<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
------------ --------------
COMMISSION FILE NUMBER 0-22743
VISTA MEDICAL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3184035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5451 AVENIDA ENCINAS, SUITE A
CARLSBAD, CA 92008
(Address of principal executive offices)
(760) 603-9120
(Registrant's phone number, including area code)
------------------------------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS:
(1) Yes [X] No [ ]
(2) Yes [X] No [ ]
As of November 10, 1997 there were 13,389,663 shares of $.01 par value
common stock outstanding.
- - -----------------------------------------------------------------------
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VISTA MEDICAL TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets ................................... 3
Consolidated Statements of Operations ......................... 4
Consolidated Statements of Cash Flows ......................... 5
Notes to Consolidated Financial Statements .................... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations .............. 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .............................. 25
SIGNATURES ............................................................. 26
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Vista Medical Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . $ 6,690,458 $ 10,119,529
Short-term investments & securities
available for sale. . . . . . . . . . . . . . . . . 22,040,577 165,000
Accounts receivable . . . . . . . . . . . . . . . . 1,114,718 526,119
Inventories . . . . . . . . . . . . . . . . . . . . 3,832,790 1,212,825
Other current assets. . . . . . . . . . . . . . . . 330,044 136,400
------------ ------------
34,008,587 12,159,873
Total current assets
Property and equipment, net. . . . . . . . . . . . . . 2,769,634 1,082,103
Patents and other assets . . . . . . . . . . . . . . . 999,334 1,073,741
------------ ------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . $ 37,777,555 $ 14,315,717
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . $ 1,606,465 $ 607,639
Accrued compensation. . . . . . . . . . . . . . . . 433,624 226,543
Accrued liabilities . . . . . . . . . . . . . . . . 1,081,220 520,584
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . 3,121,309 1,354,766
Commitments
Stockholders' equity:
Convertible preferred stock, $.01 par value:
Authorized shares - 18,000,000
Issued and outstanding shares -
11,574,252 in 1996, no shares outstanding
September 1997. . . . . . . . . . . . . . . . . . 115,742
Common stock, $.01 par value:
Authorized shares - 25,000,000
Issued and outstanding shares - 538,224 in 1996
and 13,339,555 in September 1997. . . . . . . 133,396 5,382
Additional paid-in capital. . . . . . . . . . . . . 62,186,392 28,615,223
Unrealized gain/(loss) on investments . . . . . . . 2,352
Notes receivable from stockholders. . . . . . . . . (93,375) (93,375)
Deferred compensation . . . . . . . . . . . . . . . (1,959,248) (2,061,549)
Accumulated deficit . . . . . . . . . . . . . . . . (25,613,271) (13,620,472)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . 34,656,246 12,960,951
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY. . . . . . . . . . . . . . . . . . . . . . . . $ 37,777,555 $ 14,315,717
------------ ------------
------------ ------------
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes
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VISTA MEDICAL TECHNOLOGIES, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales. . . . . . . . . . . . . . . . . . . . $ 1,228,666 $ 573,336 $ 2,563,328 $ 1,512,913
Costs and expenses:
Cost of sales. . . . . . . . . . . . . . 1,547,175 595,753 3,138,103 1,269,469
Research and development . . . . . . . . 1,793,068 1,129,779 4,860,991 2,334,432
Sales and marketing. . . . . . . . . . . 1,493,546 483,892 3,195,445 1,273,067
General and administrative . . . . . . . 1,327,471 573,748 3,671,971 1,519,933
----------- ----------- ------------ -----------
Total cost and expenses. . . . . . . . . . . 6,161,260 2,783,172 14,866,510 6,396,901
----------- ----------- ------------ -----------
Loss from operations . . . . . . . . . . . . (4,932,594) (2,209,836) (12,303,182) (4,883,988)
License income/(expense) . . . . . . . . . . (249,993) (249,993)
Interest income. . . . . . . . . . . . . . . 416,615 26,979 560,375 64,835
----------- ----------- ------------ -----------
Net loss . . . . . . . . . . . . . . . . . . $(4,765,972) $(2,182,857) $(11,992,800) $(4,819,153)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Net loss per share . . . . . . . . $ (0.36) $ (0.25) $ (1.18) $ (0.56)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Shares used in computing
net loss per share. . . . . . . . . . . . . 13,286,890 8,626,898 10,197,491 8,626,898
</TABLE>
See accompanying notes
4
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VISTA MEDICAL TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30
-----------------------------------
1997 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . $(11,992,800) $(4,819,153)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization . . . . . . . . . . . 689,060 251,700
Issuance of stock for services rendered . . . . . . 20,010
Amortization of deferred compensation . . . . . . . 773,399
Acquired in-process research and development. . . .
Write-off of non recoverable patent costs. . . . . .
Minority interest in partnership. . . . . . . . . .
Common stock issued in exchange for
license agreement . . . . . . . . . . . . . . . . 249,993
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable . . . . . . . . . . . . . . (588,598) 277,709
Inventories . . . . . . . . . . . . . . . . . . (2,619,965) (634,548)
Other current assets. . . . . . . . . . . . . . (207,771) (126,700)
Accounts payable. . . . . . . . . . . . . . . . 998,827 (244,634)
Accrued compensation. . . . . . . . . . . . . . 207,081
Accrued liabilities . . . . . . . . . . . . . . 560,637 158,863
-------------- -------------
(11,910,127) (5,136,763)
Net cash flows used for operating activities
INVESTING ACTIVITIES
Purchase of short-term investments . . . . . . . . . . (21,859,097)
Purchase of property and equipment . . . . . . . . . . (2,302,185) (590,493)
--------------- -------------
Net cash flows used for investing activities. . . . . (24,161,282) (590,493)
FINANCING ACTIVITIES
Issuance of common stock . . . . . . . . . . . . . . . 32,642,338 13,313
Issuance of convertible preferred stock, net . . . . . 5,080,538
-------------- -------------
Net cash flows provided by financing activities . . . 32,642,338 5,093,851
Net (decrease) increase in cash and cash equivalents . (3,429,071) (633,405)
Cash and cash equivalents at beginning of period . . . 10,119,529 3,234,175
-------------- -------------
Cash and cash equivalents at end of period . . . . . . $6,690,458 $2,600,770
-------------- -------------
-------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . $ 196 $ 183
-------------- -------------
-------------- -------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Exercise of stock options for stockholder
notes receivable. . . . . . . . . . . . . . . . . . . $ $ 63,750
-------------- ------------
-------------- ------------
</TABLE>
See accompanying notes
5
<PAGE>
VISTA MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The Consolidated Financial Statements of Vista Medical Technologies, Inc.
