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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(MARK ONE)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For fiscal year ended March 31, 1997 or
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[ ] 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 : 0-20584
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ABIOMED, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 04-2743260
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
33 Cherry Hill Drive, Danvers, Massachusetts 01923
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(Address of Principal Executive Offices) (Zip Code)
(508) 777-5410
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
--------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Rule
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock, $.01 par value,
held by non-affiliates of the registrant as of June 23, 1997 was $94,741,272
million based on the closing price of $13.50 on that date on the Nasdaq National
Market. As of June 23, 1997, 7,017,872 shares of the registrant's Common Stock,
$.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement involving the election of
directors, which is expected to be filed within 120 days after the end of the
registrant's fiscal year, are incorporated by reference in Part III (Items 10,
11 and 12) of this Report.
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PART I
ITEM 1. BUSINESS
Information contained in this Report contains forward-looking statements
such as statements of the Company's plans, objectives, expectations and
intentions, that can often be identified by the use of forward-looking
terminology, such as "may," "will," "should," "expect," "anticipate," "believe,"
"plan," "intend," "could," "estimates," "is being" "goal," "schedule" or other
variations of these terms or comparable terminology. All forward-looking
statements involve risks and uncertainties, and actual results, events or
performance could differ materially from those set forth in the forward-looking
statements. The cautionary statements made in this Report should be read as
being applicable to all forward-looking statements wherever they appear in this
Report. Readers are cautioned not to place undue reliance on these forward-
looking statements which speak only as of the date of this Report. Factors that
could cause or contribute to such differences include those discussed in the
risk factors set forth in Item 7 below (the "Risk Factors") as well as those
discussed elsewhere herein. The Company undertakes no obligation to publicly
release the results of any revisions to these forward-looking statements that
might be made to reflect any change in the Company's expectations or in events,
conditions or circumstances on which any such statement is based.
ABIOMED, Inc. ("ABIOMED" or the "Company") is a leader in the research and
development of cardiac assist technology. The Company developed, manufactures
and sells the first U.S. Food and Drug Administration (the "FDA") approved
temporary external artificial heart, the BVS 5000(R) (the "BVS(R)"). The Company
is also developing two permanently implantable systems: a total artificial heart
("TAH") and a Heart Booster(TM), the former to replace and the latter to assist
a patient's heart.
The TAH is being designed to replace the left and right ventricles of a
failing human heart, providing normal circulation to the body. The Company
believes that it has substantially completed the design of the TAH. Subject to
the satisfactory completion of initial testing and FDA approval of the TAH, the
Company is targeting to begin clinical testing of this device by the year 2000.
However, there can be no assurance that the Company will be successful in
meeting this timetable. See "Risk Factors -- Uncertainty of Product
Development."
The Heart Booster is a permanent implantable device being designed to wrap
around a patient's failing heart and provide assist. The Heart Booster is
intended for those patients suffering from congestive heart failure resulting in
a significant deterioration of their quality of life, but who are not at risk of
imminent death. The Company's early-stage research efforts on this device are
focused on developing cardiac assist technology that, unlike the TAH and other
ventricular assist devices, avoids the inherent risks of contact with blood
while providing a sufficient level of assistance to a patient's own heart to
restore the patient to an acceptable and active quality of life.
The Company is also active in the research and development of other
innovative medical and dental products. Products and technologies in various
stages of development by this group include advanced technologies in the area of
minimally invasive surgery, such as tissue-welding and vascular welding for the
repair of small arteries, remote suturing technology, and other temporary
cardiac assist devices including a miniaturized rotary blood pump, a
magnetically suspended centrifugal pump and a pediatric cardiac assist pump.
This group also developed the Company's PerioTemp(R) which is marketed and sold
by ABIODENT(R), the Company's dental subsidiary.
The Company is a Delaware corporation. It commenced operations in 1981. The
Company's principal offices are located at 33 Cherry Hill Drive, Danvers,
Massachusetts 01923. Its telephone number is (508) 777-1561. As used herein, the
Company or ABIOMED includes ABIOMED, Inc. together with its subsidiaries.
ABIOMED, ABIODENT(R), and the ABIOMED logo are registered service marks of the
Company. Angioflex(R), BVS(R), BVS-5000(R), PerioTemp(R), and SupraCor(R) are
registered trademarks of the Company. Heart Booster(TM) is a trademark of the
Company. This Report may also include trademarks of companies other than the
Company.
INDUSTRY BACKGROUND
Overview. Cardiovascular disease is one of the leading health problems in
the U.S. According to U.S. government sources, as of 1995, there were more than
57 million people in the U.S. who have some form of cardiovascular disease,
including approximately 4.8 million people with mild to severe congestive heart
failure. These
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sources report that in 1995, cardiovascular disease was the leading cause of
death in the U.S., killing an estimated 962,000 people, including 482,000 deaths
from coronary heart disease. In 1994, among thirty-six industrialized countries
studied by the National Heart, Lung and Blood Institute, the U.S. ranked 16th in
cardiovascular disease mortality in both middle-aged men and middle-aged women.
Many patients with cardiovascular disease are initially treated with drugs.
Cardiologic intervention (such as angioplasty and stenting), surgical correction
(such as heart by-pass surgery or valve replacement) and mechanical devices are
often considered in sequence when drug therapies prove ineffective or
inadequate. Electrical, or rhythm, disturbances of the heart that threaten to
impair the quality of a patient's life have been treated effectively with
mechanical devices such as pacemakers and implantable defibrillators. Aside from
valvular problems, irreversible mechanical dysfunctions of the heart, typically
involving the weakening of the heart muscle and tissue, have not been addressed
as effectively. Until recently, advances in devices to address mechanical
dysfunctions of the heart have been constrained by many factors, including
difficulties inherent in long-term interactions between synthetic materials and
flowing blood. Advancing knowledge in the area of blood pump flow design and
surface structure of biomaterials has begun to make devices for long-term
circulatory assist a possibility.
Patients who may benefit from mechanical cardiac assist fall into a number
of categories that may either require temporary or permanent support. The
Company classifies devices intended to be removed after a period of support
time, regardless of the duration of support, as temporary devices, and devices
which are intended to provide support through the end of life, as permanent
devices.
Temporary Cardiac Assist. Temporary mechanical cardiac assist devices
include intra-aortic balloon pumps ("IABPs"), roller and centrifugal pumps
("CPs") for heart-lung bypass, and ventricular assist devices. Each of these
devices is designed for different patient indications. The IABP is designed to
assist a failing heart, but it cannot take over the pumping function of the
heart. CPs are approved for use short-term (hours) support of patients
undergoing heart surgery. CPs have not been approved for use for post surgical
support. Implantable left ventricular assist devices ("LVADs") and certain
other ventricular assist devices, which, depending upon the device, replace and
take over the complete pumping function of one or both sides of a failing heart
have been approved for use by the FDA as bridge to heart transplantation
devices. Other external ventricular assist devices, including the Company's
BVS, can take over the pumping function either or both sides of a failing heart
without replacing the heart. These devices have been approved for use by
patients whose hearts are in failure but whose hearts may be able to recover
with rest, including patients in post-surgical life-threatening heart failure.
Permanent Cardiac Assist. Permanent mechanical cardiac assist devices
include end-stage life-renewal devices, such as total artificial hearts and
ventricular assist devices, for patients requiring full-scale replacement or
support of one or both sides of their hearts to increase their life spans, and
quality-of-life devices for patients requiring moderate support to their
existing hearts to improve the quality of their lives. There is currently no
device approved by the FDA for permanent mechanical heart assistance as an
alternative to transplantation. As a result, patients whose hearts are
irreversibly failing must rely on the availability and effectiveness of heart
transplantation to extend their lives. While patients suffering from chronic
heart disease are frequently treated with drugs, those with more advanced
disease suffer from a significant impairment in the quality of their lives.
Patients that could benefit from total artificial hearts and other end-
stage life-renewal devices include those who experience heart failure that poses
an acute and immediate threat to life and patients who suffer from a gradual
deterioration of heart function into a life-threatening condition over longer
periods of time. Patients suffering from acute heart failure are generally not
candidates for heart transplantation, unless bridged by a temporary cardiac
support system, because of timing constraints.
Patients suffering from more advanced stages of congestive heart failure,
whose quality of life has been compromised (confined to a bed-to-chair type of
existence), but who are not in danger of imminent death could benefit from
permanent cardiac assist devices that provide partial support but do not replace
the natural heart. These patients may not be candidates for heart transplants or
permanently implanted LVADs or artificial hearts, since the associated risks of
those procedures or devices (once developed) are currently considered too high
when life is not at stake. In addition to drugs, therapies which are under
development for these patients include various cardiomyoplasty concepts (which
involves wrapping the heart with skeletal muscle and pacing this muscle with a
pacemaker), other emerging pacing technology approaches, the Company's Heart
Booster, and a variety of small implantable rotary pumps of different designs
under active development and evaluation by many separate teams notably in the
U.S. and Japan.
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STRATEGY
ABIOMED is a leader in the research and development of mechanical cardiac
assist systems. The Company's goal is to develop, manufacture and sell a range
of mechanical cardiac assist devices that address the varying needs of a wide
range of patients that could benefit from mechanical support. Since its
inception in 1981, the Company has been working towards the development of
technology for implantable artificial hearts to address the needs of patients
facing imminent death due to end-stage, acute and chronic, heart failure. The
Company's goal is to be first to the clinic in the U.S. with an implantable
total artificial heart. Previously, the Company developed the first advanced
cardiac assist device, the BVS temporary artificial heart system, approved by
the FDA through the FDA's rigorous pre-market approval ("PMA") process. The
Company is also working to develop a Heart Booster to provide permanent support
for patients whose quality of life is impaired as a result of heart disease but
who are not at risk of imminent death. The Company is pursuing the following
strategies to achieve its goals.
Maintain Technological Leadership. The BVS was the first advanced cardiac
assist device to receive FDA PMA approval. Since its introduction, the Company
has continued to technically enhance this product and related components. The
Company's technological leadership in cardiac assist has also been recognized by
the National Heart, Lung and Blood Institute (the "NHLBI) of the National
Institutes of Health (the "NIH"). In fiscal 1997, the Company was one of only
two companies to be awarded continuing NHLBI funding for the development of a
total artificial heart. In October 1995, the Company was also awarded a five
year $4.3 million contract to support the research and development of the Heart
Booster. The Company intends to continue its focus on developing and enhancing
its cardiac support technology to maintain and enhance its leadership in this
field.
Accelerate Development of the TAH. The Company, in addition to funding
that it is receiving under its TAH contract with the NHLBI, is committing its
own resources to the development of the TAH with a goal of commencing clinical
trials by the year 2000. In an effort to achieve this goal, the Company has
built a new development and pilot-scale manufacturing facility, and has hired
and intends to continue to hire additional personnel dedicated to bringing the
TAH to clinical trials and commercialization. Efforts of this group will include
increased testing, final design completion, training of clinical centers,
interacting with the FDA, and development of product documentation,
manufacturing processes and standard operating procedures to achieve GMP and ISO
9001 compliance.
Increase Domestic BVS Sales. During fiscal 1997, the Company increased
the size of its domestic sales force and clinical support group. As of May 31,
1997, the Company's BVS sales, clinical support and marketing staff consisted of
twenty-eight people. Through the efforts of its sales force, the Company has
installed the BVS in approximately half of the largest open heart centers in the
U.S., those conducting over 500 open heart operations per year. This growing
customer list also serves as an expanding referral base to support further sales
of the BVS. The Company's clinical support group provides its installed base of
BVS customers with ongoing training in patient selection, BVS use and post-
operative care of patients on BVS support. The Company believes the efforts of
this group contribute significantly to increasing the number of lives saved by
the BVS and increasing usage and reorders of BVS blood pumps.
Use of Government Contracts and Grants to Fund Technology Research. The
Company has typically obtained funding for new technology development from
third-parties, primarily through government contracts and grants. The Company
commits its own funds if it believes that the scientific risk related to
developing a product can be overcome and that there is a sufficient potential
market for the product to justify the expense. Based upon this criteria, the
Company has committed to use its own funds to complete the development of the
TAH to supplement its NHLBI funding of this project. The majority of other
products under development by the Company, including the Heart Booster, are
currently funded by government contracts.
Develop Key Relationships. The Company values its relationships with key
medical centers, medical opinion leaders and with various government agencies,
including the NIH and the FDA, and intends to continue building and enhancing
these relationships to support the continued development, commercialization,
market
5
penetration and use of its products. These relationships have helped support the
Company's development and marketing efforts, provided the Company with
significant research and development funding and helped the Company more
efficiently address concerns and requirements related to obtaining the necessary
regulatory approvals. The Company is working with leading cardiovascular centers
and is expanding its collaborative efforts to other leading cardiac and heart
transplant centers to begin device and team readiness training and testing of
the TAH.
Increase International Sales. The Company's primary sales and marketing
focus has been in the U.S. The Company has a limited distributor network in
place in certain foreign countries, primarily in Europe. Following the recent
success of its initial U.S. market penetration, the Company intends to renew its
efforts to expand BVS sales and usage in Europe and other international markets.
The Company also intends to use its strengthened international presence to
introduce its TAH in selected foreign markets in parallel with the conduct of
clinical trials in the U.S., subject to obtaining the necessary foreign and FDA
approvals.
There can be no assurance that the Company will be able to successfully
implement any of its strategies on a timely basis, if at all, or that any of the
Company's strategies, even if successfully implemented, will enable the Company
to achieve its goals. See "Risk Factors."
CARDIAC ASSIST PRODUCTS
The BVS-5000 Bi-Ventricular Temporary Artificial Heart System. The BVS is a
cardiac assist device designed to provide a patient's failing heart with full
circulatory assistance as an external temporary artificial heart so that the
natural heart is allowed to rest, heal and recover its function. The BVS
received FDA pre-market approval in November 1992, allowing the Company to begin
marketing the product in the U.S. This approval represented the first time that
the FDA had approved a cardiac assist device through the rigorous PMA process.
