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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, 1998 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
Commission File Number: 1-9585
ABIOMED, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-2743260
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
33 CHERRY HILL DRIVE, DANVERS, 01923
MASSACHUSETTS (Zip Code)
(Address of Principal Executive
Offices)
(978) 777-5410
(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
None REGISTERED
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 24, 1998 was $118,037,425
based on the closing price of $13.75 on that date on the Nasdaq Stock Market's
National Market. As of June 24, 1998, 8,584,540 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," "expect," "anticipate," "believe," "plan,"
"intend," "could," "estimates," "is being" or "goal" or other variations of
these terms or comparable terminology. All forward-looking statements involve
risks and uncertainties, and actual results 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. The Company's actual results
could differ materially from those discussed herein. 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.
ABIOMED, Inc. ("ABIOMED" or the "Company") is a leader in the research and
development of cardiac assist and heart replacement technology. The Company
developed, manufactures and sells the BVS-5000 ("BVS"), a temporary cardiac
assist device designed to provide a patient's failing heart with full
circulatory assistance while allowing the heart to rest, heal and recover its
function. The BVS is most frequently used in patients whose hearts fail to
immediately recover function following heart surgery. The BVS is the only
device that can provide full circulatory assistance approved by the United
States Food and Drug Administration ("FDA") as a bridge-to-recovery device for
the treatment of all patients with reversible heart failure.
The Company is developing a battery-powered totally implantable heart
replacement device ("HRD") intended as a permanent replacement device to
assume the full pumping function of both the left and right ventricles of the
heart. The HRD is designed for use by patients with irreparably damaged hearts
and at risk of death due to acute myocardial infarction ("AMI"), chronic
ischemic disease or some form of end-stage congestive heart failure, but whose
vital organs otherwise remain viable. Among these combined groups, the Company
believes that at least 60,000 patients per year could benefit from a heart
replacement device. The Company is devoting significant resources to
accelerate the development of the HRD with the goal to initiate clinical
trials of the HRD by the end of the year 2000. There can be no assurance that
the Company will be able to successfully complete pre-clinical testing of the
HRD and receive FDA approval to begin clinical trials of the HRD in a timely
manner, if at all, or that any market will develop for the HRD.
The Company sells the BVS in the United States through direct sales and
clinical support teams. Its sales force focuses on sales to new customers,
while its clinical support group focuses on training and educating existing
customers in order to improve clinical outcomes and increase BVS blood pump
usage. The BVS is intended for use in any hospital performing open-chest
cardiac surgery, of which there are more than 900 in the United States. As of
March 31, 1998, the BVS had been purchased by over 330 medical centers in the
United States including many of the largest centers. The Company believes that
its installed base of customers provides an opportunity for reorders of the
single-use BVS blood pumps as well as a reference base to assist in selling to
new accounts.
Since the Company's inception, United States government agencies,
particularly the National Heart, Lung and Blood Institute ("NHLBI"), have
provided significant support to the Company's product development efforts. The
Company seeks funding from third parties to support its research and
development programs and generally limits the use of its own funds until the
scientific risk is reduced. In addition, the Company intends to pursue
collaborative relationships to develop and commercialize the Company's non-
cardiac assist technologies.
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 (978) 777-5410. As used herein,
the Company or ABIOMED includes ABIOMED, Inc. together with its subsidiaries.
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ABIOMED(R), 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.
HEART DISEASE
Overview
The human heart consists of four chambers, including a left and right
ventricle. The left ventricle pumps oxygen rich blood throughout the body. The
right ventricle pumps oxygen depleted blood which has been circulated through
the body to the lungs where it is re-oxygenated. The heart muscles of the
ventricles require an uninterrupted supply of oxygenated blood, which is
provided through coronary arteries.
Insufficient blood flow to the muscles of the heart, known as ischemia,
results in oxygen deprivation and leads to various complications. These
complications include reduced cell function and, in more severe cases,
permanent damage to the heart muscle, such as AMI. Diseases to the coronary
arteries, which affect blood flow to the heart, are generally classified as
coronary heart disease.
Congestive heart failure is a condition manifested clinically by an enlarged
heart. Congestive heart failure develops over time primarily due to excess
demand on the heart muscle caused by a variety of factors, including chronic
hypertension (high blood pressure), incompetent valves, coronary heart
disease, infections of the heart muscle or the valves and congenital heart
problems.
Abnormalities in the electrical conduction system regulating the pumping
function of the heart, known as rhythm disorders, can also lead to
complications. These complications range from ventricular fibrillation
(unsynchronized contractions) and arrhythmia (irregular heartbeats) to cardiac
arrest. Most cardiac arrests result in sudden death.
Prevalence and Mortality
In 1994, there were an estimated 13.7 million people with coronary heart
disease, 4.8 million people with congestive heart failure, 4.0 million people
with rhythm disorders, and 1.4 million people with valvular diseases in the
United States. These diseases and conditions resulted in approximately 750,000
deaths in 1995, of which approximately half were sudden deaths. Of the deaths
that did not occur suddenly, approximately 110,000, 131,000, and 59,000 were
associated with AMI, chronic ischemic disease and congestive heart failure,
respectively.
Circulatory Support Therapies
In general, there are four modalities for the treatment or support of
failing ventricles: pharmaceutical therapies, cardiological interventions,
surgical corrections, and mechanical cardiac interventions. Pharmaceutical
therapies, including diuretics, ACE inhibitors, beta blockers and calcium
channel blockers, are commonly the first treatment option. Cardiological
interventions, including angioplasty and the use of stents, are minimally
invasive procedures that primarily address certain forms of coronary heart
disease. Surgical corrections, including coronary bypass surgery and valve
replacement, while effective, are a viable alternative only for those patients
with enough functional heart muscle to sustain life. Mechanical cardiac
interventions involve the use of devices for those patients whose heart
muscles are unable to sustain life without cardiac assistance.
Mechanical Cardiac Interventions
Mechanical cardiac interventions can be divided into three groups of
devices: temporary cardiac assist, permanent cardiac assist and heart
replacement.
Temporary Cardiac Assist. Patients who are candidates for temporary cardiac
assist consist of those with severely but reversibly failing hearts and those
who need ventricular support to remain alive while they await
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transplantation. Temporary cardiac devices which are designed to support the
recovery of patients with reversibly failing hearts are referred to as
"bridge-to-recovery" devices, and those which can support patients awaiting
transplantation are referred to as "bridge-to-transplant" devices.
Approximately 12,000 patients with potentially recoverable hearts die every
year in the United States following heart surgery. Bridge-to-recovery devices
can save the lives of many of these patients by temporarily assuming the
pumping function of the heart, while allowing the heart to rest, heal and
recover its normal function. These devices can also be used for bridge-to-
recovery for nonsurgical patients who would otherwise die as a result of
certain transient viral infections that attack the heart muscle. Bridge-to-
transplant devices are ventricular assist devices ("VADs") used to support a
portion of the patients awaiting heart transplants. There are approximately
2,300 heart transplants performed in the United States annually.
Permanent Cardiac Assist. Patients with life-impairing or life-threatening
heart failure due to permanent muscle damage may require support to either or
both ventricles. Depending upon the severity of the damage and the nature of
the heart's condition, these patients may be helped with permanent assist
devices. Permanent assist devices under development can be grouped into two
types, those that pump blood directly, such as VADs, and those that wrap
around and help contract the heart without direct blood contact. Both types
potentially may be used to treat end-stage congestive heart failure patients
as well as those patients who are not at imminent risk of death but whose
daily activities are generally restricted due to their weakened hearts. In
1995, there were approximately 59,000 deaths in the United States attributable
to congestive heart failure.
Heart Replacement. Patients with irreparably damaged hearts and at risk of
death due to AMI, chronic ischemic disease or some form of end-stage
congestive heart failure but whose vital organs otherwise remain viable are
candidates for heart replacement. Included among these patients are those with
massive heart damage, severe rhythm disorders, prosthetic valves, clots or
thrombi in the ventricles, high pulmonary resistance, chronic right ventricle
failure or heart transplant rejection. Among these combined groups, the
Company believes that at least 60,000 patients per year could benefit from a
heart replacement device. No life-supporting treatment is currently available
for these patients except for the approximately 2,300 who receive heart
transplants annually in the United States. Currently, available donor hearts
are primarily reserved for transplantation of select end-stage congestive
heart failure patients because many of these patients are able to survive for
the long waiting periods required before a suitably matched donor heart can be
found. The Company believes that the development of a heart replacement device
would increase the number of lives saved by eliminating the scarcity of, and
waiting period for, available hearts.
ABIOMED PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The Company markets the BVS, which is a temporary cardiac assist device, and
is developing the HRD and the Heart Booster, which are replacement and
permanent cardiac assist devices, respectively.
The BVS-5000 Bi-Ventricular Assist System. The BVS is a temporary cardiac
assist device designed to provide a patient's failing heart with full
circulatory assistance while allowing the heart to rest, heal and recover its
function. The BVS is most frequently used in patients whose hearts fail to
immediately recover function following heart surgery. In November 1992, the
Company received Pre-Market Approval ("PMA") from the FDA for the BVS for this
post-surgery therapy. In 1996 and 1997, the FDA approved the use of the BVS
for additional indications, expanding its use for the treatment of all
patients with reversible heart failure as a bridge-to-recovery device. The BVS
is the only device that can provide full circulatory assistance approved by
the FDA for the treatment of all such patients.
The BVS system is comprised of a microprocessor-based pneumatic drive and
control console, single-use external blood pumps and cannulae. The BVS console
incorporates a closed-loop control system that automatically adjusts the
pumping rate, similar to the natural heart. The dual-chamber blood pumps
provide complete or partial pumping of blood for the left, right or both sides
of a patient's heart and are designed to mimic the function of the natural
heart. The BVS blood pumps reduce the risk of damaging blood cells by filling
the ventricles passively and continuously by gravity rather than by suction.
The cannulae are specially designed
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tubes used to connect the blood pumps to the heart. The integration of the
cannulae, blood pumps and console creates a system with the ability to reduce
the load on the heart, provide pulsatile blood flow to vital organs and allow
the heart muscles time to rest and recover. Stabilization of patients who
recover under BVS support typically occurs in a period of less than one week.
The BVS is designed to be simple and easy to use and does not require a
specially trained technician to constantly monitor or adjust the pumping
parameters, which can reduce hospital operating costs.
The BVS is intended for use in any hospital performing open-chest cardiac
surgery, of which there are more than 900 in the United States. As of March
31, 1998, the BVS had been purchased by over 330 medical centers in the United
States including many of the largest centers. Typically, medical centers
initially purchase the BVS console, two to four BVS single-use blood pumps,
cannulae, training and related accessories. The BVS is capable of supporting
the left, right or both ventricles of the heart. In the Company's clinical
experience, approximately half of the patients required support to both
ventricles of the heart and therefore the use of two single-use BVS blood
pumps. The Company's United States list price for a BVS console, and a blood
pump and cannulae set are $59,500 and $7,650, respectively.
The Totally Implantable Heart Replacement Device (HRD), previously referred
to as the Total Artificial Heart or TAH. The Company is developing a battery-
powered totally implantable heart replacement device intended as a permanent
replacement system to assume the full pumping function of both the left and
right ventricles of the heart. The HRD is designed for use by patients with
irreparably damaged hearts and at risk of death due to AMI, chronic ischemic
disease or some form of end-stage congestive heart failure but whose vital
organs otherwise remain viable. Included among these patients are those with
massive heart damage or infection, severe rhythm disorders, prosthetic valves,
clots or thrombi in the ventricles, high pulmonary resistance, chronic right
ventricle failure and heart transplant rejection.
The core technology for the HRD has been under development by the Company
since the Company's inception. The Company has completed its feasibility
studies of the HRD system and substantially finalized the design of the HRD.
The system and individual components have been tested through a variety of
laboratory and animal tests. The Company is devoting significant resources
towards improving the HRD manufacturing process in order to reach consistency
and reliability levels necessary to conduct advanced pre-clinical and clinical
trials. The Company's goal is to initiate clinical trials of the HRD by the
end of the year 2000. There can be no assurance that the Company will be able
to successfully complete pre-clinical testing of the HRD and receive FDA
approval to begin clinical trials of the HRD in a timely manner, if at all.
Moreover, pre-clinical trials may not be predictive of results that will be
obtained in clinical trials. The Company is consulting with regulatory
authorities, leading medical centers and physicians to define protocols and
patient populations for future clinical trials. During fiscal 1998, the
Company built and began use of a new development and pilot-scale manufacturing
facility, and significantly increased the personnel focused on the
manufacturability and testing of the HRD.
The HRD system is comprised of a thoracic unit, or "replacement heart," a
rechargeable battery, a miniaturized electronics package, a transcutaneous
energy transmission system, and an external battery pack to be carried or
attached to a belt or vest. The thoracic unit includes two artificial
ventricles with their associated valves and a hydraulic pumping system. The
unit provides complete pumping of the blood to the lungs and throughout the
body. The ventricles and their associated valves are being designed and
manufactured with seamless surfaces which reduce the risk of damaging blood
cells, or creating clots or thrombi. The electronics package automatically
adjusts the rate and amount of blood flow to the patient's needs, similar to
the natural heart. The implantable rechargeable battery and the transcutaneous
energy transmission system eliminate the need for wires penetrating the
patient's skin and associated risks of infection. The entire HRD system is
being designed to be highly reliable with minimal maintenance and patient
involvement.
