holidays and fewer elective cardiovascular surgeries scheduled over
the holidays.
Operating results have been and will continue to be difficult to forecast.
Future revenue is also difficult to forecast because the market for minimally
invasive and less invasive cardiac surgery systems is rapidly evolving, because
of the inherent risks associated with new medical device technology, and due to
the uncertainty as to whether our efforts to increase Port-Access procedure
volume by trained cardiac surgery teams will be successful. Accordingly, we
believe that period-to-period comparisons of our operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance. In addition, it is likely that in some future quarter our operating
results will be below the expectations of public market analysts and investors.
In such event, the price of our Common Stock would likely decline.
IF WE FAIL TO MAINTAIN OUR RELATIONSHIP WITH ANY ONE OR MORE OF OUR PRINCIPAL
CUSTOMERS, OUR REVENUES WILL DECLINE.
Approximately 57% of our net sales in the nine months ended September 30,
2000, were derived from sales to twenty customers. We do not enter into
long-term or firm commitment contracts with our customers. As a result, our
principal customers may not continue to purchase products from us at current
levels, if at all. The loss of, or a significant adverse change in, the
relationship between us and any major customer would cause our revenues to
decline.
WE MAY NOT HAVE THE MANUFACTURING CAPABILITIES TO TIMELY MEET DEMAND FOR OUR
PRODUCTS.
We have limited manufacturing experience. Our manufacturing activities have
consisted primarily of manufacturing low volume
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quantities for initial commercial sales. The manufacture of our products is
complex, involving a number of separate processes and components. We have very
little experience manufacturing our recently introduced products designed for
less invasive open-chest surgery, aortic valve replacement and stopped- and
beating-heart minimally invasive cardiac surgery. We have contracted with third
parties to manufacture certain of our products and product components. These
suppliers may not be able to successfully scale-up production to meet commercial
demand for our products in a timely manner. In addition, we believe that cost
reductions in their manufacturing operations will be required for us to
commercialize our systems on a profitable basis. Some 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 may 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;
- the need for further FDA approval of new manufacturing processes and
facilities.
We have experienced variable yields in manufacturing some of our product
components. These yields may retard efficient manufacturing of our products and
interrupt our business. If we cannot efficiently manufacture products for
commercial sale, our revenues may suffer and decline.
OUR INABILITY TO OBTAIN OR MANAGE PRODUCT COMPONENTS OR OTHER RESOURCES MAY
CAUSE US TO INCUR ADDITIONAL COSTS THAT WILL AFFECT PROFITABILITY.
We use or rely on a number of components and services used in our devices
that are provided by sole source suppliers. The qualification of additional or
replacement vendors for certain components or services is a lengthy process. Any
significant supply interruption would have a material adverse effect on our
ability to manufacture our products and, therefore, a material adverse effect on
our business, financial condition, and results of operations.
We manufacture our products based on forecasted product orders, and purchase
subassemblies and components prior to receipt of purchase orders from customers.
Lead times for materials and components ordered by us vary significantly, and
depend on factors such as the business practices of the specific supplier,
contract terms, and general demand for a component at a given time. Some
components used in our products have long lead times or must be ordered on
non-cancelable terms. As a result, there is a risk of excess or inadequate
inventory if orders do not match forecasts, as well as potential costs from
non-cancelable orders.
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WE MAY NOT BE ABLE TO COMPETE IN OUR RAPIDLY CHANGING MARKET.
We believe that the market for minimally invasive and less invasive cardiac
surgery will be intensely competitive. This market is still in the early stages
of development a number of competitors are likely to develop. Competitors are
likely to include a variety of different companies that currently specialize in
devices for conventional cardiac surgery, as well as those that specialize in
non-cardiac minimally invasive surgery. We believe that a number of large
companies, including Baxter International Inc., the Ethicon Endosurgery division
of Johnson & Johnson, Genzyme Corporation, Guidant Corporation, Medtronic, Inc.,
United States Surgical Corporation and others with significantly greater
financial, manufacturing, marketing, distribution, and technical resources and
experience than we do, may be focusing on the development of minimally invasive
and less invasive cardiac surgery technology. In addition, new companies have
been and will continue to be formed to pursue opportunities in the minimally
invasive and less invasive cardiac surgery fields.