As of May 31, 1997, the BVS continued to be the only cardiac assist device
approved by the FDA for post-operative patients in post-cardiotomy shock.
The BVS is targeted for use in any hospital performing open-chest cardiac
surgery (more than 900 hospitals in the U.S.) and is intended for short term use
in patients requiring mechanical circulatory support primarily after open-chest
cardiac surgery. The system consists of one or two disposable bedside blood
pumps connected to a patient's heart. Depending on the patient's needs, these
blood pumps provide complete or partial pumping of blood for the left, right or
both sides of a patient's heart. Like the natural heart, each pump contains two
chambers: an artificial atrium, which fills directly from the natural heart, and
an artificial ventricle, which pumps blood back to the body. The BVS blood pump
reduces the risk of damaging blood cells by filling passively and continuously
by gravity rather than by suction. The BVS blood-contacting pumps are single-use
disposable products.
The BVS is typically used for patients with acute operative complications
who do not respond to drug therapies and the partial support provided by intra-
aortic balloon pumps. When implanted, the BVS cannulae are sutured directly to
the patients' natural heart. The BVS blood pumps operate external to the body,
and are driven and controlled by a microprocessor-based console. The console
features a simple, easy-to-use, touch-activated control panel. The BVS
incorporates a patented closed-loop system that automatically adjusts the
pumping rate, like the natural heart. After implantation, the BVS does not
require a specially trained technician to constantly monitor or adjust pumping
parameters, which can reduce hospital operating costs.
The BVS is intended to provide temporary heart support to a failing heart
allowing it the time to rest, heal and recover its function. Stabilization and
recovery of the heart typically occurs in a period of less than one week for
patients placed on the BVS. As of May 31, 1997, the longest period that a
patient has been on BVS support is 82 days. Although patients whose hearts fail
to recover under BVS support may become candidates for transplantation, this is
not the intended use of the BVS. Patients supported by the BVS whose hearts do
not recover, may also become candidates for the Company's total artificial
heart, if and when approved for use.
The Implantable Total Artificial Heart (TAH). The TAH is a battery-powered
implantable artificial heart
6
under development by the Company to address the needs of patients with
irreversibly failing hearts who require permanent mechanical circulatory
support. The TAH is intended to be a permanent device that replaces the
ventricles of a failing human heart, providing the complete left and right side
pumping functions of the heart. The Company's design goal has been to develop a
TAH which operates well enough to require minimal attention from the patient and
effective enough to return a patient to a productive life style. See "Risk
Factors -- Uncertainty of Product Development."
The Company's TAH consists of five primary components: (i) a thoracic unit,
or "replacement heart", consisting of two artificial ventricles and associated
valves and other components; (ii) an implantable rechargeable battery; (iii) an
implantable electronics package for control and diagnostics; (iv) an implantable
transcutaneous energy transmission device (which powers the system and allows
the internal battery to be recharged without the need of wires penetrating the
skin) and a data communication unit; and (v) an external battery pack.
The Company is one of two scientific teams in the U.S. that has a contract
with the NHLBI to develop a battery-powered implantable total artificial heart.
In September 1996, as a result of peer-reviewed competitive evaluation process,
the Company received an $8.5 million cost-plus-fixed fee four year extension to
its TAH research and development contract with the NHLBI. This award follows
prior consecutive TAH contract awards from NHLBI of $5.6 million and $4.9
million. The goal of this new contract extension is to bring the TAH to
clinical testing as a permanent device. Under a sub-contract from the Company,
pre-clinical testing and evaluation of the TAH is being conducted by the Texas
Heart Institute. The Company's TAH contract is subject to annual government
appropriations and is terminable at the convenience of the government. See "Risk
Factors -- Reliance on Government Contracts."
The Company intends to supplement the funds received from the government
for TAH development and testing. The Company's goal is to obtain FDA approval
to commence clinical trials of the TAH by the year 2000. There can be no
assurance that the Company will be successful in developing the TAH on this
schedule, if at all. See "Risk Factors -- Uncertainty of Product Development,"
"-- Future Capital Needs and Uncertainty of Additional Funding."
The Heart Booster. The Company is developing the Heart Booster under a five
year, $4.3 million contract from the NHLBI awarded to the Company in October
1995. The Heart Booster is intended for use in patients for whom congestive
heart failure has resulted in a significant deterioration of their quality of
life, but who are not at risk of imminent death. The Company's research and
development efforts on this device are focused on cardiac assist technology
that, unlike the TAH, LVADs, and rotary pump mini-LVADs, avoids the inherent
risks of contact with blood while providing a sufficient level of assistance to
the heart to restore an acceptable and active quality of life for these
patients. The Heart Booster is being designed to wrap around the heart, similar
to cardiomyoplasty, to provide ventricular augmentation without requiring
contact with flowing blood, medication or ongoing skin penetration. In a much
earlier stage of development than the TAH, the Heart Booster is being designed
to use certain drive technologies developed by the Company for the TAH. Columbia
Presbyterian Medical Center, located in New York City, is the initial medical
center collaborating with the Company on this project for pre-clinical device
testing. There can be no assurance that the Company will be successful in
developing the Heart Booster. See "Risk Factors -- Uncertainty of Product
Development," "-- Reliance on Government Contracts."
Other Cardiac Technology. In addition to its research in the area of
permanent mechanical cardiac assist, the Company is conducting research and
development, supported by government funding, on a number of potential products
and technologies with applications for cardiac assist or cardiac surgery,
including (i) advanced technologies in the area of minimally invasive surgery,
such as tissue-welding and vascular welding for the repair of small arteries,
(ii) remote suturing technology, and (iii) other temporary cardiac assist
devices including a miniaturized rotary blood pump, a magnetically suspended
centrifugal pump and a pediatric cardiac assist pump. The Company had also
expended significant resources on developing the SupraCor, a percutaneous
catheter-based intra-aortic balloon device designed for use within a patient's
ascending aorta. The Company has relegated the SupraCor development program to a
low priority and suspended activities on this device to focus its resources on
the development of the TAH and Heart Booster products which the Company believe
address greater patient needs.
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MARKETING AND SALES
The Company sells the BVS in the U.S. through a direct sales and clinical
support staff. As of May 31, 1997, the Company's BVS sales, clinical support
and marketing staff included twenty-eight full-time employees. Through the
efforts of this sales force, as of May 31, 1997, the BVS has been installed in
two hundred fifty medical centers in the U.S. and more than three hundred
medical centers throughout the world. In the U.S., medical centers which have
purchased that BVS include approximately half of the largest open heart centers
(those conducting over 500 open heart operations per year). The Company's
growing customer list also serves as an expanding referral base to support
further sales of the BVS. The Company supports its customers with its clinical
support group. The clinical support group is responsible for training and
ongoing support and education of the Company's customers, including training in
patient selection, BVS use and post-operative maintenance of patients on BVS
support. The Company believes that the efforts of this group have contributed
significantly to an increase in the number of lives saved by the BVS and
increased usage and reorders of BVS blood pumps. The Company believes that
sales of its BVS may be somewhat seasonal, with reduced sales in the summer
months, reflecting hospital personnel and physician vacation schedules.
The Company's primary sales and marketing focus has been in the U.S. The
Company has a limited distributor network in place in certain foreign countries,
primarily in Europe. This distribution network consists of local distributors
that have experience in the marketing, distribution and servicing of other
cardiovascular devices. Following the recent success of its initial U.S. market
penetration, the Company intends to renew its efforts to expand BVS sales and
usage in Europe and other international markets. The Company also intends to
use its strengthened international presence to introduce its TAH in selected
foreign markets in parallel with the conduct of clinical trials in the U.S.,
subject to obtaining the necessary foreign and FDA approvals. See "Risk Factors
- -- International Sales."
COMPETITION
Competition in the cardiac assist market is intense and subject to rapid
technological change and evolving industry requirements and standards. Many of
the companies developing or marketing cardiac assist products have substantially
greater financial, product development, sales and marketing resources and
experience than the Company. These competitors may develop superior products or
products of similar quality at the same or lower prices. Moreover, there can be
no assurance that improvements in current or new technologies will not make them
technically equivalent or superior to the Company's products in addition to
providing cost or other advantages. Other advances in medical technology and
biotechnology may reduce the size of the potential markets for the Company's
products or render those products obsolete. The Company's customers frequently
have limited budgets. As a result, the Company's products will also compete
against the broad range of medical devices for these limited funds.
Through May 31, 1997, the FDA had not approved any product other than the
BVS for temporary treatment of patients with severely failing but recoverable
hearts, the primary approved indication for use of the BVS. Approval by the FDA
of products that compete directly with the BVS would increase competitive
pricing and other pressures and could adversely affect the Company's revenue and
income from sales of the BVS. Although the BVS is the only FDA approved device
or system for treatment of reversible cardiac dysfunction, the BVS competes with
other devices and technologies, including centrifugal and other continuous flow
pumps ("CPs"), intra-aortic balloon pumps ("IABPs"), and certain systems
designed for use as a bridge to transplantation or as permanently implantable
devices. CPs have low-cost disposables, but the Company believes that the use of
these systems is more labor intensive and less clinically effective than the BVS
for the longer duration of support intended for BVS use. Moreover, the Company
believes that centrifugal pumps are not currently approved for post-operative
circulatory support by the FDA. IABPs, often used prior to implantation of the
BVS, are capable of providing only partial cardiac assist as compared to the
full cardiac assist provided by the BVS. The BVS may also compete with systems
that were originally designed to be permanent devices but later adapted for
temporary use and with systems approved for temporary "bridge-to-
transplantation" support that may be able to help support patients with failing
but recoverable hearts after surgery. The Company believes that these devices
are more expensive to use and
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operate than the BVS. Certain of these devices, such as implantable LVADs,
provide support to only one side of a failing heart. Some of these devices were
also designed or adapted to assist in transplantation rather than for recovery
by patients suffering from conditions such as post-cardiotomy shock.
The Company, in collaboration with the Texas Heart Institute, is one of two
development teams in the U.S. receiving NHLBI support for the development of an
implantable artificial heart. Pennsylvania State University, in collaboration
with 3M Corporation, Inc., is the other development team. Until 1996, Nimbus
Medical, Inc., in partnership with the Cleveland Clinic, also received NHLBI
support for the development of an artificial heart. Following the termination of
NHLBI sponsorship of the Nimbus/Cleveland Clinic effort, Thermocardio Systems,
Inc., a manufacturer of LVADs, acquired Nimbus. The Company is also aware of
artificial heart technology development efforts in Canada, Europe and Japan
supported by government and private funding. The Company's TAH may also compete
with implantable LVADs for some patient groups. The Company believes that
several companies have begun clinical testing for PMA approval to use these
devices for permanent applications as alternatives to transplantation. The
Company believes that the TAH, LVADs and mini-VADs generally address the needs
of different patient populations, with an overlap for segments of the heart
failure population. There can be no assurance that the Company will develop and
receive FDA approval to market its TAH on a timely basis, if at all, or that
once developed, the TAH will be commercially successful.
THIRD PARTY REIMBURSEMENT
The Company sells its medical products to physicians and medical
institutions who are typically reimbursed for use of such products by government
health administration authorities, private health insurers and other
organizations. Market acceptance of these products depends in large part on the
extent to which reimbursement for the use of such products is available to the
physicians and medical institutions. The level of reimbursement provided by
U.S. government health agencies, private health insurers and many foreign health
care insurance systems varies according to a variety of factors, including the
insurer, location, medical procedure classification and cost. For example,
Medicare reimburses for the surgical procedures in which the BVS is used, and
incrementally reimburses physicians for use of the BVS. However, Medicare does
not currently incrementally reimburse medical institutions for use of the BVS.
Certain private payer insurance companies provide incremental reimbursement to
both physicians and medical institutions. The Company is currently working with
the Health Care Finance Administration ("HCFA"), which establishes guidelines
for the reimbursement of health care providers treating Medicare and Medicaid
patients, to recommend the incremental reimbursement to medical institutions for
use of the BVS. In October 1995, a special "ICD-9" code was established by HCFA
in an effort by HCFA to more clearly track and evaluate hospital and physician
costs associated with the use of the BVS compared to present reimbursement
levels. The recommendations of HCFA frequently are also followed by private
health care insurance providers. As a result, the Company believes that a HCFA
recommendation to reimburse medical centers for the incremental cost of the use
of the BVS will be important to promote the more widespread use of the BVS.
There can be no assurance that HCFA will approve such additional reimbursement
on a timely basis, if at all.
No reimbursement levels have been established for the Company's products
under development, including the TAH and Heart Booster. Generally,
reimbursement for the use of such products is not provided until the products
are approved by the FDA. There can be no assurance that government health
administration authorities or private health insurers will approve reimbursement
for the use of these products, if and when approved by the FDA, or that if
reimbursement is provided, that the levels of reimbursement will be sufficient
to support the widespread use of those products. Failure to obtain adequate
reimbursement policies for the use of its products would have a material adverse
affect on the Company's business.
9
MANUFACTURING
The Company manufactures the BVS console, BVS blood pumps and related
accessories. The manufacture of BVS consoles consists primarily of assembly,
testing and quality control. The Company purchases the majority of the
materials, parts and peripheral components used in the BVS consoles. The
Company manufactures certain blood contacting components for the BVS blood
pumps, including valves and bladders, from its proprietary Angioflex(R) polymer.
The Company is currently experiencing a backlog in sales of its BVS single-use
components and has been expanding its manufacturing capacity in an effort to
eliminate this backlog. There can be no assurance that the Company will be
successful in expanding its manufacturing capacity in a timely manner.
Certain of the components of the BVS are supplied by sole source vendors or
are custom made for the Company. And, suppliers of certain components of the BVS
have indicated that they intend to discontinue, or have discontinued, making
such components. In addition, certain of these components are supplied from
single sources due to quality considerations, costs or constraints imposed by
regulatory authorities. There are relatively few additional sources of supply
for such components, and the Company may not be able to establish additional or
replacement suppliers for such components quickly, if required. Failure of the
Company to do so could have a material adverse affect on the Company's business.
