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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________.
COMMISSION FILE NUMBER 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 May 8, 1998 there were 13,457,367 shares of $.01 par value common stock
outstanding.
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VISTA MEDICAL TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<C> <S> <C>
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 . . . . . . . . . 26
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Vista Medical Technologies, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 5,998,284 $ 7,328,502
Short-term investments & securities available for sale. . 14,249,326 16,784,345
Accounts receivable . . . . . . . . . . . . . . . . . . . 1,778,349 521,616
Inventories . . . . . . . . . . . . . . . . . . . . . . . 3,985,918 3,344,967
Other current assets. . . . . . . . . . . . . . . . . . . 208,848 261,864
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . 26,220,725 28,241,294
Property and equipment, net. . . . . . . . . . . . . . . . . 2,974,933 3,327,283
Patents and other assets . . . . . . . . . . . . . . . . . . 439,288 561,873
------------ ------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 29,635,006 $ 32,130,450
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . $ 1,802,297 $ 1,217,110
Accrued compensation. . . . . . . . . . . . . . . . . . . 398,203 516,743
Accrued liabilities . . . . . . . . . . . . . . . . . . . 1,474,405 665,285
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . 3,674,905 2,399,138
Commitments
Stockholders' equity:. . . . . . . . . . . . . . . . . . . .
Convertible preferred stock, $.01 par value:
Authorized shares - 5,000,000. . . . . . . . . . . . .
Issued and outstanding shares - no shares outstanding
on December 31, 1997 or March 31, 1998 . . . . . . . . -- --
Common stock, $.01 par value:
Authorized shares - 35,000,000 . . . . . . . . . . . .
Issued and outstanding shares - 13,407,038 on
December 31, 1997 and 13,447,567 on March 31, 1998 . 134,476 134,071
Additional paid-in capital. . . . . . . . . . . . . . . . 62,891,085 62,531,513
Notes receivable from stockholders. . . . . . . . . . . . (78,375) (78,375)
Deferred compensation . . . . . . . . . . . . . . . . . . (1,800,116) (1,942,074)
Unrealized gains/loss on investments. . . . . . . . . . . (522,253) (416,313)
Accumulated deficit . . . . . . . . . . . . . . . . . . . (34,664,716) (30,497,510)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . 25,960,101 29,731,312
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,635,006 $ 32,130,450
------------ ------------
------------ ------------
</TABLE>
Note: The balance sheet at December 31, 1997 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 March 31,
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1998 1997
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<S> <C> <C>
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,433,082 $ 829,218
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . 1,789,608 826,027
Research and development. . . . . . . . . . . . . . . . . 1,555,698 1,513,868
Sales and marketing . . . . . . . . . . . . . . . . . . . 1,878,921 744,661
General and administrative. . . . . . . . . . . . . . . . 1,704,254 1,164,221
----------- -----------
Total cost and expenses. . . . . . . . . . . . . . . . . . . 6,928,481 4,248,777
----------- -----------
Loss from operations . . . . . . . . . . . . . . . . . . . . (4,495,399) (3,419,559)
Interest income. . . . . . . . . . . . . . . . . . . . . . . 328,193 101,488
----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $(4,167,206) $(3,318,071)
----------- -----------
----------- -----------
Basic and diluted loss per share . . . . . . . . . . . . . . $ (0.31) $ (0.37)
----------- -----------
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Shares used in computing basic and
diluted loss per share . . . . . . . . . . . . . . . . . 13,248,379 9,016,522
</TABLE>
See accompanying notes
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VISTA MEDICAL TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $(4,167,206) $(3,318,071)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization. . . . . . . . . . . . . 631,896 107,747
Amortization of premium on short term investments. . . 59,618 --
Stock issued for services rendered . . . . . . . . . . -- 20,010
Amortization of deferred compensation. . . . . . . . . 194,290 256,055
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable . . . . . . . . . . . . . (1,256,733) (244,225)
Inventories . . . . . . . . . . . . . . . . . (640,950) (517,067)
Other current assets. . . . . . . . . . . . . 159,578 (343,363)
Accounts payable. . . . . . . . . . . . . . . 585,187 66,544
Accrued compensation. . . . . . . . . . . . . (118,541) (42,880)
Accrued liabilities . . . . . . . . . . . . . 943,954 (107,505)
----------- ----------
Net cash flows used for operating activities . . . . . . . . (3,608,907) (4,122,755)
INVESTING ACTIVITIES
Purchases of short-term investments. . . . . . . . . . . . . (80,640) --
Maturities of short-term investments . . . . . . . . . . . . 2,450,000 --
Purchase of property and equipment . . . . . . . . . . . . . (263,585) (353,151)
----------- ----------
Net cash flows provided by (used for) investing activities . 2,105,775 (353,151)
FINANCING ACTIVITIES
Issuance of common stock . . . . . . . . . . . . . . . . . . 172,913 35,854
----------- ----------
Net cash flows provided by financing activities. . . . . . . 172,913 35,854
Net (decrease) increase in cash and cash equivalents . . . . (1,330,219) (4,440,052)
Cash and cash equivalents at beginning of period . . . . . . 7,328,502 10,119,529
----------- ----------
Cash and cash equivalents at end of period . . . . . . . . . $5,998,284 $5,679,477
----------- ----------
----------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . . . $ 0 $ 70
----------- ----------
----------- ----------
</TABLE>
See accompanying notes
5
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VISTA MEDICAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The Audited Financial Statements of Vista Medical Technologies, Inc.
