<PAGE>
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 MARCH 31, 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 March 31, 2000 there were 25,573,639 shares of the Registrant's Common
Stock outstanding.
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HEARTPORT, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at March 31, 2000
and December 31, 1999 ....................................... 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and March 31, 1999 ....... 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and March 31, 1999 ....... 5
Notes to Condensed Consolidated Financial Statements ........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk .. 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................ 24
SIGNATURES ........................................................... 24
- --------------------------------------------------------------------------
Heartport, the Heartport logo and EndoCPB are registered trademarks of the
Company. Port-Access and EndoDirect are trademarks of the Company.
Port-Access Partnership is a service mark of the Company.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEARTPORT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,486 $ 5,288
Short-term investments 31,124 36,611
Accounts receivable, net 4,042 3,881
Inventories 2,013 1,644
Other current assets 771 1,259
------------- ------------
Total current assets 44,436 48,683
Property and equipment, net 10,685 10,263
Other assets 1,809 1,867
------------- ------------
Total assets $ 56,930 $ 60,813
============= ============
LIABILITIES & NET CAPITAL DEFICIENCY
Current liabilities:
Accounts payable $ 1,473 $ 1,757
Accrued compensation and related benefits 2,388 2,960
Accrued interest 1,597 639
Short-term borrowings 16,900 16,900
Current portion of long-term debt 60 134
Accrued restructure expenses 301 603
Other current liabilities 561 784
------------- ------------
Total current liabilities 23,280 23,777
------------- ------------
Noncurrent liabilities:
Long-term debt, less current portion 53,020 52,891
Other long-term liabilities 788 620
Deferred royalty income 1,672 1,922
------------- ------------
Total noncurrent liabilities 55,480 55,433
------------- ------------
Net capital deficiency:
Common stock 26 25
Additional paid-in capital 146,800 146,460
Notes receivable from stockholders (781) (781)
Accumulated deficit (167,771) (163,987)
Accumulated other comprehensive loss (104) (114)
------------- ------------
Total net capital deficiency (21,830) (18,397)
------------- ------------
Total liabilities and net capital deficiency $ 56,930 $ 60,813
============= ============
</TABLE>
(1) DERIVED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 1999.
SEE ACCOMPANYING NOTES
3
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HEARTPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
---------- ----------
<S> <C> <C>
Net sales $ 4,302 $ 5,593
Cost of sales 2,159 3,222
---------- ----------
Gross profit 2,143 2,371
Operating expenses:
Research and development 1,595 1,931
Selling, general and administrative 3,749 5,453
---------- ----------
Total operating expenses 5,344 7,384
---------- ----------
Loss from operations (3,201) (5,013)
Interest income and other, net 725 1,102
Interest expense (1,308) (1,273)
---------- ----------
Net loss $ (3,784) $ (5,184)
========== ==========
Basic and diluted net loss per share $ (0.15) $ (0.22)
========== ==========
Shares used in calculation of basic and
diluted net loss per share 24,699 23,980
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES
4
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HEARTPORT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(3,784) $(5,184)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 581 616
Compensation related to stock options - 63
Loss on sales and disposals of equipment 68 18
Changes in operating assets and liabilities:
Accounts receivable (161) (943)
Inventories (369) 532
Other assets 488 (711)
Accrued restructure expenses (302) -
Accounts payable, accrued expenses and other liabilities (203) (3,366)
------- -------
NET CASH USED IN OPERATING ACTIVITIES (3,682) (8,975)
------- -------
INVESTING ACTIVITIES
Purchases of short-term investments (5,713) (919)
Maturities of short-term investments 451 6,770
Sales of short-term investments 10,760 -
Purchases of property and equipment (885) (273)
------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES 4,613 5,578
------- -------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 341 154
Proceeds from payments of stockholders' notes receivable - 2
Repayment of long-term borrowings (74) (120)
------- -------
NET PROVIDED BY FINANCING ACTIVITIES 267 36
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,198 (3,361)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,288 10,479
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,486 $ 7,118
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 281 $ 221
======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
ACQUISITION OF EQUIPMENT UNDER CAPITAL LEASE $ 129 $ -
======= =======
</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.
The accompanying unaudited condensed consolidated financial statements
include the accounts of Heartport, Inc. and its wholly owned subsidiaries.
Significant intercompany accounts and transactions have been eliminated. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments and the restructuring charge) considered necessary for a fair
presentation have been included.