Cardiovascular diseases that can be treated with our products can also be
treated by pharmaceuticals or other medical devices and procedures including
PTCA, intravascular stents, atherectomy catheters and lasers. Many of these
alternative treatments are widely accepted in the medical community and have a
long history of use. In addition, technological advances with other therapies
for heart disease such as drugs or future innovations in cardiac surgery
techniques could make such other therapies more effective or lower in cost than
our products and could render our technology obsolete. Physicians may not use
our products to replace or supplement established treatments, such as
conventional open-chest heart surgery, PTCA, or intravascular stents, and our
products may not be competitive with current or future technologies.
Our current products and any future products developed by us that gain
regulatory clearance or approval will have to compete for market acceptance and
market share. An important factor in such competition may be the timing of
market introduction of competitive products. Accordingly, the relative speeds
with which we can develop products, complete clinical testing and regulatory
approval processes, train physicians in the use of its products, gain
reimbursement acceptance, and supply commercial quantities of the product to the
market are expected to be important competitive factors. We have experienced
delays in completing the development and introduction of new products, product
variations and product features, and there can be no assurance that such delays
will not continue or recur in the future. Such delays could result in a loss of
market acceptance and market share. If we are unable to compete successfully
against current and future competitors, our business, financial condition, and
results of operations will suffer.
WE EXPECT TO INCUR SUBSTANTIAL FUTURE LOSSES AND REQUIRE ADDITIONAL CAPITAL IN
THE FUTURE.
We have never had a profit from operations. For the period from inception to
September 30, 2000, we have incurred cumulative net
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losses of approximately $169.7 million. For at least the next three months, we
expect to continue to incur losses. We may never achieve or sustain
profitability.
We believe our current capital will be sufficient to meet our anticipated
cash needs for at least the next twelve months. We may need to raise additional
funds after this period or, if we expand more rapidly than expected, during this
period. Our future liquidity and capital requirements will depend upon numerous
factors, including but not limited to the following:
- the extent to which our products gain market acceptance;
- the timing and costs of future product introductions;
- the extent of our ongoing research and development programs;
- the costs of training physicians to become proficient in the use of our
products and procedures;
- the costs of expanding manufacturing capacity;
- the costs of developing marketing and distribution capabilities;
- the progress and scope of clinical trials required for any future
products;
- the timing and costs of filing future regulatory submissions;
- the timing and costs required to receive both domestic and international
governmental approvals for any future products; and
- the costs of protecting and defending our intellectual property.
Issuance of additional equity or convertible debt securities could result in
substantial dilution to stockholders. Additional financing may not be available
on terms acceptable to us, if at all. Our inability to fund our capital
requirements would have a material adverse effect on our business, financial
condition, and results of operations.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AND WE ARE
VULNERABLE TO CLAIMS THAT OUR PRODUCTS INFRINGE THIRD-PARTY INTELLECTUAL
PROPERTY RIGHTS.
We believe that our competitive position depends in significant part on our
ability to protect our intellectual property. We have sought to protect our
proprietary position by filing United States and foreign patent applications
related to our technology, inventions, and improvements that are important to
our products and business. As of September 30, 2000, we own 121 issued or
allowed United States patents, and 18 issued foreign patents. In addition, as of
September 30, 2000, we have 75 pending United States patent applications and we
filed 40 patent applications that are currently pending in Europe, Japan,
Australia, and Canada. Our issued patents, or any patents that may be issued in
the future, may not effectively protect our technology or provide us a
competitive advantage. Our patents or patent applications may be challenged,
invalidated, or circumvented in the future. In addition, our competitors, many
of which have substantially more resources than we do and have made substantial
investments in competing technologies, may seek to apply for and obtain patents
that will prevent, limit, or interfere with our ability to
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make, use, or sell our products either in the United States or internationally.
