<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1997
REGISTRATION NO. 333-22985
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
VISTA MEDICAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3845 94-3184035
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
5451 AVENIDA ENCINAS, SUITE A, CARLSBAD, CALIFORNIA 92008 (760) 603-9120
(Address, including zip code and telephone number, including
area code, of registrant's principal executive offices)
JOHN R. LYON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VISTA MEDICAL TECHNOLOGIES, INC.
5451 AVENIDA ENCINAS, SUITE A
CARLSBAD, CALIFORNIA 92008
(760) 603-9120
(Name, address, including zip code and telephone number, including area code, of
agent for service)
------------------
with copies to:
<TABLE>
<S> <C>
Craig S. Andrews, Esq. Douglas M. Mancino, Esq.
Faye H. Russell, Esq. Mark J. Mihanovic, Esq.
BROBECK, PHLEGER & HARRISON LLP McDERMOTT, WILL & EMERY
550 West "C" Street, Suite 1300 2049 Century Park East
San Diego, California 92101 34th Floor
Los Angeles, California 90067
</TABLE>
--------------
Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE.
THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN
WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 25, 1997
3,500,000 SHARES
[LOGO]
VISTA MEDICAL TECHNOLOGIES, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
--------------
All of the 3,500,000 shares of Common Stock offered hereby are being sold by
the Company. Prior to this Offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $8.00 and $10.00. For factors to be considered in
determining the initial public offering price, see "Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "VMTI."
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT (1) COMPANY (2)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Share................................................. $ $ $
Total (3)................................................. $ $ $
</TABLE>
- --------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting estimated expenses of $700,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 525,000 shares at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments. If
such option is exercised in full, the total initial public offering price,
underwriting discount and proceeds to the Company will be $ ,
$ and $ , respectively. See "Underwriting."
--------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York on or about
, 1997, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO. SALOMON BROTHERS INC
---------
The date of this Prospectus is , 1997.
<PAGE>
FRONT OUTSIDE FLAP
TEXT IN UPPER RIGHT CORNER:
VISTA MEDICAL'S 3D HMD FOR MINIMALLY INVASIVE MICROSURGERY
Vista Medical Technologies (Vista Medical) was originally founded by Kaiser
Aerospace and Electronics Corporation, a leader in the development and
manufacture of heads-up and head mounted displays (HMD) for aerospace
applications. Vista Medical's HMD, specifically designed for minimally invasive
microsurgery, incorporates the visualization, information and human factors
technology developed by Kaiser for its military customers.
(PHOTOGRAPH DESCRIPTION AND CAPTIONS)
1. Background: Blue with clouds
2. Top left: Typical aerospace display
3. Top left (lower and more centered): A flight helmet (head mounted display).
4. Center: Vista Medical Head Mounted Display (HMD) for surgery.
5. Lower left hand corner: Typical surgical data which will be shown on the
HMD.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company intends to furnish to its stockholders annual reports containing
audited financial statements certified by an independent public accounting firm
and quarterly reports containing unaudited interim financial information for the
first three fiscal quarters of each fiscal year of the Company.
THE COMPANY HAS RIGHTS IN THE FOLLOWING TRADEMARKS: 3D
SCOPE-REGISTERED TRADEMARK-, DESIGN OF CONE AND VISTA MEDICAL TECHNOLOGIES &
DESIGN. IN ADDITION, THE COMPANY HAS APPLIED TO REGISTER THE FOLLOWING
TRADEMARKS: MIM, STEREOSITE, CARDIOCAMERA, CARDIOZOOM, INFOMATIX, CARDIOVIEW,
CARDIOCONTROLLER, CARDIOGUIDE, CARDIOCONSOLE AND CARDIOLIGHT. THIS PROSPECTUS
ALSO INCLUDES NAMES AND TRADEMARKS OF COMPANIES OTHER THAN THE COMPANY,
INCLUDING HEARTPORT AND PORT-ACCESS WHICH ARE TRADEMARKS OF HEARTPORT, INC.
2
<PAGE>
INSIDE COVER
Background: Blue with images of a heart
Text in center right of page: Series 8000 Advanced Visualization and
Information System for Cardiac Surgery
Center right: Cardiac surgeons using the Company's system.
Lower left: The Series 8000 Advanced Visualization and Information Sytem and
the Company's micro-cameras.
Text in lower right corner: The Series 8000 is a 3D image acquisition and
display system developed in consultation with the Company's Clinical Advisory
Board to respond to the requirements of minimally invasive cardiac surgical
applications. Vista Medical believes that the Series 8000 is the only
visualization and information system specifically designed for minimally
invasive cardiac surgery. The photograph shows cardiac surgeons wearing the
CardioView HMDs and using the miniature 3D CardioCamera. Also shown is the
CardioConsole, the central control unit for the Series 8000, and a close-up view
of the series 8000 camera options.
The Series 8000 product has been cleared to market in the U.S. by the FDA
with expected commercial availability later this year.
3
<PAGE>
FRONT INSIDE FLAP
Text in upper right corner: StereoSite Systems for Head, Neck and Spine
Surgery
Background: Blue with imprint of the head.
Center: Two surgeons, with one using the Vista Medical System in a
neurological application.
Right Corner: Diagnostic data.
Text in lower left corner: Advances in neurosurgery and related specialties
are increasingly dependent on the provision of accurate diagnostic and guidance
information to the surgeon in real-time. Vista Medical's StereoSite system for
microscopic and microendoscopic applications are designed to give the surgeon
the ergonomic advantages of an HMD combined with the ability to integrate data
into the anatomical view. Illustrated here is an example of information in the
form of computer derived 3D reconstructions of the brain used by the
neurosurgeon for preoperative surgical planning and intra-operative guidance.
The photograph shows a surgeon operating using a surgical microscope for
magnified visualization, with a colleague observing the same image on a Vista
Medical HMD.
The StereoSite systems are under development, have not been cleared to
market in the U.S. by the FDA and are not commercially available.
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND THE COMPANY'S FINANCIAL STATEMENTS (INCLUDING THE NOTES
THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE INDICATED
HEREIN, ALL INFORMATION CONTAINED IN THIS PROSPECTUS (I) GIVES EFFECT TO A
THREE-FOR-FOUR REVERSE SPLIT OF THE COMMON STOCK, PAR VALUE $0.01 PER SHARE (THE
"COMMON STOCK"), OF THE COMPANY, (II) REFLECTS THE CONVERSION OF ALL OUTSTANDING
SHARES OF THE COMPANY'S PREFERRED STOCK, PAR VALUE $0.01 (THE "PREFERRED
STOCK"), INTO AN AGGREGATE OF 8,680,679 SHARES OF COMMON STOCK AND (III) ASSUMES
NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. THIS PROSPECTUS MAY
CONTAIN, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED UNDER THE HEADING "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER SUCH INFORMATION SET
FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
Vista Medical Technologies, Inc. ("Vista Medical" or the "Company")
develops, manufactures and intends to market 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 currently markets endoscopic cameras and related
surgical instruments and accessories. Vista Medical's visualization and
information systems bring together head-mounted display ("HMD") technology
originally developed for applications in military aerospace by Kaiser Aerospace
and Electronics Corporation ("Kaiser Aerospace") and three-dimensional ("3-D")
imaging capability from its acquisition of Oktas, Inc.
The development and subsequent widespread adoption of minimally invasive
surgical approaches have revolutionized many surgical fields, including general
surgery, orthopedics, gynecology and urology. Minimally invasive surgical
procedures are performed through strategically placed ports or mini-incisions in
a patient's body, thereby avoiding the larger incisions used in traditional open
surgery. Minimally invasive procedures are designed to decrease complications,
reduce pain and suffering, speed recovery and decrease costs associated with
many aspects of patient care. This movement toward minimally invasive surgery
has been driven by advances in both device technology and surgical technique, as
well as patient demand. Minimally invasive microsurgery ("MIM") is an extension
of minimally invasive surgery and is characterized by greater complexity and
precision. MIM procedures have been made possible primarily by recent advances
in medical technology.
The application of minimally invasive techniques to cardiothoracic surgery
is commonly regarded as a revolutionary development in modern surgery. Minimally
invasive cardiac procedures avoid the trauma caused by sternotomy and promise to
significantly decrease pain and trauma and shorten recovery times.
Cardiothoracic MIM requires the surgeon to perform technically challenging
procedures, including working on tiny delicate structures (such as a one
millimeter heart vessel) with highly restricted access through small incisions.
The Company believes that an advanced visualization technology which
provides the surgeon with an intuitive and ergonomic solution to the inherent
vision restrictions of the MIM approach will enable the use of the MIM technique
with increased safety, efficacy and precision. In order to meet this
visualization challenge, the Company has developed proprietary visualization and
information systems.
Vista Medical's proprietary technology is based on the following principles
which the Company believes are essential in advancing the techniques of MIM: (i)
three-dimensional view; (ii) high resolution images; (iii) improved access
through miniaturization technology; (iv) optimized surgical ergonomics; and (v)
integration of anatomical image with critical monitoring and diagnostic
information.
3
<PAGE>
Based on these principles, Vista Medical develops visualization products and
related information systems that are customized for the specific cardiothoracic
and HNS procedures to which they are directed. The Company's product lines
include the Series 8000 Advanced Visualization and Information System ("Series
8000"), designed for use in cardiothoracic procedures, and StereoSite, designed
for use in microscopic and endoscopic procedures in HNS. All 510(k) clearances
to market necessary for Series 8000 commercialization have been received, with
expected commercial availability later this year. The StereoSite systems are
under development, have not been cleared to market in the U.S. by the U.S. Food
and Drug Administration ("FDA") and are not commercially available. The Company
anticipates filing a required 510(k) pre-market notification for the processor
component of the HMD for the StereoSite system in third quarter 1997. All other
required 510(k) clearances to market for the StereoSite system have been
received. The Company also offers surgical instruments and accessories designed
for use in both cardiothoracic and HNS MIM procedures.
BUSINESS STRATEGY
The Company's business strategy is to become the leading developer and
marketer of advanced visualization and information systems for MIM applications
in cardiothoracic, HNS and other selected surgical specialties. Key elements of
the Company's strategy include:
- Establish advanced visualization technologies as standard practice in
minimally invasive cardiac surgery.
- Promote Vista Medical's visualization solution for use in all types of
cardiac surgery.
- Develop MIM applications through specialty-focused business units by
leveraging the Company's technology platform.
- Accelerate adoption of the Series 8000 Advanced Visualization and
Information System in the cardiac market by implementing a per-procedure
pricing strategy.
- Increase the surgeon's real-time access to critical data.
- Enter into strategic relationships which complement Company resources.
To assist in implementing its business strategy, the Company has established
two Clinical Advisory Boards made up of leading surgeons, one focused on
minimally invasive cardiac surgery, the other focused on HNS microsurgery and a
number of other specialties. Members of the Clinical Advisory Boards consult
with the Company exclusively in the field of visualization. The Clinical
Advisory Boards are intended to act as a clinical reference for the Company and
to provide access to potential training sites for the Company's visualization
products.
RECENT DEVELOPMENTS
In November 1996, Vista Medical and Medtronic, Inc. ("Medtronic"), a leading
cardiac company, entered into a strategic alliance providing for the
distribution and co-promotion of the Company's current and future visualization
and information systems for cardiac surgery, including the Series 8000 (the
"Vista Systems"). Medtronic will act as Vista Medical's exclusive distributor
for the Vista Systems for use in cardiothoracic surgical procedures in Europe,
the Middle East (excluding Afghanistan and Pakistan) and Africa and will
co-promote the Vista Systems in North America. Vista Medical retains direct
distribution rights in North America as well as the worldwide right to
distribute its systems for use in all other procedures. In conjunction with
entering into the agreement, Medtronic made a $10.0 million equity investment in
the Company.
The Company believes that the control and processing of information is a key
component in the development of advanced visualization systems. As a result, in
February 1997, the Company obtained from GDE Systems, Inc. ("GDE"), a leading
military electronics and information management company,
4
<PAGE>
an exclusive worldwide license to software and documentation and trademarks of
GDE for use in the medical field. Since 1993, GDE's subsidiary, Healthcom, has
been adapting the software licensed to Vista Medical to provide high-speed,
image-based information processing and networking capabilities specifically for
medical applications. In connection with the license, Vista Medical will issue
to GDE Common Stock with a value (based on the initial public offering price) of
$250,000.
In February 1997, the Company entered into an agreement with Heartport, Inc.
("Heartport"), a leading company developing minimally invasive technology for
heart surgery. Vista Medical will sell four Series 8000 systems to Heartport,
for use in the Heartport Research and Training Center in Salt Lake City, Utah.
Heartport has agreed to use the Series 8000 in its training centers, to promote
that its training courses utilize the Series 8000 and to endorse the Series 8000
as the preferred 3-D video visualization and information solution for minimally
invasive heart surgery. In connection with the agreement, the Company issued to
Heartport a warrant to purchase up to 100,000 shares of Common Stock,
exercisable at any time after this Offering and prior to March 31, 2001, at a
price per share equal to the initial public offering price. If an initial public
offering is not completed by June 30, 1997, the price will be $6.67 per share.
Since February 1997, Vista Medical's CardioThoracic Surgery division has
exhibited the Series 8000 at two major cardiothoracic surgery meetings in the
U.S. and at the World Congress on Minimally Invasive Cardiac Surgery in Paris.
Surgeons attending these conferences expressed interest in the potential growth
of minimally invasive surgeries and the importance of enabling technologies such
as visualization. At these conferences, hundreds of surgeons participated in a
hands-on demonstration of the Series 8000, expressed interest and requested
additional information.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 3,500,000 shares
Common Stock to be outstanding after the
Offering.................................... 12,797,528 shares (1)
Use of proceeds.............................. Fund product introductions, sales and
marketing activities, research and
development, acquisition of capital equipment
for manufacturing scale-up and for working
capital and other general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market symbol................ VMTI
</TABLE>
- --------------
(1) Based on shares outstanding as of March 31, 1997. Does not include (i)
1,282,676 shares of Common Stock issuable upon exercise of options
outstanding as of March 31, 1997 at a weighted average exercise price of
$0.54 per share pursuant to the Company's stock option plans, (ii) 100,000
shares of Common Stock issuable upon the exercise of warrants granted to
Heartport at an exercise price equal to the initial public offering price of
the Common Stock offered hereby or, if not completed by June 30, 1997, at an
exercise price of $6.67 per share and (iii) a number of shares of Common
Stock equal to $250,000 divided by the initial public offering price of the
Common Stock offered hereby to be issued to GDE immediately following the
closing of this Offering. See "Capitalization," "Management--Benefit Plans"
and "Description of Capital Stock."
RISK FACTORS
The shares offered hereby involve a high degree of risk, and prospective
purchasers should carefully consider the factors described under the heading
"Risk Factors."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------- -----------------------
1994 1995 1996 1996 1997
--------- --------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.............................................. $ 59 $ 1,719 $ 2,244 $ 241 $ 829
Costs and expenses:
Cost of sales.................................... 43 1,272 2,253 184 826
Research and development......................... 1,328 1,904 3,880 533 1,514
Sales and marketing.............................. 291 834 2,057 313 745
General and administrative....................... 758 1,034 3,103 399 1,164
--------- --------- ----------- ---------- -----------
Total costs and expenses....................... 2,420 5,044 11,293 1,429 4,249
--------- --------- ----------- ---------- -----------
Loss from operations............................... (2,361) (3,325) (9,049) (1,188) (3,420)
Minority interest in net loss of consolidated
partnership....................................... 270 -- -- -- --
License income..................................... -- -- 1,493 -- --
Interest income.................................... -- 51 117 34 102
--------- --------- ----------- ---------- -----------
Net loss........................................... $ (2,091) $ (3,274) $ (7,439) $ (1,154) $ (3,318)
--------- --------- ----------- ---------- -----------
--------- --------- ----------- ---------- -----------
Pro forma net loss per share (1)................... $ (0.86) $ (0.37)
Shares used in computing pro forma net loss per
share (1)......................................... 8,626,898 9,079,976
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------
AS
ACTUAL ADJUSTED (2)
---------- ------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.................................... $ 5,844 $ 34,439
Working capital...................................................................... 7,554 36,149
Total assets......................................................................... 11,226 39,821
Total debt........................................................................... -- --
Accumulated deficit.................................................................. (16,939) (16,939)
Total stockholders' equity........................................................... 9,955 38,550
</TABLE>
- --------------
(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share and shares used
in computing pro forma net loss per share.
(2) Gives effect to the sale of 3,500,000 shares of Common Stock offered by the
Company in this Offering at the assumed offering price of $9.00 per share
(the mid-point of the range set forth on the front cover) and the
application of the net proceeds therefrom, after deducting the underwriting
discount and offering expenses payable by the Company. See "Use of
Proceeds."
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. THE FOLLOWING FACTORS, IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS, SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE
COMPANY AND ITS BUSINESS BEFORE PURCHASING SHARES OF COMMON STOCK OFFERED
HEREBY. THIS PROSPECTUS MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT
MIGHT CAUSE SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW.
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 accessories that enable 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 original
equipment manufacturer ("OEM"). As of March 31, 1997, the Company had incurred
cumulative net losses of $16.9 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 this Offering and the
interest income thereon, together with its existing cash, cash equivalents and
short-term investments, will be sufficient to fund its operations through 1998.
If, at or prior to such time, the net proceeds of this Offering, 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE UPON AND UNCERTAINTY REGARDING COMMERCIALIZATION OF SERIES 8000
The 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.
7
<PAGE>
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. See "Business -- Product Lines," "Business
- -- Marketing and Sales," "Business -- Manufacturing" and "Business -- Government
Regulation."
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
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. See "Business -- Background," "Business -- Product
Lines," "Business -- Marketing and Sales," "Business -- Competition" and
"Business -- Government Regulation."
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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 Vista Medical 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 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. See "Business -- Manufacturing."
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 four direct
(Company employee) sales representatives and 30 independent sales
representatives. The Company is in the process of hiring up to eight 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.
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. See "Business -- Strategic
Alliances" and "Business -- Marketing and Sales."
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
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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. See "Business -- Manufacturing."
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.
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.
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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 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.
Europe is currently in the transitional process of implementing the Medical
Device Directive which was adopted on January 1, 1995 with a transition period
through June 1998. 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.
See "Business -- Government Regulation."
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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. See
"Business -- Competition."
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 and Heartport. The Company
will have limited or no control over the resources that any partner may devote
to the Company's products, or over 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. See "Business -- Strategic Alliances."
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,
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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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
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.
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.
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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. See "Business -- Government Regulation" and "Business
- -- Patents and Proprietary Rights."
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.
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 May 31, 1997, the Company had exclusive
ownership rights to seven issued United States patents, 10 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,
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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
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
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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. See "Business -- Patents and Proprietary Rights" and
"Business -- Competition."
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. See "Business
- -- Patents and Proprietary Rights."
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. See "Management -- Executive Officers and
Directors."
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 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
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breached. In addition, there can be no assurance that any of such agreements
will be renewed upon termination. See "Business -- Clinical Advisory Boards."
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. See "Business
- -- Human Resources" and "Management."
NO PRIOR TRADING MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained after this Offering. The initial public offering price will be
determined through negotiations among the Company and the representatives of the
Underwriters based on several factors and may not be indicative of the market
price of the Common Stock after this Offering. 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. See "Underwriting."
CONTROL BY EXISTING STOCKHOLDERS, OFFICERS AND DIRECTORS
Upon completion of this Offering, the present directors, executive officers
and principal stockholders of the Company and their affiliates will beneficially
own approximately 71.1% of the outstanding Common Stock. As a result, these
stockholders will be able to exercise control over all matters requiring
stockholder approval (including the election of directors and approval of
significant corporate transactions) irrespective of how other stockholders may
vote. Such concentration of ownership may have the effect of delaying or
preventing a change in control of the Company and thereby adversely affect the
market price of the Common Stock. See "Principal Stockholders."
17
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public market
following this Offering could adversely affect the market price for the Common
Stock. The number of shares of Common Stock available for sale in the public
market is limited by restrictions under the Securities Act of 1933, as amended
(the "Securities Act"), and by lock-up agreements under which the Company's
officers, directors and certain stockholders of the Company (who hold an
aggregate of approximately 9,139,000 shares of Common Stock, including shares
issued or issuable upon the exercise of vested options and warrants outstanding
as of May 31, 1997) have agreed not to sell or otherwise dispose of any of their
shares for a period of 180 days after the date of this Prospectus without the
prior written consent of Goldman, Sachs & Co. Goldman, Sachs & Co. may, in its
sole discretion and at any time without notice, release all or any portion of
the securities subject to lock-up agreements. As a result of restrictions under
the Securities Act and the lock-up agreements, the following shares of Common
Stock (including shares issued or issuable upon the exercise of vested options
and warrants outstanding as of May 31, 1997) will be eligible for future sale:
on the date of this Prospectus, 3,500,750 shares (including the 3,500,000 shares
offered hereby) will be eligible for sale; an additional approximately 9,039,000
shares will be eligible for sale 180 days after the date of this Prospectus; the
remaining 100,000 shares of Common Stock will become eligible for sale under
Rule 144 at various dates thereafter as the holding period provisions of Rule
144 are satisfied. In addition, the Company intends to register on the effective
date of this Offering a total of 2,820,000 shares of Common Stock subject to
outstanding options or reserved for issuance under the Company's 1997 Stock
Option/Stock Issuance Plan and 200,000 shares of Common Stock reserved for
issuance under its 1997 Employee Stock Purchase Plan. Further, upon expiration
of such lock-up agreements, holders of approximately 8,780,679 shares of Common
Stock will be entitled to certain registration rights with respect to such
shares. If such holders, by exercising their registration rights, cause a large
number of shares to be registered and sold in the public market, such sales
could have a material adverse effect on the market price for the Common Stock.
The Company cannot predict the effect, if any, that market sales of shares
or the availability of shares for sale will have on the market price of the
Common Stock prevailing from time to time. Sales of significant amounts of the
Common Stock in the public market could adversely affect the market price of the
Common Stock and could impair the Company's ability to raise capital through an
offering of its equity securities. See "Description of Capital Stock --
Registration Rights" and "Shares Eligible for Future Sale."
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. See "Dividend Policy."
18
<PAGE>
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF SECOND RESTATED
CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW
Upon completion of this Offering, the Company's Board of Directors will have
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 will be
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. See "Description of
Capital Stock -- Preferred Stock" and "Description of Capital Stock -- Possible
Antitakeover Effect of Certain Charter Provisions."
SUBSTANTIAL DILUTION
Investors participating in this Offering will incur immediate, substantial
dilution. To the extent outstanding options to purchase the Common Stock are
exercised, there will be further dilution. If the net proceeds of this Offering,
together with available funds and cash generated from operations, are
insufficient to satisfy the Company's cash needs, the Company may be required to
sell additional equity or convertible debt securities. The sale of additional
equity or convertible debt securities could result in additional dilution to the
Company's stockholders. See "Dilution" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
19
<PAGE>
THE COMPANY
Vista Medical Technologies, Inc. ("Vista Medical" or the "Company")
develops, manufactures and intends to market 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 currently markets endoscopic cameras and related
surgical instruments and accessories. Vista Medical's visualization and
information systems bring together head-mounted display ("HMD") technology
originally developed for applications in military aerospace by Kaiser Aerospace
and Electronics Corporation ("Kaiser Aerospace") and three-dimensional ("3-D")
imaging capability from its acquisition of Oktas, Inc.
The development and subsequent widespread adoption of minimally invasive
surgical approaches have revolutionized many surgical fields, including general
surgery, orthopedics, gynecology and urology. Minimally invasive surgical
procedures are performed through strategically placed ports or mini-incisions in
a patient's body, thereby avoiding the larger incisions used in traditional open
surgery. Minimally invasive procedures are designed to decrease complications,
reduce pain and suffering, speed recovery and decrease costs associated with
many aspects of patient care. This movement toward minimally invasive surgery
has been driven by advances in both device technology and surgical technique, as
well as patient demand. Minimally invasive microsurgery ("MIM") is an extension
of minimally invasive surgery and is characterized by greater complexity and
precision. MIM procedures have been made possible primarily by recent advances
in medical technology.
The application of minimally invasive techniques to cardiothoracic surgery
is commonly regarded as a revolutionary development in modern surgery. Minimally
invasive cardiac procedures avoid the trauma caused by sternotomy and promise to
significantly decrease pain and trauma and shorten recovery times.
Cardiothoracic MIM requires the surgeon to perform technically challenging
procedures, including working on tiny delicate structures (such as a one
millimeter heart vessel) with highly restricted access through small incisions.
The Company believes that an advanced visualization technology which
provides the surgeon with an intuitive and ergonomic solution to the inherent
vision restrictions of the MIM approach will enable the use of the MIM technique
with increased safety, efficacy and precision. In order to meet this
visualization challenge, the Company has developed proprietary visualization and
information systems.
Vista Medical's proprietary technology is based on the following principles
which the Company believes are essential in advancing the techniques of MIM: (i)
three-dimensional view; (ii) high resolution images; (iii) improved access
through miniaturization technology; (iv) optimized surgical ergonomics; and (v)
integration of anatomical image with critical monitoring and diagnostic
information.
Based on these principles, Vista Medical develops visualization products and
related information systems that are customized for the specific cardiothoracic
and HNS procedures to which they are directed. The Company's product lines
include the Series 8000 Advanced Visualization and Information System ("Series
8000"), designed for use in cardiothoracic procedures, and StereoSite, designed
for use in microscopic and endoscopic procedures in HNS. All 510(k) clearances
to market necessary for Series 8000 commercialization have been received, with
expected commercial availability later this year. The StereoSite systems are
under development, have not been cleared to market in the U.S. by the U.S. Food
and Drug Administration ("FDA") and are not commercially available. The Company
anticipates filing a required 510(k) pre-market notification for the processor
component of the HMD for the StereoSite system in third quarter 1997. All other
required 510(k) clearances to market for the StereoSite system have been
received. The Company also offers surgical instruments and accessories designed
for use in both cardiothoracic and HNS MIM procedures.
20
<PAGE>
BUSINESS STRATEGY
The Company's business strategy is to become the leading developer and
marketer of advanced visualization and information systems for MIM applications
in cardiothoracic, HNS and other selected surgical specialties. Key elements of
the Company's strategy include:
- Establish advanced visualization technologies as standard practice in
minimally invasive cardiac surgery.
- Promote Vista Medical's visualization solution for use in all types of
cardiac surgery.
- Develop MIM applications through specialty-focused business units by
leveraging the Company's technology platform.
- Accelerate adoption of the Series 8000 Advanced Visualization and
Information System in the cardiac market by implementing a per-procedure
pricing strategy.
- Increase the surgeon's real-time access to critical data.
- Enter into strategic relationships which complement Company resources.
To assist in implementing its business strategy, the Company has established
two Clinical Advisory Boards made up of leading surgeons, one focused on
minimally invasive cardiac surgery, the other focused on HNS microsurgery and a
number of other specialties. Members of the Clinical Advisory Boards consult
with the Company exclusively in the field of visualization. The Clinical
Advisory Boards are intended to act as a clinical reference for the Company and
to provide access to potential training sites for the Company's visualization
products.
RECENT DEVELOPMENTS
In November 1996, Vista Medical and Medtronic, Inc. ("Medtronic"), a leading
cardiac company, entered into a strategic alliance providing for the
distribution and co-promotion of the Company's current and future visualization
and information systems for cardiac surgery, including the Series 8000 (the
"Vista Systems"). Medtronic will act as Vista Medical's exclusive distributor
for the Vista Systems for use in cardiothoracic surgical procedures in Europe,
the Middle East (excluding Afghanistan and Pakistan) and Africa and will
co-promote the Vista Systems in North America. Vista Medical retains direct
distribution rights in North America as well as the worldwide right to
distribute its systems for use in all other procedures. In conjunction with
entering into the agreement, Medtronic made a $10.0 million equity investment in
the Company.
The Company believes that the control and processing of information is a key
component in the development of advanced visualization systems. As a result, in
January 1997, the Company obtained from GDE Systems, Inc. ("GDE"), a leading
military electronics and information management company, an exclusive worldwide
license to software and documentation and trademarks of GDE for use in the
medical field. Since 1993, GDE's subsidiary, Healthcom, has been adapting the
software licensed to Vista Medical to provide high-speed, image-based
information processing and networking capabilities specifically for medical
applications. In connection with the license, Vista Medical will issue to GDE
Common Stock with a value (based on the initial public offering price) of
$250,000.
In February 1997, the Company entered into an agreement with Heartport, Inc.
("Heartport"), a leading company developing minimally invasive technology for
heart surgery. Vista Medical will sell four Series 8000 systems to Heartport,
for use in the Heartport Research and Training Center in Salt Lake City, Utah.
Heartport has agreed to use the Series 8000 in its training centers, to promote
that its training courses utilize the Series 8000 and to endorse the Series 8000
as the preferred 3-D video visualization and information solution for minimally
invasive heart surgery. In connection with the agreement, the
21
<PAGE>
Company issued to Heartport a warrant to purchase up to 100,000 shares of Common
Stock, exercisable at any time after this Offering and prior to March 31, 2001,
at a price per share equal to the initial public offering price. If an initial
public offering is not completed by June 30, 1997, the price will be $6.67 per
share.
Since February 1997, Vista Medical's CardioThoracic Surgery division has
exhibited the Series 8000 at two cardiothoracic surgery meetings in the U.S. and
at the World Congress on Minimally Invasive Cardiac Surgery in Paris. Surgeons
attending these conferences expressed interest in the potential growth of
minimally invasive surgeries and the importance of enabling technologies such as
visualization. At these conferences, hundreds of surgeons participated in a
hands-on demonstration of the Series 8000, expressed interest and requested
additional information.
The Company was incorporated in the State of California in July 1993 and
reincorporated in the State of Delaware in November 1996. Unless the context
indicates otherwise, the "Company" or "Vista Medical" refers to Vista Medical
Technologies, Inc. The Company's principal executive offices are located at 5451
Avenida Encinas, Suite A, Carlsbad, California 92008, and its telephone number
is (760) 603-9120.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock offered hereby are estimated to be approximately $28,595,000
($32,989,250 if the Underwriters' over-allotment option is exercised in full),
assuming a public offering price of $9.00 per share (the mid-point of the range
set forth on the front cover) and after deducting the estimated underwriting
discounts and commissions and other estimated offering expenses.
From the anticipated $28.6 million net proceeds of this Offering, the
Company intends to use approximately $9.5 million to fund product introductions,
approximately $5.9 million for sales and marketing activities, approximately
$4.3 million for research and development, approximately $2.3 million for the
acquisition of capital equipment for manufacturing scale-up and the balance of
approximately $6.6 million for working capital and general corporate purposes.
The Company may also use a portion of the net proceeds for the acquisition of
products and technologies complementary to those of the Company. There are no
present arrangements or agreements for any such acquisitions.
