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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _______________.
Commission File Number 0-22743
VISTA MEDICAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3184035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5451 AVENIDA ENCINAS, SUITE A
CARLSBAD, CA 92008
(Address of principal executive offices)
(760) 603-9120
(Registrant's phone number, including area code)
----------------------------------------------
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:
(1) Yes [X] No [ ]
(2) Yes [ ] No [X]
As of August 11, 1997 there were 13,339,555 shares of $.01 par value common
stock outstanding.
- - -------------------------------------------------------------------------------
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VISTA MEDICAL TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations. . . . . . . . . . . . 4
Consolidated Statements of Cash Flows. . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations . . . . . . 8
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 25
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Vista Medical Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 1,276,045 $ 10,119,529
Short-term investments. . . . . . . . . . . . . . . . . . 248,000 165,000
Accounts receivable . . . . . . . . . . . . . . . . . . . 259,991 526,119
Inventories . . . . . . . . . . . . . . . . . . . . . . . 2,335,479 1,212,825
Other current assets. . . . . . . . . . . . . . . . . . . 863,983 136,400
--------- ----------
4,983,498 12,159,873
Total current assets
Property and equipment, net. . . . . . . . . . . . . . . . . 2,598,319 1,082,103
Patents and other assets . . . . . . . . . . . . . . . . . . 1,044,089 1,073,741
--------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 8,625,906 $14,315,717
--------- ----------
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . $ 712,171 $ 607,639
Accrued compensation. . . . . . . . . . . . . . . . . . . 339,463 226,543
Accrued liabilities . . . . . . . . . . . . . . . . . . . 1,262,567 520,584
--------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . 2,314,201 1,354,766
Commitments
Stockholders' equity:
Convertible preferred stock, $01 par value:
Authorized shares - 18,000,000
Issued and outstanding shares -
11,574,252 in 1996 and June 1997 . . . . . . . . . 115,742 115,742
Preference in liquidation - $26,231,145. . . . . . . .
Common stock, $01 par value:
Authorized shares - 25,000,000 . . . . . . . . . . . .
Issued and outstanding shares - 538,224 in 1996
and 623,599 in June 1997. . . . . . . . . . . . . . 6,236 5,382
Additional paid-in capital. . . . . . . . . . . . . . . . 29,345,386 28,615,223
Notes receivable from stockholders. . . . . . . . . . . . (93,375) (93,375)
Deferred compensation . . . . . . . . . . . . . . . . . . (2,214,984) (2,061,549)
Accumulated deficit . . . . . . . . . . . . . . . . . . . (20,847,300) (13,620,472)
--------- ----------
Total stockholders' equity 6,311,705 12,960,951
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY. . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,625,906 $ 14,315,717
--------- ----------
--------- ----------
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes
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VISTA MEDICAL TECHNOLOGIES, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 505,444 $ 698,535 $ 1,334,662 $ 939,578
Costs and expenses:
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . 764,901 489,238 1,590,927 673,719
Research and development . . . . . . . . . . . . . . . . . . 1,554,055 671,927 3,067,923 1,204,653
Sales and marketing. . . . . . . . . . . . . . . . . . . . . 957,238 476,245 1,701,899 789,175
General and administrative . . . . . . . . . . . . . . . . . 1,180,278 546,825 2,344,500 946,183
--------- --------- --------- ---------
Total cost and expenses . . . . . . . . . . . . . . . . . . . . 4,456,472 2,184,235 8,705,249 3,613,730
--------- --------- --------- ---------
Loss from operations. . . . . . . . . . . . . . . . . . . . . . (3,951,028) (1,485,700) (7,370,587) (2,674,152)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . 42,271 2,988 143,759 37,857
--------- --------- --------- ---------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,908,757) $(1,482,712) $(7,226,828) $(2,636,295)
--------- --------- --------- ---------
Pro forma net loss per share. . . . . . . . . . . . . . . . . . $ (0.43) $ (0.17) $ (0.80) $ (0.30)
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in computing pro forma
net loss per share. . . . . . . . . . . . . . . . . . . . . 9,096,083 8,626,898 9,086,602 8,626,898
</TABLE>
See accompanying notes
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VISTA MEDICAL TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(7,226,828) $(2,636,295)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 261,293 99,961
Issuance of stock for services rendered . . . . . . . . . . 20,010 --
Amortization of deferred compensation . . . . . . . . . . . 517,664 --
Acquired in-process research and development. . . . . . . .
Write-off of non recoverable patent costs . . . . . . . . .
Minority interest in partnership. . . . . . . . . . . . . .
Common stock received in exchange for license agreement . .
Changes in operating assets and liabilities, net of effect
of acquisitions:
Accounts receivable . . . . . . . . . . . . . . . . . . 266,128 (28,467)
Inventories . . . . . . . . . . . . . . . . . . . . . . (1,122,654) (616,927)
Other current assets. . . . . . . . . . . . . . . . . . (38,288) (4,853)
Accounts payable. . . . . . . . . . . . . . . . . . . . 104,532 (137,075)
Accrued compensation. . . . . . . . . . . . . . . . . . 112,921 --
Accrued liabilities . . . . . . . . . . . . . . . . . . 741,984 104,685
--------- ---------
Net cash flows used for operating activities . . . . . . . . . . (6,363,238) (3,218,971)
INVESTING ACTIVITIES
Purchase of short-term investments . . . . . . . . . . . . . . . (83,000) --
Purchase of property and equipment . . . . . . . . . . . . . . . (1,747,856) (471,051)
--------- ---------
Net cash flows used for investing activities . . . . . . . . . . (1,830,856) (471,051)
FINANCING ACTIVITIES
Deferred public offering costs . . . . . . . . . . . . . . . . . (689,295) --
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . -- 999,067
Issuance of common stock . . . . . . . . . . . . . . . . . . . . 39,905 11,625
--------- ---------
Net cash flows provided by financing activities. . . . . . . . . (649,390) 1,010,692
Net (decrease) increase in cash and cash equivalents . . . . . . (8,843,484) (2,679,330)
Cash and cash equivalents at beginning of period . . . . . . . . 10,119,529 3,234,175
--------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . $ 1,276,045 $ 554,845
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . $ 196 $ --
--------- ---------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Exercise of stock options for stockholder notes receivable . . . $ -- $ 63,750
--------- ---------
--------- ---------
</TABLE>
See accompanying notes
5
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The Consolidated Financial Statements of Vista Medical Technologies,
Inc. (the "Company") included in the Company's Registration Statement on Form
S-1 (No. 333-22985), including the related Prospectus dated July 2, 1997 (the
"Registration Statement"), contain additional information about the Company,
its operations, and its financial statements and accounting practices, and
should be read in conjunction with this quarterly report on Form 10-Q. These
unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and with the instructions on
Form 10-Q and, therefore, certain information and footnote disclosures
normally contained in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
The accompanying unaudited consolidated financial statements of the
Company reflect all adjustments of a normal recurring nature which are, in
the opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for all periods presented.