In the past, certain suppliers have announced that, due to government
regulation or in an effort to reduce potential product liability exposure, they
intend to limit or terminate sales of certain products to the medical industry.
Although the Company does not expect any interruption of its current product
production due to the lack of available supplies, there can be no assurance
that, if such an interruption were to occur, the Company would be able to find
suitable alternative supplies at reasonable prices. Similarly, when and if the
Company reaches the clinical testing stage of its products under development, it
may find that certain components become more difficult to source from outside
vendors due to the product liability risk perceived by those vendors. The
Company's inability to obtain acceptable components in a timely manner or to
find suitable replacements at an acceptable cost would have a material adverse
effect on the Company's business. See Risk Factors -- "Dependence on Limited
Sources of Supply."
PRODUCT BACKLOG
Backlog for the Company's BVS, primarily BVS disposable components, totaled
approximately $1.0 million as of May 31, 1997. The Company had virtually no
product sales backlog as of May 31, 1996. Backlog consists of purchase orders
for which a delivery schedule within the next twelve months has been specified
by the customer. Orders included in backlog may be canceled or rescheduled by
customers without significant penalty. Backlog as of any particular date should
not be relied upon as indicative of the Company's net revenues for any future
periods.
RESEARCH AND DEVELOPMENT
The Company has substantial expertise in electro-mechanical systems,
cardiac physiology and experimental surgery; blood-material interactions, fluid
mechanics and hemodynamics, electronics (hardware and software), plastics
processing; lasers and optical physics. The Company's research and development
efforts are focused on the development of new products, primarily related to
cardiac assist, and the continued enhancement of the BVS and related
technologies. The Company's research and development personnel also are
involved in establishing protocols, monitoring and submitting test data to the
FDA and corresponding foreign regulatory agencies to obtain the necessary
clearances and approvals for its products. Cardiac assist products currently
under development by the Company include the TAH, the Heart Booster, and a
variety of specialized pumps, such as a miniaturized rotary blood pump, a
pediatric ventricular assist pump and a magnetically-suspended centrifugal pump.
The Company is also developing devices in the area of minimally invasive surgery
applications, such as tissue welding and vascular welding for the repair of
small arteries.
The Company generally relies on external funding for its initial research
and selectively invests in product development with internal funds, particularly
in the later stages of development and testing. As of March 31, 1997,
10
the Company's had a backlog of such external government funding that totaled
approximately $10.5 million, where backlog is defined as the total dollar amount
remaining under government contracts. This backlog, included $6.7 million
remaining under the Company's TAH contract and $3.4 million under its Heart
Booster contract, both with the NHLBI. All such government contracts and grants
contain provisions making them terminable at the convenience of the government
and certain contracts, including the TAH contract and Heart Booster contract,
are subject to annual government appropriations. See "Risk Factors--Reliance on
Government Contracts."
During fiscal years ended March 31, 1995, 1996 and 1997, the Company
expended $2.5 million, $3.2 million and $3.8 million, respectively, on research
and development. Of these amounts, $1.7 million, $2.5 million and $3.2 million,
respectively, was expended in connection with externally funded research and
product development contracts. The Company retains for itself the royalty-free
rights to manufacture and market the products developed under these government
contracts and grants. As of May 31, 1997, the Company had forty-eight full-time
employees dedicated to research, development and engineering. See "Risk
Factors--Key Personnel."
DENTAL PRODUCTS
The Company, through its wholly owned subsidiary ABIODENT, markets the
PerioTemp periodontal screening system (the "PerioTemp") and Halimeter(R) for
early detection and assessment of risk of periodontal disease and other sources
of halitosis (bad breath). Periodontal disease is an infection caused by the
presence of bacteria or other microorganisms in the pockets of the gums which
results in inflammation of the gums and, in its most advanced form, the decay of
gum tissue, bone deterioration and the loss of teeth. According to published
reports, over three quarters of all adults have periodontal disease, with
approximately one third of adults 65 years and older having advanced cases of
the disease. Less serious, periodontal disease is a cause of chronic halitosis
which certain publications estimate to affect up to 25% of the U.S. population.
The PerioTemp is a tool for use by dentists, periodontists and other dental
specialists to instantly detect sites of gum inflammation. The PerioTemp
patented technology, developed in part through funding from the National
Institute of Dental Research, consists of a book-sized console, containing a
microprocessor that is connected to a probe, shaped much like a dentist's probe,
with a heat-sensing tip. The device is used in a manner which is consistent
with traditional probing but includes an instantaneous display and record of
temperature deviations from normal inside the pockets between teeth and the
surrounding gum. Gum temperature has been shown, as documented by published
sources, to be a reliable indicator of the presence of inflammation, a precursor
of periodontal disease. The PerioTemp also allows the clinician to record gum
pocket depth and bleeding point information.
The Company markets the PerioTemp in conjunction with a Halimeter, to
provide differential evaluation of the sources of halitosis. The Company
purchases the Halimeter from Interscan, Inc., under a distribution arrangement
which is exclusive to ABIODENT if ABIODENT meets certain defined sales volume
levels.
ABIODENT markets its dental products with complementary products of others
used in preventive and cosmetic dental programs. ABIODENT sells and markets its
dental products in the U.S. primarily through its direct sales force, seminars
and referrals. Revenues from this subsidiary have represented less than ten
percent of the Company's total revenues in all periods presented in this Report.
The Company believes that it cannot alone adequately support the investment that
the continued growth of its dental business requires and is looking for
alternative ways to support its dental business.
ABIODENT has a pilot production facility for the PerioTemp console and a
semi-automated disposable tip production facility which can be expanded to
produce larger quantities. Console production consists primarily of assembly,
testing and quality control. Parts for the console and materials for the
disposable tip are readily available from several supply sources.
PROPRIETARY RIGHTS
The Company relies upon the law of trade secrets, patent protection and
unpatented proprietary know-how
11
to protect its technology. Due to the rapid technological changes that
characterize the medical and dental device industries, the Company believes that
the improvement of existing products, reliance upon trade secrets and unpatented
proprietary know-how and the development of new products are generally as
important as patent protection in establishing and maintaining a competitive
advantage. Nevertheless, the Company has received patents and will continue to
make efforts to obtain patents, when available, in connection with its research
and product development programs, although there can be no assurance that any
patent obtained will provide substantial protection or be of commercial benefit
to the Company, or that its validity will not be challenged. The Company has
been issued or allowed 23 U.S. patents relating to certain of its products,
including the BVS and TAH, and has applied for additional patents relating to
those and other products in the U.S. The Company has received or applied for
corresponding patents in certain other countries. The Company's U.S. patents
have expiration dates ranging from 2003 to 2015.
Certain of the Company's products have been developed in part under Federal
government contracts pursuant to which the Company may be required to
manufacture a substantial portion of the product in the U.S. and the government
may obtain certain rights to use or disclose technical data developed under
those contracts. The Company retains the right to obtain patents on any
inventions developed under those contracts (subject to a non-exclusive, non-
transferable, royalty-free license to the government), provided it follows
certain prescribed procedures.
The Company purchased certain of its technology, including technology
incorporated in the BVS, from the Abiomed Limited Partnership (the
"Partnership"), in which the Company has a 61.7% interest. As a result of this
purchase, the Company is required to pay the Partnership a royalty through
August 3, 2000. See Note 7 to the Consolidated Financial Statements.
REGULATION
The medical (including dental) devices manufactured and marketed by the
Company are subject to regulation by the FDA and, in many instances, by foreign
governments. Under the Federal Food, Drug and Cosmetic Act (the "FDA Act"),
medical devices, including enhancements to existing products, cannot be marketed
in the U.S. without clearance or approval, as applicable, by the FDA. Sales of
medical devices to foreign countries, prior to receiving the requisite FDA
approvals or clearances for commercialization in the U.S., are also subject to
clearance by the FDA. Medical devices sold in the U.S. must also be manufactured
in compliance with FDA Good Manufacturing Practices, which regulate the design,
manufacture, packaging, storage and installation of medical devices. Moreover,
medical devices are required to comply with FDA regulations relating to
investigational research, labeling and post-market reporting. States may also
regulate the manufacture, sale and use of medical devices.
Depending upon the device, commercial sales of the Company's medical
devices must be preceded by either FDA pre-market clearance pursuant to Section
510(k) of the FDA Act or FDA approval of a Pre-market Approval ("PMA")
Application.
The Section 510(k) notification filing must contain information that
establishes that the device is substantially equivalent to an existing device
that had been in use prior to May 28, 1976. The FDA must either concur with or
deny the 510(k) submission, or require further information within 90 days of
submission. The Company received FDA marketing clearance under Section 510(k)
for the PerioTemp.
The pre-market approval procedure involves a more complex and lengthy
testing and review process by the FDA than the 510(k) pre-market notification
procedure. When a company introduces a new product that is considered to be a
significant risk device or a life-sustaining device which is not substantially
equivalent to a device in use prior to May 28, 1976, two steps of FDA approval
are required before marketing in the U.S. can begin. First, the FDA, with an
independent protocol review and approval by participating medical institutions,
must approve the Company's application for an Investigational Device Exemption
("IDE") permitting clinical evaluation of the product on human subjects under
controlled experimental conditions. Second, prior to commercialization within
the U.S., the FDA must grant the Company's Pre-market Approval Application. The
FDA will grant pre-market
12
approval if it finds that the safety and efficacy of the product have been
sufficiently demonstrated through clinical evaluation of the product. The FDA
may also require additional patient follow-up as part of a post-market
surveillance program for an indefinite period of time.
In November 1992, the Company received FDA pre-market approval for sale of
the BVS for circulatory failure following open-chest surgery. Approval of the
BVS represented the first time that the FDA approved a cardiac assist device
through the pre-market approval process. The Company also anticipates that it
will be required to comply with the pre-market approval process in connection
with its development of the TAH and Heart Booster.
The Company's products are subject to regulation by certain foreign
regulatory and safety agencies. The Company has obtained the requisite foreign
regulatory approvals for sale of the BVS to many foreign countries, including
most of Western Europe, and is seeking regulatory approvals for the BVS in
additional countries, including Japan. The Company believes that foreign
regulations relating to the manufacture and sale of medical devices are becoming
more stringent. The European Union has adopted regulations requiring that
medical devices comply with the Medical Device Directive by June 15, 1998, which
includes ISO-9001 and product certification. The Company's BVS currently has a
self-declared CE mark for compliance with the European Union's Electro-Magnetic
Compatibility (EMC) Directive, and has German MedGV approval, but is not yet
certified for ISO-9001 compliance. The Company is working to obtain ISO-9001
certification for its BVS facility. There can be no assurance that the Company
will obtain this certification in a timely manner, if at all. Unless ISO and CE
certification are obtained, the Company may not be able to sell its BVS product
into the European Union.
No assurance can be given that the FDA or foreign regulatory agencies will
give the requisite approvals or clearances for any of the Company's products or
product enhancements under development on a timely basis, if at all. Moreover,
after permission is granted, these agencies can later withdraw permission or
require the Company to change the device or its manufacturing process or
labeling, to supply additional proof of its safety and effectiveness or to
recall, repair, replace or refund the cost of the medical or dental device, if
it is shown to be hazardous or defective. See "Risk Factors -- Government
Regulation."
EMPLOYEES
As of May 31, 1997, the Company had one hundred thirty-eight full-time
employees. The Company has entered into contractual agreements with all of its
employees which include strict confidentiality and non-compete commitments by
each employee. None of the Company's employees is represented by a union. The
Company considers its employee relations to be good.
EXECUTIVE OFFICERS, AND SIGNIFICANT EMPLOYEES
The senior management of the Company consists of the following:
NAME AGE POSITION
---- --- --------
David M. Lederman, Ph.D.* 53 Chairman of the Board of Directors, President
Chief Executive Officer and Assistant
Treasurer
Robert T.V. Kung, Ph.D.* 53 Senior Vice President-Research and
Development, Assistant Secretary
Eugene D. Rabe * 41 Vice President - Global Sales and Clinical
Programs
John F. Thero * 36 Vice President - Finance, Chief Financial
Officer, Treasurer and Asst. Secretary
Anthony W. Bailey 41 Vice President - Engineering
13
William J. Bolt 45 Vice President (in charge of ABIODENT)
David Nikka 42 Vice President - Resources and Administration
Janice Piasecki 43 Vice President - Regulatory Affairs
Edward G. Taylor, Ph.D. 46 Vice President - Advanced Product Development
-Program Director, Implantable Artificial
Heart
(*) Executive Officer.
Dr. Lederman founded the Company in 1981, has served as Chairman of the
Board and Chief Executive Officer since that time, and as President for the
majority of that time to date. Dr. Lederman has directed the financing strategy
of the Company since its founding. Prior to founding ABIOMED, he was Chairman
of the Medical Research group at the Everett Subsidiary of Avco Corporation. He
originated the design and development of ABIOMED's artificial heart blood pumps
and their valves; has authored over 40 medical publications, is a member of
numerous medical and scientific professional organizations and has been a
frequent speaker in forums on cardiac support systems and on the financing and
commercialization of advanced medical technology. Dr. Lederman received a Ph.D.
degree in Aerospace Engineering from Cornell University.
Dr. Kung has served as Vice President of Research and Development of the
Company since 1987. From 1982 to 1987, he served as Chief Scientist of the
Company. Since 1993, Dr. Kung has served as the Divisional President of the
Company's subsidiary, ABIOMED R&D, Inc., and since 1995 as Senior Vice President
of the Company. Prior to joining ABIOMED, he was a Principal Research Scientist
at Schafer Associates and at the Avco Everett Research Laboratory. He developed
non-linear optical techniques for laser applications and investigated physical
and chemical phenomena in re-entry physics. Dr. Kung has been Principal
Investigator for the Company's TAH and Heart Booster programs and has conceived
of and directed the development of the Company's laser-based minimally invasive
technologies, as well as the PerioTemp. Dr. Kung received a Ph.D. degree in
Physical Chemistry from Cornell University.