The amounts actually expended for each purpose may vary significantly
depending upon numerous factors, including the progress of the Company's product
development, the regulatory status of such products, the timing of regulatory
approvals, technological advances, the commercial potential of the Company's
products and the status of competitive products. In addition, expenditures will
also depend upon the establishment of collaborative agreements with other
companies, the availability of additional financing and other factors. The
Company anticipates that the net proceeds from this Offering and the interest
income thereon, together with its existing cash, cash equivalents and short-term
investments, will be sufficient to fund its operations through 1998. Pending
application of the net proceeds as described above, the Company intends to
invest the net proceeds of this Offering in short-term investment-grade
securities.
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock. The
Company does not anticipate paying any cash dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of the Company's
Board of Directors after taking into account various factors, including the
Company's financial condition, operating results, current and anticipated cash
needs and plans for expansion. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
22
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1997 (i) the actual
capitalization of the Company, after giving effect to the three-for-four reverse
split of the Common Stock, (ii) the pro forma capitalization of the Company,
after giving effect to the conversion of all outstanding shares of Preferred
Stock into Common Stock at the closing of this Offering and (iii) as adjusted to
give effect to the sale by the Company of 3,500,000 shares of Common Stock
offered hereby, assuming a public offering price of $9.00 per share (the
mid-point of the range set forth on the front cover) less estimated underwriting
discounts and commissions and other expenses of this Offering.
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------
AS
ACTUAL PRO FORMA ADJUSTED
---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments........................... $ 5,844 $ 5,844 $ 34,439
---------- ----------- ----------
---------- ----------- ----------
Long-term obligations less current portion.................................. $ -- $ -- $ --
Stockholders' equity:
Convertible preferred stock, $.01 par value; 18,000,000 shares authorized
actual; 5,000,000 authorized pro forma and as adjusted; 11,574,252
issued and outstanding actual; and no shares issued and outstanding pro
forma and as adjusted................................................... 116 -- --
Common stock, $.01 par value; 25,000,000 shares authorized actual;
35,000,000 authorized pro forma and as adjusted; 616,849 shares issued
and outstanding actual; 9,297,528 shares pro forma; and 12,797,528
shares as adjusted (1).................................................. 6 93 128
Additional paid-in capital................................................ 29,413 29,442 58,002
Notes receivable stockholders............................................. (93) (93) (93)
Deferred compensation..................................................... (2,548) (2,548) (2,548)
Accumulated deficit....................................................... (16,939) (16,939) (16,939)
---------- ----------- ----------
Total stockholders' equity.............................................. 9,955 9,955 38,550
---------- ----------- ----------
Total capitalization.................................................... $ 9,955 $ 9,955 $ 38,550
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
- --------------
(1) Based on shares outstanding as of March 31, 1997. Does not include (i)
1,282,676 shares of Common Stock issuable upon exercise of options
outstanding as of March 31, 1997 at a weighted average exercise price of
$0.54 per share pursuant to the Company's stock option plans, (ii) 100,000
shares of Common Stock issuable upon the exercise of warrants granted to
Heartport at an exercise price equal to the initial public offering price of
the Common Stock offered hereby or, if not completed by June 30, 1997, at an
exercise price of $6.67 per share and (iii) a number of shares of Common
Stock equal to $250,000 divided by the initial public offering price of the
Common Stock offered hereby to be issued to GDE immediately following the
closing of this Offering. See "Management--Benefit Plans" and "Description
of Capital Stock."
23
<PAGE>
DILUTION
The net tangible book value of the Company at March 31, 1997 was $9,645,187,
or $1.04 per share (after giving effect to the conversion of all outstanding
shares of Preferred Stock into Common Stock upon the consummation of this
Offering). Net tangible book value per share of Common Stock represents the
amount of total tangible assets of the Company less total liabilities divided by
the number of shares of the Common Stock outstanding. After giving effect to the
sale of the 3,500,000 shares of Common Stock offered hereby at an assumed public
offering price of $9.00 per share (the mid-point of the range set forth on the
front cover), and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, the Company's net tangible
book value as of March 31, 1997 would have been $38,240,187 or $2.99 per share
of Common Stock. This represents an immediate increase in net tangible book
value per share of Common Stock of $1.95 to existing stockholders and immediate
dilution in net tangible book value of $6.01 per share to new investors
purchasing Common Stock in this Offering. The following table illustrates the
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 9.00
Net tangible book value per share of Common Stock at March
31, 1997................................................ 1.04
Increase per share attributable to new investors.......... 1.95
Net tangible book value per share of Common Stock after this
Offering.................................................. 2.99
---------
Dilution per share to new investors (1)..................... $ 6.01
---------
---------
</TABLE>
- --------------
(1) If the Underwriters' over-allotment option is exercised in full, dilution
per share to new investors would be $5.80.
The following table summarizes, on a pro forma basis as of March 31, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and by new investors purchasing shares in this Offering (before
deduction of underwriting discounts and commissions and estimated offering
expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------------- --------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 9,297,528 73% $ 26,395,504 46% $ 2.84
New investors................. 3,500,000 27% 31,500,000 54% $ 9.00
------------- ----- -------------- -----
Total....................... 12,797,528 100% $ 57,895,504 100%
------------- ----- -------------- -----
------------- ----- -------------- -----
</TABLE>
All of the above computations assume no exercise of outstanding options or
warrants to purchase Common Stock. As of March 31, 1997, options to purchase
1,282,676 shares of Common Stock were outstanding at a weighted average exercise
price of approximately $0.54 per share under the Company's stock option plan. To
the extent these options become vested and are exercised, there will be further
dilution to new investors. As of March 31, 1997, the Company had also (i) issued
warrants to Heartport to purchase 100,000 shares of Common Stock at an exercise
price equal to the initial public offering price of the Common Stock offered
hereby or, if not completed by June 30, 1997, with an exercise price of $6.67
per share and (ii) agreed to issue to GDE immediately following the closing of
this Offering a number of shares of Common Stock equal to $250,000 divided by
the initial public offering price of the Common Stock offered hereby. As of
March 31, 1997, the Company also had an additional 1,537,324 shares of Common
Stock available for grant pursuant to the Company's stock option plan. Further
dilution may result from the exercise of such outstanding options. See
"Management -- Benefit Plans" and "Description of Capital Stock."
24
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
consolidated statements of operations for each of the three years in the period
ended December 31, 1996, and with respect to the Company's consolidated balance
sheets at December 31, 1995 and 1996, are derived from the financial statements
of the Company that have been audited by Ernst & Young LLP, independent
auditors, which are included elsewhere herein and are qualified by reference to
such financial statements. The statement of operations data for the period from
July 19, 1993 (inception) to December 31, 1993, and the balance sheet data at
December 31, 1993 and 1994 have been derived from financial statements audited
by Ernst & Young LLP, independent auditors, which are not included herein. The
unaudited statement of operations data for the three months ended March 31, 1996
and 1997 and the unaudited balance sheet at March 31, 1997 have been derived
from unaudited financial statements also appearing herein which, in the opinon
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the financial position and
results of operations for the unaudited interim periods. The operating results
for the three months ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the full fiscal year ending December 31, 1997
or for any subsequent period. The selected financial data set forth below should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's financial statements and
notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------------- ------------------------
1993 (1) 1994 1995 1996 1996 1997
----------- --------- --------- ---------- ------------ ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales............................................... $ 73 $ 59 $ 1,719 $ 2,244 $ 241 $ 829
Costs and expenses:
Cost of sales..................................... 50 43 1,272 2,253 184 826
Research and development.......................... 310 1,328 1,904 3,880 533 1,514
Sales and marketing............................... 48 291 834 2,057 313 745
General and administrative........................ 562 758 1,034 3,103 399 1,164
----------- --------- --------- ---------- ------------ ----------
Total costs and expenses............................ 970 2,420 5,044 11,293 1,429 4,249
----------- --------- --------- ---------- ------------ ----------
Loss from operations................................ (897) (2,361) (3,325) (9,049) (1,188) (3,420)
Minority interest in net loss of consolidated
partnership....................................... 80 270 -- -- -- --
License income...................................... -- -- -- 1,493 -- --
Interest income..................................... -- -- 51 117 34 102
----------- --------- --------- ---------- ------------ ----------
Net loss............................................ $ (817) $ (2,091) $ (3,274) $(7,439) $ (1,154 ) $ (3,318)
----------- --------- --------- ---------- ------------ ----------
----------- --------- --------- ---------- ------------ ----------
Pro forma net loss per share (2).................... $ (0.86) $ (0.37)
---------- ----------
---------- ----------
Shares used in computing pro forma net loss per
share (2)......................................... 8,626,898 9,079,976
---------- ----------
---------- ----------
<CAPTION>
DECEMBER 31,
--------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997
----------- --------- --------- ---------- ------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments... $ 442 $ 9 $ 3,399 $ 10,285 $ 5,844
Working capital..................................... 409 (76) 4,224 10,805 7,554
Total assets........................................ 855 475 5,208 14,316 11,226
Total debt.......................................... 1,293 3,243 -- -- --
Accumulated deficit................................. (817) (2,907) (6,181) (13,620) (16,939)
Total stockholders' equity (deficit)................ (816) (2,906) 4,707 12,961 9,955
</TABLE>
- ----------------
(1) July 19, 1993 (inception) to December 31, 1993.
(2) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share and shares used
in computing pro forma net loss per share.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with "Selected Financial Data"
and the Company's Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
OVERVIEW
The Company develops, manufactures and intends to market 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 currently markets endoscopic cameras and
related surgical instruments and accessories.
The Company has generated minimal revenues, principally from the sale of its
endoscopic cameras, and has been unprofitable since its formation in July 1993.
For the period from the Company's formation to March 31, 1997, the Company has
incurred cumulative net losses of approximately $16.9 million. The Company
expects to continue to incur substantial losses for at least the next 18 months.
There can be no assurance that the Company's development efforts will result in
commercially available products, that the Company will be successful in
introducing its products under development, or that required regulatory approval
of products will continue to be obtained in a timely manner, if at all.
The Company has increased its staffing each year to support its research and
development, manufacturing and sales and marketing activities. At December 31,
1994, 1995, 1996 and at March 31, 1997, the Company had 11, 21, 49 and 59
employees, respectively. The Company expects to continue to increase staffing
levels significantly in future periods in support of its research and
development, manufacturing scale up, service and support, sales and marketing
and general and administrative activities related to new products. The Company
expects that its increased staffing needs will negatively impact operating
income, which in turn may impact the Company's ability to achieve profitability.
The Company recorded noncash deferred compensation of approximately $2.5
million in connection with the grant of certain stock options during 1996, of
which approximately $447,000 was recognized as an expense in 1996. The Company
recorded an additional $743,000 of deferred compensation for stock options
granted in January and February 1997. The unamortized balance of the deferred
compensation will be expensed over the vesting periods of the options (typically
four or five years) and, therefore, will continue to impact the Company's
operating results through 2001.
The Company plans to adopt a per-procedure pricing strategy for the Series
8000 in the United States market. This strategy, designed to accelerate adoption
of the Series 8000, would require a payment to the Company every time the Series
8000 is used in a procedure. Therefore, revenues are directly related to usage.
In return, customers would receive an integrated equipment and service package,
including installation, in-service training, on-going technical support and
system upgrades, for a single charge which can be clearly related to a specific
procedure. The Company believes that adoption of such a strategy, based upon a
service contract rather than an upfront capital payment, will allow more rapid
penetration of the available market. The Company intends to amortize the cost of
the Series 8000 over the term of the service contract. Under the per-procedure
pricing strategy, the Company is required to allocate adequate capital resources
to fund such investment, as the customer does not purchase the system with an
upfront capital payment.
This discussion may contain forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in such forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors."
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RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1996 AND 1997
SALES. The Company had revenues from product sales of $241,000 in the
quarter ended March 31, 1996 and $829,000 in the quarter ended March 31, 1997.
The increase was primarily attributable to the sales of surgical instruments and
sutures for which the Company acquired distribution rights during the second
half of 1996 and to the increased sales of the Company's endoscopic cameras to
new and existing customers. Sales to individual customers exceeding 10% or more
of revenues for the three months ended March 31, 1996 and 1997 were as follows:
for the three months ended March 31, 1996, three customers accounted for 62%,
20% and 12% of revenues; for the three months ended March 31, 1997, four
customers accounted for 27%, 18%, 17% and 10% of revenues, three of whom were
greater than 10% customers for the three months ended March 31, 1996. The
Company believes that the loss of any of these customers would not have a
material adverse effect on the Company's business, operating results or
financial condition and that concentration of revenues to individual customers
will likely decrease in future periods as the Company introduces new products.
COST OF SALES. Cost of sales consist primarily of purchased parts and
supplies, labor, facilities-related expenses and equipment depreciation. The
Company's cost of sales were $184,000 for the quarter ended March 31, 1996 and
$826,000 for the quarter ended March 31, 1997. The increase in these expenses
was related to the growth in revenue between the periods and to investment in
manufacturing infrastructure the Company is making to accommodate the scale-up
for new product introductions in 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of personnel expenses, fees paid to independent contractors,
certain purchased technology and development, and equipment and facilities costs
to support product development, prototyping and product evaluation. The
Company's research and development expenses were $533,000 for the quarter ended
March 31, 1996 and $1,514,000 for the quarter ended March 31, 1997. The increase
was primarily attributable to increases in staffing, contract research and
development expense and consulting fees related to development, prototyping and
evaluation of future products.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of the cost of sales and marketing personnel and independent
contractors, commissions, office facilities, travel and promotional events such
as trade shows, seminars and technical conferences, as well as the costs
associated with marketing programs necessary to support the expansion of the
Company's business. Sales and marketing expenses were $313,000 for the quarter
ended March 31, 1996 and $745,000 for the quarter ended March 31, 1997. The
increase was primarily attributable to increases in staffing and related
expenses, professional and consulting fees in connection with marketing programs
related to new products and commissions.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of salaries and other related expenses of the administrative
and executive, finance and accounting, and information systems departments of
the Company and expenses associated with legal and accounting requirements.
General and administrative expenses were $399,000 for the quarter ended March
31, 1996 and $1,164,000 for the quarter ended March 31, 1997. The increase was
primarily attributable to increases in staffing and related expenses associated
with development of the Company's administrative infrastructure, increases in
legal and professional fees related to patents and other business development
efforts, and the amortization of deferred compensation. The Company recorded
noncash deferred compensation of $743,000 in connection with stock options
granted in January and February 1997. The unamortized balance of the deferred
compensation will be expensed over the five-year vesting periods of the options
and, therefore, will continue to impact the Company's operating results through
2001.
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INTEREST INCOME. Interest income was $34,000 in the quarter ended March 31,
1996 and $102,000 in the quarter ended March 31, 1997, with the increase due to
increasing average investment balances.
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
SALES. The Company had revenues from product sales of $59,000, $1,719,000
and $2,244,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. The increase in revenues from 1994 to 1995 was primarily
attributable to the introduction of endoscopic cameras by the Company. The
increase in revenue from 1995 to 1996 was attributable to the increased sales of
the Company's endoscopic cameras and the sale of surgical instruments and
sutures for which the Company acquired distribution rights during 1996. Sales to
individual customers exceeding 10% or more of revenues for the years ended
December 31, 1994, 1995 and 1996 were as follows: during 1994, two customers
accounted for 82% and 18% of revenues; during 1995, one customer accounted for
85% of revenues; during 1996, three customers accounted for 30%, 27% and 25% of
revenues. For the years ended December 31, 1994, 1995 and 1996, the same
customer accounted for 18%, 85% and 25% of revenues, respectively. The Company
believes that the loss of any of these customers would not have a material
adverse effect on the Company's business, operating results or financial
condition and that concentration of revenues to individual customers will likely
decrease in future periods as the Company introduces new products.
COST OF SALES. The Company's cost of sales were $43,000, $1,272,000 and
$2,253,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
The increase in cost of sales from 1994 to 1995 was related to the growth in
revenue from 1994 to 1995. The increase in cost of sales from 1995 to 1996 was
attributable to the increase in revenues from 1995 to 1996 as well as the
investment the Company made in its manufacturing infrastructure to accommodate
the scale-up for new product introductions. This investment includes personnel
expenses, consulting fees and facilities-related costs and was approximately
$208,000. The Company anticipates it will continue to make significant
investments in manufacturing infrastructure in 1997 and 1998 and expects this
investment to increase cost of sales during such time period.
RESEARCH AND DEVELOPMENT EXPENSES. The Company's research and development
expenses were $1,328,000, $1,904,000 and $3,880,000 for the years ended December
31, 1994, 1995 and 1996, respectively. The increase in research and development
expenses from 1994 to 1995 was primarily attributable to acquired in-process
research and development, increased staffing and contract research and
development expense performed by third parties. The increase in research and
development expenses from 1995 to 1996 was attributable to significant increases
in staffing, contract research and development expense, and consulting fees
related to development, prototyping and evaluation of future products. The
Company anticipates it will continue to devote substantial resources to research
and development and that research and development expenses, particularly the
costs associated with increased staffing, prototyping and product evaluation
will increase substantially in 1997 and beyond.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased from
$291,000 in 1994 to $834,000 in 1995 and to approximately $2,057,000 in 1996.
The increase from 1994 to 1995 was primarily attributable to increased staffing
and consulting fees related to the introduction of new products and expansion of
the Company's product line. The increase from 1995 to 1996 was related to
significant increases in staffing and related expenses, commissions and
professional and consulting fees as the Company continued to build its sales
operations and expand its marketing activities in relation to future products.
The Company believes that its sales and marketing expenses will increase
substantially in 1997 and 1998 as it continues to build its sales force and
expand its marketing efforts in connection with commercialization of new
products.
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GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $758,000, $1,034,000 and $3,103,000 for the years ended December 31, 1994,
1995 and 1996, respectively. The increase from 1994 to 1995 was primarily
attributable to increased staffing and related costs associated with the growth
of the Company's business during this period. The increase from 1995 to 1996 was
primarily attributable to the continued development of corporate management and
related support functions, the addition of new facilities and expansion of
current facilities, expansion of the Company's information systems and the
amortization of deferred compensation. The Company recorded noncash deferred
compensation of approximately $2.5 million in connection with the grant of
certain stock options during 1996, of which approximately $447,000 was
recognized as an expense in 1996. The unamortized balance of the deferred
compensation will be expensed over the vesting periods of the options (typically
four or five years) and, therefore, will continue to impact the Company's
operating results through 2001. The Company also expects that its general and
administrative expenses will increase in the future as it expands its staffing,
information systems and other related infrastructure and as a result of
increases in expenses associated with being a public company.
LICENSE INCOME. License income of $1,493,000 in 1996 represents the net
amount received by the Company from a perpetual license to certain of its
technology and patents unrelated to the Company's main products and markets. The
license to Urohealth was a unique, non-recurring transaction that involved a
license of only that component of the Company's technology that it did not want
to pursue. For this reason, the license fees were treated as non-operating
income. Prior to 1996, the Company had no license income. No other technology is
being developed with the purpose of being licensed and the Company does not
anticipate any future licensing arrangements of any of its core technology for
medical applications.
INTEREST INCOME. Interest income represents the net amount of interest
earned by the Company on its cash and short-term investments and interest
expense on debt. Interest income increased from approximately $51,000 for the
year ended December 31, 1995 to approximately $117,000 for the year ended
December 31, 1996 due primarily to increasing average investment balances. The
Company had immaterial amounts of interest income prior to 1995.
TAXES. At December 31, 1996, the Company had federal and state tax net loss
carryforwards of approximately $8,494,000 and $5,146,000, respectively. The
federal and state tax loss carryforwards will expire in 2010 and 2000,
respectively, unless previously utilized. At December 31, 1996, the Company also
had federal and state research tax credit carryforwards of approximately
$135,000 and $143,000, respectively, which will expire in 2010 unless previously
utilized. The Company has provided a full valuation allowance on the deferred
tax assets as realization of such assets is uncertain.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had approximately $5,844,000 in cash, cash
equivalents and short-term investments. Since formation, the Company has
financed its operations and investments in equipment and inventories through
advances from Kaiser Aerospace totaling $5,379,000, net proceeds from licensing
of certain of the Company's technology for $1,000,000 and from the private sale
of common and preferred stock totaling approximately $23,055,000, of which
$3,004,000 was used to repay advances from Kaiser Aerospace (with the remaining
$2,375,000 in outstanding advances being satisfied by the issuance of Series A-1
Preferred Stock).
Net cash used in operating activities was approximately $2,288,000,
$3,567,000 and $6,937,000 for 1994, 1995 and 1996, respectively, and $1,603,000
and $4,123,000 for the quarters ended March 31, 1996 and 1997, respectively. The
increase in net cash used from operating activities each year and for the
quarterly periods has resulted primarily from increasing net losses during such
periods and investments in inventories associated with expansion of the
Company's product line.
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Net cash used in investing activities was approximately $94,000, $298,000
and $1,239,000 for 1994, 1995 and 1996, respectively, and $92,000 and $353,000
for the quarters ended March 31, 1996 and 1997, respectively. The increase in
net cash used in investing activities each year and for the quarterly periods
has resulted primarily from the purchase of short-term investments and the
purchase of property and equipment related to increased staffing, expansion of
manufacturing capabilities and marketing demonstrations.
Cash flows from financing activities in 1994, 1995 and 1996 were $1,950,000,
$7,090,000 and $15,061,000, respectively and $3,000 and $36,000 for the quarters
ended March 31, 1996 and 1997, respectively. The increase in cash flows from
financing activities resulted primarily from increased advances from Kaiser
Aerospace in 1994 and primarily from the private sale of common and preferred
stock in 1995 and 1996. The increase in the quarter ended March 31, 1997 from
that of the quarter ended March 31, 1996 was due to increased exercises of
options to purchase common stock.
Capital expenditures for equipment to support the Company's expanded
operations were approximately $57,000, $81,000 and $1,221,000 for 1994, 1995 and
1996, respectively, and $92,000 and $353,000 for the quarters ended March 31,
1996 and 1997, respectively. The Company expects its capital expenditures to
continue to grow as it expands its manufacturing base and scope of operations in
future periods. At March 31, 1997, the Company had commitments for capital
expenditures of approximately $1,250,000 relating primarily to custom injection
molded tooling required for certain of the Company's products and for prototype
systems to be used for evaluation and demonstration purposes.
The Company is currently negotiating with a lender to secure a $10.0 million
credit line. There can be no assurances that the Company will be successful in
negotiating such a credit line on favorable terms, if at all.
The Company expects it will continue to incur substantial expense in
additional research and development activities, production scale up, continued
establishment of its sales force and marketing organization and administrative
support activities. The Company anticipates that the net proceeds from this
Offering and the interest income thereon, together with its existing cash, cash
equivalents and short-term investments, will be sufficient to fund its
operations through 1998. Certain circumstances, however, including slow rate of
market acceptance of the Company's products, the Company's inability to scale up
manufacturing or delay in further regulatory approvals, would accelerate the
Company's use of proceeds from the Offering. Therefore the Company may require
additional funds to support its operating requirements or for other purposes.
Accordingly, the Company may, from time to time, seek to raise such additional
funds through public or private equity financings, debt financings or from other
sources. There can be no assurance that additional financing will be available
at all or that, if available, such financing would be obtainable on terms
acceptable to the Company.
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BUSINESS
OVERVIEW
Vista Medical develops, manufactures and intends to market proprietary
visualization and information systems that enable minimally invasive surgical
solutions in cardiothoracic, head, neck and spine and other selected
microsurgical procedures. The Company currently markets endoscopic cameras and
related surgical instruments and accessories. Vista Medical's visualization and
information systems bring together the head-mounted display technology
originally developed for applications in military aerospace by Kaiser Aerospace
and Electronics Corporation ("Kaiser Aerospace") and three-dimensional imaging
capability from its acquisition of Oktas, Inc. The Company was founded as a
wholly-owned subsidiary of Kaiser Aerospace in July 1993, and became an
independent entity in July 1995 with the addition of several venture capital
funds as investors.
BACKGROUND
MINIMALLY INVASIVE SURGERY
The development and subsequent widespread adoption of minimally invasive
surgical approaches have revolutionized many surgical fields, including general
surgery, orthopedics, gynecology and urology. Minimally invasive surgical
procedures are performed through strategically placed ports or mini-incisions in
a patient's body thereby avoiding the larger incisions used in traditional open
surgery. A minimally invasive approach is most advantageous in cases in which
significant trauma results from gaining surgical access to an affected organ or
site. Notable examples of minimally invasive surgical procedures include
laparoscopic procedures in the field of general surgery and arthroscopic
procedures in the field of orthopedic surgery, many of which have become the
standard of care and have achieved significant procedure volumes rapidly. For
example, according to Medical Data International, an independent research
organization, the number of laparoscopic surgical procedures performed annually
in the United States increased from approximately 84,000 in 1990 to more than an
estimated 2.4 million in 1995. Minimally invasive procedures are designed to be
as efficacious as conventional surgery, but with substantially reduced trauma.
Minimally invasive procedures are designed to reduce pain and suffering, speed
recovery, shorten the length of hospital stays and decrease many of the costs
associated with patient care. This movement toward minimally invasive surgery
has been driven by advances in both device technology and surgical technique, as
well as patient demand.
MINIMALLY INVASIVE MICROSURGERY
Minimally invasive microsurgery ("MIM") is an extension of minimally
invasive surgery, characterized by greater complexity and precision. MIM
procedures have been made possible primarily by recent advances in medical
technology. MIM is usually performed in very confined areas of the body,
involves critical anatomical structures, and often requires dissection and
reconstruction as well as excision. As a result, the Company believes that in
order for MIM procedures to be extensively adopted, surgeons must have access to
enhanced visualization and specialized instruments. Examples of MIM are emerging
procedures in cardiothoracic surgery and head, neck and spine ("HNS") surgery.
CARDIOTHORACIC SURGERY
CONVENTIONAL TREATMENTS. Cardiovascular disease, the leading cause of death
in the United States, is typically treated with drugs, various surgical
procedures or both. The two principal types of cardiovascular disease are
coronary artery disease and valvular heart disease. Methods of accessing the
heart for treatment include surgically opening the chest, threading a
balloon-tipped catheter through a major artery or, most recently, gaining
surgical access via a small incision in the chest. Conventional cardiology
procedures include angioplasty, atherectomy and inserting coronary stents;
conventional surgical procedures include coronary artery bypass graft ("CABG")
and valve replacement or repair.
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Angioplasty, atherectomy and inserting coronary stents involve the use of a
balloon-tipped catheter which is threaded into the heart through an artery in a
patient's leg. Although these procedures are less invasive than conventional
CABG, a major drawback is the high rate of restenosis or renarrowing of the
blood vessel at the treatment site. Traditional CABG and valve replacement or
repair procedures typically involve a sternotomy, whereby a surgeon makes a 12
to 18 inch incision in the patient's chest, the sternum is cut in half with a
bone saw, and the rib cage is then spread open with a steel retractor to perform
the grafting procedures or to replace or repair the heart valves. According to
the results of a recent study, approximately one-third of all angioplasties
experience restenosis or renarrowing of the blood vessel at the treatment site
within seven months while the Company believes most traditional CABG procedures
remain effective for more than a decade.
According to the most recent data published by the American Heart
Association, there were approximately 628,000 open heart surgical procedures
performed in the United States in 1994. Of these, 501,000 were CABG procedures,
60,000 were valve procedures and 67,000 were other procedures including
congenital and pediatric repairs. The Company believes that worldwide there are
approximately 800,000 CABG procedures and approximately 100,000 valve
replacement or repair procedures performed each year.
CARDIOTHORACIC MIM. The application of minimally invasive techniques to
cardiothoracic surgery is commonly regarded as a revolutionary development in
modern surgery. Minimally invasive CABG and valve replacement or repair
procedures avoid the trauma caused by sternotomy and promise to significantly
decrease pain and trauma and shorten recovery times. The minimally invasive
approaches to surgical intervention are evolving and include methods performed
on either a beating or arrested heart. While few agree on the ultimate form of
the emerging techniques and practices, nearly all of those involved believe that
minimally invasive procedures will change the future practice of cardiothoracic
surgery, just as laparoscopy has revolutionized general surgery. However,
cardiothoracic MIM requires the surgeon to perform technically challenging
procedures, including working on tiny delicate structures (such as a one
millimeter heart vessel) with highly restricted access through small incisions.
The Company believes that a current limitation to widespread adoption of
cardiothoracic MIM is the restricted visibility through the minimal incisions
currently used. While new retractor systems are being introduced to open the
incision and therefore improve the surgeon's access and ability to visualize the
anatomy directly, restricted visibility, particularly for more complex cases,
remains an issue. In addition, the objective of minimizing the incision size
("keyhole" access) to reduce trauma can only be achieved effectively with
visualization, as has been demonstrated in other minimally invasive
applications. As a result of these factors, the development of cardiothoracic
MIM will require enhanced visualization, as well as specialized instruments and
surgeon training in the new techniques.
THE VISTA MEDICAL SOLUTION. The Company believes that an advanced
visualization technology which provides the surgeon with an intuitive and
ergonomic solution to the inherent vision restrictions of the MIM approach will
enable the use of the MIM technique with increased safety, efficacy and
precision. In the cardiothoracic MIM area, the Company's proprietary
technologies are equally applicable whether the surgeon elects to use either a
beating or arrested heart approach. In addition, the enhanced visualization
provided by the Company's products is expected to enable a significant number of
surgeons, who otherwise might be reluctant to perform MIM, to adopt the
procedures, thereby accelerating the rate of conversion towards a standard of
care. Finally, there is growing evidence of patient interest and demand for
cardiothoracic MIM procedures.
HEAD, NECK AND SPINE (HNS) SURGERY
CONVENTIONAL HNS TREATMENTS. Conventional head, neck and spine procedures
are often invasive and involve a lengthy and painful recovery. Neurosurgical
procedures involving the brain and spinal cord have traditionally been performed
under microscopic visualization to facilitate the delicate manipulations and
extreme precision which are required. More recently, the visualization system
often includes
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neuroendoscopes in combination with microscopes. The Company estimates there
were approximately 315,000 neurosurgical and skull base procedures, 430,000
surgical sinus procedures and 650,000 spinal procedures performed in the United
States in 1995.
HNS MIM. The Company believes that there are significant opportunities to
advance MIM techniques in HNS procedures which involve manipulation in close
proximity to critical anatomical structures. The visualization techniques
currently available for these procedures are limited. Existing fiberoptic
neuroendoscopes have inferior resolution, do not provide depth perception and
require a surgeon to view the procedure on a video monitor. The position
required for both the principal and assistant surgeon to utilize a surgical
microscope is both ergonomically awkward and physically uncomfortable. In
addition, many of these procedures require the simultaneous monitoring of
multiple information sources, including the images used in the emerging
technique of image guided surgery. Image guided surgery converts the output from
digital imaging modalities, such as magnetic resonance imaging (MRI) and
computerized tomography (CT) into highly precise 3-D and volumetric computer
models which help the surgeon with pre-operative planning. In addition, image
guided surgery helps the surgeon choose the least destructive path when
operating close to critical anatomy and to locate and remove tissue with the
highest degree of safety and accuracy.