The 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 March 31, 2000 and December 31,
1999 were as follows (in thousands):
<TABLE>
<CAPTION>
March 31 DECEMBER 31,
2000 1999
(UNAUDITED)
----------- ------------
<S> <C> <C>
Materials and purchased parts $1,458 $1,240
Work in process 73 68
Finished goods 482 336
----------- ------------
Total inventories $2,013 $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 subject to repurchase. Outstanding nonvested
shares subject to repurchase are not included in the computations of basic
and diluted net loss per share until the time-based vesting restriction has
lapsed. The Company has other securities outstanding that could dilute basic
earnings per share in the future that were not included in the computation of
diluted net loss per share in the periods presented as their effect is
antidilutive.
The following table sets forth the computation of basic and diluted net
loss per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
--------- ---------
(UNAUDITED)
<S> <C> <C>
Numerator for basic and diluted net loss per share:
Net loss $ (3,784) $ (5,184)
--------- ---------
Denominator:
Weighted-average common shares outstanding 25,549 25,296
Weighted-average nonvested shares subject to repurchase (850) (1,316)
--------- ---------
Denominator for basic and diluted net loss per share 24,699 23,980
--------- ---------
Basic and diluted net loss per share $ (0.15) $ (0.22)
========= =========
</TABLE>
NOTE 4. COMPREHENSIVE LOSS
For the three-month period ended March 31, 2000 and March 31, 1999
comprehensive loss was $3.8 million and $5.4 million, respectively.
Accumulated other comprehensive income (loss) presented in the accompanying
consolidated balance sheets consists solely of the accumulated net unrealized
gain (loss) on available-for-sale investments. There is no related tax effect
for the unrealized gain (loss) on available-for-sale investments.
7
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NOTE 5. 1999 RESTRUCTURING CHARGE
In June 1999, the Company adopted a restructuring plan to reduce
expenses and improve operating efficiency. Under the restructuring plan, the
Company reduced its United States workforce by approximately 55 employees
primarily in manufacturing and administration. The restructuring activities
resulted in a net charge of $2.5 million. The following table summarizes the
restructuring charge activity for the three months ended March 31, 2000 (in
thousands):
<TABLE>
<CAPTION>
ACCRUED ACCRUED
RESTRUCTURING CASH PAYMENTS RESTRUCTURING
CHARGE AT MADE IN CHARGE AT
DECEMBER 31, 1999 Q1 2000 MARCH 31, 2000
----------------- ------------- --------------
<S> <C> <C> <C>
Severance and benefits 356 (253) 103
Sublease excess facilities 129 (45) 84
----------------- ------------- --------------
Total $485 $(298) $187
================= ============= ==============
</TABLE>
The remaining liability relates primarily to estimated cash expenditures
in connection with severance and other employee-related costs, and excess
facilities.
NOTE 6. 1998 RESTRUCTURING CHARGE
In May 1998, the Company adopted a restructuring plan whereby the
Company reduced its United States workforce and closed its training facility
in Utah. The restructuring plan resulted in a net charge of $12.1 million. The
following table summarizes the restructuring charge activity for the three
months ended March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
ACCRUED ACCRUED
RESTRUCTURING CASH PAYMENTS RESTRUCTURING
CHARGE AT MADE IN CHARGE AT
DECEMBER 31, 1999 Q1 2000 MARCH 31, 2000
----------------- ------------- --------------
<S> <C> <C> <C>
Exit facility leases 118 (4) 114
----------------- ------------- --------------
Total 118 (4) 114
================= ============= ==============
</TABLE>
The remaining liability relates primarily to estimated cash expenditures
in connection with excess facilities.
8
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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 March 31, 2000, and for the three months ended
March 31, 2000 and March 31, 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. Sales of our EndoCPB and EndoDirect systems comprise the
majority of our net sales.
We have never had a profit from our operations. For the period from
inception to March 31, 2000, we have incurred cumulative net losses of
approximately $167.8 million. For at least the next nine months, we expect
to continue to incur losses.
RESULTS OF OPERATIONS
NET SALES. Net sales consisted primarily of sales of our EndoCPB and
EndoDirect systems. Revenue from product sales is recognized upon transfer
of title, which is generally upon product shipment. Net sales were $4.3
million in the three months ended March 31, 2000,
9
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compared with $5.6 million in the three months ended March 31, 1999. In the
first quarter of 2000 net sales decreased as we increased expenditures
relating to the development and marketing of our new products. For the three
months ended March 31, 2000 and 1999, international net sales represented 18%
and 14% of net sales in those periods, respectively.