Mr. Rabe joined the Company in 1993, as its Vice-President for Sales. In
1996, he assumed responsibility for all domestic sales, clinical and field
support. Recently he was promoted to Vice-President Sales and Clinical recently
promoted to Vice-President, Global Sales and Clinical Programs. Prior to
joining ABIOMED, he was Vice-President, Sales and Marketing for Endosonics
Corporation before which he was a Sales Manager for St. Jude Medical, Inc. He
has been involved in the sales and marketing of cardiovascular/cardiological
devices for over ten years. Mr. Rabe received a Bachelor's degree from St.
Cloud State University and his MBA from the University of California.
Mr. Thero joined the Company in 1994 as Vice President, Finance and
Administration and Chief Financial Officer. Prior to joining ABIOMED, during the
period 1992 to 1995, Mr. Thero was Chief Financial Officer and acting President
for the restructuring of two venture-backed companies. From 1987 to 1992, Mr.
Thero was employed, in various capacities including Chief Financial Officer, by
Aries Technology, Inc. From 1983 to 1987, Mr. Thero was employed by the
commercial audit division of Arthur Andersen & Co. during which time he became a
Certified Public Accountant (CPA). Mr. Thero received a B.A. in
Economics/Accounting from The College of the Holy Cross.
Mr. Bailey joined the Company in 1997 to lead the Electronics System
Development of the Implantable Artificial Heart Program and is currently Vice
President - Engineering. Prior to joining ABIOMED, during 1987 to 1997, Mr.
Bailey was Vice President and General Manager for Pace Medical, Inc., a
manufacturer of external pacemakers, rhythm management analyzers and
accessories. From 1982 to 1987, he was Manager of Design and Development at
Shiley Infusaid, Inc., a manufacturer of implantable drug pumps and infusion
ports. Prior to that, Mr. Bailey served in various Engineering functions with
manufacturers of implantable pacemakers, data acquisition and control systems
and medical monitoring equipment. Mr. Bailey received his Bachelor's degree
from University of Lowell in 1986.
14
Mr. Bolt joined the Company in 1982. Since that time, he has served in
various roles, from Director of Operations to Vice President of Engineering and
was the engineer in-charge when the BVS and PerioTemp systems were developed.
He is presently responsible for the operations of ABIODENT, including dental
product sales, marketing, manufacturing and engineering support. Mr. Bolt
received a Bachelor's degree in Electrical Engineering and a Masters degree in
Business Administration from Northeastern University.
Ms. Piasecki joined the Company in 1991 as Manager of Clinical Research and
Regulatory Affairs. In this role she has worked extensively on PMA submissions
for the BVS which led to FDA approvals. She was promoted to Vice-President,
Regulatory Affairs in 1994. Prior to joining ABIOMED, she held position of
Investigator for the U.S. Food and Drug Administration and Manager of Regulatory
Affairs for C.R. Bard. Ms. Piasecki received her B.S. degree in Biology and
Chemistry from Boston College.
Mr. Nikka joined the Company in 1997 as its Vice President - Resources and
Administration. Prior to joining ABIOMED, he was Vice President, Human
Resources from 1991-1997 for Genzyme Genetics, Director of Human Resources from
1989 - 1991 for Genzyme Corporation and Director of Human Resources for
Integrated Genetics from 1986 - 1989. Mr. Nikka received his Bachelor Degree
from Boston University. Mr. Nikka is past Chairperson of both the BIO and the
Massachusetts Biotechnology Council Human Resource Committees.
Dr. Taylor joined the Company at the end of 1996 as Director of the
Artificial Heart Program. Prior to joining ABIOMED, Dr. Taylor worked in the
U.S. Air Force from 1972 to 1996 where he attained the rank of Colonel and was
most recently the Program Director for the Airborne Warning and Control System
(AWACS) in the U.S., Europe and Japan. Previously he had directed high
technology research and development of nationally significant defense programs,
including self-protection avionics for Air Force One. He was also involved in
the launch and operation of reconnaissance and communication satellites. Dr.
Taylor holds a Bachelor's degree from the Illinois Institute of Technology, a
Master's degree from the Air Force Institute of Technology and a Ph.D. degree in
Estimation and Control from the Massachusetts Institute of Technology.
ITEM 2. PROPERTIES
The Company leases its headquarters and research and development and
production facilities in three separate buildings in an industrial office park
covering approximately 55,000 square feet. The addresses of these leased spaces
are 33 Cherry Hill Drive and 24 Cherry Hill Drive in Danvers, Massachusetts and
66 Cherry Hill Drive in Beverly, Massachusetts. All facilities are located
approximately 22 miles north of Boston. The leases at the primary facility,
representing 23,000 square feet, expire in April, 2000. All leases have options
to extend at market rates.
The Company's facilities include fabrication areas for medical and dental
device manufacturing, and development facilities for laboratory and durability
testing of plastics and electronics. The Company has begun improving
approximately 18,000 square feet of this space to better accommodate its BVS
growth and to allow for expanded engineering, production and testing relating to
the TAH.
The Company's facilities include fabrication areas for medical and dental
device manufacture, and development facilities for laboratory and durability
testing of plastics and electronics.
ITEM 3. LEGAL PROCEEDINGS
ABIOMED is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE TO SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 1997.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE
The Company's Common Stock, $.01 par value, is traded on the Nasdaq
National Market under the symbol "ABMD". The following table sets forth the
range of high and low sales prices on the Nasdaq National Market for the
Company's two most recent fiscal years:
FISCAL YEAR ENDED MARCH 31, 1996 HIGH LOW
- ---------------------------------- ------ ------
First Quarter..................... 9 6
Second Quarter.................... 13-1/4 6-7/8
Third Quarter..................... 16 8-3/4
Fourth Quarter.................... 15-1/4 11-1/2
FISCAL YEAR ENDED MARCH 31, 1997 HIGH LOW
- ---------------------------------- ------ ------
First Quarter..................... 18 12-1/2
Second Quarter.................... 18-1/4 10-1/8
Third Quarter..................... 18-1/4 11-1/2
Fourth Quarter.................... 13-1/4 9-1/2
NUMBER OF STOCKHOLDERS
As of March 31, 1997, there were approximately 342 holders of record of the
Company's Common Stock, including multiple beneficial holders at depositories,
banks and brokers included as a single holder in the single street name of each
respective depository, bank or broker.
DIVIDENDS
The Company has never paid any cash dividends on its capital stock and does
not plan to pay any cash dividends in the foreseeable future. The current
policy of the Company's Board of Directors is to retain any future earnings for
use in the business of the Company.
SALES OF UNREGISTERED SECURITIES
In January 1997, the Company issued 400 shares of its Common Stock to each
of its five non-employee directors as partial consideration for services
rendered to the Company. The issuance of the shares was exempt under Section
4(2) of the Securities Act of 1933, as amended.
16
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA: FISCAL YEARS ENDED MARCH 31,
-------------------------------------------------
1993 1994 1995 1996 1997
--------- -------- -------- -------- --------
Revenues:
Products.......................... $ 1,709 $ 4,648 $ 6,893 $ 9,725 $12,311
Contracts......................... 1,736 2,027 2,337 3,118 4,151
-------- ------- ------- ------- -------
3,445 6,675 9,230 12,843 16,462
Costs and expenses:
Cost of products sold............. 2,043 2,211 3,289 3,921 5,361
Cost of Contract research and
development.................... 1,283 1,517 1,718 2,457 3,233
Internal research and development 814 914 747 761 600
Selling, marketing, general and
administrative.................. 3,803 4,553 4,278 5,741 7,068
-------- ------- ------- ------- -------
7,942 9,195 10,032 12,880 16,262
-------- ------- ------- ------- -------
Income (loss) before interest and
provision for income taxes........ (4,497) (2,519) (801) (37) 200
Interest and other income......... 603 537 449 528 535
Provision for income taxes........ --- --- --- --- ---
-------- ------- ------- ------- -------
Net income (loss)................... $( 3,893) $(1,983) $( 352) $ 491 $ 735
======== ======= ======= ======= =======
Net income (loss) per share $( 0.60) $(0.31) $(0.05) $0.07 $0.10
======== ======= ======= ======= =======
Weighted average number of common
and common equivalent shares
outstanding....................... 6,441 6,461 6,512 6,995 7,162
BALANCE SHEET DATA: MARCH 31,
-------------------------------------------------
1993 1994 1995 1996 1997
-------- ------- ------- ------- -------
Working capital $ 10,727 $ 6,043 $ 6,304 $12,735 $12,850
Long-term investments 4,307 7,219 6,533 --- ---
Total assets 17,504 15,426 14,730 16,209 18,547
Long-term debt 3,820 3,773 --- --- ---
Stockholders' equity (1) 12,460 10,589 13,305 13,945 15,225
- --------------------
(1) No dividends on Common Stock were declared or paid during any of the periods
presented.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data," the Company's Consolidated Financial
Statements and Notes thereto and the information described under the caption
"Risk Factors" below.
OVERVIEW
The operating results of ABIOMED reflect the dual activities of commercial
operations and investments in the research and development of new technologies.
Since fiscal 1994, the first full year marketing the BVS in the U.S.,
increasing new orders and reorders of the BVS have made product revenues the
largest contributor to the Company's operating results. The Company sells and
supports the BVS through a team of domestic sales, clinical support and
marketing people consisting of twenty-eight people. The Company believes that
this team and the effectiveness of the BVS in saving lives are the primary
reasons for increases in product revenues in each of its first four years of
domestic sales of the BVS.
Research and development of new technologies and products is a significant
portion of ABIOMED's operations. Total research and development costs,
including costs of research and development under government contracts, have
increased in each of the past three years. In each of these years, the
Company's research and development costs have exceeded 30% of product revenues.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of revenues represented by the respective line items set forth below of the
Company's consolidated statement of operations set forth below:
YEAR ENDED MARCH 31,
-----------------------------
1995 1996 1997
----- ---------- ----------
Revenues: 100% 100% 100%
Products.............................. 75 76 75
Contracts............................. 25 24 25
Costs and expenses:
Cost of products sold................. 36 31 33
Cost of contract research and
development.......................... 19 19 20
Internal research and development..... 8 6 4
Selling, marketing, general and
administrative....................... 46 45 43
---- ---- ----
Total costs and operating expenses.. 109 100 99
Income from operations (9) 0 1
Interest income and other............. 5 4 3
Provision for income taxes............ - - -
---- ---- ----
Net income (loss)........................ (4)% 4% 4%
==== ==== ====
NET INCOME (LOSS)
Net income and income per share increased to $735,000 and $0.10 for the
year ended March 31, 1997 ("fiscal 1997") from $491,000 and $0.07 in fiscal 1996
and from a net loss and net loss per share of $352,000 and $0.05 in fiscal 1995.
These increases primarily reflect increased revenues.
18
REVENUES
Consolidated total revenues, excluding interest income, for fiscal 1997
rose to a record $16,462,000 as compared to $12,843,000 in fiscal 1996 and
$9,230,000 in fiscal 1995. This represents increases of 28% and 39% for fiscal
1997 and 1996 respectively.
Product revenues increased to $12,311,000 in fiscal 1997 from $9,725,000 in
fiscal 1996, and $6,893,000 in fiscal 1995. The 27% and 41% product revenue
increases in fiscal 1997 and 1996, respectively, were primarily attributable to
growing US unit sales of the BVS consoles and disposable products, including
increased blood pump reorders, and to increased average selling prices of BVS
consoles and disposable products. At March 31, 1997, the Company's product
backlog totaled approximately $1,006,000.
The majority of the Company's product revenues in the last three years have
been to US customers. International revenues represented 7%, 9% and 13% of
total product revenues in fiscal 1997, 1996 and 1995 respectively. The
Company's product revenues from its dental business, ABIODENT, increased in
fiscal 1997 but were less than 10% of total product revenues.
Contract revenues increased to $4,151,000 in fiscal 1997 from $3,118,000 in
fiscal 1996 and $2,338,000 in fiscal 1995, representing increases of 33% for
both fiscal 1997 and 1996. Contract revenues are based upon cost reimbursement
and, therefore, these increases are reflective of the increased level of the
Company's research and development activities in each year.
The majority of the Company's contract revenues, approximately 59% in
fiscal 1997, was recognized in connection with the research and development for
the Company's implantable battery-operated Total Artificial Heart (TAH). The TAH
revenue was earned under a two phase contract totaling approximately $13.4
million awarded by the National Heart, Lung and Blood Institute (NHLBI). Phase I
of the contract ended in September 1996. Phase II of the contract was awarded in
September 1996 with a total value of $8.5 million over four years. The Funding
for the Company's government research and development contracts is subject to
government appropriation. For the first year of the TAH contract, $2.7 million
was appropriated by the government. As of March 31, 1997, the remaining balance
of the TAH contract and the remaining balance of appropriated funds under this
contract were approximately $6.7 million and $876,000, respectively. There can
be no assurance that the government will not terminate or reduce or delay the
funding for any of the Company's contracts. The Company's spending for TAH
development has increased in each of the past two years and the Company
anticipates that this spending will further increase in Fiscal 1998. The Company
also believes that its spending under the TAH contract will exceed the remaining
appropriated balance under this contract during its first quarter of fiscal 1998
(the quarter ending June 30, 1997) and that no further amounts will be
appropriated for the TAH contract prior to October 1, 1997. As a result of the
Company's increasing and significant spending levels for the TAH combined with
the timing of government appropriations under the Company's TAH contract, the
Company anticipates that in coming fiscal quarters, including the first quarter
of fiscal 1998, its spending for TAH development will exceed the appropriated
reimbursement and revenue levels available under the TAH contract for those
fiscal quarters. The Company believes that certain of these TAH costs may be
reimbursable under the TAH contract in and when such additional appropriation is
received but that total TAH expenses for fiscal 1998 will likely exceed the
amount appropriated for the fiscal year. See Risk Factors -- "Reliance on
Government Contracts."