THE VISTA MEDICAL SOLUTION. In the HNS MIM area, the Company's products
incorporate 3-D visualization into a small diameter endoscope which provides the
surgeon with the critical element of depth perception missing from conventional
endoscopes. In addition, the endoscopic image in the head-mounted display worn
by an assistant surgeon who is operating directly across from the principal
surgeon can be electronically reversed in order to align the assistant's
movements with those of the principal surgeon. The Company can also retrofit
surgical microscopes, so that both the principal surgeon and assistants can view
the case simultaneously on their head-mounted displays in 3-D, with superior
comfort and ergonomic positioning.
BUSINESS STRATEGY
The Company's business strategy is to become the leading developer and
marketer of advanced visualization and information systems for MIM applications
in cardiothoracic, HNS and other selected surgical specialties. Key elements of
the Company's strategy include:
ESTABLISH ADVANCED VISUALIZATION TECHNOLOGIES AS STANDARD PRACTICE IN
MINIMALLY INVASIVE CARDIAC SURGERY. The Company believes that it has the only
visualization system specifically designed for minimally invasive cardiac
surgery. The Company is currently working with its Cardiac Clinical Advisory
Board and other leading surgeons to develop operating protocols which
incorporate advanced visualization technologies as standard practice. The
Company then intends to provide training in these protocols, including the use
of the Company's visualization system, to other cardiac surgeons to accelerate
the general rate of conversion to MIM procedures, whether performed on a beating
or arrested heart.
PROMOTE VISTA MEDICAL'S VISUALIZATION SOLUTION FOR USE IN ALL TYPES OF
CARDIAC SURGERY. The Company believes that its technology is applicable to all
types of cardiac surgery, whether minimally invasive or conventional open heart,
especially where enhancement of the surgeon's view is particularly critical. The
Company believes that use of its advanced visualization product in open heart
surgeries will enhance visualization, improve the quality of procedures and
result in shorter operating times and reduced costs.
DEVELOP MIM APPLICATIONS THROUGH SPECIALTY-FOCUSED BUSINESS UNITS BY
LEVERAGING THE COMPANY'S TECHNOLOGY PLATFORM. The Company approaches its target
markets via its focused business units, the CardioThoracic Surgery division and
the HNS Microsurgery division. The business units concentrate on the specific
requirements of their target markets, with dedicated clinical marketing
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programs, clinical advisory boards, sales forces and customer support teams for
the introduction and support of the Company's products. The Company's strategy
is to optimize its fundamental technology platform for each of these medical
specialties and to develop appropriate partnership and distribution systems both
in the United States and international markets.
ACCELERATE ADOPTION OF THE SERIES 8000 ADVANCED VISUALIZATION AND
INFORMATION SYSTEM IN THE CARDIAC MARKET BY IMPLEMENTING A PER-PROCEDURE PRICING
STRATEGY. The Company believes that it can accelerate the adoption of its
Series 8000 advanced visualization and information system by implementing a
per-procedure pricing strategy. This strategy would offer the Series 8000 on a
rental basis and would require a payment to the Company every time the Series
8000 is used in a procedure. The Company commissioned market research in order
to determine the viability of a per-procedure pricing strategy in the United
States market. The results of this market research support the Company's belief
that an integrated equipment and service package, including installation,
in-service training, on-going technical support and system upgrades for a single
procedure-based charge will maximize market penetration and accelerate roll-out
of the product line.
INCREASE THE SURGEON'S REAL-TIME ACCESS TO CRITICAL DATA. The surgeon's
access to critical monitoring and diagnostic data, on demand, in real time and
integrated with the anatomical image, enhances procedure performance. The
Company's head-mounted display, incorporating picture-in-picture capability, is
designed to give the surgeon this real-time access to critical information
integrated with the anatomical images generated by the Company's camera systems.
ENTER INTO STRATEGIC RELATIONSHIPS WHICH COMPLEMENT COMPANY RESOURCES. The
Company intends to leverage its position in both technology and distribution by
forming strategic alliances with partners. In November 1996, the Company and
Medtronic, Inc. ("Medtronic"), a leading cardiac company, entered into a
strategic alliance providing for the distribution and co-promotion of the
Company's current and future visualization and information systems for cardiac
surgery, including the Vista Systems. Medtronic will co-promote the product line
in the United States and Canada and act as the Company's exclusive distributor
in Europe, the Middle East (excluding Afghanistan and Pakistan) ("Middle East")
and Africa. In February 1997, the Company entered into an agreement with
Heartport, Inc. ("Heartport"), a leading company developing minimally invasive
technology for heart surgery. Vista Medical will sell four Series 8000 systems
to Heartport, for use in the Heartport Research and Training Center in Salt Lake
City, Utah. The Company has also formed strategic partnerships with Cogent Light
Technologies ("Cogent Light") and GDE Systems, Inc. ("GDE") to incorporate light
source and information technologies, respectively, into its products. The
Company expects to pursue additional strategic relationships.
ADVANCED VISUALIZATION PRINCIPLES AND PRODUCT PLATFORM
Vista Medical's proprietary technology is based on the following principles
which the Company believes are both essential in advancing the techniques of MIM
and offer several key advantages over other visualization approaches:
- 3-D VIEW. The surgeon's ability to view the principal anatomical image in
3-D provides the accurate depth perception necessary so that vital
anatomical structures are accurately identified and located, thereby
improving safety, precision and speed of the procedure.
- HIGH RESOLUTION IMAGES. The availability of a high resolution image which
can be electronically managed under the surgeon's control significantly
enhances the surgeon's ability to differentiate critical tissues in a
confined setting and perform intricate dissection and reconstruction as
well as excision.
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- ACCESS. The surgeon benefits from miniaturization technology which allows
for the direct insertion of a camera into the body cavities or organs and
provides high quality images from an optimal anatomical orientation.
- ERGONOMICS. Due to the complex and time consuming nature of MIM
procedures, the surgeon requires an ergonomic display system which allows
comfortable operating posture and maximizes hand-eye coordination without
strain.
- INFORMATION INTEGRATION. The surgeon's access to critical monitoring and
diagnostic data, on demand, in real time and integrated with the
anatomical image within the surgeon's visual field, enhances procedure
performance.
The Company has applied its proprietary technology by incorporating the
above principles into its visualization product platform.
HEAD-MOUNTED DISPLAY
The head-mounted display ("HMD") was originally developed for mission
critical applications in military aerospace by Kaiser Aerospace, one of the
world's leading manufacturers of head-mounted displays for aviation
applications. The HMD was determined by the Company to be the optimal solution
to the display challenge of MIM. The fundamental technology and human factors
experience incorporated in the Company's HMD was originally developed by Kaiser
Aerospace and is the result of substantial investment in the technologies of
advanced aerospace display systems and incorporates extensive human factors
experience. This human factors knowledge, derived from many years of analysis
into the display characteristics which enable pilots performing critical
physical tasks to simultaneously absorb and react to crucial information, is a
key element in the Company's HMD design. Kaiser's original know-how and
technical knowledge have been transferred to the Company pursuant to the
development agreement with Kaiser Electro-Optics, Inc. ("Kaiser
Electro-Optics"), a subsidiary of Kaiser Aerospace. The Company has done
significant additional development work, and has proprietary rights, in the
surgical HMD design. The Vista Medical HMD, which the Company believes is the
first specifically designed for surgical use, provides 3-D visualization of an
endoscopic or microscopic image, has the capability of integrating relevant data
and presents the images to a surgeon in an optically correct, intuitive and
ergonomic way. Wearing the HMD, the microsurgeon can also perform surgery
"in-line" -- the natural way people perform micro-critical tasks -- eyes, hands,
instruments and subject in line. This is not the case when the surgeon is
observing the anatomy on a remotely-positioned video monitor.
The Company's HMD is a proprietary, lightweight, high resolution display
designed to allow the surgeon to view information on demand, whether such
information is generated from attached endoscopes, microscopes or monitoring
equipment in the operating room. It is presently contemplated that further
enhancements to the HMD will allow for voice-activated control and information
display from other diagnostic equipment in the hospital or from remote locations
via information networks. The video display in the HMD is fixed in relation to
the surgeon's eyes, but his or her head may move into any position necessary for
comfort. The HMD design allows the surgeon to have a constant view of the
surgical anatomy required for the procedure as well as full awareness of the
surroundings in the operating room. The HMD is designed to provide a true 3-D
image by replicating the way the human visual system works -- left and right
acquired images are delivered directly to left and right liquid crystal
displays. The HMD is designed so that it can be worn with conventional surgical
loupes.
THREE-DIMENSIONAL IMAGE ACQUISITION
Vista Medical believes that 3-D visualization capability is critical in MIM
procedures such as cardiothoracic and neurosurgical procedures. The Company's
technology for stereo visualization consists of the following proprietary
elements: the optical system, the stereo camera and the stereo processor. The
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3-D endoscopic optical system employed by Vista Medical was originally developed
and patented by a noted optical designer, Mr. H. McKinley, and is licensed
exclusively to the Company for medical applications. The system is designed to
replicate the exact view that the surgeon would have if the procedures were
being performed open and he or she had direct sight of the anatomy. The Company
believes that the McKinley optical system will provide it with a significant and
enduring competitive advantage because it provides natural depth perception, and
it can be packaged with twin cameras in a very compact design. The twin cameras
acquire the image in a manner analogous to a human's two eyes.
Vista Medical's technology packages the twin cameras in two ways. In the
first method, a micro-camera is attached to the end of a flexible or rigid guide
which can then be inserted directly into the body cavity and organs. The image
is directly captured by the camera chips without being transmitted through
multiple rod lenses as in a conventional optical endoscope design. The
elimination of optical surfaces produces several important advantages, including
increased image quality, improved contrast, better reliability and improved
ability to sterilize by autoclaving. Alternatively, for applications where a
standard optical endoscope configuration remains preferable, a stereo
micro-camera can be mounted externally on a stereo endoscope. The image acquired
by either approach is then processed for display by control electronics
developed exclusively by the Company. The controller will also include image
management features which will contribute significantly to procedure
performance, such as zoom control, dual image presentation and
picture-in-picture.
INFORMATION MANAGEMENT
Medicine is an information rich discipline, but the provision of relevant
information in real-time to surgeons has not been developed to the levels
attained, for example, in military aviation. The HMD is designed to give the
surgeon real-time access on demand to critical information, integrated with the
anatomical images generated by the Company's camera systems. Therefore, the
surgeon will be able to command the diagnostic and monitoring information
relevant to the specific procedure while it is taking place. In addition to
real-time display, the information can be managed (stored or transmitted) within
the hospital or to remote locations for training, advisory or administrative
purposes. The applications software to control this flow of information is a key
element in Vista Medical's long-term product strategy, which positions
visualization within the context of a total information service to the surgeon.
The Company's data integration capability has been enhanced by the recent
exclusive license from GDE which has added high speed image-based information
processing and networking software to the Company's technology platform. The
Company believes that its technology will demonstrate that real-time access to
relevant information, along with enhanced visualization, is a critical
requirement of performing MIM and other surgical procedures.
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PRODUCT LINES
Vista Medical develops products based on the Company's core technology and
product platform described above, that are customized for the specific
cardiothoracic and HNS procedures to which they are directed. The Company's
product lines are as follows:
SERIES 8000 ADVANCED VISUALIZATION AND INFORMATION SYSTEM
The Company has developed the Series 8000 for minimally invasive and other
procedures in cardiothoracic surgery. The components of the Series 8000 are
individual modules, rack mounted in a custom console, and supplied as an
integrated, upgradeable system.
<TABLE>
<CAPTION>
COMPONENT DESCRIPTION
- ---------------------- ------------------------------------------------------------------------------------------
<S> <C>
CardioView (1) Head-mounted display (HMD) and information processing computer which integrates 3-D
visualization of surgical anatomy and related diagnostic and monitoring data (up to four
HMDs may be used simultaneously with each Series 8000).
CardioCamera 2-D and 3-D miniature high resolution digital cameras. Cameras can be delivered directly
into the surgical field by CardioGuide or externally by attachment to retractor systems.
CardioController High resolution stereo image processor which drives all the CardioCameras in the cardiac
operating room.
CardioLight High power xenon light source incorporating micro-illuminated light delivery technology
developed by Cogent Light.
CardioGuide Flexible, steerable, disposable guidance system for CardioCamera.
CardioConsole Console for rack mounting of all Series 8000 modules.
Cardio3DScope (2) Small diameter, angled, rotatable Stereo Thoracoscope.
CardioRecorder (2) 3-D disk image recorder.
</TABLE>
- --------------
(1) The Company expects to introduce a voice-activated control feature for
CardioView in future versions of the Series 8000.
(2) The Company expects to introduce the Cardio3DScope and the CardioRecorder in
future versions of the Series 8000. The Cardio3DScope recently received
510(k) clearance to market from the FDA. The CardioRecorder is currently
under development by an OEM supplier.
Of the components listed in the table above, CardioView, CardioCamera,
CardioController, CardioLight and CardioConsole are necessary for Series 8000
commercialization. 510(k) clearances to market the first four components have
been received, and 510(k) clearance to market is not necessary for the
CardioConsole component. The Company expects the Series 8000 to be commercially
available later this year. The Company anticipates filing a required 510(k)
pre-market notification for the CardioGuide in third quarter 1997.
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STEREOSITE SYSTEMS FOR MICROSCOPY AND ENDOSCOPY
The Company is developing two systems, designed specifically for microscopic
and endoscopic procedures in HNS Microsurgery, which will be marketed under the
brand name of StereoSite.
<TABLE>
<CAPTION>
COMPONENT DESCRIPTION
- --------------------- -------------------------------------------------------------------------------------------
<S> <C>
HMD/Processor Head-mounted display and information processing computer which provides 3-D visualization
of surgical anatomy and related diagnostic and monitoring data (up to four HMDs may be used
simultaneously with each StereoSite system).
3-D Scope Small diameter, angled, rotatable 3-D endoscope.
MSVA Micro-stereo video adapter ("MSVA") which retrofits to the surgical microscope to produce a
3-D video image to be displayed on the HMD. The MSVA incorporates twin endoscopic cameras.
Light Source High power xenon light source incorporating micro-illuminated light delivery technology
developed by Cogent Light.
</TABLE>
In the same manner as the Series 8000, the StereoSite systems incorporate
advanced visualization principles and the Company's platform technology in
application specific packages. The Company expects that its StereoSite system
targeted at microscopy will incorporate the HMD and MSVA and expects that its
StereoSite system targeted at microendoscopy will incorporate the HMD, the 3-D
Scope and the light source. The Company currently has prototype clinical
StereoSite systems available and placed at evaluation sites.
The Company anticipates filing a required 510(k) pre-market notification for
the processor component of the HMD for the StereoSite systems in third quarter
1997. The processor component will incorporate enhanced software capabilities.
All other required 510(k) clearances to market for the StereoSite system have
been received. The Company believes that there is a predicate device which can
be relied upon for regulatory clearance of the HMD/Processor component, which
predicate device was developed by the Company and Kaiser Aerospace. The Company
expects the StereoSite systems to be commercially available in first quarter
1998, subject to receipt of required regulatory approvals.
OTHER PRODUCTS
RELATED CARDIOTHORACIC AND HNS PRODUCTS. The Company's CardioThoracic
Surgery division is the exclusive North American distributor of instruments
manufactured by Delacroix-Chevalier, a French corporation, and sutures
manufactured by Peters, a French corporation, which are particularly appropriate
for the minimally invasive approach. The Company's HNS Microsurgery division is
the United States distributor of a line of hand instruments for functional
endoscopic sinus surgery, including instruments developed by Dr. Hiroshi
Moriyama of Jikei University, Tokyo.
ENDOSCOPIC CAMERA. Endoscopic cameras are the state-of-the-art in
two-dimensional endoscopic imaging. The Company currently manufactures a
compact, high resolution endoscopic camera under its own label and for OEM
customers and strategic partners. This product has historically accounted for a
significant portion of the Company's revenues. The Company's endoscopic camera
is also referred to as a three-chip camera. "Three-chip" refers to the
allocation of a chip to each of the primary colors--red, green and blue. This
results in superior color reproduction relative to a standard "single chip"
camera, where one chip serves for all three primary colors.
ELECTRONIC ZOOM LAPAROSCOPE (EZL). The EZL represents a new generation of
laparoscopes in which the camera is placed on the distal end of the endoscope
and then inserted inside the body. The EZL incorporates Vista Medical's unique
proprietary zoom feature, which allows a surgeon to manipulate the image by
zooming in and out at the touch of a button, while remaining in focus and
without
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moving the scope. This capability is not available in any other currently
marketed endoscope and the Company is currently seeking a strategic partner with
distribution capability in laparoscopy. The Company may also utilize the zoom
technology in future products for the CardioThoracic Surgery and HNS
Microsurgery divisions.
STRATEGIC ALLIANCES
The Company intends to leverage its position in both technology and
distribution by forming strategic alliances with corporations and research
institutions with respect to the development, regulatory approval and marketing
of certain of its products. The Company has entered into strategic partnering
arrangements as follows:
MEDTRONIC
In November 1996, Vista Medical and Medtronic, a leading cardiac company,
entered into a strategic alliance providing for the distribution and
co-promotion of the Company's current and future visualization and information
systems for cardiac surgery, including the Series 8000 (the "Vista Systems").
The parties entered into a co-promotion agreement for the United States and
Canada under which Medtronic will promote the Vista Systems in conjunction with
Medtronic's own proprietary products for minimally invasive cardiac surgery.
Vista Medical will be responsible for the sale and distribution of the Vista
Systems to customers in the United States and Canada. The Company will be
responsible for obtaining all regulatory clearances in the United States and
Canada, will provide training and installation at its expense and will pay
Medtronic a sales commission based on net revenues generated by the installation
and use of the Vista Systems in the United States and Canada. During the term of
the co-promotion agreement, Medtronic has agreed not to market or sell in the
United States and Canada visualization products which are competitive with Vista
Medical in cardiothoracic surgical procedures. Medtronic's right to co-promote
will terminate in December 1999, subject to (i) earlier termination for
Medtronic's failure to meet certain objectives or breach of material obligations
by either party and (ii) automatic renewal if certain performance criteria are
met.
Medtronic will also act as Vista Medical's exclusive distributor for the
Vista Systems for use in cardiothoracic surgical procedures in Europe, the
Middle East and Africa. Medtronic will be responsible for obtaining all
regulatory clearances other than the CE mark and will provide training and
installation at its expense. Medtronic will purchase the Vista Systems for a
transfer price to be adjusted each year. Medtronic's exclusive distributorship
will terminate on the third anniversary of the initial commercial release of the
Vista Systems in Europe, subject to earlier termination for Medtronic's failure
to meet certain objectives or breach of material obligations by either party.
The initial term of co-promotion and/or distributorship will be
automatically renewed for an additional two-year term provided certain
performance criteria are met. Vista Medical retains the worldwide right to
distribute products based upon the technology incorporated in the Vista Systems
for use in specialties other than cardiothoracic surgery. Vista Medical also
retains the right to make the Vista Systems available worldwide (other than in
Europe, the Middle East and Africa) for clinical and training programs organized
by any company. Medtronic has the right of first refusal to obtain distribution
rights for the Vista Systems in other areas of the world.
In conjunction with entering into the co-promotion agreement, Medtronic made
a $10 million equity investment in the Company and received 2,000,000 shares of
Series C Preferred Stock, which will be automatically converted into 1,500,000
shares of Common Stock in connection with this Offering.
HEARTPORT
In February 1997, the Company entered into a Supply and Services Agreement
with Heartport, a leading company developing minimally invasive technology for
heart surgery. Vista Medical will sell four
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Series 8000 systems to Heartport, for use in the Heartport Research and Training
Center in Salt Lake City, Utah. The four systems are scheduled to be delivered
by approximately September 1997 or as soon as possible thereafter. Heartport has
agreed to use the Series 8000 in its training centers, to promote that its
training courses utilize the Series 8000 and to endorse the Series 8000 as the
preferred 3-D video visualization and information solution for minimally
invasive heart surgery. Until December 31, 1999, the Company will maintain and
support the four systems at the Heartport Research and Training Center and will
collaborate with Heartport with the goal of ensuring that the Series 8000 is
compatible with technology used in the performance of Heartport's Port-Access
procedures. During the period ending December 31, 2003, the Company has also
agreed to provide the Vista Systems to hospitals, clinics or similar sites in
North America whose surgeons have been trained at the Heartport Research and
Training Center, without discrimination and on the best available terms and
conditions the Company offers to any other similarly situated customers of the
Company. In connection with the agreement, the Company issued to Heartport a
warrant to purchase up to 100,000 shares of Common Stock, exercisable at any
time after this Offering and prior to March 31, 2001, at a price per share equal
to the initial public offering price. If an initial public offering is not
completed by June 30, 1997, the price will be $6.67 per share.
GDE SYSTEMS
In February 1997, GDE, a leading military electronics and information
management company, granted the Company an exclusive worldwide license to
software, documentation and trademarks of GDE for use in the medical field.
Since 1993, GDE's subsidiary, Healthcom, has been adapting the software licensed
to Vista Medical to provide high-speed, image-based information processing and
networking capabilities specifically for medical applications. In connection
with the license, Vista Medical will issue to GDE Common Stock with a value
(based on the initial public offering price) of $250,000 and will pay GDE a
royalty on revenues derived from any products based upon or derived from the GDE
software. Vista Medical has also agreed to make a non-refundable payment of at
least $250,000 by December 31, 1998 as a combination of royalty payments earned
through such date and a royalty advance creditable against future royalties due
thereafter. Pursuant to the license agreement, Vista Medical has hired three of
GDE's software development engineers. GDE has a right of first refusal to
license Vista Medical improvements to the software for use in non-medical
markets, subject to the payment of a royalty to Vista Medical. The parties also
agreed to negotiate in good faith to enter into a services agreement which would
provide Vista Medical with access to GDE consultancy services on a
project-by-project basis, on terms to be mutually agreed upon.
COGENT LIGHT
The Company and Cogent Light formed a strategic alliance in March 1996,
pursuant to a memorandum of understanding, to cooperate in the development of
products for minimally invasive cardiac surgery which incorporate Cogent Light's
proprietary light fiber delivery technology. Pursuant to the memorandum of
understanding, Cogent Light is currently providing its single fiber and
MicroBundle technologies exclusively for incorporation into the Series 8000,
including CardioCamera, CardioLight and Cardio3DScope. The memorandum of
understanding stipulates that Vista Medical will incorporate only a Cogent Light
source in its cardiac surgical instrumentation, for example, CardioLight,
provided such light source meets all of Vista Medical's performance
requirements. The parties retain rights to their respective intellectual
property, with new developments under the alliance being jointly owned and
cross-licensed to each party.
KAISER AEROSPACE
The Company was founded as a wholly-owned subsidiary of Kaiser Aerospace in
July 1993, and became an independent entity in July 1995 with the addition of
several venture capital funds as investors. Substantially all of the shares
originally issued to Kaiser Aerospace were subsequently
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<PAGE>
transferred to Foster City Partners, a partnership which includes senior
executives of Kaiser Aerospace, in June 1996. Foster City Partners remained a
significant stockholder participating pro-rata in a further investment round in
July 1996. See "Certain Transactions."
In July 1995, the Company entered into a Technology Strategic Alliance:
Memorandum of Understanding (the "Technology Strategic Alliance") and a
Manufacturing Supply Agreement with Kaiser Electro-Optics, a subsidiary of
Kaiser Aerospace. The Technology Strategic Alliance provides that the Company
and Kaiser Electro-Optics will cooperate in joint development programs related
to the HMD as appropriate to be negotiated on an arms-length and
project-by-project basis for an unspecified term. The Company contracts with
Kaiser Electro-Optics for development and manufacturing services related to the
Company's HMD, including initial production quantities for the HMD. The
Manufacturing Supply Agreement provides that Kaiser Electro-Optics will be the
Company's preferred supplier for a three-year period for not less than 75% of
its requirements for the optical subassembly of the Company's HMD, provided that
pricing and other terms are competitive and mutually agreed upon.
UROHEALTH
In December 1996, the Company and Urohealth Systems, Inc. ("Urohealth")
entered into a license agreement under which the Company exclusively licensed
visual instrument technology developed principally for the field of gynecology
(the "Newman Technology") to Urohealth for use in gynecology, urology and
general surgery on a worldwide basis. Vista Medical has a right of first refusal
to manufacture Urohealth's requirements for the camera and light source
equipment required for medical office use of the products derived from the
Newman Technology for a specified period of time following the date of the
agreement. Urohealth will pay to Vista Medical a sliding royalty based on sales
of products incorporating the Newman Technology, subject to certain maximums and
minimums. The agreement may be terminated in the event of an uncured material
breach or insolvency by either party. In connection with the license agreement,
the parties entered into a consulting agreement whereby Vista Medical agreed to
use its reasonable efforts to provide the services of Allen Newman, the
Company's Vice President and General Manager, HNS Microsurgery, as a consultant
to Urohealth on a limited basis. The Company exclusively licensed the Newman
Technology from Mr. Newman in September 1994. The Newman license agreement was
amended in December 1996 to permit the Company to sublicense the Newman
Technology to Urohealth. In connection with the amendment of the Newman license
agreement, including the termination of royalty rights for camera systems, the
Company paid Mr. Newman an additional sum of money and agreed to pay Mr. Newman
a percentage of the royalties received from Urohealth for sales of disposable
products manufactured under the sublicense.
MARKETING AND SALES
The Company has organized its sales and marketing efforts by
specialty-specific divisions: Vista CardioThoracic Surgery division ("VCS") and
Vista HNS Microsurgery division ("VHNS"). The Company believes that this
organizational structure provides the commitment and focus necessary to
introduce and support new advanced technology to these two distinct markets.
Each division, however, will follow similar strategic principles in developing
its business.
TRAINING. The introduction of new technology requires training for both
surgeons and operating room personnel. VCS intends to begin training programs in
the third quarter of 1997 and expects to be able to train up to 250 surgeons on
an annual basis. VCS will also provide the visualization equipment for training
programs organized by Medtronic, Heartport and other cardiac surgery companies.
The VCS training format will involve one or two day sessions at selected
locations where surgeons will have the opportunity to use the Series 8000 in a
laboratory environment. Operating room personnel will receive in-service
training from company representatives when equipment is installed. VHNS intends
to utilize a similar format specifically designed for HNS surgeons. See
"--Strategic Alliances."
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CLINICAL EVALUATION. VCS and VHNS product lines have been developed with
frequent input from the Clinical Advisory Boards of each division. This
evaluation phase will progress into a publication phase with the Company's
advisors publishing results of their experience in leading publications and
speaking at major clinical conferences. The Company supports such research,
although it has no control over the content or timing of any publication or
presentation, because impartial education of the general clinical audience is a
key component in establishing procedure and equipment acceptance. As part of
their strategy, VCS and VHNS also intend to continue to support seminars and
symposiums and participate in industry trade shows.
Since February 1997, Vista Medical's CardioThoracic Surgery division has
exhibited the Series 8000 at two major cardiothoracic surgery meetings in the
U.S. and at the World Congress on Minimally Invasive Cardiac Surgery in Paris.
Surgeons attending these conferences expressed interest in the potential growth
of minimally invasive surgeries and the importance of enabling technologies such
as visualization. At these conferences, hundreds of surgeons participated in a
hands-on demonstration of the Series 8000, expressed interest and requested
additional information.
SALES FORCE. VCS and VHNS will have separate sales forces, consisting of a
combination of direct and independent sales representatives. VCS currently
markets its products through four direct and 30 independent representatives and
is in the process of hiring up to eight additional direct sales people to
support the introduction of the Series 8000. In addition, Medtronic will
co-promote the Series 8000 in conjunction with Medtronic's own proprietary
products for minimally invasive cardiac surgery in the U.S. and Canada. VHNS
will market its products through a similar combination of direct and independent
sales representatives. VHNS currently has two sales managers, one based in the
United States and the other in Europe.
PATIENT EDUCATION. As the success of the Company's products is dependent on
the adoption of MIM procedures, it must support the purchasers of its products
in the introduction of these procedures to the local community. The Company has
therefore engaged a national firm, specializing in medical communications, to
provide public relations assistance to create patient awareness of the minimally
invasive surgical options. Initial emphasis will be to support the launch of the
Series 8000.
INTERNATIONAL SALES. The Company markets its products internationally
through independent distributors and has entered into a strategic relationship
with Medtronic for the distribution of the Vista Systems in Europe, the Middle
East and Africa. See "-- Strategic Alliances -- Medtronic."
MANUFACTURING
The Company has established a manufacturing facility in Westborough,
Massachusetts, which it believes generally meets the Good Manufacturing Practice
("GMP") standards set by the FDA. The Company believes this facility is adequate
for the Company's near-term manufacturing requirements which are principally
final assembly of sub-assemblies and components, including hardware and
software. The Company has been manufacturing OEM camera systems in limited
quantities for two years and has been developing the necessary procedures,
systems and controls and hiring supervisory staff throughout this period. The
Company believes that its current manufacturing facility will be adequate to
meet its forecasted requirements through first quarter 1998 and that additional
space will be available when required on reasonable commercial terms.
The Company lacks experience in manufacturing its products under
development, including the Series 8000, in the quantities that would be
necessary to achieve significant commercial sales. The manufacture of the
Company's products primarily involves the assembly of a number of sub-assemblies
and components either by the Company directly or by contract manufacturers.
Companies such as Vista Medical often encounter difficulties in scaling up
manufacturing of products, which could include problems involving quality
control and assurance, component and service availability, adequacy of
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control policies and procedures, lack of qualified personnel, compliance with
FDA regulations and the need for further FDA review and possible approval of new
manufacturing processes and facilities or 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 uses or relies on certain components and services used in its
devices that are provided by sole source 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. Any significant supply interruption would have a material adverse
effect on the Company's ability to manufacture its products and, therefore, a
material adverse effect on its business, financial condition and results of
operations.
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 design and production processes which
further reduce costs.
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.
Although several companies compete with aspects of the Company's
visualization product line, the Company believes there is no single company
which offers a complete and integrated advanced visualization and information
system specifically directed at minimally invasive microsurgical applications.
In addition, the Company believes that no other head-mounted display has been
cleared for marketing in surgical applications by the FDA. 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 in 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.
GOVERNMENT 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.
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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.
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.
The Company has received 510(k) clearance to market the following product
lines in the United States: (i) 3-D video endoscope (April 1997); (ii) mini
cameras (April 1997); (iii) illumination system (April 1997); (iv) head mounted
display (September 1996); (v) additional cardiothoracic indications for the 3-D
scope (July 1996); (vi) sinus telescopes (October 1995); (vii) video endoscope
with zoom (January 1995); (viii) stereo viewing system (November 1994); (ix)
dental camera (November 1994); (x) three-chip (endoscopic) video camera (June
1994); and (xi) 3-D scope (December 1992). All 510(k) clearances to market
necessary for Series 8000 commercialization have been received. The Company
anticipates filing a required 510(k) pre-market notification for the processor
component of the HMD for the StereoSite systems in third quarter 1997. All other
required 510(k) clearances to market for the StereoSite system have been
received. Internationally, the Company's three-chip video camera and the
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zoom endoscope have qualified for the CE mark under the Electromagnetic
Compatibility Directive for sale in Europe.