The interim financial information herein are not necessarily indicative of
results for any future interim periods or for the full fiscal year ending
December 31, 1997.
2. Initial Public Offering
In July 1997, the Company completed an initial public offering ("IPO")
of 4,000,000 shares of the Company's common stock, par value $.01 per share
(the "Common Stock") at a price of $9.00 per share, raising gross proceeds of
$36.0 million before underwriters' commissions and expenses. In connection
with the offering, an aggregate of 11,574,252 of the Company's previously
issued Convertible Preferred Stock, par value $.01 per share, was converted
on a four-for-three basis into an aggregate of 8,680,679 shares of common
stock, par value $.01 per share.
3. Computation of Pro Forma Net Loss Per Share
Pro forma net loss per share is computed using the weighted average
number of common shares and common stock equivalents outstanding. Common
equivalent shares from stock options and warrants are excluded from the
computation when their effect is antidilutive except that the Securities and
Exchange Commission requires common shares and common share equivalents
issued during the twelve months prior to the initial filing of a proposed
public offering to be included in the calculation as outstanding for all
periods prior to the Company's initial public offering (using the treasury
stock method). The calculation also gives effect to the conversion of all
convertible preferred shares (using the if-converted method), which
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automatically converted into common shares upon completion of the Company's
initial public offering.
4. New Accounting Standard
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings per Share,
which supersedes APB Opinion No. 15. Statement No. 128 replaces the
presentation of primary Earnings Per Share ("EPS") with "Basic EPS" which
includes no dilution and is based on weighted-average common shares
outstanding for the period. Companies with complex capital structures will
also be required to present "Diluted EPS" that reflects the potential
dilution of securities like employee stock options. Statement No. 128 is
effective for financial statements issued for periods ending after December
15, 1997. The Company does not anticipate any impact on the calculation of
EPS from the adoption of Statement 128.
5. Inventories
June 30, 1997 December 31, 1996
------------- -----------------
(Unaudited)
Parts and supplies . . . . . . $ 1,036,256 $ 567,707
Work in process. . . . . . . . 857,910 286,099
Finished goods . . . . . . . . 441,313 359,019
--------- ---------
$ 2,335,479 $ 1,212,825
--------- ---------
--------- ---------
7
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THIS QUARTERLY REPORT MAY CONTAIN PREDICTIONS, ESTIMATES AND OTHER
FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED BELOW AT "RISKS AND UNCERTAINTIES." WHILE THIS
OUTLOOK REPRESENTS MANAGEMENT'S CURRENT JUDGMENT ON THE FUTURE DIRECTION OF
THE BUSINESS, SUCH RISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM ANY FUTURE PERFORMANCE SUGGESTED BELOW. THE COMPANY
UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES ARISING
AFTER THE DATE HEREOF. THE FOLLOWING DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO
INCLUDED IN ITEM 1 OF THIS QUARTERLY REPORT ON FORM 10-Q AND THE REGISTRATION
STATEMENT.
Overview
The Company develops, manufactures and markets proprietary visualization
and information systems that enable minimally invasive surgical solutions in
cardiothoracic, head, neck and spine ("HNS") and other selected microsurgical
procedures. The Company also markets endoscopic cameras and related surgical
instruments and accessories and has generated minimal revenues from the sales
of these products since its formation in July 1993. The Company expects to
continue to incur substantial losses for at least the next 18 months. As of
June 30, 1997, the Company's accumulated deficit was approximately $20.8
million.
Results of Operations
Sales. The Company had revenues from product sales of $505,000 and
$1,335,000 for the three- and six-months ended June 30, 1997, respectively,
compared to $699,000 and $940,000 for the same periods in 1996. The decrease
in sales for the three-month period was primarily due to reduced shipments to
certain distributors of certain of the Company's non-core general surgery and
ENT instrument product lines, partially offset by revenues associated with a
line of cardiac instruments and sutures for which the Company acquired
distribution rights in the second half of 1996, and increased original
equipment manufacturer ("OEM") sales of the Company's endoscopic cameras
compared to the year-earlier period. The increase in sales for the six-month
period was due to increased OEM sales of the Company's endoscopic cameras to
new and existing customers and revenues associated with a line of cardiac
instruments and sutures for which the Company acquired distribution rights in
the second half of 1996.
Cost of Sales. The Company's cost of sales were $765,000 and $1,591,000
for the three- and six-months ended June 30, 1997, respectively, and $489,000
and $674,000 for the three- and six-months ended June 30, 1996, respectively,
an increase of $276,000 and $917,000, respectively. The increase for both
the three- and six-month periods was primarily due to manufacturing scale-up
expenses the Company incurred to accommodate new product launches targeted at
cardiothoracic and HNS markets. The Company expects to continue to incur
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expenses related to manufacturing scale-up associated with these product
launches during the third and fourth quarters of 1997.
Research and Development Expenses. Research and development expenses
increased to $1,554,000 and $3,068,000 for the three- and six-months ended
June 30, 1997, respectively, from $672,000 and $1,205,000 for the
corresponding periods in 1996. The increase in research and development
expenses for both the three- and six-month periods was attributable to
continued development and expansion of the Company's research and development
organization focused on development, prototyping and evaluation of new
products and consisted of increases in staffing and related supply and
occupancy costs. Contracted research and development effort also contributed
to the increase. The Company believes that a significant level of investment
for product development and evaluation is necessary to maintain its
technological advantage and, accordingly, anticipates that it will continue
to increase its spending in research and development on an absolute dollar
basis.