At March 31, 1997 the Company was working on a number of contracts and
grants representing a total contract and grant backlog of approximately $10.5
million compared to a contract and grant backlog of approximately $11.8 million
as of March 31, 1996. Of this March 31, 1997 backlog, approximately $6.7 million
is in support of phase II of the TAH and approximately $3.4 million is for
continued research and development of the implantable heart booster. All such
government contracts contain provisions making them terminable at the
convenience of the government. The Company retains the rights, royalty-free and
clear, to manufacture and market the products developed under these government
contracts and grants.
COSTS AND EXPENSES:
19
Costs and expenses for fiscal 1997 increased to $16,262,000 compared to
$12,880,000 and $10,032,000 in fiscal 1996 and 1995 respectively, representing
increases of 26% and 28% for fiscal 1997 and 1996. These increases in fiscal
1997 and 1996 primarily reflect increased costs related to product sales,
increased activity related to research and development grants and contracts and
increased sales and marketing expenses to support increased revenues.
Cost of product revenues represented approximately 44%, 40% and 48% of
product revenues for fiscal 1997, 1996 and 1995, respectively. The decrease in
gross margins experienced in fiscal 1997 as compared to fiscal 1996 is primarily
attributable the mix of product sold, with a higher proportion of revenues
derived from BVS consoles sold in fiscal 1997 compared to fiscal 1996, and to
increased costs of production of the disposable blood pump, including
approximately $200,000 in direct costs and other indirect costs related to the
Company's voluntary recall during the third quarter of fiscal 1997 of certain
production lots of disposable BVS blood pumps.
Cost of research and development increased to approximately $3,833,000 in
fiscal 1997 compared to $3,218,000 and $2,465,000 in fiscal 1996 and 1995,
respectively. These increases reflect increased activity under research and
development contracts and grants which are billed on a cost-plus-fixed-fee
basis. Costs of internal research and development primarily relate to continued
engineering support and improvement of existing products as well as regulatory
support for all products. The Company anticipates that its spending for
research and development will continue to increase, particularly as it relates
to the TAH. In certain periods, as discussed above, this spending is likely to
exceed the government appropriated balance under the TAH contract from the
NHLBI. The Company also believes that, at it moves closer to the development of
the TAH as a product, an increasing portion of the Company's TAH spending will
be funded internally. Such TAH spending outside the TAH contract or in excess of
the appropriated amount under the TAH contract is likely to be significant.
Selling, general and administrative expenses (SG&A) increased to
approximately $7,068,000 in fiscal 1997 from $5,741,000 and $4,278,000 in fiscal
1996 and fiscal 1995, respectively. These increases primarily reflect increased
costs associated with higher sales revenues, including the expansion of the U.S.
based sales team and clinical post-sales support personnel.
INTEREST AND OTHER REVENUES AND EXPENSES:
Interest income, net of interest and other expenses, totaled approximately
$535,000, $528,000 and $449,000, for fiscal 1997, 1996 and 1995, respectively,
and primarily represents income earned on short-term investments.
LIQUIDITY AND CAPITAL RESOURCES:
As of March 31, 1997, the Company's balance sheet included approximately
$9,361,000 in cash and marketable securities, a decrease of $1,286,000 over the
Company's $10,647,000 balance of cash and marketable securities at March 31,
1996. This decrease primarily reflects the Company's investment in equipment
and leasehold improvements of approximately $1,594,000 and approximately
$237,000 used in operations, partially offset by approximately $545,000 in
proceeds from the exercise of employee stock options. The March 31, 1997 cash
and marketable securities balance includes approximately $1,617,000 in cash and
$7,744,000 in investments all with maturities of less than one year. Working
capital increased from approximately $12,735,000 at March 31, 1996 to
approximately $12,850,000 at March 31, 1997.
The primary operating sources of cash during fiscal 1997 were net income of
approximately $735,000, depreciation and amortization expenses of approximately
$430,000, an increase in accounts payable of approximately $511,000 and an
increase in accrued expenses of approximately $545,000. These sources of cash
were offset by an increase in accounts receivable of approximately $2,210,000,
an increase in inventory of approximately $167,000 and an increase in prepaid
expenses and other current assets of approximately $81,000. The increase in
accounts receivable is attributable to increased revenues and extended
collection periods for certain accounts. The increase in accounts payable is
primarily attributed to increased purchases and timing of purchases of direct
materi-
20
als and capital equipment for manufacturing and R&D.
Net cash used by investing activities is primarily attributable to
approximately $1,594,000 of purchases of capital equipment and leasehold
improvements for manufacturing and R&D.
As of March 31, 1997 the Company had no borrowings or other debt. The
Company has a $3,000,000 unsecured line of credit from a bank which expires
September 1997. The line of credit, if used, bears interest at the banks prime
rate.
Although the Company does not currently have significant capital
commitments, the Company believes that it will continue to make significant
investments over the next several years to support the development and
commercialization of its products under development. In particular, the Company
has begun to increase its development and testing efforts related to its TAH.
The Company believes that the total cost of developing and commercializing the
TAH will exceed the amount available under its existing government contract and
that additional funding will be needed for this development and
commercialization. The Company is evaluating alternative sources of funding to
address this need. The Company believes that its revenues and its existing
resources are sufficient to meet its operating needs for the current fiscal
year. See Risk Factors -- "Future Capital Needs and Uncertainty of Additional
Funding."
RISK FACTORS
This Report contains forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Report
should be read as being applicable to all forward-looking statements wherever
they appear in this Report. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include those discussed below, as well as those discussed
elsewhere in this Report.
Uncertainty of Product Development. The Company has developed and markets
a limited number of products and believes that its future success will in large
part be dependent upon its ability to develop and market innovative new
products, such as the TAH and Heart Booster. The successful development of
these products presents enormous challenges. The TAH, which is being designed
to take over the function of a human heart, and the Heart Booster, which is
being designed to provide permanent support to an ailing heart, must demonstrate
that they can operate effectively and reliably within a patient over an extended
period. For many years, the Company and others have been attempting to develop
mechanical products that meet these needs and have not yet been successful.
Initial testing of the TAH, Heart Booster and other products being developed by
the Company will be conducted in simulated environments before they are tested
in humans. Until the products have been clinically assessed there can be no
assurance that any of these products will perform as expected in humans. In
addition, the Company's product development will include all other risks
associated with new product development, including unanticipated delays,
expenses, technical problems or other difficulties that could result in the
abandonment or substantial change in the commercialization of these new
products. Successful development of these products will also require FDA and
corresponding foreign regulatory approvals. Given the uncertainties inherent
with product development and introduction, there can be no assurance that the
Company will be successful in introducing products on a timely basis and within
budget, if at all.
Government Regulation. Medical devices, including enhancements to existing
medical products, cannot be marketed in the U.S. without clearance or approval
by the FDA. Medical devices sold in the U.S. must also be manufactured in
compliance with FDA Good Manufacturing Practices, which regulate the design,
manufacture, packaging, storage and installation of medical devices. Moreover,
medical devices are required to comply with FDA regulations relating to
investigational research, labeling and post-market reporting. States may also
regulate the manufacture, sale and use of medical devices. The Company's
products are also subject to approval and regulation by certain foreign
regulatory and safety agencies. The process of obtaining and maintaining
clearances and approvals can be costly and time-consuming. The Company believes
that regulatory oversight of medical devices is becoming more stringent in many
foreign countries. Beginning June 15, 1998, in accordance with regulations of
the European Union, in order for medical devices to be marketed in Europe, the
product and the
21
manufacturer must comply with the Medical Device Directive which includes ISO-
9001 and product compliance. The BVS and the Company currently do not meet this
requirement and there can be no assurance that the BVS or the Company will be in
compliance by June 15, 1998. Many manufacturers of medical devices, including
the Company, have often relied on foreign markets for the initial commercial
introduction of their products. The more strict foreign regulatory environment
could make it more difficult, costly and time consuming for the Company to
pursue this strategy for new products. Moreover, any FDA, foreign or state
regulatory approvals or clearances, once obtained, can be withdrawn or modified.
Delay in the Company obtaining, or inability of the Company to obtain and
maintain, any necessary U.S. or foreign clearances or approvals for new or
existing products or product enhancements, or cost overruns resulting from these
regulatory requirements, could have a material adverse effect on the Company's
business and prospects.
Anticipated Future Losses. The Company plans to use significant resources
to internally fund the development of the TAH in amounts significantly in excess
of the funding under the Company's NHLBI development contract. As a result, the
Company believes that it may again incur losses. The amount and duration of
these losses will depend upon a number of factors, including the Company's
ability to increase sales and profitability of its present products, to develop
and obtain regulatory approvals for new products and product enhancements, to
successfully manufacture and market these new products and enhancements, the
timing and extent of the Company's spending related to product development and
the timing of government appropriations related to the Company's NHLBI
contracts. The Company anticipates that it spending under its NHLBI contract to
develop the TAH will, beginning in the first quarter of fiscal 1998, exceed the
amount which the government has currently appropriated for that contract. There
can be no assurance that the government will appropriate the additional annual
amounts scheduled under the NHLBI contract for the TAH.
Future Capital Needs and Uncertainty of Additional Funding. The Company is
working on the research and development of several long-term products. The
Company has stepped-up its development of these products, particularly the TAH,
which will result in significantly increased internally funded research and
development expenditures, including costs of clinical trials. The Company
estimates that it will require significant additional funds in order to complete
the development and achieve FDA approval of the TAH. Generally, estimates of
long-term project costs are extremely imprecise and cost overruns are common.
As a result, there can be no assurance that the Company will not require
significantly more resources to complete the development of the TAH or any of
its other products. The Company plans to fund this effort through a combination
of its NHLBI TAH development contract, existing resources, sales of securities
and cash flow from sales of its existing products. Even if the Company does not
experience cost overruns, there can be no assurance that the Company will be
able to obtain sufficient funds to complete the development of the TAH or any
other product. Moreover, the Company may require additional funds to commence
the manufacture and marketing of the TAH or any of the Company's other products
under development in commercial quantities, if and when approved or cleared by
the FDA. Failure of the Company to obtain any required additional funding could
delay product development and otherwise materially and adversely affect the
business of the Company. There can be no assurance that that the Company would
be able to obtain additional funding on favorable terms, if at all.
Substantial Reliance on BVS Product Line; Early Stage of BVS Market
Development. In the fiscal 1997, sales of the BVS and related products and
services represented more than ninety percent of the Company's product revenues.
The Company believes that this dependence on the BVS product line is likely to
continue for at least the next several years, until the Company is able to
complete development and successfully market one or more of its other products
under development. The market for the BVS continues to be in the early stage of
development. The Company has initially focused its marketing efforts on larger
medical centers and hospitals, and has expended substantial efforts in educating
and training physicians, technicians and nurses at those centers and hospitals
in the use of the device. The continued commercial success of the BVS will be
dependent upon both the Company's ability to sell the BVS to smaller hospitals
and medical centers, which generally have more limited financial resources, and
the increase of the use of the BVS at those medical centers and hospitals which
have purchased the systems. There can be no assurance that the Company will be
successful in marketing the BVS. Failure of the Company to expand the market
for and use of the BVS could have a material adverse affect on its business and
prospects.
22
Markets for Products under Development Unproven. Most of the Company's
products under development, including the TAH and Heart Booster, are targeting
new and unproven markets. As a result, it is likely that the Company's
evaluation of the potential markets for these products will materially vary with
time. In addition, the effective use of these products will likely require
development of new surgical techniques by well-trained physicians, which will
initially limit the market for the Company's products. The timing and amount of
reimbursement by health care insurers for the use of these products, once
developed, will also have a significant impact on the market for these products.
Other companies may also introduce products which will compete with these
products, reduce the market for these products, or render these products
obsolete. There can be no assurance that the Company will be able to market any
of its products under development successfully, if and when these products are
developed. Failure to do so would have a material adverse effect on the
Company's business and prospects.
Dependence on Third Party Reimbursement. The Company sells its medical
products to physicians and medical institutions who are typically reimbursed for
use of such products by government health administration authorities, private
health insurers and other organizations. Market acceptance of these products
depends in large part on the extent to which reimbursement for the use of such
products is available to the physicians and medical institutions. The level of
reimbursement provided by U.S. government health agencies, private health
insurers and many foreign health care insurance systems varies according to a
variety of factors, including the insurer, location, medical procedure
classification and cost. For example, Medicare reimburses for the surgical
procedures in which the BVS is used, and incrementally reimburses physicians for
use of the BVS. However, Medicare does not incrementally reimburse medical
institutions for use of the BVS. Certain private payer insurance companies
provide incremental reimbursement to both physicians and medical institutions.
The Company is currently working with the Health Care Finance Administration
("HCFA"), which establishes guidelines for the reimbursement of health care
providers treating Medicare and Medicaid patients, to recommend the incremental
reimbursement of medical institutions for use of the BVS. The recommendations
of HCFA frequently are also followed by private health care insurance providers.
As a result, the Company believes that a HCFA recommendation to reimburse
medical centers for the incremental cost of the use of the BVS will be important
to promote the more widespread use of the BVS. There can be no assurance that
HCFA will approve such additional reimbursement on a timely basis, if at all.
No reimbursement levels have been established for most of the Company's
products being developed, including the TAH and Heart Booster. Generally,
reimbursement for the use of such products is not provided until the products
are approved by the FDA. There can be no assurance that government health
administration authorities or private health insurers will approve reimbursement
for the use of these products, if and when approved by the FDA, or that if
reimbursement is provided, that the levels of reimbursement will be sufficient
to support the widespread use of those products. Failure to obtain adequate
reimbursement policies for the use of its products would have a material adverse
affect on the Company's business.