Much of the development of the HRD has been funded by the NHLBI. Prior to
receiving its most recent $8.5 million HRD Contract extension, the Company
demonstrated to the NHLBI that the basic design of the system functioned
adequately in laboratory and animal models. The Company retains the right to
market the
5
resulting HRD without royalty to NHLBI. The Company is responsible for the
complete research and development program and has collaborated over the past
ten years with the Texas Heart Institute for pre-clinical product testing and
evaluation.
In preparation for initial HRD clinical trials, the Company has reached
agreement to begin training the following five select U.S. medical centers: 1)
Allegheny University of the Health Sciences; 2) a team consisting of Brigham
and Women's Hospital and the Massachusetts General Hospital; 3) Jewish
Hospital in conjunction with the University of Louisville; 4) Texas Heart
Institute; 5) UCLA Medical Center. The Company has also begun conversations
with select European Centers.
The Heart Booster. The Company is developing the Heart Booster as a
permanent cardiac assist device designed to wrap around and help contract the
heart without direct blood contact. The Heart Booster is being designed for
use in patients with congestive heart failure who are not at imminent risk of
death, but whose daily activities are generally restricted due to their
weakened hearts. This device, unlike most devices being developed to pump
blood directly, avoids the potential risks of damage to blood cells and
formation of clots and thrombi. The Heart Booster consists of a pliant and
thin artificial plastic "muscle" that can be wrapped around the heart. This
artificial muscle is being developed to mimic the contraction-relaxation
characteristics of the heart muscle and provide sufficient contractility. The
design goal of the Heart Booster is to restore an acceptable and active
quality of life to the patient. The Heart Booster is in an earlier stage of
research and development than the HRD and is being developed under a five
year, $4.3 million contract from the NHLBI. There can be no assurance that the
Company will be successful in developing the Heart Booster.
MARKETING AND SALES
Approximately 900 medical centers in the United States perform heart
surgery. The Company has focused its initial BVS selling efforts on teaching
and transplant centers as well as the medical centers that perform the most
heart surgery procedures. As of March 31, 1998, the BVS had been purchased by
over 330 medical centers in the United States, many of which are within the
group of medical centers initially targeted. The Company believes that its
installed base of customers provides an opportunity for reorders of the
single-use BVS blood pumps as well as a reference base to assist in selling to
new accounts.
The Company sells the BVS in the United States through direct sales and
clinical support teams. As of June 1, 1998, the Company's BVS sales, clinical
support, marketing and field service teams included 35 full-time employees.
Its sales force focuses on BVS sales to new customers. Its clinical support
group focuses on training and educating existing customers in order to improve
clinical outcomes and increase BVS blood pump usage. The Company believes the
efforts of its clinical support group contribute significantly to the number
of lives saved by the BVS and usage and reorders of BVS blood pumps. The
Company also believes that its sales and support teams will be key assets for
the introduction of potential future products such as the HRD. Building on its
experience in the United States, the Company also is working to expand its
international sales efforts both through distributors, including a recent
collaborative arrangement for distribution in Japan, and by selling directly
in select European markets. 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.
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 polymer.
The nature of the Company's products requires high quality manufacturing.
The Company's manufacturing and quality testing processes and procedures are
highly dependent on the diligence and experience of the Company's personnel.
To the extent that the Company's manufacturing volumes expand or the Company
begins
6
the manufacture of new products, this dependence on personnel will likely
increase. In addition, the manufacture of blood contacting surfaces of the
Company's products requires a high degree of precision. These surfaces are
manufactured from polyurethane-based materials. The quality and composition of
polyurethane-based products can vary significantly based on numerous factors
including humidity, temperature, material content and air flow during the
manufacturing process. The Company's products also incorporate plastic
components for non-blood contacting surfaces. The Company relies on third-
party vendors to provide these components to the Company's specifications. The
Company is not able to fully inspect the quality of all vendor-supplied
components and, therefore, relies on its vendors with respect to the quality
of these components. Once the plastic-based components of the Company's
products have been assembled, accessibility for inspection is limited. If a
defect is detected in as few as one of the Company's products, or in one
component of a Company product, it can result in the recall or restriction on
sale of products. Once assembled, in most cases, the Company's blood
contacting components cannot be reworked for human use. The manufacturing lead
times for parts and assemblies, particularly the polyurethane-based
components, can take many weeks from the date that all materials and
components are received by the Company. In addition, vendor lead times for
materials and components of the Company's products vary significantly, with
lead times for certain materials and components exceeding six months.
The Company is negotiating with its landlord to enter into a new or amended
lease which would allow the Company to consolidate its operations into one
building by expanding into approximately 19,000 square feet of additional
space in one of the two buildings occupied by the Company and exiting
approximately 10,000 square feet of space in the second building. The Company
intends to use the additional space primarily to expand its manufacturing and
research and development activities. The Company anticipates beginning to use
this new space within the next twelve months. There can be no assurance that
the products manufactured in the expanded facility will be manufactured at the
same cost and quality as the BVS is currently being manufactured. In addition,
to the extent that the Company's products under development have been
manufactured, they have been manufactured as prototypes with, at most, pilot-
scale production. The Company's products under development are likely to
involve additional manufacturing complexities and high quality requirements.
There can be no assurance that the Company will be able to increase production
of the BVS or manufacture future products, if developed and approved, in
commercial quantities on a consistent and timely basis, with acceptable cost
and quality. The inability to manufacture current and future products in
sufficient quantities in a timely manner, and with acceptable cost and
quality, would have a material adverse effect on the Company's business,
financial condition and results of operations.
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. From time to time, 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 certain components and establishing additional or replacement suppliers
for such components cannot be accomplished quickly and may require FDA
approval. 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. 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 or would be able to obtain requisite regulatory approvals in
a timely manner, if at all. 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, financial condition and results of operations.
7
RESEARCH AND PRODUCT DEVELOPMENT
The Company has substantial expertise in electro-mechanical systems, cardiac
physiology and experimental surgery, blood-material interactions, fluid
mechanics and hemodynamics, internal and external electronic hardware,
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 mechanical cardiac assist and heart
replacement, 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. Sophisticated tools, such as 3-
dimensional CAD/CAM, and procedures are used in an effort to ensure smooth
transition of new products from research to product development to
manufacturing.
Cardiac assist products currently under development by the Company include
the HRD, the Heart Booster, and a variety of specialized pumps, such as a
miniaturized rotary blood 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.
During the fiscal years ended March 31, 1998, 1997 and 1996, the Company
expended $9.1 million, $3.8 million and $3.2 million, respectively, on
research and development. Government contracts and grants funded a substantial
portion of these expenses. Since the Company's inception, United States
government agencies, particularly the NHLBI, have provided significant support
to the Company's product development efforts. The most significant current
funding from the NHLBI supports the Company's development of the HRD and Heart
Booster. In September 1996, the Company received an $8.5 million extension to
its HRD Contract from the NHLBI. In September 1995, the Company received a
$4.3 million contract from the NHLBI to develop the Heart Booster. During the
fiscal years ended March 31, 1998, 1997 and 1996, the Company recognized
revenues of $5.2 million, $4.2 million and $3.1 million, respectively, under
United States government contracts and grants. All of the Company's government
contracts and grants contain provisions making them terminable at the
convenience of the government and are subject to government appropriations.
There can be no assurance that the government will not terminate, 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.
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, biotechnology and pharmaceuticals may reduce
the size of the potential markets for the Company's products or render those
products obsolete.
The BVS is the only device that can provide full circulatory assistance
approved by the FDA as a bridge-to-recovery device for the treatment of all
patients with reversible heart failure. In May 1998, Thoratec Laboratories
Corporation received FDA approval to market their device for postcardiotomy
recovery of the natural heart, which is one of the primary patient categories
addressed by the BVS. The Company is not aware of any other Company that has
applied for FDA approval of a device which is directly competitive with the
BVS. Approval by the FDA of products that compete directly with the BVS
increases competitive pricing and other pressures and could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company believes that it competes with such products on the
basis of cost, clinical outcome and customer relations. There can be no
assurance that the Company would be able to compete effectively with respect
to these factors.
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The Company is aware of other heart replacement device development efforts
in the United States, Canada, Europe and Japan. A joint effort between
Pennsylvania State University, 3M Corporation, Inc. and Minnetronix, Inc. is
developing a heart replacement device with significant NHLBI support. There
are a number of companies, including Thermo Cardiosystems, Inc. and Novacor, a
division of Baxter International, Inc., which are developing permanent cardiac
assist products, including implantable left ventricular assist devices and
miniaturized rotary ventricular assist devices, that may address markets that
overlap with certain segments of the markets targeted by the Company's HRD.
The Company's HRD may compete with those VADs for some patient groups, notably
patients with severe congestive heart failure due to predominant left
ventricle dysfunction. An implantable VAD supplements the pumping ability of a
failing ventricle. In contrast, the HRD is being designed to replace failing
ventricles. The Company believes that Thermo Cardiosystems, Inc. has commenced
clinical testing for PMA approval of LVADs for permanent cardiac assist. The
Company believes that the HRD, LVADs and other VADs, if developed, will
generally be used to address the needs of different patient populations, with
an overlap for certain segments of the heart failure population. There can be
no assurance that the Company will develop and receive FDA approval to market
its HRD on a timely basis, if at all, or that once developed, the HRD will be
commercially successful.
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. The
Company believes that important competitive factors with respect to the
development and commercialization of its products include the relative speed
with which it can develop products, establish clinical utility, complete
clinical testing and regulatory approval processes, obtain reimbursement and
supply commercial quantities of the product to the market. There can be no
assurance that the Company will be able to compete successfully or that
competition will not have a material adverse effect on the Company's business,
financial condition and results of operations.
THIRD-PARTY REIMBURSEMENT
The Company's BVS product is, and most of its products under development are
intended to be, sold to medical institutions. Medical institutions and their
physicians typically seek reimbursement for the use of these products from
third-party payers, including Medicare, Medicaid, private health insurers and
managed care organizations. As a result, market acceptance of the Company's
current and proposed products may depend in large part on the extent to which
reimbursement is available to medical institutions and their physicians for
use of the Company's products.
The level of reimbursement provided by United States and foreign third-party
payers varies according to a number of factors, including the medical
procedure category, payer, location, outcome and cost. In the United States,
many private health care insurance carriers follow the recommendations of the
Health Care Finance Administration ("HCFA"), which establishes guidelines for
the reimbursement of health care providers treating Medicare and Medicaid
patients. Internationally, healthcare reimbursement systems vary
significantly. In certain countries, medical center budgets are fixed
regardless of levels of patient treatment. In other countries, such as Japan,
reimbursement from government or third party payers must be applied for and
approved. As of the date of this Annual Report, under HCFA guidelines,
Medicare reimburses medical institutions for Medicare patients based on the
category of surgical procedures in which the BVS is used and incrementally
reimburses physicians for the use of the BVS. Medicare does not, however,
currently reimburse medical institutions for the incremental cost of using the
BVS above the amount allowed for the reimbursement category of the surgical
procedure. Certain private health insurers and managed care providers provide
incremental reimbursement to both the medical institutions and their
physicians. The Company is currently petitioning HCFA to assign a higher
paying reimbursement category whenever the BVS is used. In October 1995, HCFA
established a special "ICD-9" code for the BVS in an effort to more clearly
track and evaluate hospital and physician costs associated specifically with
the BVS compared to current reimbursement levels, so that HCFA can determine
the appropriate category and level of reimbursement. There can be no assurance
that HCFA will reassign the BVS to a higher paying category in a timely
manner, if at all.
9
No reimbursement levels have been established for the Company's products
under development, including the HRD. Prior to approving coverage for new
medical devices, most third-party payers require evidence that the product has
received FDA approval or clearance for marketing, is safe and effective and
not experimental or investigational, and is medically necessary and
appropriate for the specific patient for whom the product is being used.
Increasing numbers of third-party payers require evidence that the procedures
in which the products are used, as well as the products themselves, are cost-
effective. There can be no assurance that the Company's products under
development will meet these criteria, that third-party payers will reimburse
physicians and medical institutions for the use of the products or that the
level of reimbursement will be sufficient to support the widespread use of the
products. Furthermore, there can be no assurance that third-party payers will
continue to provide reimbursement for the use of BVS or that such payers will
not reduce the current level of reimbursement for the product. Failure to
achieve adequate reimbursement for its current or proposed products would have
a material adverse effect on the Company's business, financial condition and
results of operations.
ABIODENT SUBSIDIARY
ABIODENT, Inc. ("ABIODENT"), a wholly owned subsidiary of the Company,
manufactures and markets the PerioTemp periodontal screening system
("PerioTemp") and markets the Halimeter. 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. According to published
sources, gum temperature has been shown 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 Halimeter is used for early detection and assessment of risk
of periodontal disease and other sources of halitosis. In fiscal 1998, the
Company made the decision to shift all of its focus to the Company's core
cardiovascular business and to sell, license or otherwise dispose of its
dental business. The operating results of ABIODENT are presented as
discontinued operations in the accompanying Consolidated Financial Statements.