COST OF SALES. Cost of sales consisted 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 $2.2
million in the three months ended March 31, 2000 and $3.2 million in the
three months ended March 31, 1999. Gross margin was 50% in the three months
ended March 31, 2000 compared to 42% in the three months ended March 31,
1999. Cost of sales declined and gross margin increased in the three months
ended March 31, 2000 as compared to the previous year due to decreases in
manufacturing overhead and increased production efficiencies.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consisted primarily of personnel and other costs in support of product
development, clinical evaluations, and regulatory submissions, as well as
costs incurred in producing products for research and development activities.
Research and development expenses were $1.6 million in the three months ended
March 31, 2000 and $1.9 million in the three months ended March 31, 1999. The
decrease was primarily due to a reduction in headcount in 1999 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 decreased to
$3.8 million in the three months ended March 31, 2000, from $5.5 million in
the three months ended March 31, 1999. The decrease was primarily due to a
reduction in headcount related to our restructuring, as well as a continued
focus on reducing general operating expenses.
INTEREST INCOME AND OTHER, NET. Interest income and other, net was $0.7
million in the three months ended March 31, 2000 and $1.1 million in the
three months ended March 31, 1999. The decrease is primarily due to our lower
average investment balances.
INTEREST EXPENSE. Interest expense was $1.3 million in each of the
three months ended March 31, 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES. At March 31, 2000, we had approximately
$37.6 million in cash and investments and approximately $21.2 million in
working capital. Approximately $20.6 million of our cash and investments
secure short-term borrowings and a letter of credit related to our
facilities, and is therefore not
10
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available for operations. We also have a $10.0 million credit facility with
a commercial bank. At March 31, 2000 no amount was outstanding under this
facility.
Net cash used in operating activities was approximately $3.7 million in
the three months ended March 31, 2000 and $9.0 million in the three months
ended March 31, 1999, and resulted primarily from net losses in each period.
Net cash provided by investing activities was approximately $4.6 million
in the three months ended March 31, 2000 and $5.6 million in the three months
ended March 31, 1999. The net cash provided by investing activities in each
year was primarily the result of net maturity and sales of short-term
investments, offset partly by capital expenditures in each period.
Capital expenditures for equipment and leasehold improvements to support
our operations were approximately $0.9 million in the three months ended
March 31, 2000 and $0.3 million in the three months ended March 31, 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.
11
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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 June 1999 we began implementing a restructuring plan to reduce
expenses and improve operating efficiency. Although management believes that
the actions it is taking in connection with the restructuring should help
align our expense structure with our business prospects, we can not be sure
that such actions will enable us to achieve our objectives of reducing costs
and reducing net losses. For example, it is possible that we may experience
attrition beyond our planned reduction in workforce. Our future operations,
operating results and financial condition will be harmed if we encounter
difficulty in managing the restructuring.
UNFAVORABLE PRESS MAY CONTINUE TO REDUCE SALES OF OUR PRODUCTS AND CAUSE OUR
REVENUES TO DECLINE.
On May 5, 1999, THE WALL STREET JOURNAL published a highly unfavorable
article about us. Among other things, the article implied that our
Port-Access products were not safe and that the U.S. Food and Drug
Administration is considering regulatory action against us. The article did
not reflect the excellent clinical outcomes surgeons have achieved with
Port-Access minimally invasive cardiac surgery. With regard to the FDA, we
have 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
our 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 our customers and, consequently, our business. A significant
number of our 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. We may not be able to convince these customers to begin using our
products again, or to increase the number of Port-Access procedures they are
performing. We also anticipate that the article will make it very difficult
to convince potential new customers to become interested in Port-Access
surgery. We believe that the article may continue to have a material adverse
impact on our net sales and results of operations in future periods.
12
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OUR PRODUCTS ARE IN AN EARLY STAGE OF UTILIZATION AND IF THEY DO NOT PROVE
SAFE OR EFFECTIVE, OUR BUSINESS WILL FAIL.