Uncertainty of Health Care Reform. Health care reform and medical cost
containment have been areas of significant attention in the U.S. and many
foreign countries. Certain reform proposals and cost containment measures could
limit the use of the Company's products or reduce reimbursement available for
such use. As a result, such reforms or cost containment measures could
materially and adversely affect sales of the Company's products. Uncertainty in
the medical community regarding the nature and effect of proposed health care
reforms and cost containment measures may also have a material adverse effect on
purchases of the Company's products.
Fluctuations and Unpredictability of Operating Results. Significant annual
and quarterly fluctuations in the Company's results of operations may be caused
by, among other factors, the overall state of health care and cost containment
efforts, economic conditions in the Company's markets, the expense and timing of
the Company's development efforts for a particular product or product
enhancement, the potential need to recall or rework product from time-to-time,
timing of government appropriations related to research contracts and grants,
changes in insurance reimbursement policies for the Company's products, the
timing of expenditures in anticipation of future sales, variations in the
Company's product mix and component costs, the timing of customer orders,
adjustments of delivery schedules to accommodate customers, inventory levels of
products at customers (including inventory at distributors), changes in the
government's funding policies under the Company's existing contracts, pricing
and other competitive conditions, and the timing of the announcement,
introduction and delivery of new products and
23
product enhancements by the Company and its competitors. Customers may also
cancel or reschedule shipments, and production difficulties could delay
shipments. Relatively few BVS system sales comprise a significant portion of the
Company's product revenues in each quarter. Therefore, small variations in the
number of systems sold have a significant effect on the Company's results of
operations. The Company also believes that sales of its BVS may be somewhat
seasonal, with reduced sales in the Summer months, reflecting hospital personnel
and physician vacation schedules. Beginning in fiscal 1998, the Company
anticipates potentially significant quarterly and annual fluctuations in
contract revenues and research and development costs associated with its TAH
development due to the need for additional government appropriations under the
NHLBI contract and to increased levels of Company spending. The Company believes
that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance.
Reliance on Government Contracts. The Company often relies on external
funding for its basic research and development, primarily through government
research contracts and grants. Such funding has been responsible for the
initial development of the majority of the Company's current products and
products under development. In particular, in September 1996, the Company was
awarded by the NHLBI a four year $8.5 million extension to its contract for
development of the total artificial heart, and in October 1995 the Company was
awarded a five year $4.3 million contract from the NHLBI for development of the
Company's Heart Booster. As of March 31, 1997, the Company's total backlog of
government contracts and grants was $10.5 million. Such contracts and grants are
not expected to be sufficient to bring the underlying products to market and for
certain products, including the total artificial heart, the cost of product
development in excess of the contract value is expected to be significant. The
Company anticipates that it will continue to seek government contracts and
grants to support development efforts. Funding for the Company's government
research and development contracts is subject to government appropriation, and
all of these contracts contain provisions which make them terminable at the
convenience of the government. Although the Company has not experienced
reductions, delays or termination of funding of its government contracts, recent
concerns over the federal budget deficit has resulted in the decrease or delays
in funding and termination of other government contracts and program. There can
be no assurance that the government will not terminate or reduce or delay the
funding for any of the Company's contracts. In addition, there can be no
assurance that the Company will be successful in obtaining any new government
contracts or further extensions to existing contracts. A significant delay or
reduction of funding under the Company's government contracts could have a
material adverse effect on the Company's business and prospects.
Potential Inadequacy of Product Liability Insurance. The Company's
business involves the risk of product liability claims inherent in the
manufacture and marketing of life support systems. There are many factors
beyond the control of the Company that could result in the failure of the BVS to
sustain the life of a patient, the most important of which is the condition of
the patient prior to the use of the product. As a result, many of the patients
using the BVS do not survive. In addition, the effectiveness of the Company's
products could be adversely affected by the reliability of the physicians,
nurses and technicians using and monitoring the use of the product, and the
maintenance of the product by the Company's customers. The failure of the BVS
or any other life support system under development by the Company to save a life
could give rise to product liability claims and result in negative publicity
that could have a material adverse effect on the Company's business. The
Company currently maintains product liability insurance with an aggregate
coverage limit of $21 million per year, subject to certain deductibles and
exclusions. There can be no assurance that this insurance will be sufficient to
protect the Company from product liability claims, or that product liability
insurance will continue to be available to the Company at a reasonable cost, if
at all.
The risk of product liability claims against the Company may increase as
the Company introduces new products under development, particularly products
such as the TAH and Heart Booster intended for permanent life support. The TAH
is being designed to support patients for their entire remaining lives; until
either the TAH ceases to work or is stopped due to failure of another vital
organ. As with all mechanical devices, the TAH will have a finite life. Despite
the Company's best efforts to develop a reliable, zero-defect, high-quality TAH,
the eventual failure of the TAH could give rise to product liability claims,
regardless of whether the TAH has extended or improved the quality of the
patient's life beyond that expected without the use of the TAH. The Heart
Booster, if developed, will result in similar product liability risk. As a
result of the additional product liability risks that will be associated with
the TAH, Heart Booster and other products under development by the Company,
there can be no
24
assurance that the Company will be able to secure product liability insurance
for these products, when and if developed, or that such insurance will be
available in sufficient quantities to protect the Company at an acceptable cost.
The failure of the Company to be able to obtain adequate product liability
insurance, if any, for these products could have a material adverse effect on
its business.
Dependence on Limited Sources of Supply. The Company relies on outside
vendors to supply certain components used in the BVS and in its products under
development. Certain of the components of the BVS are supplied by sole source
vendors or are custom made for the Company. And, suppliers of certain components
of the BVS have indicated that they intend to discontinue, or have discontinued,
making such components. In addition, certain of these components are supplied
from single sources due to quality considerations, costs or constraints imposed
by regulatory authorities. There are relatively few additional sources of
supply for such components and establishing additional or replacement suppliers
for such components cannot be accomplished quickly. In the past, certain
suppliers have announced that, due to government regulation or in an effort to
reduce potential product liability exposure, they intend to limit or terminate
sales of certain products to the medical industry. Although the Company does
not expect any interruption of its current product production due to the lack of
available supplies, there can be no assurances that, if such an interruption
were to occur, the Company would be able to find suitable alternative supplies
at reasonable prices. Similarly, when and if the Company reaches the clinical
testing stage of its products under development, it may find that certain
components become more difficult to source from outside vendors due to the
product liability risk perceived by those vendors. The Company's inability to
obtain acceptable components in a timely manner or to find suitable replacements
at an acceptable cost would have a material adverse effect on the Company's
business.
Competition and Technological Change. Competition in the cardiac assist
market is intense and subject to rapid technological change and evolving
industry requirements and standards. Many of the companies developing or
marketing cardiac assist products have substantially greater financial, product
development, sales and marketing resources and experience than the Company.
These competitors may develop superior products or products of similar quality
at the same or lower prices. Moreover, there can be no assurance that
improvements in current or new technologies will not make them technically
equivalent or superior to the Company's products in addition to providing cost
or other advantages. Other advances in medical technology and biotechnology may
reduce the size of the potential markets for the Company's products or render
those products obsolete. To date, the FDA has not approved any product other
than the Company's BVS for treatment of post-cardiotomy shock. Approval by the
FDA of products that compete directly with the BVS would increase competitive
pricing and other pressures and could adversely affect the Company's revenue and
income from sales of the BVS. The Company's customers frequently have limited
budgets. As a result, the Company's products compete against the broad range of
medical devices for these limited funds. The Company's success will depend in
large part upon its ability to enhance its existing products and to develop new
products to meet regulatory and customer requirements and to achieve market
acceptance. There can be no assurance that the Company will be successful in
introducing products or product enhancements on a timely basis, if at all, that
the Company will be able to market these products and product enhancements once
developed, or that the Company otherwise will be able to compete effectively.
Dependence on Patents and Proprietary Rights. The Company's business
depends significantly upon proprietary technology. The Company relies on a
combination of patent, copyright, trademark and trade secret laws,
confidentiality agreements and other contractual provisions to establish,
maintain and protect its proprietary rights, all of which afford only limited
protection. There can be no assurance that any of the Company's patent
applications will be granted, that any patent or patent application will provide
significant protection for the Company's products and technology, or that any of
the Company's patent claims would be upheld if challenged. In the absence of
significant patent protection, the Company may be vulnerable to competitors who
attempt to copy the Company's products, processes or technology. The Company
also protects its proprietary technology by entering into confidentiality and
non-compete agreements with industry partners, consultants and all of its
employees. There can be no assurance that these agreements will not be breached,
that the Company will have adequate remedies for any breach, or that the
Company's trade secrets and proprietary know-how will not otherwise become known
or be independently discovered by competitors.
Management of Growth. The Company has undergone a period of growth, and
its continued expansion,
25
particularly to support a step-up of its product development efforts, may
significantly strain the Company's management, financial and other resources.
Due to the level of technical and marketing expertise necessary to support its
ongoing research and development, manufacturing, marketing and sales efforts,
the Company must attract and retain highly qualified and well-trained personnel.
There are a limited number of persons with the requisite skills to serve in
these positions, and it may become increasingly difficult for the Company to
hire such personnel. The Company's expansion may also significantly strain the
Company's management, manufacturing, financial and other resources. There can be
no assurance that the Company's systems, procedures and controls will be
adequate to support the Company's operations. Failure to manage the Company's
growth properly could have a material adverse effect on the Company's business
and financial condition.
Dependence on Key Personnel. The Company is highly dependent on the
principal members of its scientific, sales, and management staff, the loss of
whose service could have a material adverse effect on the Company. Competition
among medical device companies for highly skilled scientific, sales and
management personnel is intense. In addition, in order for the Company to
successfully develop its TAH and other products under development, the Company
will have to continue to hire and train high quality employees. There can be no
assurance that the Company will be able to attract and retain all personnel
necessary for the development of its business. Failure to do so could have a
material adverse effect on its business.
International Sales. In fiscal 1997, international sales accounted for 7%
of the Company's product revenues. The Company's international sales are
subject to certain additional risks, including risks of exchange rate
fluctuations, U.S. and foreign regulatory requirements and policy changes,
foreign reimbursement practices and policy changes, political and economic
instability, inventory management, accounts receivable collection, difficulties
in managing distributors or representatives, tariff regulations and seasonality
of sales. Most foreign countries have their own standards and regulatory
approval requirements for the Company's products. As a result, the Company's
introduction of new products and product enhancements into international markets
can be costly and time-consuming and there can be no assurance that the Company
will obtain the required regulatory approvals on a timely basis, if at all.
Although the Company's international sales have been denominated in U.S.
dollars, the value of the U. S. dollar in relation to foreign currencies may
adversely affect the Company's sales to foreign customers. To the extent that
the Company expands its international operations or changes its pricing
practices to denominate prices in foreign currencies, the Company will be
exposed to increased risks of currency fluctuation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated Financial Statements and Supplementary Data of the Company
are listed under Part IV, Item 14, in this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements on accounting principles or practices or
financial statement disclosure between the Company and its accountants during
the fiscal year ended March 31, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by
reference to the text appearing under Part I, Item 1--Business under the caption
"Executive Officers of the Registrant" in this Report, and by reference to the
Company's definitive proxy statement to be filed by the Company within 120 days
after the close of its fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
26
The information required by this Item 11 is hereby incorporated by
reference to the information under the heading "Executive Compensation" in the
Company's definitive proxy statement to be filed by the Company within 120 days
after the close of its fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is hereby incorporated by
reference to the information under the heading "Securities Beneficially Owned by
Directors, Officers and Principal Stockholders" in the Company's definitive
proxy statement to be filed by the Company within 120 days after the close of
its fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by
reference to the information under the heading "Certain Transactions", if any,
in the Company's definitive proxy statement to be filed by the Company within
120 days after the close of its fiscal year.
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
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PAGE
----
Report of Independent Public Accountants........................ F-2
Consolidated Balance Sheets as of the Fiscal Years Ended
March 31, 1996 and 1997........................................ F-3
Consolidated Statements of Operations for the Fiscal Years
Ended March 31, 1995, 1996 and 1997............................ F-4
Consolidated Statements of Stockholders' Equity for the Fiscal
Years Ended March 31, 1995, 1996 and 1997...................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 1995, 1996 and 1997............................ F-6
Notes to Consolidated Financial Statements...................... F-7
(A) (2) FINANCIAL STATEMENT SCHEDULES
-----------------------------
Supplemental schedules are not provided because of the absence of
conditions under which they are required or because the required information is
given in the financial statements or notes thereto.
(A) (3) EXHIBITS
---------
(3) Articles of Incorporation and By-Laws.
(a) Certificate of Incorporation - filed as Exhibit 3.01 to the
-------
Company's Quarterly Report of Form 10-Q for the quarter ended
September 30, 1996 (the "September 1996 10-Q"). *
(b) Restated By-Laws-filed as Exhibit 3.02 the September 1996 10.Q*.
-------
(4) Instruments defining the rights of Security Holders, including
Indentures.
(a) Specimen Certificate of Common Stock - filed as Exhibit 4.01 to
--------
the Registration Statement on Form S-1 (Registration No, 33-
14861) (the "1987 Registration Statement").*
27
(10) Material Contracts.