PATENTS AND PROPRIETARY RIGHTS
The Company's business depends significantly upon its proprietary
technology. The Company relies on a combination of trade secret laws, patents,
copyrights, trademarks and 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 others
will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets or disclose such technology or that the Company can meaningfully
protect its trade secrets.
The Company has been issued or allowed 25 patents and has pending five
patent applications in the United States. The Company has obtained or applied
for corresponding patents and patent applications for certain of these patents
and patent applications in a limited number of foreign countries. These
patents relate to the BVS and certain of its products under development
including the HRD. The Company's United States patents expire at various times
from 2003 to 2018. There can be no assurance that the Company's pending patent
applications or any future applications will be approved, that any patents
will provide the Company with competitive advantages or will not be challenged
by third parties, or that the patents of others will not render the Company's
patents obsolete or otherwise have an adverse effect on the Company's ability
to conduct business. Because foreign patents may afford less protection under
foreign law than is available under United States patent law, there can be no
assurance that any such patents issued to the Company will adequately protect
the Company's proprietary information. Others may have filed and may file
patent applications in the future that are similar or identical to those of
the Company. To determine the priority of inventions, the Company may have to
participate
10
in interference proceedings declared by the United States Patent and Trademark
Office or opposition proceedings before a foreign patent office that could
result in substantial cost to the Company. No assurance can be given that any
such interfering patent or patent application will not have priority over
patent applications filed on behalf of the Company or that the Company will
prevail in any opposition proceeding.
The medical device industry is characterized by a large number of patents
and by frequent and substantial intellectual property litigation. There can be
no assurance that the Company's products and technologies do not infringe or
violate any patents or proprietary rights of third parties. The Company has in
the past and may in the future be notified that it may be infringing or
violating proprietary rights possessed by others. Any intellectual property
litigation would be costly and could divert the efforts and attention of the
Company's management and technical personnel, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that infringement or other claims will
not be asserted in the future or such assertions, if proven to be true, will
not prevent the Company from selling its products or materially and adversely
affect the Company's business, financial condition and results of operations.
If any such claims are asserted against the Company's proprietary rights, it
may seek to enter into a royalty or licensing arrangement. There can be no
assurance, however, that a license will be available on reasonable terms, or
at all. The Company could decide, in the alternative, to resort to litigation
to challenge such claims or to design around the patented or otherwise
proprietary technology. Such actions could be costly and would divert the
efforts and attention of the Company's management and technical personnel,
which would materially and adversely affect the Company's business, financial
condition and results of operations.
On January 20, 1998, World Heart Corporation and the Ottawa Heart Institute
Research Corporation filed a complaint in the United States District Court for
the District of Delaware. The complaint seeks damages and injunctive relief
for alleged breaches of contract, misappropriation of trade secrets,
conversion of trade secrets and patent infringement by the Company. These
claims and allegations relate to certain technology used in the transcutaneous
energy transmission system that is a component of the HRD under development by
the Company. The Company does not believe that it is infringing any patent or
other intellectual property rights of the plaintiffs and intends to vigorously
defend this position. There can be no assurance that the Company will prevail
in the defense of these claims and allegation or in the defense of any future
infringement or other claim, if made. If infringement or violation of the
patent or other proprietary rights were determined to exist, the Company would
either be required to use or develop alternative technology for its
transcutaneous energy transmission system or to seek a license of the
technology. There can be no assurance that the Company could obtain a license
of this technology on a timely basis or on reasonable terms, if at all. In
addition, there can be no assurance that the Company could develop or license
alternative technology on a timely basis, if at all, to allow for the safe and
effective transmission of energy into the body without wires penetrating the
skin. As a result, a determination of infringement or violation could have a
material adverse effect on the Company's development of the HRD and on its
business, financial condition and results of operations. Any patent or
intellectual property dispute or litigation could result in product
development delays, would be costly and could divert the efforts and attention
of the Company's management and technical personnel, and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Certain of the Company's products have been developed in part under
government contracts pursuant to which the Company may be required to
manufacture a substantial portion of the product in the United States 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 8 to the Consolidated Financial Statements.
11
GOVERNMENT REGULATION
Clinical testing, manufacture and sale of the Company's products and
products under development, including the BVS, HRD and Heart Booster, are or
will be subject to regulation by the FDA and corresponding state and foreign
regulatory agencies. Noncompliance with applicable requirements can result in,
among other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant pre-market clearance or pre-market approval for devices, withdrawal
of marketing approvals and criminal prosecution. The FDA also has the
authority to request repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.
In the United States, medical devices are classified into one of three
classes (i.e., Class I, II or III) on the basis of the controls deemed
necessary by the FDA to reasonably ensure their safety and effectiveness.
Class I devices are subject to general controls, such as labeling, pre-market
notification and adherence to the FDA's Current Good Manufacturing Practices
requirements set forth in the Quality System Regulation ("QSR"), which include
testing, control and documentation requirements. Class II devices are subject
to general and special controls, such as performance standards, post-market
surveillance, patient registries and QSR compliance. Class III devices, which
are typically life-sustaining, life-supporting and implantable devices, or new
devices that have been found not to be substantially equivalent to legally
marketed devices, are subject to the requirements applicable to Class I and
Class II devices and must generally also receive pre-market approval by the
FDA to ensure their safety and effectiveness.
Before introducing a new device into the market, the Company must generally
obtain FDA clearance or approval through either concurrence of a 510(k)
notification or receipt of a PMA. A 510(k) concurrence will be granted if the
submitted information establishes that the proposed device is "substantially
equivalent" to a legally marketed Class I or Class II medical device or a
Class III medical device for which the FDA has not required PMAs. The Company
has received FDA concurrence under Section 510(k) for the PerioTemp.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
Class III device for which the FDA has required PMAs. A PMA application must
be supported by valid scientific evidence, which typically includes extensive
information including relevant bench tests, laboratory and animal studies and
clinical trial data to demonstrate the safety and effectiveness of the device.
The PMA application also must contain a complete description of the device and
its components, a detailed description of the methods, facilities and controls
used to manufacture the device, and the proposed labeling advertising
literature and training materials. By regulation, the FDA has 180 days to
review the PMA application, and during that time an advisory committee may
evaluate the application and provide recommendations to the FDA. Advisory
Committee reviews often occur over a significantly protracted period, and a
number of devices for which FDA approval has been sought have never been
cleared for marketing. In addition, modifications to a device that is the
subject of an approved PMA, or to its labeling or manufacturing process, may
require approval by the FDA, including the submission of PMA supplements or
new PMAs.
If clinical trials of a device are required in order to obtain FDA approval
and the device presents a "significant risk," the sponsor of the trial will
have to file an Investigational Device Exemption ("IDE") application prior to
commencing clinical trials. The IDE application must be supported by data,
which typically includes the results of animal and laboratory testing. If the
IDE application is approved by the FDA and all of the appropriate
Institutional Review Boards ("IRBs"), clinical trials may begin at a specific
number of investigational sites with a specific number of patients, as
approved by the FDA. If the device presents a "nonsignificant risk" to the
patient, a sponsor may begin the clinical trial after obtaining approval for
the study by one or more appropriate IRBs without the need for FDA approval.
Sponsors of clinical trials are permitted to charge for investigational
devices distributed in the course of the study provided that compensation does
not exceed recovery of the costs of manufacture, research, development and
handling. An IDE supplement must be submitted to and approved by the FDA
before a sponsor or investigator may make a change to the investigational plan
that may affect its scientific soundness or the rights, safety or welfare of
human subjects.
12
In November 1992, the Company received PMA approval from the FDA for the
BVS. In 1996 and 1997, the FDA approved the use of the BVS for additional
indications, expanding its use to the treatment of all patients with
reversible heart failure. In May 1998, the Company received notice from the
FDA that the BVS has successfully concluded all required postmarket
surveillance. The primary purpose of required postmarket surveillance is to
provide a warning system to alert the health care community to any potential
problems with a device within a reasonable time of the initial marketing of
the device. Postmarket surveillance provides clinical monitoring of the
experiences with the device once it is distributed in the general population
under actual conditions of use. The HRD and the Heart Booster will be Class
III devices and therefore will be subject to the IDE and PMA processes and the
QSR.
Any devices, including the BVS, which are manufactured or distributed by the
Company pursuant to FDA clearances or approvals, are subject to pervasive and
continuing regulation by the FDA and certain state agencies. Manufacturers of
medical devices for marketing in the United States are required to adhere to
the QSR and must also comply with Medical Devices Reporting ("MDR")
requirements that a firm report to the FDA any incident in which its product
may have caused or contributed to a death or serious injury, or in which its
product malfunctioned and, if the malfunction were to recur, it would be
likely to cause or contribute to a death or serious injury. Labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Current FDA enforcement policy
prohibits the marketing of approved medical devices for unapproved uses. The
Company is subject to routine inspection by the FDA and certain state agencies
for compliance with the QSR and MDR requirements, as well as other applicable
regulations.
The Company is also subject to regulation in each of the foreign countries
in which it sells its products. Many of the regulations applicable to the
Company's products in these counties are similar to those of the FDA. The
Company has obtained the requisite foreign regulatory approvals for sale of
the BVS in many foreign countries, including most of Western Europe, and has
recently commenced the regulatory approval process in 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 14, 1998, which includes ISO-9001 and CE certification. The
Company's BVS is not yet certified for ISO-9001 compliance. The Company has
substantially completed the requirements to obtain ISO-9001 and CE
certification from an accredited registrar for its BVS operations. While there
can be no assurance that the Company will obtain such certification in a
timely manner, if at all, the Company believes that it will be certified in
the near term with no discernable negative effect on its European sales. Until
ISO and CE certification are obtained, the Company's sale of the BVS into the
European Union will be restricted. Many manufacturers of medical devices,
including the Company, have often relied on foreign markets for the initial
commercial introduction of their products. The more stringent foreign
regulatory environment could make it more difficult, costly and time consuming
for the Company to pursue this strategy for new products.
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 United States or foreign
clearances or approvals for new or existing products or product enhancements,
or cost overruns resulting from these regulatory requirements, would have a
material adverse effect on the Company's business, financial condition and
results of operations.
13
EMPLOYEES
As of June 1, 1998, the Company had 173 full-time employees. The Company has
entered into contractual agreements with all of its employees, which include
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 OF REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
David M. Lederman, Ph.D......... 54 Chairman of the Board of Directors,
President, Chief Executive Officer and
Assistant Treasurer
Robert T.V. Kung, Ph.D.......... 54 Senior Vice President--Research and
Development, and Assistant Secretary
Anthony W. Bailey............... 42 Vice President, Engineering and Operations
Eugene D. Rabe.................. 41 Vice President, Sales, Marketing and
Clinical Programs
Edward G. Taylor, Ph.D.......... 46 Vice President, Director Heart Replacement
Device Program
John F. Thero................... 37 Vice President--Finance, Chief Financial
Officer, Treasurer and Assistant Secretary
Dr. David M. 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. 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 cardiac assist and heart
replacement devices, 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. Robert T.V. 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 1995, Dr. Kung has served as the 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 HRD 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. Anthony W. Bailey joined the Company in 1997 to lead the Electronics
System Development of the Implantable Heart Replacement Device Program and is
currently Vice President--Engineering and Operations. From 1987 to 1997, and
prior to joining ABIOMED, 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 a Bachelor's degree in Engineering from the University of Lowell.
Mr. Eugene D. 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. In 1997, he assumed added responsibility for
14
marketing functions and is currently Vice-President Sales, Marketing 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 his
MBA from the University of California.
Dr. Edward G. Taylor joined the Company at the end of 1996 as Vice President
and Director of the Implantable Heart Replacement Device Program. Prior to
joining ABIOMED, Dr. Taylor worked in the United States 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 United
States, 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 received
a Ph.D. degree in Estimation and Control from the Massachusetts Institute of
Technology.
Mr. John F. 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.
ITEM 2. PROPERTIES
The Company leases its headquarters and research and development and
production facilities in two separate buildings in an industrial office park
covering approximately 51,000 square feet. The addresses of these leased
spaces are 33 Cherry Hill Drive and 24 Cherry Hill Drive in Danvers,
Massachusetts. These facilities are located approximately 22 miles north of
Boston. The leases at the primary facilities, representing 23,000 square feet
and 18,000 square feet, respectively, expire in April 2000 and June 2001,
respectively. 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 is negotiating with its landlord to enter into a new or amended
lease which would allow the Company to consolidate its operations into one
building by expanding into approximately 19,000 square feet of additional
space in one of the two buildings occupied by the Company and exiting
approximately 10,000 square feet of space in the second building. The Company
intends to use the additional space primarily to expand its manufacturing and
research and development activities. The Company anticipates beginning to use
this new space within the next twelve months.