Our EndoCPB system, EndoDirect system and other products and related
devices are at an early stage of clinical utilization, and there can be no
assurance as to their clinical safety and efficacy. Port-Access minimally
invasive cardiac surgery has many of the risks of open-chest heart surgery,
including bleeding from the wound or internal organs, irregular heartbeat,
formation of blood clots and related complications, infection, heart attack,
heart failure, stroke, and death. Port-Access minimally invasive cardiac
surgery also has additional risks compared to open-chest surgery, including
tearing or splitting of major blood vessels. We believe, based on the
clinical experience to date, that mortality and morbidity rates associated
with Port-Access surgical procedures are comparable to mortality and
morbidity rates experienced with conventional open-chest procedures. We have
little or no clinical experience with our recently introduced products
designed for less invasive open-chest surgery, aortic valve replacement and
stopped- and beating-heart minimally invasive cardiac surgery. Accordingly,
we cannot be sure of their clinical safety and efficacy. If, with further
experience, any of our products do not prove to be safe and effective or if
we are otherwise unable to commercialize them successfully, our business will
fail.
IF OUR PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE OUR BUSINESS WILL FAIL.
Our products may not gain any significant degree of market acceptance
among physicians, patients, and health care payors. If our products do not
obtain physicians' acceptance and health care payors' reimbursement of
minimally invasive and less invasive cardiac surgery procedures, it is
unlikely that our products will achieve market acceptance. Physicians will
not recommend minimally invasive or less invasive cardiac surgical procedures
unless they conclude, based on clinical data, ease of use, operative time and
other factors, that such procedures are an attractive alternative to other
treatments for cardiovascular disease. Most patients with cardiovascular
disease first consult with a cardiologist, who may treat the patient with
pharmaceuticals or non-surgical interventions such as percutaneous
transluminal coronary angioplasty ("PTCA") and intravascular stents, or may
refer the patient to a cardiac surgeon for open-chest surgery. Cardiologists
may not recommend minimally invasive or less invasive surgical procedures
until such time, if any, as such procedures can be successfully demonstrated
to be as safe and cost-effective as other accepted treatments. In addition,
cardiac surgeons may elect not to recommend minimally invasive or less
invasive surgical procedures until such time, if any, as the efficacy of such
procedures can be successfully demonstrated as compared to conventional,
open-chest surgery methods, which have become widely adopted by cardiac
surgeons since the initial use of such surgery in the mid-1950s. Even if the
clinical efficacy of minimally invasive and less invasive cardiac surgical
procedures is established, cardiologists, cardiac surgeons, and other
physicians may elect not to recommend the procedures for any number of other
reasons. We believe that our Port-Access procedure volume by trained cardiac
surgery teams has been negatively impacted by ease of use issues, the
significant physician learning curve, and longer procedure times associated
with
13
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Port-Access surgery. Although we are focusing our training and sales efforts
on addressing these issues, we may not be successful in increasing
Port-Access procedure volume, and our products may not obtain any significant
degree of market acceptance. In addition, broad use of our Port-Access
products will require extensive training of numerous physicians, and the time
required to begin and complete such training could adversely affect market
acceptance. We may not be able to train physicians quickly enough or in
numbers sufficient to generate adequate demand for our products. If our
products fail to achieve significant market acceptance our business will
fail.
YOU SHOULD NOT RELY ON QUARTERLY RESULTS OF OPERATIONS AS AN INDICATION OF
OUR FUTURE RESULTS BECAUSE THEY FLUCTUATE SIGNIFICANTLY AND ARE DIFFICULT TO
FORECAST.
Our results of operations may vary significantly from quarter to quarter
and year to year depending upon numerous factors, including:
- demand for our products;
- the number of cardiac surgery teams trained in the use of our systems
and the number of procedures performed by those teams;
- the number of hospitals that begin using our products; our ability to
manufacture, test and deliver our products in commercial volumes;
- health care reform and reimbursement policies;
- delays associated with the FDA and other regulatory approval processes;
- changes in ours or our competitors' pricing policies;
- the number, timing, and significance of product enhancements and new
product announcements by us and our competitors;
- our ability to develop, introduce, and market new products and enhanced
versions of our existing products on a timely basis;
- customer order deferrals in anticipation of enhancements or new products
offered by us or our competitors;
- product quality problems;
- personnel changes; and
- the level of international sales.
In addition, our operating results are affected by seasonality, principally
during the third and fourth quarters due to summer vacation, reduced surgical
activity during the summer months particularly in Europe, fewer operating
days during the holidays and fewer elective cardiovascular surgeries
scheduled over the holidays.