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 with the FDA's 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.
Europe is currently in the transitional process of implementing the Medical
Device Directive which was adopted on January 1, 1995 with a transition period
through June 1998. 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. With respect to the Series 8000, the Company is
responsible for gaining, at its expense, the CE mark in Europe. Medtronic is
responsible for obtaining, at its expense, all necessary regulatory and other
approvals required for sale in the Middle East and Africa. See "--Strategic
Alliances--Medtronic."
PATENTS AND PROPRIETARY RIGHTS
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 May 31, 1997, the Company had exclusive
ownership rights to seven issued United States patents, 10 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
45
<PAGE>
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 for such patents to issue could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company has rights in the following trademarks: 3D
Scope-Registered Trademark-, Design of Cone and Vista Medical Technologies &
Design. In addition, the Company has applied to register the following
trademarks: MIM, StereoSite, CardioCamera, CardioZoom, Infomatix, CardioView,
CardioController, CardioGuide, CardioConsole and CardioLight.
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 Company has in-licensed certain aspects of its technology. In September
1995, 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 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.
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
46
<PAGE>
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 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
affect 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.
47
<PAGE>
CLINICAL ADVISORY BOARDS
The Company has established two Clinical Advisory Boards made up of leading
surgeons, one focused on minimally invasive cardiac surgery, the other focused
on HNS microsurgery and a number of other specialties. Members of the Clinical
Advisory Boards consult with the Company exclusively in the field of
visualization, but may also consult with other non-competing instrumentation
companies and are employed elsewhere on a full-time basis. The Clinical Advisory
Boards are intended to act as a clinical reference for the Company and to
provide access to potential training sites for the Company's visualization
products. The Clinical Advisory Boards and their members are as follows:
CLINICAL ADVISORY BOARD: CARDIOTHORACIC SURGERY
<TABLE>
<CAPTION>
ADVISOR (1) INSTITUTION AND LOCATION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Delos M. Cosgrove III, M.D.............................. The Cleveland Clinic Foundation, Cleveland, OH
Federico Benetti, M.D................................... Fundacion Benetti, Rosario, Argentina
Alain Carpentier, M.D................................... Hopital Broussais, Paris, France
O. Howard Frazier, M.D.................................. Texas Heart Institute, Houston, TX
Laman Gray, M.D......................................... University of Louisville, Louisville, KY
Renee S. Hartz, M.D..................................... Illinois Masonic Hospital, Chicago, IL
Urban Lonn, M.D......................................... University Hospital, Linkoping, Sweden
William Northrup, III, M.D.............................. Minneapolis Heart, Minneapolis, MN
M. Clive Robinson, M.D.................................. University of Kentucky, Lexington, KY
William Santamore, Ph.D................................. University of Louisville, Louisville, KY
Meredith Scott, M.D..................................... Florida Hospital, Orlando, FL
Hani Shennib, M.D....................................... Montreal General Hospital, Montreal, Canada
Albert Starr, M.D....................................... St. Vincent Hospital, Portland, OR
Gus J. Vlahakes, M.D.................................... Massachusetts General Hospital, Boston, MA
John Wain, M.D.......................................... Massachusetts General Hospital, Boston, MA
</TABLE>
- --------------
(1) Each of the listed advisors specializes in cardiac surgery, with the
exceptions of Dr. John Wain, who specializes in thoracic surgery, and Dr.
William Santamore, who is a cardiovascular researcher.
CLINICAL ADVISORY BOARD: HNS MICROSURGERY AND OTHER SPECIALTIES
<TABLE>
<CAPTION>
ADVISOR ADVISORY FOCUS INSTITUTION AND LOCATION
- ------------------------------ ------------------------------- -------------------------------------------------
<S> <C> <C>
Desmond H. Birkett, M.D. 3-D endoscopic surgery Lahey Clinic, Woburn, MA
Richard D. Bucholz, M.D. Neuro-navigational surgery St. Louis University School of Medicine, St.
Louis, MO
James T. Caillouette, M.D. Information Technology Hoag Hospital, Newport Beach, CA
John Coller, M.D. Telemedicine Lahey Clinic, Woburn, MA
John Diaz Day, M.D. Skull base surgery Allegheny General Hospital, Pittsburgh, PA
Michael Levy, M.D. Neurosurgery University of California, Los Angeles, Los
Angeles, CA
Douglas Olsen, M.D. Spine surgery Vanderbilt University School of Medicine,
Nashville, TN
John H. Payne, Jr., M.D. Telemedicine Kaiser Permanente Hospital, Honolulu, HI
Stanley Shapshay, M.D. ENT/Sinus surgery New England Medical Center, Boston, MA
</TABLE>
48
<PAGE>
HUMAN RESOURCES
As of May 31, 1997, the Company had 64 full-time employees, of whom 10 hold
advanced degrees. None of the Company's employees is represented by a collective
bargaining agreement, nor has the Company experienced work stoppages. The
Company believes its relations with its employees are good.
FACILITIES
The Company's facilities consist of approximately 6,500 square feet of
office space located in Carlsbad, California, in which the Company's executive
offices and the HNS Microsurgery division are located, pursuant to a lease which
expires in November 1998. In addition, the Company maintains a facility of
approximately 22,500 square feet in Westborough, Massachusetts in which the
Company's development and manufacturing operations and the CardioThoracic
Surgery division are located, pursuant to several leases which expire at various
points in time beginning in May 1999 and ending in October 2001. The Company
believes that suitable additional space will be available to it, when needed, on
commercially reasonable terms.
LEGAL PROCEEDINGS
As of the date of this Prospectus, the Company is not a party to any legal
proceedings. Notwithstanding the foregoing, from time to time, Vista Medical may
be involved in litigation.
49
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company as of May 31, 1997, are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
James C. Blair (1)................................... 58 Chairman of the Board and Director
John R. Lyon......................................... 51 President, Chief Executive Officer and Director
Koichiro (Ken) Hori.................................. 61 Senior Vice President, Advanced Technology
Nancy M. Briefs...................................... 42 Vice President and General Manager, CardioThoracic
Surgery division
Allen Newman......................................... 46 Vice President and General Manager, Head, Neck &
Spine Microsurgery division
Clifford F. Potocky.................................. 50 Vice President and General Manager, Oktas division
Robert J. De Vaere................................... 39 Chief Financial Officer and Director of Finance and
Administration
Olav B. Bergheim..................................... 47 Director
Nicholas B. Binkley (1).............................. 51 Director
Daniel J. Holland (2)................................ 61 Director
Larry M. Osterink (2)................................ 56 Director
</TABLE>
- --------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
JAMES C. BLAIR. Dr. Blair has served as Chairman of the Board and a
Director of the Company since July 1995. Dr. Blair has been a General Partner of
Domain Associates ("Domain"), a venture capital management company, since 1985.
From 1969 to 1985, Dr. Blair was an officer of three investment banking and
venture capital firms. Dr. Blair is a director of Amylin Pharmaceuticals, Inc.,
Aurora Biosciences Corp., CoCensys Inc., Dura Pharmaceuticals, Inc., Gensia
Sicor, Inc. and Trega Biosciences Inc., all biopharmaceutical companies. Dr.
Blair is a graduate of Princeton University and holds a Ph.D. from the
University of Pennsylvania.
JOHN R. LYON. Mr. Lyon co-founded the Company in July 1993 and has served
as President since July 1993, as Chief Executive Officer since December 1996 and
as a director of the Company since July 1995. Prior to co-founding Vista
Medical, Mr. Lyon served for three years with Cooper Companies, as President of
the International Division within Cooper's Health Care Group from January 1991
through December 1992, and as President of CooperSurgical, a manufacturer and
distributor of minimally invasive surgical products, from January 1992 through
January 1993. Mr. Lyon also was employed by Kaiser Aerospace in a business
development role from February 1993 until the Company was founded in July 1993.
Mr. Lyon holds a B.A. from the University of Durham, United Kingdom.
KOICHIRO (KEN) HORI. Mr. Hori co-founded Vista Medical and served as
Executive Vice President and Chief Technical Officer prior to being appointed
Senior Vice President, Advanced Technology in December 1996. Mr. Hori also
served as a director of the Company from July 1995 to December 1996. Prior to
co-founding the Company, Mr. Hori served as President of Technology for Imaging,
which was subsequently acquired by Bristol-Myers Squibb, from December 1985 to
May 1992 and then founded Oktas, Inc. in November 1992 and served as its
President until December 1996. Oktas, Inc. was a wholly-owned subsidiary of the
Company from July 1995 through December 1996, when it was legally dissolved as a
separate entity and its assets were transferred to the Company. Mr. Hori earned
his B.S.E.E. from Tokyo's Nihon University College of Science and Engineering.
50
<PAGE>
NANCY M. BRIEFS. Ms. Briefs joined the Company as a consultant in May 1995
and has served as Vice President and General Manager of the Company's
CardioThoracic Surgery division since December 1995. Prior to joining Vista
Medical, from August 1993 through April 1995, Ms. Briefs served as Vice
President of Marketing and Sales at American Surgical Technologies Corporation
("AST"), a company that developed and received approval for the first
three-dimensional endoscope before its assets were acquired by Vista Medical in
July 1995. Previously, Ms. Briefs served as Director of Worldwide Marketing and
Corporate Accounts at Stryker Corp.'s Endoscopy Division from January 1990
through August 1992, where she was responsible for both the arthroscopy and
laparoscopy business units. She holds a B.A. and B.S. from Emporia State
University in Kansas and an M.B.A. in Marketing from Golden Gate University in
San Francisco.
ALLEN NEWMAN. Mr. Newman joined Vista Medical in June 1994 and served as
the Company's Vice President, Business Development until being appointed Vice
President and General Manager of the Company's Head, Neck & Spine Microsurgery
division in December 1996. Prior to joining the Company, Mr. Newman served as
president of Newman Medical, a medical consultancy, from October 1992 through
June 1994. Previously, he served as Vice President of Business Development at
Birtcher Medical Systems from March through October 1992 and in various sales
and management positions at Karl Storz Endoscopy America from 1982 through
February 1992, serving as Vice President, Sales and Marketing from 1989. Mr.
Newman holds a B.A. from California State University (Sonoma) and graduated from
the Medical Marketing Program of the John E. Anderson Graduate School of
Business at the University of California, Los Angeles ("UCLA").
CLIFFORD F. POTOCKY. Mr. Potocky joined Vista Medical in January 1996 and
has served as the Company's Vice President and General Manager of its Oktas
division since December 1996. Prior to joining Vista Medical, Mr. Potocky worked
at Frigitronics from 1974 through October 1995, in a variety of positions,
including Executive Vice President, Vice President-Director of Engineering and
Product Manager/Product Engineer. Frigitronics, a subsidiary of Starr Surgical,
Inc., was acquired and became CooperSurgical in 1990, specializing in
cryosurgery and other minimally invasive medical devices. Mr. Potocky holds a
B.S. from the University of Massachusetts.
ROBERT J. DE VAERE. Mr. De Vaere has served as Chief Financial Officer
since December 1996 and as Director of Finance and Administration for the
Company since January 1996. From January 1991 until joining Vista Medical, Mr.
De Vaere served in various financial roles at several of Kaiser Aerospace's
business units, most recently as Director of Finance and Business Management at
Kaiser Electro-Optics. Mr. De Vaere holds a B.S. from UCLA.
OLAV B. BERGHEIM. Mr. Bergheim has served as a Director of the Company
since August 1996. Mr. Bergheim has been a Venture Partner of Domain Associates
since October 1995. From April to July 1995, Mr. Bergheim was Executive
Vice-President of Coram Healthcare and from 1977 to 1995 served in various
management capacities with Baxter Healthcare Corporation in Europe and the
United States. From 1992 to 1995, Mr. Bergheim was President of Baxter's
Cardiovascular Group. Mr. Bergheim is a director of Fusion Medical Technologies,
Inc. Mr. Bergheim graduated from the University of Oslo with a Masters degree in
Industrial Pharmacy.
NICHOLAS B. BINKLEY. Mr. Binkley has served as a Director of the Company
since July 1995. In June 1993, Mr. Binkley was one of the founding principals of
Forrest Binkley & Brown L.P., the managing general partner of SBIC Partners,
L.P., a private equity investment fund licensed as a small business investment
company by the U.S. Small Business Administration. From 1977, Mr. Binkley served
in a variety of senior executive positions at Security Pacific Corporation
("SPC"), including Chairman and Chief Executive Officer of Security Pacific
Financial Services System, SPC's non-banking subsidiary, from 1981, and Vice
Chairman of the Board of Directors of SPC from 1991. In April 1992, Mr. Binkley
became Vice Chairman of the Board of Directors of BankAmerica Corporation
("BankAmerica"), following the merger of SPC into BankAmerica, serving in such
capacity until his resignation in May 1993.
51
<PAGE>
Mr. Binkley is a graduate of The Colorado College and holds a masters degree
from Johns Hopkins School of Advanced International Studies.
DANIEL J. HOLLAND. Mr. Holland has served as a Director of the Company
since July 1995. Mr. Holland is a General Partner of One Liberty Fund III, a
venture capital fund organized in 1995. He served as President of Morgan,
Holland Ventures Corporation until 1995 when he was appointed Senior Officer of
OneLiberty Ventures, Inc. (formerly Morgan, Holland Ventures Corporation). He
has also served as a Managing General Partner of Morgan, Holland Fund and
Morgan, Holland Fund II since 1981 and 1988, respectively. Mr. Holland holds a
B.S. in mechanical engineering from The Massachusetts Institute of Technology
and an MBA from Harvard Business School.
LARRY M. OSTERINK. Dr. Osterink has been a Director of the Company since
July 1995. Since 1993, Dr. Osterink has served as President of Medical Optics
Inc., a subsidiary of Kaiser Aerospace. From 1984 to 1992, Dr. Osterink was
President of Kaiser Electro-Optics Inc. and from 1979 to 1984 he was General
Manager of the Industrial Laser Division of SpectraPhysics Inc. Dr. Osterink
graduated from Michigan State University and holds a Ph.D. in Electrical
Engineering from Stanford University.
Members of the Board currently hold office and serve until the next annual
meeting of the stockholders of the Company or until their respective successors
have been elected. The Board is currently comprised of six directors. Under the
Company's Restated Bylaws, beginning with the next annual meeting of
stockholders the Company's Board will be classified into three classes of
directors serving staggered three-year terms, with one class of directors to be
elected at each annual meeting of stockholders. The classification of directors
has the effect of making it more difficult to change the composition of the
Board. See "Description of Capital Stock -- Possible Anti-takeover Effect of
Certain Charter Provisions."
All executive officers are appointed annually by and serve at the discretion
of the Board. All of the Company's executive officers are employed by the
Company at will.
Pursuant to the Company's 1997 Stock Option/Issuance Plan, which was adopted
by the Board in February 1997 and approved by the Company's stockholders in
February 1997, directors who are not officers or employees of the Company will
receive periodic option grants beginning with the next annual meeting of
stockholders. See "-- Benefit Plans."
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has a standing Compensation Committee currently composed of Dr.
Blair and Mr. Binkley. The Compensation Committee reviews and acts on matters
relating to compensation levels and benefit plans for executive officers and key
employees of the Company, including salary and stock options. The Committee is
also responsible for granting stock awards, stock options and stock appreciation
rights and other awards to be made under the Company's existing incentive
compensation plans. The Company also has a standing Audit Committee composed of
Mr. Holland and Dr. Osterink. The Audit Committee assists in selecting the
Company's independent auditors and in designating services to be performed by,
and maintaining effective communication with, those auditors.
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the aggregate compensation paid by the
Company to the President and Chief Executive Officer and to each of the most
highly compensated executive officers who in 1996
52
<PAGE>
earned over $100,000 (the "Named Executive Officers") for services rendered in
all capacities to the Company for the year ended December 31, 1996:
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION AWARDS
-------------------------------------
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (2) BONUS (3) OPTIONS/SARS (#) COMPENSATION
- ---------------------------------------- --------- ----------- ----------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
John R. Lyon ........................... 1996 $ 149,510 $ 75,000 246,000 $ --
President, Chief Executive Officer and
Director
Koichiro Hori .......................... 1996 129,754 32,400 75,000 --
Senior Vice President,
Advanced Technology
Allen Newman ........................... 1996 129,696 32,200 135,000 --
Vice President and General
Manager, HNS Microsurgery
division
Nancy M. Briefs ........................ 1996 118,582 32,000 135,000 --
Vice President and General
Manager, CardioThoracic
Surgery division
Clifford F. Potocky .................... 1996 99,414 16,000 78,750 19,685(4)
Vice President and General
Manager, Oktas division
</TABLE>
- --------------
(1) Pursuant to Instruction to Item 402(b) of Regulation S-K promulgated by the
Securities and Exchange Commission (the "Commission"), information with
respect to fiscal years prior to 1996 has not been included as the Company
was not a reporting company pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
information has not been previously reported to the Commission in response
to a filing requirement.
(2) Includes amounts deferred pursuant to the Company's 401(k) Plan.
(3) Includes cash payments for bonuses accrued for and related to 1995 and 1996
services.
(4) Reimbursement for per diem and temporary living expenses.
STOCK OPTIONS
The following table sets forth information concerning stock option grants
made to each of the Named Executive Officers for the year ended December 31,
1996. The Company granted no stock appreciation rights ("SARs") to Named
Executive Officers during 1996.
53
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
- -------------------------------------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED OPTION TERM (3)
OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION --------------------
NAME GRANTED (1) FISCAL YEAR PER SHARE (2) DATE 5% 10%
- ------------------------------ ----------- --------------- --------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
John R. Lyon.................. 11,250 1.0% $ 0.80 12/12/2006 $ 5,660 $ 14,344
234,750 20.0 0.20 05/21/2006 29,527 74,826
Koichiro Hori................. 75,000 6.4 0.20 05/21/2006 9,433 23,906
Allen Newman.................. 7,500 0.6 0.80 12/12/2006 3,773 9,562
127,500 10.9 0.20 05/21/2006 16,037 40,640
Nancy M. Briefs............... 7,500 0.6 0.80 12/12/2006 3,773 9,562
127,500 10.9 0.20 05/21/2006 16,037 40,640
Clifford F. Potocky........... 3,750 0.3 0.80 12/12/2006 1,887 4,781
45,000 3.8 0.20 05/21/2006 5,660 14,344
30,000 2.6 0.20 02/15/2006 3,773 9,562
</TABLE>
- --------------
(1) In accordance with the terms of the 1995 Stock Option Plan under which these
options were granted, 50% of the shares subject to each option will
immediately vest in the event the Company is acquired by a merger or asset
sale, unless the Company's repurchase rights with respect to those shares
are transferred to the acquiring entity. The other 50% of the shares vest if
employee is terminated without cause within two years of the merger or asset
sale. The grant dates for the above options are as follows:
<TABLE>
<CAPTION>
NAME OPTIONS GRANTED (#) GRANT DATE
- ----------------------------------------------------------- -------------------- -----------
<S> <C> <C>
John R. Lyon............................................... 11,250 12/12/96
234,750 05/21/96
Koichiro Hori.............................................. 75,000 05/21/96
Allen Newman............................................... 7,500 12/12/96
127,500 05/21/96
Nancy M. Briefs............................................ 7,500 12/12/96
127,500 05/21/96
Clifford F. Potocky........................................ 3,750 12/12/96
45,000 05/21/96
30,000 02/15/96
</TABLE>
(2) The exercise price per share of options granted represented the fair market
value of the underlying shares of Common Stock on the dates the respective
options were granted as determined by the Board, considering all relevant
factors. The exercise price may be paid in cash or in shares of Common Stock
valued at fair market value on the exercise date or a combination of cash or
shares or any other form of consideration approved by the Board. After the
effective date of the Registration Statement of which this Prospectus is a
part, the fair market value of shares of Common Stock will be determined in
accordance with certain provisions of the Plan based on the closing selling
price per share of a share of Common Stock on the date in question on the
primary exchange or national market system on which the Company's common
stock is listed or reported. If shares of the Common Stock are not listed or
admitted to trading on any stock exchange nor traded on the Nasdaq National
Market, then the fair market value shall be determined by the Plan
Administrator after taking into account such factors as the Plan
Administrator shall deem appropriate.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Commission. The price used for computing this
appreciation is the exercise price of the
54
<PAGE>
options, not the price of Common Stock in this Offering. There is no
assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% or 10% levels or at any other
defined level.
OPTION EXERCISES AND HOLDINGS
The following table provides information concerning option exercises during
1996 by the Named Executive Officers and the value of unexercised options held
by each of the Named Executive Officers as of December 31, 1996. No SARs were
exercised during 1996 or outstanding as of December 31, 1996.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS AT DECEMBER
SHARES 31, 1996
ACQUIRED ON VALUE --------------------------------
NAME EXERCISE (#) REALIZED (1) EXERCISABLE (2) UNEXERCISABLE
- ---------------------------------- ------------ ------------ --------------- --------------
<S> <C> <C> <C> <C>
John R. Lyon...................... 168,750 $0 246,000 0
Koichiro Hori..................... -- -- 75,000 0
Allen Newman...................... 75,000 0 135,000 0
Nancy M. Briefs................... 75,000 0 135,000 0
Clifford F. Potocky............... -- -- 78,750 0
<CAPTION>
VALUE OF UNEXERCISED IN-THE-
MONEY OPTIONS
AT DECEMBER 31, 1996 (3)
-------------------------------
NAME EXERCISABLE (2) UNEXERCISABLE
- ---------------------------------- --------------- -------------
<S> <C> <C>
John R. Lyon...................... $140,850 $0
Koichiro Hori..................... 45,000 0
Allen Newman...................... 76,500 0
Nancy M. Briefs................... 76,500 0
Clifford F. Potocky............... 45,000 0
</TABLE>
- --------------
(1) "Value realized" is calculated on the basis of the fair market value of the
Common Stock on the date of exercise minus the exercise price and does not
necessarily indicate that the optionee sold such stock.
(2) The options are immediately exercisable; however, any shares purchased upon
exercise may be subject to rights of repurchase on the part of the Company
which lapse at various times over the next five years.
(3) "Value" is defined as fair market price of the Common Stock at fiscal
year-end ($0.80) less exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1996, the Compensation Committee of the
Company's Board established the levels of compensation for the Company's
executive officers. The members of the Company's Compensation Committee are Dr.
Blair and Mr. Binkley. See "Certain Transactions." Mr. Lyon, the Company's
President and Chief Executive Officer, participated in the deliberations of the
Compensation Committee regarding executive compensation that occurred during
1996, but did not take part in the deliberations regarding his own compensation.
EMPLOYMENT ARRANGEMENTS
The Company has not entered into any employment contracts or arrangements
with any of its Named Executive Officers.
Fifty percent of the unvested shares subject to options outstanding to the
Company's executive officers will immediately vest if the Company is acquired by
a merger or asset sale, unless the Company's repurchase rights with respect to
those shares are transferred to the acquiring entity. The other 50% of the
shares vest if the employee is terminated without cause within two years of the
merger or asset sale. See "Benefit Plans -- 1997 Stock Option/Stock Issuance
Plan."
55
<PAGE>
DIRECTOR COMPENSATION
The Company reimburses its directors for all reasonable and necessary travel
and other incidental expenses incurred in connection with their attendance at
meetings of the Board. Directors are not currently compensated for serving on
the Board. However, under the 1997 Stock Option/Issuance Plan, as amended, (the
"Plan") which was adopted in February 1997 and amended in March and May 1997,
beginning with the first annual meeting of stockholders following this Offering,
each non-employee director who is first elected to the Board will automatically
receive an option to purchase 15,000 shares of Common Stock for the first year
of the director's Board term and 5,000 shares of Common Stock for each
additional year remaining on the director's Board term following the automatic
option grant. Each director who is currently serving on the Board will receive
an option to purchase 5,000 shares of Common Stock for each additional year for
which he is elected as a director. These options will have an exercise price
equal to 100% of the fair market value of the Common Stock on the grant date.
The grant of 15,000 shares will become exercisable in equal monthly installments
over four years of Board service completed by the director following such grant,
and the grants of 5,000 shares will become exercisable at the end of one year of
Board service completed by the director following the date of grant. See "--
Benefit Plans -- 1997 Stock Option/Issuance Plan."
Under the Company's 1995 Stock Option Plan (the "Predecessor Plan"), each
non-employee director received a fully vested option to purchase 4,500 shares of
Common Stock in December 1996, and Mr. Lyon received an option to purchase
11,250 shares of Common Stock of the Company. The option grant to Mr. Lyon vests
over five years, subject to acceleration upon a change of control. Fifty percent
of the shares subject to Mr. Lyon's option will immediately vest in the event
the Company is acquired by a merger or asset sale, unless the Company's
repurchase rights with respect to those shares are transferred to the acquiring
entity. The other 50% of the shares will immediately vest if Mr. Lyon is
terminated without cause within two years of the merger or asset sale.
BENEFIT PLANS
1997 STOCK OPTION/STOCK ISSUANCE PLAN
The Plan serves as the successor equity incentive program to the Predecessor
Plan. The Plan became effective on February 28, 1997 upon adoption by the Board
and approval by the stockholders. 2,820,000 shares of Common Stock have been
authorized for issuance under the Plan. This share reserve is comprised of (i)
the shares that remain available for issuance under the Predecessor Plan,
including the shares subject to outstanding options thereunder, plus (ii) an
additional increase of 1,417,489 shares. However, in no event may any one
participant in the Plan receive option grants or direct stock issuances for more
than 300,000 shares in the aggregate per calendar year.
Outstanding options under the Predecessor Plan were incorporated into the
Plan upon its adoption, and no further option grants will be made under the
Predecessor Plan. The incorporated options will continue to be governed by their
existing terms, unless the Plan Administrator (described below) elects to extend
one or more features of the Plan to those options. However, except as otherwise
noted below, the outstanding options under the Predecessor Plan contain
substantially the same terms and conditions summarized below for the
Discretionary Option Grant Program in effect under the Plan.
The Plan is divided into three separate components: (i) the Discretionary
Option Grant Program under which eligible individuals in the Company's employ or
service (including officers and other employees, non-employee Board members and
independent consultants) may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock at an exercise price not less
than 85% of their fair market value on the grant date, (ii) the Stock Issuance
Program under which such individuals may, in the Plan Administrator's
discretion, be issued shares of Common Stock directly, through the purchase of
such shares at a price not less than 100% of their fair market value at the time
of issuance or as a bonus tied to the performance of services and (iii) the
Automatic Option Grant Program
56
<PAGE>
under which option grants will automatically be made at periodic intervals to
eligible non-employee Board members to purchase shares of Common Stock at an
exercise price equal to 100% of their fair market value on the grant date.
The Board or a committee appointed by the Board (the "Plan Administrator")
will administer the Discretionary Option Grant and Stock Issuance Programs. The
Plan Administrator, subject to the provisions of the plan, will have complete
discretion to determine which eligible individuals will receive option grants or
stock issuances, the time or times at which such option grants or stock issuance
are to be made, the number of shares subject to each such grant or issuance, the
vesting schedule to be in effect for the option grant or stock issuance, the
maximum term for which any granted option is to remain outstanding and whether
an option will be granted as an incentive stock option or a non-statutory stock
option under the Federal tax laws. The administration of the Automatic Option
Grant Program will be self-executing in accordance with the express provisions
of such Program and no Plan Administrator will exercise any discretionary
functions with respect to any option grants or stock issuances made under the
Program.
Under the Automatic Option Grant Program, at each Annual Stockholders
Meeting, beginning with the next Annual Stockholders Meeting, each individual
who (i) is elected or re-elected to serve as a non-employee Board member or (ii)
was appointed as a non-employee Board member since the last Annual Stockholders
Meeting (and whose Board term does not expire at such Meeting) will receive an
option grant to purchase shares of Common Stock. The number of shares subject to
the option will be equal to 15,000 shares for the first year that the optionee
is elected to the Board and 5,000 shares for each additional year served by such
optionee following the automatic option grant. Each option granted pursuant to
the Automatic Option Grant Program will have an exercise price equal to the fair
market value per share of Common Stock on the grant date and will have a maximum
term of 10 years, subject to earlier termination following the optionee's
cessation of Board service. The grant of 15,000 shares will vest in successive
equal monthly installments over forty-eight months of Board service completed by
the optionee measured from the date the optionee is first elected to the Board
of Directors, and the grants of 5,000 will vest at the end of each additional
year of Board service completed by the optionee. In addition, the option shares
will become fully vested upon (i) certain changes in the ownership or control of
the Company or (ii) the death or disability of the optionee while serving as a
Board member. The automatic options may only be exercised to the extent vested.
Payment of the exercise price for the shares of Common Stock subject to
option grants made under the Plan may be made in cash or in shares of Common
Stock valued at fair market value on the exercise date. The optionee may elect
to make payment for the option shares upon exercise through a same-day sale
program, which enables the optionee to purchase the option shares without making
any cash payment. In addition, the Plan Administrator may provide financial
assistance to one or more optionees in the exercise of their outstanding options
by allowing such individuals to deliver a full-recourse, interest-bearing
promissory note in full payment of the exercise price and associated withholding
taxes incurred in connection with such exercise.
In the event that the Company is acquired by merger or asset sale, the
unvested portion of each outstanding option under the Discretionary Option Grant
Program that is not to be assumed by the successor corporation will
automatically vest in full. Similarly, unless the Company assigns the repurchase
rights associated with any unvested shares under the Stock Issuance Program to
the successor corporation, such unvested shares will vest in full. Any
outstanding options assumed by the successor corporation and shares that remain
subject to repurchase rights assigned to the successor corporation will not vest
immediately, but will vest in accordance with their original vesting schedule.
The Plan Administrator will have the authority under the Discretionary Option
Grant and Stock Issuance Programs to grant options and to structure repurchase
rights so that the shares subject to those options or repurchase rights will
automatically vest in the event the individual's service is terminated, whether
involuntarily or through a resignation for good reason, within a specified
period (not to exceed 18
57
<PAGE>
months) following (i) a merger or asset sale in which those options are assumed
or those repurchase rights are assigned, (ii) a hostile change in control of the
Company effected by a successful tender offer for more than 50% of the
outstanding voting stock or by proxy contest for the election of Board members
or (iii) the sale, transfer or disposition of all or substantially all of the
Company's assets (each a "Corporate Transaction"). The Plan Administrator will
also have the discretion to provide for the automatic acceleration of options
and the lapse of any repurchase rights upon (i) a hostile change in control of
the Company effected by a successful tender offer for more than 50% of the
Company's outstanding voting stock or by proxy contest for the election of Board
members or (ii) the termination of the individual's service, whether
involuntarily or through a resignation for good reason, within a specified
period (not to exceed 18 months) following such a hostile change in control. The
unvested portion of the options currently outstanding under the Predecessor Plan
will accelerate and such options will terminate and cease to be exercisable upon
an acquisition of the Company by merger or asset sale, unless those options are
assumed by the acquiring entity. The unvested portion of any options assumed by
the successor corporation will automatically accelerate upon the involuntary
termination of the optionee's service within 18 months following the occurrence
of a Corporate Transaction in which the options are assumed or replaced by the
successor corporation.