Sales and Marketing Expenses. Sales and marketing expenses were
$957,000 and $1,702,000 for the three- and six-months ended June 30, 1997,
respectively, and $476,000 and $789,000 for the same periods in 1996. These
increases in sales and marketing expenses were attributable to the Company's
development and expansion of its sales force, increased marketing efforts
associated with commercialization of new products, and commissions and other
expenses related to revenues associated with a line of cardiac instruments
and sutures for which the Company acquired distribution rights in the second
half of 1996. The Company expects that such expenses will continue to
increase as it expands its sales and marketing efforts in connection with
commercialization of new products.
General and Administrative Expenses. The Company's general and
administrative expenses increased to $1,180,000 and $2,344,000 for three -and
six-months ended June 30, 1997, respectively from $547,000 and $946,000 for
the corresponding periods in 1996. These increases are primarily due to
increases in staffing and related expenses associated with the continued
development of the Company's administrative infrastructure, amortization of
deferred compensation in connection with the grant of certain stock options
in 1996 and early 1997, expansion of the Company's information and
communication systems, and increases in legal and professional fees
associated with business development efforts. The Company expects its
general and administrative expenses to continue to increase in the future as
it increases its administrative staff and systems to manage the growth of the
Company and as a result of increases in expenses associated with being a
public company.
Interest Income. The Company had net interest income of $42,000 and
$144,000 for the three- and six-month periods ended June 30, 1997,
respectively, as compared to $3,000 and $38,000 for the corresponding periods
in 1996. The increase for both the three- and six-month periods was due
primarily to increasing average investment balances of the Company's excess
cash.
9
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Liquidity and Capital Resources
The Company completed its initial public offering in July 1997, raising
approximately $32.8 million net of offering costs. Prior to the IPO, the
Company satisfied its liquidity requirements from the private sale of common
and preferred stock, through advances from a related party, and from the
proceeds from licensing of certain of the Company's technology.
Net cash used in operating activities for the six months ended June 30,
1997 was $6,363,000 compared to net cash used of $3,219,000 for the
corresponding six-month period in 1996. The increase in net cash used in
operating activities was primarily attributable to increasing net losses
during the 1997 period.
Net cash used in investing activities was $1,831,000 for the six months
ended June 30, 1997 compared to $471,000 for the same period in 1996. The
increase is primarily attributable to the purchase of property and equipment
related to increased staffing, expansion of manufacturing capabilities, and
marketing demonstrations.
Net cash used in financing activities was $649,000 for the six months
ended June 30, 1997 compared to net cash provided by financing activities of
$1,011,000 for the same period in 1996. The cash used in financing
activities in the 1997 period was associated with expenses related to the
Company's IPO which was completed in July 1997. For the fiscal 1996 period,
cash from financing activities was primarily attributable to bridge financing
provided by certain of the Company's then current investors while the Company
was completing the private sale of preferred stock.
In July 1997, the Company reached agreement on the principal terms of a
$10.0 million credit line to finance the placement with customers of its
Series 8000 Cardiac product on a pay per procedure basis rather than through
an upfront capital payment, although there can be no assurance that the
Company will enter into definitive loan documents on the terms agreed, if at
all.
The Company anticipates that the net proceeds from the IPO completed in
July 1997 and the interest income thereon, together with its existing cash,
cash equivalents and short-term investments, and product revenues, will be
sufficient to fund its operations through 1998.
Risks and Uncertainties
THE FOLLOWING ARE AMONG THE FACTORS THAT SHOULD ALSO BE CONSIDERED
CAREFULLY IN EVALUATING VISTA MEDICAL TECHNOLOGIES AND ITS BUSINESS.
DEVELOPMENT STAGE COMPANY; SUBSTANTIAL FUTURE LOSSES AND FUTURE CAPITAL
REQUIREMENTS. Since its formation in July 1993, the Company has been engaged
in the development of visualization and information systems and related
surgical instruments and
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accessories that enable minimally invasive microsurgery ("MIM") solutions for
applications in cardiothoracic and other selected microsurgical procedures
and in manufacturing and marketing limited quantities of camera systems to
customers as an OEM. As June 30, 1997, the Company had incurred cumulative
net losses of $20.8 million since its formation. The Company expects to incur
substantial and increasing operating losses before it will reach
profitability, if at all. Furthermore, the Company expects its expenses in
all categories to increase as its marketing and other business activities
expand. There can be no assurance that the Company will achieve or sustain
profitability in the future. Failure to achieve significant commercial
revenues or profitability would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the following: the extent to which the Company's
products gain market acceptance; the progress and scope of product
evaluations; the timing and costs of filing future regulatory submissions;
the timing and costs required to receive both domestic and international
governmental approvals; the timing and costs of product introductions; the
extent of the Company's ongoing research and development programs; the costs
of training physicians to become proficient in the use of the Company's
products and procedures; and the costs of developing marketing and
distribution capabilities. The Company anticipates that the net proceeds from
the IPO completed in July 1997 and the interest income thereon, together with
its existing cash, cash equivalents and short-term investments, and product
revenues, will be sufficient to fund its operations through 1998. If, at or
prior to such time, the net proceeds of the IPO, together with available
funds and cash generated from operations, are insufficient to satisfy the
Company's cash needs, the Company may require additional financing. There can
be no assurance that such additional financing will be available on terms
acceptable to the Company, if at all. The Company's inability to fund its
capital and operational requirements would have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE UPON AND UNCERTAINTY REGARDING COMMERCIALIZATION OF SERIES
8000. The Series 8000 Advanced Visualization and Information System ("Series
8000") for minimally invasive cardiac surgery is the Company's primary
near-term product focus and is expected to account for the majority of the
Company's revenues over the next several years. In international markets,
however, regulatory clearance or approval is required before the system can
be widely marketed. There can be no assurance that demand for the Series 8000
will be sufficient to achieve profitable operations.
Development of certain peripheral components of the Series 8000 has not
yet been finalized, and final prototypes have not yet been completed. There
can be no assurance that such development efforts will be successful or that
the Company's products under development will be shown to be safe or
effective, capable of being manufactured in commercial quantities at
acceptable costs, cleared or approved by regulatory authorities or
successfully marketed.
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Evaluations of the Series 8000 conducted to date have shown that there
is a learning process involved for surgeons and other members of the surgery
team to become proficient with the use of the system. Based on a limited
number of clinical and laboratory procedures performed to date, there can be
no assurance that visualization and information system enhancements
incorporated, or to be incorporated, in the Series 8000 will prove suitable
for use by a substantial number of cardiothoracic surgeons. If the Series
8000 proves unsuitable for a number of surgeons to use, the potential markets
and applications for the Company's products would be significantly limited.