ITEM 3. LEGAL PROCEEDINGS
On January 20, 1998, World Heart Corporation and the Ottawa Heart Institute
Research Corporation filed a complaint in the United States District Court for
the District of Delaware. The complaint seeks damages and injunctive relief
for alleged breaches of contract, misappropriation of trade secrets,
conversion of trade secrets and patent infringement by the Company. These
claims and allegations relate to certain technology used in its transcutaneous
energy transmission system that is a component of the HRD under development by
the Company. The Company does not believe that it is infringing any patent or
other intellectual property rights of the plaintiffs and intends to vigorously
defend this position. There can be no assurance that the Company will prevail
in the defense of these claims and allegation.
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, 1998.
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 Stock
Market 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, 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
FISCAL YEAR ENDED MARCH 31, 1998 HIGH LOW
-------------------------------- ------ ------
First Quarter............................................. 16 9 1/2
Second Quarter............................................ 19 13 1/2
Third Quarter............................................. 23 1/2 15 1/2
Fourth Quarter............................................ 17 5/8 12 7/8
NUMBER OF STOCKHOLDERS
As of June 11, 1998, there were approximately 381 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 1998, 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 from
registration under the Securities Act of 1933, as amended, in reliance upon
the exemption from registration, which is set forth in Section 4(2) of the
Securities Act.
16
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
FISCAL YEARS ENDED MARCH 31,
------------------------------------------
1994 1995 1996 1997 1998
------- ------ ------- ------- -------
STATEMENT OF OPERATIONS DATA:
Revenues:
Products......................... $ 4,418 $6,392 $ 8,483 $10,872 $17,261
Contracts........................ 2,027 2,337 3,118 4,151 5,185
------- ------ ------- ------- -------
6,445 8,729 11,601 15,023 22,446
Costs and expenses:
Cost of product revenues......... 2,000 2,881 3,234 4,427 6,502
Research and development(1)...... 2,416 2,464 3,178 3,773 9,091
Selling general and
administrative.................. 4,113 3,831 5,051 6,082 9,054
------- ------ ------- ------- -------
8,529 9,176 11,463 14,282 24,647
------- ------ ------- ------- -------
Income (loss) from operations..... (2,084) (447) 138 741 (2,201)
Interest and other income, net... 537 449 528 535 1,206
------- ------ ------- ------- -------
Income (loss) from continuing
operations....................... $(1,547) $ 2 $ 666 $ 1,276 $ (995)
Loss from discontinued
operations(2).................... (436) (354) (175) (541) (1,513)
------- ------ ------- ------- -------
Net income (loss)................. $(1,983) $ (352) $ 491 $ 735 $(2,508)
======= ====== ======= ======= =======
Income (loss) from continuing
operations per share(3).......... $ (0.24) $ 0.00 $ 0.10 $ 0.18 $ (0.12)
Loss from discontinued operations
per share(3)..................... (0.07) (0.05) (0.03) (0.08) (0.19)
------- ------ ------- ------- -------
Net income (loss) per share(3).... $ (0.31) $(0.05) $ 0.07 $ 0.10 $ (0.31)
======= ====== ======= ======= =======
Weighted average shares
outstanding(3)................... 6,461 6,512 6,995 7,162 8,074
======= ====== ======= ======= =======
MARCH 31,
------------------------------------------
1994 1995 1996 1997 1998
------- ------ ------- ------- -------
BALANCE SHEET DATA:
Working capital................... $ 6,182 $6,341 $12,745 $12,858 $28,693
Long-term investments............. 7,219 6,533 -- -- --
Total assets...................... 15,420 14,631 16,066 18,373 38,615
Long-term debt.................... 3,773 -- -- -- --
Stockholders' equity(4)........... 10,589 13,305 13,945 15,225 33,018
- - --------
(1) Research and development expenses include certain contract costs. See Note
1(d) to Consolidated Financial Statements.
(2) Discontinued operations reflect the results of the Company's dental
subsidiary, including a one-time charge of $967 in the year ended March
31, 1998. The Company has decided to sell, license or dispose of its
dental business. See Note 2 to Consolidated Financial Statements.
(3) Number of shares and per share data were calculated on a diluted basis.
See Note 1(g) to Consolidated Financial Statements.
(4) No cash 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," and the Company's Consolidated
Financial Statements and Notes thereto. The discussion and analysis contains
forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including
those set forth under "Risk Factors" below.
OVERVIEW
The Company is a leader in the research and development of cardiac assist
and heart replacement technology. The Company developed, manufactures and
sells the BVS, a temporary cardiac assist device, and is developing a totally
implantable, battery powered, heart replacement device. The Company's
operating results reflect the dual activities of commercial operations and
investments in the research and development of new technologies.
The BVS is a temporary cardiac assist device designed to provide a patient's
failing heart with full circulatory assistance while allowing the heart to
rest, heal and recover its function. The BVS is the only device that can
provide full circulatory assistance approved by the FDA as a bridge-to-
recovery device for the treatment of all patients with reversible heart
failure. Since fiscal 1994, the first full year of marketing the BVS in the
United States, increasing reorders and new orders of the BVS have made product
revenues the largest contributor to the Company's revenues. The Company has
focused its initial selling efforts of the BVS on the approximately 300
medical centers that perform the most heart surgery procedures, teaching
centers and transplant centers. As of March 31, 1998, the BVS had been
purchased by over 330 medical centers in the United States, many of which are
within the group of medical centers initially targeted. The BVS consists of a
pneumatic drive and control console, single-use external blood pumps and
cannulae. During fiscal 1998, revenues from BVS sales represented all of the
Company's product revenues with no single customer representing more than 5%
of product revenues.
Research and development is a significant portion of the Company's
operations. The Company's research and development efforts are focused on the
development of new products, primarily related to cardiac assist and heart
replacement, and the continued enhancement of the BVS and related
technologies. The Company's research and development expenses have been
primarily attributable to research and development under the Company's
government contracts and grants. Revenues from contract research and
development and total research and development costs have increased in each of
the past three years. The Company's government-sponsored research and
development contracts generally provide for payment on a cost-plus-fixed-fee
basis. The Company accounts for revenue under these contracts and grants as
work is performed, provided that the government has appropriated sufficient
funds for the work. There can be no assurance that the government will not
terminate, 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.
In fiscal 1998, the Company began using its own resources to fund the
further development of the HRD in amounts significantly in excess of the
funding provided under the Company's HRD Contract. The Company estimates that
the development of the HRD, including conducting pre-clinical and clinical
studies and obtaining regulatory approvals, will require substantial funds. In
fiscal 1998, the Company incurred $4.3 million, or $0.53 per share, of
discretionary spending for this project in excess of the amount appropriated
under the Company's HRD Contract. Excluding these expenses, the Company's
income from continuing operations for fiscal 1998 would have been $3.3 million
or $0.41 per share. There can be no assurance that the Company will be able to
develop the HRD, or receive the required regulatory approvals to commence
clinical trials on a timely basis or within budget, if at all.
18
In fiscal 1998, the Company made the decision to shift all of its focus to
the Company's core cardiovascular business and to sell, license or otherwise
dispose of its dental business. The Company's consolidated financial results
contain certain accounts that have been reclassified in each of the periods
presented to reflect this decision by the Company. The operating losses of the
Company's dental business are presented on a net basis in the consolidated
financial statements as discontinued operations and, for the year ended March
31, 1998, include a one-time charge of $967,000 representing the estimated
loss on the disposal of the business, its assets and extinguishment of
liabilities.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of operations
data for the periods indicated as a percentage of total revenues:
YEAR ENDED MARCH 31,
----------------------
1996 1997 1998
------ ------ ------
Revenues:
Products.......................................... 73.1% 72.4% 76.9%
Contracts......................................... 26.9 27.6 23.1
------ ------ ------
Total revenues.................................. 100.0 100.0 100.0
------ ------ ------
Costs and expenses:
Cost of product revenues.......................... 27.9 29.5 29.0
Research and development.......................... 27.4 25.1 40.5
Selling, general and administrative............... 43.5 40.5 40.3
------ ------ ------
Total costs and expenses........................ 98.8 95.1 109.8
------ ------ ------
Income (loss) from operations....................... 1.2 4.9 (9.8)
Interest and other income, net...................... 4.5 3.6 5.4
------ ------ ------
Income (loss) from continuing operations............ 5.7% 8.5% (4.4)%
Loss from discontinued operations................... (1.5) (3.6) (6.8)
------ ------ ------
Net income (loss)................................... 4.2% 4.9% (11.2)%
====== ====== ======
Revenues. Total revenues, excluding interest income, increased to $22.4
million in fiscal 1998 from $15.0 million and $11.6 million in fiscal 1997 and
1996, respectively. This represents increases of 49% and 29% for fiscal 1998
and 1997 respectively. These increases were attributable to an increase in
both product and contract revenues.
Product revenues increased to $17.3 million in fiscal 1998 from $10.9
million and $8.5 million in fiscal 1997 and 1996, respectively. The 59% and
28% increases in product revenue in fiscal 1998 and 1997, respectively, were
primarily attributable to growing United States unit sales of BVS single-use
products, including increased blood pump reorders, growing United States unit
sales of BVS consoles and to increased average selling prices of the BVS
single-use products and BVS consoles. The majority of the Company's product
revenue in the last three years has been to United States customers.
International revenues represented 6%, 7% and 9% of total product revenues in
fiscal 1998, 1997 and 1996, respectively.
Contract revenues increased to $5.2 million in fiscal 1998 from $4.2 million
and $3.1 million in fiscal 1997 and 1996, respectively. The 25% and 33%
increases in contract revenue in fiscal 1998 and 1997 primarily reflected
increased activity under the Company's HRD Contract. The Company accounts for
revenue under its government contracts and grants as work is performed,
provided that the government has appropriated sufficient funds for the work.
Through March 31, 1998, the government had appropriated $4.9 million of the
$8.5 million Phase II HRD Contract amount. During fiscal 1998, the Company's
expenditures under the HRD Contract exceeded the appropriated amount. As a
result, in fiscal 1998, the Company recognized as revenue all of the
19
remaining $3.2 million balance of the $4.9 million appropriated under the HRD
Contract and used $4.3 million of its own resources to fund HRD development.
The original government appropriation schedule calls for $1.8 million to be
appropriated for the HRD Contract in both October 1998 and 1999. This schedule
is subject to change at the discretion of the government.
The Company plans to further increase its expenditures in connection with
the development of the HRD, and it will not recognize any further contract
revenues under the HRD Contract until such time as additional funds are
appropriated under the HRD Contract, if ever. The Company believes that
certain of its costs incurred prior to further appropriations may be
reimbursable under the HRD Contract, if and when additional appropriation
under the HRD Contract is made. Due to the Company's accelerated HRD
development activity and the timing of government appropriations, the Company
believes that it will experience significant quarterly fluctuations in
contract revenues. The Company also believes that its total expenses to
complete the development of the HRD will significantly exceed the remaining
$3.6 million HRD Contract amount.
As of March 31, 1998, the Company's total backlog of research and
development contracts and grants was $7.5 million including $3.6 million under
the HRD Contract and $2.3 million for Heart Booster research and development.
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.
Cost of Product Revenues. Cost of product revenues represented approximately
38%, 41% and 38% of product revenues for fiscal 1998, 1997 and 1996,
respectively. The changes in gross margins as a percent of product revenues
are primarily attributable to the mix of product sold with a higher proportion
of revenues derived from BVS blood pumps in fiscal 1998 and 1996 compared to
fiscal 1997. The higher fiscal 1997 cost of product revenues as a percentage
of product revenues also included costs related to the Company's voluntary
recall in fiscal 1997 of certain production lots of disposable BVS blood
pumps.
Research and Development Expenses. Research and development expenses for
fiscal 1998 increased to $9.1 million compared to $3.8 million and $3.2
million in fiscal 1997 and 1996, respectively, representing increases of 141%
and 19% for 1998 and 1997, respectively. These increases primarily reflected a
higher level of development activity related to the HRD. The Company
anticipates that its research and development expenses will continue to
increase as a result of its plans to further increase its research and
development efforts to further develop and test the HRD and enhance the BVS.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 1998 increased to $9.1 million compared to
$6.1 million and $5.1 million in fiscal 1997 and 1996, respectively,
representing increases of approximately 49% and 20% for 1998 and 1997,
respectively. The increases primarily reflect increased sales expenses,
particularly increased personnel and sales commissions, related to the
increase in product revenues, as well as additional administrative personnel
and legal expenses.
Interest and Other Income. Interest and other income consist primarily of
interest earned on the Company's short-term investments. Interest income
increased to $1.2 million in fiscal 1998 compared to $0.5 million in both
fiscal 1997 and 1996, representing an increase of 125%. This increase
primarily reflects the Company's higher average investment balances.
Discontinued Operations. Discontinued operations consist of the net
revenues, costs and expenses of the Company's dental subsidiary, ABIODENT. In
fiscal 1998, the Company made the decision to shift all of its focus to the
Company's core cardiovascular business and to sell, license or otherwise
dispose of its dental business. The $1.5 million loss from discontinued
operations for the year ended March 31, 1998 represents a loss from dental
operation of $46,000, or $0.07 per share, and an estimated loss on the
disposal of the business, its assets and extinguishment of liabilities of
$967,000, or $0.12 per share, which includes an estimated operating loss from
dental activities of $370,000 to be incurred during the first six months of
fiscal 1999.