Stock appreciation rights may be issued in tandem with option grants made
under the Discretionary Option Grant Program. The holders of these rights will
have the opportunity to elect between the exercise of their outstanding stock
options for shares of Common Stock or the surrender of those options for an
appreciation distribution from the Company equal to the excess of (i) the fair
market value of the vested shares of Common Stock subject to the surrendered
option over (ii) the aggregate exercise price payable for such shares. The
appreciation distribution may be made in cash or in shares of Common Stock.
There are currently no outstanding stock appreciation rights.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or a different number of option shares with an exercise
price per share based upon the fair market value of the Common Stock on the new
grant date.
The Board may amend or modify the Plan at any time. The Plan will terminate
10 years from its effective date unless otherwise terminated by the Board prior
to such date.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board on February 19, 1997 and was subsequently approved by the
stockholders on February 20, 1997. The Purchase Plan is designed to allow
eligible employees of the Company to purchase shares of Common Stock, at
semi-annual intervals, through periodic payroll deductions under the Purchase
Plan. A reserve of 200,000 shares of Common Stock has been established for this
purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering period
under the Purchase Plan will commence on the effective date of a Registration
Statement on Form S-8 covering the shares of Common Stock issuable under the
Purchase Plan (which the Company intends to file on the effective date of this
Offering) and will terminate no later than the last business day in March 1999.
Individuals who are eligible employees on the start date of any offering
period may enter the Purchase Plan on that start date or on any subsequent
semi-annual entry date (April 1 or October 1 each year). Individuals who become
eligible employees after the start date of the offering period may join the
Purchase Plan on any subsequent semi-annual entry date within that period.
Payroll deductions may not exceed 10% of the participant's base salary for
each semi-annual period of participation, and the accumulated payroll deductions
will be applied to the purchase of shares on the
58
<PAGE>
participant's behalf on each semi-annual purchase date (the last business day of
March and September each year, with the first purchase date to occur on the last
business day of September 1997) at a purchase price per share not less than 85%
of the LOWER of (i) the fair market value of the Common Stock on the
participant's entry date into the offering period or (ii) the fair market value
of the Common Stock on the semi-annual purchase date. Should the fair market
value of the Common Stock on any semi-annual purchase date be less than the fair
market value of the Common Stock on the first day of the offering period, then
the current offering period will automatically end and a new 24-month offering
period will begin, based on the lower fair market value.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Second Restated Certificate of Incorporation eliminates,
subject to certain exceptions, directors' personal liability to the Company or
its stockholders for monetary damages for breaches of fiduciary duties. The
Second Restated Certificate of Incorporation does not, however, eliminate or
limit the personal liability of a director for (i) any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law
or (iv) any transaction from which the director derived an improper personal
benefit.
The Company's Restated Bylaws provide that the Company shall indemnify its
directors and executive officers to the fullest extent permitted under the
Delaware General Corporation Law and may indemnify its other officers, employees
and other agents as set forth in the Delaware General Corporation Law. In
addition, the Company has entered into indemnification agreements with its
directors and officers. The indemnification agreements contain provisions that
require the Company, among other things, to indemnify its directors and
executive officers against certain liabilities (other than liabilities arising
from intentional or knowing and culpable violations of law) that may arise by
reason of their status or service as directors or executive officers of the
Company or other entities to which they provide service at the request of the
Company and to advance expenses they may incur as a result of any proceeding
against them as to which they could be indemnified. The Company believes that
these provisions and agreements are necessary to attract and retain qualified
directors and officers. The Company has obtained an insurance policy covering
directors and officers for claims that such directors and officers may otherwise
be required to pay or for which the Company is required to indemnify them,
subject to certain exclusions.
59
<PAGE>
CERTAIN TRANSACTIONS
Since its formation in July 1993, the Company has issued, in private
placement transactions, shares of its Preferred Stock as follows (not adjusted
for the three-for-four reverse stock split): 8,094,340 shares of Series A-1
Preferred Stock at a price of $1.325 per share in July 1995; 154,581 shares of
Series A-3 Preferred Stock at a price of $1.325 per share in September 1995;
1,325,331 shares of Series B Preferred Stock at a price of $4.00 per share in
July 1996; and 2,000,000 shares of Series C Preferred Stock at a price of $5.00
per share in November 1996. The purchasers of Preferred Stock include, among
others, the following executive officers and holders of more than five percent
of the Company's outstanding stock and their respective affiliates (all shares
of Preferred Stock are convertible into Common Stock on a three-for-four basis):
<TABLE>
<CAPTION>
PREFERRED STOCK
EXECUTIVE OFFICERS, DIRECTORS AND 5% ------------------------------------------------ TOTAL
STOCKHOLDERS SERIES A-1 SERIES A-3 SERIES B SERIES C CONSIDERATION
- --------------------------------------------- ----------- ----------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Funds advised by Domain Associates (1)....... 2,113,207 32,215 326,341 -- $ 4,148,048
SBIC Partners, L.P. (2)...................... 1,886,792 -- 291,375 -- 3,665,499
Foster City Partners (3)..................... 1,792,453 -- 276,807 -- 3,482,228
Biotechnology Investments Limited............ 1,056,604 15,875 163,170 -- 2,073,715
One Liberty Fund III, L.P. (4)............... 747,170 -- 115,385 -- 1,451,540
Koichiro Hori................................ 264,151 -- 8,244 -- 382,976
Nancy M. Briefs.............................. -- -- 50,000 -- 200,000
Medtronic Asset Management, Inc. (5)......... -- -- -- 2,000,000 10,000,000
</TABLE>
- --------------
(1) Includes Domain Partners III, L.P., DP III Associates, L.P. and Domain
Partners II, L.P., associated with Dr. Blair.
(2) Associated with Mr. Binkley.
(3) Includes shares of Series A-1 Preferred Stock originally issued to Kaiser
Aerospace and subsequently transferred to Foster City Partners in June 1996.
Does not include 750 shares of Common Stock held by Kaiser Aerospace.
(4) Associated with Mr. Holland.
(5) A wholly-owned subsidiary of Medtronic.
Holders of Preferred Stock are entitled to certain registration rights with
respect to the Common Stock issued or issuable upon conversion thereof. See
"Description of Capital Stock -- Registration Rights."
Vista Medical was founded as a wholly-owned subsidiary of Kaiser Aerospace
in July 1993. Kaiser Aerospace financed the initial operations of the Company
through cash advances aggregating $5.4 million.
In July 1995, the Company raised approximately $8 million from various
venture capital funds, including funds which are principal stockholders of the
Company and/or are affiliated with directors of the Company, in a private
placement of its Series A-1 Preferred Stock. The Company repaid its indebtedness
to Kaiser Aerospace by permitting Kaiser Aerospace to cancel $2.4 million of
indebtedness owed by the Company as payment for shares of Series A-1 Preferred
Stock and by repaying an additional $3 million debt owed to Kaiser Aerospace
with funds received pursuant to the private placement transaction. See "Business
- -- Strategic Alliances -- Kaiser Aerospace." As part of this Series A-1
Preferred Stock financing, the Company also acquired Oktas, Inc. as its
wholly-owned subsidiary pursuant to the receipt of all of the outstanding shares
of Oktas, Inc. as payment for shares of Series A-1 Preferred Stock received by
Mr. Koichiro Hori, the founder and sole shareholder of Oktas, Inc. and currently
an executive officer of the Company.
60
<PAGE>
In July 1995, the Company entered into a Technology Strategic Alliance and a
Manufacturing Supply Agreement with Kaiser Electro-Optics, a subsidiary of
Kaiser Aerospace. The Technology Strategic Alliance provides that the Company
and Kaiser Electro-Optics will cooperate in joint development programs related
to the HMD as appropriate to be negotiated on an arms-length and
project-by-project basis for an unspecified term. The Company contracts with
Kaiser Electro-Optics for development and manufacturing services related to the
Company's HMD, including initial production quantities for the HMD. The
Manufacturing Supply Agreement provides that Kaiser Electro-Optics will be the
Company's preferred supplier for a three-year period for not less than 75% of
its requirements for the optical subassembly of the Company's HMD, provided that
pricing and other terms are competitive and mutually agreed upon.
In July 1996, the Company raised approximately $4.3 million in cash from
Foster City Partners, various venture capital funds, including funds which are
principal stockholders of the Company and/or affiliated with directors of the
Company, and other accredited investors in a private placement of its Series B
Preferred Stock. The Company repaid its indebtedness to certain of the venture
capital funds by permitting such funds to cancel approximately $0.8 million of
indebtedness owed by the Company as consideration for shares of Series B
Preferred Stock.
In September 1995, the Company purchased substantially all of the assets of
AST, which was engaged in the business of designing, developing, marketing and
supporting stereoscopic endoscopes. The purchase price for such assets consisted
of $25,000 and 154,581 shares of Series A-3 Preferred Stock of Vista Medical,
which is non-voting stock. Pursuant to its rights under the purchase agreement,
AST assigned its rights to receive the consideration payable by Vista Medical to
various venture capital funds, including funds which are principal stockholders
of the Company and/or are affiliated with directors of the Company. The
Company's acquisition of the assets of AST was accounted for using the purchase
method of accounting with the assets being recorded at their estimated fair
values at the date of acquisition.
In September 1994, the Company entered into a license agreement with Allen
Newman, currently an executive officer of the Company, under which Mr. Newman
granted the Company an exclusive license to use the Newman Technology. In
December 1996, the Company and Urohealth entered into a license agreement under
which the Company exclusively sublicensed the Newman Technology to Urohealth for
use in gynecology, urology and general surgery on a worldwide basis. In
connection with the license agreement, the parties entered into a consulting
agreement whereby Vista Medical agreed to use its reasonable efforts to provide
the services of Mr. Newman as a consultant. The Newman license agreement was
amended in December 1996 to permit the Company to sublicense the Newman
Technology to Urohealth. In connection with the amendment of the Newman license
agreement, the Company paid Mr. Newman $200,000 and agreed to pay Mr. Newman 50%
of the royalties received from Urohealth. Previously, the Company made advance
royalty payments of $37,500 to Mr. Newman in connection with the execution of
the initial license agreement.
In November 1996, Vista Medical and Medtronic entered into a strategic
alliance providing for the distribution and co-promotion of the Vista Systems.
In connection with entering into a co-promotion agreement, Medtronic made a $10
million equity investment in the Company and received 2,000,000 shares of Series
C Preferred Stock, which will be automatically converted into 1,500,000 shares
of Common Stock in connection with this Offering.
In May 1996, the Company loaned certain officers of the Company an aggregate
of $63,750 in connection with the exercise of certain stock options by such
officers.
All of the Company's officers are employed by the Company at will. The
Company has entered into indemnification agreements with each of its directors
and executive officers. See "Management -- Limitations on Liability and
Indemnification Matters."
61
<PAGE>
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company expects that all future transactions
between the Company and its officers, directors and principal stockholders and
their affiliates will be approved in accordance with the Delaware General
Corporation Law by a majority of the Board, as well as by a majority of the
independent and disinterested directors of the Board, and will be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties.
62
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of May 31, 1997, and as adjusted to reflect the
sale of the shares of the Common Stock offered hereby by the Company, by (i) all
those known by the Company to be beneficial owners of more than 5% of its
outstanding Common Stock, (ii) each director of the Company, (iii) each of the
Named Executive Officers of the Company and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED (2)
NUMBER OF --------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES (1) PRIOR TO OFFERING AFTER OFFERING
- ------------------------------------------------------------------ ----------- ------------------- -----------------
<S> <C> <C> <C>
Funds advised by Domain Associates (3) ........................... 1,873,320 20.1% 14.6%
One Palmer Square
Princeton, NJ 08542
SBIC Partners, L.P. .............................................. 1,633,625 17.6% 12.8%
201 Main Street, Suite 2302
Fort Worth, TX 76102
Foster City Partners ............................................. 1,551,944 16.7% 12.1%
950 Tower Lane, Suite 800
Foster City, CA 94404
Medtronic Asset Management, Inc. ................................. 1,500,000 16.1% 11.7%
7000 Central Avenue NE
Minneapolis, MN 55432
Biotechnology Investments Limited (B.I.L.). ...................... 926,736 10.0% 7.2%
Post Office Box 58
St. Julian's Court
St. Peter Port
Guernsey, Channel Islands
One Liberty Fund III, L.P. ....................................... 646,915 7.0% 5.1%
1 Liberty Square, 2nd Floor
Boston, MA 02109
James C. Blair (3)................................................ 1,873,320 20.1% 14.6%
John R. Lyon (4).................................................. 414,750 4.3% 3.2%
Olav B. Bergheim (5).............................................. 19,500 * *
Nicholas B. Binkley (6)........................................... 1,640,125 17.6% 12.8%
Daniel J. Holland (7)............................................. 666,415 7.2% 5.2%
Larry Osterink (8)................................................ 1,692,194 18.2% 13.2%
Koichiro Hori (9)................................................. 279,296 3.0% 2.2%
Nancy M. Briefs (10).............................................. 247,500 2.6% 1.9%
Allen Newman (11)................................................. 210,000 2.2% 1.6%
Clifford F. Potocky (12).......................................... 78,750 * *
All directors and executive officers as a group (11 persons)
(13)............................................................. 7,185,600 71.8% 53.2%
</TABLE>
- ----------------
* Less than 1%
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them. Share ownership in each
case includes shares issuable upon exercise of certain outstanding options
as described in the footnotes below. The address for those individuals for
which an address is not otherwise indicated is: 5451 Avenida Encinas, Suite
A, Carlsbad, California 92008.
(2) Percentage of ownership is calculated pursuant to Commission Rule
13d-3(d)(1).
63
<PAGE>
(3) Includes 1,767,787 shares beneficially owned by Domain Partners III, L.P.,
24,161 shares beneficially owned by Domain Partners, II L.P., 61,872 shares
beneficially owned by DP III Associates, L.P. and 19,500 shares beneficially
owned by Domain Associates. Dr. Blair is a general partner of One Palmer
Square Associates, II, L.P., which is the general partner of Domain Partners
II, L.P., and he is also a general partner of One Palmer Square Associates,
III, L.P., the general partner of Domain Partners III, L.P. and DP III
Associates. Dr. Blair has an indirect beneficial ownership of these shares.
Dr. Blair is a general partner of Domain Associates. Excludes 926,736 shares
beneficially owned by BIL. Pursuant to a contractual agreement, Domain
Associates is the U.S. venture capital advisor to BIL. Domain Associates has
neither voting nor investment power over BIL and Dr. Blair and Domain
Associates disclaim beneficial ownership of the BIL shares.
(4) Includes 246,000 shares issuable upon exercise of options exercisable
within 60 days of May 31, 1997.
(5) Mr. Bergheim is employed by Domain Associates as a Venture Partner. Mr.
Bergheim has no beneficial ownership of any of the shares owned by funds
advised by Domain Associates.
(6) Includes 1,500 shares issuable upon exercise of options exercisable within
60 days of May 31, 1997. Also includes 5,000 shares beneficially owned by
The Binkley Family Trust, of which Mr. Binkley is a trustee, and 1,633,625
shares beneficially owned by SBIC Partners, L.P., a Texas limited
partnership ("SBIC Partners"). SBIC Partners is the beneficial owner of all
shares of the Company's Common Stock registered in its name. Forrest Binkley
& Brown L.P., a Texas limited partnership ("FBB"), is the managing general
partner of SBIC Partners, and Forrest Binkley & Brown Venture Co., a Texas
corporation ("Venture Co."), is the sole general partner of FBB. Mr. Binkley
is a limited partner of FBB, and is an executive officer, director and
shareholder of Venture Co. Mr. Binkley disclaims beneficial ownership with
respect to all shares of Common Stock owned by SBIC Partners, except to the
extent of his pecuniary interest therein.
(7) Includes 19,500 shares issuable upon exercise of options exercisable within
60 days of May 31, 1997. Also includes 646,915 shares beneficially owned by
One Liberty Fund III, L.P. Mr. Holland is a general partner of One Liberty
Partners III, L.P., which is a general partner of One Liberty Fund III, L.P.
Mr. Holland disclaims beneficial ownership with respect to all shares of
Common Stock owned by One Liberty Fund III, L.P.
(8) Includes 19,500 shares issuable upon exercise of options exercisable within
60 days of May 31, 1997. Also includes 1,551,944 shares beneficially owned
by Foster City Partners and 750 shares beneficially owned by Kaiser
Aerospace. Dr. Osterink, president of a subsidiary of Kaiser Aerospace,
disclaims beneficial ownership of the shares owned by Foster City Partners
and Kaiser Aerospace.
(9) Includes 75,000 shares issuable upon exercise of options exercisable within
60 days of May 31, 1997.
(10) Includes 135,000 shares issuable upon exercise of options exercisable
within 60 days of May 31, 1997. Also includes 37,500 shares beneficially
owned by Delaware Charter Guarantee & Trust TTEE FBO Nancy Briefs (the
"Briefs Trust"). Ms. Briefs is a beneficiary of the Briefs Trust.
(11) Includes 135,000 shares issuable upon exercise of options exercisable
within 60 days of May 31, 1997.
(12) Includes 78,750 shares issuable upon exercise of options exercisable within
60 days of May 31, 1997.
(13) Includes 714,000 shares issuable upon exercise of options exercisable
within 60 days of May 31, 1997. See also footnotes 3, 6, 7 and 8.
64
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of the Offering, the Company will be authorized to issue
35,000,000 shares of Common Stock, $.01 par value per share, of which 12,797,528
shares will be issued and outstanding, and 5,000,000 shares of undesignated
Preferred Stock, $.01 par value per share, of which no shares will be issued and
outstanding.
COMMON STOCK
At May 31, 1997, there were 9,297,528 shares of Common Stock outstanding and
held of record by approximately 74 stockholders. The holders of Common Stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of the stockholders. Subject to preferences that may be applicable to any
outstanding shares of Preferred Stock, holders of Common Stock are entitled to
receive ratably such dividends as may be declared by the Board out of funds
legally available. See "Dividend Policy." All outstanding shares of Common Stock
are fully paid and nonassessable.
PREFERRED STOCK
After completion of the Offering, the Board will have the authority, without
further action by the stockholders, to issue up to 5,000,000 shares of Preferred
Stock in one or more series and to fix the rights, priorities, preferences,
qualifications, limitations and restrictions, including dividend rights,
conversion rights, voting rights, terms of redemption, terms of sinking funds,
liquidation preferences and the number of shares constituting any series or the
designation of such series, which could decrease the amount of earnings and
assets available for distribution to holders of Common Stock or adversely affect
the rights and powers, including voting rights, of the holders of the Common
Stock. The issuance of Preferred Stock could have the effect of delaying or
preventing a change in control of the Company or make removal of management more
difficult. Additionally, the issuance of Preferred Stock may have the effect of
decreasing the market price of the Common Stock and may adversely affect the
voting and other rights of the holders of Common Stock.
WARRANTS
In February 1997, in connection with the agreement with Heartport, the
Company issued to Heartport a warrant to purchase up to 100,000 shares of Common
Stock, exercisable at any time after the closing of this Offering and prior to
March 31, 2001 at a price per share equal to the initial public offering price.
If an initial public offering is not completed by June 30, 1997, the exercise
price will be $6.67 per share. The warrant contains provisions for the
adjustment of the exercise price and the aggregate number of shares issuable
upon exercise of the warrant under certain circumstances, including stock
dividends, stock splits, reorganizations, reclassifications or consolidations.
The holder of the warrant is entitled to certain registration rights with
respect to the Common Stock issued or issuable upon exercise thereof. See "--
Registration Rights."
REGISTRATION RIGHTS
The holders of approximately 8,780,679 shares of Common Stock or their
permitted transferees (the "Holders") are entitled to certain rights with
respect to the registration of such shares under the Securities Act. Under the
terms of agreements between the Company and such Holders, if the Company
proposes to register any of its securities under the Securities Act for its own
account, such Holders are entitled to notice of such registration and are
entitled to include shares of such Common Stock therein, provided, among other
conditions, that the underwriters of any such offering have the right to limit
the number of shares included in such registration. In addition, Holders of at
least 40% of approximately 8,780,679 shares of Common Stock with demand
registration rights may require the Company to prepare and file a registration
statement under the Securities Act with respect to the shares entitled to
65
<PAGE>
demand registration rights, and the Company is required to use its best efforts
to effect such registration, subject to certain conditions and limitations. The
Company is not obligated to effect more than two of these stockholder-initiated
registrations nor to effect such a registration within 90 days following an
offering of the Company's securities, including the Offering made hereby. The
Holders of approximately 8,780,679 shares of Common Stock may also request the
Company to register such shares on Form S-3 provided the shares registered have
an aggregate market value of at least $7.5 million. The Company is not obligated
to effect more than two of these registrations pursuant to Form S-3 per year.
Generally, the Company is required to bear the expense of all such
registrations. The registration rights of the Holders expire on the seventh
anniversary of the effective date of this Offering or, if earlier, for an
individual Holder, at such time after the Offering as all shares held by such
Holder can be sold within any three-month period pursuant to Rule 144. All
rights of the Holders to require registration of the resale of their shares in
connection with this Offering have been waived.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
SECOND RESTATED CERTIFICATE OF INCORPORATION AND RESTATED BYLAWS
The Company's Second Restated Certificate of Incorporation authorizes the
Board to establish one or more series of undesignated Preferred Stock, the terms
of which can be determined by the Board at the time of issuance. See "--
Preferred Stock." The Second Restated Certificate of Incorporation also provides
that all stockholder action must be effected at a duly called meeting of
stockholders and not by a consent in writing. The Company's Restated Bylaws
provide that the Company's Board will be classified into three classes of
directors beginning at the next annual meeting of stockholders. See "Management
- -- Executive Officers and Directors." In addition, the Restated Bylaws do not
permit stockholders of the Company to call a special meeting of stockholders;
only the Company's Chief Executive Officer, President, Chairman of the Board or
a majority of the Board are permitted to call a special meeting of stockholders.
The Restated Bylaws also require that stockholders give advance notice to the
Company's secretary of any nominations for director or other business to be
brought by stockholders at any stockholders' meeting and require a supermajority
vote of members of the Board and/or stockholders to amend certain Bylaw
provisions. These provisions of the Second Restated Certificate of Incorporation
and the Restated Bylaws could discourage potential acquisition proposals and
could delay or prevent a change in control of the Company. Such provisions may
also have the effect of preventing changes in the management of the Company.
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder (defined as any person or entity that is the beneficial owner of at
least 15% of a corporation's voting stock) for a period of three years following
the time that such stockholder became an interested stockholder, unless: (i)
prior to such time, the board of directors of the corporation approved either
the business combination or the transaction that resulted in the stockholder's
becoming an interested stockholder; (ii) upon consummation of the transaction
that resulted in the stockholder's becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding, for purposes of
determining the number of shares outstanding, those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer;
or (iii) at or subsequent to such time, the business combination is approved by
the Board and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the interested stockholder.
66
<PAGE>
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, lease, exchange, mortgage, transfer, pledge or other disposition involving
the interested stockholder and 10% or more of the assets of the corporation;
(iii) subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation to the
interested stockholder; (iv) any transaction involving the corporation that has
the effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Boston EquiServe.
67
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 12,797,528 shares of
Common Stock outstanding (assuming no exercise of options or other convertible
securities or issuances of Common Stock subsequent to March 31, 1997). The
3,500,000 shares sold in this Offering will be freely tradeable without
restriction or further registration under the Securities Act, except that any
shares purchased by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act ("Affiliates"), may generally be sold only in
compliance with certain of the limitations of Rule 144 described below.
The remaining approximately 9,298,000 shares of Common Stock are deemed
"Restricted Shares" under Rule 144. Of the Restricted Shares, approximately 750
shares may be eligible for sale in the public market immediately after this
offering pursuant to Rule 144(k) under the Securities Act. Approximately
7,548,000 additional Restricted Shares may be eligible for sale in the public
market in accordance with Rule 144 or Rule 701 under the Securities Act
beginning 90 days after the date of this Prospectus. The holders of
approximately 7,514,000 of these Restricted Shares have agreed not to sell or
otherwise dispose of any of their shares for a period of 180 days after the date
of this Prospectus without the prior written consent of Goldman, Sachs & Co.
Goldman, Sachs & Co. may, in its sole discretion, and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements.
Upon expiration of the lock-up agreements 180 days after the date of this
Prospectus, approximately 9,489,000 shares of Common Stock (including shares
issued or issuable upon the exercise of vested options and warrants outstanding
as of May 31, 1997) will become available for sale in the public market; the
remaining 100,000 shares will become eligible for sale under Rule 144 at various
dates thereafter as the holding period provisions of Rule 144 are satisfied.
In general, under Rule 144 as recently amended, beginning approximately 90
days after the effective date of the Registration Statement of which this
Prospectus is a part, a stockholder, including an Affiliate, who has
beneficially owned his or her restricted securities (as that term is defined in
Rule 144) for at least one year from the later of the date such securities were
acquired from the Company or (if applicable) the date they were acquired from an
Affiliate, is entitled to sell, within any three-month period, a number of such
shares that does not exceed the greater of 1% of the then outstanding shares of
Common Stock (approximately 127,000 immediately after the Offering) or the
average weekly trading volume in the Common Stock during the four calendar weeks
preceding the date on which notice of such sale was filed under Rule 144,
provided certain requirements concerning availability of public information,
manner of sale and notice of sale are satisfied. In addition, under Rule 144(k),
if a period of at least two years has elapsed between the later of the date
restricted securities were acquired from the Company or (if applicable) the date
they were acquired from an Affiliate of the Company, a stockholder who is not an
Affiliate of the Company at the time of sale and has not been an Affiliate of
the Company for at least three months prior to the sale is entitled to sell the
shares immediately without compliance with the foregoing requirements under Rule
144.
Securities issued in reliance on Rule 701 (such as shares of Common Stock
that may be acquired pursuant to the exercise of certain options granted prior
to this Offering) are also restricted securities and, beginning 90 days after
the date of this Prospectus, may be sold by stockholders other than an Affiliate
of the Company subject only to the manner of sale provisions of Rule 144 and by
an Affiliate under Rule 144 without compliance with its one-year holding period
requirement.
Prior to this Offering, there has been no public market for the Common
Stock. No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price of
the Common Stock prevailing from time to time. The Company is unable to estimate
the number of shares that may be sold in the public market pursuant to Rule 144,
since this will depend on the market price of the Common Stock, the personal
circumstances of the sellers and other factors. Nevertheless, sales of
significant amounts of the Common Stock of the Company in the public market
68
<PAGE>
could adversely affect the market price of the Common Stock and could impair the
Company's ability to raise capital through an offering of its equity securities.
In addition, the Company intends to register on the effective date of this
Offering a total of 2,820,000 shares of Common Stock subject to outstanding
options or reserved for issuance under the Company's 1997 Stock Option/Stock
Issuance Plan and 200,000 shares of Common Stock reserved for issuance under its
1997 Employee Stock Purchase Plan. Further, upon expiration of such lock-up
agreements, holders of approximately 8,780,679 shares of Common Stock will be
entitled to certain registration rights with respect to such shares. If such
holders, by exercising their registration rights, cause a large number of shares
to be registered and sold in the public market, such sales could have a material
adverse effect on the market price for the Common Stock.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, San Diego, California. Partners of
such firm own 7,500 shares of the Common Stock. Certain legal matters will be
passed upon for the Underwriters by McDermott, Will & Emery.
EXPERTS
The consolidated financial statements of Vista Medical Technologies, Inc. at
December 31, 1995 and 1996 and for each of the three years in the period ended
December 31, 1996 appearing in this Prospectus and the Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein and in the Registration
Statement and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission the Registration Statement under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules filed therewith. For further information with respect to the Company
and the Common Stock offered hereby, reference is hereby made to such
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or other document are not necessarily complete, and in each instance reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respect by
such reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the principal office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies of all of any part thereof may be obtained
at prescribed rates from the Commission's Public Reference Section at such
addresses. Also, the Commission maintains a World Wide Web site on the Internet
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission. Upon approval of the Common Stock for quotation on the Nasdaq
National Market, such reports, proxy and information statements and other
information also can be inspected at the office of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.
69
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1995 and 1996 and at March 31, 1997
(unaudited).......................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and
1996 and the three months ended March 31, 1996 (unaudited) and 1997 (unaudited)...... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994,
1995 and 1996 and the three months ended March 31, 1997 (unaudited).................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996 and the three months ended March 31, 1996 (unaudited) and 1997 (unaudited)...... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Vista Medical Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Vista
Medical Technologies, Inc. as of December 31, 1995 and 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Vista Medical Technologies, Inc. at December 31, 1995 and 1996 and the results
of its consolidated operations and its cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Diego, California
January 30, 1997,
except for Note 9, as to which the date is
March 3, 1997
F-2
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
DECEMBER 31, MARCH 31, MARCH 31,
-------------------------------- 1997 1997
1995 1996 (UNAUDITED) (UNAUDITED)
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 3,234,175 $ 10,119,529 $ 5,679,477
Short-term investments............................ 165,000 165,000 165,000
Accounts receivable............................... 568,854 526,119 770,344
Inventories....................................... 685,456 1,212,825 1,729,892
Other current assets.............................. 70,445 136,400 479,763
--------------- --------------- --------------
Total current assets................................ 4,723,930 12,159,873 8,824,476
Property and equipment, net......................... 187,874 1,082,103 1,341,136
Patents and other assets............................ 296,083 1,073,741 1,060,112
--------------- --------------- --------------
TOTAL ASSETS........................................ $ 5,207,887 $ 14,315,717 $ 11,225,724
--------------- --------------- --------------
--------------- --------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 350,058 $ 607,639 $ 674,183
Accrued compensation.............................. 147,410 226,543 183,663
Accrued liabilities............................... 2,970 520,584 413,079
--------------- --------------- --------------
Total current liabilities........................... 500,438 1,354,766 1,270,925
Commitments
Stockholders' equity:
Convertible preferred stock, $.01 par value:
Authorized shares--18,000,000 actual (5,000,000
pro forma)
Issued and outstanding shares-- 8,248,921 in
1995, 11,574,252 in 1996 and March 1997 (no
shares pro forma)............................. 82,490 115,742 115,742 --
Preference in liquidation--$26,231,145..........
Common stock, $.01 par value:
Authorized shares--25,000,000 actual (35,000,000
pro forma)....................................