(the "Company") included in the Company's Registration Statement on Form S-1
(No. 333-22985), including the related Prospectus dated July 2, 1997 (the
"Registration Statement"), contain additional information about the Company, its
operations, and its financial statements and accounting practices, and should be
read in conjunction with this quarterly report on Form 10-Q. These unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and with the instructions on Form 10-Q
and, therefore, certain information and footnote disclosures normally contained
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted.
The accompanying unaudited consolidated financial statements of the Company
reflect all adjustments of a normal recurring nature which are, in the opinion
of management, necessary for a fair presentation of the financial position,
results of operations and cash flows for all periods presented. The interim
financial information contained herein is not necessarily indicative of results
for any future interim periods or for the full fiscal year ending December 31,
1997.
2. Initial Public Offering
In July 1997, the Company completed an initial public offering ("IPO") of
4,000,000 shares of the Company's common stock, par value $.01 per share (the
"Common Stock") at a price of $9.00 per share, raising gross proceeds of $36.0
million before underwriters' commissions and expenses. In connection with the
IPO, an aggregate of 11,574,252 of the Company's previously issued Convertible
Preferred Stock, par value $.01 per share, was converted on a four-for-three
basis into an aggregate of 8,680,679 shares of Common Stock, par value $.01 per
share.
3. Computation of Net Loss Per Share
Net loss per share is computed using the weighted average number of common
shares and common stock equivalents outstanding. Common equivalent shares from
stock options and warrants are excluded from the computation when their effect
is antidilutive except that the Securities and Exchange Commission requires
common shares and common share equivalents issued during the twelve months prior
to the initial filing of a proposed public offering to be included in the
calculation as outstanding for all periods prior to the Company's IPO (using the
treasury stock method). The calculation also gives effect to the conversion of
all convertible preferred shares (using the if-converted method), which
automatically converted into common
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shares immediately prior to the completion of the Company's IPO.
4. New Accounting Standard
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
("Statement No. 128"), which supersedes APB Opinion No. 15. Statement No. 128
replaces the presentation of primary Earnings Per Share ("EPS") with "Basic EPS"
which includes no dilution and is based on weighted-average common shares
outstanding for the period. Companies with complex capital structures will also
be required to present "Diluted EPS" that reflects the potential dilution of
securities like employee stock options. Statement No. 128 is effective for
financial statements issued for periods ending after December 15, 1997. The
Company does not anticipate any impact on the calculation of EPS from the
adoption of Statement No. 128.
5. Inventories
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
Parts and supplies. . . . . . $1,228,528 $ 567,707
Work in process . . . . . . . 1,817,683 286,099
Finished goods. . . . . . . . 786,579 359,019
---------- ----------
$3,832,790 $1,212,825
---------- ----------
---------- ----------
7
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THIS QUARTERLY REPORT MAY CONTAIN PREDICTIONS, ESTIMATES AND OTHER
FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED BELOW AT "RISKS AND UNCERTAINTIES." WHILE THIS
OUTLOOK REPRESENTS MANAGEMENT'S CURRENT JUDGMENT ON THE FUTURE DIRECTION OF
THE BUSINESS, SUCH RISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM ANY FUTURE PERFORMANCE SUGGESTED BELOW. THE COMPANY
UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES ARISING
AFTER THE DATE HEREOF. THE FOLLOWING DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO
INCLUDED IN ITEM 1 OF THIS QUARTERLY REPORT ON FORM 10-Q AND THE REGISTRATION
STATEMENT.
Overview
The Company develops, manufactures and markets proprietary visualization
and information systems that enable minimally invasive surgical solutions in
cardiothoracic, head, neck and spine ("HNS") and other selected microsurgical
procedures. The Company also markets endoscopic cameras and related surgical
instruments and accessories and has generated minimal revenues from the sales
of these products since its formation in July 1993. The Company expects to
continue to incur substantial losses for at least the next 15 months. As of
September 30, 1997, the Company's accumulated deficit was approximately $25.6
million.
Results of Operations
Sales. The Company had revenues from product sales of $1,229,000 and
$2,563,000 for the three- and nine-months ended September 30, 1997,
respectively, compared to $573,000 and $1,513,000 for the same periods in
1996. The increase in sales for the three- and nine-month periods was
primarily due to sales of the Company's Series 8000 Advanced Visualization
and Information ("Series 8000") product for minimally invasive cardiac
surgery launched during the third quarter, revenues associated with a line of
cardiac instruments and sutures for which the Company acquired distribution
rights in the second half of 1996, and increased original equipment
manufacturer ("OEM") sales of the Company's endoscopic cameras compared to
the year-earlier period.