20
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had $26.4 million in cash and short-term
marketable securities. The Company also has a $3,000,000 line of credit from a
bank that expires in September 1998, and which was entirely available at March
31, 1998.
During fiscal 1998, operating activities used $687,000 of cash. Net cash
used by operating activities in fiscal 1998 reflected a net loss of $2.5
million, including depreciation and amortization expense of $877,000, an
increase in accounts receivable of approximately $805,000, an increase in
inventory of approximately $859,000 and an increase in prepaid expenses and
other current assets of approximately $331,000. These uses of cash were
partially offset by the establishment of a reserve for net assets and
liabilities of discontinued operations of approximately $1.2 million, an
increase in accounts payable of approximately $768,000 and an increase in
accrued expenses of approximately $1.0 million. The increase in accounts
receivable is attributable to increased revenues and extended collection
periods for certain accounts. The increase in inventory reflects increased
production levels. The increase in accounts payable is primarily attributed to
increased purchases and timing of purchases of direct material and capital
equipment for manufacturing, research and development. The increase in accrued
expenses reflects timing of payments and increased operating activity
throughout the Company, including increased size of payroll and payroll
related costs.
During fiscal 1998, investing activities used $18.5 million of cash. Net
cash used by investing activities included $16.0 million of purchases of
short-term investments and $2.5 million of purchases and improvements of
property and equipment. 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 and the expansion of its
manufacturing facility. The Company is currently negotiating with its landlord
to enter into a new or amended lease which would allow the Company to
consolidate its operations into one building by expanding into approximately
19,000 square feet of additional space in one of the two buildings occupied by
the Company and exiting approximately 10,000 square feet of space in the
second building. The Company intends to use the additional space primarily to
expand its manufacturing and research and development activities. The Company
anticipates beginning to use this new space within the next twelve months. The
Company has not yet finalized the details of its plans for this space and
estimates that within the next twelve months it may incur costs of between two
and three million dollars to improve the new and existing spaces.
During fiscal 1998, financing activities provided $20.3 million of cash. Net
cash provided by financing activities included $16.0 million in net proceeds
from the private placement of Common Stock to Genzyme Corporation and certain
of the Company's directors in July 1997, $4.1 million in net proceeds from the
sale of the Company's Common Stock in November 1997 and $230,000 in proceeds
from the exercise of employee stock options.
The Company believes that its revenues and existing resources will be
sufficient to fund its planned operations, including the planned increases in
its internally funded HRD and new BVS development and product extension
efforts, for at least the next twelve months. However, the Company estimates
that it will require significant additional funds in order to complete the
development and achieve regulatory approvals of the HRD and other products
under development over the next several years. 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.
21
Dependence on BVS Product Line; Early Stage of BVS Market Development
In the fiscal year ended March 31, 1998, sales of the BVS product line,
including related services, represented all of the Company's product revenues.
The Company believes that its dependence on the BVS product line is likely to
continue for at least the next several years, unless and until the Company
successfully develops, obtains regulatory approvals for and sells new
products.
The Company has initially focused its marketing efforts on larger medical
centers and hospitals. The 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 to
increase 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. Advances in medical technology, biotechnology
and pharmaceuticals may reduce the size of the potential markets for the
Company's products or render those products obsolete. Failure of the Company
to expand the market for and use of the BVS would have a material adverse
effect on its business, financial condition and results of operations.
Uncertainty of Product Development and Clinical Trials
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 HRD. The
successful development of these products presents enormous challenges. The
Company must demonstrate that the HRD, which is being designed to assume the
full pumping function of both the left and right ventricles of the heart, can
operate effectively and reliably within a patient over an extended period. For
many years, the Company and others have been attempting to develop products
that meet these criteria and have not yet been successful. Before obtaining
regulatory approvals for the commercial sale of any of its products under
development, the Company must demonstrate through pre-clinical studies and
clinical trials that the product is safe and effective. Initial pre-clinical
testing of the HRD and other products being developed by the Company will be
conducted in simulated environments and animal models to demonstrate safety
and effectiveness over an extended period of time before they are permitted to
be clinically tested in humans. There can be no assurance that the Company
will be able to successfully complete pre-clinical testing of the HRD or other
products being developed by the Company and receive FDA approval to initiate
clinical trials of such products in a timely manner, if at all. Moreover, pre-
clinical trials may not be predictive of results that will be obtained in
clinical trials. Any significant delays in, or termination of, pre-clinical
trials of the Company's products under development would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Clinical trials for the Company's cardiac assist and heart replacement
products will be conducted with patients who are critically ill. During the
course of treatment, these patients may die or suffer other adverse medical
effects for reasons that may not be related to the product being tested but
which can nevertheless affect clinical trial results. A number of companies in
the medical device industry have suffered significant setbacks in advanced
clinical trials, even after promising results in earlier trials. Clinical
trials of the Company's HRD and other products under development may be
delayed or terminated as a result of many factors, and there can be no
assurance that such delays or terminations will not occur. One such factor is
the rate of enrollment of patients, which generally varies throughout the
course of a clinical trial and which depends on the size of the potential
patient population, the number of clinical trial sites, the proximity of the
patients to clinical trial sites, the eligibility criteria for the trial and
the existence of competitive clinical trials. The Company cannot control the
rate at which patients present themselves for enrollment, and there can be no
assurance that the rate of patient enrollment will be consistent with the
Company's expectations or be sufficient to enable clinical trials of the
Company's products under development to be completed in a timely manner, if at
all. Any significant delays in, or termination of, clinical trials of the
Company's products under development would have a material adverse effect on
the Company's business, financial condition and results of operations.
22
In addition, the Company's product development will be subject to numerous
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 design, development and
commercialization of these new products. Given the uncertainties inherent with
product development and introduction, there can be no assurance that any of
the Company's products under development will demonstrate sufficient safety
and efficacy to obtain the requisite regulatory approvals, on a timely basis
and within budget, if at all, or that any of these products will be
commercially successful if such approvals are obtained.
Anticipated Future Losses
The Company is using its own resources to fund the further development of
the HRD in amounts significantly in excess of the funding provided under the
Company's development contract for the HRD with the NHLBI ("HRD Contract").
The Company estimates that the development of the HRD, including conducting
pre-clinical and clinical studies and obtaining regulatory approvals, will
require substantial funds. Its spending under the HRD Contract in the fiscal
year ended March 31, 1998 exceeded by approximately $4.3 million the amount
which the government has appropriated for that contract, and the original
government appropriation schedule calls for no further appropriations for the
HRD Contract until October 1998. There can be no assurance that the government
will appropriate any additional amounts under the HRD Contract or any of the
Company's other government contracts on a timely basis, if at all. Even if and
when additional amounts are appropriated under the HRD Contract, the Company
believes that its total expenses to complete the development of the HRD will
significantly exceed the remaining HRD Contract amount. As a result, the
Company believes that it is likely that the Company will incur losses from
continuing operations. 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, and to successfully
manufacture and market these new products and enhancements, as well as 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.
Complex Manufacturing; High-Quality Requirements
The nature of the Company's products requires high-quality manufacturing.
The Company's manufacturing and quality testing processes and procedures are
highly dependent on the diligence and experience of the Company's personnel.
To the extent that the Company's manufacturing volumes expand or the Company
begins the manufacture of new products, this dependence on personnel will
likely increase. In addition, the manufacture of the blood contacting surfaces
of the Company's products requires a high degree of precision. These surfaces
are manufactured from polyurethane-based materials. The quality and
composition of polyurethane-based products can vary significantly based on
numerous factors including humidity, temperature, material content and air
flow during the manufacturing process. The Company's products also incorporate
plastic components for non-blood contacting surfaces. The Company relies on
third-party vendors to provide these components to the Company's
specifications. The Company is not able to fully inspect the quality of all
vendor-supplied components and, therefore, relies on its vendors with respect
to the quality of these components. Once the plastic-based components of the
Company's products have been assembled, accessibility for inspection is
limited. If a defect is detected in as few as one of the Company's products,
or in one component of a Company product, it can result in the recall or
restriction on sale of products. Once assembled, in most cases, the Company's
blood contacting components cannot be reworked for human use. The
manufacturing lead times for parts and assemblies, particularly the
polyurethane-based components, can take many weeks from the date that all
materials and components are received by the Company. In addition, vendor lead
times for materials and components of the Company's products vary
significantly, with lead times for certain materials and components exceeding
six months.
The Company is planning to expand its manufacturing facility for the BVS
during the next twelve months. There can be no assurance that the products
manufactured in the expanded facility will be manufactured at the same cost
and quality as the BVS is currently being manufactured. In addition, to the
extent that the Company's
23
products under development have been manufactured, they have been manufactured
as prototypes with, at most, pilot-scale production. The Company's products
under development are likely to involve additional manufacturing complexities
and high quality requirements. There can be no assurance that the Company will
be able to increase production of the BVS or manufacture future products, if
developed and approved, in commercial quantities on a consistent and timely
basis, with acceptable cost and quality. The inability to manufacture current
and future products in sufficient quantities in a timely manner, and with
acceptable cost and quality, would have a material adverse effect on the
Company's business, financial condition and results of operations.
Risk of Market Withdrawal or Product Recall
Complex medical devices, such as the BVS and other of the Company's products
under development, can experience performance problems that require review and
possible corrective action by the manufacturer. Similar to many other medical
device manufacturers, the Company periodically receives reports from users of
its products relating to performance difficulties that they have encountered.
The Company expects that it will continue to receive customer reports
regarding the performance and use of the BVS. There can be no assurance that
component failures, manufacturing errors or design defects that could result
in an unsafe condition or injury to the patient will not occur. Certain of
these failures or defects have been deemed sufficiently serious by the Company
to result in recalls of products associated with certain manufacturing lots or
containing certain components. Any product problems could result in market
withdrawals or recalls of products, voluntarily or required, which could have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, there can be no assurance that a product
recall will result in the recovery of all defective products or prevent
customers from using these products. The use of a defective product could
result in injury to a patient and significant liability to the Company, which
could have a material adverse effect on its business, financial condition and
results of operations.
Fluctuations and Unpredictability of Operating Results
The Company's annual and quarterly operating results have fluctuated and the
Company expects these fluctuations to continue. 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 timing of regulatory actions, the potential need to recall or
rework products from time to time, timing of government appropriations related
to the Company's research contracts and grants, the timing of or changes in
third-party 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 availability of components, 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
product enhancements by the Company and its competitors. Customers may also
cancel or reschedule shipments, and production difficulties could delay
shipments. The price for the BVS console is significantly higher than for the
single-use blood pumps. As a result, variations in the number and timing of
consoles sold have a disproportionate effect on the Company's revenues and
results of operations. The Company also believes that BVS sales may be
somewhat seasonal, with reduced sales in the summer months, reflecting
hospital personnel and physician vacation schedules. In fiscal 1999, the
Company anticipates potentially significant annual and quarterly fluctuations
in contract revenues and research and development costs due to the timing of
additional government appropriations under the HRD Contract and to increased
levels of Company spending.
Markets for Products under Development Unproven
Most of the Company's products under development, including the HRD, are
targeting new and unproven markets. There can be no assurance that the HRD or
other products under development by the Company will
24
gain any degree of market acceptance among physicians, medical centers and
third party payers, including managed care organizations, even if necessary
regulatory approvals and reimbursement are obtained. 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.
Physicians, patients and society as a whole may have ethical concerns or be
reluctant to accept medical devices designed to replace the heart. The timing
and amount of reimbursement, if any, by third-party payers for the use of
these products, if developed, will also have a significant impact on the
market for these products. Other companies may also introduce products or
technologies that 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 successfully any of its products under
development, if and when these products are developed. Failure to do so would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Dependence on Key Personnel; Risks Associated with Growing Number of
Employees
The Company is highly dependent on the principal members of its scientific,
sales, and management staff, the loss of whose services could have a material
adverse effect on the Company's business, financial condition and results of
operations. Competition among medical device companies for highly skilled
scientific, sales and management personnel is intense. 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, financial condition and results of
operations.
The Company has recently experienced a significant increase in the number of
its full-time employees, from 79 at April 1, 1996 to 124 at April 1, 1997 to
173 at June 1, 1998. Moreover, the Company intends to continue to add a
significant additional number of employees to support its development and
expanding manufacturing, marketing and sales efforts. The expansion of the
Company's personnel has placed additional demands upon, and may significantly
strain the Company's management, financial systems and other resources. There
can be no assurance that the Company will be able to successfully manage its
growing number of employees. Failure to do so would have a material adverse
effect on the Company's business, financial condition and results of
operations.