We also rely upon trade secrets, technical know-how, and continuing
technological innovation to develop and maintain our competitive position. We
typically require our employees, consultants, and advisors to execute
confidentiality and assignment of inventions agreements in connection with their
employment, consulting, or advisory relationships with us. These agreements may
be breached and we may not have adequate remedies for any such breach.
Furthermore, our competitors may independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our
proprietary technology, and we may not be able to meaningfully protect our
rights in unpatented proprietary technology.
Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries and the filing of
related patent applications. Patents issued and patent applications filed
relating to medical devices are numerous and current and potential competitors
and other third parties may have filed or received or in the future may file
applications for, or receive, patents or obtain additional proprietary rights
relating to products or processes used or proposed to be used by us. We are
aware of patents issued to third parties that contain subject matter related to
our technology. Based, in part, on advice of our patent counsel, we believe that
the technologies employed by us in our devices and systems do not infringe the
claims of any such patents. Third parties may, however, seek to assert that our
devices and systems infringe their patents or seek to expand their patent claims
to cover aspects of our technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular, has
been characterized by substantial competition and litigation regarding patent
and other intellectual property rights. Any such claims, whether with or without
merit, could be time-consuming and expensive to respond to and could divert our
technical and management personnel. We may be involved in litigation to defend
against claims of infringement by other patent holders, to enforce patents
issued to us, or to protect our trade secrets. If any relevant claims of
third-party patents are upheld as valid and enforceable in any litigation or
administrative proceeding, we could be prevented from practicing the subject
matter claimed in such patents, or would be required to obtain licenses from the
patent owners of each such patent, or to redesign its products or processes to
avoid infringement. Such licenses may not be available or, if available, may not
be available on terms acceptable to us or at all. We may not be successful in
any attempt to redesign our products or processes to avoid infringement.
Accordingly, an adverse determination in a judicial or administrative proceeding
or failure to obtain necessary licenses could prevent us from manufacturing and
selling our products. We intend to vigorously protect and defend our
intellectual property. Costly and time-consuming litigation brought by us may be
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necessary to enforce patents issued to us, to protect trade secrets or know-how
owned by us, or to determine the enforceability, scope, and validity of the
proprietary rights of others. Any such litigation, if commenced by us, may not
be successful.
PRODUCT LIABILITY LAWSUITS COULD DIVERT OUR RESOURCES, RESULT IN SUBSTANTIAL
LIABILITIES AND REDUCE THE COMMERCIAL POTENTIAL OF OUR PRODUCTS.
As a developer and manufacturer of devices for use by consumers, we may be
exposed to product liability claims in the event that the use of our products
results in personal injury or death. Claims related to product liability are a
regular and ongoing aspect of the medical device industry, and at any one time
we may be subject to claims asserted against us and are involved in product
liability litigation. We maintain limited insurance against certain product
liability claims, such coverage may not continue to be available on terms
acceptable to us or such coverage may not be adequate for any liabilities
actually incurred. Also, in the event that any of our products prove to be
defective, we may be required to recall or redesign such products. A successful
claim brought against us in excess of available insurance coverage, or any claim
or product recall that results in significant adverse publicity against us, may
impair our ability to sell products or become profitable.
IF OUR PRODUCTS ARE NOT APPROVED BY REGULATORY AGENCIES, WE WILL BE UNABLE TO
COMMERCIALIZE THEM.