(the "Company") and the notes thereto for the year ended December 31, 1997
included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission, 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 except that 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, 1998.
2. Computation of Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," (SFAS 128) which replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities, except that, for the periods prior to the Company's initial
public offering (July 2, 1997), preferred shares are included on an as-if
converted basis in the basic computation. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been restated to conform to
SFAS 128 and the requirements of the recently effective Staff Accounting
Bulletin No. 98.
3. New Accounting Standard
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Segment
Information." Both of these standards are effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 requires that all components
of comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income
is defined as the change in equity during a period from transactions and
other events and
6
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circumstances from non-owner sources. Net income and other comprehensive
income, including foreign currency translation adjustments, and unrealized
gains and losses on investments, shall be reported, net of their related tax
effect, to arrive at comprehensive income. The Company believes that
comprehensive income or loss will not be materially different than net income
or loss. SFAS No. 131 amends the requirements for public enterprises to
report financial and descriptive information about its reportable operating
segments. Operating segments, as defined by SFAS No. 131, are components of
an enterprise for which financial information is available and evaluated
regularly by the Company in deciding how to allocate resources and in
assessing performance. This financial information is required to be reported
on the basis that it is used internally for evaluating the segment
performance. The Company believes it operates in one business and operating
segment and that adoption of SFAS No. 131 will not have a material impact on
the Company's financial statements.
4. Inventories
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
Parts and materials......... $ 1,761,831 $ 1,977,878
Work in process............. 1,151,232 662,237
Finished goods.............. 1,072,855 704,852
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$ 3,985,918 $ 3,344,967
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</TABLE>
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 COMPANY'S
1997 ANNUAL REPORT ON FORM 10-K, FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
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 12 months. As of
March 31, 1998, the Company's accumulated deficit was approximately $34.7
million.
Results of Operations
Sales. The Company had revenue from product sales and distribution fees
of $2,433,000 for the three-months ended March 31, 1998, compared to $829,000
for the same period in 1997. The increase in revenues was due to initial
sales of StereoSite systems and associated distribution fees paid by Sofamor
Danek, the Company's strategic partner and exclusive distributor for the HNS
market and sales of the Company's Series 8000 Advanced Visualization and
Information System ("Series 8000") for minimally invasive cardiac surgery
launched during the third quarter of 1997.
Cost of Sales. The Company's cost of sales were $1,790,000 and $826,000
for the three- months ended March 31, 1998 and 1997, respectively, an
increase of $964,000. The increase was primarily due to costs corresponding
to the growth in revenues from product sales and costs incurred to launch the
Company's StereoSite product for the HNS market.
Research and Development Expenses. Research and development expenses
increased to $1,556,000 for the three-months ended March 31, 1998, from
$1,514,000 for the corresponding period in 1997. The increase in research
and development expenses was attributable to continued development and
expansion of the Company's research and development organization
8
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focused on development, prototyping and evaluation of new products and
consisted primarily of increases in staffing and related supply and occupancy
costs. The Company believes that a significant level of investment for
product development and evaluation is necessary to remain technologically
competitive and anticipates that it will continue its spending in research
and development at or near current levels.
Sales and Marketing Expenses. Sales and marketing expenses were
$1,879,000 and $745,000 for the three-months ended March 31, 1998 and 1997,
respectively. The increase in sales and marketing expense was attributable to
the Company's development and expansion of its sales force, increased
marketing efforts associated with commercialization of new products and
physician training costs. 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 $1,704,000 for the three-months ended
March 31, 1998, from $1,164,000 for the corresponding period in 1997. This
increase was primarily due to increases in staffing and related expenses
associated with the continued development of the Company's administrative
infrastructure, 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.
Interest Income. The Company had net interest income of $328,000 for
the three-month period ended March 31, 1998 compared to $101,000 for the
corresponding period in 1997. This increase was due primarily to increasing
average investment balances of the Company's excess cash following the
Company's Initial Public Offering ("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 three-months ended March
31, 1998 was $3,609,000 compared to net cash used of $4,123,000 for the
corresponding three-month period in 1997. The decrease in net cash used in
operating activities was primarily attributable to higher revenues, customer
advances and prepaid royalties received during the 1998 period which offset
higher net losses over the 1997 period.