Widespread use of the Series 8000 will require training of a large number of
surgeons, and the time required to institute a training program and to train
such surgeons could adversely affect market acceptance. Failure to
successfully commercialize the Series 8000 would have a material adverse
effect on the Company's business, financial condition and results of
operations.
UNCERTAINTY OF CLINICAL ADOPTION OF MINIMALLY INVASIVE MICROSURGICAL
PROCEDURES. The Company's near-term products are being developed in order to
enable cardiothoracic and HNS surgeons to perform MIM surgical procedures
using their existing skills coupled with training and complementary equipment
being developed by other companies. Accordingly, the Company's success is
dependent upon acceptance of these procedures by the medical community as a
reliable, safe and cost effective alternative to existing treatments. To
date, MIM surgical procedures have only been performed on a very limited
basis by a small number of highly skilled surgeons. The Company is unable to
predict how quickly, if at all, MIM surgical procedures will be adopted by
the medical community or, if they are adopted, the number of procedures that
will be performed.
Most patients with cardiovascular disease first consult with a
cardiologist, who then may treat the patient with pharmaceuticals or
non-surgical interventions, such as angioplasty and intravascular stents, or
refer the patient to a cardiac surgeon for open-chest coronary artery bypass
graft ("CABG") surgery. Cardiologists may not recommend MIM procedures until
such time, if at all, as such procedures can successfully be demonstrated to
be as safe and cost-effective as other accepted treatments. In addition,
cardiac surgeons may choose not to recommend MIM procedures until such time,
if at all, as such procedures are proven to be as efficacious as
conventional, open-chest surgery methods, which have become widely adopted by
cardiac surgeons since the initial use of such surgery in the mid-1950s.
Even if the clinical efficacy of MIM procedures is established in
cardiac and other specialties, surgeons, specialists and other physicians may
choose not to recommend the procedures for any number of other reasons.
Clinical adoption will depend, for example, upon the Company's ability to
facilitate training of surgeons to perform MIM surgery and the willingness of
such surgeons to perform such procedures. Physicians may similarly elect not
to recommend the MIM procedure based on possible unavailability of acceptable
reimbursement from health care payors. Health care payor acceptance may
require evidence of the cost effectiveness of MIM procedures as compared to
other currently available treatments. The Company believes that physician
endorsements will be essential for clinical adoption of MIM procedures, and
there can be no assurance that any such endorsements will be obtained in a
timely manner, if at all. Patient
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acceptance of the procedure will depend upon such physician recommendations,
as well as other factors, including the effectiveness of, and the rate and
severity of complications associated with, the procedure as compared to other
treatments.
There can be no assurance that MIM procedures will gain clinical
adoption. Failure of these procedures to achieve significant clinical
adoption would have a material adverse effect on the Company's business,
financial condition and results of operations.
LACK OF COMMERCIAL MANUFACTURING EXPERIENCE; SCALE-UP RISK. The Company
lacks experience in manufacturing the products under development, including
the Series 8000, in the quantities that would be necessary for the Company to
achieve significant commercial sales. The manufacture of the Company's
products primarily involves the assembly of a number of sub-assemblies and
components. Companies such as the Company often encounter difficulties in
scaling up manufacturing of products, which difficulties could include
problems involving quality control and assurance, component and service
availability, adequacy of control policies and procedures, lack of qualified
personnel, compliance with U.S. Food and Drug Administration ("FDA")
regulations and the need for further FDA approval of new manufacturing
processes and facilities and other production constraints. There can be no
assurance that reliable, high-volume manufacturing can be established or
maintained at commercially reasonable costs. The Company will also require
additional manufacturing facilities as production volumes increase;
acquisition of new manufacturing facilities will likely involve relocation.
Any of these factors could have a material adverse effect on the Company's
business, financial condition and results of operation.
The Company has and will continue to consider as appropriate, the
internal manufacture of sub-assemblies currently provided by third party
subcontractors, as well as the implementation of new production processes.
There can be no assurance that manufacturing yields or costs will not be
adversely affected by the transition to in-house production or to new
production processes when such efforts are undertaken, or that FDA Good
Manufacturing Practices ("GMP") requirements can be met and that such a
transition would not materially adversely affect the Company's business,
financial condition and results of operations.
LIMITED SALES, MARKETING, DISTRIBUTION AND TECHNICAL SUPPORT EXPERIENCE.
The Company has organized its sales and marketing efforts by the Company's
CardioThoracic Surgery and HNS Microsurgery divisions. The Company currently
markets its cardiothoracic products in North America through six direct
(Company employee) sales representatives and 30 independent sales
representatives. The Company is in the process of hiring up to six additional
direct sales representatives to support the introduction of its Series 8000
by the CardioThoracic Surgery division. A similar combination of direct and
independent sales representatives will market the products of the Company's
HNS Microsurgery division. Establishment of a sales force capable of
effectively commercializing the Company's systems will require substantial
efforts and significant management and financial resources. There can be no
assurance that the Company will be able to establish such a sales capability
on a timely basis or at all.
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The Company believes that a critical element of its sales efforts in
North America will be the provision of technical support, including training
and clinical validation efforts, to its customers. Provision of an adequate
level of such support on a timely basis requires significant financial
resources. There can be no assurance that the Company will be able to provide
an adequate level of technical support on a timely basis, or at all.
POTENTIAL COMPONENT SHORTAGES; DEPENDENCE ON SOLE SOURCES OF SUPPLY.
The Company uses or relies on certain components and services used in its
systems that are provided by sole source suppliers. The manufacture of the
Company's products in larger commercial quantities will require a substantial
increase in component supplies and will likely necessitate the replacement of
current suppliers or the addition of new suppliers. The qualification of
additional or replacement vendors for certain components or services is a
lengthy process. In addition, the substitution of replacement vendors may
entail re-engineering time and cost and could delay the supply of the
Company's products.
The Company expects to manufacture its products based on forecasted
product orders and intends to purchase subassemblies and components prior to
receipt of purchase orders from customers. Lead times for materials and
components ordered by the Company vary significantly and depend on factors
such as the business practices of the specific supplier, contract terms and
general demand for a component at a given time. Certain components used in
the Company's products have long lead times. As a result, there is a risk of
excess or inadequate inventory if orders do not match forecasts.