Our products are subject to regulatory clearances or approvals by the FDA. We
believe that most of our individual devices and systems will be subject to
United States regulatory clearance through the 510(k) premarket notification
process rather than a more extensive PMA submission. Although we have received
clearance from the FDA to market the EndoCPB system, the EndoDirect system and
several proprietary Class II disposable surgical devices for our Port-Access
CABG and MVR surgery systems in the United States, securing FDA approvals and
clearances for additional Port-Access devices and other products under
development will require submission to the FDA of
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extensive technical information and may require submission of extensive clinical
data. The FDA may not act favorably or quickly on our 510(k) or other
submissions, and we may encounter significant difficulties and costs in our
efforts to obtain FDA clearance that could delay or preclude us from marketing
and selling our products in the United States. Furthermore, the FDA may request
additional data, require that we conduct further clinical studies, or require a
more extensive PMA submission, causing us to incur substantial costs and delays.
Our business, financial condition, and results of operations are critically
dependent upon FDA clearance or approval of our systems. Failure to obtain such
clearances or approvals, or to obtain such clearances or approvals on a timely
basis, would have a material adverse effect on our business, financial
condition, and results of operations, and could result in postponement of the
commercialization of our products or even cessation of our business in the
United States.
Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approval for sale in foreign countries may be longer or
shorter than that required for FDA clearance or approval, and the requirements
may differ. Although our EndoCPB system, EndoDirect system and Port-Access CABG
and MVR systems bear the CE Mark under the European Community medical device
directive, some European countries may impose additional requirements for
commercialization of those products. Other products under development will
require additional approvals or assessments, and these approvals or assessments
may not be received on a timely basis, if at all. Most other countries either do
not currently regulate medical systems or have minimal regulatory requirements,
although these countries may adopt more extensive regulations in the future that
could impact our ability to market its systems. In addition, significant costs
and requests for additional information may be encountered by us in our efforts
to obtain regulatory approvals. Any such events could substantially delay or
preclude us from marketing our systems internationally.
In addition, the FDA and certain foreign regulatory authorities impose
numerous other requirements with which medical device manufacturers must
comply. Product approvals can be withdrawn for failure to comply with
regulatory standards or because of the occurrence of unforeseen problems
following initial marketing. We will also be required to adhere to applicable
FDA regulations setting forth current QSR requirements, which include
testing, control, and documentation requirements. Ongoing compliance with QSR
and other applicable regulatory requirements is monitored through periodic
inspections by state and federal agencies, including the FDA, and by
comparable agencies in other countries. Failure to comply with applicable
regulatory requirements can result in fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
denial or withdrawal of premarket clearance or premarket approval for
devices, and criminal prosecution. Furthermore, changes in existing
regulations or adoption of new regulations or policies could delay or even
prevent us from obtaining future regulatory approvals or clearances. Such
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revisions could have a material adverse effect on our business, financial
condition, and results of operations.
HEALTHCARE REFORM AND RESTRICTIONS ON REIMBURSEMENTS MAY LIMIT OUR RETURNS ON
OUR PRODUCTS.
We expect that sales volumes and prices of our products will be heavily
dependent on the availability of reimbursement from third-party payors. In
addition, we believe individuals seldom, if ever, will be willing or able to pay
directly for the costs associated with the use of our products. Our products are
typically purchased by clinics, hospitals, and other users, which bill various
third-party payors, such as governmental programs and private insurance plans,
for the healthcare services provided to their patients. Third-party payors
carefully review and increasingly challenge the prices charged for medical
products and services. Reimbursement rates from private companies vary depending
on the procedure performed, the third-party payor, the insurance plan, and other
factors. Medicare reimburses hospitals a prospectively determined fixed amount
for the costs associated with an in-patient hospitalization based on the
patient's discharge diagnosis, and reimburses physicians a prospectively
determined fixed amount based on the procedure performed, regardless of the
actual costs incurred by the hospital or physician in furnishing the care and
unrelated to the specific devices used in that procedure. Medicare and other
third-party payors are increasingly scrutinizing whether to cover new products
and the level of reimbursement for covered products.