Cost of Sales. The Company's cost of sales were $1,547,000 and
$3,138,000 for the three- and nine-months ended September 30, 1997,
respectively, and $596,000 and $1,269,000 for the three- and nine-months
ended September 30, 1996, respectively, an increase of $951,000 and
$1,869,000, respectively. The increase for both the three- and nine-month
periods was primarily due to costs corresponding to the growth in revenues
and manufacturing scale-up expenses the Company incurred to accommodate new
product launches targeted at cardiothoracic and HNS markets, including the
Series 8000 product. The Company expects to incur additional expenses
related to manufacturing scale-up associated with these product launches
during the fourth quarter of 1997.
8
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Research and Development Expenses. Research and development expenses
increased to $1,793,000 and $4,861,000 for the three- and nine-months ended
September 30, 1997, respectively, from $1,130,000 and $2,334,000 for the
corresponding periods in 1996. These increases in research and development
expenses for both the three- and nine-month periods were attributable to
continued development and expansion of the Company's research and development
organization focused on development, prototyping and evaluation of new
products and consisted primarily of increases in staffing and related supply
and occupancy costs. Contracted research and development effort also
contributed to the increase. The Company believes that a significant level
of investment for product development and evaluation is necessary to maintain
its technological advantage and, accordingly, anticipates that it will
continue to increase its spending in research and development on an absolute
dollar basis.
Sales and Marketing Expenses. Sales and marketing expenses were
$1,494,000 and $3,195,000 for the three- and nine-months ended September 30,
1997, respectively, and $484,000 and $1,273,000 for the same periods in 1996.
These increases in sales and marketing expenses were attributable to the
Company's development and expansion of its sales force, increased marketing
efforts associated with commercialization of new products, and commissions
and other expenses related to revenues associated with a line of cardiac
instruments and sutures for which the Company acquired distribution rights in
the second half of 1996. The Company expects that such expenses will
continue to increase on an absolute dollar basis in the future as it expands
its sales and marketing efforts in connection with commercialization of new
products.
General and Administrative Expenses. The Company's general and
administrative expenses increased to $1,327,000 and $3,672,000 for three -and
nine-months ended September 30, 1997, respectively from $574,000 and
$1,520,000 for the corresponding periods in 1996. These increases were
primarily due to increases in staffing and related expenses associated with
the continued development of the Company's administrative infrastructure,
amortization of deferred compensation in connection with the grant of certain
stock options in 1996 and early 1997, increases in legal and professional
fees and costs associated with being a public company. The Company expects
its general and administrative expenses to continue to increase in the future
as it increases its administrative staff and systems to manage the growth of
the Company and as a result of increases in expenses associated with being a
public company.
License Expense. The Company had license expense totaling $250,000 in
both the three- and nine months ended September 30, 1997 and had no such
charges for the corresponding periods in 1996. These expenses related to
software, documentation and trademarks the Company gained exclusive worldwide
rights to from GDE Systems, Inc. in February 1997. The Company is required
to pay future minimum royalties of $250,000 payable by December 31, 1998.
9
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Interest Income. The Company had net interest income of $417,000 and
$560,000 for the three- and nine-month periods ended September 30, 1997,
respectively, as compared to $27,000 and $65,000 for the corresponding
periods in 1996. These increases for both the three- and nine-month periods
were due primarily to increasing average investment balances of the Company's
excess cash following the Company's IPO.
Liquidity and Capital Resources
The Company completed its IPO in July 1997, raising approximately $32.8
million net of offering costs. Prior to the IPO, the Company satisfied its
liquidity requirements from the private sale of common and preferred stock,
through advances from a related party, and from the proceeds from licensing
certain of the Company's technology.
Net cash used in operating activities for the nine months ended September
30, 1997 was $11,910,000 compared to net cash used of $5,137,000 for the
corresponding nine-month period in 1996. The increase in net cash used in
operating activities was primarily attributable to increasing net losses
during the 1997 period.
Net cash used in investing activities was $24,161,000 for the nine months
ended September 30, 1997 compared to $590,000 for the same period in 1996.
The increase is primarily attributable to the purchase of short-term
investments and the purchase of property and equipment related to increased
staffing, expansion of manufacturing capabilities, and marketing
demonstrations.
Net cash provided by financing activities was $32,642,000 for the nine
months ended September 30, 1997 compared to $5,094,000 for the same period in
1996. The net cash provided by financing activities in 1997 was primarily
attributable to proceeds from the Company's IPO, while the net cash provided
in 1996 was primarily attributable to the private sale of preferred stock.
In October 1997, the Company completed a $10.0 million Loan and Security
Agreement ("Loan Agreement") to finance the placement with customers of its
Series 8000 product on a pay per procedure basis rather than through an
upfront capital payment.
The Company anticipates that the net proceeds from the IPO completed in
July 1997 and the interest income thereon, together with borrowings available
under the $10.0 million Loan Agreement, existing cash, cash equivalents and
short-term investments, and product revenues, will be sufficient to fund its
operations through 1998.
Risks and Uncertainties
THE FOLLOWING ARE AMONG THE FACTORS THAT SHOULD ALSO BE CONSIDERED
CAREFULLY IN EVALUATING VISTA MEDICAL TECHNOLOGIES AND ITS BUSINESS.