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Net cash provided by investing activities was $2,106,000 for the
three-months ended March 31, 1998 compared to $353,000 of net cash used in
the same period in 1997. The net cash provided by investing activities in
1998 was primarily attributable to maturities of short-term investments and
the net cash used in 1997 was primarily attributable to purchase of property
and equipment related to increased staffing, expansion of manufacturing
capabilities, and marketing demonstrations.
Net cash provided by financing activities was $173,000 for the three
months ended March 31, 1998 compared to $36,000 for the same period in 1997.
The net cash provided by financing activities in 1998 was primarily
attributable to proceeds from the purchase of stock by employees through the
Company's employee stock purchase plan and the exercise of stock options
while the cash provided in 1997 was from exercise of stock options.
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. As of March 31, 1998 there were no outstanding
balances under the agreement.
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.
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 March 31, 1998,
the Company had incurred cumulative net losses of approximately $34.7 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.
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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 Initial Public Offering completed in July 1997 and the interest income
thereon, together with borrowings available under the $10.0 million Loan and
Security Agreement entered into in October 1997, 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 Initial Public 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.
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 additional 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 these components 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, 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.
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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 Minimally Invasive
Microsurgical ("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.
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LIMITED SALES, MARKETING, DISTRIBUTION AND TECHNICAL SUPPORT EXPERIENCE;
DEPENDENCE ON SOFAMOR DANEK. The Company has organized its sales and
marketing efforts through 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 eight independent sales representatives. The products of
the Company's HNS Microsurgery division will be sold via Sofamor Danek's
sales force. Establishment of a sales force capable of effectively
commercializing the Company's cardiothoracic products 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.
The Company is dependent on its relationship with Sofamor Danek for a
variety of reasons, and the termination of this relationship could have a
material adverse effect on the Company. Sofamor Danek is engaged in the
worldwide development, manufacturing and distribution of systems for spinal
surgery. Sofamor Danek manufactures products in the United States and Europe
and sells its products to surgeons and hospitals worldwide. Pursuant to an
exclusive distribution agreement between Sofamor Danek and the Company, the
Company appointed Sofamor Danek as its exclusive worldwide distributor for
the Company's current and future visualization and information systems for
neurosurgery, spinal surgery, radiation delivery, otolaryngology and
maxillofacial surgery (the "StereoSite Systems"). There can be no assurance
that Sofamor Danek will commit significant resources to market StereoSite
Systems or that its marketing activities will be effective.
The Company and Sofamor Danek also entered into a cooperative technology
agreement, pursuant to which the parties have agreed to work exclusively
together in performing research and development specifically designed to
enhance StereoSite Systems or integrate StereoSite Systems with Sofamor
Danek's image guidance systems and certain other products, including systems
and instruments for spinal surgery. There can be no assurance that such
improvement and integration of products will be successfully completed.
LACK OF COMMERCIAL MANUFACTURING EXPERIENCE; SCALE-UP RISK. The Company
lacks experience in manufacturing the products under development, including
its Series 8000 systems for minimally invasive cardiac surgery and StereoSite
systems for minimally invasive HNS surgery, 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. Businesses such as the Company's
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.
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,
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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.
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
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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. 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.
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Failure to comply with regulatory requirements could have a material
adverse effect on 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 or to HNS microsurgery. There can be no
assurance that the Company will be successful in competing with any such
companies.
Technological advances with other therapies such as drugs,
interventional procedures or future innovations in surgical techniques could
make such other therapies more effective or lower in cost than MIM surgical
procedures and could render MIM surgery obsolete.
There can be no assurance that physicians will use MIM surgical
procedures to replace or supplement established treatments, or that MIM
cardiac surgery or HNS microsurgery 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 and Sofamor Danek. 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
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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.
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
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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.
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 March 31, 1998, the Company had exclusive ownership rights to seven
issued United States patents, 10 pending United States patent applications
and 16 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 consulting, as the
case may be, and assignment to the Company of proprietary rights to such
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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 three Clinical Advisory Boards made up of
leading surgeons, one focused on minimally invasive cardiac surgery, another
focused on HNS
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microsurgery and a third General Board focused on several specialties. The
Company also has formed a Research Advisory Board to conduct specific
research in the development of techniques applicable to the use of video
assistance in minimally invasive cardiac surgery. Members of the Clinical
Advisory Boards consult with the Company exclusively in the field of
visualization, but are free to consult with other non-competing
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. 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.