Operating results have been and will continue to be difficult to
forecast. Future revenue is also difficult to forecast because the market for
minimally invasive and less invasive cardiac surgery systems is rapidly
evolving, because of the inherent risks associated with new medical device
technology, and due to the uncertainty as to whether our efforts to increase
Port-Access procedure volume by trained cardiac surgery teams will be
successful. Accordingly, we believe that period-to-period comparisons of our
operating results are
14
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not necessarily meaningful and should not be relied upon as indications of
future performance. If we fail, for any reason, to increase revenue from
sales of our products, our business, operating results, and financial
condition would be adversely affected and it is likely that our stock price
would decline. In addition, it is likely that in some future quarter our
operating results will be below the expectations of public market analysts
and investors. In such event, the price of our Common Stock would likely
decline.
IF WE FAIL TO MAINTAIN OUR RELATIONSHIP WITH ANY ONE OR MORE OF OUR PRINCIPAL
CUSTOMERS, OUR REVENUES WILL DECLINE.
Approximately 55% of our net sales in the three months ended March 31,
2000, were derived from sales to twenty customers. Our principal customers
may not continue to purchase products from us at current levels, if at all.
The loss of, or a significant adverse change in, the relationship between us
and any major customer would cause our revenues to decline.
WE MAY NOT HAVE THE MANUFACTURING CAPABILITIES TO TIMELY MEET DEMAND FOR OUR
PRODUCTS.
To date, our manufacturing activities have consisted primarily of
manufacturing low volume quantities for initial commercial sales. The
manufacture of our products is complex, involving a number of separate
processes and components. We have limited experience in manufacturing our
Port-Access products in higher volume commercial quantities, and we have very
little experience manufacturing our recently introduced products designed for
less invasive open-chest surgery, aortic valve replacement and stopped- and
beating-heart minimally invasive cardiac surgery. We have contracted with
third parties to manufacture certain of our products and product components.
These suppliers may not be able to successfully scale-up production to meet
commercial demand for our products in a timely manner. In addition, we
believe that cost reductions in its manufacturing operations will be required
for us to commercialize our systems on a profitable basis. Certain
manufacturing processes are labor-intensive, and achieving significant cost
reductions will depend, in part, upon reducing the time required to complete
these processes. Medical device manufacturers often encounter difficulties in
scaling up manufacturing of new products, including problems involving
product yields, quality control and assurance, component and service
availability, adequacy of control policies and procedures, lack of qualified
personnel, compliance with FDA regulations, and the need for further FDA
approval of new manufacturing processes and facilities. To date, we have
experienced variable yields in manufacturing certain of our product
components, and such variability may continue or may adversely impact our
ability to meet demand for its products. We have considered and will continue
to consider as appropriate the internal manufacture of components currently
provided by third parties, as well as the implementation of new production
processes. Manufacturing yields or costs may be adversely affected by the
transition to in-house production or to new production processes when such
efforts are undertaken, and such a transition may materially and adversely
affect our business, financial
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condition, and results of operations. We have received ISO 9001
certification and in 1998 we passed an FDA inspection of our compliance with
Quality System Regulations ("QSR"), which include testing, control, and
documentation requirements. There can be no assurance that we will continue
to meet ISO 9001 requirements or FDA QSR requirements.
We use or rely on a number of components and services used in our
devices that are provided by sole source suppliers. The qualification of
additional or replacement vendors for certain components or services is a
lengthy process. Any significant supply interruption would have a material
adverse effect on our ability to manufacture our products and, therefore, a
material adverse effect on our business, financial condition, and results of
operations.
We manufacture our products based on forecasted product orders, and
purchase subassemblies and components prior to receipt of purchase orders
from customers. Lead times for materials and components ordered by us vary
significantly, and depend on factors such as the business practices of the
specific supplier, contract terms, and general demand for a component at a
given time. Certain components used in our products have long lead times or
must be ordered on non-cancelable terms. As a result, there is a risk of
excess or inadequate inventory if orders do not match forecasts, as well as
potential costs from non-cancelable orders.
WE MAY NOT BE ABLE TO COMPETE IN OUR RAPIDLY CHANGING MARKET.
We expect that the market for minimally invasive and less invasive
cardiac surgery, which is currently in the early stages of development, will
be intensely competitive. Competitors are likely to include a variety of
different companies that currently specialize in devices for conventional
cardiac surgery, as well as those that specialize in non-cardiac minimally
invasive surgery. We believe that a number of large companies, including
Baxter International Inc., the Ethicon Endosurgery division of Johnson &
Johnson, Genzyme Corporation, Guidant Corporation, Medtronic, Inc., United
States Surgical Corporation and others with significantly greater financial,
manufacturing, marketing, distribution, and technical resources and
experience than we do, may be focusing on the development of minimally
invasive and less invasive cardiac surgery technology. In addition, new
companies have been and will continue to be formed to pursue opportunities in
the minimally invasive and less invasive cardiac surgery fields.