10
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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 minimally invasive
microsurgery ("MIM") solutions for applications in cardiothoracic and other
selected microsurgical procedures and in manufacturing and marketing limited
quantities of camera systems to customers as an OEM. As of September 30,
1997, the Company had incurred cumulative net losses of $25.6 million since
its formation. The Company expects to incur substantial and increasing
operating losses before it will reach profitability, if at all. Furthermore,
the Company expects its expenses in all categories to increase as its
marketing and other business activities expand. There can be no assurance
that the Company will achieve or sustain profitability in the future. Failure
to achieve significant commercial revenues or profitability would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the following: the extent to which the Company's
products gain market acceptance; the progress and scope of product
evaluations; the timing and costs of filing future regulatory submissions;
the timing and costs required to receive both domestic and international
governmental approvals; the timing and costs of product introductions; the
extent of the Company's ongoing research and development programs; the costs
of training physicians to become proficient in the use of the Company's
products and procedures; and the costs of developing marketing and
distribution capabilities. The Company anticipates that the net proceeds from
the IPO completed in July 1997 and the interest income thereon, together with
borrowings available under the $10.0 million Loan Agreement, existing cash,
cash equivalents and short-term investments, and product revenues, will be
sufficient to fund its operations through 1998. If, at or prior to such time,
the net proceeds of the IPO, together with available funds and cash generated
from operations, are insufficient to satisfy the Company's cash needs, the
Company may require additional financing. There can be no assurance that such
additional financing will be available on terms acceptable to the Company, if
at all. The Company's inability to fund its capital and operational
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE UPON AND UNCERTAINTY REGARDING COMMERCIALIZATION OF SERIES
8000. The Series 8000 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 regulatory clearance or approval is also 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 the Company's development efforts for the Series
8000 will be successful or that the Company's
11
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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.
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 the clinical
and laboratory procedures performed to date, there can be no assurance that
visualization and information system enhancements incorporated, or to be
incorporated, in the Series 8000 will prove suitable for use by a substantial
number of cardiothoracic surgeons. If the Series 8000 proves unsuitable for a
number of surgeons to use, the potential markets and applications for the
Company's products would be significantly limited. Widespread use of the
Series 8000 will require training of a large number of surgeons, and the time
required to institute a training program and to train such surgeons could
adversely affect market acceptance. Failure to successfully commercialize the
Series 8000 would have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTY OF CLINICAL ADOPTION OF MINIMALLY INVASIVE MICROSURGICAL
PROCEDURES. The Company's near-term products are being developed in order to
enable cardiothoracic and HNS surgeons to perform MIM surgical procedures
using their existing skills coupled with training and complementary equipment
being developed by other companies. Accordingly, the Company's success is
dependent upon acceptance of these procedures by the medical community as a
reliable, safe and cost effective alternative to existing treatments. To
date, MIM surgical procedures have only been performed on a very limited
basis by a small number of highly skilled surgeons. The Company is unable to
predict how quickly, if at all, MIM surgical procedures will be adopted by
the medical community or, if they are adopted, the number of procedures that
will be performed.
Most patients with cardiovascular disease first consult with a
cardiologist, who then may treat the patient with pharmaceuticals or
non-surgical interventions, such as angioplasty and intravascular stents, or
refer the patient to a cardiac surgeon for open-chest coronary artery bypass
graft ("CABG") surgery. Cardiologists may not recommend MIM procedures until
such time, if at all, as such procedures can successfully be demonstrated to
be as safe and cost-effective as other accepted treatments. In addition,
cardiac surgeons may choose not to recommend MIM procedures until such time,
if at all, as such procedures are proven to be as efficacious as
conventional, open-chest surgery methods, which have become widely adopted by
cardiac surgeons since the initial use of such surgery in the mid-1950s.
Even if the clinical efficacy of MIM procedures is established in cardiac
and other specialties, surgeons, specialists and other physicians may choose
not to recommend the procedures for any number of other reasons. Clinical
adoption will depend, for example, upon the Company's ability to facilitate
training of surgeons to perform MIM surgery and the willingness of such
surgeons to perform such procedures. Physicians may similarly elect not to
recommend the MIM procedure based on possible unavailability of acceptable
reimbursement from health
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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.
LACK OF COMMERCIAL MANUFACTURING EXPERIENCE; SCALE-UP RISK. The Company
lacks experience in manufacturing the products under development, including
the Series 8000, in the quantities that would be necessary for the Company to
achieve significant commercial sales. The manufacture of the Company's
products primarily involves the assembly of a number of sub-assemblies and
components. Companies such as the Company often encounter difficulties in
scaling up manufacturing of products, which difficulties could include
problems involving quality control and assurance, component and service
availability, adequacy of control policies and procedures, lack of qualified
personnel, compliance with U.S. Food and Drug Administration ("FDA")
regulations and the need for further FDA approval of new manufacturing
processes and facilities and other production constraints. There can be no
assurance that reliable, high-volume manufacturing can be established or
maintained at commercially reasonable costs. The Company will also require
additional manufacturing facilities as production volumes increase;
acquisition of new manufacturing facilities will likely involve relocation.
Any of these factors could have a material adverse effect on the Company's
business, financial condition and results of operation.
The Company has considered and will continue to consider as appropriate,
the internal manufacture of sub-assemblies currently provided by third party
subcontractors, as well as the implementation of new production processes.
There can be no assurance that manufacturing yields or costs will not be
adversely affected by the transition to in-house production or to new
production processes when such efforts are undertaken, or that FDA Good
Manufacturing Practices ("GMP") requirements can be met and that such a
transition would not materially adversely affect the Company's business,
financial condition and results of operations.
LIMITED SALES, MARKETING, DISTRIBUTION AND TECHNICAL SUPPORT EXPERIENCE.
The Company has organized its sales and marketing efforts by the Company's
CardioThoracic Surgery and HNS Microsurgery divisions. The Company currently
markets its cardiothoracic products in North America through six direct
(Company employee) sales representatives and 24 independent sales
representatives. The Company is in the process of hiring up to six additional
direct sales representatives to support the introduction of its Series 8000
by the CardioThoracic Surgery division. A similar combination of direct and
independent sales representatives will market the products of the Company's
HNS Microsurgery division. Establishment of a sales force
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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.
POTENTIAL COMPONENT SHORTAGES; DEPENDENCE ON SOLE SOURCES OF SUPPLY. The
Company uses or relies on certain components and services used in its systems
that are provided by sole source suppliers. The manufacture of the Company's
products in larger commercial quantities will require a substantial increase
in component supplies and will likely necessitate the replacement of current
suppliers or the addition of new suppliers. The qualification of additional
or replacement vendors for certain components or services is a lengthy
process. In addition, the substitution of replacement vendors may entail
re-engineering time and cost and could delay the supply of the Company's
products.