Issued and outstanding shares-- 148,875 in 1995,
538,224 in 1996 and 616,849 in March 1997
(9,297,528 shares pro forma).................. 1,489 5,382 6,168 92,975
Additional paid-in capital........................ 10,834,428 28,615,223 29,412,801 29,441,736
Notes receivable from stockholders................ (29,625) (93,375) (93,375) (93,375)
Deferred compensation............................. -- (2,061,549) (2,547,994) (2,547,994)
Accumulated deficit............................... (6,181,333) (13,620,472) (16,938,543) (16,938,543)
--------------- --------------- -------------- ---------------
Total stockholders' equity.......................... 4,707,449 12,960,951 9,954,799 $ 9,954,799
--------------- --------------- -------------- ---------------
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $ 5,207,887 $ 14,315,717 $ 11,225,724
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEARS ENDED DECEMBER 31,
---------------------------------------------- ------------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales................................. $ 59,362 $ 1,719,223 $ 2,243,756 $ 241,043 $ 829,218
Costs and expenses:
Cost of sales....................... 43,123 1,272,010 2,252,509 184,481 826,027
Research and development............ 1,327,608 1,903,618 3,880,069 532,726 1,513,868
Sales and marketing................. 291,169 834,518 2,056,767 312,930 744,661
General and administrative.......... 757,877 1,034,434 3,103,256 399,358 1,164,221
-------------- -------------- -------------- -------------- --------------
Total cost and expenses............... 2,419,777 5,044,580 11,292,601 1,429,495 4,248,777
-------------- -------------- -------------- -------------- --------------
Loss from operations.................. (2,360,415) (3,325,357) (9,048,845) (1,188,452) (3,419,559)
Minority interest in net loss of
consolidated partnership............. 269,706 -- -- -- --
License income........................ -- -- 1,493,000 -- --
Interest income....................... -- 51,407 116,706 34,869 101,488
-------------- -------------- -------------- -------------- --------------
Net loss.............................. $ (2,090,709) $ (3,273,950) $ (7,439,139) $ (1,153,583) $ (3,318,071)
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Pro forma net loss per share.......... $ (0.86) $ (0.37)
-------------- --------------
-------------- --------------
Shares used in computing pro forma net
loss per share....................... 8,626,898 9,079,976
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED NOTES
STOCK COMMON STOCK ADDITIONAL RECEIVABLE
--------------------- -------------------- PAID-IN FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
---------- --------- --------- --------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993...... -- $ -- 750 $ 8 $ 992 $ -- $ --
Net loss........................ -- -- -- -- --
---------- --------- --------- --------- ----------- ------------- --------------
BALANCE AT DECEMBER 31, 1994...... -- -- 750 8 992 -- --
Issuance of Series Aconvertible
preferred stock for cash....... 6,037,736 60,377 -- -- 7,897,585 -- --
Issuance of Series A convertible
preferred stock to retire
debt........................... 1,792,453 17,925 -- -- 2,357,075 -- --
Issuance of Series A convertible
preferred stock for the
assets......................... 154,581 1,546 -- -- 203,274 -- --
Issuance of Series A convertible
preferred stock for minority
partnership interest........... 264,151 2,642 -- -- 347,358 -- --
Exercise of stock options....... 148,125 1,481 28,144 (29,625) --
Net loss........................ -- -- -- -- -- -- --
---------- --------- --------- --------- ----------- ------------- --------------
BALANCE AT DECEMBER 31, 1995...... 8,248,921 82,490 148,875 1,489 10,834,428 (29,625) --
Issuance of Series B convertible
preferred stock for cash....... 1,279,331 12,792 -- -- 5,065,848 -- --
Issuance of Series B convertible
preferred stock for assets..... 46,000 460 -- -- 183,540 -- --
Issuance of Series C convertible
preferred stock for cash....... 2,000,000 20,000 -- -- 9,948,619 -- --
Exercise of stock options for
cash........................... -- -- 389,349 3,893 73,977 (63,750) --
Deferred compensation........... -- -- -- -- 2,508,811 -- (2,508,811)
Amortization of deferred
compensation................... -- -- -- -- -- -- 447,262
Net loss........................ -- -- -- -- -- -- --
---------- --------- --------- --------- ----------- ------------- --------------
BALANCE AT DECEMBER 31, 1996...... 11,574,252 115,742 538,224 5,382 28,615,223 (93,375) (2,061,549)
Exercise of stock options for
cash........................... -- -- 75,625 756 35,098 -- --
Issuance of stock for services
rendered....................... -- -- 3,000 30 19,980 -- --
Deferred compensation........... -- -- -- -- 742,500 -- (742,500)
Amortization of deferred
compensation................... -- -- -- -- -- -- 256,055
Net loss........................ -- -- -- -- -- -- --
---------- --------- --------- --------- ----------- ------------- --------------
BALANCE AT MARCH 31, 1997
(Unaudited)...................... 11,574,252 $ 115,742 616,849 $ 6,168 $29,412,801 $ (93,375) $ (2,547,994)
---------- --------- --------- --------- ----------- ------------- --------------
---------- --------- --------- --------- ----------- ------------- --------------
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------- -----------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1993...... $ (816,674) $ (815,674)
Net loss........................ (2,090,709) (2,090,709)
------------- -----------
BALANCE AT DECEMBER 31, 1994...... (2,907,383) (2,906,383)
Issuance of Series Aconvertible
preferred stock for cash....... -- 7,957,962
Issuance of Series A convertible
preferred stock to retire
debt........................... -- 2,375,000
Issuance of Series A convertible
preferred stock for the
assets......................... -- 204,820
Issuance of Series A convertible
preferred stock for minority
partnership interest........... -- 350,000
Exercise of stock options....... -- --
Net loss........................ (3,273,950) (3,273,950)
------------- -----------
BALANCE AT DECEMBER 31, 1995...... (6,181,333) 4,707,449
Issuance of Series B convertible
preferred stock for cash....... -- 5,078,640
Issuance of Series B convertible
preferred stock for assets..... -- 184,000
Issuance of Series C convertible
preferred stock for cash....... -- 9,968,619
Exercise of stock options for
cash........................... -- 14,120
Deferred compensation........... -- --
Amortization of deferred
compensation................... -- 447,262
Net loss........................ (7,439,139) (7,439,139)
------------- -----------
BALANCE AT DECEMBER 31, 1996...... (13,620,472) 12,960,951
Exercise of stock options for
cash........................... -- 35,854
Issuance of stock for services
rendered....................... -- 20,010
Deferred compensation........... -- --
Amortization of deferred
compensation................... -- 256,055
Net loss........................ (3,318,071) (3,318,071)
------------- -----------
BALANCE AT MARCH 31, 1997
(Unaudited)...................... $(16,938,543) $ 9,954,799
------------- -----------
------------- -----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................. $(2,090,709) $(3,273,950) $(7,439,139) $(1,153,582) $(3,318,071)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization...................... 20,328 36,138 351,256 32,796 107,747
Issuance of stock for services rendered............ -- -- -- -- 20,010
Amortization of deferred compensation.............. -- -- 447,262 -- 256,055
Acquired in-process research and development....... -- 350,000 -- -- --
Write-off of non recoverable patent costs.......... -- 28,733 -- -- --
Minority interest in partnership................... (269,706) -- -- -- --
Common stock received in exchange for license
agreement........................................ -- -- (693,000) -- --
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts receivable.............................. 38,353 (568,264) 126,752 243,508 (244,225)
Inventories...................................... (17,755) (472,579) (405,706) (661,157) (517,067)
Other current assets............................. 976 (30,846) (64,105) (6,003) (343,363)
Accounts payable................................. 12,544 255,192 171,714 (155,226) 66,544
Accrued compensation............................. 14,841 108,750 79,133 -- (42,880)
Accrued liabilities.............................. 3,394 (424) 488,591 96,553 (107,505)
----------- ----------- ----------- ----------- -----------
Net cash flows used for operating activities......... (2,287,734) (3,567,250) (6,937,242) (1,603,111) (4,122,755)
INVESTING ACTIVITIES
Purchase of short-term investments................... -- (165,000) -- -- --
Increase in patent and other assets.................. (37,500) (51,975) (17,895) -- --
Purchase of property and equipment................... (56,509) (80,954) (1,220,888) (92,029) (353,151)
----------- ----------- ----------- ----------- -----------
Net cash flows used for investing activities......... (94,009) (297,929) (1,238,783) (92,029) (353,151)
FINANCING ACTIVITIES
Advances from a related party........................ 1,949,508 2,136,000 -- -- --
Repayment of advances to arelated party.............. -- (3,004,000) -- -- --
Issuance of common stock............................. -- -- 14,120 3,000 35,854
Issuance of convertible preferred stock, net......... -- 7,957,962 15,047,259 -- --
----------- ----------- ----------- ----------- -----------
Net cash flows provided by financing activities...... 1,949,508 7,089,962 15,061,379 3,000 35,854
Net (decrease) increase in cash and cash
equivalents......................................... (432,235) 3,224,783 6,885,354 (1,692,140) 4,440,052
Cash and cash equivalents at beginning of year....... 441,627 9,392 3,234,175 3,234,175 10,119,529
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of year............. $ 9,392 $ 3,234,175 $10,119,529 $ 1,542,035 $ 5,679,477
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................... $ -- $ 1,711 $ 183 $ -- $ 70
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Debt obligation to related party converted to Series
A convertible preferred stock....................... $ -- $ 2,375,000 $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Exercise of stock options for stockholder notes
receivable.......................................... $ -- $ 29,625 $ 63,750 $ -- $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Common stock received in exchange for license
agreement........................................... $ -- $ -- $ 693,000 $ -- $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
ISSUANCE OF CONVERTIBLE PREFERRED STOCK IN
CONJUNCTION WITH ACQUISITIONS:
Oktas, Inc. (Series A)............................... $ -- $ 350,000 $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
American Surgical Technologies, Inc. (Series A)...... $ -- $ 204,820 $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Promedica, Inc. (Series B)........................... $ -- $ -- $ 184,000 $ -- $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Vista Medical Technologies, Inc. ("the Company") was founded in July 1993 as
a wholly-owned subsidiary of Kaiser Aerospace and Electronics Corporation
("Kaiser Aerospace") to develop an advanced technology business concentrated on
visualization products for minimally invasive surgery. In July 1995, equity
securities were sold to outside investors, thereby reducing Kaiser Aerospace's
ownership of the Company. (See Note 6.)
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Oktas, Inc. In 1993, the Company acquired a 65%
interest in a partnership established to perform further research and
development related to certain of the Company's technology. This partnership is
included in the consolidated financial statements and because the Company
provided all the financial resources to the partnership, the Company has
recorded all losses in excess of the minority partners original contribution. In
1995, the minority partner, Oktas, Inc., was acquired by issuing shares of
Series A convertible preferred stock. On December 31, 1996, the partnership was
dissolved. The Company charged the $350,000 value of the preferred stock to
expense as acquired research and development. Significant intercompany accounts
and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the consolidated financial
statements. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The financial statements for the three month periods ended March 31, 1996
and 1997 include all adjustments (consisting only of normal recurring
adjustments) which management considers necessary for a fair statement of the
financial position at such dates and the operating results and cash flows for
the periods. Results for interim periods are not necessarily indicative of
results for the entire year or any future periods.
REVENUE RECOGNITION
Revenue is recognized upon shipment of product.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents and short-term investments consist of money market funds
and a certificate of deposit. The Company considers all highly liquid
investments with maturities when purchased of three months or less to be cash
equivalents. The Company evaluates the financial strength of institutions at
F-7
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
which significant investments are made and believes the related credit risk is
limited to an acceptable level.
The Company has adopted Statement of Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, and has
classified its cash equivalents and short-term investments as available-for-sale
in accordance with that standard. Available-for-sale securities are carried at
fair value, with unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. At December 31, 1996, the cost of cash
equivalents and short-term investments was equal to estimated fair value.
Accordingly, there were no unrealized gains or losses.
CONCENTRATION OF CREDIT RISK
The Company provides credit, in the normal course of business, to commercial
entities that meet specified credit requirements. The Company's principal
customers consist of original equipment manufacturers in the United States and
Asia. The Company provides for losses from uncollectible accounts and such
losses have not exceeded management's expectations.
INVENTORIES
Inventories are stated at lower of cost (determined on a first-in, first-out
basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. The Company provides for
depreciation on property and equipment using the straight-line method over the
estimated useful lives of the assets, generally five to seven years. Marketing
demonstration equipment is amortized over a one-year useful life.
PATENTS
Capitalized patent costs are amortized over the lesser of the remaining
useful life of the related technology or the remaining patent life, commencing
on the date the patent is issued. The Company reviews its patents for impairment
on an annual basis or whenever events or changes in circumstances indicate that
the carrying value of the asset would not be recoverable. If the sum of expected
future net cash flows of an individual asset would be less than the carrying
amount of the asset, an impairment loss would be recognized.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which is effective for the year
ending December 31, 1996. SFAS No. 123 allows companies to either account for
stock-based compensation under the new provisions of SFAS No. 123 or under the
provisions of Accounting Principles Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES ("APB 25"), but requires pro forma disclosure in the footnotes to
the financial statements as if
F-8
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the measurement provisions of SFAS No. 123 had been adopted. The Company has
continued accounting for its stock-based compensation in accordance with the
provisions of APB 25.
ASSET IMPAIRMENT
In March 1995, the FASB issued SFAS No.121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the estimated undiscounted cash flows
to be generated by those assets are less than the assets' carrying amount. SFAS
121 also addresses the accounting for long-lived assets that are expected to be
disposed of. The Company adopted the provisions of SFAS No. 121 effective
January 1, 1996. There was no effect of such adoption on the Company's financial
position or results of operations.
NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact of Statement 128 on the
calculation of fully diluted earnings per share, if applicable, for these
periods is not expected to be material.
NET LOSS PER SHARE
Historical net loss per share is calculated using the weighted average
number of common shares outstanding and common stock equivalents outstanding
during the periods presented. Common equivalent shares result from stock options
and preferred stock. For loss periods, common equivalent shares are excluded
from the computation as their effect would be antidilutive, except that the
Securities and Exchange Commission requires common and common share equivalents
issued during the twelve-month period prior to the initial filing of a proposed
public offering, to be included in the calculation as if they were outstanding
for all periods presented (using the treasury stock method and the assumed
initial public offering price).
Historical net loss per share information is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEARS ENDED DECEMBER 31,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss per share.......... $ (0.91) $ (1.39) $ (3.05) $ (0.46) $ (1.15)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Shares used in computing net
loss per share............. 2,292,382 2,356,502 2,440,507 2,489,176 2,893,585
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
F-9
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA NET LOSS PER SHARE AND UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of the preferred stock, which will automatically
convert to common stock immediately prior to the completion of the Company's
initial public offering, using the as converted method from the original date of
issuance.
If the offering contemplated by the Prospectus is consummated, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into 8,680,679 shares of common stock. Unaudited pro
forma stockholders' equity at March 31, 1997, as adjusted for the conversion of
preferred stock, is disclosed in the accompanying balance sheet.
2. BALANCE SHEET COMPONENTS
Inventories consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1995 1996 1997
----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Parts and supplies................................. $ 325,899 $ 567,707 $ 1,176,951
Work in process.................................... 127,307 286,099 228,287
Finished goods..................................... 232,250 359,019 324,654
----------- ------------- -------------
$ 685,456 $ 1,212,825 $ 1,729,892
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1995 1996 1997
----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment............................ $ 63,610 $ 271,747 $ 430,428
Office computers, furniture and equipment.......... 121,068 352,911 448,235
Marketing demonstration equipment.................. 64,216 776,420 845,370
Leasehold improvements............................. -- 68,704 98,900
----------- ------------- -------------
248,894 1,469,782 1,822,933
Less: accumulated depreciation..................... (61,020) (387,679) (481,797)
----------- ------------- -------------
$ 187,874 $ 1,082,103 $ 1,341,136
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
F-10
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
2. BALANCE SHEET COMPONENTS (CONTINUED)
Patents and other assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1995 1996 1997
----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Investment in common stock......................... $ -- $ 693,000 $ 693,000
Patents and other intangible assets, net........... 258,583 323,241 309,612
Prepaid royalties.................................. 37,500 57,500 57,500
----------- ------------- -------------
$ 296,083 $ 1,073,741 $ 1,060,112
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
3. MAJOR CUSTOMERS
Sales to individual customers exceeding 10% or more of revenues for the
years ended December 31, 1994, 1995 and 1996 and the three months ended March
31, 1996 and 1997 were as follows: during 1994, two customers accounted for 82%
and 18% of revenues; during 1995, one customer accounted for 85% of revenues;
during 1996, three customers accounted for 30%, 27% and 25% of revenues; for the
three months ended March 31, 1996, three customers accounted for 62%, 20% and
12% of revenues; for the three months ended March 31, 1997, four customers
accounted for 27%, 18%, 17% and 10% of revenues.
4. COMMITMENTS
The Company leases its corporate facilities and certain equipment under
operating leases that expire on various dates through 2001. Annual future
minimum lease payments as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ---------------------------------------------------------------------------------
<S> <C>
1997............................................................................. $ 306,000
1998............................................................................. 307,000
1999............................................................................. 152,000
2000............................................................................. 110,000
2001............................................................................. 95,000
-----------
$ 970,000
-----------
-----------
</TABLE>
Rent expense was approximately $55,000, $75,000, $183,000, $28,000 and
$76,000 for the years ended December 31, 1994, 1995, 1996, and the three months
ended March 31, 1996 and 1997, respectively.
5. LICENSE INCOME
In December 1996, the Company granted to Urohealth Systems Inc.
("Urohealth") a perpetual license to certain of its technology and patents
unrelated to the Company's main products and markets.
F-11
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
5. LICENSE INCOME (CONTINUED)
In exchange for the license, the Company received $1,000,000 in cash and 110,000
shares of common stock valued at $693,000. The common stock received is
restricted stock of a publicly traded company with restrictions on the sale of
the stock for two years from the date of the agreement in accordance with the
provisions of Rule 144 under the Securities Act of 1933, as amended. No other
technology is being developed with the purpose of being licensed and the Company
does not anticipate any future licensing arrangements of any of its core
technology for medical applications. The license to Urohealth Systems, Inc.
("Urohealth") was a unique, non-recurring transaction that involved a license of
only that component of the Company's technology that it did not want to pursue.
For this reason, the license fees were treated as non-operating income. The
Company has recorded these shares at their estimated fair value to reflect the
trading restrictions. The licensed technology and patent rights were obtained by
the Company through a perpetual license and royalty agreement with an officer of
the Company. In connection with the license agreement with Urohealth, the
Company amended an existing license agreement with the officer to make its terms
consistent with the licensing agreement with Urohealth in exchange for $200,000.
6. STOCKHOLDERS' EQUITY
CHANGES IN CAPITALIZATION
In November 1996, the Company reincorporated in the State of Delaware which
was accomplished through a merger between the California corporation and its
wholly-owned Delaware subsidiary. Each share of convertible preferred stock was
exchanged for one share of convertible preferred stock of the Delaware
corporation. Each share of common stock in the California corporation was
exchanged for one share of common stock of the Delaware corporation.
CONVERTIBLE PREFERRED STOCK
In November 1996, the Company issued 2,000,000 shares of Series C
convertible preferred stock at $5.00 per share for net proceeds to the Company
of $9,968,619. The purchaser of the Series C convertible preferred stock entered
into a three year sales and distribution agreement with the Company for certain
of the Company's cardiovascular products.
Convertible preferred stock is as follows:
<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
-----------------------------------------
AGGREGATE DECEMBER 31, MARCH 31,
LIQUIDATION DESIGNATED -------------------------- -------------
SERIES PREFERENCE SHARES 1995 1996 1997
- ------------------ -------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
A-1............... $ 10,725,001 8,300,000 8,094,340 8,094,340 8,094,340
A-3............... 204,820 500,000 154,581 154,581 154,581
B................. 5,301,324 3,100,000 -- 1,325,331 1,325,331
C................. 10,000,000 2,000,000 -- 2,000,000 2,000,000
-------------- ------------- ----------- ------------- -------------
$ 26,231,145 13,900,000 8,248,921 11,574,252 11,574,252
-------------- ------------- ----------- ------------- -------------
-------------- ------------- ----------- ------------- -------------
</TABLE>
F-12
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
Each share of the convertible preferred stock is convertible at the option
of the holder into three quarters of a share of common stock. Conversion is
mandatory upon the closing of an underwritten public offering in which the
aggregate gross proceeds received by the Company are at least $15,000,000 with a
per share price of no less than $5.00. The conversion ratio is subject to
certain anti dilution adjustments, and the holders of each share of Series A-1,
B and C convertible preferred stock are entitled to one vote for each share of
common stock into which it would convert. Series A-3 convertible preferred stock
has no voting rights until the Series A-3 convertible preferred stock converts
to common stock.
The holders of convertible preferred stock are entitled to receive
non-cumulative dividends when and as declared by the Board of Directors at the
rate of 8% per annum. No dividends have been declared to date.
STOCK OPTION PLAN
The Company has reserved 2,015,610 shares of common stock under the 1995
Stock Option Plan ("the 1995 Plan") for issuance to eligible employees,
officers, directors, advisors and consultants. The 1995 Plan provides for the
grant of incentive and nonstatutory stock options. Terms of the stock option
agreements, including vesting requirements, are determined by the Board of
Directors, subject to the provisions of the 1995 Plan. Options granted by the
Company generally vest over four to five years and are exercisable from the date
of grant for a period of ten years. The exercise price of the incentive stock
options must equal at least the fair market value of the stock on the date of
grant. The exercise price of the incentive stock options must equal at least the
fair market value of the stock on the date of grant. The exercise price of
nonstatutory stock options must equal at least 85% of the fair market value of
the stock on the date of grant. The Company has the option, in the event of
termination of employment to repurchase unvested shares issued under the 1995
Plan at the original issue price.
The Company recorded $2,508,811 of deferred compensation for options granted
during the year ended December 31, 1996, representing the difference between the
option exercise price and the deemed value for financial statement presentation
purposes. The Company is amortizing the deferred compensation over the vesting
period of the options. The Company recorded $447,262 of compensation expense
during the year ended December 31, 1996.
The Company recorded $743,000 of additional deferred compensation
representing the difference between the option exercise price and the deemed
value for financial statement presentation purposes for stock options granted in
January and February 1997.
F-13
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER PRICE PER
SHARES SHARE SHARE
----------- -------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1994........................ -- $ -- $ --
Granted............................................. 655,322 $ .20 $ .20
-----
Exercised........................................... (148,125) $ .20 $ .20
-----
Canceled............................................ -- -- $ --
----------- -------------- -----
Balance at December 31, 1995........................ 507,197 $ .20 $ .20
Granted............................................. 1,173,888 $ .20 - $.80 $ .33
Exercised........................................... (389,349) $ .20 $ .20
Canceled............................................ (45,935) $ .20 $ .20
----------- -------------- -----
Balance at December 31, 1996........................ 1,245,801 $ .20 - $.80 $ .32
Granted............................................. 112,500 $ .80 - $4.00 $ 2.93
Exercised........................................... (75,625) $ .20 - $.80 $ .50
Canceled............................................ -- $ -- $ --
----------- -------------- -----
Balance at March 31, 1997 (Unaudited)............... 1,282,676 $ .20 - $4.00 $ .54
----------- -------------- -----
----------- -------------- -----
</TABLE>
At December 31, 1996, 157,806 options to purchase common shares were vested
and 232,335 options were available for future grant. At March 31, 1997, 195,309
options to purchase common shares were vested and 1,537,324 options were
available for future grant.
The weighted-average fair value of options granted during the year ended
December 31, 1996 and the three months ended March 31, 1997 was $0.09 and $0.76,
respectively. The weighted-average remaining contractual life at December 31,
1996 and March 31, 1997 is 9.24 and 9.04 years, respectively.
Adjusted pro forma information regarding net income is required by SFAS 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the "minimal value" method for
option pricing with the following weighted-average assumptions: risk-free
interest rate range of 5.5% to 6.0%; dividend yield of 0%; and a
weighted-average expected life of the option of 2.5 to 5 years.
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The effect
of applying SFAS 123 for purposes of providing
F-14
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
pro forma disclosures is not likely to be representative of the effects on
reported net income for future years. The Company's pro forma information is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ --------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Adjusted pro forma net loss................... $ (3,279,659) $ (7,451,220) $ (3,326,605)
-------------- -------------- --------------
-------------- -------------- --------------
Adjusted pro forma net loss per share......... $ (0.66) $ (0.86) $ (0.37)
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
COMMON STOCK RESERVED
At December 31, 1996 and March 31, 1997, a total of 10,158,815 and
11,621,512 shares, respectively, of the Company's common stock have been
reserved for the conversion of preferred stock, the exercise of stock options
and warrants, for stock options available for future grant and for shares to be
issued in connection with the GDE license agreement at the initial public
offering price.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31, 1996 are shown below. A
valuation allowance has been recognized to offset the deferred tax assets, as
realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------ --------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation.................................................. $ (6,000) $ (51,000)
Deferred tax assets:
Net operating loss carryforwards.............................. 529,000 3,197,000
Research and development credits.............................. 14,000 229,000
Other, net.................................................... 15,000 32,000
------------ --------------
Total deferred tax assets....................................... 558,000 3,458,000
Valuation allowance for deferred tax assets..................... (552,000) (3,407,000)
------------ --------------
Net deferred tax assets......................................... 6,000 51,000
------------ --------------
Net deferred taxes.............................................. $ -- $ --
------------ --------------
------------ --------------
</TABLE>
As the Company was part of a consolidated group prior to the change in
ownership in July 1995, all tax loss and tax credit carryforwards up to the date
of change in ownership have been reported by the
F-15
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
7. INCOME TAXES (CONTINUED)
previous consolidated group. All tax loss and tax credit carryforwards reflected
in the accompanying financial statements reflect activity only for the
seventeen-month period ending December 31, 1996.
At December 31, 1996, the Company has federal and state tax net loss
carryforwards of approximately $8,494,000 and $5,146,000, respectively. The
federal and state tax loss carryforwards will expire in 2010 and 2000,
respectively, unless previously utilized. The Company also has federal and state
research tax credit carryforwards of approximately $135,000 and $143,000
respectively, which will expire in 2010 unless previously utilized.
In accordance with Sections 382 and 383 of the Internal Revenue Code, a
change in ownership of greater than 50 percent of a corporation within a
three-year period will place an annual limitation on the Company's ability to
utilize its existing tax loss and tax credit carryforwards.
8. TRANSACTIONS WITH RELATED PARTIES
Kaiser Aerospace financed the initial operations of the Company through cash
advances. In 1995 upon the closing of the Series A convertible preferred stock,
total advances by Kaiser Aerospace aggregated $5,379,000 which were settled in
full with cash payments of $3,004,000 and the issuance of Series A convertible
preferred stock valued at $2,375,000.
The Company has a technology strategic alliance and a manufacturing supply
agreement with a Kaiser Aerospace Subsidiary for the development and
manufacturing of certain of the Company's proprietary products. Under the terms
of the agreements, which expire in July 1998, Kaiser Aerospace will provide
development and consulting services and a minimum of 75% of certain of the
Company's product requirements provided certain competitive criteria are met.
Payments made to Kaiser under these arrangements totaled approximately $292,000,
$1,205,000 and $259,310 for the years ending December 31, 1995 and 1996, and the
three months ended March 31, 1997, respectively. At December 31, 1996 and March
31, 1997, the Company had approximately $1,335,000 and $1,641,000 in purchase
commitments to Kaiser under these agreements.
9. SUBSEQUENT EVENTS
REVERSE STOCK SPLIT
In February 1997, the Company's stockholders approved a three-for-four
reverse stock split of the Company's common stock. All share data has been
retroactively restated to reflect the reverse stock split.
INCREASE IN CAPITALIZATION
In February 1997, the Board of Directors approved an amendment to the
Articles of Incorporation increasing the number of authorized shares of common
stock to 35,000,000 shares and the authorized preferred stock to 5,000,000
shares.
F-16
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO MARCH 31, 1997
AND THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
9. SUBSEQUENT EVENTS (CONTINUED)
REGISTRATION STATEMENT
In January 1997, the Board of Directors approved filing a registration
statement with the Securities and Exchange Commission to sell 3,500,000 shares
of the Company's Common Stock to the public. If the Offering is consummated
under the proposed terms, the Company's outstanding shares of Series A, B and C
convertible preferred stock will automatically convert into shares of its Common
Stock. This conversion has been reflected in the accompanying pro forma
stockholders' equity as of March 31, 1997.
1997 STOCK OPTION PLAN/ STOCK ISSUANCE PLAN
In February 1997, the Company adopted the 1997 Stock Option Plan/Stock
Issuance Plan (the "1997 Plan") and reserved 2,820,000 shares for issuance
thereunder. The 1997 Plan incorporates the outstanding options under the 1995
Plan and no further options will be granted under the 1995 Plan.
1997 EMPLOYEE STOCK PURCHASE PLAN
In February 1997, the Company adopted the 1997 Employee Stock Purchase Plan
( the "Purchase Plan") and reserved 200,000 shares for issuance, thereunder. The
Purchase Plan permits eligible employees of the Company to purchase shares of
Common Stock, at semi-annual intervals, through periodic payroll deductions.
Payroll deductions may not exceed 10% of the participant's base salary, and the
purchase price per share will not be less than 85% of the lower of the fair
market value of the common stock at either the beginning or the end of the
semi-annual intervals.
NEW AGREEMENTS
In February 1997, the Company entered into an agreement with Heartport, Inc.
whereby the Company will sell four visualization and information systems used
for minimally invasive cardiothoracic surgery for use in Heartport's training
centers. In connection with the agreement the Company issued a warrant to
purchase up to 100,000 shares of common stock, exercisable until March 31, 2001
for a price per share equal to the initial public offering price. If an initial
public offering is not completed by June 30, 1997, the price will be $6.67 per
share. The Company will record a charge to cost of sales for the value of the
warrant upon shipment of the units.
In February 1997, the Company entered into an agreement whereby the Company
will receive an exclusive worldwide license to certain software, documentation
and trademarks of GDE Systems, Inc. In connection with the agreement, the
Company will issue to GDE Systems, Inc. $250,000 of the Company's common stock
valued at the initial public offering price. The Company is required to pay
future minimum royalties of $250,000 payable by December 31, 1998.
F-17
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
such Underwriters, for which Goldman, Sachs & Co. and Salomon Brothers Inc are
acting as representatives, has severally agreed to purchase from the Company,
the respective number of shares of Common Stock set forth opposite its name
below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Goldman, Sachs & Co..........................................................
Salomon Brothers Inc.........................................................
---------------
Total....................................................................
---------------
---------------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 525,000
additional shares of Common Stock solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 3,500,000 shares of Common
Stock offered in the Offering.