Cardiovascular diseases that can be treated with our products can also
be treated by pharmaceuticals or other medical devices and procedures
including PTCA, intravascular stents, atherectomy catheters and lasers. Many
of these alternative treatments are widely accepted in the medical community
and have a long history of use. In addition, technological advances with
other therapies for heart disease such as drugs or future innovations in
cardiac surgery techniques could make such other therapies more effective or
lower in cost than our products and could render our technology obsolete.
Physicians may not use our products to replace or supplement established
treatments, such as conventional open-chest heart
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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.
17
<PAGE>
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 March 31, 2000, we have incurred cumulative net losses of
approximately $167.8 million. For at least the next nine months, we expect to
continue to incur losses. We may never achieve or sustain profitability.
We believe our current capital will be sufficient to meet our
anticipated cash needs for at least the next twelve months. We may need to
raise additional funds after this period or, if we expand more rapidly than
expected, during this period. Our future liquidity and capital requirements
will depend upon numerous factors, including but not limited to the
following:
- the extent to which our products gain market acceptance;
- the timing and costs of future product introductions;
- the extent of our ongoing research and development programs;
- the costs of training physicians to become proficient in the use of our
products and procedures;
- the costs of expanding manufacturing capacity;
- the costs of developing marketing and distribution capabilities;
- the progress and scope of clinical trials required for any future
products;
- the timing and costs of filing future regulatory submissions;
- the timing and costs required to receive both domestic and international
governmental approvals for any future products; and
- the costs of protecting and defending our intellectual property.
Issuance of additional equity or convertible debt securities could result in
substantial dilution to stockholders. Additional financing may not be
available on terms acceptable to us, if at all. Our inability to fund our
capital requirements would have a material adverse effect on our business,
financial condition, and results of operations.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AND WE ARE
VULNERABLE TO CLAIMS THAT OUR PRODUCTS INFRINGE THIRD-PARTY INTELLECTUAL
PROPERTY RIGHTS.
We believe that our competitive position depends in significant part on
our ability to protect our intellectual property. Our policy is to seek to
protect our proprietary position by, among other methods, filing United
States and foreign patent applications related to its technology, inventions,
and improvements that are important to the development of its business. As of
March 31, 2000, we own 111 issued or allowed United States patents, and 16
issued foreign patents. In addition, as of March 31, 2000, we have 74 pending
United States patent applications and we filed 41 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
18
<PAGE>
advantage. Our patents or patent applications may be challenged, invalidated,
or circumvented in the future. In addition, our competitors, many of which
have substantially more resources than we do and have made substantial
investments in competing technologies, may seek to apply for and obtain
patents that will prevent, limit, or interfere with our ability to make, use,
or sell our products either in the United States or internationally.
We also rely upon trade secrets, technical know-how, and continuing
technological innovation to develop and maintain our competitive position. We
typically require our employees, consultants, and advisors to execute
confidentiality and assignment of inventions agreements in connection with
their employment, consulting, or advisory relationships with us. These
agreements may be breached and we may not have adequate remedies for any such
breach. Furthermore, our competitors may independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
our proprietary technology, and we may not be able to meaningfully protect
our rights in unpatented proprietary technology.
Patent applications in the United States are maintained in secrecy until
patents issue, and patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries and
the filing of related patent applications. Patents issued and patent
applications filed relating to medical devices are numerous and current and
potential competitors and other third parties may have filed or received or
in the future may file applications for, or receive, patents or obtain
additional proprietary rights relating to products or processes used or
proposed to be used by us. We are aware of patents issued to third parties
that contain subject matter related to our technology. Based, in part, on
advice of our patent counsel, we believe that the technologies employed by us
in our devices and systems do not infringe the claims of any such patents.
Third parties may, however, seek to assert that our devices and systems
infringe their patents or seek to expand their patent claims to cover aspects
of our technology.
The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease in particular,
has been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. Any such claims, whether with
or without merit, could be time-consuming and expensive to respond to and
could divert our technical and management personnel. We may be involved in
litigation to defend against claims of infringement by other patent holders,
to enforce patents issued to us, or to protect our trade secrets. If any
relevant claims of third-party patents are upheld as valid and enforceable in
any litigation or administrative proceeding, we could be prevented from
practicing the subject matter claimed in such patents, or would be required
to obtain licenses from the patent owners of each such patent, or to redesign
its products or processes to
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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 necessary to enforce patents
issued to us, to protect trade secrets or know-how owned by us, or to
determine the enforceability, scope, and validity of the proprietary rights
of others. Any such litigation, if commenced by us, may not be successful.