The Company expects to manufacture its products based on forecasted
product orders and intends to purchase subassemblies and components prior to
receipt of purchase orders from customers. Lead times for materials and
components ordered by the Company vary significantly and depend on factors
such as the business practices of the specific supplier, contract terms and
general demand for a component at a given time. Certain components used in
the Company's products have long lead times. As a result, there is a risk of
excess or inadequate inventory if orders do not match forecasts.
Any significant supply interruption, or inventory shortage or overage,
would have a material adverse effect on the Company's ability to manufacture
the Company's products and, therefore, a material adverse effect on its
business, financial condition and results of operations.
NO ASSURANCE OF REGULATORY CLEARANCE OR APPROVAL; SIGNIFICANT DOMESTIC
AND INTERNATIONAL REGULATION. The manufacture and sale of medical devices
intended for commercial distribution are subject to extensive governmental
regulation in the United States. Medical devices are regulated in the United
States primarily by the FDA and, to a lesser extent, by certain state
agencies. Generally, medical devices require pre-market clearance or
pre-market approval prior to commercial distribution. In addition, certain
material changes or modifications to, and changes in intended use of, medical
devices also are subject to FDA review and clearance or approval. The FDA
regulates the research, testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, promotion and distribution of medical
devices in the United States and the export of unapproved medical devices
from the United States to other countries. Noncompliance with applicable
requirements can result in failure of the government to grant pre-market
clearance or approval for devices, withdrawal or suspension of approval,
total or
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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
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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. 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
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the Company's business, financial condition and results of operations.
RAPID TECHNOLOGICAL CHANGE; SIGNIFICANT COMPETITION. The medical device
market is characterized by intensive development efforts and rapidly
advancing technology. The future success of the Company will depend, in large
part, upon its ability to anticipate and keep pace with advancing technology
and competing innovations. There can be no assurance, however, that the
Company will be successful in identifying, developing and marketing new
products or enhancing its existing products.
The Company believes that a number of large companies, with significantly
greater financial, manufacturing, marketing, distribution and technical
resources and experience than that of the Company, are focusing on the
development of visualization products for MIM. Several companies are
currently developing and marketing visualization products for MIM which could
be applied to cardiac surgery. There can be no assurance that the Company
will be successful in competing with any such companies.
Technological advances with other therapies for heart disease such as
drugs, interventional cardiology procedures or future innovations in cardiac
surgery techniques could make such other therapies more effective or lower in
cost than MIM surgical procedures and could render MIM cardiac surgery
obsolete.
There can be no assurance that physicians will use MIM surgical
procedures to replace or supplement established treatments, such as
conventional open-chest heart surgery, angioplasty or intravascular stents,
or that MIM cardiac surgery will be competitive with current or future
technologies. There can be no assurance that the Company will be able to
compete successfully against current and future competitors. Failure to do so
would have a material adverse effect upon the Company's business, financial
condition and results of operations.
RELIANCE ON STRATEGIC RELATIONSHIPS. The Company intends to pursue
strategic relationships with corporations and research institutions with
respect to the research, development, regulatory approval and marketing of
certain of its products. The Company's future success may depend, in part, on
its relationships with such partners, including, for example, the Company's
relationships with Medtronic Inc. and Heartport, Inc. The Company will have
limited or no control over the resources that any partner may devote to the
Company's products, or over its partners' development and marketing efforts.
There can be no assurance that any of the Company's present or future
collaborative partners will perform their obligations as expected or will
devote sufficient resources to the development or marketing of the Company's
potential products. Any parallel development by a partner of alternate
technologies, preclusion from entering into competitive arrangements, failure
to obtain timely regulatory approvals, premature termination of a
collaborative agreement or failure by a partner to devote sufficient
resources to the development and commercialization of the Company's products
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company anticipates that these
partners may have the unilateral right to terminate any such relationship
without significant penalty. There can be no assurance that the Company will
be
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successful in establishing or maintaining any such strategic relationships in
the future or that any such relationship will be successful.
FLUCTUATIONS IN OPERATING RESULTS. Results of operations of the Company
may vary significantly from quarter to quarter depending upon numerous
factors, including the following: timing and results of product evaluations;
delays associated with the FDA and other regulatory approval processes;
demand for and utilization of the Company's products; changes in pricing
policies by the Company or its competitors; changes in third-party payment
guidelines; the number, timing and significance of product enhancements and
new product announcements by the Company and its competitors; the ability of
the Company to develop, introduce and market new and enhanced versions of the
Company's products on a timely basis; customer order deferrals in
anticipation of enhancements or new products offered by the Company or its
competitors; product quality problems; personnel changes; and the level of
international sales.
UNCERTAINTY RELATING TO THIRD-PARTY PAYMENTS. The Company expects that
sales volumes and prices of the Company's products will be directly
influenced by the profitability to, or cost-effectiveness for, hospitals of
the procedures in which the Company's products are involved. Profitability
levels are directly related to the level of payments for these procedures,
either by Medicare or private insurance companies, and it is a continuing
trend in U.S. health care for such payments to be under continual scrutiny
and downward pressure. The Company expects that its products typically will
be used by hospitals and surgical centers, which bill various third-party
payors, such as governmental programs and private insurance plans, for the
health care services provided to their patients. Third-party payors carefully
review and increasingly challenge the prices charged for medical products and
services or negotiate a flat rate fee in advance. Payment rates from private
companies also vary depending on the procedure performed, the third-party
payor, the insurance plan and other factors. Medicare compensates hospitals
at a prospectively determined fixed amount for the costs associated with an
in-patient hospitalization based on the patient's discharge diagnosis and
compensates physicians at a prospectively determined fixed amount based on
the procedure performed, regardless of the actual costs incurred by the
hospital or physician in furnishing the care and unrelated to the specific
devices or systems used in that procedure. Medicare and other third-party
payors are increasingly scrutinizing whether to cover new products and the
level of payment for new procedures. The flat fee reimbursement trend is
causing hospitals to control costs strictly in the context of a managed care
system in which health care providers contract to provide comprehensive
health care for a fixed cost per person. The Company is unable to predict
what changes will be made in the reimbursement methods utilized by
third-party health care payors. The Company could be adversely affected by
changes in payment policies of government or private health care payors,
particularly to the extent any such changes affect payment for the procedure
in which the Company's products are intended to be used.