(a) Option to Purchase Developed Technology between the Company and the
Partnership - filed as Exhibit 10.06 to the 1987 Registration
-------
Statement. *
(b) Bill of Sale and Technology Transfer and Intellectual Property
Agreement between the Company and the Partnership - filed as
Exhibit 10(b) to the Company's Annual Report of Form 10-K for the
-------
fiscal year ended March 31, 1991. *
(c) Facility Leases dated September 30, 1993 for the premises at 33
Cherry Hill Drive - filed as Exhibit 10(e) to the Company's Annual
-------
Report of Form 10-K for the fiscal year ended March 31, 1994 (the
"1994 Form 10-K"), as amended per the First Amendment to Lease
filed as Exhibit 10.03 to the Company's Form 10-Q for the fiscal
quarter ended December 31, 1996. *
(d) Form of Indemnification Agreement for Directors and Officers -
filed as Exhibit 10.13 to the 1987 Registration Statement. *
--------
(e) Abiomed Limited Partnership Amended and Restated Certificate and
Agreement of Limited Partnership (without schedule of Partners) -
filed as Exhibit 10.15 to the 1987 Registration Statement. *
-------
(f) 1992 Combination Stock Option Plan - filed as Exhibit 10.2 to the
-------
Company's Form 10-Q for the fiscal quarter ended September 30, 1995
(the "September 1995 10-Q"). **
(g) 1988 Employee Stock Purchase Plan - filed as Exhibit 10(p) to the
-------
Company's Form 10-K for the fiscal year ended March 31, 1988. **
(h) 1989 Non-Qualified Stock Option Plan for Non-Employee Directors-
filed as Exhibit 10.1 to the Company's Form 10-Q for the fiscal
-------
quarter ended September 1995. **
(i) NHLBI Contract Extension for Total Artificial Heart - filed as
Exhibit 10.01 to the Company's form 10-Q for the fiscal quarter
-------
ended September 30, 1996. *
(j) Facility Lease dated September 30, 1993 as amended on November 19,
1993 for the premises at 24B Cherry Hill Drive - filed as Exhibit
-------
10(p) to the Company's Form 10-K for the fiscal year ended March
31, 1994.*
(k) Facility Lease dated August 8, 1996 for the lease of additional
space at 33 Cherry Hill Drive - filed as Exhibit 10.02 to the
-------
Company's Form 10-Q for the fiscal quarter ended December 31, 1996.
*
(11) Statement re computation of Per Share Earnings - see Note 1(g),
Notes to Consolidated Financial Statements.
(21) Subsidiaries of the Registrant - filed as Exhibit 22 to the 1994
-------
Form 10K. *
(23) Consent of Arthur Andersen LLP.
(27) Financial Data Schedule.
(B) REPORTS ON FORM 8-K
-------------------
The Company did not file any current reports on Form 8-K during the quarter
ended March 31, 1997.
28
____________
* In accordance with Rule 12b-32 under the Securities Exchange Act of 1934, as
amended, reference is made to the documents previously filed with the
Securities and Exchange Commission, which documents are hereby incorporated
by reference.
** Compensatory plan or arrangement.
29
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
ABIOMED, Inc.
Dated: June 25, 1997 By: /s/ David M. Lederman
---------------------------
David M. Lederman, Chairman
of the Board, President
Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ David M. Lederman Chairman of the Board, June 25, 1997
- ----------------------- Chief Executive Officer
David M. Lederman President and Director
/s/ John F. Thero Vice President Finance June 25, 1997
- ----------------------- Chief Financial Officer
John F. Thero Principal Accounting Officer
/s/ W. Gerald Austen Director June 21, 1997
- -----------------------
/s/ Paul B. Fireman Director June 25, 1997
- -----------------------
Paul B. Fireman
/s/ John F. O'Brien Director June 25, 1997
- -----------------------
John F. O'Brien
/s/ Desmond O'Connell Director June 20, 1997
- -----------------------
Desmond O'Connell
/s/ Henri A. Termeer Director June 25, 1997
- -----------------------
Henri A. Termeer
30
INDEX
PAGE
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of March 31, 1996 and 1997 F-2
Consolidated Statements of Operations for the Years
Ended March 31, 1995, 1996 and 1997 F-3
Consolidated Statements of Stockholders' Investment
for the Years Ended March 31, 1995, 1996 and 1997 F-4
Consolidated Statements of Cash Flows for the Years
Ended March 31, 1995, 1996 and 1997 F-5
Notes to Consolidated Financial Statements F-6F-15
Report of Independent Public Accountants
To ABIOMED, Inc.:
We have audited the accompanying consolidated balance sheets of ABIOMED, Inc.
(a Delaware corporation) and subsidiaries as of March 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' investment and cash
flows for each of the three years in the period ended March 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. an audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ABIOMED, Inc. and subsidiaries
as of March 31, 1996 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended March 31, 1997, in
conformity with generally accepted accounting principles.
Boston, Massachusetts
May 8, 1997
F-1
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-----------MARCH 31,----------- ----------MARCH 31,----------
ASSETS 1996 1997 LIABILITIES AND STOCKHOLDERS' 1996 1997
INVESTMENT
Current Assets: Current Liabilities:
Cash and cash equivalents Accounts payable $ 777,943 $ 1,289,024
(Note 1) $ 2,938,332 $ 1,616,696 Accrued expenses (Notes 8 and 9) 1,486,981 2,032,506
Short-term marketable
securities (Note 1) 7,709,110 7,744,664
Accounts receivable, net
of allowance for doubtful
accounts of $111,000 and
$229,000 at march 31,
1996 and 1997,
respectively 2,606,289 4,816,500
Inventories (Note 1) 1,653,512 1,820,783
Prepaid expenses and
other current assets 92,280 173,172
----------- ----------- ----------- -----------
Total current assets 14,999,523 16,171,815 Total current liabilities 2,264,924 3,321,530
----------- ----------- ----------- -----------
Property and Equipment, at
cost (Note 1):
Machinery and equipment 2,378,851 3,147,837 Commitments (Notes 5 and 7)
Furniture and fixtures 156,048 241,867
Leasehold Improvements 378,998 1,118,677
----------- ----------- Stockholders' investment (notes 2 and 6):
2,913,897 4,508,381 Class B Preferred Stock, $.01 par value-
Authorized--1,000,000 shares
Less__Accumulated Issued and outstanding--none - -
depreciation and Common Stock, $.01 par value
amortization 2,331,145 2,618,603 Authorized--25,000,000 shares
----------- ----------- Issued and outstanding--5,518,054
582,752 1,889,778 shares and 7,008,282 shares at
----------- ----------- March 31, 1996 and 1997,
respectively 55,180 70,082
Class A Common Stock, $.01 par value-
Authorized--2,346,000 shares
Issued and outstanding--1,428,000 shares
and none at March 31, 1996 and 1997 14,280 -
respectively
Additional paid-in capital 36,625,221 37,169,893
Accumulated deficit (22,750,176) (22,014,912)
Other Assets, ----------- -----------
Net (Note7): 627,154 485,000
----------- ----------- Total stockholders' investment 13,944,505 15,225,063
----------- -----------
$16,209,429 $18,546,593
=========== ===========
$16,209,429 $18,546,59
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
----------YEARS ENDED MARCH 31,----------
1995 1996 1997
Revenues (Note 1):
Products $ 6,892,931 $ 9,725,332 $12,311,178
Contracts 2,337,505 3,118,278 4,150,752
----------- ----------- -----------
9,230,436 12,843,610 16,461,930
----------- ----------- -----------
Costs and Expenses:
Cost of products 3,288,833 3,921,319 5,360,449
Research and development (Note 1) 2,464,519 3,218,211 3,832,918
Selling, general and administrative 4,278,392 5,740,830 7,068,403
----------- ----------- -----------
10,031,744 12,880,360 16,261,770
----------- ----------- -----------
Income (Loss) From Operations (801,308) (36,750) 200,160
Interest and other income 449,124 527,874 535,104
----------- ----------- -----------
Net Income (loss) $ (352,184) $ 491,124 $ 735,264
=========== =========== ===========
Net Income (loss) per Common and Common $(0.05) $0.07 $0.10
Equivalent Share (Note 1) =========== =========== ===========
Weighted Average Number of Common and
Common Equivalent Shares Outstanding
(Note 1) 6,511,777 6,995,664 7,162,347
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
CLASS A
COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
NUMBER $.01 NUMBER $.01 PAID-IN ACCUMULATED STOCKHOLDERS'
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL DEFICIT INVESTMENT
BALANCE, MARCH 31, 1994 4,432,686 $44,327 2,040,000 $ 20,400 $33,413,242 $(22,889,116) $10,588,853
Stock options exercised 1,100 11 - - 6,314 - 6,325
Stock issued under
employee stock purchase
plan 639 7 - - 3,873 - 3,880
Stock issued in exchange
for amount due to
Abiomed Limited
Partnership 451,427 4,514 - - 3,053,341 - 3,057,855
Net loss - - - - - (352,184) (352,184)
--------- ------- --------- -------- ----------- ------------ -----------
Balance, March 31, 1995 4,885,852 48,859 2,040,000 20,400 36,476,770 (23,241,300) 13,304,729
Conversion of Class A
Common Stock to
Common Stock 612,000 6,120 (612,000) (6,120) - - -
Stock options exercised 19,425 194 - - 143,018 - 143,212
Stock issued under
employee stock
purchase plan 777 7 - - 5,433 - 5,440
Net income - - - - - 491,124 491,124
--------- ------- --------- -------- ----------- ------------ -----------
Balance, March 31, 1996 5,518,054 55,180 1,428,000 14,280 36,625,221 (22,750,176) 13,944,505
Conversion of Class A
Common Stock to
Common Stock 1,428,000 14,280 (1,428,000) (14,280) - - -
Stock options exercised 59,112 611 - - 533,142 - 533,753
Stock issued to
directors and under
employee stock
purchase plan 3,116 11 - - 11,530 11,541
Net income - - - - - 735,264 735,264
--------- ------- --------- -------- ----------- ------------ -----------
Balance, March 31, 1997 7,008,282 $70,082 - $ - $37,169,893 $(22,014,912) $15,225,063
========= ======= ========= ======== =========== ============ ===========
The accompanying notes are integral part of these consolidated financial
statements.
F-4
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------YEARS ENDED MARCH 31,------
1995 1996 1997
Cash Flows from Operating Activities:
Net income (loss) $(352,184) $ 491,124 $ 735,264
Adjustments to reconcile net income
(loss) to net cash
provided by (used in) operating
activities-
Depreciation and amortization 353,293 349,756 429,612
Noncash transactions related to
Abiomed Limited Partnership (251,883) - -
Changes in current assets and
liabilities-
Accounts receivable (73,518) (830,555) (2,210,211)
Inventories 815,518 (244,232) (167,271)
Prepaid expenses and other current
assets 58,530 (38,450) (80,892)
Accounts payable (65,894) 579,663 511,081
Accrued expenses 428,244 259,602 545,525
--------- ---------- -----------
Net cash provided by (used in)
operating activities 912,106 566,908 (236,892)
--------- ---------- -----------
Cash Flows from Investing Activities:
(Purchases) maturities of short term
marketable security investments, net (604,618) 2,701,323 (35,554)
Purchases of property and equipment (132,087) (322,642) (1,594,484)
Purchases of Abiomed Limited
Partnership units from limited
partners (Note 7) - (770,000) -
--------- ---------- -----------
Net cash provided by (used in)
investing activities (736,705) 1,608,681 (1,630,038)
--------- ---------- -----------
Cash Flows from Financing Activities:
Registration fees and costs in
connection with exchange of common
stock for amounts due to
Abiomed Limited Partnership (51,573) - -
Proceeds from exercise of stock options
and stock purchase plan 10,205 148,652 545,294
--------- ---------- -----------
Net cash (used in) provided by
financing activities (41,368) 148,652 545,294
--------- ---------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents, excluding
investments 134,033 2,324,241 (1,321,636)
Cash and Cash Equivalents, excluding
investments, at beginning of year 480,058 614,091 2,938,332
--------- ---------- -----------
Cash and Cash Equivalents, excluding
investments, at end of year $ 614,091 $2,938,332 $ 1,616,696
========= ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
ABIOMED, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
March 31, 1997
(1) Summary of Operations and Significant Accounting Policies
ABIOMED(R), Inc. and subsidiaries (the Company) is engaged primarily in the
research, development and commercialization of medical devices, with a
primary focus on the development of cardiac support systems. In particular,
the Company markets the BVS-5000(R) system, a bi-ventricular temporary
artificial heart, from which the majority of the Company's product revenues
have been derived. The accompanying consolidated financial statements
reflect the application of certain significant accounting policies
described below.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries, and beginning in
fiscal 1996, the accounts of its majority-owned subsidiary Abiomed
Limited Partnership. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(b) Uses of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
(c) Product Revenues
The Company recognizes product revenues at the time products are
shipped to the customers. Service revenues, which are not material, are
recognized over the periods of the contracts. In fiscal 1995, 1996 and
1997, 13%, 9% and 7%, respectively, of product revenues were from
customers located outside of the United States. No customer accounted
for greater than 10% of product revenues during fiscal 1995, 1996 or
1997.
(d) Contract Revenues
The Company accounts for contracts by applying the percentage-of-
completion method. The percentage of completion under these contracts
is determined by relating the actual cost of work performed to date on
each contract to the contract's estimated final cost. For contracts
F-6
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(CONTINUED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) Contract Accounting (continued)
that extend over one year, revisions in cost and profit estimates
during the course of the contract work are reflected in the accounting
period during which the facts that require the revision become known.
In fiscal 1995, 1996 and 1997, the majority of the Company's research
and development contract revenues were generated from contracts and
grants with various government agencies. Each of these contracts and
grants provide for revenues on a cost-plus-fixed-fee basis. The Company
retains rights to all technological discoveries and products resulting
from these efforts. Costs associated with these contracts and grants
are recorded in the accompanying consolidated financial statements as
part of research and development expenses and totaled approximately
$1,718,000, $2,457,000 and $3,232,000 for fiscal 1995, 1996 and 1997,
respectively.
(e) Inventories
Inventories include raw materials, work-in-process and finished goods,
are priced at the lower of cost (first-in, first-out) or market and
consist of the following:
------March 31,------
1996 1997
Raw materials $ 799,548 $ 896,433
Work-in-process 428,287 373,383
Finished goods 425,677 550,967
---------- ----------
$1,653,512 $1,820,783
========== ==========
Finished goods and work-in-process inventories consist of direct
material, labor and overhead.