PRODUCT LIABILITY LAWSUITS COULD DIVERT OUR RESOURCES, RESULT IN SUBSTANTIAL
LIABILITIES AND REDUCE THE COMMERCIAL POTENTIAL OF OUR PRODUCTS.
We face an inherent and significant business risk of exposure to product
liability claims in the event that the use of our products results in
personal injury or death. Claims related to product liability are a regular
and ongoing aspect of the medical device industry, and at any one time we may
be subject to claims asserted against us and are involved in product
liability litigation. We maintain limited insurance against certain product
liability claims, such coverage may not continue to be available on terms
acceptable to us or such coverage may not be adequate for any liabilities
actually incurred. Also, in the event that any of our products prove to be
defective, we may be required to recall or redesign such products. A
successful claim brought against us in excess of available insurance
coverage, or any claim or product recall that results in significant adverse
publicity against us, may have a material adverse effect on our business,
financial condition, and results of operations.
WE COULD LOSE CERTAIN KEY PERSONNEL, WHICH COULD PREVENT US FROM EXECUTING
OUR BUSINESS STRATEGIES.
Our future business and operating results depend in significant part
upon the continued contributions of our key sales, technical and senior
management personnel, many of whom would be difficult to replace. Our
business and future operating results also depend in significant part upon
our ability to attract and retain qualified management, manufacturing,
technical, marketing, and sales and support personnel for our operations.
Competition for such personnel is intense, particularly in the geographic
region of California where our principal office is located, we may not be
successful in attracting or retaining such personnel. The loss of any key
employee, the failure of any key employee to perform in his or her current
position, or our inability to attract and retain skilled employees, as
needed, could prevent us from successfully pursuing our business.
20
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IF OUR PRODUCTS ARE NOT APPROVED BY REGULATORY AGENCIES, WE WILL BE UNABLE TO
COMMERCIALIZE THEM.
Our individual devices are subject to regulatory clearances or approvals
by the FDA. We believe that most of our devices and systems will be subject
to United States regulatory clearance through the 510(k) premarket
notification process rather than a more extensive PMA submission. Although we
have received clearance from the FDA to market the EndoCPB system, the
EndoDirect system and several proprietary Class II disposable surgical
devices for our Port-Access CABG and MVR surgery systems in the United
States, securing FDA approvals and clearances for additional Port-Access
devices and other products under development will require submission to the
FDA of extensive technical information and may require submission of
extensive clinical data. The FDA may not act favorably or quickly on our
510(k) or other submissions, and we may encounter significant difficulties
and costs in our efforts to obtain FDA clearance that could delay or preclude
us from marketing and selling our products in the United States. Furthermore,
the FDA may request additional data, require that we conduct further clinical
studies, or require a more extensive PMA submission, causing us to incur
substantial costs and delays. Our business, financial condition, and results
of operations are critically dependent upon FDA clearance or approval of our
systems. Failure to obtain such clearances or approvals, or to obtain such
clearances or approvals on a timely basis, would have a material adverse
effect on our business, financial condition, and results of operations, and
could result in postponement of the commercialization of our products or even
cessation of our business in the United States.
Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approval for sale in foreign countries may be longer
or shorter than that required for FDA clearance or approval, and the
requirements may differ. Although our EndoCPB system, EndoDirect system and
Port-Access CABG and MVR systems bear the CE Mark under the European
Community medical device directive, some European countries may impose
additional requirements for commercialization of those products. Other
products under development will require additional approvals or assessments,
and these approvals or assessments may not be received on a timely basis, if
at all. Most other countries either do not currently regulate medical systems
or have minimal regulatory requirements, although these countries may adopt
more extensive regulations in the future that could impact our ability to
market its systems. In addition, significant costs and requests for
additional information may be encountered by us in our efforts to obtain
regulatory approvals. Any such events could substantially delay or preclude
us from marketing our systems internationally.
In addition, the FDA and certain foreign regulatory authorities impose
numerous other requirements with which medical device manufacturers must
comply. Product approvals can be withdrawn for failure to comply with
regulatory standards or because of the occurrence of unforeseen problems
following initial marketing. We will also be required to adhere to applicable
FDA regulations setting
21
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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 revisions could have a material adverse effect
on our business, financial condition, and results of operations.