If the Company obtains the necessary foreign regulatory registrations or
approvals, market acceptance of the Company's products in international
markets would be dependent, in part, upon the acceptance by the prevailing
health care financing system in each country. Health
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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.
RISK RELATING TO INTERNATIONAL OPERATIONS. In the event the Company is
successful in developing its products, manufacturing them in commercial
quantities and receiving necessary FDA and foreign regulatory registrations
or approvals, the Company plans to market its products in international
markets, either on its own or with its strategic partners. The Company has
limited experience in marketing its products overseas. Changes in overseas
economic conditions, currency exchange rates, foreign tax laws or tariffs or
other trade regulations could have a material adverse effect on the Company's
business, financial condition and results of operations. The anticipated
international nature of the Company's business is also expected to subject it
and its representatives, agents and distributors to laws and regulations of
the foreign jurisdictions in which they operate or in which the Company's
products under development are sold. The regulation of medical devices in a
number of such jurisdictions, particularly in the European Union, continues
to develop and there can be no assurance that new laws or regulations will
not have an adverse effect on the Company's business, financial condition and
results of operations. In addition, the laws of certain foreign countries do
not protect the Company's intellectual property rights to the same extent as
do the laws of the United States.
PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE. The Company faces an
inherent and significant business risk of exposure to product liability
claims in the event that the use of its products results in personal injury
or death and there can be no assurance that the Company will not experience
any material product liability losses in the future. Also, in the event that
any of the Company's products prove to be defective, the Company may be
required to recall or redesign such products. The Company's current product
liability insurance coverage limit is $10.0 million per occurrence and 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
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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 October 30, 1997, the Company had exclusive ownership rights to seven
issued United States patents, nine pending United States patent applications
and eight pending foreign applications covering various aspects of its
devices and systems. Furthermore, as of the same date, the Company had
exclusive rights in the medical field to four issued United States patents,
one pending United States patent application, three issued foreign patents
and nine pending foreign applications covering various aspects of its devices
and systems. The Company intends to file additional patent applications in
the future. The failure of such patents to issue could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's future success will depend, in part, on its ability to
continue to develop patentable products, enforce its patents and obtain
patent protection for its products both in the United States and in other
countries. The patent positions of medical device companies, including the
Company, however, are generally uncertain and involve complex legal and
factual questions. There can be no assurance that patents will issue from any
patent applications owned by or licensed to the Company or that, if patents
do issue, the claims allowed will be sufficiently broad to protect the
Company's technology. In addition, there can be no assurance that any issued
patents owned by or licensed to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will
provide competitive advantages to the Company.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights.
Litigation, which would result in substantial expense to the Company, may be
necessary to enforce any patents issued or licensed to the Company and/or to
determine the scope and validity of proprietary rights of third parties or
whether the Company's products, processes or procedures infringe any such
third-party proprietary rights. The Company may also have to participate in
interference proceedings declared by the United States Patent and Trademark
Office, which could result in substantial expense to the Company, to
determine the priority of inventions covered by the Company's issued United
States patents or pending patent applications. Furthermore, the Company may
have to participate at substantial cost in International Trade Commission
proceedings to enjoin importation of products which would compete unfairly
with products of the Company. Any adverse outcome of any patent litigation
(including interference proceedings) could subject the
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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 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
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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.
The Company has in-licensed certain aspects of its technology. In
September 1995, Mr. H. McKinley and McKinley Optics, Inc. (collectively,
"McKinley") granted to the Company a perpetual, exclusive, worldwide license
in the medical field to make, have made, modify, use, lease, market, sell and
otherwise distribute certain endoscopes and other medical products
incorporating a stereo objective lens and/or a relay lens configuration.
Under the terms of this license agreement, Vista Medical is obligated to pay
McKinley an annual maintenance royalty, additional royalties upon the sale of
certain numbers of systems incorporating the McKinley technology and
royalties on net sales of products incorporating the McKinley technology. The
exclusive license granted under this agreement becomes a non-exclusive
license (or, under certain circumstances, the license terminates) in the
event Vista Medical fails to pay any royalties following receipt of notice of
such failure to pay. In addition, Vista Medical has the right to terminate
the agreement with limited notice.
In June 1996, Fuji Film Co. and Fuji Photo Optical Co., Ltd.
(collectively, "Fuji") granted to the Company a non-exclusive license to
certain optical zoom technology for use in endoscopes. Vista Medical is
obligated to pay royalties on net sales of products in the United States
which incorporate Fuji's technology. Fuji may terminate the agreement if
Vista Medical does not cure any violation of the agreement within a limited
period of time. Failure of the Company to retain rights to these technologies
could have a material, adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON KEY PERSONNEL AND ADVISORS. The Company's future business
and operating results depend in significant part upon the continued
contributions of its key technical and senior management personnel, many of
whom would be difficult to replace and certain of whom perform important
functions for the Company beyond those functions suggested by their
respective job titles or descriptions. The Company's business and future
operating results also depend in significant part upon its ability to attract
and retain qualified management, manufacturing, technical, marketing and
sales and support personnel for its operations. The Company has not entered
into any employment contracts or arrangements with any of its employees.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting or retaining such personnel. The
loss of any key employee, the failure of any key employee to perform in his
or her current position or the Company's inability to attract and retain
skilled employees, as needed, could materially adversely affect the Company's
business, financial condition and results of operations.