The Company has agreed that it will not, during the period beginning from
the date of this Prospectus and continuing to and including the date 180 days
after the date of this Prospectus, offer, sell, contract to sell or otherwise
dispose of any securities of the Company (other than pursuant to employee stock
option plans existing, or on the conversion or exchange of convertible or
exchangeable securities outstanding, on the date of this Prospectus) which are
substantially similar to the shares of Common Stock or which are convertible
into or exchangeable for securities which are substantially similar to the
shares of Common Stock, without the prior written consent of Goldman, Sachs &
Co., except for the shares of Common Stock offered in connection with the
Offering. Certain directors, officers and stockholders of the Company have
agreed not to offer, sell, contract to sell or otherwise dispose of any of such
securities held thereby for a period of 180 days after the date of this
Prospectus without the prior written consent of Goldman, Sachs & Co.
U-1
<PAGE>
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed 5% of the total number of shares of Common
Stock offered thereby.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be negotiated among the Company and the
representatives of the Underwriters. Among the factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. Stabilizing transactions consist of
certain bids or purchases for the purposes of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock than
they are required to purchase from the Company in the Offering. The Underwriters
also may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the Common Stock sold in the
Offering for their account may be reclaimed by the syndicate if such securities
are repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock, which may be higher than the price that might otherwise prevail in
the open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "VMTI."
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
U-2
<PAGE>
INSIDE BACK COVER
Background: Blue
Center: Vista Medical's HMD for surgery against a background of the clinical
specialities and procedures in which the Company is involved.
Text on bottom of page: Vista Medical believes that the management of
information under surgeon control is a key component in the development of
advanced visualization systems for minimally invasive microsurgery (MIM). The
HMD is designed to facilitate the display of critical diagnostic and monitoring
data integrated in real-time with the anatomical images generated by the
Company's camera systems. This capability will be enhanced by the recent
addition of high speed image-based information processing and networking
software to the Company's technology portfolio.
The Series 8000 product has been cleared to market in the U.S. by the FDA
with expected commercial availability later this year. The StereoSite systems
are under development, have not been cleared to market in the U.S. by the FDA
and are not commercially available.
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCE IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
The Company............................................................... 20
Use of Proceeds........................................................... 22
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Dilution.................................................................. 24
Selected Financial Data................................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Business.................................................................. 31
Management................................................................ 50
Certain Transactions...................................................... 60
Principal Stockholders.................................................... 63
Description of Capital Stock.............................................. 65
Shares Eligible for Future Sale........................................... 68
Legal Matters............................................................. 69
Experts................................................................... 69
Additional Information.................................................... 69
Index to Financial Statements............................................. F-1
Underwriting.............................................................. U-1
</TABLE>
--------------
THROUGH AND INCLUDING , 1997 (THE 25TH DAY AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
3,500,000 SHARES
VISTA MEDICAL
TECHNOLOGIES, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
-------------------
[LOGO]
-------------------
GOLDMAN, SACHS & CO.
SALOMON BROTHERS INC
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates,
except for the registration fee, the Nasdaq National Market filing fee and the
NASD fee.
<TABLE>
<S> <C>
Registration fee................................................. $ 15,857
Nasdaq National Market fee....................................... 49,297
NASD fee......................................................... 5,733
Blue Sky fees and expenses....................................... 10,000
Printing and engraving expenses.................................. 125,000
Legal fees and expenses.......................................... 250,000
Accounting fees and expenses..................................... 150,000
Transfer Agent and Registrar fees................................ 5,000
Miscellaneous expenses........................................... 89,113
---------
TOTAL........................................................ $ 700,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers and directors of the Company under certain conditions and subject to
certain limitations. Section 145 of the Delaware General Corporation Law also
provides that a corporation has the power to purchase and maintain insurance on
behalf of its officers and directors against any liability asserted against such
person and incurred by him or her in such capacity, or arising out of his or her
status as such, whether or not the corporation would have the power to indemnify
him or her against such liability under the provisions of Section 145 of the
Delaware General Corporation Law.
Article VII, Section (1) of the Restated Bylaws of the Company provides that
the Company shall indemnify its directors and executive officers to the fullest
extent not prohibited by the Delaware General Corporation Law. The rights to
indemnity thereunder continue as to a person who has ceased to be a director,
officer, employee or agent and inure to the benefit of the heirs, executors and
administrators of the person. In addition, expenses incurred by a director or
executive officer in defending any civil, criminal, administrative or
investigative action, suit or proceeding by reason of the fact that he or she is
or was a director or officer of the Company (or was serving at the Company's
request as a director or officer of another corporation) shall be paid by the
Company in advance of the final disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the Company as authorized by the relevant section
of the Delaware General Corporation Law.
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
Article V, Section (A) of the Company's Second Restated Certificate of
Incorporation provides that a director of the Company shall not be personally
liable for monetary damages for breach of fiduciary duty as a director, except
for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
acts or omissions that involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for
any transaction from which the director derived any improper personal benefit.
II-1
<PAGE>
The Company has entered into indemnification agreements with each of its
directors and executive officers. Generally, the indemnification agreements
attempt to provide the maximum protection permitted by Delaware law as it may be
amended from time to time. Moreover, the indemnification agreements provide for
certain additional indemnification. Under such additional indemnification
provisions, however, an individual will not receive indemnification for
judgments, settlements or expenses if he or she is found liable to the Company
(except to the extent the court determines he or she is fairly and reasonably
entitled to indemnity for expenses), for settlements not approved by the Company
or for settlements and expenses if the settlement is not approved by the court.
The indemnification agreements provide for the Company to advance to the
individual any and all reasonable expenses (including legal fees and expenses)
incurred in investigating or defending any such action, suit or proceeding. In
order to receive an advance of expenses, the individual must submit to the
Company copies of invoices presented to him or her for such expenses. Also, the
individual must repay such advances upon a final judicial decision that he or
she is not entitled to indemnification.
The Company intends to purchase directors' and officers' liability
insurance.
The Underwriting Agreement (Exhibit 1.1 hereto) contains provisions by which
the Underwriters have agreed to indemnify the Company, each person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act,
each director of the Company, and each officer of the Company who signs this
Registration Statement, with respect to information furnished in writing by or
on behalf of the Underwriters for use in the Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since February 15, 1994, the Company has sold and issued the following
unregistered securities (which numbers have not been adjusted for the reverse
stock split effected in February 1997):
(1)
From February 15, 1994 to February 15, 1997, the Company issued an
aggregate of 2,527,701 options to purchase shares of Common Stock with
exercise prices ranging from $0.15 to $3.00 per share under the Predecessor
Plan and an aggregate of 817,466 shares of Common Stock were issued through
the exercise of options granted under the Predecessor Plan for an aggregate
exercise price of $145,045. For additional information concerning these
transactions, reference is made to the information contained under the
caption "Management -- Benefit Plans" in the form of the Prospectus
included herein.
(2)
On July 19, 1993, the Company issued an aggregate of 1,000 shares of Common
Stock to Kaiser Aerospace for an aggregate consideration of $1000.00.
(3)
On July 27, 1995, the Company issued an aggregate of 6,207,548 shares of
Series A-1 Preferred Stock to various venture capital funds and certain
other investors for an aggregate consideration of $8,225,001.10.
(4)
On August 1, 1995, the Company issued an aggregate of 1,886,792 shares of
Series A-1 Preferred Stock to a certain venture capital fund for an
aggregate consideration of $2,499,999.40.
(5)
On September 19, 1995, the Company issued an aggregate of 154,581 shares of
Series A-3 Preferred Stock to certain venture capital funds and other
institutional investors in consideration for substantially all of the
assets of AST.
(6)
On July 12, 1996, the Company issued an aggregate of 1,269,331 shares of
Series B Preferred Stock to various venture capital funds and certain other
investors for an aggregate consideration of $5,077,324.00.
(7)
On July 26, 1996, the Company issued an aggregate of 56,000 shares of
Series B Preferred Stock to various venture capital funds and certain other
investors for an aggregate consideration of $224,000.00.
II-2
<PAGE>
(8)
On November 27, 1996, the Company issued an aggregate of 2,000,000 shares
of Series C Preferred Stock to Medtronic Asset Management, Inc. for an
aggregate consideration of $10,000,000.00.
(9)
On February 22, 1997, the Company issued a warrant to purchase 100,000
shares of Common Stock at an exercise price per share equal to the initial
public offering price of the Common Stock offered hereby (or, if not
completed by June 30, 1997, with an exercise price of $6.67 per share) to
Heartport in consideration of Heartport entering into a certain Supply and
Services Agreement with the Company.
(10)
On February 28, 1997, the Company entered into a License Agreement with
HealthCom, Inc. and GDE, pursuant to which the Company is obligated to
issue 27,778 shares of Common Stock to GDE within ten business days of the
close of this Offering, assuming an initial public offering price of $9.00
per share (the midpoint of the range set forth on the cover page of this
Prospectus).
(11)
On March 3, 1997, the Company issued an aggregate of 3,000 shares of Common
Stock to certain employees of the Company in consideration for past
services rendered to the Company.
The sales and issuances of securities in the above transactions were deemed
to be exempt under the Act by virtue of Section 4(2) thereof and/or Regulation D
and Rule 701 promulgated thereunder as transactions not involving any public
offering. The purchasers in each case represented their intention to acquire the
securities for investment only and not with a view to the distribution thereof.
Appropriate legends were affixed to the stock certificates issued in such
transactions. Similar representations of investment intent were obtained and
similar legends imposed in connection with any subsequent transfers of any such
securities. The Company believes that all recipients had adequate access,
through employment or other relationships, to information about the Company to
make an informed investment decision.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1++ Amended and Restated Certificate of Incorporation of the Company.
3.2++ Form of Second Restated Certificate of Incorporation of the Company to become effective immediately
prior to the Offering.
3.3++ Bylaws of the Company, as amended.
3.4++ Form of Restated Bylaws of the Company to be effective upon completion of the Offering.
4.1 Form of Certificate for Common Stock.
5.1++ Opinion of Brobeck, Phleger & Harrison LLP with respect to the Common Stock being registered.
10.1++ Asset Purchase Agreement between the Company and AST, dated September 15, 1995.
10.2++ Asset Purchase Agreement between the Company, ProMedica Distribution, Inc. (ProMedica) and certain
stockholders of ProMedica, dated July 26, 1996.
10.3++ Series A-1 Preferred Stock Purchase Agreement among the Company and the purchasers listed on Schedule A
thereto, dated July 27, 1995.
10.4++ Series B Preferred Stock Purchase Agreement among the Company and the investors listed on Schedule A
thereto, dated July 12, 1996.
10.5++ Series C Preferred Stock Purchase Agreement between the Company and Medtronic Asset Management, Inc.,
dated November 27, 1996.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.6++ Common Stock Purchase Warrant between the Company and Heartport, Inc. (Heartport), dated February 22,
1997.
10.7*++ International Distribution Agreement between AST and AMCO, Inc., dated September 20, 1994.
10.8*++ Manufacturing Supply Agreement between the Company and Kaiser Electro-Optics, Inc., dated July 19, 1995.
10.9*++ U.S.A. and Canada Distribution Agreement between the Company and Delacroix-Chevalier Inc., dated July
11, 1996.
10.10*++ Distributor Agreement between the Company and Peters, dated July 15, 1996.
10.11*++ Sales Agreement between the Company and Medtronic, Inc., dated November 27, 1996.
10.12*++ Supply and Services Agreement between the Company and Heartport, dated February 22, 1997.
10.13*++ Supplemental Rights Agreement between the Company and Medtronic, Inc., dated November 27, 1996.
10.14++ Amended and Restated Investors' Rights Agreement between the Company and the stockholders listed on
Schedule A thereto, dated November 27, 1996.
10.15++ Amendment to the Amended and Restated Investors' Rights Agreement between the Company, Heartport and the
stockholders listed on Exhibit A thereto, dated February 22, 1997.
10.16++ Letter Agreement regarding Investment Representations and Registration Rights between the Company and
Urohealth Systems, Inc. (Urohealth), dated December 13, 1996.
10.17*++ Consulting Agreement between the Company and Harry R. McKinley, dated September 15, 1995.
10.18*++ Consulting Agreement between the Company and Urohealth, dated December 13, 1996.
10.19++ Form of Professional Services Agreement.
10.20++ Form of Non-Disclosure Agreement for Proprietary or Business Confidential Information.
10.21++ Non-Competition, Non-Disclosure and Patent and Inventions Assignment Agreement among Harry R. McKinley,
McKinley Optics, Inc. ("MOI") and AST, dated December 18, 1991.
10.22*++ License and Development Agreement among Harry R. McKinley, MOI and AST, dated December 18, 1991, as
amended on June 28, 1994.
10.23*++ License Agreement between the Company and Allen Newman, dated September 2, 1994, as amended December 13,
1996.
10.24*++ Agreement to Amend License and Development Agreement between Harry R. McKinley, MOI and the Company,
dated September 15, 1995.
10.25*++ License Agreement between the Company and Kaiser Aerospace, dated July 19, 1995.
10.26*++ Technology Strategic Alliance: Memorandum of Understanding between the Company and Kaiser Electro
Optics, Inc., dated July 19, 1995.
10.27*++ Non-Exclusive License Agreement between the Company, Fuji Photo Film Co., Ltd. and Fuji Photo Film
Optical Co., Ltd., dated June 25, 1996.
10.28++ Memorandum of Understanding between the Company and Cogent Light Technologies, dated March 27, 1996.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.29*++ License Agreement between the Company and Urohealth, dated December 13, 1996.
10.30*++ License Agreement between the Company, HealthCom, Inc. and GDE Systems, Inc., dated February 28, 1997.
10.31++ Lease dated April 14, 1994, as amended by a certain First Amendment to Lease dated March 29, 1996 and a
certain Second Amendment to Lease dated October 22, 1996 between the Company and Robert F. Tambone, as
Trustee of MAT Realty Trust, u/d/t dated June 4, 1986.
10.32++ Standard Sublease between the Company and Quintiles Pacific, Inc., dated January 23, 1996.
10.33++ Standby Letter of Credit from Silicon Valley Bank, dated August 9, 1996.
10.34++ 1995 Stock Option Plan.
10.35++ 1995 Stock Option Plan Form of Notice of Grant.
10.36++ 1995 Stock Option Plan Form of Stock Option Agreement.
10.37++ 1995 Stock Option Plan Form of Stock Purchase Agreement.
10.38++ 1997 Stock Option/Stock Issuance Plan, as amended.
10.39++ 1997 Stock Option/Stock Issuance Plan Form of Notice of Grant.
10.40++ 1997 Stock Option/Stock Issuance Plan Form of Stock Option Agreement.
10.41++ 1997 Stock Option/Stock Issuance Plan Form of Stock Purchase Agreement.
10.42++ 1997 Employee Stock Purchase Plan.
10.43++ Form of Indemnification Agreement between the Company and each of its directors.
10.44++ Form of Indemnification Agreement between the Company and each of its officers.
10.45++ Form of Waiver of Registration Rights, dated February 28, 1997.
10.46++ 1997 Stock Option/Stock Issuance Plan Form of Stock Issuance Agreement.
10.47++ Stock Issuance Agreement dated March 3, 1997 between the Company and those purchasers set forth in
Schedule A.
11.1++ Statement re: Computation of Per Share Data.
23.1++ Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion filed as Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1++ Power of Attorney.
27.1++ Financial Data Schedule.
</TABLE>
- --------------
+
To be filed by amendment.
++
Previously filed.
*
Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text (the "Mark"). This Exhibit has been filed
separately with the Secretary of the Commission without the Mark pursuant
to the Company's Application Requesting Confidential Treatment under Rule
406 under the Securities Act.
(b) Financial Statement Schedules included separately in the Registration
Statement.
II-5
<PAGE>
All other schedules are omitted because they are not required, are not
applicable or the information is included in the Financial Statements or Notes
thereto.
ITEM 17. UNDERTAKINGS.
The undersigned hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described in Item 14, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, County of San
Diego, State of California, on the 25th day of June, 1997.
VISTA MEDICAL TECHNOLOGIES, INC.
By: /s/ JOHN R. LYON
-----------------------------------------
John R. Lyon
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ JOHN R. LYON Officer and Director
- ------------------------------ (Principal Executive June 25, 1997
(John R. Lyon) Officer)
Director of Finance and
/s/ ROBERT J. DE VAERE Administration and Chief
- ------------------------------ Financial Officer June 25, 1997
(Robert J. De Vaere) (Principal Financial and
Accounting Officer)
*
- ------------------------------ Chairman of the Board and June 25, 1997
(James C. Blair) Director
*
- ------------------------------ Director June 25, 1997
(Olav B. Bergheim)
*
- ------------------------------ Director June 25, 1997
(Nicholas B. Binkley)
*
- ------------------------------ Director June 25, 1997
(Daniel J. Holland)
*
- ------------------------------ Director June 25, 1997
(Larry M. Osterink)
By: /s/ JOHN R.
LYON
- ------------------------------
John R. Lyon, Attorney-in-fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------------ -----
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1++ Amended and Restated Certificate of Incorporation of the Company.
3.2++ Form of Second Restated Certificate of Incorporation of the Company to become effective
immediately prior to the Offering.
3.3++ Bylaws of the Company, as amended.
3.4++ Form of Restated Bylaws of the Company to be effective upon completion of the Offering.
4.1 Form of Certificate for Common Stock.
5.1++ Opinion of Brobeck, Phleger & Harrison LLP with respect to the Common Stock being registered.
10.1++ Asset Purchase Agreement between the Company and AST, dated September 15, 1995.
10.2++ Asset Purchase Agreement between the Company, ProMedica Distribution, Inc. (ProMedica) and
certain stockholders of ProMedica, dated July 26, 1996.
10.3++ Series A-1 Preferred Stock Purchase Agreement among the Company and the purchasers listed on
Schedule A thereto, dated July 27, 1995.
10.4++ Series B Preferred Stock Purchase Agreement among the Company and the investors listed on
Schedule A thereto, dated July 12, 1996.
10.5++ Series C Preferred Stock Purchase Agreement between the Company and Medtronic Asset Management,
Inc., dated November 27, 1996.
10.6++ Common Stock Purchase Warrant between the Company and Heartport, Inc. (Heartport), dated
February 22, 1997.
10.7*++ International Distribution Agreement between AST and AMCO, Inc., dated September 20, 1994.
10.8*++ Manufacturing Supply Agreement between the Company and Kaiser Electro-Optics, Inc., dated July
19, 1995.
10.9*++ U.S.A. and Canada Distribution Agreement between the Company and Delacroix-Chevalier Inc., dated
July 11, 1996.
10.10*++ Distributor Agreement between the Company and Peters, dated July 15, 1996.
10.11*++ Sales Agreement between the Company and Medtronic, Inc., dated November 27, 1996.
10.12*++ Supply and Services Agreement between the Company and Heartport, dated February 22, 1997.
10.13*++ Supplemental Rights Agreement between the Company and Medtronic, Inc., dated November 27, 1996.
10.14++ Amended and Restated Investors' Rights Agreement between the Company and the stockholders listed
on Schedule A thereto, dated November 27, 1996.
10.15++ Amendment to the Amended and Restated Investors' Rights Agreement between the Company, Heartport
and the stockholders listed on Exhibit A thereto, dated February 22, 1997.
10.16++ Letter Agreement regarding Investment Representations and Registration Rights between the
Company and Urohealth Systems, Inc. (Urohealth), dated December 13, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------------ -----
<C> <S> <C>
10.17*++ Consulting Agreement between the Company and Harry R. McKinley, dated September 15, 1995.
10.18*++ Consulting Agreement between the Company and Urohealth, dated December 13, 1996.
10.19++ Form of Professional Services Agreement.
10.20++ Form of Non-Disclosure Agreement for Proprietary or Business Confidential Information.
10.21++ Non-Competition, Non-Disclosure and Patent and Inventions Assignment Agreement among Harry R.
McKinley, McKinley Optics, Inc. and AST, dated December 18, 1991.
10.22*++ License and Development Agreement among Harry R. McKinley, McKinley Optics, Inc. ("MOI") and
AST, dated December 18, 1991, as amended on June 28, 1994.
10.23*++ License Agreement between the Company and Allen Newman, dated September 2, 1994, as amended
December 13, 1996.
10.24*++ Agreement to Amend License and Development Agreement between Harry R. McKinley, MOI and the
Company, dated September 15, 1995.
10.25*++ License Agreement between the Company and Kaiser Aerospace, dated July 19, 1995.
10.26*++ Technology Strategic Alliance: Memorandum of Understanding between the Company and Kaiser
Electro Optics, Inc., dated July 19, 1995.
10.27*++ Non-Exclusive License Agreement between the Company, Fuji Photo Film Co., Ltd. and Fuji Photo
Film Optical Co., Ltd., dated June 25, 1996.
10.28++ Memorandum of Understanding between the Company and Cogent Light Technologies, dated March 27,
1996.
10.29*++ License Agreement between the Company and Urohealth, dated December 13, 1996.
10.30*++ License Agreement between the Company, HealthCom, Inc. and GDE Systems, Inc., dated February 28,
1997.
10.31++ Lease dated April 14, 1994, as amended by a certain First Amendment to Lease dated March 29,
1996 and a certain Second Amendment to Lease dated October 22, 1996 between the Company and
Robert F. Tambone, as Trustee of MAT Realty Trust, u/d/t dated June 4, 1986.
10.32++ Standard Sublease between the Company and Quintiles Pacific, Inc., dated January 23, 1996.
10.33++ Standby Letter of Credit from Silicon Valley Bank, dated August 9, 1996.
10.34++ 1995 Stock Option Plan.
10.35++ 1995 Stock Option Plan Form of Notice of Grant.
10.36++ 1995 Stock Option Plan Form of Stock Option Agreement.
10.37++ 1995 Stock Option Plan Form of Stock Purchase Agreement.
10.38++ 1997 Stock Option/Stock Issuance Plan, as amended.
10.39++ 1997 Stock Option/Stock Issuance Plan Form of Notice of Grant.
10.40++ 1997 Stock Option/Stock Issuance Plan Form of Stock Option Agreement.
10.41++ 1997 Stock Option/Stock Issuance Plan Form of Stock Purchase Agreement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------------ -----
<C> <S> <C>
10.42++ 1997 Employee Stock Purchase Plan.
10.43++ Form of Indemnification Agreement between the Company and each of its directors.
10.44++ Form of Indemnification Agreement between the Company and each of its officers.
10.45++ Form of Waiver of Registration Rights, dated February 28, 1997.
10.46++ 1997 Stock Option/Stock Issuance Plan Form of Stock Issuance Agreement
10.47++ Issuance Agreement dated March 3, 1997 between the Company and those purchasers set forth in
Schedule A.
11.1++ Statement re: Computation of Per Share Data.
23.1++ Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion filed as Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1++ Power of Attorney.
27.1++ Financial Data Schedule.
</TABLE>
- --------------
++ Previously filed.
* Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text (the "Mark"). This Exhibit has been filed
separately with the Secretary of the Commission without the Mark pursuant to
the Company's Application Requesting Confidential Treatment under Rule 406
under the Securities Act.
<PAGE>
Draft -- June 23, 1997
Vista Medical Technologies, Inc.
Common Stock
($.01 par value per share)
Underwriting Agreement
_________________, 1997
Goldman, Sachs & Co.,
Salomon Brothers Inc
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004.
Ladies and Gentlemen:
Vista Medical Technologies, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of 3,500,000 shares (the "Firm Shares") and, at the election of the
Underwriters, up to 525,000 additional shares (the "Optional Shares") of common
stock, $.01 par value per share (the "Common Stock"), of the Company (the Firm
Shares and the Optional Shares that the Underwriters elect to purchase pursuant
to Section 2 hereof being collectively called the "Shares").
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-22985) (the
"Initial Registration Statement") in respect of the Shares has been filed with
the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto, to you for
each of the other Underwriters, have been declared effective by the Commission
in such form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement") filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the "Act"), which became
effective upon filing, no other document with respect to the Initial
Registration Statement has heretofore been filed with the Commission; and no
stop order suspending the effectiveness of the Initial Registration Statement,
any post-effective amendment thereto or the Rule 462(b) Registration Statement,
if any, has been issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule 424(a) of
the rules and regulations of the Commission under the Act, is hereinafter called
a "Preliminary Prospectus"; the various parts of the Initial Registration
Statement, and the Rule 462(b) Registration Statement, if any, including all
exhibits thereto and including the information contained in the form of final
prospectus filed with the Commission pursuant to Rule 424(b) under the Act in
accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under the
Act to be part of the Initial Registration Statement at the time it was declared
effective, each as amended at the time such part of the Initial Registration
Statement became effective or
<PAGE>
such part of the Rule 462(b) Registration Statement, if any, became or
hereafter becomes effective, is hereinafter collectively called the
"Registration Statement"; and such final prospectus, in the form first filed
pursuant to Rule 424(b) under the Act, is hereinafter called the
"Prospectus");
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; PROVIDED, HOWEVER, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration Statement and
any amendment thereto, and as of the applicable filing date as to the Prospectus
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that
this representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information furnished in writing to
the Company by an Underwriter through Goldman, Sachs & Co. expressly for use
therein;
(d) The Company has not sustained since the date of the latest audited
financial statements included in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there has
not been any change in the capital stock or long-term debt of the Company or any
of its subsidiaries, if any, material adverse change, or any development
involving a prospective material adverse change, in or affecting the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company, or any of its subsidiaries, if any, otherwise than as
set forth or contemplated in the Prospectus;
(e) The Company does not own any real property; the Company has good and
marketable title to all personal property owned thereby, free and clear of all
liens, encumbrances and defects except such as are described in the Prospectus
or such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company; and any real property and buildings held under lease by the Company are
held thereby under valid, subsisting and enforceable leases with such exceptions
as are not material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company;
(f) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, or is subject to
no material liability or disability by reason of the failure to be so qualified
in any such jurisdiction;
(g) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description of the Common Stock contained in the Prospectus;
and the Company has no subsidiaries;
-2-
<PAGE>
(h) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable and will conform to the
description of the Common Stock contained in the Prospectus;
(i) The issue and sale of the Shares by the Company and the compliance by
the Company with all of the provisions of this Agreement and the consummation of
the transactions herein contemplated (x) will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, or loan agreement, (y)
will not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any other agreement or instrument
to which the Company is a party or by which the Company is bound or to which any
of the property or assets of the Company is subject, which breach, violation or
default could individually or in the aggregate have a material adverse effect on
the current or future financial position, stockholders' equity or results of
operations of the Company, and (z) will not result in any violation of the
provisions of the Second Restated Certificate of Incorporation (the "Certificate
of Incorporation") or the Restated Bylaws (the "Bylaws") of the Company or any
statute or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its properties; and no
consent, approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the issue and
sale of the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the Act of the
issuance of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of the Shares by
the Underwriters;
(j) The Company is not in violation of its Certificate of Incorporation or
Bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement or instrument
to which it is a party or by which it or any of its properties may be bound;
(k) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the capital stock of the Company and under the caption
"Underwriting", insofar as they purport to describe the provisions of the laws
and documents referred to therein, are accurate, complete and fair;
(l) Each of the License and Development Agreement by and between Harry R.
McKinley ("McKinley"), McKinley Optics, Inc. ("MOI") and American Surgical
Technologies Corporation ("AST"), dated December 18, 1991, and the
Non-Competition, Non-Disclosure and Patent and Inventions Assignment Agreement
by and between McKinley, MOI and AST, dated December 18, 1991, in each case as
amended by that certain letter agreement between MOI and AST, dated June 28,
1994, as further amended by that certain Agreement to Amend License and
Development Agreement by and between MOI, McKinley and the Company, dated
September 15, 1995, relating to technology developed by MOI and McKinley for use
in endoscopes incorporating a stereo objective lens for medical purposes; the
Consulting Agreement by and between McKinley and the Company, dated September
15, 1995;the License Agreement by and between Allen Newman and the Company,
dated September 2, 1994, as amended by that certain Amendment to License
Agreement by and between the Company and Allen Newman, dated December 13, 1996,
relating to specific medical instruments employing advanced optical
technologies; the License Agreement by and between the Company and Kaiser
Aerospace and Electronics Corporation ("Kaiser"), dated July 19, 1995, relating
to the technology of an optical collimating apparatus; and the Non-Exclusive
License Agreement by and among the Company, Fuji Photo Film Co. Ltd. and Fuji
Photo Optical Co. Ltd., dated June 25, 1996, relating to an imaging system with
a varifocal lens for use in endoscopes (collectively, the "License Agreements");
is in full force and effect and constitutes a valid and binding agreement
between the parties thereto, enforceable in accordance with its terms, and there
has not occurred any default under any License Agreement or any event that with
the giving of notice or lapse of time would constitute a default thereunder;
-3-
<PAGE>
(m) Each of the Sales Agreement by and between the Company and Medtronic,
Inc. ("Medtronic"), dated November 27, 1996, relating to the sale and/or
distribution of the Company's Series 8000 in North America, Europe, the Middle
East and Africa; the License Agreement by and between the Company and Urohealth
Systems, Inc. ("Urohealth"), dated December 13, 1996, relating to the license by
the Company to Urohealth of visual instrument technology developed for the
gynecology field; the License Agreement (the "GDE License Agreement") between
the Company and GDE Systems, Inc., dated February 28, 1997, relating to the
granting to the Company of a worldwide exclusive license to certain software,
documentation and trademarks of GDE used in the medical field; and the Supply
and Services Agreement by and between the Company and Heartport, Inc.
("Heartport"), dated February 22, 1997, relating to the Company's sale and
subsequent maintenance of Series 8000 systems to Heartport (collectively, the
"Alliance Agreements"); is in full force and effect and constitutes a valid and
binding agreement between the parties thereto, enforceable in accordance with
its terms, and there has not occurred any default under any Alliance Agreement
or any event that with the giving of notice or lapse of time would constitute a
default thereunder; and the Company and Cogent Light Technologies, Inc.
("Cogent") entered into that certain Memorandum of Understanding, dated March
27, 1996, relating to the development and marketing of Company products which
incorporate Cogent's single fiber light technologies, and Cogent and the Company
have performed their respective obligations thereunder and there are no
outstanding disputes thereunder;
(n) The Company is conducting business in compliance with all applicable
statutes, rules, regulations and orders administered or issued by any
governmental or regulatory authority in the jurisdictions in which it is
conducting business, including, without limitation, the United States Food and
Drug Administration;
(o) Except as disclosed in the Prospectus, the Company is not in violation
of any statute, or any rule, regulation, decision or order of any governmental
agency or body or any court relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or restoration of
the environment or human exposure to hazardous or toxic substances
(collectively, "environmental laws"), does not own or operate any real property
contaminated with any substance that is subject to any environmental laws, has
not received notice of any claims with respect to, and to the best of its
knowledge is not liable for, any off-site disposal or contamination pursuant to
any environmental laws, and is not subject to any claim relating to any
environmental laws; and the Company is not aware of any pending investigation
which could reasonably be expected to lead to such a claim;
(p) Except as disclosed in the Prospectus, the Company owns or possesses
valid, binding, enforceable licenses or other rights to use any patents, patent
licenses, trademarks, service marks, trade names, service names, copyrights,
mask works, technology, know-how and other proprietary intellectual property
rights ("Intellectual Property") necessary to conduct the business as described
in the Prospectus and the Company has not received any notice of infringement of
or conflict with (and knows of no such infringement of or conflict with)
asserted rights of others with respect to any patents, trademarks, service
marks, trade names, copyrights, mask works, technology or know-how which could
result in any material adverse effect on the current or future financial
position, stockholders' equity or results of operations of the Company; the
Company or its assignor has duly and properly filed with the U.S. Patent and
Trademark Office the pending patent applications referred to in the Prospectus
(the "Patent Applications"); the information contained in the Registration
Statement and Prospectus concerning the Patent Applications and patents owned by
or licensed to the Company is accurate in all material respects; and the
discoveries, inventions, products or processes owned or licensed by the Company
referred to in the Prospectus do not, to the knowledge of the Company, infringe
or conflict, and the Company has not received any notice that its Intellectual
Property or activities infringe or conflict with any right or patent, or any
discovery, invention, product or process which is the subject of a patent
application known to the Company;
-4-
<PAGE>
(q) The Company holds all material licenses, certificates and permits from
state, federal and other regulatory authorities which are necessary for the
conduct of its business.