Future Capital Needs and Uncertainty of Additional Funding
The Company is working on the research and development of several long-term
projects and is placing increased emphasis on development of the HRD and other
technologies, which will result in significantly increased internally funded
research and development expenditures. These costs include costs of pre-
clinical trials and regulatory approvals. The Company estimates that the cost
of developing the HRD and other products will be significant. These costs may
include costs related to pre-clinical and clinical trials and regulatory
approvals. The Company estimates that it will require significant additional
funds in order to complete the development and achieve regulatory approvals of
the HRD and other products under development. 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 HRD and its
other products. The Company plans to fund this effort through a combination of
the HRD Contract, existing resources, sales of additional securities and cash
flow from sales of its existing products. There can be no assurance that the
Company will be able to obtain sufficient funds on favorable terms, if at all,
to complete the development of the HRD and other products. Moreover, the
Company may require additional funds to commence the manufacture and marketing
of the HRD or any of the Company's other products under development in
commercial quantities, if and when approved or cleared by the regulatory
authorities. 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.
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
25
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, biotechnology and pharmaceuticals may reduce
the size of the potential markets for the Company's products or render those
products obsolete.
The BVS is the only device that can provide full circulatory assistance
approved by the FDA as a bridge-to-recovery device for the treatment of all
patients with reversible heart failure. In May 1998, Thoratec Laboratories
Corporation received FDA approval to market their device for postcardiotomy
recovery of the natural heart, which represents the primary patient population
historically addressed by the BVS. The Company is not aware of any other
Company that has applied for FDA approval of a device which is competitive
with the BVS. Approval by the FDA of products that compete directly with the
BVS increases competitive pricing and other pressures and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is aware of other heart replacement device development efforts
in the United States, Canada, Europe and Japan. A joint effort between
Pennsylvania State University, 3M Corporation, Inc. and Minnetronix, Inc. is
developing a heart replacement device with significant NHLBI support. There
are a number of companies, including Thermo Cardiosystems, Inc. and Novacor, a
division of Baxter International, Inc., which are developing permanent cardiac
assist products, including implantable left ventricular assist devices
("LVADs") and miniaturized rotary ventricular assist devices, that may address
markets that overlap with those targeted by the Company's HRD.
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. The
Company believes that important competitive factors with respect to the
development and commercialization of its products include the relative speed
with which it can develop products, establish clinical utility, complete
clinical testing and regulatory approval processes, obtain reimbursement and
supply commercial quantities of the product to the market. There can be no
assurance that the Company will be able to compete successfully or that
competition will not have a material adverse effect on the Company's business,
financial condition and results of operations.
Government Regulation
Clinical testing, manufacture and sale of the Company's products and
products under development, including the BVS and the HRD, are or will be
subject to regulation by the FDA and corresponding state and foreign
regulatory agencies. Noncompliance with applicable requirements can result in,
among other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant pre-market clearance or pre-market approval for devices, withdrawal
of marketing approvals and criminal prosecution. The FDA also has the
authority to request repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.
Any devices, including the BVS, which are manufactured or distributed by the
Company pursuant to FDA clearances or approvals, are subject to pervasive and
continuing regulation by the FDA and certain state agencies. Manufacturers of
medical devices for marketing in the United States are required to adhere to
the FDA's Quality System Regulation and must also comply with Medical Devices
Reporting requirements that a firm report to the FDA any incident in which its
product may have caused or contributed to a death or serious injury, or in
which its product malfunctioned and, if the malfunction were to recur, it
would be likely to cause or contribute to a death or serious injury. Labeling
and promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Current FDA enforcement policy
prohibits the marketing of
26
approved medical devices for unapproved uses. The Company is subject to
routine inspection by the FDA and certain state agencies for compliance with
the Quality System Regulation and Medical Device Reporting requirements, as
well as other applicable regulations.
The Company is also subject to regulation in each of the foreign countries
in which it sells its products. Many of the regulations applicable to the
Company's products in these counties are similar to those of the FDA. 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 14, 1998, which includes ISO-9001 and CE certification. The
Company's BVS currently is not yet certified for ISO-9001 compliance. The
Company has substantially completed the requirements to obtain ISO-9001 and CE
certification from an accredited registrar for its BVS operations. While there
can be no assurance that the Company will obtain such certification in a
timely manner, if at all, the Company believes that it will be certified in
the near term with no discernable negative effect on its European sales. Until
ISO and CE certification are obtained, the Company's sale of the BVS into the
European Union will be restricted. Many manufacturers of medical devices,
including the Company, have often relied on foreign markets for the initial
commercial introduction of their products. The more stringent foreign
regulatory environment could make it more difficult, costly and time consuming
for the Company to pursue this strategy for new products.
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 United States or foreign
clearances or approvals for new or existing products or product enhancements,
or cost overruns resulting from these regulatory requirements, would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Reliance on Government Contracts
The Company generally relies on external funding for its basic research and
development, primarily through government research contracts and grants. Such
funding has been obtained for the initial development of most 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 HRD Contract, and in September 1995 the Company was awarded a five-year
$4.3 million contract from the NHLBI for the development of the Company's
Heart Booster. As of March 31, 1998, the Company's total backlog of government
contracts and grants was $7.5 million. Such contracts and grants are not
expected to be sufficient to commercialize the underlying products, and for
certain products, including the HRD, the cost of product development in excess
of the contract value is expected to be significant. The Company's strategy is
to 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. 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, financial condition and results of operations.
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. From time to time, 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 certain components and establishing additional or replacement suppliers
for such components cannot be accomplished quickly and may require FDA
27
approval. 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. 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 or would be able to obtain requisite regulatory approvals in
a timely manner, if at all. 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, financial condition and results of operations.
Dependence on Third-Party Reimbursement
The Company's BVS product is, and most of its products under development are
intended to be, sold to medical institutions. Medical institutions and their
physicians typically seek reimbursement for the use of these products from
third-party payers, including Medicare, Medicaid, private health insurers and
managed care organizations. As a result, market acceptance of the Company's
current and proposed products may depend in large part on the extent to which
reimbursement is available to medical institutions and their physicians for
use of the Company's products.
The level of reimbursement provided by United States and foreign third-party
payers varies according to a number of factors, including the medical
procedure category, payer, location, outcome and cost. In the United States,
many private health care insurance carriers follow the recommendations of
HCFA, which establishes guidelines for the reimbursement of health care
providers treating Medicare and Medicaid patients. Internationally, medical
reimbursement systems vary significantly. In certain countries, medical center
budgets are fixed regardless of levels of patient treatment. In other
countries, such as Japan, reimbursement from government or third party payers
must be applied for and approved. As of the date of this Annual Report, under
HCFA guidelines, Medicare reimburses medical institutions for Medicare
patients based on the category of surgical procedures in which the BVS is used
and incrementally reimburses physicians for the use of the BVS. Medicare does
not, however, currently reimburse medical institutions for the incremental
cost of using the BVS above the amount allowed for the reimbursement category
of the surgical procedure. Certain private health insurers and managed care
providers provide incremental reimbursement to both the medical institutions
and their physicians. The Company is currently petitioning HCFA to assign a
higher paying reimbursement category whenever the BVS is used. In October
1995, HCFA established a special "ICD-9" code for the BVS in an effort to more
clearly track and evaluate hospital and physician costs associated
specifically with the BVS compared to current reimbursement levels, so that
HCFA can determine the appropriate category and level of reimbursement. There
can be no assurance that HCFA will reassign the BVS to a higher paying
category in a timely manner, if at all.
No reimbursement levels have been established for the Company's products
under development, including the HRD. Prior to approving coverage for new
medical devices, most third-party payers require evidence that the product has
received FDA approval or clearance for marketing, is safe and effective and
not experimental or investigational, and is medically necessary and
appropriate for the specific patient for whom the product is being used.
Increasing numbers of third-party payers require evidence that the procedures
in which the products are used, as well as the products themselves are cost-
effective. There can be no assurance that the Company's products under
development will meet these criteria, that third-party payers will reimburse
physicians and medical institutions for the use of the products or that the
level of reimbursement will be sufficient to support the widespread use of the
products. Furthermore, there can be no assurance that third-party payers will
continue to provide reimbursement for the use of BVS or that such payers will
not reduce the current level of reimbursement for the product. Failure to
achieve adequate reimbursement for its current or proposed products would have
a material adverse effect on the Company's business, financial condition and
results of operations.
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
28
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, financial condition and results of
operations. The Company currently maintains product liability insurance,
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 HRD intended for permanent life support. The HRD will have a finite
life and could cause unintended complications to other organs. The eventual
failure of the HRD could give rise to product liability claims, regardless of
whether the HRD has extended or improved the quality of the patient's life
beyond that expected without the use of the HRD. As a result of the additional
product liability risks that will be associated with the HRD and other
products under development by the Company, there can be no 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 sufficient 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, financial condition and
results of operations.
Dependence on Patents and Proprietary Rights
The Company's business depends significantly upon its proprietary
technology. The Company relies on a combination of trade secret laws, patents,
copyrights, trademarks and 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 others
will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets or disclose such technology or that the Company can meaningfully
protect its trade secrets.
The Company has been issued or allowed 25 patents and has pending five
patent applications in the United States. The Company has obtained or applied
for corresponding patents for certain of these patents and patent applications
in a limited number of foreign countries. These patents relate to the BVS and
certain of its products under development including the HRD. The Company's
United States patents expire at various times from 2003 to 2018. There can be
no assurance that the Company's pending patent applications or any future
applications will be approved, that any patents will provide the Company with
competitive advantages or will not be challenged by third parties, or that the
patents of others will not render the Company's patents obsolete or otherwise
have an adverse effect on the Company's ability to conduct business. Because
foreign patents may afford less protection under foreign law than is available
under United States patent law, there can be no assurance that any such
patents issued to the Company will adequately protect the Company's
proprietary information. Others may have filed and may file patent
applications in the future that are similar or identical to those of the
Company. To determine the priority of inventions, the Company may have to
participate in interference proceedings declared by the United States Patent
and Trademark Office or opposition proceedings before a foreign patent office
that could result in substantial cost to the Company. No assurance can be
given that any such interfering patent or patent application will not have
priority over patent applications filed on behalf of the Company or that the
Company will prevail in any opposition proceeding.
The medical device industry is characterized by a large number of patents
and by frequent and substantial intellectual property litigation. There can be
no assurance that the Company's products and technologies do not infringe or
violate any patents or proprietary rights of third parties. The Company has in
the past and may in the
29
future be notified that it may be infringing or violating proprietary rights
possessed by others. Any intellectual property litigation would be costly and
could divert the efforts and attention of the Company's management and
technical personnel, which could have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that infringement or other claims will not be asserted in the
future or such assertions, if proven to be true, will not prevent the Company
from selling its products or materially and adversely affect the Company's
business, financial condition and results of operations. If any such claims
are asserted against the Company's proprietary rights, it may seek to enter
into a royalty or licensing arrangement. There can be no assurance, however,
that a license will be available on reasonable terms, or at all. The Company
could decide, in the alternative, to resort to litigation to challenge such
claims or to design around the patented or otherwise proprietary technology.
Such actions could be costly and would divert the efforts and attention of the
Company's management and technical personnel, which would materially and
adversely affect the Company's business, financial condition and results of
operations.
On January 20, 1998, World Heart Corporation and the Ottawa Heart Institute
Research Corporation filed a complaint in the United States District Court for
the District of Delaware. The complaint seeks damages and injunctive relief
for alleged breaches of contract, misappropriation of trade secrets,
conversion of trade secrets and patent infringement by the Company. These
claims and allegations relate to certain technology used in its transcutaneous
energy transmission system that is a component of the HRD under development by
the Company. The Company does not believe that it is infringing any patent or
other intellectual property rights of the plaintiffs and intends to vigorously
defend this position. There can be no assurance that the Company will prevail
in the defense of these claims and allegation or in the defense of any future
infringement or other claim, if made. If infringement or violation of the
patent or other proprietary rights were determined to exist, the Company would
either be required to use or develop alternative technology for its
transcutaneous energy transmission system or to seek a license of the
technology. There can be no assurance that the Company could obtain a license
of this technology on a timely basis or on reasonable terms, if at all. In
addition, there can be no assurance that the Company could develop or license
alternative technology on a timely basis, if at all, to allow for the safe and
effective transmission of energy into the body without wires penetrating the
skin. As a result, a determination of infringement or violation could have a
material adverse effect on the Company's development of the HRD and on its
business, financial condition and results of operations. Any patent or
intellectual property dispute or litigation could result in product
development delays, would be costly and could divert the efforts and attention
of the Company's management and technical personnel, and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Year 2000 Compliance
As the year 2000 approaches, it is generally anticipated that computers,
software and other equipment utilizing microprocessors may be unable to
function properly. The Company has evaluated this potential issue with respect
to its products, its financial and management information systems and it
suppliers. With respect to the Company's products, the software controlling
the BVS drive console includes internal counters, but the BVS operation is not
related in any way to a specific calendar date. Accordingly, the Company
believes that the BVS will not need any repair or modification with regard to
the Year 2000 issue. With respect to the Company's financial and management
information systems, the Company must upgrade the application software to be
Year 2000 compliant. The supplier of the software has developed a Year 2000
compliant version of the software and the Company anticipates upgrading its
systems to this version prior to the end of fiscal 1999. Because on April 1,
1999 the Company begins its fiscal Year 2000, the Company anticipates that if
it does not upgrade its financial and management information systems in Fiscal
1999, it may encounter Year 2000 compliance issues as early as April 1999.