(f) Depreciation and Amortization
The Company provides for depreciation and amortization by charges to
operations in amounts that allocate the cost of depreciable assets over
their estimated useful lives as follows:
ESTIMATED
CLASSIFICATION METHOD USEFUL LIFE
Machinery and equipment Sum-of-the-year's digits/ 3- 5 Years
straight-line
Furniture and fixtures Sum-of-the-year's digits/ 5-10 Years
straight-line
Leasehold improvements Straight-line Life of lease
F-7
ABIOMED, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
March 31, 1997
(Continued)
(1) Summary of Operations and Significant Accounting Policies (continued)
(g) Net Income (Loss) per Common and Common Equivalent Share
Net income per common and common equivalent share is computed by
dividing net income by the weighted average number of common and common
equivalent shares outstanding during the period using the treasury
stock method. Net loss per share is computed by dividing the net loss
by the weighted average number of common shares outstanding during the
period excluding the effect of stock options outstanding.
(h) Cash and Cash Equivalents
The Company classifies any marketable security with an original
maturity date of 90 days or less at the time of purchase as a cash
equivalent.
(i) Investments
The Company classifies any security, including marketable securities,
with an original maturity of greater than 90 days as investments and
classifies investments with a maturity of greater than one year from
the balance sheet date as long-term investments.
Under Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities,
investments that the Company has the positive intent and ability to
hold to maturity are reported at amortized cost and classified as held-
to-maturity. The Company has classified all investments at March 31,
1996 and 1997 as held-to-maturity. The amortized cost and market value
of short-term investments were approximately $7,709,000 and $7,545,000
at March 31, 1996 and $7,697,000 and $7,689,000 at March 31, 1997,
respectively. At March 31, 1997 these short term investments consisted
of government grade securities.
(j) Disclosures about Fair Value of Financial Instruments
As of March 31, 1996 and 1997 the Company's financial instruments were
comprised of cash and cash equivalents, accounts receivable, accounts
payable and short term investments, the carrying amounts of which
approximated fair market value.
F-8
ABIOMED, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
March 31, 1997
(Continued)
(1) Summary of Operations and Significant Accounting Policies (continued)
(k) Recent Accounting Pronouncements
For fiscal 1997, under SFAS No. 121 Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of, the
Company is required to review impairment of long-lived assets and
certain intangibles whenever events indicate that the carrying amount
of the assets may not be recoverable. The adoption of this statement
did not have a material impact on the Company's results of operations.
On March 3, 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128, Earnings Per Share. This statement which
supersedes Accounting Principles Board (APB) Opinion No. 15,
establishes standards for the computation and presentation of earnings
per share (EPS) and applies to entities with publicly held common stock
or potential common stock. This statement is effective for fiscal years
ending after December 15, 1997 and requires restatement of all prior-
period EPS data presented. The statement is not expected to have a
material impact on the Company's EPS presentation.
(2) Capital Stock
Each share of Common Stock has a voting right of one vote per share and
generally has the right to elect, as a class, at least 25% of the Company's
directors. During fiscal 1996 and 1997 respectively, 612,000 and 1,428,000
shares of Class A Common Stock, representing all of the remaining shares of
Class A Common Stock, were converted to Common Stock.
The Company has authorized 1,000,000 shares of Class B Preferred Stock,
$.01 par value, of which the designation, rights and privileges can be set
by the Board of Directors. No share of Class B Preferred Stock has been
issued or is outstanding.
(3) Line of Credit with a Bank
The Company has an unsecured demand line of credit under which it can
borrow up to $3,000,000 from a bank at the bank's prime rate. The Company
is required to maintain a compensating balance of $100,000 plus 5% of any
amounts outstanding under the arrangement. This line expires in September
1997. There were no borrowings under the company's line of credit at March
31, 1996 and 1997.
F-9
ABIOMED, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
March 31, 1997
(Continued)
(4) Income Taxes
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, Accounting for Income Taxes. The asset and liability approach
used under SFAS No. 109 requires a recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of other assets
and liabilities.
At March 31, 1997 the Company had available net operating loss
carryforwards of approximately $21,241,000. The Company also had available,
at March 31, 1997, approximately $766,000 of tax credits to reduce future
federal income taxes, if any. The net operating loss and tax credit carry-
forwards expire through 2010. These carryforwards are subject to review by
the Internal Revenue Service and may be subject to limitation in any given
year under certain conditions.
During 1997, the Company utilized a portion of its net operating loss
carryforward to reduce its current year taxable income. The Company has not
given recognition to any of these future tax benefits in the accompanying
consolidated financial statements due to the uncertainty surrounding the
timing of the realization of the tax benefits. The Company has placed a
valuation allowance of approximately $11,330,000 as of March 31, 1997
against its otherwise recognizable net deferred tax asset.
The deferred tax asset as of March 31, 1996 and 1997 consisted of the
following:
1996 1997
Purchase of technology (Note 7) $ 1,573,000 $ 1,353,000
Net operating loss and tax credit
carryforwards 9,082,000 9,262,000
Other, net 549,000 715,000
------------ ------------
11,204,000 11,330,000
Less--Valuation allowance (11,204,000) (11,330,000)
------------ ------------
$ - $ -
============ ============
(5) Commitments
(a) The Company leases its facilities and certain equipment under various
operating lease agreements with terms through fiscal 2001. Total rent
expense under these leases, included in the accompanying consolidated
statements of operations, was approximately $262,000, $233,000 and
$324,000 for fiscal 1995, 1996 and 1997, respectively.
F-10
ABIOMED, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
March 31, 1997
(Continued)
(5) Commitments (continued)
Future minimum lease payments under these agreements are as follows:
Amount
Years Ended March 31,
1998 $307,000
1999 247,000
2000 120,000
2001 31,000
2002 -
--------
$705,000
========
(b) The Company maintains various insurance coverage. Most policies renew
on a fiscal year basis while several policies have been secured for a
three year period. Future insurance obligations under these insurance
policies, over a three year period, are approximately $540,000.
(6) Stock Option Plans
All stock options granted by the Company under the below described plans
were granted at the fair value of the stock at the date of grant.
Outstanding stock options, if not exercised, expire 10 years from the date
of grant.
The 1992 Combination Stock Option Plan (the Combination Plan), approved by
the Company's stockholders in September 1992, combined and restated the
Company's then outstanding Incentive Stock Option Plan and Nonqualified
Plan. The options generally become exercisable ratably over five years. All
of the options granted under the Combination Plan during the three years
ended March 31, 1997 were to employees.
In addition, the Company has a nonqualified stock option plan for
nonemployee directors (the Directors' Plan). The Directors' Plan, as
adopted in July 1989 and amended, with shareholder approval, in August
1992, granted options to purchase 12,500 shares of the Company's Common
Stock to each of the Company's then elected outside directors and provides
for grants of options to purchase 12,500 shares of the Company's Common
Stock to any newly elected eligible director. Thereafter, each eligible
director will be granted a new option to purchase 12,500 shares of Common
Stock on July 1 of each successive fifth year. These options vest over a
five-year period at the rate of 2,500 shares per year, commencing on June
30 of the year following the date of grant.
F-11
ABIOMED, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
March 31, 1997
(Continued)
(6) Stock Option Plans (continued)
The following table summarizes stock option activity under these plans:
-----------Combination Plan------------ -------------------Directors' Plan--------------------
NUMBER EXERCISE PRICE WEIGHTED NUMBER EXERCISE PRICE WEIGHTED
OF AVERAGE OF AVERAGE
OPTIONS PRICE PER SHARE OPTIONS PRICE PER SHARE
Options outstanding,
March 31, 1994 410,830 $0.55-$13.50 $ 8.47 95,000 $7.00-$13.88 $10.72
Options granted 17,000 5.63- 6.50 6.19 - - -
Options exercised (1,100) 5.75- 5.75 5.75 - - -
Options canceled (31,500) 5.75- 13.50 8.48 - - -
------- ------------ ------ ------- ------------ ------
Options outstanding,
March 31, 1995 395,230 0.55- 13.50 8.38 95,000 7.00- 13.88 $10.72
Options granted 219,000 6.25- 11.00 10.23 12,500 11.00 11.00
Options exercised (16,925) 5.75- 8.50 7.34 (2,500) 7.00 7.00
Options canceled (19,140) 5.75- 13.50 9.90 (15,000) 11.00- 11.13 11.02
------- ------------ ------ ------- ------------ ------
Options outstanding,
March 31, 1996 578,165 0.55- 13.50 $ 9.09 90,000 7.00- 13.88 10.81
Option granted 234,235 11.00- 13.50 12.53 - - -
Options exercised (58,912) 0.55- 13.50 8.65 - - -
Options canceled (55,613) 5.75- 13.50 11.45 - - -
------- ------------ ------ ------- ------------ ------
Options outstanding,
March 31, 1997 697,875 $5.63-$13.50 $10.29 90,000 $7.00-$13.88 $10.81
Options exercisable,
March 31, 1997 179,415 $5.63-$13.50 $ 8.96 70,000 $7.00-$13.88 $10.76
Shares available for
Future issuance,
March 31, 1997 459,032 107,500
======= =======
F-12
ABIOMED, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
March 31, 1997
(Continued)
(6) Stock Option Plans (continued)
The Company has an Employee Stock Purchase Plan (the Purchase Plan), as
amended. Under the Purchase Plan, all employees (including officers and
directors) of the Company who have completed six months of employment are
eligible to purchase the Company's Common Stock at an exercise price equal to
85% of the fair market value of the Common Stock. The Company has reserved
100,000 shares of Common Stock for issuance under the Purchase Plan, of which
90,718 shares are available for future issuance as of March 31, 1997. During
the years ended March 31, 1996 and 1997, 777 shares and 1,116 shares,
respectively, of Common Stock were sold pursuant to the Purchase Plan.
In October 1995, FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of
stock options, including stock purchase plans, or warrants granted to
employees to be included in the statement of operations or disclosed in the
notes to financial statements. The Company has determined that it will
continue to account for stock-based compensation for employees under APB
Opinion No. 25 and elect the disclosure-only alternative under SFAS No 123.
The Company has computed the pro forma disclosures required under SFAS No. 123
for options granted in fiscal 1996 and 1997 using the Black-Scholes option
pricing model prescribed by SFAS No. 123. The weighted average information
and assumptions used for 1996 and 1997 are as follows:
1996 1997
-------- --------
Risk-free interest rate.................. 6.75% 6.75%
Expected dividend yield.................. - -
Expected life............................ 5 years 5 years
Expected volatility...................... 30% 33%
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-13
ABIOMED, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
March 31, 1997
(Continued)
(6) Stock Option Plans (continued)
The total fair value of the options granted during Fiscal 1996 and 1997 was
computed as approximately $431,000 and $598,000, respectively. Of these
amounts approximately $108,000 and $257,000 would be charged to operations
for the years ended March 31, 1996 and 1997 respectively. The remaining
amount, approximately $664,000, would be amortized over the remaining
vesting periods. Similarly, the total fair value of stock sold under this
Purchase Plan was computed as approximately $4,000 and $3,000 during Fiscal
1996 and 1997. The resulting pro forma compensation expense may not be
representative of the amount to be expected in future years as pro forma
compensation expense may vary based upon the number of options granted and
shares purchased.
The pro forma net income and pro forma net income per common share
presented below have been computed assuming no tax benefit. The effect of a
tax benefit has not been considered since a substantial portion of the
stock options granted are incentive stock options and the Company does not
anticipate a future deduction associated with the exercise of these stock
options.
The pro forma effect of SFAS No. 123 for the years ended March 31, 1996 and
1997 is as follows:
1996 1997
----------------------- ----------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
Net income............................ $491,124 $379,124 $735,264 $475,264
Pro forma net income per common and
common equivalent share ............. 0 .07 $ 0 .05 $ 0 .10 $ 0 .07
(7) Royalty Obligation
Commencing April 1, 1995 and ending August 3, 2000, the Company owes a
royalty to certain third parties equal in aggregate to approximately 2.1%
of certain revenues derived from the BVS 5000 and certain other technology
incorporated in the SupraCor(R). This royalty is subject to certain maximum
revenue amounts and to certain adjustments, as defined, in the event that
the Company sells the underlying technology. For the years ended March 31,
1996 and 1997, the amount of this royalty, net of certain reimbursed
expenses, was approximately $160,000 and $216,000, respectively. These
amounts are reflected as part of the cost of product sales in the
accompanying consolidated financial statements.
This royalty is paid to the third parties through Abiomed Limited
Partnership which, at present, is inactive except with respect to the
distribution of such royalties. During fiscal 1996, the Company paid
$770,000 to reduce its royalty obligation to 2.1%, as described above. This
one-time payment capitalized by the company, is being amortized on a
straight-line basis over the estimated useful life of the asset and, net of
accumulated amortization, is classified as a long-term other asset in the
accompanying consolidated financial statements.
F-14
ABIOMED, INC. AND SUBSIDIARIES
Notes to consolidated financial statements
March 31, 1997
(Continued)
(8) Employee Deferred Compensation Profit-sharing Plan and Trust
The Company has an Employee Deferred Compensation Profit-sharing Plan and
Trust (the 401(k) Plan) that covers all employees over 20 years of age who
have completed at least six months of service with the Company.
Contributions by the Company are determined by the Company's Board of
Directors and totaled approximately $36,000 and $80,000 for the fiscal
years ended March 31, 1995 and 1996 respectively. The accompanying
consolidated financial statements include a fiscal 1997 provision of
approximately $59,000 for this purpose, the actual contribution of which is
pending presentation to and approval by the Company's Board of Directors.
(9) Accrued Expenses
Accrued expenses consist of the following:
---------March 31,---------
1996 1997
Salaries and benefits $ 703,478 $ 700,570
Legal and audit 72,436 76,914
Customer advances 56,067 287,882
Sales taxes 214,521 172,836
Warranty 72,662 227,093
Other 367,817 567,211
---------- ----------
$1,486,981 $2,032,506
========== ==========
F-15