(r) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company is a party or of which any
property of the Company is the subject which, if determined adversely to the
Company, would individually or in the aggregate have a material adverse effect
on the current or future financial position, stockholders' equity or results of
operations of the Company; and, to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others;
(s) The Company is not and, after giving effect to the offering and sale
of the Shares, will not be an "investment company" or an entity "controlled" by
an "investment company", as such terms are defined in the Investment Company Act
of 1940, as amended (the "Investment Company Act");
(t) Neither the Company nor any of its affiliates does business with the
government of Cuba or with any person or affiliate located in Cuba within the
meaning of Section 517.075, Florida Statutes; and
(u) Ernst & Young LLP, who have certified certain financial statements of
the Company, are independent public accountants as required by the Act and the
rules and regulations of the Commission thereunder.
2. Subject to the terms and conditions herein set forth (a) the Company
agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price per share of $___________, the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto and (b) in the event
and to the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company agrees to issue and sell to each
of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at the purchase price per share set forth
in clause (a) of this Section 2, that portion of the number of Optional Shares
as to which such election shall have been exercised (to be adjusted by you so as
to eliminate fractional shares) determined by multiplying such number of
Optional Shares by a fraction, the numerator of which is the maximum number of
Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Shares that all of the Underwriters
are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 525,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement,
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company shall be delivered by or on behalf of the Company to
Goldman, Sachs & Co., for the account of such Underwriter, against payment by or
on behalf of such Underwriter of the purchase price therefor by certified or
official bank check or checks, payable to the order of the Company in
immediately available funds. The Company will cause the certificates
representing the
-5-
<PAGE>
Shares to be made available for checking and packaging at least twenty-four
hours prior to the Time of Delivery (as defined below) with respect thereto
at the offices of Goldman, Sachs & Co., 85 Broad Street, New York, New York
10004 (the "Designated Office"). The time and date of such delivery and
payment shall be, with respect to the Firm Shares, 9:30 a.m., New York City
time, on _______ 1997, or such other time and date as Goldman, Sachs & Co.
and the Company may agree upon in writing, and, with respect to the Optional
Shares, 9:30 a.m., New York City time, on the date specified by Goldman,
Sachs & Co. in the written notice given by Goldman, Sachs & Co. of the
Underwriters election to purchase such Optional Shares, or such other time
and date as Goldman, Sachs & Co. and the Company may agree upon in writing.
Such time and date for delivery of the Firm Shares is herein called the
"First Time of Delivery", such time and date for delivery of the Optional
Shares, if not the First Time of Delivery, is herein called the "Second Time
of Delivery", and each such time and date for delivery is herein called a
"Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on behalf
of the parties hereto pursuant to Section 7 hereof, including the cross receipt
for the Shares and any additional documents requested by the Underwriters
pursuant to Section 7(j) hereof, will be delivered at the offices of Brobeck,
Phleger & Harrison LLP, 550 West C Street, Suite 1200, San Diego, CA 92101 (the
"Closing Location"), and the Shares will be delivered at the Designated Office,
all at such Time of Delivery. A meeting will be held at the Closing Location at
3:00 p.m., Pacific time, on the New York Business Day (as such term is
hereinafter defined) next preceding such Time of Delivery, at which meeting the
final drafts of the documents to be delivered pursuant to the preceding sentence
will be available for review by the parties hereto. For the purposes of this
Section 4, "New York Business Day" shall mean each Monday, Tuesday, Wednesday,
Thursday and Friday which is not a day on which banking institutions in New York
are generally authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file such
Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's
close of business on the second business day following the execution and
delivery of this Agreement, or, if applicable, such earlier time as may be
required by Rule 430A(a)(3) under the Act; to make no further amendment or any
supplement to the Registration Statement or Prospectus which shall be
disapproved by you promptly after reasonable notice thereof; to advise you,
promptly after it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any supplement to
the Prospectus or any amended Prospectus has been filed and to furnish you with
copies thereof; to advise you, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or supplementing
of the Registration Statement or Prospectus or for additional information; and,
in the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus or suspending any
such qualification, promptly to use its best efforts to obtain the withdrawal of
such order;
(b) Promptly from time to time to take such action as you may reasonably
request to qualify the Shares for offering and sale under the securities laws of
such jurisdictions as you may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such jurisdictions for
as long as may be necessary to complete the distribution of the Shares, provided
that in connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process in any
jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York Business Day
next succeeding the date of this Agreement, and from time to time, to furnish
the Underwriters with copies of the Prospectus in New York City in such
quantities as you may reasonably request, and, if the delivery of a prospectus
is required at any time prior to the expiration of nine months after the time of
issue of the Prospectus in
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<PAGE>
connection with the offering or sale of the Shares and if at such time any
event shall have occurred as a result of which the Prospectus as then amended
or supplemented would include an untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made when such
Prospectus is delivered, not misleading, or, if for any other reason it shall
be necessary during such period to amend or supplement the Prospectus in
order to comply with the Act, to notify you and upon your request to prepare
and furnish without charge to each Underwriter and to any dealer in
securities as many copies as you may from time to time reasonably request of
an amended Prospectus or a supplement to the Prospectus which will correct
such statement or omission or effect such compliance, and in case any
Underwriter is required to deliver a prospectus in connection with sales of
any of the Shares at any time nine months or more after the time of issue of
the Prospectus, upon your request but at the expense of such Underwriter, to
prepare and deliver to such Underwriter as many copies as you may request of
an amended or supplemented Prospectus complying with Section 10(a)(3) of the
Act;
(d) If the Company elects to rely upon Rule 462(b), the Company shall file
a Rule 462(b) Registration Statement with the Commission in compliance with Rule
462(b) by 10:00 p.m. Washington, D.C. time, on the date of this Agreement, and
the Company shall at the time of filing either pay to the Commission the filing
fee for the Rule 462(b) Registration Statement or give irrevocable instructions
for the payment of such fee pursuant to Rule 111(b) under the Act.
(e) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
thereunder (including, at the option of the Company, Rule 158);
(f) During the period beginning from the date hereof and continuing to and
including the date 180 days after the date of the Prospectus, not to offer,
sell, contract to sell or otherwise dispose of, except as provided hereunder,
any securities of the Company that are substantially similar to the Shares,
including, but not limited, to, any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to employee stock option
plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this Agreement, or
pursuant to Section 5.1 of the GDE License Agreement), without the prior written
consent of Goldman, Sachs & Co.;
(g) To furnish to its stockholders as soon as practicable after the end of
each fiscal year an annual report (including a balance sheet and statements of
income, stockholders' equity and cash flows of the Company and any of its
subsidiaries, if any, certified by independent public accountants) and, as soon
as practicable after the end of each of the first three quarters of each fiscal
year (beginning with the fiscal quarter ending after the effective date of the
Registration Statement), consolidated summary financial information of the
Company, and any of its subsidiaries, if any, for such quarter in reasonable
detail;
(h) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request;
(i) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under the
caption "Use of Proceeds";
(j) To use its best efforts to list for quotation the Shares on the Nasdaq
National Market ("NNM"); and
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<PAGE>
(k) To file with the Commission such reports on Form SR as may be required
by Rule 463 under the Act.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey;
(iv) all fees and expenses in connection with listing the Shares on the NNM; (v)
the filing fees incident to, and the fees and disbursements of counsel for the
Underwriters in connection with, securing any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of the Shares;
(vi) the cost of preparing stock certificates; (vii) the cost and charges of any
transfer agent or registrar; and (viii) all other costs and expenses incident to
the performance of its obligations hereunder which are not otherwise
specifically provided for in this Section. It is understood, however, that,
except as provided in this Section, and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees
and disbursements of their counsel, stock transfer taxes on resale of any of the
Shares by them, and any advertising expenses connected with any offers they may
make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) within the applicable time period prescribed for such filing by the
rules and regulations under the Act and in accordance with Section 5(a) hereof;
if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 p.m. Washington,
D.C. time, on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) McDermott, Will & Emery, counsel for the Underwriters, shall have
furnished to you such opinion or opinions (a draft of each such opinion is
attached as Annex II(a) hereto), dated such Time of Delivery, with respect to
the matters covered in paragraphs (i), (iii), (iv), (v) and (xiii) of subsection
(c) below as well as such other related matters as you may reasonably request,
and such counsel shall have received such papers and information as they may
reasonably request to enable them to pass upon such matters;
(c) Brobeck, Phleger and Harrison LLP, counsel for the Company, shall have
furnished to you their written opinion (a draft of each such opinion is attached
as Annex II(b) hereto), dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with full corporate power and authority to own or lease
its properties and conduct its business as described in the
Registration Statement and Prospectus;
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<PAGE>
(ii) The Company is duly qualified to do business as a
foreign corporation, and is in good standing, in each jurisdiction of
the United States, except where its failure to do so, individually or
in the aggregate, would not have a material adverse effect on the
properties, assets, business condition (financial or otherwise) or
results of operations of the Company;
(iii) The Company has an authorized capitalization as
set forth in the Prospectus, and the authorized capital stock of the
Company (including the Shares) conforms as to legal matters in all
material respects to the description thereof contained in the
Registration Statement and Prospectus;
(iv) The outstanding shares of capital stock of the Company,
including the Shares, have been duly and validly authorized and
issued, are non assessable and fully paid, and are not subject to any
preemptive or similar rights.
(v) This Agreement has been duly authorized, executed and
delivered by the Company;
(vi) The execution and delivery by the Company of, and the
performance by the Company of its obligations under (including,
without limitation, the issue and sale of the Shares at such Time of
Delivery by the Company) and the consummation of the transactions
herein contemplated will not contravene or result in any violation of
any provision of applicable law or the Second Restated Certificate of
Incorporation or Restated Bylaws of the Company or, to the knowledge
of such counsel, any rule, regulation, judgment, order or decree of
any governmental body, agency or court having jurisdiction over the
Company or any of
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<PAGE>
its property, or constitute a breach or violation of any of the terms or
provisions of, or constitute a default under, any agreement or instrument
which is filed as an Exhibit to the Registration Statement under Item 601
of Regulation S-K, and no consent, approval, authorization or order of or
registration or qualification with any governmental body or agency is
required for the performance by the Company of its obligations under, or
the consummation by the Company of the transactions contemplated by, this
Agreement, except the registration under the Act of the Shares, and such
consents, approvals, authorizations, registrations or qualifications as
may be required under securities or Blue Sky laws of the various states
in connection with the purchase and distribution of the Shares by the
Underwriters;
(vii) We do not know of any legal or governmental
proceeding pending of threatened to which the Company is or may become
a party or to which any of the properties of the Company is or may
become subject that is required to be described in the Registration
Statement or the Prospectus and is not so described, of any amendment
to the Registration Statement required to be filed, or of any statute,
regulation, contract or other document that is required to be
described in the Registration Statement or the Prospectus or to be
filed as an Exhibit to the Registration Statement that is not
described or filed as required;
(viii) To our knowledge, the Company does not own any
real property. The real property and buildings held under lease by
the Company in California are held by the Company under valid,
subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company;
-10-
<PAGE>
(ix) The statements in the Prospectus under the captions
"Risk Factors - Shares Eligible for Future Sale; Risk Factors -
Registration Rights", "Shares Eligible for Future Sale" and
"Underwriting", insofar as such statements purport to describe the
provisions of the laws and documents referred to therein, are
accurate, complete and fair summaries thereof in all material
respects;
(x) The description of the License Agreements in the
Prospectus under the captions "Risk Factors - Uncertainty Regarding
Patents and Protection of Proprietary Technology; Risks of Future
Litigation," "Business - Strategic Alliances" and "Business -- Patents
and Proprietary Rights" are accurate and fairly present the
information with respect thereto required to be presented in such
contexts by the Act or Rules and Regulations under the Act;
(xi) The description of the Alliance Agreements in the
Prospectus under the captions "Risk Factors - Reliance on Strategic
Relationships," "Business - Strategic Alliances" and "Business -
Patents and Proprietary Rights" are accurate and fairly present the
information with respect thereto required to be presented in such
contexts by the Act or Rules and Regulations under the Act;
(xii) The Company is not an "investment company" or an
entity "controlled" by an "investment company", as such terms are
defined in the Investment Company Act; and
(xiii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to
such Time of Delivery (other than the financial statements,
financial schedules and other financial data derived therefrom and
contained therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of
the Act and the rules and regulations thereunder; and although they do
not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement or
the Prospectus, except for those referred to in the opinion in
subsections (iii), (ix), (x) and (xi) of this section 7(c), they have
no reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior
to such Time of Delivery (other than the financial statements,
financial schedules and other financial data derived therefrom and
contained therein, as to which such counsel need express no belief)
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that, as of its date, the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules therein, as to which such counsel
need express no opinion) contained an untrue statement of a material
fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading or that, as of such Time of Delivery, either
the Registration Statement or the Prospectus or any further amendment
or supplement thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) contains an
untrue statement of a material fact or omits to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
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<PAGE>
(d) Each of Pandiscio & Pandiscio, Fish & Richardson and Arant, Kleinberg,
Lerner & Ram, patent and/or trademark counsel for the Company, shall have
furnished to you their written opinions (a draft of each such opinion is
attached hereto as Annex II(c), II(d), and II(e), respectively), and each of
Lappin & Kusmer and Doherty, Wallace, Pillsbury and Murphy, P.C., special
counsel for McKinley and MOI, shall have furnished to you their written opinions
(a draft of each such opinion is attached hereto as Annex II(f) and II(g),
respectively), dated such Time of Delivery, in form and substance satisfactory
to you;
(e) Hale and Dorr, regulatory counsel for the Company, shall have
furnished to you their written opinion (a draft of such opinion is attached
hereto as Annex II(h) hereto) dated such Time of Delivery, in form and substance
satisfactory to you to the effect that it has examined the Registration
Statement and;
(i) The statements under the caption "Risk Factors - No
Assurance of Regulatory Clearance or Approval; Significant Domestic
and International Regulation" and "Business - Government Regulation"
in the Prospectus, are, in all material respects, accurate and fair
statements or summaries of applicable federal law and regulation as
applied by the FDA, subject to the qualifications set forth therein;
(ii) No facts have come to the attention of such counsel that
lead it to believe that the information contained under the captions
"Risk Factors - No Assurance of Regulatory Clearance or Approval;
Significant Domestic and International Regulation" and "Business -
Government Regulation" (a) in the Registration Statement, at the time
the Registration Statement became effective, contained any untrue
statement of a material fact, or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, or (b) in the Prospectus, at the time the
Prospectus was issued or at the date hereof, contained any untrue
statement of a material fact, or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and
(iii) Such counsel has no actual knowledge of any action,
suit or proceeding pending or threatened by the FDA against the
Company seeking limitation, suspension, or revocation of any license,
permit, approval or authorization required by the Company to conduct
its business as described in the Registration Statement and the
Prospectus;
(f) On the date of the Prospectus at a time prior to the execution of this
Agreement, at 9:30 a.m., [New York City time], on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, Ernst_& Young, LLP,
shall have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you (the executed copy
of the letter delivered prior to the execution of this Agreement is attached as
Annex I(a) hereto and a draft of the form of letter to be delivered on the
effective date of any post-effective amendment to the Registration Statement and
as of each Time of Delivery is attached as Annex I(b) hereto);
(g) (i) The Company shall not have sustained since the date of the latest
audited financial statements included in the Prospectus any loss or interference
with its business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated in the Prospectus,
and (ii) since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock or
long-term debt of the Company or any change, or any development involving a
prospective change, in or affecting the general affairs, management, financial
position, stockholders' equity
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<PAGE>
or results of operations of the Company, otherwise than as set forth or
contemplated in the Prospectus, the effect of which, in any such case
described in Clause (i) or (ii), is in the judgment of the Representatives so
material and adverse as to make it impracticable or inadvisable to proceed
with the public offering or the delivery of the Shares being delivered at such
Time of Delivery on the terms and in the manner contemplated in the Prospectus;
(h) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or on the NNM; (ii) a suspension or
material limitation in trading of the Company's securities on the NNM; (iii) a
general moratorium on commercial banking activities declared by either Federal,
New York or California State authorities; or (iv) the outbreak or escalation of
hostilities involving the United States or the declaration by the United States
of a national emergency or war, if the effect of any such event specified in
this Clause (v) in the judgment of the Representatives makes it impracticable
or inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(i) The Shares to be sold at such Time of Delivery shall have been duly
listed for quotation on the NNM; and
(j) The Company has obtained and delivered to the Underwriters executed
copies of an agreement from each of the executive officers, directors,
stockholders, option holders and warrant holders listed on Schedule 7(j)
attached hereto, substantially to the effect set forth in Subsection 5(f) hereof
in form and substance satisfactory to you;
(k) The Company shall have complied with the provisions of Subsection 5(c)
hereof with respect to the furnishing of prospectuses on the New York Business
Day next succeeding the date of this Agreement.
(l) The Company shall have furnished or caused to be furnished to you at
such Time of Delivery certificates of officers of the Company satisfactory to
you as to the accuracy of the representations and warranties of the Company
herein at and as of such Time of Delivery, as to the performance by the Company
of all of its obligations hereunder to be performed at or prior to such Time of
Delivery, as to the matters set forth in subsections (a) and (e) of this Section
and as to such other matters as you may reasonably request; and
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; PROVIDED, HOWEVER, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the
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<PAGE>
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or supplement
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter through Goldman, Sachs & Co. expressly for use
therein; and will reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party (i)
shall only relieve the indemnifying party from its obligations to indemnify
under subsections (a) or (b) above, as the case may be, to the extent the
indemnifying party is materially damaged by such failure and (ii) shall not
relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written
consent of the indemnified party, effect the settlement or compromise of, or
consent to the entry of any judgment with respect to, any pending or threatened
action or claim in respect of which indemnification or contribution may be
sought hereunder (whether or not the indemnified party is an actual or potential
party to such action or claim) unless such settlement, compromise or judgment
(i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under subsection (c) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and
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equitable if contributions pursuant to this subsection (d) were determined by
PRO RATA allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to
above in this subsection (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were offered
to the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company (including any
person who, with his or her consent, is named in the Registration Statement as
about to become a director of the Company) and to each person, if any, who
controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company shall be entitled to a further period of
thirty-six hours within which to procure another party or other parties
satisfactory to you to purchase such Shares on such terms. In the event that,
within the respective prescribed periods, you notify the Company that you have
so arranged for the purchase of such Shares, or the Company notifies you that it
has so arranged for the purchase of such Shares, you or the Company shall have
the right to postpone such Time of Delivery for a period of not more than seven
days, in order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall include
any person substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting
-15-
<PAGE>
Underwriter or Underwriters, then this Agreement (or, with respect to the
Second Time of Delivery, the obligations of the Underwriters to purchase and
of the Company to sell the Optional Shares) shall thereupon terminate, without
liability on the part of any non-defaulting Underwriter or the Company, except
for the expenses to be borne by the Company and the Underwriters as provided
in Section 6 hereof and the indemnity and contribution agreements in Section 8
hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Shares.
EX1 If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections_6 and 8 hereof; but, if for any other reason, any Shares
are not delivered by or on behalf of the Company as provided herein, the Company
will reimburse the Underwriters through you for all out-of-pocket expenses
approved in writing by you, including fees and disbursements of counsel,
reasonably incurred by the Underwriters in making preparations for the purchase,
sale and delivery of the Shares not so delivered, but the Company shall then be
under no further liability to any Underwriter except as provided in Sections 6
and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
Representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 85 Broad Street, New York, New York 10004, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail to the
address of the Company set forth in the Registration Statement, Attention:
Secretary; provided, however, that any notice to an Underwriter pursuant to
Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its Underwriters'
Questionnaire, or telex constituting such Questionnaire, which address will be
supplied to the Company by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and, to the extent provided in Sections 8 and
10 hereof, the officers and directors of the Company and each person who
controls the Company or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
-16-
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us [one for the Company and each of the Representatives plus five for
each counsel] counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof shall
constitute a binding agreement between each of the Underwriters and the Company.
It is understood that your acceptance of this letter on behalf of each of the
Underwriters is pursuant to the authority set forth
-17-
in a form of Agreement among Underwriters, the form of which shall be submitted
to the Company for examination upon request, but without warranty on your part
as to the authority of the signers thereof.
Very truly yours,
VISTA MEDICAL TECHNOLOGIES, INC.
By:_______________________________
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Salomon Brothers Inc
By: ________________________________
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
-38-
<PAGE>
SCHEDULE I
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
----------- --------------- ---------
Goldman, Sachs & Co.
Salomon Brothers Inc
Total
-19-
<PAGE>
ANNEX I
Pursuant to Section 7(f) of the Underwriting Agreement, the accountants shall
furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published rules and
regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial forecasts
and/or pro forma financial information) examined by them and included in the
Prospectus or the Registration Statement comply as to form in all material
respects with the applicable accounting requirements of the Act and the related
published rules and regulations thereunder; and, if applicable, they have made a
review in accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim financial
statements, selected financial data, pro forma financial information, financial
forecasts and/or condensed financial statements derived from audited financial
statements of the Company for the periods specified in such letter, as indicated
in their reports thereon, copies of which have been separately furnished to the
representatives of the Underwriters (the "Representatives");
(iii) They have made a review in accordance with standards established
by the American Institute of Certified Public Accountants of the unaudited
condensed consolidated statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the Prospectus as indicated in
their reports thereon copies of which have been separately furnished to the
Representatives and on the basis of specified procedures including inquiries of
officials of the Company who have responsibility for financial and accounting
matters regarding whether the unaudited condensed consolidated financial
statements referred to in paragraph (vi)(A)(i) below comply as to form in all
material respects with the applicable accounting requirements of the Act and the
related published rules and regulations, nothing came to their attention that
cause them to believe that the unaudited condensed consolidated financial
statements do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company and its
subsidiaries for the three most recent fiscal years included in the Prospectus
agrees with the corresponding amounts (after restatements where applicable) in
the audited consolidated financial statements for such three fiscal years;
(v) They have compared the information in the Prospectus under selected
captions with the disclosure requirements of Regulation S-K and on the basis of
limited procedures specified in such letter nothing came to their attention as a
result of the foregoing procedures that caused them to believe that this
information does not conform in all material respects with the disclosure
requirements of Items 301, 302, 402 and 503(d), respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an examination in
accordance with generally accepted auditing standards, consisting of a reading
of the unaudited financial statements and other information referred to below, a
reading of the latest available interim financial statements of the Company and
its subsidiaries, inspection of the minute books of the Company since the date
of the latest audited financial statements included in the Prospectus, inquiries
of officials of the Company responsible for financial and accounting matters and
such other inquiries and procedures as may be specified in such letter, nothing
came to their attention that caused them to believe that:
(A) any unaudited income statement data and balance sheet items
included in the Prospectus do not agree with the corresponding items in the
unaudited consolidated financial statements from which such data and items were
derived, and any such unaudited data and items were not determined on a basis
substantially consistent with the basis for the corresponding amounts in the
audited consolidated financial statements included in the Prospectus;
(B) the unaudited financial statements which were not included in the
Prospectus but from which were derived any unaudited condensed financial
statements referred to in Clause (A) and any unaudited income statement data and
balance sheet items included in the Prospectus and referred to in Clause (A)
were not determined on a basis substantially consistent with the basis for the
audited consolidated financial statements included in the Prospectus;
-20-
<PAGE>
(C) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Act and the
published rules and regulations thereunder or the pro forma adjustments have not
been properly applied to the historical amounts in the compilation of those
statements;
(D) as of a specified date not more than five days prior to the date
of such letter, there have been any changes in the capital stock (other than
issuances of capital stock upon exercise of options and stock appreciation
rights, upon earn-outs of performance shares and upon conversions of convertible
securities, in each case which were outstanding on the date of the latest
financial statements included in the Prospectus) or any increase in the
long-term debt of the Company or any decreases in net current assets or
stockholders= equity or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each case as
compared with amounts shown in the latest balance sheet included in the
Prospectus, except in each case for changes, increases or decreases which the
Prospectus discloses have occurred or may occur or which are described in such
letter; and
(E) for the period from the date of the latest financial statements
included in the Prospectus to the specified date referred to in Clause (D) there
were any decreases in net revenues or operating profit or the total or per share
amounts of net income or other items specified by the Representatives, or any
increases in any items specified by the Representatives, in each case as
compared with the comparable period of the preceding year and with any other
period of corresponding length specified by the Representatives, except in each
case for decreases or increases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and (vi)
above, they have carried out certain specified procedures, not constituting an
examination in accordance with generally accepted auditing standards, with
respect to certain amounts, percentages and financial information specified by
the Representatives, which are derived from the general accounting records of
the Company and its subsidiaries, which appear in the Prospectus, or in Part II
of, or in exhibits and schedules to, the Registration Statement specified by the
Representatives, and have compared certain of such amounts, percentages and
financial information with the accounting records of the Company and its
subsidiaries and have found them to be in agreement.
-21-
<PAGE>
ANNEX II(a)
[Form Of Opinion - McDermott, Will & Emery]
-1-
<PAGE>
ANNEX II(b)
[Form Of Opinion - Brobeck, Phleger & Harrison]
<PAGE>
ANNEX II(c)
[Letterhead of Pandiscio & Pandiscio]
<PAGE>
ANNEX II(d)
[Letterhead of Fish & Richardson]
<PAGE>
ANNEX II(e)
[Letterhead of Arant, Kleinber, Lerner & Ram]
-2-
<PAGE>
ANNEX II(f)
[Letterhead of Lappin & Kosner]
March ___,1997
-3-
<PAGE>
ANNEX II(g)
[Form of Opinion-Doherty, Wallace, Pillsbury and Murphy, P.C.]
-4-
<PAGE>
ANNEX II(h)
[Form of Opinion-"Company Regulatory Counsel"]
-1-
<PAGE>
SCHEDULE 7(j)
LOCK-UP AGREEMENT
Goldman, Sachs & Co.
Salomon Brothers Inc.
As Representatives of the Several Underwriters
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Ladies and Gentlemen:
The undersigned understands that you, as representatives of the several
underwriters (the "Representatives"), propose to enter into an Underwriting
Agreement with Vista Medical Technologies, Inc. (the "Company") providing for
the public offering (the "Public Offering") by the several underwriters,
including yourselves, of the common stock (the "Common Stock"), $.01 par value
per share, of the Company. The undersigned recognizes that the Public Offering
will benefit the Company by, among other things, raising additional capital for
product introduction, marketing and general corporate purposes.
In consideration of the underwriters' agreement to purchase shares of
Common Stock and conduct the Public Offering, and for other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, the
undersigned irrevocably agrees that, without the prior written consent of the
Representatives, the undersigned will not, directly or indirectly, offer, sell,
contract to sell, grant any option to purchase, make any short sale, or
otherwise dispose of any Common Stock of the Company, or other securities of the
Company that are substantially similar to Common Stock (including, without
limitation, any securities that are convertible into or exchangeable for, or
that represent the right to receive upon exercise or otherwise, Common Stock or
any substantially similar securities), or any Common Stock of the Company which
may be deemed to be beneficially owned by the undersigned in accordance with the
rules and regulations of the Securities and Exchange Commission, for a period of
180 days from and after the date of the final Prospectus covering the public
offering of shares of the Common Stock. The undersigned acknowledges that you
and the Company are relying on the agreements of the undersigned contained
herein in carrying out the Public Offering and in entering into underwriting
arrangements with respect thereto.
The foregoing restriction is expressly agreed to preclude the undersigned
from engaging in any hedging or other transaction which is designed to or
reasonably expected to lead to or result in a sale or disposition of the shares
of Common Stock even if such shares of Common Stock would be disposed of by
someone other than the undersigned. Such prohibited hedging or other
transactions would include without limitation any short sale or any purchase,
sale or grant of any right (including without limitation any put or call option)
with respect to any of the shares of Common Stock or with respect to any
security that includes, relates to, or derives any significant part of its value
from such shares.
-2-
<PAGE>
The Company and _________________, the Company's Transfer Agent, are hereby
authorized to enforce this Lock-Up Agreement by refusing to permit transfers
which the Company believes may violate this agreement. The undersigned
understands that this Lock-Up Agreement is irrevocable and shall be binding upon
the undersigned's heirs, legal representatives, successors and assigns.
Sincerely,
__________________________
Signature
__________________________
Name (Print or Type)
__________________________
Date
-3-
<PAGE>
[LOGO]
[LOGO] [LOGO]
VMT
VISTA MEDICAL TECHNOLOGIES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN SEE REVERSE FOR CERTAIN DEFINITIONS
THE CITY OF BOSTON, MA OR NEW YORK, NY AND A STATEMENT AS TO RIGHTS,
PREFERENCES, PRIVILEGES AND
RESTRICTIONS, IF ANY
This Certifies that CUSIP 928369 10 7
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.01 PAR VALUE PER
SHARE, OF
- -------------------------VISTA MEDICAL TECHNOLOGIES, INC.----------------------
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated
/S/ ILLEGIBLE /S/ ILLEGIBLE
CHIEF FINANCIAL OFFICER PRESIDENT AND
AND SECRETARY CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
BANKBOSTON, N.A.
TRANSFER AGENT AND REGISTRAR
BY
/S/ ILLEGIBLE
AUTHORIZED SIGNATURE
[SEAL]
<PAGE>
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge at
the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S><C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the --------- ----------
entireties (Cust) (Minor)
JT TEN - as joint tenants with under Uniform Gifts to Minors
right of survivorship Act
and not as tenants ------------------------
in common (State)
UNIF TRF MIN ACT - Custodian (until age )
---------- ----
(Cust)
under Uniform Transfers
-----------
(Minor)
to Minors Act --------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
----------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- ------------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-------------------------------
X
-------------------------------------------
X
-------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
--------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Financial Data" and to the use of our report dated January 30,
1997, except for Note 9, as to which the date is March 3, 1997, in Amendment
No. 3 to the Registration Statement (Form S-1) and the related Prospectus of
Vista Medical Technologies, Inc. for the registration of 4,025,000 shares of
its common stock.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
San Diego, California
June 24, 1997