In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans, and labor
unions. In most foreign countries, there are also private insurance systems that
may offer payments for alternative therapies. Although not as prevalent as in
the United States, health maintenance organizations are emerging in certain
European countries. We may need to seek international reimbursement approvals to
secure reimbursement for procedures using our products. Such approvals may not
be obtained in a timely manner or at all. Failure to receive international
reimbursement approvals could have an adverse effect on market acceptance of our
products in the international markets in which such approvals are sought.
We believe that reimbursement in the future will be subject to increased
restrictions such as those described above, both in the United States and in
foreign markets. We believe that the overall escalating cost of medical products
and services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by us. We are aware that certain
third-party payors have challenged or refused to provide reimbursement for
Port-Access procedures. Third-party reimbursement and coverage may not be
adequate or available in either United States or foreign markets. If third-party
payor coverage or reimbursement is unavailable or inadequate, our ability to
compete and generate revenues could be impaired.
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IF OUR COMMON STOCK IS DELISTED FROM THE NASDAQ NATIONAL MARKET, OUR COMMON
STOCK WILL BECOME LESS EASILY TRADEABLE AND STOCKHOLDERS MAY BE UNABLE TO
QUICKLY AND EASILY BUY OR SELL OUR COMMON STOCK.
Holders of our common stock currently enjoy the benefit of being able to
easily buy or sell our common stock because our common stock is listed on the
Nasdaq National Market trading system. We have been informed by Nasdaq that
our net tangible assets has fallen below the level required for continued
listing on the Nasdaq National Market. Nasdaq also informed us that we would be
eligible for listing on the Nasdaq SmallCap Market. We are now in the process
of applying to have our common stock listed on the Nasdaq SmallCap Market.
Pending approval of our application, our common stock will trade
on the Nasdaq SmallCap Market. Trading on the SmallCap Market may
result in potentially lower volumes of active buyers and sellers. In
addition, there are classes of purchasers of securities who are limited in
their ability to acquire or trade in SmallCap stocks. As a result, there
could be a less active trading market. This, in turn, could adversely affect
stockholder's ability to quickly and easily sell our common stock and the
prices at which it may be bought or sold.
IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH CORPORATIONS
AND RESEARCH INSTITUTIONS, WE MAY NOT BE ABLE TO EFFECTIVELY COMMERCIALIZE OUR
PRODUCTS.
We intend to pursue strategic relationships with corporations and research
institutions with respect to the research, development, regulatory approval, and
marketing of certain of our potential products and procedures. Our future
success may depend, in part, on our relationships with third parties and their
success in marketing our products or willingness to purchase such products. We
anticipate that these third parties may have the unilateral right to terminate
any such relationship without significant penalty. We may not be successful in
establishing or maintaining any such strategic relationships in the future and
any such relationships may not be successful.
CONCENTRATION OF OWNERSHIP WILL LIMIT YOUR ABILITY TO INFLUENCE CORPORATE
MATTERS.
The present directors, executive officers, and principal stockholders of
Heartport and their affiliates beneficially own approximately 47% of the
outstanding Common Stock. As a result, these stockholders will be able to
continue to exert significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may have the effect of
delaying or preventing a change in control of Heartport.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7.A., Quantitative and Qualitative
Disclosures About Market Risk, in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1999.
The company is exposed to equity market risks for changes in the fair value of
Intuitive Surgical common stock. As of September 30, 2000, the company holds a
warrant for the purchase of Intuitive Surgical common stock which as a carrying
value of $466,000 and an estimated fair value of approximately $1.7 million. As
of September 30, 2000, a hypothetical 20% decrease in the fair value of
Intuitive Surgical common stock would result in an adverse change in the fair
value of the warrants of approximately $0.3 million.
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On May 31, 2000 Robert V. Gunderson resigned from our Board of Directors.
On June 15, 2000 Steven C. Wheelwright resigned from our Board of
Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months
ended September 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2000 HEARTPORT, INC.
------------------
By: /s/ Casey M. Tansey
------------------------
President,
Chief Executive Officer
and Acting Chief Financial Officer
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