HEALTHCARE REFORM AND RESTRICTIONS ON REIMBURSEMENTS MAY LIMIT OUR RETURNS ON
OUR PRODUCTS.
We expect that sales volumes and prices of our products will be heavily
dependent on the availability of reimbursement from third-party payors and
that individuals seldom, if ever, will be willing or able to pay directly for
the costs associated with the use of our products. Our products are typically
purchased by clinics, hospitals, and other users, which bill various
third-party payors, such as governmental programs and private insurance
plans, for the healthcare services provided to their patients. Third-party
payors carefully review and increasingly challenge the prices charged for
medical products and services. Reimbursement rates from private companies
vary depending on the procedure performed, the third-party payor, the
insurance plan, and other factors. Medicare reimburses hospitals a
prospectively determined fixed amount for the costs associated with an
in-patient hospitalization based on the patient's discharge diagnosis, and
reimburses physicians a prospectively determined fixed amount based on the
procedure performed, regardless of the actual costs incurred by the hospital
or physician in furnishing the care and unrelated to the specific devices
used in that procedure. Medicare and other third-party payors are
increasingly scrutinizing whether to cover new products and the level of
reimbursement for covered products.
In foreign markets, reimbursement is obtained from a variety of sources,
including governmental authorities, private health insurance plans, and labor
unions. In most foreign countries, there are also private insurance systems
that may offer payments for alternative therapies. Although not as prevalent
as in the United States, health maintenance organizations are emerging in
certain European countries. We may need to seek international reimbursement
approvals. Such approvals may not be obtained in a timely manner or at all.
Failure to receive international reimbursement approvals could have an
adverse effect on market acceptance of our products in the international
markets in which such approvals are sought.
We believe that reimbursement in the future will be subject to increased
restrictions such as those described above, both in the United States and in
foreign markets. We believe that the overall escalating cost of medical
products and services has led to and will
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continue to lead to increased pressures on the health care industry, both
foreign and domestic, to reduce the cost of products and services, including
products offered by us. We are aware that certain third-party payors have
challenged or refused to provide reimbursement for Port-Access procedures.
Third-party reimbursement and coverage may not be adequate or available in
either United States or foreign markets. In addition, current reimbursement
amounts may be decreased in the future and future legislation, regulation, or
reimbursement policies of third-party payors may otherwise adversely affect
the demand for our products or our ability to sell our products on a
profitable basis, particularly if our systems are more expensive than
competing cardiac surgery procedures. If third-party payor coverage or
reimbursement is unavailable or inadequate, our business, financial
condition, and results of operations could be materially adversely affected.
OUR STOCK PRICE MAY BE EXTREMELY VOLATILE AND YOU MAY NOT BE ABLE TO SELL
YOUR SHARES ABOVE THE PRICE YOU PURCHASED THEM.
Our stock price has been, and is likely to continue to be, highly
volatile. The market price of the shares of Common Stock may be significantly
affected by factors such as actual or anticipated fluctuations in our
operating results, announcements of technological innovations, new products
or new contracts by us or our competitors, developments with respect to
patents or proprietary rights, conditions and trends in the medical device
and other technology industries, adoption of new accounting standards
affecting the medical device industry, changes in financial estimates by
securities analysts, general market conditions, and other factors.
In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market price for many high
technology companies and that have often been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of our Common Stock, and there can be no assurance
that the market price of the Common Stock will not decline. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. Such litigation, if brought against us, could result in
substantial costs and a diversion of management's attention and resources.
IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH
CORPORATIONS AND RESEARCH INSTITUTIONS, WE MAY NOT BE ABLE TO EFFECTIVELY
COMMERCIALIZE OUR PRODUCTS.
We intend to pursue strategic relationships with corporations and
research institutions with respect to the research, development, regulatory
approval, and marketing of certain of our potential products and procedures.
Our future success may depend, in part, on our relationships with third
parties and their success in marketing our products or willingness to
purchase such products. We anticipate that these third parties may have the
unilateral right to terminate any such relationship without significant
penalty. We may not be successful in establishing or maintaining any such
strategic
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<PAGE>
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 48% 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.
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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months
ended March 31, 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: May 11, 2000 HEARTPORT, INC.
--------------------
By: /s/ Casey M. Tansey
-------------------------
President,
Chief Executive Officer
And Acting Chief Financial Officer
24
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