YEAR 2000 ISSUES. The Company recognizes the need to ensure its
operations will not be adversely impacted by the inability of the Company's
systems to process data having dates on or after January 1, 2000 (the "Year
2000" issues). Processing errors due to software failure arising from
calculations using the Year 2000 date are a recognized risk. The Company is
currently addressing the risk, with respect to the availability and integrity
of its financial systems and the reliability of its operating systems, and
is in the process of communicating with suppliers, customers, financial
institutions and others with whom it conducts business transactions to assess
whether they are Year 2000 compliant.
While the Company believes its planning efforts are adequate to address
its Year 2000 concerns, there can be no guarantee that the systems of other
companies on which the Company's systems and operations rely will be
converted on a timely basis and will not have a material
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effect on the Company. In addition, the potential impact of the Year 2000
issues on significant suppliers, customers, financial institutions and others
with whom the Company does business cannot be reasonably estimated at this
time. The cost of the Year 2000 initiatives to be executed by the Company is
not expected to be material to the Company's results of operations or
financial position.
POTENTIAL VOLATILITY OF STOCK PRICE. The market prices and trading
volumes for securities of emerging companies, like the Company, have
historically been highly volatile and have experienced significant
fluctuations unrelated to the operating performance of such companies. The
market price of the shares of Common Stock is likely to be highly volatile
and may be significantly affected by factors such as actual or anticipated
fluctuations in the Company's operating results, changes in financial
estimates by securities analysts, announcements of technological innovations,
new products or new contracts by the Company or its competitors, regulatory
announcements, developments with respect to patents or proprietary rights,
conditions and trends in the medical device and other technology industries,
adoption of new accounting standards affecting the medical device industry,
general market conditions and other factors. In addition, the stock market
has from time to time experienced significant price and volume fluctuations
that have particularly affected the market prices for shares of early stage
companies. These broad market fluctuations may adversely affect the market
price of the Common Stock. In the past, following periods of volatility in
the market price of a particular company's securities, securities class
action litigation has often been brought against that company. Such
litigation, if brought against the Company, could result in substantial costs
and a diversion of management's attention and resources.
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
24
<PAGE>
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.
25
<PAGE>
PART II. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 6. Exhibits and Reports on Form 8-K
<C> <S>
A) Exhibits
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 March 31, 1998.
</TABLE>
26
<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: May 14, 1998 /s/ John R. Lyon
------------------ -----------------------------------------
John R. Lyon
President, Chief Executive Officer and
Director
Date: May 14, 1998 /s/ Robert J. De Vaere
------------------ -----------------------------------------
Robert J. De Vaere
Vice President of Finance & Administration
& Chief Financial Officer
(Principal financial and accounting officer)
27
<PAGE>
EXHIBIT 11.1
VISTA MEDICAL TECHNOLOGIES, INC.
Statement Regarding Computation of Per Share Data
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
----------- ----------
<S> <C> <C>
Net income (loss). . . . . . . . . . . . . . . . . . . . . . $(4,167,206) $(3,318,071)
----------- ----------
----------- ----------
Average common shares outstanding. . . . . . . . . . . . . . 13,248,379 335,843
Effect of assumed conversion of
preferred stock from date of issuance . . . . . . . . . . -- 8,680,679
----------- ----------
Shares used in basic per share
computations. . . . . . . . . . . . . . . . . . . . . . . 13,248,379 9,016,522
----------- ----------
----------- ----------
Net income (loss) per share - basic. . . . . . . . . . . . . $ (0.31) $ (0.37)
----------- ----------
----------- ----------
Net effect of dilutive common share
equivalents based on the treasury
stock method . . . . . . . . . . . . . . . . . . . . . . -- --
Shares used in diluted per share
computations. . . . . . . . . . . . . . . . . . . . . . . 13,248,379 9,016,522
----------- ----------
----------- ----------
Net income (loss) per share - diluted. . . . . . . . . . . . $ (0.31) $ (0.37)
----------- ----------
----------- ----------
</TABLE>
<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, 1997 AND AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,998,284
<SECURITIES> 14,249,326
<RECEIVABLES> 1,778,349
<ALLOWANCES> 0
<INVENTORY> 3,985,918
<CURRENT-ASSETS> 26,220,725
<PP&E> 5,148,824
<DEPRECIATION> 2,173,831
<TOTAL-ASSETS> 29,635,006
<CURRENT-LIABILITIES> 3,674,905
<BONDS> 0
0
0
<COMMON> 134,476
<OTHER-SE> 25,825,625
<TOTAL-LIABILITY-AND-EQUITY> 29,635,006
<SALES> 1,968,482
<TOTAL-REVENUES> 2,761,275
<CGS> 1,789,608
<TOTAL-COSTS> 1,789,608
<OTHER-EXPENSES> 5,138,873
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,167,206)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,167,206)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,167,206)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