The Company has established two Clinical Advisory Boards made up of leading
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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 breached. In addition,
there can be no assurance that any of such agreements will be renewed upon
termination.
NEED TO MANAGE A CHANGING BUSINESS. In order to compete effectively
against current and future competitors, prepare additional products for
potential commercialization and develop future products, the Company believes
that it must continue to expand its operations, particularly in the areas of
development and manufacturing. If the Company were to experience significant
growth in the future, such growth would likely result in new and increased
responsibilities for management personnel and place significant strain upon
the Company's management, operating and financial systems and resources. To
accommodate such growth and compete effectively, the Company must continue to
implement and improve information systems, procedures and controls, and to
expand, train, motivate and manage its work force. The Company is in the
final stages of implementing an integrated financial, manufacturing and
inventory information system. Implementing such a system can be
time-consuming and expensive and requires significant management resources.
There can be no assurance that such system will be implemented on a timely
basis. All of the foregoing demands will require the addition of new
management personnel. The Company's future success will depend to a
significant extent on the ability of its current and future management
personnel to operate effectively, both independently and as a group. There
can be no assurance that the Company's personnel, systems, procedures and
controls will be adequate to support the Company's future operations. Any
failure to implement and improve the Company's operational, financial and
management systems or to expand, train, motivate or manage employees could
have a material adverse effect on the Company's business, financial condition
and results of operations.
POTENTIAL VOLATILITY OF STOCK PRICE. The market prices and trading
volumes for securities of emerging companies, like the Company, have
historically been highly volatile and have experienced significant
fluctuations unrelated to the operating performance of such companies. The
market price of the shares of Common Stock is likely to be highly volatile
and may be significantly affected by factors such as actual or anticipated
fluctuations in the Company's operating results, changes in financial
estimates by securities analysts, announcements of technological innovations,
new products or new contracts by the Company or its competitors, regulatory
announcements, developments with respect to patents or proprietary rights,
conditions and trends in the medical device and other technology industries,
adoption of new accounting standards affecting the medical device industry,
general market conditions and
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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.
HAZARDOUS MATERIALS. The Company's research and development may involve
the controlled use of hazardous materials and chemicals. Although the Company
believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any resultant damages, and any such
liability could exceed the resources of the Company. The Company may incur
substantial cost to comply with environmental regulations.
NO DIVIDENDS. The Company currently intends to retain any future
earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF SECOND
RESTATED CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW. The
Company's Board of Directors has the authority to issue up to 5,000,000
shares of preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting and conversion rights of such
shares, without any further vote or action by the Company's stockholders. The
rights of the holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be
issued in the future. The issuance of preferred stock could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company.
In addition, the Company's Second Restated Certificate of Incorporation
provides for a classified Board of Directors such that approximately
one-third of the members of the Company's Board of Directors are elected at
each annual meeting of stockholders. Such classification of the Company's
Board of Directors may have the effect of delaying, deferring or discouraging
changes in control of the Company. Making more difficult or discouraging a
change in control of the Company may adversely affect the market price of the
Common Stock.
24
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
10.1 Third Amendment to Lease between the Registrant and MAT Realty
Trust dated September 1, 1997
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
B) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three
months ended September 30, 1997.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VISTA MEDICAL TECHNOLOGIES, INC.
Date: November 13, 1997 /s/ JOHN R. LYON
-------------------------------------
John R. Lyon
President, Chief Executive Officer and
Director
Date: November 13, 1997 /s/ ROBERT J. DE VAERE
--------------------------------------
Robert J. De Vaere
Vice President of Finance & Administration
& Chief Financial Officer
(Principal financial and accounting officer)
26
<PAGE>
EXHIBIT 10.1
VISTA MEDICAL TECHNOLOGIES, INC.
THIRD AMENDMENT TO LEASE
--------------------------------
This Third Amendment to Lease (the "Amendment") is made as of this 1st
day of September, 1997, by and between Robert F. Tambone, as Trustee of MAT
Realty Trust, u/d/t dated June 4, 1986 and recorded with the Worcester County
Registry of Deeds in Book 9569, Page 286 (the "Landlord") and VISTA Medical
Technologies, Inc., a Delaware corporation, successor in interest to OKTAS, a
Massachusetts general partnership of which OKTAS, Inc., a Massachusetts
corporation and VISTA Medical Technologies, Inc., a California corporation
were the sole general partners (the "Tenant").
Reference is hereby made to a certain lease (as amended, the "Lease")
dated as of April 14, 1994 by and between Landlord and Tenant; a certain
First Amendment to Lease dated as of March 1, 1996 (the "First Amendment"),
and a certain Second Amendment to Lease dated as of October 28, 1996 (the
"Second Amendment"), relating to certain space in the building located at 134
Flanders Road, Westborough, Massachusetts. The Guaranty of Kaiser Aerospace
and Electronics Corporation, a Nevada corporation, remains with respect to
the obligations arising from the 8,733 square feet originally leased under
the Lease (the "Original Premises"), and the obligations of Tenant under the
First Amendment are secured by a security deposit in lieu of a guaranty.
Capitalized terms used herein and not otherwise defined shall have the
meanings set forth in the Lease.