Any significant supply interruption, or inventory shortage or overage,
would have a material adverse effect on the Company's ability to manufacture
the Company's products and, therefore, a material adverse effect on its
business, financial condition and results of operations.
NO ASSURANCE OF REGULATORY CLEARANCE OR APPROVAL; SIGNIFICANT DOMESTIC
AND INTERNATIONAL REGULATION. The manufacture and sale of medical devices
intended for commercial distribution are subject to extensive governmental
regulation in the United States. Medical devices are regulated in the United
States primarily by the FDA and, to a lesser extent, by certain state
agencies. Generally, medical devices require pre-market clearance or
pre-market approval prior to commercial distribution. In addition, certain
material changes or modifications to, and changes in intended use of, medical
devices also are subject to FDA review and clearance or approval. The FDA
regulates the research, testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, promotion and distribution of medical
devices in the United States and the export of unapproved medical devices
from the United States to other countries. Noncompliance with applicable
requirements can result in failure of the government to grant pre-market
clearance or approval for devices, withdrawal or suspension of approval,
total or partial suspension of production, fines, injunctions, civil
penalties, refunds, recall or seizure of products and criminal prosecution.
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In the United States, medical devices are classified into one of three
classes, Class I, II or III, on the basis of the controls deemed by the FDA
to be necessary to reasonably ensure their safety and effectiveness. The
Company's products to date have either been classified as Class I or Class II
devices.
Class I devices are subject to general controls (e.g., establishment
registration and product listing, labeling, adulteration and misbranding
provisions and medical device reporting requirements and, unless exempt, to
pre-market notification and adherence to GMP standards). Class II devices are
subject to general controls and special controls (e.g., performance
standards, post-market surveillance, patient registries and FDA guidelines).
Generally, Class III devices are those that must receive pre-market approval
by the FDA to ensure their safety and effectiveness (e.g., life-sustaining,
life-supporting and implantable or new devices which have not been found to
be substantially equivalent to legally marketed devices). Class III devices
ordinarily require clinical testing to ensure safety and effectiveness and
FDA approval prior to marketing and distribution. The FDA also has the
authority to require clinical testing of Class I and Class II devices. A
pre-market approval ("PMA") application must be filed if a proposed device is
not substantially equivalent to a legally marketed predicate device or if it
is a Class III device for which the FDA has called for such application. A
PMA typically takes several years to be approved by the FDA.
Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
510(k) notification or submission and approval of a PMA application. If a
medical device manufacturer or distributor can establish that a device is
"substantially equivalent" to a legally marketed Class I or Class II device,
or to a Class III device for which the FDA has not called for a PMA, the
manufacturer or distributor may market the device upon receipt of an FDA
order determining such a device substantially equivalent to a predicate
device. The 510(k) notification may need to be supported by appropriate
performance, clinical or testing data establishing the claim of substantial
equivalence. The FDA requires a rigorous demonstration of substantial
equivalence.
Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an
FDA substantial equivalence order permitting the marketing of a device is
received by the person who submitted the 510(k) notification. At this time,
the FDA typically responds to the submission of a 510(k) notification within
90 to 200 days. An FDA letter may declare that the device is substantially
equivalent to a legally marketed device and allow the proposed device to be
marketed in the United States. The FDA, however, may determine that the
proposed device is not substantially equivalent or require further
information, including clinical data, to make a determination regarding
substantial equivalence. Such determination or request for additional
information will delay market introduction of the product that is the subject
of the 510(k) notification.
All clinical investigations involving the use of an unapproved or
uncleared device on humans to determine the safety or effectiveness of the
device must be conducted in accordance
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with the FDA's investigational device exemption ("IDE") regulations. If the
device presents a "significant risk," the manufacturer or distributor of the
device is required to file an IDE application with the FDA prior to
commencing human clinical trials. The IDE application must be supported by
data, typically the result of animal and bench testing. If the IDE
application is approved by the FDA, human clinical trials may begin at a
specific number of investigational sites with a maximum number of patients,
as approved by the FDA. If the device presents a "non-significant risk,"
approval by an Institutional Review Board prior to commencing human clinical
trials is required, as well as compliance with labeling, record keeping,
monitoring and other requirements. However, the FDA can disagree with a
non-significant risk device finding.
Any products manufactured or distributed by the Company are subject to
continuing regulation by the FDA, which includes record keeping requirements,
reporting of adverse experience with the use of the device, GMP requirements
and post-market surveillance, and may include post-market registry and other
actions deemed necessary by the FDA. A new 510(k), PMA or PMA supplement is
also required when a medical device manufacturer makes a change or
modification to a legally marketed device that could significantly affect the
safety or effectiveness of the device, or where there is a major change or
modification in the intended use of the device or a new indication for use of
the device. When any change or modification is made to a device or its
intended use, the manufacturer is expected to make the initial determination
as to whether the change or modification is of a kind that would necessitate
the filing of a new 510(k), PMA or PMA supplement.
Sales of medical device products outside the United States are subject
to foreign regulatory requirements that vary from country to country. The
time required to obtain approvals required by foreign countries may be longer
or shorter than that required for FDA clearance, and requirements for
licensing may differ from FDA requirements. Failure to comply with regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. The current regulatory
environment in Europe for medical devices differs significantly from that in
the United States. After June 1998, all medical devices sold in the European
Union must bear the CE mark. Devices are now classified by manufacturers
according to the risks they represent with a classification system giving
Class III as the highest risk devices and Class I as the lowest. Once the
device has been classified, the manufacturer can follow one of a series of
conformity assessment routes, typically through a registered quality system,
and demonstrate compliance to a European Notified Body. After that, the CE
mark may be applied to the device. Maintenance of the system is ensured
through annual on-site audits by the Notified Body and a post-market
surveillance system requiring the manufacturer to submit serious complaints
to the appropriate governmental authority.
Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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RAPID TECHNOLOGICAL CHANGE; SIGNIFICANT COMPETITION. The medical device
market is characterized by intensive development efforts and rapidly
advancing technology. The future success of the Company will depend, in large
part, upon its ability to anticipate and keep pace with advancing technology
and competing innovations. There can be no assurance, however, that the
Company will be successful in identifying, developing and marketing new
products or enhancing its existing products.