With respect to its suppliers, the Company is beginning to communicate with
key suppliers to assess their vulnerability to the Year 2000 issue and intends
to increase inventory levels of certain key components to help mitigate the
risk of certain suppliers not being able to supply materials on a timely basis
due to systems issues. Any interruption to the Company's ability to operate
and manufacture product due to the effect of the Year 2000 issue on the
Company's systems or on the systems of its suppliers could have a material
adverse effect on the Company's business, financial condition and results of
operations.
30
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, 1998.
31
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
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
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) Financial Statements
PAGE
----
Report of Independent Public Accountants.............................. F-1
Consolidated Balance Sheets as of March 31, 1997 and 1998............. F-2
Consolidated Statements of Operations for the Fiscal Years Ended March
31, 1996, 1997 and 1998.............................................. F-3
Consolidated Statements of Stockholders' Investment for the Fiscal
Years Ended March 31, 1996, 1997 and 1998............................ F-4
Consolidated Statements of Cash Flows for the Fiscal Years Ended March
31, 1996, 1997 and 1998.............................................. F-5
Notes to Consolidated Financial Statements............................ F-6
(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.
32
(A)(3) Exhibits
(3) Articles of Incorporation and By-Laws.
(a) Restated Certificate of Incorporation--filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-3 (Registration No. 333-
36657) (the "1997 Registration Statement").*
(b) Restated By-Laws--filed as Exhibit 3.02 the September 1996 10-Q.*
(c) Certificate of Designations of Series A Junior Participating
Preferred Stock--filed as Exhibit 3.3 to the 1997 Registration
Statement.*
(4) Instruments defining the rights of Security Holders, including
Ind entures.
(a) Specimen Certificate of Common Stock--filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (Registration No. 33-
14861) (the "1987 Registration Statement").*
(b) Description of Capital Stock (contained in the Restated Certificate
of Incorporation filed as Exhibit 3.1 to the 1997 Registration
Statement and in the Certificate of Designations of Series A Junior
Participating Preferred Stock filed as Exhibit 3.3 to the 1997
Registration Statement).*
(c) Rights Agreement between the Company and BankBoston, N.A., as
Rights Agent dated as of August 13, 1997 (including Form of Rights
Certificate attached thereto as Exhibit A)--filed as Exhibit 4 to
the Company's Current Report on Form 8-K, dated August 13, 1997.*
(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 on 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, as amended--filed as Exhibit
10.2 to the Company's Form 10-Q for the fiscal quarter ended
September 30, 1997 (the "September 1997 10-Q"). **
(g) 1988 Employee Stock Purchase Plan, as amended--filed as Exhibit
10.1 to the Company's September 1997 10-Q.**
(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 30, 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.
33
(21) Subsidiaries of the Registrant--filed as Exhibit 22 to the 1994 Form
10-K.*
(23) Consent of Arthur Andersen LLP.
(27) Financial Data Schedules.
(a) Financial Data Schedule as of March 31, 1998 for the fiscal year
ended March 31, 1998.
(b) Financial Data Schedule as of March 31, 1997 for the fiscal year
ended March 31, 1997.
(c) Financial Data Schedule as of March 31, 1996 for the fiscal year
ended March 31, 1996.
(B) Reports on Form 8-K
The Company did not file any current reports on Form 8-K during the quarter
ended March 31, 1998.
- - --------
* 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.
34
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.
/s/ David M. Lederman
Dated: June 29, 1998 By: _________________________________
DAVID M. LEDERMAN, CHAIRMANOF THE
BOARD, PRESIDENTPRINCIPAL
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 June 29, 1998
- - ------------------------------------- Board, Chief
DAVID M. LEDERMAN Executive Officer
President and
Director
/s/ John F. Thero Vice President June 29, 1998
- - ------------------------------------- Finance Chief
JOHN F. THERO Financial Officer
Principal
Accounting Officer
/s/ W. Gerald Austen Director June 29, 1998
- - -------------------------------------
W. GERALD AUSTEN
/s/ Paul Fireman Director June 29, 1998
- - -------------------------------------
PAUL FIREMAN
/s/ John F. O'Brien Director June 29, 1998
- - -------------------------------------
JOHN F. O'BRIEN
/s/ Desmond O'Connell Director June 29, 1998
- - -------------------------------------
DESMOND O'CONNELL
/s/ Henri A. Termeer Director June 29, 1998
- - -------------------------------------
HENRI A. TERMEER
35
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, 1997 and 1998, and the
related consolidated statements of operations, stockholders' investment and cash
flows for each of the three years in the period ended March 31, 1998. 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, 1997 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended March 31, 1998, in
conformity with generally accepted accounting principles.
Boston, Massachusetts
April 27, 1998
F-1
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31,
1997 1998
--------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 1,579,972 $ 2,683,151
Short-term marketable securities (Note 1) 7,744,664 23,714,641
Accounts receivable, net of allowance for doubtful accounts
of approximately $194,000 and $204,000 at March 31,
1997 and 1998, respectively 4,551,035 5,356,348
Inventories (Note 1) 1,468,738 2,327,442
Prepaid expenses and other current assets 173,172 208,387
------------ ------------
Total current assets 15,517,581 34,289,969
------------ ------------
ASSETS OF DISCONTINUED OPERATIONS, NET (Note 2) 488,468 -
PROPERTY AND EQUIPMENT, AT COST (Note 1):
Machinery and equipment 2,522,783 4,316,852
Furniture and fixtures 229,873 533,460
Leasehold improvements 1,118,677 1,561,189
------------ ------------
3,871,333 6,411,501
Less--Accumulated depreciation and amortization 1,989,657 2,724,442
------------ -------------
1,881,676 3,687,059
------------ -------------
OTHER ASSETS, NET (Note 8) 485,000 638,176
------------ ------------
$ 18,372,725 $ 38,615,204
============ ============
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
MARCH 31,
1997 1998
----------------------------
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 1,289,024 $ 2,057,473
Accrued expenses (Notes 9 and 10) 1,858,638 2,872,288
------------ ------------
Total current liabilities 3,147,662 4,929,761
LIABILITIES OF DISCONTINUED OPERATIONS, NET (Note 2) - 667,466
COMMITMENTS (Notes 6 and 8)
STOCKHOLDERS' INVESTMENT (Notes 3 and 7):
Class B Preferred Stock, $.01 par value-
Authorized--1,000,000 shares
Issued and outstanding--none - -
Common Stock, $.01 par value-
Authorized--25,000,000 shares
Issued and outstanding--7,008,282 shares and
8,567,015 shares at March 31, 1997 and 1998,
respectively
Class A Common Stock, $.01 par value- 70,082 86,670
Authorized--2,346,000 shares
Issued and outstanding--none
Additional paid-in capital 37,169,893 57,454,983
Accumulated deficit (22,014,912) (24,522,676)
------------ ------------
Total stockholders' investment 15,225,063 33,017,977
------------ ------------
$ 18,372,725 $ 38,615,204
============ ============
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,
1996 1997 1998
---------- ------------ -----------
REVENUES (Note 1):
Products $ 8,482,637 $10,872,203 $17,260,577
Contracts 3,118,278 4,150,752 5,184,859
----------- ---------- -----------
11,600,915 15,022,955 22,445,436
----------- ---------- -----------
COSTS AND EXPENSES:
Cost of product revenues 3,233,479 4,427,189 6,502,256
Research and development (Note 1) 3,178,277 3,772,609 9,090,517
Selling, general and administrative 5,051,383 6,081,884 9,054,095
----------- ---------- -----------
11,463,139 14,281,682 24,646,868
----------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS 137,776 741,273 (2,201,432)
Interest and other income, net 527,874 535,104 1,206,317
----------- ---------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS $ 665,650 $1,276,377 $ (995,115)
LOSS FROM DISCONTINUED OPERATIONS (Note 2) (174,526) (541,113) (1,512,649)
----------- ---------- -----------
NET INCOME (LOSS) $ 491,124 $ 735,264 $(2,507,764)
=========== ========== ===========
INCOME (LOSS) FROM CONTINUING OPERATIONS PER
SHARE (Note 1):
Basic $ 0.10 $ 0.18 $ (0.12)
Diluted $ 0.10 $ 0.18 $ (0.12)
LOSS FROM DISCONTINUED OPERATIONS
SHARE (Notes 1 and 2):
Basic $ (0.03) $ (0.07) $ (0.19)
Diluted $ (0.03) $ (0.08) $ (0.19)
----------- ---------- -----------
NET INCOME (LOSS) PER SHARE (Note 1):
Basic $ 0.07 $ 0.11 $ (0.31)
Diluted $ 0.07 $ 0.10 $ (0.31)
=========== ========== ===========
WEIGHTED AVERAGE NUMBER SHARES OUTSTANDING (Note 1):
Basic 6,937,620 6,978,569 8,074,150
Diluted 6,995,664 7,162,347 8,074,150
=========== ========== ===========
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, 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
Sales of Common Stock,
net 1,532,710 15,327 - - 20,054,077 - 20,069,404
Stock options exercised 20,015 200 - - 151,180 - 151,380
Stock issued to directors
and under employee stock
purchase plan 6,008 61 - - 79,833 - 79,894
Net loss - - - - - (2,507,764) (2,507,764)
--------- ------- --------- -------- ----------- ------------ -----------
BALANCE, MARCH 31, 1998 8,567,015 $85,670 - $ - $57,454,983 $(24,522,676) $33,017,977
========= ======= ========== ========= =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
ABIOMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
1996 1997 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 491,124 $ 735,264 $(2,507,764)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 320,531 424,225 876,939
Changes in assets and liabilities
Accounts receivable, net (612,709) (2,217,017) (805,313)
Inventories (89,156) (39,362) (858,704)
Prepaid expenses and other assets (38,450) (80,892) (330,545)
Assets and liabilities of discontinued operations, net (238,655) (56,591) 1,155,934
Accounts payable 579,663 511,081 768,449
Accrued expenses 215,853 514,611 1,013,650
----------- ----------- -----------
Net cash provided by (used in) operating activities 628,201 (208,681) (687,354)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities (purchases) of short term marketable securities,
net 2,701,323 (35,554) (15,969,977)
Purchases of property and equipment (319,291) (1,591,846) (2,540,168)
Purchases of Abiomed Limited Partnership units from limited
Partners (Note 8) (770,000) - -
----------- ----------- -----------
Net cash provided by (used in) investing activities 1,612,032 (1,627,400) (18,510,145)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of Common Stock, net - - 20,069,404
Proceeds from exercise of stock options
and stock issued under employee purchase plan 148,652 545,294 231,274
----------- ----------- -----------
Net cash provided by financing activities 148,652 545,294 20,300,678
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,388,885 (1,290,787) 1,103,179
CASH AND CASH EQUIVALENTS, EXCLUDING MARKETABLE SECURITIES,
AT BEGINNING OF YEAR 481,874 2,870,759 1,579,972
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, EXCLUDING MARKETABLE SECURITIES,
AT END OF YEAR $ 2,870,759 $ 1,579,972 $ 2,683,151
=========== =========== ===========
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, 1998
(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 biventricular temporary
artificial heart from which the majority of the Company's product revenues
have been derived, and is developing an implantable heart replacement system.
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 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
estimated or assumed.
(c) Product Revenues
The Company recognizes product revenues at the time products are shipped
to customers. Service revenues, which are not material, are recognized
over the periods of the contracts. In fiscal 1996, 1997 and 1998, 9%, 7%
and 6%, 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 1996, 1997 or 1998.
F-6
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(CONTINUED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(d) Contract Revenues
In fiscal 1996, 1997 and 1998, 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
recognizes revenue under its government contracts and grants as work is
performed, provided that the government has appropriated sufficient funds
for the work. 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
statements of operations as part of research and development expenses and
totaled approximately $2,457,000, $3,232,000 and $4,110,000 for fiscal
1996, 1997 and 1998, respectively.
The Company, at its sole discretion, may elect to further develop
government-funded technologies or products by spending resources outside
or above the contract limits. In fiscal 1998, the majority of the
Company's research and development expenditures were directed to
development of an implantable heart replacement system. These
expenditures included amounts spent under the Company's government
contract and supplemental amounts from the Company's own resources. All
such discretionary spending is not included in the contracts and grants
costs per above.
(e) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following:
March 31,
1997 1998
---------- ----------
Raw materials $ 789,365 $1,320,600
Work-in-process 276,880 483,723
Finished goods 402,493 523,119
---------- ----------
$1,468,738 $2,327,442
========== ==========
Finished goods and work-in-process inventories consist of direct
material, labor and overhead.
F-7
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(CONTINUED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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 Straight-line 3- 5 Years
Furniture and fixtures Straight-line 5-10 Years
Leasehold improvements Straight-line Life of lease
(g) Net Income (Loss) per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per
Share. This statement established standards for computing and presenting
earnings per share and applies to entities with publicly traded common
stock or potential common stock. This statement is effective for fiscal
years ending after December 15, 1997. Prior years' earnings per share
have been restated to reflect the adoption of SFAS No. 128.
Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during
the period. Diluted net income (loss) per share is computed by dividing
net income (loss) by the weighted average number of dilutive common
shares outstanding during the period. Diluted weighted average shares
reflects the dilutive effect, if any, of common stock options based on
the treasury stock method. No common stock options are considered
dilutive in periods, such as the fiscal year ended March 31, 1998, in
which a loss is reported because all such common equivalent shares are
antidilutive. The number of shares that otherwise would have been
dilutive is 287,709 for the year ended March 31, 1998.
The calculations of basic and diluted weighted average shares outstanding
are as follows:
March 31,
1996 1997 1998
--------------------------------
Basic weighted average shares outstanding 6,937,620 6,978,569 8,074,150
Dilutive shares 58,044 183,778 -
--------- --------- ---------
Diluted weighted average shares outstanding 6,995,664 7,162,347 8,074,150
========= ========= =========
F-8
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(CONTINUED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) Cash and Cash Equivalents
The Company classifies any marketable security with a 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 a 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 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 securities. The Company has classified all
investments at March 31, 1997 and 1998 as held-to-maturity securities.
The amortized cost and market value of short-term investments were
approximately $7,745,000 and $7,689,000 at March 31, 1997 and $23,715,000
and $23,886,000 at March 31, 1998, respectively. At March 31, 1998 these
short-term investments consisted primarily of government agency
securities.
(j) Disclosures about Fair Value of Financial Instruments
As of March 31, 1997 and 1998 the Company's financial instruments were
comprised of cash and cash equivalents, marketable securities, accounts
receivable and accounts payable, the carrying amounts of which
approximated fair market value.
(k) Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No.130, Reporting Comprehensive
Income. SFAS No. 130 requires disclosure of all components of
comprehensive income on an annual and interim basis. Comprehensive income
is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-
owner sources. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. This statement is not currently expected to have
an impact on the Company.
In July 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 requires certain
financial and supplementary information to be disclosed on an annual and
interim basis for each reportable segment of an enterprise. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997. Unless
impracticable, companies would be required to restate prior period
information upon adoption. This statement is not currently expected to
have an impact on the Company.
F-9
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(CONTINUED)
(2) DISCONTINUED OPERATIONS
In fiscal 1998, the Company made the decision to shift all of its focus to
the Company's core cardiovascular business and to sell, license or otherwise
dispose of its dental business. The Company's dental business, which has
operated as a wholly owned subsidiary of the Company under the name ABIODENT,
Inc., markets devices for periodontal screening and for detection and
assessment of halitosis sources. The Company's $1,513,000, or $0.19 per
share, loss reported from discontinued operations for the year ended March
31, 1998 represents a loss from dental operations of $546,000, or $0.07 per
share, and an estimated loss on the disposal of the business, its assets and
extinguishment of liabilities of approximately $967,000, or $0.12 per share,
which includes an estimated operating loss of $370,000 to be incurred during
the first two quarters of fiscal 1999.
The accompanying consolidated financial statements contain certain accounts
that have been reclassified in each of the periods presented to reflect this
decision by the Company. Reported revenue, costs and expenses exclude the
operating results of the Company's dental business. The operating losses of
the Company's dental business are presented on a net basis in the
consolidated statements of operations as loss from discontinued operations.
Product revenues from the dental business were approximately $1,243,000,
$1,439,000 and $1,057,000 for the years ended March 31, 1996, 1997 and 1998,
respectively.
The components of net assets (liabilities) of discontinued operations
included in the accompanying consolidated balance sheets are approximately as
follows:
March 31,
1997 1998
---------------------------
Cash $ 37,000 $ 28,000
Accounts receivable, net 265,000 87,000
Inventories 352,000 359,000
Property and equipment, net 8,000 12,000
Accrued expenses (174,000) (1,153,000)
--------- -----------
$ 488,000 $ (667,000)
========= ===========
F-10
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(CONTINUED)
(3) 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 1997, 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.
In July 1997, the Company completed a private placement of 1,242,710 shares
of its Common Stock to Genzyme Corporation and certain of the Company's
directors. Proceeds to the Company from the private placement, net of direct
expenses of approximately $145,000, totaled approximately $16,010,000.
In November 1997, the Company completed an offering of 290,000 shares of its
Common Stock. Proceeds to the Company from the stock offering, net of direct
expenses of approximately $725,000, totaled approximately $4,060,000.
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 shares of Class B Preferred Stock have been issued or
are outstanding.
In August 1997, the Company declared a dividend of one Preferred Share
Purchase Right (the "Right") for each outstanding share of Common Stock to
its stockholders of record at August 28, 1997. Each right entitles the
registered holder to purchase from the Company one one-thousandth of a share
of Series A Junior Participating Preferred Stock with a par value of $0.01
per share, at a price of $90.00 per one one-thousandth of a share, subject to
adjustment.
In accordance with the terms set forth in the Rights Agreement, the Rights
are not exercisable until the occurrence of certain events, as defined. In
addition, the registered holders of the Rights will have no rights as a
Common stockholder of the Company until the Rights are exercised. The terms
of the Rights may be amended by the Board of Directors. The Rights will
expire on August 13, 2007.
F-11
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(CONTINUED)
(4) LINE OF CREDIT WITH A BANK
The Company has an unsecured demand line of credit agreement with a bank
under which it can borrow up to $3,000,000 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. The line of credit expires in
September 1998. There were no borrowings under the Company's line of credit
at March 31, 1997 and 1998.
(5) 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 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, 1998, the Company had available net operating loss carryforwards
of approximately $21,559,000. The Company also had available, at March 31,
1998, approximately $751,000 of tax credit carryforwards to reduce future
federal income taxes, if any. The net operating loss and tax credit
carryforwards 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.
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 $12,264,000 as of March 31,
1998 against its otherwise recognizable net deferred tax asset.
The deferred tax asset consisted of the following:
March 31,
1997 1998
------------------------------
Net operating loss and tax credit carryforwards $ 9,262,000 $ 9,374,000
Purchase of technology (Note 8) 1,353,000 1,068,000
Nondeductible reserves 131,000 241,000
Nondeductible accruals 293,000 879,000
Reserve for discontinued operations - 387,000
Depreciation 185,000 169,000
Other, net 106,000 146,000
------------ ------------
11,330,000 12,264,000
Less--Valuation allowance (11,330,000) (12,264,000)
------------ ------------
$ - $ -
============ ============
F-12
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(CONTINUED)
(6) COMMITMENTS
(a) The Company leases its facilities and certain equipment under various
operating lease agreements with terms through fiscal 2002. Total rent
expense under these leases, included in the accompanying consolidated
statements of operations, was approximately $233,000, $324,000 and
$360,000 for fiscal 1996, 1997 and 1998, respectively.
Future minimum lease payments under these agreements are as follows:
Amount
Year Ended March 31,
1999 $276,000
2000 247,000
2001 120,000
2002 31,000
--------
$674,000
========
(b) The Company maintains various insurance coverage. Most policies renew on
a fiscal year basis while certain policies have been secured for three-
year periods. Future insurance obligations under these insurance
policies, over a three-year period, are approximately $510,000.
(7) STOCK OPTION AND PURCHASE 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), as amended,
was adopted in September 1992 as a combination and restatement of the
Company's then outstanding Incentive Stock Option Plan and Nonqualified Plan.
Options granted and outstanding under the Combination Plan are primarily held
by Company employees and generally become exercisable ratably over five
years.
In addition, the Company has a nonqualified stock option plan for non-
employee directors (the Directors' Plan). The Directors' Plan, as amended in
August 1992, was adopted in July 1989 and provides for grants of options to
purchase 12,500 shares of the Company's Common Stock to any newly elected
eligible director and grants of additional options to purchase 12,500 shares
of Common Stock to existing directors 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.
Separate from the Directors' Plan, non-employee directors of the Company
receive as compensation an annual retainer of 400 shares of Common Stock. The
Company issued 2,000 shares of its Common Stock for this purpose in the years
ending March 31, 1997 and 1998.
F-13
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(CONTINUED)
(7) STOCK OPTION AND PURCHASE PLANS (CONTINUED)
The following table summarizes stock option activity under these plans:
COMBINATION PLAN DIRECTORS' PLAN
-------------------------------------------- ------------------------------------------------
NUMBER WEIGHTED NUMBER WEIGHTED
OF AVERAGE OF AVERAGE
OPTIONS EXERCISE PRICE PRICE PER SHARE OPTIONS EXERCISE PRICE PRICE PER SHARE
Outstanding,
March 31, 1995 395,230 $ 0.55- $13.50 $ 8.38 95,000 $ 7.00- $13.88 $10.72
Granted 219,000 6.25- 11.00 10.23 12,500 11.00 11.00
Exercised (16,925) 5.75- 8.50 7.34 (2,500) 7.00 7.00
Canceled (19,140) 5.75- 13.50 9.90 (15,000) 11.00- 11.13 11.02
------- -------------- ------ ------- -------------- ------
Outstanding,
March 31, 1996 578,165 0.55- 13.50 9.09 90,000 7.00- 13.88 10.81
Granted 234,235 11.00- 13.50 12.53 - - -
Exercised (58,912) .55- 13.50 8.65 - - -
Canceled (55,613) 5.75- 13.50 11.45 - - -
------- -------------- ------ -------- --------------- ------
Outstanding,
March 31, 1997 697,875 5.63- 13.50 10.29 90,000 7.00- 13.88 10.81
Granted 178,850 10.00- 18.00 11.91 50,000 14.00 14.00
Exercised (20,015) 5.63- 10.63 7.56 - - -
Canceled (37,325) 5.63- 13.25 10.69 - - -
------- -------------- ------ -------- --------------- ------
Outstanding,
March 31, 1998 819,385 $ 5.63- $18.00 $10.71 140,000 $ 7.00- $14.00 $11.95
======= ============== ====== ======== =============== ======
Exercisable,
March 31, 1998 253,151 $ 5.63- $13.50 $ 9.17 82,500 $ 7.00- $13.88 $10.79
======= ============== ====== ======== ============== ======
Shares available for
future issuance,
March 31, 1998 317,507 57,500
======= ========
F-14
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(CONTINUED)
(7) STOCK OPTION AND PURCHASE 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
86,679 shares are available for future issuance as of March 31, 1998. During
the years ended March 31, 1996, 1997 and 1998, 777, 1,116 shares and 4,039
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, 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, 1997 and 1998 using the Black-Scholes option pricing
model prescribed by SFAS No. 123. The weighted average information and
assumptions used for 1997 and 1998 are as follows:
1996 1997 1998
Risk-free interest rate ................... 6.75% 6.75% 5.50%
Expected dividend yield ................... - - -
Assumed life .............................. 5 years 5 years 5 years
Assumed volatility ........................ 30% 33% 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-15
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(CONTINUED)
(7) STOCK OPTION AND PURCHASE PLANS (CONTINUED)
The total fair value of the options granted during fiscal 1996, 1997 and 1998
was computed as approximately $431,000, $598,000 and $501,000, respectively.
Of these amounts approximately $108,000, $257,000 and $383,000 would be
charged to operations for the years ended March 31, 1996, 1997 and 1998
respectively. The remaining amounts, would be amortized over the remaining
vesting periods of the underlying options. Similarly, the total fair value of
stock sold under the Purchase Plan was computed as approximately $4,000,
$3,000 and $17,000 during fiscal 1996, 1997 and 1998, respectively. 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 (loss) and pro forma net income (loss) per 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, 1997
and 1998 is as follows [in thousands except per share information]:
1996 1997 1998
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
Net income (loss) $491,124 $379,124 $735,264 $475,264 $(2,507,764) $(2,907,764)
Pro forma net income
(loss) per share:
Basic $0.07 $0.05 $0.11 $0.07 $(0.31) $(0.36)
Diluted $0.07 $0.05 $0.10 $0.07 $(0.31) $(0.36)
(8) ROYALTY OBLIGATION
Until 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. 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, 1997 and 1998, the amount of this royalty, net of certain
reimbursed expenses, was approximately $160,000, $216,000 and $338,000,
respectively. These amounts are reflected as part of the cost of products in
the accompanying consolidated statements of operations.
F-16
ABIOMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(CONTINUED)
(8) ROYALTY OBLIGATION
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. In 1995, 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 of $285,000 and
$427,000 at March 31, 1997 and 1998 respectively is classified as a long-term
other asset in the accompanying consolidated balance sheets.
(9) EMPLOYEE DEFERRED COMPENSATION PROFIT-SHARING PLAN AND TRUST
The Company has an employee deferred compensation profit-sharing plan (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, which consist of amounts paid by the Company to match a portion
of employees' contributions and discretionary amounts determined by the
Company's Board of Directors, totaled approximately $80,000, $72,000 and
$144,000 for the fiscal years ended March 31, 1996, 1997 and 1998
respectively.
(10) ACCRUED EXPENSES
Accrued expenses consist of the following:
March 31,
1997 1998
-----------------------------
Salaries and benefits $ 684,472 $1,460,222
Contract services 65,296 321,512
Warranty 221,093 173,362
Sales taxes 30,502 157,277
Professional fees 76,914 126,377
Customer advances 287,882 85,284
Other 492,479 548,254
---------- ----------
$1,858,638 $2,872,288
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F-17