WHEREAS, Landlord and Tenant desire to add 4,454 rentable square feet of
space on the first floor of the Building (the "Third Amendment Additional
Premises") to the Premises leased under the Lease, the First Amendment, and
the Second Amendment, and to amend the Lease in the manner hereinafter
provided;
NOW, THEREFORE, in consideration of the agreements set forth herein and
for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, Landlord and Tenant hereby amend the Lease as
of September 1, 1997 (the "Effective Date") as follows:
1. In addition to the Base Rent described in Section 1.1 of the Lease,
and in addition to the Base Rent described in the First Amendment, and Second
Amendment, the following is inserted therewith and added thereto:
"Third Amendment Additional Premises Base Rent: The sums set forth
below, as the same may be adjusted and/or abated pursuant to this Lease:
(a) Forty Eight Thousand Nine Hundred Ninety Four Dollars ($48,994.00)
annually ($4,082.83 monthly) for the first year of the Term, i.e.
through August 31, 1998 ($11.00 per square foot of Premises Rentable
Area).
1
<PAGE>
(b) Fifty One Thousand Two Hundred Twenty One Dollars ($51,221.00)
annually ($4,268.42 monthly) for the second year of the Term, i.e.
through August 31, 1999 ($11.50 per square foot of the Premises
Rentable Area).
(c) Fifty Three Thousand Four Hundred Forty Eight Dollars ($53,448.00)
annually ($4,454.00 monthly) for the third and fourth years of the
Term and through the expiration of the Term, i.e. through October 31,
2001 ($12.00 per square foot of the Premises Rentable Area).
The Base Rent for the Third Amendment Additional Premises shall
commence to be due and payable on the Effective Date."
2. The definition of "Premises" contained in Section 1.1 of the Lease
is hereby deleted and the following is inserted therefor:
"22,524 square fee until the Effective Date and, then, 26,978 square
feet (the "Premises Rentable Area") of the Building which is agreed to
be as shown on EXHIBIT FP annexed hereto."
3. The definition of "Tenant's Proportionate Share" contained in
Section 1.1 of the Lease is hereby deleted and the following is inserted
therefor:
"The quotient derived by dividing the Premises Rentable Area by the
Building Rentable Area which as of the execution date of this Lease
Amendment is 39.52% and, as of the Effective Date, will become
47.33%."
4. EXHIBIT FP of the Lease is hereby deleted and the plan attached
hereto as EXHIBIT FP is hereby incorporated into the Lease as EXHIBIT FP.
5. The Term for the Third Amendment Additional Premises shall extend
from the Effective Date through October 31, 2001. The Term for the Original
Premises and the Additional Premises leased pursuant to the Lease, the First
Amendment, and the Second Amendment, shall be unchanged by this Third
Amendment.
6. Except as otherwise expressly stated herein, the Additional Premises
shall be delivered to Tenant by Landlord in its "AS IS" condition on the
Effective Date and thereupon shall become part of the Premises. Landlord
shall not be obligated to install any tenant improvements. Any work done by
Tenant in the Additional Premises shall be done in full compliance with all
applicable laws and regulations, with Section 5.2 of the Lease, and with all
other applicable provisions of the Lease.
7. Landlord and Tenant agree that Tenant shall be obligated to pay, in
the manner specified in Section 8.2 of the Lease, a management fee of three
(3%) percent of Base Rent
2
<PAGE>
relative to the Premises, the Additional Premises, the Second Amendment
Additional Premises, and the Third Amendment Additional Premises.
Except as expressly set forth herein, the Lease shall remain unmodified
and in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have caused this Amendment to be
duly executed, under seal, by persons hereunto duly authorized, in multiple
copies, each to be considered an original hereof, as of the date first set
forth above.
LANDLORD:
/s/ ROBERT F. TAMBONE, TRUSTEE
--------------------------------------
Robert F. Tambone, Trustee as
aforesaid and not individually
TENANT:
VISTA MEDICAL TECHNOLOGIES, INC., a
Delaware corporation
By: /s/ JOHN LYON
------------------------------------
Name: John Lyon
Title: President
3
<PAGE>
EXHIBIT 11.1
VISTA MEDICAL TECHNOLOGIES, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ --------------------------
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Loss . . . . . . . . . . . . $4,765,972 $2,182,857 $11,992,800 $4,819,153
Weighted Average Common
Shares Outstanding . . . . . . 4,606,211 148,875 1,651,587 148,875
Adjustments to Reflect
SEC Requirements (SAB 83) . . -0- 2,291,632 1,526,227 2,291,632
Assumed Conversion of
Convertible Preferred . . . . 8,680,679 6,186,391 7,019,677 6,186,391
---------- --------- ---------- ---------
Adjusted Shares Outstanding. . . 13,286,890 8,626,898 10,197,491 8,626,898
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Net Loss Per Share . . . . . . . $ (0.36) $ (0.25) $ (1.18) $ (0.56)
</TABLE>
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
YEAR ENDED DECEMBER 31, 1996 AND AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN IT'S ENTIRETY BY REFERENCE TO
SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,690,458
<SECURITIES> 22,040,577
<RECEIVABLES> 1,114,718
<ALLOWANCES> 0
<INVENTORY> 3,832,790
<CURRENT-ASSETS> 34,008,587
<PP&E> 3,771,967
<DEPRECIATION> 1,002,334
<TOTAL-ASSETS> 37,777,555
<CURRENT-LIABILITIES> 3,121,309
<BONDS> 0
0
0
<COMMON> 133,396
<OTHER-SE> 34,522,850
<TOTAL-LIABILITY-AND-EQUITY> 37,777,555
<SALES> 2,563,328
<TOTAL-REVENUES> 3,123,703
<CGS> 3,138,103
<TOTAL-COSTS> 3,138,103
<OTHER-EXPENSES> 11,978,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,992,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,992,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,992,800)
<EPS-PRIMARY> (1.18)
<EPS-DILUTED> (1.18)
</TABLE>