The Company believes that a number of large companies, with
significantly greater financial, manufacturing, marketing, distribution and
technical resources and experience than that of the Company, are focusing on
the development of visualization products for MIM. Several companies are
currently developing and marketing visualization products for MIM which could
be applied to cardiac surgery. There can be no assurance that the Company
will be successful in competing with any such companies.
Technological advances with other therapies for heart disease such as
drugs, interventional cardiology procedures or future innovations in cardiac
surgery techniques could make such other therapies more effective or lower in
cost than MIM surgical procedures and could render MIM cardiac surgery
obsolete.
There can be no assurance that physicians will use MIM surgical
procedures to replace or supplement established treatments, such as
conventional open-chest heart surgery, angioplasty or intravascular stents,
or that MIM cardiac surgery will be competitive with current or future
technologies. There can be no assurance that the Company will be able to
compete successfully against current and future competitors. Failure to do so
would have a material adverse effect upon the Company's business, financial
condition and results of operations.
RELIANCE ON STRATEGIC RELATIONSHIPS. The Company intends to pursue
strategic relationships with corporations and research institutions with
respect to the research, development, regulatory approval and marketing of
certain of its products. The Company's future success may depend, in part, on
its relationships with such partners, including, for example, the Company's
relationships with Medtronic Inc. and Heartport, Inc. The Company will have
limited or no control over the resources that any partner may devote to the
Company's products, or over its partners' development and marketing efforts.
There can be no assurance that any of the Company's present or future
collaborative partners will perform their obligations as expected or will
devote sufficient resources to the development or marketing of the Company's
potential products. Any parallel development by a partner of alternate
technologies, preclusion from entering into competitive arrangements, failure
to obtain timely regulatory approvals, premature termination of a
collaborative agreement or failure by a partner to devote sufficient
resources to the development and commercialization of the Company's products
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company anticipates that these
partners may have the unilateral right to terminate any such relationship
without significant penalty. There can be no assurance that the Company will
be successful in establishing or maintaining any such strategic relationships
in the future or that any such relationship will be successful.
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FLUCTUATIONS IN OPERATING RESULTS. Results of operations of the Company
may vary significantly from quarter to quarter depending upon numerous
factors, including the following: timing and results of product evaluations;
delays associated with the FDA and other regulatory approval processes;
demand for and utilization of the Company's products; changes in pricing
policies by the Company or its competitors; changes in third-party payment
guidelines; the number, timing and significance of product enhancements and
new product announcements by the Company and its competitors; the ability of
the Company to develop, introduce and market new and enhanced versions of the
Company's products on a timely basis; customer order deferrals in
anticipation of enhancements or new products offered by the Company or its
competitors; product quality problems; personnel changes; and the level of
international sales.
UNCERTAINTY RELATING TO THIRD-PARTY PAYMENTS. The Company expects that
sales volumes and prices of the Company's products will be directly
influenced by the profitability to, or cost-effectiveness for, hospitals of
the procedures in which the Company's products are involved. Profitability
levels are directly related to the level of payments for these procedures,
either by Medicare or private insurance companies, and it is a continuing
trend in U.S. health care for such payments to be under continual scrutiny
and downward pressure. The Company expects that its products typically will
be used by hospitals and surgical centers, which bill various third-party
payors, such as governmental programs and private insurance plans, for the
health care services provided to their patients. Third-party payors carefully
review and increasingly challenge the prices charged for medical products and
services or negotiate a flat rate fee in advance. Payment rates from private
companies also vary depending on the procedure performed, the third-party
payor, the insurance plan and other factors. Medicare compensates hospitals
at a prospectively determined fixed amount for the costs associated with an
in-patient hospitalization based on the patient's discharge diagnosis and
compensates physicians at a prospectively determined fixed amount based on
the procedure performed, regardless of the actual costs incurred by the
hospital or physician in furnishing the care and unrelated to the specific
devices or systems used in that procedure. Medicare and other third-party
payors are increasingly scrutinizing whether to cover new products and the
level of payment for new procedures. The flat fee reimbursement trend is
causing hospitals to control costs strictly in the context of a managed care
system in which health care providers contract to provide comprehensive
health care for a fixed cost per person. The Company is unable to predict
what changes will be made in the reimbursement methods utilized by
third-party health care payors. The Company could be adversely affected by
changes in payment policies of government or private health care payors,
particularly to the extent any such changes affect payment for the procedure
in which the Company's products are intended to be used.
If the Company obtains the necessary foreign regulatory registrations or
approvals, market acceptance of the Company's products in international
markets would be dependent, in part, upon the acceptance by the prevailing
health care financing system in each country. Health care financing systems
in international markets vary significantly by country and include both
government sponsored health care programs and private insurance. There can be
no assurance that these financing systems will endorse use of the Company's
technology.
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The Company believes that reimbursement in the future will be subject to
increased restrictions such as those described above, both in the United
States and in foreign markets. The Company believes that the overall
escalating cost of medical products and services has led to and will continue
to lead to increased pressures on the health care industry, both foreign and
domestic, to reduce the cost of products and services, including products
offered by the Company. There can be no assurance, as to either United States
or foreign markets, that funding will be available or adequate, or that
future legislation, regulation or reimbursement policies of third-party
payors will not otherwise adversely affect the demand for the Company's
products or its ability to sell its products on a profitable basis,
particularly if the Company's systems are more expensive than competing
surgical procedures. The unavailability or inadequacy of third-party payor
coverage or reimbursement would have a material adverse effect on the
Company's business, financial condition and results of operations.
RISK RELATING TO INTERNATIONAL OPERATIONS. In the event the Company is
successful in developing its products, manufacturing them in commercial
quantities and receiving necessary FDA and foreign regulatory registrations
or approvals, the Company plans to market its products in international
markets, either on its own or with its strategic partners. The Company has
limited experience in marketing its products overseas. Changes in overseas
economic conditions, currency exchange rates, foreign tax laws or tariffs or
other trade regulations could have a material adverse effect on the Company's
business, financial condition and results of operations. The anticipated
international nature of the Company's business is also expected to subject it
and its representatives, agents and distributors to laws and regulations of
the foreign jurisdictions in which they operate or in which the Company's
products under development are sold. The regulation of medical devices in a
number of such jurisdictions, particularly in the European Union, continues
to develop and there can be no assurance that new laws or regulations will
not have an adverse effect on the Company's business, financial condition and
results of operations. In addition, the laws of certain foreign countries do
not protect the Company's intellectual property rights to the same extent as
do the laws of the United States.
PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE. The Company faces
an inherent and significant business risk of exposure to product liability
claims in the event that the use of its products results in personal injury
or death and there can be no assurance that the Company will not experience
any material product liability losses in the future. Also, in the event that
any of the Company's products prove to be defective, the Company may be
required to recall or redesign such products. The Company's current product
liability insurance coverage limit is $4.0 million in the aggregate. There
can be no assurance that such coverage limits are adequate to protect the
Company from any liabilities it might incur in connection with the
development, manufacture and sale of its products. In addition, the Company
may require increased product liability coverage if any products are used in
clinical evaluations or successfully commercialized. Product liability
insurance is expensive and in the future may not be available to the Company
on acceptable terms, if at all. A successful product liability claim or
series of claims brought against the Company in excess of its insurance
coverage or a product recall could have a material adverse effect on the
Company's business, financial condition and results of operations.
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UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY TECHNOLOGY;
RISKS OF FUTURE LITIGATION. Vista Medical relies on a combination of
technical leadership, patent, trade secret, copyright and trademark
protection and nondisclosure agreements to protect its proprietary rights. As
of July 30, 1997, the Company had exclusive ownership rights to seven issued
United States patents, nine pending United States patent applications and
eight pending foreign applications covering various aspects of its devices
and systems. Furthermore, as of the same date, the Company had exclusive
rights in the medical field to four issued United States patents, one pending
United States patent application, three issued foreign patents and nine
pending foreign applications covering various aspects of its devices and
systems. The Company intends to file additional patent applications in the
future. The failure of such patents to issue could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company's future success will depend, in part, on its ability to
continue to develop patentable products, enforce its patents and obtain
patent protection for its products both in the United States and in other
countries. The patent positions of medical device companies, including the
Company, however, are generally uncertain and involve complex legal and
factual questions. There can be no assurance that patents will issue from any
patent applications owned by or licensed to the Company or that, if patents
do issue, the claims allowed will be sufficiently broad to protect the
Company's technology. In addition, there can be no assurance that any issued
patents owned by or licensed to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will
provide competitive advantages to the Company.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights.
Litigation, which would result in substantial expense to the Company, may be
necessary to enforce any patents issued or licensed to the Company and/or to
determine the scope and validity of proprietary rights of third parties or
whether the Company's products, processes or procedures infringe any such
third-party proprietary rights. The Company may also have to participate in
interference proceedings declared by the United States Patent and Trademark
Office, which could result in substantial expense to the Company, to
determine the priority of inventions covered by the Company's issued United
States patents or pending patent applications. Furthermore, the Company may
have to participate at substantial cost in International Trade Commission
proceedings to enjoin importation of products which would compete unfairly
with products of the Company. Any adverse outcome of any patent litigation
(including interference proceedings) could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from or
to third parties or require the Company to cease using the technology in
dispute.
Patent applications in the United States are maintained in secrecy until a
patent issues, and patent applications in foreign countries are maintained in
secrecy for a period of time after filing. After such period of time, and
usually before the grant of the patent, patent applications in foreign countries
are published. While publication of discoveries in the scientific or patent
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literature tends to lag behind actual discoveries and the filing of related
patent applications, such publication may enable the Company's competitors to
ascertain what areas of research or development the Company is engaged in
prior to the Company's receipt of patent protection in the United States or
foreign countries relating to such research or development.
In general, the development of visualization and information systems and
related surgical instruments and accessories is intensely competitive.
Patents issued and patent applications filed relating to medical devices are
numerous and there can be no assurance that current and potential competitors
and other third parties have not filed or in the future will not file
applications for, or have not received or in the future will not receive,
patents or obtain additional proprietary rights relating to products or
processes used or proposed to be used by the Company. There can also be no
assurance that third parties will not assert infringement claims against the
Company in the future or that any such assertions will not result in costly
litigation or require the Company to obtain a license to intellectual
property rights of such parties. There can be no assurance that any such
licenses would be available on terms acceptable to the Company, if at all.
Furthermore, parties making such claims may be able to obtain injunctive or
other equitable relief that could effectively block the Company's ability to
make, use, sell or otherwise practice its intellectual property (whether or
not patented or described in pending patent applications), or to further
develop or commercialize its products in the United States and abroad and
could result in the award of substantial damages. Defense of any lawsuit or
failure to obtain any such license could have a material adverse effect on
the Company.
The Company relies on unpatented trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire the same or substantially
equivalent technologies or otherwise gain access to the Company's proprietary
technology or disclose such technology or that the Company can ultimately
protect its rights to such unpatented proprietary technology. No assurance
can be given that third parties will not obtain patent rights to such
unpatented trade secrets, which patent rights could be used to assert
infringement claims against the Company. The Company also relies on
confidentiality agreements with its collaborators, employees, advisors,
vendors and consultants to protect its proprietary technology. There can be
no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors. In addition, the Company's agreements with its employees and
consultants require disclosure to the Company of ideas, developments,
discoveries or inventions conceived during employment or consulting, as the
case may be, and assignment to the Company of proprietary rights to such
matters related to the business and technology of the Company. The extent to
which efforts by others will result in patents and the effect on the Company
of the issuance of such patents is unknown. Failure to obtain or maintain
patent and trade secret protection, for any reason, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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The Company has in-licensed certain aspects of its technology. In
September 1995, Mr. H. McKinley and McKinley Optics, Inc. (collectively,
"McKinley") granted to the Company a perpetual, exclusive, worldwide license
in the medical field to make, have made, modify, use, lease, market, sell and
otherwise distribute certain endoscopes and other medical products
incorporating a stereo objective lens and/or a relay lens configuration.
Under the terms of this license agreement, Vista Medical is obligated to pay
McKinley an annual maintenance royalty, additional royalties upon the sale of
certain numbers of systems incorporating the McKinley technology and
royalties on net sales of products incorporating the McKinley technology. The
exclusive license granted under this agreement becomes a non-exclusive
license (or, under certain circumstances, the license terminates) in the
event Vista Medical fails to pay any royalties following receipt of notice of
such failure to pay. In addition, Vista Medical has the right to terminate
the agreement with limited notice.
In June 1996, Fuji Film Co. and Fuji Photo Optical Co., Ltd.
(collectively, "Fuji") granted to the Company a non-exclusive license to
certain optical zoom technology for use in endoscopes. Vista Medical is
obligated to pay royalties on net sales of products in the United States
which incorporate Fuji's technology. Fuji may terminate the agreement if
Vista Medical does not cure any violation of the agreement within a limited
period of time. Failure of the Company to retain rights to these technologies
could have a material, adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON KEY PERSONNEL AND ADVISORS. The Company's future business
and operating results depend in significant part upon the continued
contributions of its key technical and senior management personnel, many of
whom would be difficult to replace and certain of whom perform important
functions for the Company beyond those functions suggested by their
respective job titles or descriptions. The Company's business and future
operating results also depend in significant part upon its ability to attract
and retain qualified management, manufacturing, technical, marketing and
sales and support personnel for its operations. The Company has not entered
into any employment contracts or arrangements with any of its employees.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting or retaining such personnel. The
loss of any key employee, the failure of any key employee to perform in his
or her current position or the Company's inability to attract and retain
skilled employees, as needed, could materially adversely affect the Company's
business, financial condition and results of operations.
The Company has established two Clinical Advisory Boards made up of leading
surgeons, one focused on minimally invasive cardiac surgery, the other focused
on a number of HNS microsurgery and other specialties. Members of the Clinical
Advisory Boards consult with the Company exclusively in the field of
visualization, but are free to consult with other instrumentation companies and
are employed elsewhere on a full-time basis. As a result, they only spend a
limited amount of time on the Company's affairs. Although the Company has
entered into consulting agreements, with terms ranging from 12 months to two
years, including confidentiality provisions with each of the members of the
Clinical Advisory Boards, there can
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be no assurance that the consulting and confidentiality agreements between
the Company and each of the members of the Clinical Advisory Boards will not
be terminated or breached. In addition, there can be no assurance that any of
such agreements will be renewed upon termination.
NEED TO MANAGE A CHANGING BUSINESS. In order to compete effectively
against current and future competitors, prepare additional products for
potential commercialization and develop future products, the Company believes
that it must continue to expand its operations, particularly in the areas of
development and manufacturing. If the Company were to experience significant
growth in the future, such growth would likely result in new and increased
responsibilities for management personnel and place significant strain upon
the Company's management, operating and financial systems and resources. To
accommodate such growth and compete effectively, the Company must continue to
implement and improve information systems, procedures and controls, and to
expand, train, motivate and manage its work force. The Company is in the
final stages of implementing an integrated financial, manufacturing and
inventory information system. Implementing such a system can be
time-consuming and expensive and requires significant management resources.
There can be no assurance that such system will be implemented on a timely
basis. All of the foregoing demands will require the addition of new
management personnel. The Company's future success will depend to a
significant extent on the ability of its current and future management
personnel to operate effectively, both independently and as a group. There
can be no assurance that the Company's personnel, systems, procedures and
controls will be adequate to support the Company's future operations. Any
failure to implement and improve the Company's operational, financial and
management systems or to expand, train, motivate or manage employees could
have a material adverse effect on the Company's business, financial condition
and results of operations.
POTENTIAL VOLATILITY OF STOCK PRICE. The market prices and trading
volumes for securities of emerging companies, like the Company, have
historically been highly volatile and have experienced significant
fluctuations unrelated to the operating performance of such companies. The
market price of the shares of Common Stock is likely to be highly volatile
and may be significantly affected by factors such as actual or anticipated
fluctuations in the Company's operating results, changes in financial
estimates by securities analysts, announcements of technological innovations,
new products or new contracts by the Company or its competitors, regulatory
announcements, developments with respect to patents or proprietary rights,
conditions and trends in the medical device and other technology industries,
adoption of new accounting standards affecting the medical device industry,
general market conditions and other factors. In addition, the stock market
has from time to time experienced significant price and volume fluctuations
that have particularly affected the market prices for shares of early stage
companies. These broad market fluctuations may adversely affect the market
price of the Common Stock. In the past, following periods of volatility in
the market price of a particular company's securities, securities class
action litigation has often been brought against that company. Such
litigation, if brought against the Company, could result in substantial costs
and a diversion of management's attention and resources.
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HAZARDOUS MATERIALS. The Company's research and development may involve
the controlled use of hazardous materials and chemicals. Although the Company
believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any resultant damages, and any such
liability could exceed the resources of the Company. The Company may incur
substantial cost to comply with environmental regulations.
NO DIVIDENDS. The Company currently intends to retain any future
earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF SECOND
RESTATED CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW. The
Company's Board of Directors has the authority to issue up to 5,000,000
shares of preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting and conversion rights of such
shares, without any further vote or action by the Company's stockholders. The
rights of the holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be
issued in the future. The issuance of preferred stock could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company.
In addition, the Company's Second Restated Certificate of Incorporation
provides for a classified Board of Directors such that approximately
one-third of the members of the Company's Board of Directors are elected at
each annual meeting of stockholders. Such classification of the Company's
Board of Directors may have the effect of delaying, deferring or discouraging
changes in control of the Company. Making more difficult or discouraging a
change in control of the Company may adversely affect the market price of the
Common Stock.
24
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 19, 1997, the stockholders approved an amendment to the
Company's 1997 Stock Option/Stock Issuance Plan by written consent,
pursuant to which the maximum number of common shares any one person
participating in the plan may receive in the form of options, stock
appreciation rights and direct stock issuances in the aggregate per
calendar year was increased to 300,000. Holders of 511,502 shares of
common stock and 9,334,667 shares of preferred stock voted in favor of
the amendment, representing 80.8% of the Company's outstanding capital
stock. No abstentions or broker non-votes were received.
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
27 Financial Data Schedule
B) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three
months ended June 30, 1997.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VISTA MEDICAL TECHNOLOGIES, INC.
Date: August 12, 1997 /s/ John R. Lyon
---------------- --------------------------------------------
John R. Lyon
President, Chief Executive Officer and
Director
Date: August 12, 1997 /s/ Robert J. De Vaere
---------------- --------------------------------------------
Robert J. De Vaere
Director of Finance and Administration and
Chief Financial Officer
(Principal financial and accounting officer)
26
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1996 AND AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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